<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 15, 1999.
REGISTRATION NO. 333-71919
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
NET PERCEPTIONS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7372 41-1844584
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification
organization) Number)
</TABLE>
7901 FLYING CLOUD DRIVE
MINNEAPOLIS, MINNESOTA 55344
(612) 903-9424
(Address, including zip code, and telephone number, including
area code, of the Registrant's principal executive offices)
STEVEN J. SNYDER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
NET PERCEPTIONS, INC.
7901 FLYING CLOUD DRIVE
MINNEAPOLIS, MINNESOTA 55344
(612) 903-9424
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
ROBERT V. GUNDERSON, JR. KENNETH L. GUERNSEY
DANIEL E. O'CONNOR MICHAEL J. SULLIVAN
GUNDERSON DETTMER STOUGH COOLEY GODWARD LLP
VILLENEUVE FRANKLIN & HACHIGIAN, LLP ONE MARITIME PLAZA
155 CONSTITUTION DRIVE 20(TH) FLOOR
MENLO PARK, CALIFORNIA 94025 SAN FRANCISCO, CALIFORNIA
(650) 321-2400 (415) 693-2000
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of this prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to such Section 8(a), may determine.
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- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION) ISSUED APRIL 15, 1999
[LOGO]
3,650,000 SHARES
COMMON STOCK
Net Perceptions, Inc. is offering 3,650,000 shares. This is our initial
public offering and no public market currently exists for our stock. We
anticipate that the initial public offering price will be between $10.00 and
$12.00 per share. We have filed an application for the common stock to be quoted
on the Nasdaq National Market under the symbol "NETP."
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
---------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------------- ---------------
<S> <C> <C>
Public Offering Price......................................................... $ $
Underwriting Discounts and Commissions........................................ $ $
Proceeds to Net Perceptions................................................... $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Net Perceptions, Inc. has granted the underwriters the right to purchase up
to an additional 547,500 shares of common stock to cover over-allotments.
BancBoston Robertson Stephens expects to deliver the shares of common stock to
purchasers on , 1999.
------------------------
BANCBOSTON ROBERTSON STEPHENS
HAMBRECHT & QUIST
U.S. BANCORP PIPER JAFFRAY
THE UNDERSIGNED IS FACILITATING INTERNET DISTRIBUTION
WIT CAPITAL CORPORATION
as E-MANAGER-TM-
THE DATE OF THIS PROSPECTUS IS , 1999
<PAGE>
[Revised chart to follow]
The Net Perceptions logo and "NET PERCEPTIONS" are centered over the graphic.
Underneath are five parts to the graphic with arrows connecting them. The first
part is a photo of a woman in front of a computer, pointing at the monitor.
Under the photo appears the caption "1. Customer visits a retailer's electronic
commerce web site that utilizes Net Perceptions for E-commerce software." An
arrow leads down to the second part. The second part consists of the title
"Client's Web Site" centered over a computer screen with the word "Welcome"
appearing on the computer screen. Under the computer screen appears the caption
"2. The customer browses the retailer's web site." An arrow leads up to the
third part. The third part consists of the title "Net Perceptions for
E-commerce" centered over an oval with the words "Net Perceptions Recommendation
Engine" contained within the oval and a hexagon with the words "Customer
Preference Database" contained within the hexagon. The oval and hexagon are
superimposed over a picture of a computer keyboard. Below the oval appears the
caption "3. The web site solicits customer preference information and tracks the
customer's browsing behaviors and purchases." Adjacent to this caption below the
hexagon is the caption "4. The recommendation engine predicts other products
likely to to be appealing to the customer." Below these captions, an arrow leads
to a picture of three computer screens superimposed on each other with the top
screen containing the words "Recommended Merchandise" and the letters "A", "B"
and "C". An arrow leads across to a picture of a computer screen containing the
letter "C" and the word "Buy". Directly below this computer screen is the
caption "5. The web site recommends products likely to be appealing to the
customer."
2
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. INFORMATION CONTAINED ON NET PERCEPTIONS' WEB SITE
IS NOT PART OF THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF THE COMMON STOCK. IN THIS PROSPECTUS, "NET
PERCEPTIONS," "WE," "US" AND "OUR" REFER TO NET PERCEPTIONS, INC.
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary......................................................................................... 4
Risk Factors............................................................................................... 7
Forward-looking Statements May Prove Inaccurate............................................................ 18
Use of Proceeds............................................................................................ 19
Dividend Policy............................................................................................ 19
Capitalization............................................................................................. 20
Dilution................................................................................................... 21
Selected Financial Data.................................................................................... 22
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 23
Business................................................................................................... 32
Management................................................................................................. 48
Certain Transactions....................................................................................... 56
Principal Stockholders..................................................................................... 57
Description of Capital Stock............................................................................... 59
Shares Eligible for Future Sale............................................................................ 62
Underwriting............................................................................................... 64
Legal Matters.............................................................................................. 65
Experts.................................................................................................... 66
Additional Information..................................................................................... 66
Index to Financial Statements.............................................................................. F-1
</TABLE>
We have the following registered trademarks:
GroupLens-Registered Trademark-. We also have the following unregistered
trademarks: Net Perceptions and the Net Perceptions logo. This prospectus also
includes trademarks of other companies.
3
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
YOU SHOULD READ THIS SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION AND OUR
FINANCIAL STATEMENTS AND NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS
SUMMARY IS NOT COMPLETE AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU
SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. NET PERCEPTIONS' ACTUAL RESULTS COULD DIFFER
SIGNIFICANTLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION
CONTAINED IN THIS PROSPECTUS (A) ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT
OPTION IS NOT EXERCISED, (B) ASSUMES THE CONVERSION OF ALL OUTSTANDING PRINCIPAL
AND ACCRUED INTEREST ON A $4.0 MILLION CONVERTIBLE PROMISSORY NOTE INTO COMMON
STOCK UPON THE CLOSING OF THIS OFFERING, (C) REFLECTS THE 2-FOR-1 SPLIT OF ALL
OUTSTANDING CAPITAL STOCK TO BE COMPLETED PRIOR TO THE CLOSING OF THIS OFFERING,
AND (D) EXCEPT IN THE FINANCIAL STATEMENTS, REFLECTS THE CONVERSION OF ALL
OUTSTANDING PREFERRED STOCK INTO COMMON STOCK UPON THE CLOSING OF THIS OFFERING.
NET PERCEPTIONS
Net Perceptions is a leading provider of marketing solutions that enable
Internet retailers to market to customers on a personalized, one-to-one basis in
real time. By "real-time" we mean delivering responses to requests for
information in typically less than one second. With our software solutions, a
retailer learns from each customer interaction and, based on the information
received, adjusts marketing messages and product offerings to that customer in
real time. Net Perceptions defines its product offerings as real-time
relationship marketing solutions. We believe that retailers that implement our
solutions can attract more customers, generate more products per order and
increase customer loyalty. To date, we have focused on providing solutions to
electronic commerce retailers. Our customers currently include
Barnesandnoble.com, CDnow, Egghead.com, Preview Travel, Ticketmaster Online and
Value America.
With the size and growth of electronic commerce, the opportunity for
one-to-one marketing on the Internet is potentially large. International Data
Corporation estimates that the amount of Internet commerce worldwide will
increase from $32 billion in 1998 to over $400 billion in 2002. Electronic
commerce retailers must find ways to compete more effectively and distinguish
themselves in this rapidly-growing market. As a result, these retailers are
beginning to personalize the online shopping experiences of their customers. A
Jupiter Communications survey conducted in June 1998 reported that 40% of online
retailers used some form of personalization and 93% of the remaining online
retailers planned to implement the practice in the next 12 months.
Our products enable effective real-time relationship marketing by analyzing
past and current customer behavior, including purchase history, stated
preferences, demographic information and Internet browsing behavior. Based on
this analysis, our products use proprietary collaborative filtering technology
to anticipate other merchandise or information a customer is likely to be
interested in purchasing or viewing. Our product suite consists of:
- NET PERCEPTIONS FOR E-COMMERCE, which is a leading real-time relationship
marketing solution for electronic commerce retailers;
- NET PERCEPTIONS FOR CALL CENTERS, which is designed to provide call center
operators with caller-specific recommendations to deliver during customer
interactions. A call center is a department within an organization in
which operators make and receive telephone calls related to customer
orders and inquiries; and
- NET PERCEPTIONS RECOMMENDATION ENGINE, which is a general-purpose
relationship marketing platform that can be used to leverage data across
multiple customer points of contact.
4
<PAGE>
We design each of our products to provide high recommendation accuracy while
reliably meeting the real-time and volume requirements of large retailers. In
addition, we base our solutions on a distributed architecture that is flexible
enough to integrate with our customers' new or existing marketing
implementations, including web site and call center software.
We also provide our customers with a comprehensive array of services,
including training and consulting services, software updates, documentation
updates, telephone support and web-based support. We market our products and
services through our direct sales organization and through indirect distribution
channels, including resellers, systems integrators and original equipment
manufacturers.
Our objective is to extend our leadership position in providing real-time
marketing solutions to Internet and traditional retailers. To achieve this
objective, we intend to:
- Maintain and extend our technological leadership in real-time relationship
marketing solutions through continued investment in the development of our
proprietary recommendation engine;
- Leverage this technology investment into additional online and traditional
markets;
- Continuously increase the value of our solutions to customers by offering
additional and improved professional services;
- Develop our international presence to address the global adoption of the
Internet and to address international demand for real-time relationship
marketing solutions; and
- Expand our indirect distribution channels by recruiting additional
resellers, systems integrators and original equipment manufacturers.
Net Perceptions was incorporated in Delaware on July 3, 1996. Our principal
sales, marketing, research and development and administrative facility is in
Minneapolis, and we lease sales and support offices in San Francisco and New
York. Our telephone number is (612) 903-9424.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered.............. 3,650,000 shares
Common stock to be outstanding
after this offering............. 21,321,705 shares(1)
Over-allotment option............. 547,500 shares
Use of proceeds................... For working capital and general corporate purposes.
Dividend policy................... We do not intend to pay dividends on our common stock.
We plan to retain any earnings for use in the operation
of our business and to fund future operations.
Proposed Nasdaq National Market
symbol.......................... NETP
</TABLE>
- ---------
(1) Based on 17,302,008 shares outstanding as of December 31, 1998. Also
includes 369,697 shares of common stock issuable upon conversion of a
convertible promissory note upon the closing of this offering at an assumed
conversion price of $11.00 per share. This number does not include (A)
1,408,564 shares of common stock subject to outstanding options under our
1996 Stock Plan as of December 31, 1998, and (B) 11,982 shares of common
stock issuable upon exercise of an outstanding warrant. Subsequent to
December 31, 1998, we granted options to purchase an additional 524,936
shares of common stock. See "Capitalization," "Management--1999 Equity
Incentive Plan," "--Employee Stock Purchase Plan," "--1999 Non-Employee
Director Option Plan" and Note 7 of Notes to Financial Statements.
5
<PAGE>
SUMMARY FINANCIAL DATA
(table in thousands, except per share data)
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED
JULY 3, 1996 DECEMBER 31,
(INCEPTION) TO ------------------
DECEMBER 31, 1996 1997 1998
----------------- ------- -------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues......................................... $ 4 $ 317 $ 4,477
Gross margin........................................... 2 273 4,052
Operating expenses..................................... 1,042 5,020 9,084
Loss from operations................................... (1,040) (4,747) (5,032)
Net loss............................................... (1,027) (4,722) (4,968)
Basic and diluted net loss per share................... $ (3.40) $ (3.01) $ (1.40)
------- ------- -------
------- ------- -------
Shares used in computing basic and diluted net loss per
share................................................ 302 1,569 3,546
------- ------- -------
------- ------- -------
Pro forma basic and diluted net loss per share......... $ (0.35)
-------
-------
Shares used in computing pro forma basic and diluted
net loss per share................................... 14,113
-------
-------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1998
----------------------
ACTUAL AS ADJUSTED
--------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................................................. $ 972 $ 41,311
Working capital............................................................................ 468 40,807
Total assets............................................................................... 5,637 45,976
Long-term liabilities, net of current portion.............................................. 538 538
Redeemable convertible preferred stock..................................................... 650 --
Total stockholders' equity................................................................. 421 41,410
</TABLE>
See Note 2 of Notes to Financial Statements for an explanation of the
methods used to determine the number of shares used in computing net loss per
share data.
The numbers displayed in the "As Adjusted" column are adjusted to reflect
the conversion of preferred stock into 10,668,700 shares of common stock, the
issuance of a convertible promissory note in the amount of $4,000,000 subsequent
to December 31, 1998, the issuance of 369,697 shares of common stock upon
conversion of the convertible promissory note upon the closing of this offering
at an assumed conversion price of $11.00 per share, and the sale of 3,650,000
shares of common stock in this offering at an assumed initial public offering
price of $11.00 per share and the application of the estimated net proceeds
therefrom. See "Use of Proceeds" and "Capitalization."
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. IN
ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, YOU SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS BEFORE INVESTING IN OUR COMMON
STOCK.
NET PERCEPTIONS IS AN EARLY-STAGE COMPANY AND WE EXPECT TO ENCOUNTER RISKS AND
DIFFICULTIES FREQUENTLY ENCOUNTERED BY EARLY-STAGE COMPANIES IN NEW AND
RAPIDLY EVOLVING MARKETS.
Net Perceptions was founded in July 1996. We began shipping product in the
first quarter of 1997. The market for our products is unproven. Our limited
operating history makes an evaluation of our future prospects very difficult. We
will encounter risks and difficulties frequently encountered by early-stage
companies in new and rapidly evolving markets. We may not successfully address
any of these risks. If we do not successfully address these risks, our business,
financial condition and results of operations would be seriously harmed.
OUR QUARTERLY OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT. IF WE
FAIL TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE
MARKET PRICE OF OUR COMMON STOCK MAY DECREASE SIGNIFICANTLY.
Our quarterly operating results have varied in the past and may vary
significantly in the future. Because our operating results are volatile and
difficult to predict, we believe that period-to-period comparisons of our
results of operations are not a good indication of our future performance. It is
likely that in some future quarter or quarters our operating results will be
below the expectations of public market analysts and investors. In such event,
the market price of our common stock may decrease significantly.
We cannot predict our future quarterly revenues with any degree of certainty
for several reasons, including:
- Product revenues in any quarter are substantially dependent on orders
booked and shipped in that quarter, because we operate with very little
order backlog;
- The market in which we compete is relatively new and rapidly evolving;
- We expect that, for the foreseeable future, revenues will come from
licenses to a small number of customers, so delays or cancellations of
orders by a few customers can significantly impact revenues within a
quarter;
- Our sales cycle varies substantially from customer to customer; and
- The timing of large orders can significantly affect revenues within a
quarter.
Historically, we have recognized a substantial portion of our revenues in
the last month of a quarter, with these revenues frequently concentrated in the
last two weeks of the quarter. Accordingly, we cannot predict our financial
results for any quarter until very late in the quarter. A delay in an
anticipated sale near the end of a quarter can seriously harm our operating
results for that quarter.
Our expense levels are relatively fixed in the short term and are based, in
part, on our expectations as to our future revenues. As a result, any delay in
generating or recognizing revenues could cause significant variations in our
operating results from quarter to quarter and could result in increased
operating losses.
WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR LOSSES IN THE FUTURE.
We had net losses of $4.7 million in 1997 and $5.0 million in 1998. As of
December 31, 1998, we had an accumulated deficit of $10.7 million. We have not
had a profitable quarter and do not expect to
7
<PAGE>
have a profitable quarter in 1999 or 2000. We expect that our losses will
continue to increase in 1999. We expect to continue to incur significant sales
and marketing, research and development and general and administrative expenses.
As a result, we will need to generate significant quarterly revenues to achieve
profitability. We may never achieve profitability. Although our revenues have
grown in recent quarters, we do not believe that we can sustain these growth
rates, or that such growth rates are indicative of future revenue growth rates.
See "Selected Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
WE DEPEND ON OUR NET PERCEPTIONS FOR E-COMMERCE PRODUCT. A DECLINE IN THE PRICE
OF, OR DEMAND FOR, OR MARKET ACCEPTANCE OF NET PERCEPTIONS FOR E-COMMERCE
WOULD SERIOUSLY HARM OUR BUSINESS.
We currently derive a substantial portion of our revenues from our Net
Perceptions for E-commerce product. We anticipate that Net Perceptions for
E-commerce will continue to account for a substantial portion of our revenues
for the foreseeable future. Consequently, a decline in the price of or demand
for Net Perceptions for E-commerce, or its failure to achieve broad market
acceptance, would seriously harm our business, financial condition and results
of operations.
WE FACE INTENSE COMPETITION AND IF WE ARE UNABLE TO COMPETE SUCCESSFULLY OUR
BUSINESS WILL BE SERIOUSLY HARMED.
The market for our products is intensely competitive, evolving and subject
to rapid technological change. We expect the intensity of competition to
increase in the future. Competitors vary in size and in the scope and breadth of
the products and services offered. In the license of electronic commerce
products, we primarily encounter competition from the LikeMinds division of
Andromedia, the Aptex division of HNC Software and Personify. Microsoft
Corporation recently acquired FireFly Network Inc., a company with collaborative
filtering technology and, as a result, we expect that we will encounter
competition from Microsoft in the future. We expect that if we are successful in
our strategy to leverage our technology into new vertical markets, we will
encounter many additional, market-specific competitors. In addition, because
there are relatively low barriers to entry in the software market, we expect
additional competition from other established and emerging companies as the
Internet software market continues to develop and expand.
Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition and a larger installed base of customers than we have.
In addition, many of our competitors have well-established relationships with
current and potential customers of ours, have extensive knowledge of our
industry and are capable of offering a single-vendor solution. As a result, our
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
development, promotion and sale of their products than we can. In addition,
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address customer needs. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. We also expect that competition will increase as a
result of software industry consolidations.
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, financial condition and results of operations. We may not be able to
compete successfully against current and future competitors.
8
<PAGE>
OUR PRODUCTS HAVE A LENGTHY SALES CYCLE. AS A RESULT, IT IS DIFFICULT TO PREDICT
THE QUARTER IN WHICH A SALE MAY OCCUR.
We are one of the first companies to market real-time relationship marketing
software. As a result, we must educate potential customers on the use and
benefits of our products. In addition, we believe that the purchase of our
products is relatively discretionary and involves a significant commitment of
capital and other resources by a customer. As a result, it usually takes our
sales organization several months to finalize a sale. This makes it difficult to
predict the quarter in which a sale may occur.
WE HAVE A LENGTHY IMPLEMENTATION CYCLE. IN ADDITION, ONLY A SMALL NUMBER OF OUR
CUSTOMERS HAVE A DEPLOYED AND OPERATING APPLICATION UTILIZING OUR PRODUCTS. AS
A RESULT, WE CANNOT BE CERTAIN THAT OUR PRODUCTS WILL PERFORM AND BE RECEIVED
AS WE EXPECT.
The implementation, including application design and deployment, of our
products requires a significant commitment of resources by our customers. The
time required for implementation of Net Perceptions for E-commerce has varied
depending on the customer's application of the product. Additionally,
implementation often does not begin until a customer otherwise undertakes to
update its web site, which generally occurs only once or twice per year. We
anticipate that implementation of our Net Perceptions for Call Centers product
may take longer than Net Perceptions for E-commerce due to more extensive
integration requirements.
We have currently licensed our products to more than 70 customers. However,
only a small number of these customers have a deployed and operating application
utilizing our products. Because most of our customers have not yet fully
implemented and deployed our products, we cannot be certain that our products
will:
- Perform as designed;
- Deliver the desired level of economic benefit to our customers;
- Meet the other expectations and needs of our customers;
- Achieve any significant degree of market acceptance; or
- Perform to the level necessary to generate good customer references and
repeat customers.
If implementation services constitute a significant part of a product sales
transaction, we recognize a substantial portion of our revenues from such sales
transaction upon the delivery of these services. As a result, delays in service
delivery could cause significant reduction in our license revenues and operating
results for any particular period. The occurrence of any of these events could
seriously harm our business, financial condition and results of operations.
WE NEED TO SUBSTANTIALLY EXPAND OUR DIRECT SALES OPERATIONS IF WE ARE TO
INCREASE MARKET AWARENESS AND SALES OF OUR PRODUCTS AND SERVICES. IF WE FAIL
TO DO SO, OUR BUSINESS WILL BE SERIOUSLY HARMED.
We need to substantially expand our direct sales operations if we are to
increase market awareness and sales of our products and services. If we fail to
increase our direct sales capabilities as we have planned, our business,
financial condition and results of operations would be seriously harmed. Our
products and services require a sophisticated sales effort targeted at senior
management of our prospective customers. We have recently expanded our direct
sales force and plan to hire additional sales personnel. As of February 28,
1999, our direct sales organization consisted of 25 employees. Competition for
qualified sales personnel is intense, and we might not be able to hire the kind
and number of sales personnel we are targeting. New hires will require extensive
training and typically take several months to achieve productivity. We cannot be
certain that our recent hires will be as productive as necessary.
9
<PAGE>
WE ARE DEPENDENT ON AND PLAN TO INCREASE THE SIZE OF OUR PROFESSIONAL SERVICES
ORGANIZATION. IF WE DO NOT ADD MORE CUSTOMER SUPPORT PERSONNEL, OUR BUSINESS
WILL BE SERIOUSLY HARMED.
Customers that license our software typically engage our professional
services organization to assist with support, training, consulting and
implementation. We believe that growth in our product sales depends on our
ability to provide our clients with these services and to educate resellers on
how to use our products. From time to time, we receive customer complaints about
the timeliness and accuracy of our customer support. We plan to add more
customer support personnel in order to address current customer support needs.
If we are not successful hiring such personnel, our business, financial
condition and results of operations could be seriously harmed. As of February
28, 1999, our professional services organization consisted of 11 employees. We
are in a new market and there are a limited number of people who have the skills
needed to provide the services that our customers demand. Competition for
qualified service personnel is intense. We cannot be certain that we can attract
or retain a sufficient number of the highly-qualified service personnel that our
business needs.
OUR BUSINESS COULD BE SERIOUSLY IMPACTED BY THE PRIVACY CONCERNS OF ELECTRONIC
COMMERCE USERS.
Typically, our Net Perceptions for E-commerce product captures customer
preference and profile information each time a customer visits a web site or
volunteers information in response to survey questions. Privacy concerns may
cause visitors to resist providing the personal data necessary to support this
profiling capability. More importantly, even the perception of privacy concerns,
whether or not valid, may indirectly inhibit market acceptance of our products.
In addition, legislative or regulatory requirements may heighten such concerns
if web site users must be notified that the data captured after visiting web
sites may be used by marketing entities to unilaterally direct product promotion
and advertising to that user. We are not aware of any such legislation or
regulatory requirements currently in effect in the United States. Various other
countries and political entities, such as the European Economic Community, have
adopted such legislation or regulatory requirements. The United States may adopt
similar legislation or regulatory requirements. If customer privacy concerns are
not adequately addressed or if restrictive legislation is adopted in the United
States, our business, financial condition and results of operations could be
seriously harmed.
Our Net Perceptions for E-commerce product can use data captured with
"cookies" to track demographic information and user preferences. A "cookie" is a
bit of information keyed to a specific server, file pathway or directory
location that is stored on a computer user's hard drive, possibly without the
user's knowledge, but generally removable by the user. Some countries have
imposed laws limiting the use of cookies, and a number of Internet commentators,
advocates and governmental bodies in the United States and other countries have
urged passage of laws limiting or abolishing the use of cookies. If such laws
are passed, our business, financial condition and results of operations could be
seriously harmed.
WE RECENTLY ANNOUNCED NET PERCEPTIONS FOR CALL CENTERS, WHICH MAY NOT ACHIEVE
MARKET ACCEPTANCE.
We announced the commercial launch of Net Perceptions for Call Centers in
November 1998 and expect to make our initial shipments in 1999. Net Perceptions
for Call Centers has not received any degree of market acceptance. There are
significant risks inherent in product introductions such as Net Perceptions for
Call Centers. This product may not address some or all of the needs of customers
and may contain undetected errors or failures. A lack of necessary features or
errors or failures in Net Perceptions for Call Centers will likely result in
loss or delay of market acceptance for this product. We expect that our future
financial performance will depend significantly on the successful sales,
implementation and market acceptance of Net Perceptions for Call Centers, which
may not occur on a timely basis or at all.
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WE ARE DEPENDENT ON POTENTIAL NEW PRODUCTS. IF THESE POTENTIAL NEW PRODUCTS ARE
NOT LAUNCHED ON A TIMELY BASIS OR DO NOT ACHIEVE MARKET ACCEPTANCE, OUR
BUSINESS WILL BE SERIOUSLY HARMED.
We currently have plans to introduce and market potential new products in
1999. If these potential new products are not launched on a timely basis or do
not achieve market acceptance, our business, financial condition and results of
operations will be seriously harmed. Our potential new products are:
- Net Perceptions for Marketing Campaigns, which is being designed to be a
tool for producing targeted promotional electronic mail messages; and
- Net Perceptions for Knowledge Management, which is being designed to apply
the real-time relationship management capabilities of our recommendation
platform to knowledge management.
Our potential new products are subject to significant technical risks. We
may fail to introduce or deploy such potential new products on a timely basis,
or at all. In the past, we have experienced significant delays in the
commencement of commercial shipments of our new releases and new products. These
delays caused customer frustrations and delay or loss of product revenues. Some
of our competitors currently offer products with features and functionality
similar to those that may be offered in our potential new products. In the past,
we have also experienced delays in purchases of our products by customers
anticipating our launch of new releases or new products. Our business, financial
condition and results of operations would be seriously harmed if customers defer
material orders in anticipation of new releases or new product introductions.
The software products we offer are complex and may contain undetected errors
or failures when first introduced or as new versions are released. We have in
the past discovered software errors in our new releases and new products after
their introduction. We experienced delays in release or lost revenues during the
period required to correct these errors. We may discover errors in new releases
or new products after the commencement of commercial shipments, despite testing
by our personnel and our current and potential customers. This may result in
loss of or delay in market acceptance of our products, which could seriously
harm our business, financial condition and results of operations.
WE DEPEND ON THE CONTINUED GROWTH OF OUR CUSTOMER BASE AND THE RETENTION OF OUR
CUSTOMERS. IF WE FAIL TO GENERATE REPEAT OR EXPANDED BUSINESS FROM OUR CURRENT
AND FUTURE CUSTOMERS, OUR BUSINESS WILL BE SERIOUSLY HARMED.
Our success is dependent on the continued growth of our customer base and
the retention of our customers. We currently depend on a limited number of key,
high-profile customers. Our ability to attract new customers will depend on a
variety of factors, including the accuracy, scalability, reliability and
cost-effectiveness of our products and services and our ability to effectively
market such products and services. In the past, we have lost potential customers
to competitors for various reasons, including lower prices and other incentives
not matched by us. Many of our current customers initially purchase a limited
license for our products and services for evaluation. If such evaluation is
successful, the customer may purchase a license to expand the use of our
products in its organization or license additional products and services. If we
fail to generate repeat and expanded business from our current and future
customers, our business, financial condition and results of operations would be
seriously harmed.
IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR PRODUCTS COULD BECOME
OBSOLETE AND OUR BUSINESS WILL BE SERIOUSLY HARMED.
The life cycles of our products are difficult to predict because the markets
for our products are characterized by rapid technological change, changing
customer needs, frequent new software product introductions, and evolving
industry standards.
11
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The introduction of products embodying new technologies and the emergence of
new industry standards could render our existing products obsolete and
unmarketable. To be successful, we need to develop and introduce new software
products and enhancements to existing products on a timely basis that:
- Keep pace with technological developments and emerging industry standards;
and
- Address the increasingly sophisticated needs of our customers.
In addition, we may:
- Fail to develop and market new products and enhancements to existing
products that respond to technological changes or evolving industry
standards;
- Experience difficulties that could delay or prevent the successful
development, introduction and marketing of these new products and
enhancements to existing products; and
- Fail to develop new products and enhancements to existing products that
adequately meet the requirements of the marketplace or achieve market
acceptance.
In any such event, our business, financial condition and results of operations
would be seriously harmed.
WE RELY ON RESELLERS AND NEED TO DEVELOP THIS SALES CHANNEL. IF OUR RESELLER
CHANNEL DOES NOT PERFORM ADEQUATELY, OUR BUSINESS COULD BE SERIOUSLY HARMED.
We intend to increase the proportion of our customers licensed through our
reseller channels, which include distributors, resellers and systems
integrators. Our failure to achieve this could seriously harm our business,
financial condition and results of operations. Our agreements with such
resellers are generally not exclusive and in many cases may be terminated by
either party without cause. Many of these resellers do not have minimum purchase
or resale requirements. Many of these resellers carry product lines that are
competitive with our product lines. These resellers may not give a high priority
to the marketing of our products or may not continue to carry our products. They
may give a higher priority to other products, including the products of
competitors. We may not retain any of our current resellers or successfully
recruit new resellers. Events or occurrences of this nature could seriously harm
our business, financial condition and results of operations. In addition, any
sales through resellers will have lower gross margins than direct sales.
WE RELY ON ORIGINAL EQUIPMENT MANUFACTURERS AND NEED TO DEVELOP THIS SALES
CHANNEL. IF OUR ORIGINAL EQUIPMENT MANUFACTURER CHANNEL DOES NOT PERFORM
ADEQUATELY, OUR BUSINESS COULD BE SERIOUSLY HARMED.
We intend to increase sales through original equipment manufacturers. We may
fail to implement this strategy, which could seriously harm our business,
financial condition and results of operations. We are currently investing, and
intend to continue to invest, resources to develop this sales channel. Such
investments could seriously harm our operating margins. We depend on our
original equipment manufacturers' abilities to develop product enhancements or
new products on a timely and cost-effective basis that will meet changing
customer needs and respond to emerging industry standards and other
technological changes. Our original equipment manufacturers may not effectively
meet these technological challenges. These original equipment manufacturers:
- Are not within our control;
- May incorporate into their products the technologies of other companies in
addition to or in place of our technologies; and
- Are not obligated to purchase our products.
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<PAGE>
Our original equipment manufacturers may not continue to carry our products. Our
inability to recruit, or our loss of, important original equipment manufacturers
could seriously harm our business, financial condition and results of
operations. In addition, any sales through original equipment manufacturers will
have lower gross margins than direct sales.
WE DEPEND ON INTERNATIONAL SALES AND, THEREFORE, OUR BUSINESS IS SUSCEPTIBLE TO
NUMEROUS RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.
We recognized 13% of our total revenues in 1998 through licenses and
services sold to customers located outside of the United States. We expect
international revenues to account for a significant percentage of total revenues
in the future, and we believe that we must continue to expand our international
sales and marketing activities in order to be successful. To successfully expand
international sales, we must:
- Establish international operations;
- Hire international personnel; and
- Recruit additional international resellers.
This will require significant management attention and financial resources
and could seriously harm our operating margins. We have very limited experience
in marketing, selling and distributing our products and services
internationally. We currently have no employees located outside of the United
States and Canada. The acceptance and use of the Internet in international
markets are in earlier stages of development than in the United States,
particularly with the Internet as a method for conducting commerce. If the
Internet or electronic commerce fail to gain sufficient acceptance in
international markets or we fail to further expand our international operations
in a timely manner, our business, financial condition and results of operations
could be seriously harmed. In addition, we may fail to maintain or increase
international market demand for our products.
WE DEPEND ON TECHNOLOGY LICENSED FROM OTHER PARTIES. IF WE ARE UNABLE TO
CONTINUE TO UTILIZE SUCH TECHNOLOGY, OUR BUSINESS WOULD BE SERIOUSLY HARMED.
We license personalization screening and collaborative filtering technology
known as the "GroupLens" technology from the University of Minnesota pursuant to
an exclusive, worldwide, license agreement. The exclusive rights granted are
subject to non-exclusive rights retained by:
- AT&T Corporation, for portions of the technology funded by AT&T;
- The United States government, for government-funded aspects of the
technology, but solely for government purposes; and
- The University of Minnesota, for its own educational and research
purposes.
The license agreement also provides that for the three academic years ending
in the spring of 2000, we will pay research fees to the University of Minnesota
for exclusive rights to commercial applications that the research may produce
related to improvements to the GroupLens technology. If the agreement is
terminated prior to the end of the 1999-2000 academic year or if we are unable
to renew the agreement, we will no longer have access to the research conducted
by the University of Minnesota, which could result in an increased burden on our
product development department, as well as a reduction in improvements to our
core technology. We may not be able to renew the agreement, hire adequate
personnel to meet any increased demands on our product development department,
or continue to advance our technology on a timely basis. If we are unable to
renew the agreement, hire sufficient personnel or develop product improvements
in a timely manner, our business, financial condition and results of operations
would be seriously harmed.
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We integrate third-party software in our software products. For instance, we
license the Orbix object request broker from IONA Technologies for use in our
Net Perceptions for E-commerce, Net Perceptions for Call Centers and Net
Perceptions Recommendation Engine products. The agreement expires in July 2001.
The third-party software may not continue to be available to us on commercially
reasonable terms. We may not be able to renew this agreement or develop
alternative technology. If we cannot maintain licenses to key third-party
software, such as Orbix, develop similar technology or license similar
technology from another source on a timely or commercially feasible basis, our
business, financial condition and results of operations could be seriously
harmed.
WE ARE DEPENDENT UPON KEY PERSONNEL. THE LOSS OF THE SERVICES OF ONE OR MORE OF
OUR KEY PERSONNEL, OR OUR FAILURE TO ATTRACT, ASSIMILATE AND RETAIN OTHER
HIGHLY QUALIFIED PERSONNEL IN THE FUTURE WOULD SERIOUSLY HARM OUR BUSINESS.
Our future success depends on the continued service of our senior
management, product development and sales personnel. The loss of the services of
one or more of our key personnel could seriously harm our business, financial
condition and results of operations. None of these persons is bound by an
employment agreement. As of February 28, 1999, Net Perceptions consisted of only
92 employees. We only carry key person life insurance on Steven J. Snyder, our
President and Chief Executive Officer. The amount of such policy is $1,000,000.
Our future success also depends on our continuing ability to attract, hire,
train and retain a substantial number of highly skilled managerial, technical,
sales, marketing and customer support personnel. Competition for such personnel
is intense, and we may fail to retain our key employees, or attract, assimilate
or retain other highly qualified personnel in the future. If so, our business,
financial condition and results of operations could be seriously harmed.
WE DEPEND ON INCREASING USE OF THE INTERNET AND ON THE GROWTH OF ELECTRONIC
COMMERCE. IF THE USE OF THE INTERNET AND ELECTRONIC COMMERCE DO NOT GROW AS
ANTICIPATED, OUR BUSINESS WILL BE SERIOUSLY HARMED.
Our future revenues depend upon the increased acceptance and use of the
Internet and other online services as a medium of commerce. Rapid growth in the
use of the Internet, the web and online services is a recent phenomenon.
Acceptance and use may not continue to develop at historical rates and a
sufficiently broad base of customers may not adopt or continue to use the
Internet and other online services as a medium of commerce. Demand and market
acceptance for recently-introduced services and products over the Internet are
subject to a high level of uncertainty and few proven services and products
exist.
In addition, the Internet may not be accepted as a viable long-term
commercial marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. To the extent that the
Internet continues to experience significant expansion in the number of users,
frequency of use or bandwidth requirements, the infrastructure for the Internet
may be unable to support the demands placed upon it. In addition, the Internet
could lose its viability as a commercial medium due to delays in the development
or adoption of new standards and protocols required to handle increased levels
of Internet activity, or due to increased governmental regulation. Changes in,
or insufficient availability of, telecommunications services to support the
Internet also could result in slower response times and adversely affect usage
of the Internet generally.
Our business, financial condition and results of operations would be
seriously harmed if:
- Use of the Internet, the web and other online services does not continue
to increase or increases more slowly than expected;
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- The infrastructure for the Internet, the web and other online services
does not effectively support expansion that may occur; or
- The Internet, the web and other online services do not become a viable
commercial marketplace, which would inhibit the development of electronic
commerce and of the need for our Net Perceptions for E-commerce product.
PROTECTION OF OUR INTELLECTUAL PROPERTY MAY NOT BE ADEQUATE.
We are a technology company. Our success depends on protecting our
intellectual property, which are our most important assets. If we do not
adequately protect our intellectual property, our business, financial condition
and results of operations will be seriously harmed.
We license our software and require our customers to enter into license
agreements, which impose restrictions on our customers' ability to utilize the
software. In addition, we seek to avoid disclosure of our trade secrets,
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 and other written materials under trade secret and copyright laws,
which afford only limited protection.
We have four pending U.S. patent applications. We also have license rights
to two issued U.S. patents and one pending U.S. patent application from the
University of Minnesota. We have no issued foreign patents, nor do we have any
pending foreign patent applications. It is possible that no patents will issue
from the currently pending patent applications. It is also possible that our
current patents or potential future patents may be found invalid or
unenforceable, or otherwise be successfully challenged. It is also possible that
any patent issued to us may not provide us with any competitive advantages. It
is also possible 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.
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
our software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect our
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 and our
competitors may independently develop similar technology, duplicate our products
or design around patents issued to us or our other intellectual property.
There has been a substantial amount of litigation in the software industry
regarding intellectual property rights. We have from time to time received
claims that we are infringing third parties' intellectual property rights. It is
possible that in the future third parties may claim that our current or
potential future products infringe their intellectual property. We expect that
software developers will increasingly be subject to infringement claims as the
number of products and competitors in our industry segment grows and the
functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require us to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms acceptable to us or at all, which could seriously harm our
business, financial condition and results of operations.
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IN ORDER TO MANAGE OUR GROWTH AND EXPANSION, WE WILL NEED TO IMPROVE AND
IMPLEMENT NEW SYSTEMS, PROCEDURES AND CONTROLS.
We have recently experienced a period of significant expansion of our
operations that has placed a significant strain upon our management systems and
resources. In addition, we have recently hired a significant number of employees
and plan to further increase our total headcount. Our headcount has increased
from 14 at December 31, 1996 to 34 at December 31, 1997 to 70 at December 31,
1998 to 92 at February 28, 1999. We also plan to expand the geographic scope of
our customer base and operations. This expansion has resulted and will continue
to result in substantial demands on our management resources. 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, and expand, train and manage
our employee work force. Our failure to do so could seriously harm our business,
financial condition and results of operations.
OUR BUSINESS COULD BE AFFECTED BY YEAR 2000 ISSUES.
"Year 2000 Issues" refer 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.
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 the date elements in interfaces and data storage specify
the century; and
- Recognize the Year 2000 as a leap year.
We designed our current products to be Year 2000 compliant when configured
and used in accordance with the related documentation, and provided that the
underlying operating system of the host machine and any other software used with
or in the host machine or our products are Year 2000 compliant. However, we have
not tested our products for Year 2000 compliance. We continue to respond to
customer questions about prior versions of our products on a case-by-case basis.
We have not tested software obtained from third parties. However, we are
seeking assurances from our vendors that licensed software is Year 2000
compliant. Despite 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 or defects in our products
could result in delay or loss of revenues, diversion of development resources,
damage to our reputation, or increased service and warranty costs, any of which
could seriously harm our business, financial condition and results of
operations. Some commentators have predicted significant litigation regarding
Year 2000 compliance issues, and we are aware of such lawsuits against other
software vendors. Because of the unprecedented nature of such litigation, it is
uncertain whether or to what extent we may be affected by it.
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We are assessing our material internal information technology systems,
including both our own software products and third-party software and hardware
technology, but we have not initiated an assessment of our non-information
technology systems. We expect to complete testing of our information technology
systems in 1999. To the extent that we are not able to test the technology
provided by third-party vendors, we are seeking assurances from such vendors
that their systems are Year 2000 compliant. We are not currently aware of any
significant operational issues or costs associated with preparing our internal
information technology and non-information technology systems for the Year 2000.
However, we may experience significant 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. 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, they may face
litigation costs and they may delay purchases or implementation of our products.
Year 2000 issues could reduce or eliminate the budgets that current or potential
customers could have for purchases of our products and services. As a result,
our business, financial condition and results of operations could be seriously
harmed.
We have funded our Year 2000 plan from cash balances and have not separately
accounted for these costs in the past. To date, these costs have not been
significant. We will incur additional costs related to the Year 2000 plan for
administrative personnel to manage the project, outside contractor assistance,
technical support for our products, product engineering and customer
satisfaction. In addition, we may experience material problems and costs with
Year 2000 compliance that could seriously harm our business, financial condition
and results of operations.
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. The cost of developing and implementing such a plan may itself be
significant. Finally, we are also subject to external forces that might
generally affect industry and commerce, such as utility or transportation
company interruptions caused by Year 2000 compliance failures.
OUR CURRENT REVENUE RECOGNITION PRACTICES MAY NEED TO CHANGE, WHICH COULD
SERIOUSLY HARM OUR BUSINESS.
The American Institute of Certified Public Accountants issued Statement of
Position ("SOP") 97-2, "Software Revenue Recognition," in October 1997 and
amended it by Statement of Position 98-4. We adopted SOP 97-2 effective January
1, 1998. We believe our current revenue recognition policies and practices are
consistent with SOP 97-2 and SOP 98-4. However, full implementation guidelines
for these standards have not yet been issued. Once available, our current
revenue accounting practices may need to change and such changes could seriously
harm our future revenues and earnings. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
INCREASING GOVERNMENT REGULATION COULD LIMIT THE MARKET FOR OUR PRODUCTS AND
SERVICES, WHICH COULD SERIOUSLY HARM OUR BUSINESS.
As Internet commerce evolves, we expect that federal, state or foreign
agencies will adopt regulations covering issues such as user privacy, pricing,
content and quality of products and services. If enacted, such laws, rules or
regulations could limit the market for our products and services, which could
seriously harm our business, financial condition and results of operations.
Although many of these regulations may not apply to our business directly, we
expect that laws regulating the solicitation, collection or processing of
personal/customer information could indirectly affect our business. The
Telecommunications Act of 1996 prohibits some types of information and content
from being
17
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transmitted over the Internet. The prohibition's scope and the liability
associated with a Telecommunications Act violation are currently unsettled. In
addition, although substantial portions of the Communications Decency Act were
held to be unconstitutional, we cannot be certain that similar legislation will
not be enacted and upheld in the future. It is possible that such legislation
could expose companies involved in Internet commerce to liability, which could
limit the growth of Internet commerce generally. Legislation like the
Telecommunications Act and the Communications Decency Act could dampen the
growth in web usage and decrease its acceptance as a communications and
commercial medium.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE.
We expect that the net proceeds from this offering will be sufficient to
meet our working capital and capital expenditure needs for at least the next 12
months. After that, we may need to raise additional funds and we cannot be
certain that we will be able to obtain additional financing on favorable terms,
if at all. If we cannot raise funds, if needed, on acceptable terms, we may not
be able to develop or enhance our products, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements,
which could seriously harm our business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and capital resources."
WE ARE SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS.
Because our customers use our products for mission-critical applications
such as electronic commerce, errors or defects in or other performance problems
with our products could result in financial or other damages to our customers.
Our customers could seek damages for losses from us. Although our license
agreements typically contain provisions designed to limit our exposure to
product liability claims, existing or future laws or unfavorable judicial
decisions could negate such limitation of liability provisions. We have not
experienced any product liability claims to date. However, a product liability
claim brought against us, even if not successful, would likely be time-consuming
and costly. A product liability claim could seriously harm our business,
financial condition and results of operations.
WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR EXPECTED STOCK
PRICE VOLATILITY.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources, which could seriously harm our business, financial condition and
results of operations.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
All statements, trend analyses and other information contained in this
prospectus relating to markets for our products and trends in total revenues,
gross margin and anticipated expense levels, as well as other statements
including words such as "anticipate," "believe," "plan," "estimate," "expect"
and "intend" and other similar expressions, are forward-looking statements.
These forward-looking statements are subject to business and economic risks, and
our actual results of operations may differ substantially from those anticipated
in the forward-looking statements. The cautionary statements made in this
prospectus apply to all forward-looking statements wherever they appear in this
prospectus.
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USE OF PROCEEDS
The net proceeds to Net Perceptions from the sale of the 3,650,000 shares of
common stock offered hereby are estimated to be $36,300,000, assuming an initial
public offering price of $11.00 per share, and after deducting estimated
underwriting discounts and commissions and estimated offering expenses. The net
proceeds of this offering are estimated to be $41,900,000 if the underwriters'
over-allotment option is exercised in full. The primary purposes of this
offering are to obtain additional equity capital, create a public market for our
common stock, and facilitate future access to public markets. We expect to use
the net proceeds for general corporate purposes, including working capital. A
portion of the net proceeds may also be used for the acquisition of businesses,
products and technologies that are complementary to ours. We have no current
plans, agreements or commitments and are not currently engaged in any
negotiations with respect to any such transaction. Pending such uses, we will
invest the net proceeds of this offering in investment grade, interest-bearing
securities.
DIVIDEND POLICY
We have not paid any cash dividends since our inception and do not intend to
pay any cash dividends in the foreseeable future.
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CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998,
on a pro forma basis after giving effect to a 2-for-1 split of our capital
stock, the conversion of all outstanding shares of preferred stock into common
stock and the filing of an amended and restated certificate of incorporation
upon the closing of this offering, and as adjusted to reflect the receipt of the
estimated net proceeds from the sale by us of 3,650,000 shares of common stock
pursuant to this offering at an assumed initial offering price of $11.00 per
share (after deducting the estimated underwriting discounts and commissions and
estimated offering expenses) and the issuance of 369,697 shares of common stock
upon the conversion of a convertible promissory note on the closing of this
offering at an assumed conversion price of $11.00 per share:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------
PRO FORMA AS ADJUSTED
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term liabilities, less current portion(1)...................... $ 538 $ 538
Stockholders' equity:
Preferred stock, $.0001 par value per share, 10,000,000 shares
authorized; no shares issued or outstanding pro forma or as
adjusted........................................................ -- --
Common stock, $.0001 par value per share, 100,000,000 shares
authorized, 17,302,008 shares issued and outstanding pro forma,
21,321,705 shares issued and outstanding as adjusted............ 1 2
Additional paid-in capital........................................ 11,787 52,192
Accumulated deficit............................................... (10,717) (10,784)
----------- -----------
Total stockholders' equity...................................... 1,071 41,410
----------- -----------
Total capitalization.......................................... $ 1,609 $ 41,948
----------- -----------
----------- -----------
</TABLE>
- ---------
(1) See Note 6 of Notes to Financial Statements.
The number of shares of common stock issued and outstanding pro forma and as
adjusted excludes 1,408,564 shares of common stock issuable upon exercise of
stock options outstanding under our 1996 Stock Plan as of December 31, 1998 at a
weighted average exercise price of $0.52 per share, and 1,058,128 shares of
common stock reserved for grant of future options under our 1996 Stock Plan.
These numbers also exclude 11,982 shares of common stock issuable upon the
exercise of a warrant outstanding as of December 31, 1998 at an exercise price
of $1.535 per share. Subsequent to December 31, 1998, we granted options to
purchase 524,936 shares of common stock. The number of shares of common stock
issued and outstanding as adjusted includes the 369,697 shares of common stock
issuable upon conversion of a convertible promisory note upon the closing of
this offering at an assumed conversion price of $11.00 per share. The number of
shares of common stock issued and outstanding pro forma excludes these shares.
On February 4, 1999, we adopted, subject to stockholder approval, our 1999
Equity Incentive Plan as a successor plan to replace our 1996 Stock Plan,
whereby an additional 800,000 shares were reserved for issuance thereunder. In
addition, on February 4, 1999, we adopted, subject to stockholder approval, our
Employee Stock Purchase Plan and reserved 1,000,000 shares of common stock for
issuance under such plan and our 1999 Non-Employee Director Option Plan and
reserved 500,000 shares of common stock for issuance under such plan. See
"Management-- 1999 Equity Incentive Plan," "--Employee Stock Purchase Plan,"
"--1999 Non-Employee Director Option Plan," and Note 7 of Notes to Financial
Statements.
20
<PAGE>
DILUTION
The pro forma net tangible book value of our common stock as of December 31,
1998 was $1,071,000, or approximately $0.06 per share. Pro forma net tangible
book value per share represents the amount of our stockholders' equity, less
intangible assets, divided by 17,302,008 shares of common stock outstanding
after giving effect to the conversion of all outstanding shares of preferred
stock into shares of common stock upon completion of this offering.
Net tangible book value dilution per share to new investors represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the pro forma net tangible book value per share of
common stock immediately after completion of this offering. After giving effect
to the sale by us of 3,650,000 shares of common stock in this offering at an
assumed initial offering price of $11.00 per share and after deducting the
estimated underwriting discounts and commissions and estimated offering expenses
and the application of the estimated net proceeds therefrom and after giving
effect to the issuance of 369,697 shares of common stock upon conversion of a
convertible promissory note at the closing of this offering at an assumed
conversion price of $11.00 per share, our pro forma net tangible book value as
of December 31, 1998, would have been $41,410,000, or $1.94 per share. This
represents an immediate increase in net tangible book value of $1.88 per share
to existing stockholders and an immediate dilution in net tangible book value of
$9.06 per share to purchasers of common stock in this offering, as illustrated
in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share........... $ 11.00
Pro forma net tangible book value per share as of
December 31, 1998..................................... $ 0.06
Increase per share attributable to new investors........ 1.88
---------
Pro forma net tangible book value per share after this
offering................................................ 1.94
---------
Net tangible book value dilution per share to new
investors............................................... $ 9.06
---------
---------
</TABLE>
The following table sets forth as of December 31, 1998, after giving effect
to the conversion of all outstanding shares of preferred stock into common stock
upon completion of this offering, the difference between the existing
stockholders and the purchasers of shares in this offering (at the assumed
initial offering price of $11.00 per share) with respect to the number of shares
purchased from us, the total consideration paid and the average price per share
paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- -------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------------ --------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders......................... 17,302,008 81.1% $ 11,856,579 21.1% $ 0.685
New stockholders.............................. 4,019,697 18.9 44,216,667 78.9 $ 11.000
------------ --------- ------------- -----
Totals.................................... 21,321,705 100.0% $ 56,073,246 100.0%
------------ --------- ------------- -----
------------ --------- ------------- -----
</TABLE>
As of December 31, 1998, there were options outstanding to purchase a total
of 1,408,564 shares of common stock at a weighted average exercise price of
$0.52 per share under our 1996 Stock Plan. In addition, as of December 31, 1998,
there was a warrant outstanding to purchase a total of 11,982 shares of common
stock at an exercise price of $1.535 per share. Subsequent to December 31, 1998,
we granted options to purchase 524,936 shares of common stock. To the extent
outstanding options or warrants are exercised, there will be further dilution to
new investors. In addition, subsequent to December 31, 1998, we issued a $4.0
million convertible promissory note, which note will convert into common stock
upon the closing of this offering. See "Management--1999 Equity Incentive Plan,"
"--Employee Stock Purchase Plan," "--1999 Non-Employee Director Stock Option
Plan" and Note 7 of Notes to Financial Statements.
21
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
financial statements and the notes to the financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," which
are included elsewhere in this prospectus. The statement of operations data for
the period from July 3, 1996 (inception) to December 31, 1996, and for each of
the two years in the period ended December 31, 1998, and the balance sheet data
at December 31, 1997 and 1998, are derived from, and are qualified by reference
to, the audited financial statements included in this prospectus. The balance
sheet data at December 31, 1996 are derived from audited financial statements
not included in this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED
JULY 3, 1996 DECEMBER 31,
(INCEPTION) TO --------------------
DECEMBER 31, 1996 1997 1998
----------------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product................................................................ $ -- $ 284 $ 3,955
Maintenance and service................................................ 4 33 522
------- --------- ---------
Total revenues....................................................... 4 317 4,477
------- --------- ---------
Cost of revenues:
Product................................................................ -- 14 52
Maintenance and service................................................ 2 30 373
------- --------- ---------
Total cost of revenues............................................... 2 44 425
------- --------- ---------
Gross margin............................................................. 2 273 4,052
------- --------- ---------
Operating expenses:
Sales and marketing.................................................... 454 3,063 5,238
Research and development............................................... 378 1,372 2,372
General and administrative............................................. 210 585 1,474
------- --------- ---------
Total operating expenses............................................. 1,042 5,020 9,084
------- --------- ---------
Loss from operations..................................................... (1,040) (4,747) (5,032)
Other income (expense), net.............................................. 13 25 64
------- --------- ---------
Net loss................................................................. $ (1,027) $ (4,722) $ (4,968)
------- --------- ---------
------- --------- ---------
Basic and diluted net loss per share..................................... $ (3.40) $ (3.01) $ (1.40)
------- --------- ---------
------- --------- ---------
Shares used in computing basic and diluted net loss per share(1)......... 302 1,569 3,546
------- --------- ---------
------- --------- ---------
Pro forma basic and diluted net loss per share........................... $ (0.35)
---------
---------
Shares used in computing pro forma basic and diluted net loss per
share(1)............................................................... 14,113
---------
---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1996 1997 1998
--------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................................ $ 2,064 $ 1,407 $ 972
Working capital.................................................................. 3,554 4,442 468
Total assets..................................................................... 4,099 5,575 5,637
Long-term liabilities, net of current portion.................................... 87 345 538
Redeemable convertible preferred stock........................................... 650 650 650
Total stockholders' equity....................................................... 2,950 3,879 421
</TABLE>
- ---------
(1) See Note 2 of Notes to Financial Statements for an explanation of the
methods used to determine the number of shares used in computing net loss
per share data.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF NET PERCEPTIONS SHOULD BE READ IN CONJUNCTION WITH "SELECTED
FINANCIAL DATA" AND NET PERCEPTIONS' FINANCIAL STATEMENTS AND NOTES THERETO
APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION AND ANALYSIS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS, UNCERTAINTIES AND ASSUMPTIONS.
OUR ACTUAL RESULTS MAY DIFFER SUBSTANTIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS INCLUDING, BUT NOT
LIMITED TO, THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS.
OVERVIEW
We develop, market and support real-time relationship marketing software
solutions. We were incorporated in Delaware in July 1996. In connection with our
formation, we licensed technology that had been developed at the University of
Minnesota. From inception through December 31, 1996, we were considered to be in
the development stage, with activities primarily relating to raising capital,
recruiting personnel, conducting research and development, developing our
initial product, establishing the market for our initial product and purchasing
operating assets. During 1997 and 1998, we continued to invest in research and
development, built sales channels, expanded marketing activities and developed
administrative operations. We began shipping our first product in the first
quarter of 1997.
Substantially all of our product revenues through December 31, 1998 were
attributable to our Net Perceptions for E-commerce product. Net Perceptions for
E-commerce was originally marketed under the name "GroupLens Recommendation
Engine," which we launched in the first quarter of 1997. We anticipate that Net
Perceptions for E-commerce will continue to account for a substantial portion of
our product revenues for the foreseeable future. Consequently, a decline in the
price of or demand for Net Perceptions for E-commerce, or its failure to achieve
broad market acceptance, would seriously harm our business, financial condition
and results of operations. We expect to deliver our Net Perceptions for Call
Centers product in 1999.
We market the majority of our products through our direct sales force. Sales
derived through indirect channels, which consist of resellers, systems
integrators and original equipment manufacturers, accounted for approximately 8%
of our total revenues in 1998. We expect that sales derived through indirect
channels will increase as a percentage of total revenues. Sales through indirect
channels have lower average selling prices and gross margins than direct sales.
As a result, we expect that our gross margins on product sales will decline if
sales through indirect channels increase.
We license our products to our customers on a perpetual or annual basis. Net
Perceptions for E-commerce is licensed based on the number of web sites the
product supports and the number of user profiles the recommendation engine
stores. To date, we have licensed the Net Perceptions for E-commerce product
primarily on a perpetual basis. We are currently transitioning our license
arrangements for the Net Perceptions for E-commerce product to allow for
increased recurring revenues on an annual basis. We may not be successful in
this transition. Net Perceptions for Call Centers is licensed on an annual basis
based on the number of call center operators utilizing the product. Net
Perceptions Recommendation Engine is licensed based on the number of user
profiles the recommendation engine stores. Selling prices for our products have
typically ranged from $40,000 to several hundred thousand dollars. Annual
support and maintenance contracts, which can be purchased in conjunction with
the licensing of all products, are sold separately and entitle customers to
telephone support and some upgrade rights. The price for the support and
maintenance program is based on a percentage of the list price of the software
the customer has licensed. Consulting fees for implementation services and
training are charged at a per diem rate or on a fixed fee basis for a package of
services.
23
<PAGE>
License revenues are generally recognized upon product delivery to
customers, provided there are no significant post-delivery obligations or
uncertainties and collection of the related account receivable is probable.
Where multiple products or services are sold together under one contract,
revenues are allocated to each element based on its relative fair value, with
fair value being determined using the price charged when that element is sold
separately. An allowance for estimated future returns is recorded at the time
revenues are recognized based on our return policy. Service revenues are
recognized as services are rendered or ratably over the term of the service
agreement.
Deferred compensation related to stock options granted below fair market
value through December 31, 1998 was approximately $1,639,000 and during the
first quarter of 1999 was approximately $1,507,000. Of these amounts, we
amortized approximately $366,000 in 1998. Amortization of deferred stock
compensation expense is allocated to all operating expense lines identified in
the statement of operations. These amounts represent the difference between the
exercise price of certain stock option grants and the deemed fair value of the
common stock at the time of such grants. Deferred stock compensation expense is
amortized over the vesting period of the options, generally four years. As a
result, the amortization of deferred compensation will impact our reported
results of operations through 2003.
We have sustained losses on a quarterly and an annual basis since inception.
As of December 31, 1998, we had an accumulated deficit of $10.7 million. Our net
loss was $4.7 million in 1997 and $5.0 million in 1998. These losses resulted
from significant costs incurred in the development and sale of our products and
services. We expect to experience significant growth in our operating expenses
for the foreseeable future in order to execute our business plan, particularly
research and development and sales and marketing expenses. As a result, we
anticipate that such operating expenses, as well as planned capital
expenditures, will constitute a material use of our cash resources. As a result,
we expect to incur additional losses and continued negative cash flow from
operations for the foreseeable future, and such losses are anticipated to
increase significantly from current levels. We do not expect to achieve
profitability in 1999 or 2000.
Our limited operating history makes the prediction of future operating
results very difficult. We believe that period-to-period comparisons of our
operating results should not be relied upon as predictive of future performance.
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. We may not be
successful in addressing these risks and difficulties. We have experienced
significant percentage growth in revenues in recent periods; however, we do not
believe that prior growth rates are sustainable or indicative of future growth
rates.
24
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of revenues, statement of
operations data for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1998
------------ ------------
<S> <C> <C>
Revenues:
Product.................................................................................. 90 % 88 %
Maintenance and service.................................................................. 10 12
------ ---
Total revenues......................................................................... 100 100
Cost of revenues:
Product.................................................................................. 4 1
Maintenance and service.................................................................. 9 8
------ ---
Total cost of revenues................................................................. 13 9
------ ---
Gross margin............................................................................... 87 91
Operating expenses:
Sales and marketing...................................................................... 966 117
Research and development................................................................. 433 53
General and administrative............................................................... 185 33
------ ---
Total operating expenses............................................................... 1,584 203
------ ---
Loss from operations....................................................................... (1,497) (112)
Other income (expense), net................................................................ 7 1
------ ---
Net loss................................................................................... (1,490)% (111)%
------ ---
------ ---
</TABLE>
PERIODS ENDED DECEMBER 31, 1996, 1997 AND 1998
REVENUES
Total revenues were $4,000 for the period from inception to December 31,
1996, $317,000 in 1997 and $4.5 million in 1998.
PRODUCT REVENUES. Revenues from product licenses were $284,000 in 1997 and
$4.0 million in 1998. We had no product revenues in 1996. The majority of the
period-to-period growth in product revenues was due to higher unit sales
volumes. We anticipate that revenues from product licenses will continue to
represent a substantial majority of our revenues for the foreseeable future. We
expect that prior percentage growth rates of our product revenues will not be
sustainable in the future.
Revenues from international sales were $85,000 in 1997 and $603,000 in 1998,
which accounted for 27% of total revenues in 1997 and 13% of total revenues in
1998. The majority of international sales were made in Canada, Europe and Asia
by our direct sales force located in the United States. Our international sales
are generally denominated in U.S. dollars
MAINTENANCE AND SERVICE REVENUES. Maintenance and service revenues were
$4,000 for the period from inception to December 31, 1996, $33,000 in 1997 and
$522,000 in 1998. This growth is primarily due to increased licensing activity,
which has resulted in increased revenues from services related to maintenance
and support, training and consulting. We expect that prior percentage growth
rates of our maintenance and service revenues will not be sustainable in the
future.
25
<PAGE>
COST OF REVENUES
Gross margins increased from 87% in 1997 to 91% in 1998, primarily as a
result of increased product sales. In the future, we expect that royalties paid
to third parties will increase. In addition, we expect that sales derived
through indirect channels will increase as a percentage of total revenues. Sales
through indirect channels have lower average selling prices and gross margins
than direct sales. We also expect that maintenance and service revenues will
increase as a percentage of total revenues. Maintenance and service revenues
have lower gross margins than product revenues. For all of these reasons, we
expect that our gross margins will decline.
COST OF PRODUCT REVENUES. Cost of product revenues consists primarily of
royalties paid to third parties, the cost of manuals and product media, and
shipping costs. Cost of product revenues was $14,000 in 1997 and $52,000 in
1998. We had no cost of product revenues in 1996. The increase in the dollar
amount of cost of product revenues from 1997 to 1998 reflects the higher volumes
of product shipped in 1998. The decrease in costs as a percentage of the related
product revenues from 1997 to 1998 is primarily due to economies of scale
realized as a result of shipping greater quantities of product in 1998. Because
all development costs incurred in the research and development of software
products and enhancements to existing software products have been expensed as
incurred, cost of product revenues includes no amortization of capitalized
software development costs.
COST OF MAINTENANCE AND SERVICE REVENUES. Cost of maintenance and service
revenues consists primarily of personnel-related costs incurred in providing
support, consulting services and training to customers. Cost of maintenance and
service revenues was $2,000 for the period from inception to December 31, 1996,
$30,000 in 1997 and $373,000 in 1998, representing 91% of the related
maintenance and service revenues in 1997 and 71% in 1998. Cost of maintenance
and service revenues increased significantly from 1997 to 1998 as a result of
increased personnel-related costs as we began to build our customer support,
education and training, and consulting services organizations. We believe that
the cost of maintenance and service revenues will increase in dollar amounts but
decrease as a percentage of maintenance and service revenues in the future.
OPERATING EXPENSES
Operating expenses were $1.0 million for the period from inception to
December 31, 1996, $5.0 million in 1997 and $9.1 million in 1998.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses of sales and marketing personnel, and
promotional expenses. Sales and marketing expenses were $454,000 for the period
from inception to December 31, 1996, $3.1 million in 1997 and $5.2 million in
1998. Increased headcount in our sales and marketing organizations accounted for
approximately $1.2 million of the increase in sales and marketing expenses from
1996 to 1997 and approximately $1.3 million of the increase from 1997 to 1998.
Increased marketing expenses accounted for approximately $1.4 million of the
increase in sales and marketing expenses from 1996 to 1997 and approximately
$900,000 of the increase from 1997 to 1998. We believe that sales and marketing
expenses will increase in dollar amount but decrease as a percentage of total
revenues in the future.
RESEARCH AND DEVELOPMENT. Research and development expenses were $378,000
for the period from inception to December 31, 1996, $1.4 million in 1997 and
$2.4 million in 1998. The increases in research and development expenses were
primarily attributable to increased staffing and associated support for software
engineers required to expand and enhance our product line. We believe that
research and development expenses will increase in dollar amount but decrease as
a percentage of total revenues in the future.
Research and development expenditures are generally charged to operations as
incurred. Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to be Sold,
26
<PAGE>
Leased or Otherwise Marketed," requires capitalization of certain software
development costs subsequent to the establishment of technological feasibility.
Based on our product development process, technological feasibility is
established upon completion of a working model. The costs incurred between
completion of the working model and the point at which the product is ready for
general release have been insignificant. Through December 31, 1998, all research
and development costs have been expensed.
We license technology from various third parties for use in our products.
Third-party technology may not continue to be available to us on commercially
reasonable terms. We may not be able to renew our agreements with third parties
or develop alternative technology. If we cannot maintain rights or licenses to
key third-party technology, develop similar technology or license similar
technology from another source on a timely and commercially feasible basis, our
business, financial condition and results of operations could be seriously
harmed. See "Risk Factors--We depend on technology licensed from other parties.
If we are unable to continue to utilize such technology, our business would be
seriously harmed."
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$210,000 for the period from inception to December 31, 1996, $585,000 in 1997
and $1.5 million in 1998. The increases in general and administrative expenses
were primarily the result of increased staffing and associated expenses
necessary to manage and support our growth. In addition, the allowance for
doubtful accounts receivable increased by $28,000 from 1996 to 1997 and by
$266,000 from 1997 to 1998. We believe that general and administrative expenses
will increase in dollar amount as we continue to increase staffing to manage
expanding operations and facilities and incur the additional expenses associated
with operating as a public company. However, we believe that general and
administrative expenses will decrease as a percentage of total revenues in the
future.
OTHER INCOME (EXPENSE), NET
Other income (expense), net consists of interest income, income expense and
other expense. Other income (expense), net was $13,000 for the period from
inception to December 31, 1996, $25,000 in 1997 and $64,000 in 1998.
PROVISION FOR INCOME TAXES
As of December 31, 1998, we had net operating loss carryforwards of
approximately $9.1 million available to reduce future taxable income expiring at
various dates beginning in 2011. In addition, as of December 31, 1998, we had
$258,000 of tax credit carryforwards expiring at various dates beginning in
2011. Under the provisions of the Internal Revenue Code, certain substantial
changes in our ownership may limit in the future the amount of net operating
loss and tax credit carryforwards that could be utilized annually to offset
future taxable income.
We have recorded a valuation allowance for the full amount of our net
deferred tax assets, as the future realization of the tax benefit is not
currently likely.
27
<PAGE>
SELECTED QUARTERLY OPERATING RESULTS
The following tables set forth statement of operations data for the eight
quarters ended December 31, 1998, as well as the percentage of our total
revenues represented by each item. This information has been derived from our
unaudited financial statements. The unaudited financial statements have been
prepared on the same basis as the audited financial statements contained in this
prospectus and include all adjustments, consisting only of normal recurring
accruals, that we consider necessary for a fair presentation of such information
when read in conjunction with our annual audited financial statements and notes
thereto appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
--------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS AND AS A PERCENTAGE OF REVENUES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product............................... $ 86 $ 23 $ 55 $ 120 $ 617 $ 889 $ 993 $ 1,456
Maintenance and service............... 7 4 4 18 53 100 163 206
--------- -------- --------- -------- --------- -------- --------- --------
Total revenues...................... 93 27 59 138 670 989 1,156 1,662
--------- -------- --------- -------- --------- -------- --------- --------
Cost of revenues:
Product............................... 4 1 3 6 6 9 10 27
Maintenance and service............... 7 3 4 16 35 65 106 167
--------- -------- --------- -------- --------- -------- --------- --------
Total cost of revenues.............. 11 4 7 22 41 74 116 194
--------- -------- --------- -------- --------- -------- --------- --------
Gross margin............................ 82 23 52 116 629 915 1,040 1,468
Operating expenses:
Sales and marketing................... 653 906 740 764 935 1,154 1,222 1,927
Research and development.............. 290 345 391 346 371 513 623 865
General and administrative............ 129 141 163 152 227 298 402 547
--------- -------- --------- -------- --------- -------- --------- --------
Total operating expenses............ 1,072 1,392 1,294 1,262 1,533 1,965 2,247 3,339
--------- -------- --------- -------- --------- -------- --------- --------
Loss from operations.................... (990) (1,369) (1,242) (1,146) (904) (1,050) (1,207) (1,871)
Other income (expense), net............. 33 14 2 (24) 28 38 24 (26)
--------- -------- --------- -------- --------- -------- --------- --------
Net loss................................ $ (957) $(1,355) $(1,240) $(1,170) $ (876) $(1,012) $(1,183) $(1,897)
--------- -------- --------- -------- --------- -------- --------- --------
--------- -------- --------- -------- --------- -------- --------- --------
PERCENT OF TOTAL REVENUES:
Revenues:
Product............................... 93% 85% 93% 87% 92% 90% 86% 88%
Maintenance and service............... 7 15 7 13 8 10 14 12
--------- -------- --------- -------- --------- -------- --------- --------
Total revenues...................... 100 100 100 100 100 100 100 100
Cost of revenues:
Product............................... 4 4 5 4 1 1 1 2
Maintenance and service............... 8 11 7 12 5 7 9 10
--------- -------- --------- -------- --------- -------- --------- --------
Total cost of revenues.............. 12 15 12 16 6 8 10 12
--------- -------- --------- -------- --------- -------- --------- --------
Gross margin............................ 88 85 88 84 94 92 90 88
Operating expenses:
Sales and marketing................... 702 3,356 1,254 554 140 117 106 116
Research and development.............. 312 1,278 663 251 55 52 54 52
General and administrative............ 139 522 276 110 34 30 35 33
--------- -------- --------- -------- --------- -------- --------- --------
Total operating expenses............ 1,153 5,156 2,193 915 229 199 195 201
--------- -------- --------- -------- --------- -------- --------- --------
Loss from operations.................... (1,065) (5,071) (2,105) (831) (135) (107) (105) (113)
Other income (expense), net............. 35 52 3 (17) 4 4 2 (2)
--------- -------- --------- -------- --------- -------- --------- --------
Net loss................................ (1,030)% (5,019)% (2,102)% (848)% (131)% (103)% (103)% (115)%
--------- -------- --------- -------- --------- -------- --------- --------
--------- -------- --------- -------- --------- -------- --------- --------
</TABLE>
Our quarterly operating results are expected to vary significantly from
quarter to quarter and are difficult to predict. See "Risk Factors--Our
quarterly operating results are volatile and difficult to predict. If we fail to
meet the expectations of public market analysts and investors, the market price
of our common stock may decrease significantly."
28
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations through private sales of
preferred stock, with net proceeds of $11.3 million, bank loans and equipment
leases. We used $802,000 of cash in operations for the period from inception to
December 31, 1996, $4.6 million in 1997 and $4.4 million in 1998. We used cash
primarily to fund our net losses from operations. At December 31, 1998, we had
$972,000 in cash and cash equivalents and $468,000 in working capital.
In 1998, $3.0 million of cash was provided by investing activities. We had
sales of short-term investments of $3.4 million, offset by purchases of property
and equipment of $442,000. In 1996 and 1997, our investing activities consisted
of net purchases of short-term investments. We used $1.8 million net cash in
investing activities in 1996 and $1.7 million in 1997. We expect that, in the
future, cash in excess of current requirements, if any, will be invested in
investment grade, interest-bearing securities.
On February 4, 1999, we borrowed $4.0 million from a foreign corporate
investor pursuant to a convertible promissory note. The note is due January 31,
2000 and bears interest at the rate of 8% per annum. The note will automatically
convert into our equity securities upon our next equity financing at the price
per share in such financing. Accordingly, at the closing of this offering, all
principal and accrued but unpaid interest on the note will convert into our
common stock at a conversion price equal to the price per share in this
offering.
Capital expenditures, including capital leases, were $117,000 for the period
from inception to December 31, 1996, $414,000 in 1997 and $914,000 in 1998. Our
capital expenditures consisted of purchases of property and equipment, primarily
computer equipment and software. We expect that our capital expenditures will
continue to increase in the future. Since inception, we have generally funded
the purchase of property and equipment with capital leases. We have an equipment
loan agreement that allows us to borrow up to $1.0 million for the purchase of
property and equipment through December 1999. The initial term of the loan is 42
months from the borrowing date. The loan has an effective interest rate of 14%.
At December 31, 1998, the entire $1.0 million was available under the loan. As
of December 31, 1998, our primary commitments consisted of obligations
outstanding under operating leases and $794,000 of capital lease obligations.
We expect to experience significant growth in our operating expenses for the
foreseeable future in order to execute our business plan, particularly research
and development and sales and marketing expenses. As a result, we anticipate
that such 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 the net proceeds from the sale of
the common stock in this offering will be sufficient to meet our working capital
and capital expenditure requirements for at least the next 12 months.
Thereafter, we may find it necessary to obtain additional 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.
YEAR 2000 READINESS
"Year 2000 Issues" refer 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.
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;
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- 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 the date elements in interfaces and data storage specify
the century; and
- Recognize the Year 2000 as a leap year.
We designed our current products to be Year 2000 compliant when configured
and used in accordance with the related documentation, and provided that the
underlying operating system of the host machine and any other software used with
or in the host machine or our products are Year 2000 compliant. However, we have
not tested our products for Year 2000 compliance. We continue to respond to
customer questions about prior versions of our products on a case-by-case basis.
We have not tested software obtained from third parties. However, we are
seeking assurances from our vendors that licensed software is Year 2000
compliant. Despite 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 or defects in our products
could result in delay or loss of revenues, diversion of development resources,
damage to our reputation, or increased service and warranty costs, any of which
could seriously harm our business, financial condition and results of
operations. Some commentators have predicted significant litigation regarding
Year 2000 compliance issues, and we are aware of such lawsuits against other
software vendors. Because of the unprecedented nature of such litigation, it is
uncertain whether or to what extent we may be affected by it.
We are assessing our material internal information technology systems,
including both our own software products and third-party software and hardware
technology, but we have not initiated an assessment of our non-information
technology systems. We expect to complete testing of our information technology
systems in 1999. To the extent that we are not able to test the technology
provided by third-party vendors, we are seeking assurances from such vendors
that their systems are Year 2000 compliant. We are not currently aware of any
significant operational issues or costs associated with preparing our internal
information technology and non-information technology systems for the Year 2000.
However, we may experience significant 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. 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, they may face
litigation costs and they may delay purchases or implementation of our products.
Year 2000 issues could reduce or eliminate the budgets that current or potential
customers could have for purchases of our products and services. As a result,
our business, financial condition and results of operations could be seriously
harmed.
We have funded our Year 2000 plan from cash balances and have not separately
accounted for these costs in the past. To date, these costs have not been
significant. We will incur additional costs related to the Year 2000 plan for
administrative personnel to manage the project, outside contractor assistance,
technical support for our products, product engineering and customer
satisfaction. In addition, we may experience material problems and costs with
Year 2000 compliance that could seriously harm our business, financial condition
and results of operations.
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. The cost of developing and implementing such a plan may itself be
significant. Finally, we are also subject to external forces that
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might generally affect industry and commerce, such as utility or transportation
company interruptions caused by Year 2000 compliance failures.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
We do not expect SFAS No. 133 to have a significant effect on our financial
condition or results of operations.
In November 1998, the FASB cleared for issuance SOP 98-9, "Modification of
SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions,"
which will retain the limitations of SOP 97-2 on what constitutes vendor
specific objective evidence of fair value. SOP 98-9 will be effective for
transactions entered into in fiscal years beginning after March 15, 1999. We
believe that our current revenue recognition policies and practices are
consistent with the provisions of the new guidance.
In February 1998, the AcSEC issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 establishes
the accounting for costs of software products developed or purchased for
internal use, including when such costs should be capitalized. We do not expect
SOP 98-1, which is effective for us beginning January 1, 1999, to have a
significant effect on our financial condition or results of operations.
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BUSINESS
INTRODUCTION
Net Perceptions is a leading provider of marketing solutions that enable
Internet retailers to market to customers on a personalized, one-to-one-basis in
real time. With our software solutions, a retailer learns from each customer
interaction and, based on the information received, adjusts marketing messages
and product offerings to that customer in real time. Net Perception defines its
product offerings as real-time relationship marketing solutions. We believe that
retailers that implement our solutions can attract more customers, generate more
products per order and increase customer loyalty. To date, we have focused on
providing solutions to electronic commerce retailers. Our customers currently
include Barnesandnoble.com, CDnow, Egghead.com, Preview Travel, Ticketmaster
Online and Value America.
Our products enable effective real-time relationship marketing by analyzing
past and current customer behavior, including purchase history, stated
preferences, demographic information and Internet browsing behavior. Based on
this analysis, our products use proprietary collaborative filtering technology
to anticipate other merchandise or information a customer is likely to be
interested in purchasing or viewing.
INDUSTRY BACKGROUND
MARKETING IN RETAIL INDUSTRIES
Over the past several decades, the retail industry has experienced
significant consolidation, which has been accompanied by a change in how
retailers market their goods and services to customers. Prior to the emergence
of national chain stores and other large retailers, many retailers knew their
customers personally. By learning the unique needs, tastes and preferences of
each customer, the retailer could deliver a high level of personalized service.
In many cases the retailer was able to recommend goods and services specifically
tailored to the needs of a particular customer, providing value and saving time
for the customer and increasing sales for the retailer. In addition, by knowing
customer tastes, the retailer was able to buy more efficiently, resulting in
less wasted or unsold inventory.
Customers now make many of their purchases at national chain stores and
other large retailers. These retailers compete primarily on the basis of price,
convenience, location and selection. The personalized service delivered by the
traditional retailer is often too expensive for large, modern retailers because
the service delivery cost conflicts with the price savings the retailer aims to
provide customers. Many large retailers communicate with their customers through
unfocused mass marketing channels, such as television and print advertisements,
direct mail and coupons. These mass marketing techniques provide an inexpensive
way of reaching a large group of potential customers. However, these approaches
are impersonal and do not allow for personalized communications with potential
customers. Furthermore, they are inefficient in that the messages are received
by large groups of people who are not likely customers of a given retailer or
buyers of a particular product.
ONE-TO-ONE MARKETING OPPORTUNITIES
In recent years, competition for the attention of customers has intensified.
Customers are confronted with a variety of purchase choices, in many cases at
similar prices. As a result, many retailers now seek to distinguish themselves
by satisfying the unique needs of each customer through one-to-one marketing.
Instead of selling one product at a time to as many customers as possible in a
particular sales period, one-to-one marketing uses customer databases, computer
technology and interactive communications to sell to each customer as many
products and services as possible. This approach requires companies to manage
customers individually rather than managing only products, sales channels and
programs. One-to-one marketing is designed to increase the number of products
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sold by helping customers find the products they want to purchase and by
generating repeat sales. The challenge is to automate one-to-one marketing so it
can be implemented effectively and inexpensively across large customer
populations.
ONE-TO-ONE MARKETING FOR ELECTRONIC COMMERCE. Because the Internet has
emerged as an interactive and individually addressable communications and
commerce medium, retailers now have the opportunity to implement one-to-one
marketing on a mass basis. One-to-one marketing can occur on the Internet each
time a customer interacts with a retailer's electronic commerce web site. The
retailer can observe and record customer behavior on its web site and solicit
preference information. This data can be processed to generate an understanding
of the customer's interests and recommend appropriate products and services,
often referred to as "personalization." With the size and tremendous growth of
electronic commerce, the opportunity for one-to-one marketing on the Internet is
potentially large. International Data Corporation estimates that the amount of
Internet commerce worldwide will increase from $32 billion in 1998 to over $400
billion in 2002. A Jupiter Communications survey conducted in June 1998 reported
that 40% of online retailers used some form of personalization and 93% of the
remaining online retailers planned to implement the practice in the following 12
months.
ONE-TO-ONE MARKETING IN TRADITIONAL CHANNELS. The one-to-one marketing
model on the Internet creates new opportunities in more traditional sales
channels, such as in retail stores and in outbound or inbound call centers.
One-to-one marketing can occur each time a customer interacts with a retailer.
In a retail store or call center, a retailer can use technology to track
customer behavior and develop an understanding of the customer's tastes and
preferences. The retailer can then recommend products and services that match
those tastes and preferences. For example, point-of-sale terminals in retail
stores can print personalized coupons. For inbound call centers, software can
collect data about current and past purchases, and suggest, through the sales
agent, additional products to recommend to the customer. In outbound call
centers, data can be leveraged to recommend which customers should be called for
a particular product offering, based on products those customers have purchased
in the past.
ONE-TO-ONE MARKETING ACROSS MULTIPLE TOUCH-POINTS. A touch-point is a point
of contact between a retailer and a customer, such as a retail store, web site
or call center. Those retailers that interact with customers through multiple
channels or touch-points have the opportunity to learn about their customers
through these interactions. We believe that retailers that are most successful
in learning from all of their touch-point interactions will build the strongest
relationships with their customers. Retailers need a means of sharing this
learning across multiple touch-points so that activity on one touch-point can be
used in recommendations produced for another touch-point.
Realizing the potential of one-to-one marketing requires software that is:
- ACCURATE: Recommendations generated by the software, whether for products
to promote or content to display, must accurately reflect customer
preferences. The more accurate the recommendations, the more effective
they will be in driving customer behavior.
- REAL-TIME: The response time for producing recommendations must be
virtually unnoticeable to customers. Customers may not wait for the
recommendations if they slow the interaction.
- SCALABLE: The software must scale to allow retailers to market millions
of products to millions of customers.
- RELIABLE: The software must be reliable, so it can run 24 hours a day, 7
days a week.
- EASY TO INTEGRATE: The software must integrate easily and effectively
with external systems, including web servers, electronic commerce servers
and customer management systems in call centers.
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Existing one-to-one marketing tools have not been able to maximize the full
potential of one-to-one marketing. They are unable to automatically learn from
customers or to deliver recommendations in real time, thus they are unable to
provide real-time relationship marketing for a retailer. In real-time
relationship marketing, a retailer learns a customer's preferences during each
interaction and adjusts the marketing message in real-time based on the
information received. A real-time relationship marketing solution must allow for
retailers to leverage the learning from all customer interactions to serve each
individual customer better.
THE NET PERCEPTIONS SOLUTION
Net Perceptions is a leading provider of real-time relationship marketing
solutions that enable Internet retailers to market to customers on a
personalized, one-to-one basis. With our software solutions, a retailer learns
from each customer interaction and, based on the information received, can
adjust marketing messages and product offerings to that customer in real time.
We believe that retailers that implement our solutions can achieve the following
results:
- MORE CUSTOMERS. More of the visitors who interact with the retailer may
decide to purchase, as the visitors are better able to navigate the
retailer's large product offerings, and retailers can present more
personalized product offerings.
- MORE PRODUCTS PER ORDER. Because the retailer is able to present
personalized product offerings to each customer, customers may purchase
more products during each interaction.
- INCREASED CUSTOMER LOYALTY. Customers value the recommendations that help
them find products they like, so they may come back to the retailer that
has built the relationship with them by catering to their individual
tastes. The retailer benefits because the cost of keeping an existing
customer is lower than the cost of acquiring a new customer.
Our products enable effective real-time relationship marketing by analyzing
past and current customer behavior, including purchase history, stated
preferences, demographic information and Internet browsing behavior. Based on
this analysis, our products use proprietary collaborative filtering to
anticipate other merchandise or information a customer would be most interested
in purchasing or viewing. Our product suite consists of the following:
- NET PERCEPTIONS FOR E-COMMERCE. Our Net Perceptions for E-commerce
product is a leading real-time relationship marketing solution for
electronic commerce. It offers retailers the ability to automatically
target their merchandise to customers who visit their web sites based on
each customer's individual tastes, preferences and behavior.
- NET PERCEPTIONS FOR CALL CENTERS. Our Net Perceptions for Call Centers
product is designed to provide personalized recommendations to the call
center operator for products a caller is likely to purchase based on the
caller's individual tastes and preferences.
- NET PERCEPTIONS RECOMMENDATION ENGINE. Our recommendation engine provides
a robust platform for implementing real-time relationship marketing
solutions. We leverage our development effort by investing in this
general-purpose relationship marketing platform that supports the analysis
and prediction requirements of all of our market-specific products. This
platform can be used to leverage data across multiple customer
touch-points.
Each of our products has the following characteristics:
- ACCURACY. We design our products to provide high recommendation accuracy
for our customers.
- REAL-TIME. Our solutions are designed to meet the real-time requirements
of large web sites, call centers and other retailers by delivering
personalized responses in fractions of a second.
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- SCALABILITY. We design our products to satisfy the volume requirements of
the large web sites, call centers and other retailers.
- RELIABILITY. We design our products to provide high reliability,
including support for online database backups, and rapid database
restoration, if necessary.
- INTEGRATION. We base our solutions on a distributed architecture that is
flexible enough to integrate with new or existing marketing
implementations, including web site and call center software.
Our solutions provide real-time relationship marketing both on the Internet
and in traditional marketing applications.
STRATEGY
Our objective is to extend our leadership position in providing real-time
relationship marketing solutions to Internet and traditional retailers. Key
elements of our strategy to achieve this objective include the following:
MAINTAIN AND EXTEND TECHNOLOGY LEADERSHIP. We intend to maintain and extend
our technological leadership in real-time relationship marketing solutions
through continued investment in the development of our proprietary
recommendation engine and other predictive technologies. We believe that we are
currently a technology leader in collaborative filtering and in real-time
relationship marketing because of the accuracy, real-time functionality,
scalability, reliability and ease of integration of our products. We intend to
maintain an open architecture so that our recommendation engine will continue to
integrate with major platforms and technologies as they evolve. We believe that
maintaining and enhancing our products and services is critical to solidifying
our technology leadership and strengthening our customer relationships.
LEVERAGE TECHNOLOGY INVESTMENTS IN NEW VERTICAL APPLICATION SOLUTIONS. We
intend to leverage our investment in our recommendation platform into additional
on-line and traditional markets, including applications for corporate intranets,
direct marketing and retail environments. We believe that there are
complementary vertical applications of our technology beyond our current
offerings in electronic commerce and call center systems. We believe many of our
customers will use our technology across many of their customer touch-points,
leveraging both our recommendation platform as well as our existing vertical
applications.
PROVIDE VALUE-ADDED PROFESSIONAL SERVICES. We intend to continuously
increase the value of our solutions to customers by offering additional and
improved professional services. We provide our customers with a comprehensive
array of services, including training and consulting services, software updates,
documentation updates, telephone support and web-based support. We believe the
relationships developed with our customers by providing services are critical to
understanding customer needs and thereafter designing our solutions to satisfy
these needs. In addition, by providing superior professional services, we can
heighten customer awareness of real-time relationship marketing, which creates
opportunities for us to sell new products and services to existing customers.
BUILD GLOBAL PRESENCE. We intend to develop our international presence to
address the global adoption of the Internet and to address international demand
for real-time relationship marketing solutions. We believe that international
markets present an attractive growth opportunity and that an early presence in
international markets will enhance our long-term competitive position in these
regions. We intend to increase our international sales capabilities by
developing a direct sales and support presence in selected European and Asian
markets, adding international distributors in targeted countries, developing
joint marketing programs with distributors and developing localized versions of
our product.
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BROADEN DISTRIBUTION CHANNELS AND BUILD STRATEGIC ALLIANCES. We intend to
expand our indirect distribution channels by recruiting additional resellers,
systems integrators, original equipment manufacturers and strategic alliance
partners. Over time, we expect that indirect sales will represent a higher
percentage of total sales. We believe that designing our products to interface
with the products of leading vendors of web site and call center software will
make our products more attractive to strategic alliance partners, resellers,
systems integrators and original equipment manufacturers. We believe these
distribution partners will provide an additional sales and marketing channel and
facilitate the successful deployment of our products.
PRODUCTS
Our product line includes the following: Net Perceptions for E-commerce, Net
Perceptions for Call Centers and Net Perceptions Recommendation Engine.
NET PERCEPTIONS FOR E-COMMERCE
Net Perceptions for E-commerce allows on-line retailers to create a
personalized shopping environment using real-time relationship marketing. Net
Perceptions for E-commerce can be used to dynamically predict which products to
recommend to each customer browsing an electronic commerce site, based on past
and current customer behavior, including purchase history, stated preferences,
demographic information and Internet browsing behavior. These recommendations
are presented to the customer, who may find additional appealing products and
purchase them.
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The following graphic shows a typical customer interacting with a commerce
web site that is using Net Perceptions for E-commerce.
[GRAPHIC]
There are five parts to the graphic with arrows connecting them. The first part
is a photo of a woman in front of a computer, pointing at the monitor. The
caption "1 Customer visits a retailer's electronic commerce web site that
utilizes Net Perceptions for E-commerce software." appears under the photo. An
arrow leads down to the second part. The second part consists of the title
"Retailer's Web Site" centered over a computer screen with the word "Welcome!"
appearing on the computer screen. The caption "2 The customer browses the
retailer's web site." appears under the computer screen. An arrow leads up to
the third part. The third part consists of the title "Net Perceptions for
E-commerce" centered over an oval with the words "Net Perceptions Recommendation
Engine" contained within the oval and a hexagon with the words "Customer
Preference Database" contained within the hexagon. The oval and hexagon are
superimposed over a picture of a computer keyboard. The caption "3 The web site
solicits customer preference information and tracks the customer's browsing
behavior and purchases." appears below the oval. Adjacent to this caption below
the hexagon is the caption "4 The recommendation engine predicts other products
likely to to be appealing to the customer." Below these captions, an arrow leads
to a picture of three computer screens superimposed on each other with the top
screen containing the words "Recommended Merchandise" and the letters "A", "B"
and "C". An arrow leads across to a picture of a computer screen containing the
letter "C" and the word "Buy". Directly below this computer screen is the
caption "5 The web site presents appealing products for the customer to
purchase."
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Net Perceptions for E-commerce can also be used in many other ways,
including the following:
- PERSONALIZED SPECIAL OFFERS. A "special offers" list can be personalized
to include products likely to appeal to the customer.
- PRODUCT RECOMMENDATION CENTER. A product recommendation center can allow
customers to express opinions about products and receive recommendations
of other products likely to be appealing.
- GIFT CENTER. A gift center can help customers choose gifts for others by
allowing the customer to name a few items liked by the intended recipient
of the gift. The gift center recommends other products the recipient will
like based on the stated preferences.
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NET PERCEPTIONS FOR CALL CENTERS
Net Perceptions for Call Centers allows call center retailers to recommend
products to customers using real-time relationship marketing. Net Perceptions
for Call Centers can be used to create product recommendations for customers
based on their past and present interaction with the call center, including past
purchases and customer inquiries. Net Perceptions for Call Centers is more
powerful than a traditional cross-sell table, because the recommendations are
created in real-time and updated based on the interests of a particular
customer.
The following graphic illustrates the operation of Net Perceptions for Call
Centers.
[GRAPHIC]
Graphic depicting Net Perceptions for Call Centers. Underneath are four parts to
the graphic with arrows connecting them. The first part is a photo of a woman
using a telephone. The caption "1 Caller phones a call center supported by Net
Perceptions for Call Centers to place an order." appears under the photo. An
arrow leads down to the second part. The second part consists of the title
"Retailer's Call Center" centered over a photo of an operator pointing at a
computer monitor. A caption to the bottom right of the photo reads "2 The
operator takes the order and enters it into the order processing system (OPS)."
An arrow leads from part two to a black square with the words "Retailer's Order
Processing System" in white text in the black square. An arrow runs from the
black square back to part two. Under this arrow is the caption "5 The products
recommended by the Recommendation Engine are displayed on the operator's
screen." Another arrow leads up from the black square to the third part. This
consists of the title "Net Perceptions for Call Centers" centered over an oval
with the words "Net Perceptions Recommendation Engine" contained within the oval
and a hexagon with the words "Preference Database" contained within the hexagon.
The oval and hexagon are superimposed over a picture of a computer keyboard. The
caption "3 The OPS forwards the content of the current order to the Net
Perceptions Recommendation Engine" appears below the oval. Below the hexagon is
the caption "4 The recommendation engine predicts other products likely to to be
appealing to the customers." An arrow runs from the oval back down to the black
square.
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We announced the commercial launch of Net Perceptions for Call Centers in
November 1998 and expect to make our initial shipments in 1999. Net Perceptions
for Call Centers has not received any degree of market acceptance. See "Risk
Factors--We recently announced Net Perceptions for Call Centers, which may not
achieve market acceptance."
Net Perceptions for Call Centers can be integrated with other parts of call
center systems for more sophisticated applications, including:
- The inventory database, so only products with sufficient inventory levels
are recommended;
- The product database, so recommendations can be based on additional
information about the products; and
- The pricing database, so only products with sufficient profit margins are
recommended.
NET PERCEPTIONS RECOMMENDATION ENGINE
The Net Perceptions Recommendation Engine allows customers to deploy the
recommendation engine technology within their own, unique applications. The Net
Perceptions Recommendation Engine evolved from our original GroupLens
Recommendation Engine, which was a general-purpose tool for real-time
relationship marketing. The Net Perceptions Recommendation Engine has evolved
into a
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general platform that supports Net Perceptions for E-commerce and Net
Perceptions for Call Centers. In addition, we license the Net Perceptions
Recommendation Engine separately to customers who would prefer to apply the
functionality of the recommendation engine in markets for which we do not yet
have a specific vertical product. For example, customers have incorporated the
Net Perceptions Recommendation Engine into:
- Content-based applications, for helping customers find the news and
information in which they are most interested; and
- Original equipment manufacturer software applications, in which the
recommendation engine is embedded.
PRODUCTS UNDER DEVELOPMENT
We are developing new products planned for introduction later in 1999. These
products consist of Net Perceptions for Marketing Campaigns and Net Perceptions
for Knowledge Management.
NET PERCEPTIONS FOR MARKETING CAMPAIGNS. Net Perceptions for Marketing
Campaigns is being designed as a tool for managing and personalizing outbound
promotional electronic mail campaigns. It is being designed to analyze past
customer responses and purchase behavior to select a personalized set of
products to target to each set of customers, or to select a set of customers to
target for a particular product. The set of products can then be recommended to
the customers through promotional e-mail. Net Perceptions for Marketing
Campaigns is being designed to include a graphical user interface that visually
shows the effectiveness of the ongoing promotional campaign. We believe that the
ability of the recommendation engine to better tailor message content to the
recipient on a one-to-one basis should yield higher response rates per mailing
and will provide a core competitive advantage.
NET PERCEPTIONS FOR KNOWLEDGE MANAGEMENT. Net Perceptions for Knowledge
Management is being designed to apply the real-time relationship management
capabilities of the recommendation platform to knowledge management. Knowledge
Management means proactively planning and managing a company's process for
leveraging information and employee knowledge to achieve a competitive advantage
in a marketplace. Net Perceptions for Knowledge Management is being designed to
integrate with existing information management systems, such as search engines,
document management systems, Lotus Notes and the web, and to track the everyday
interactions between these systems and their users. Using the interaction
information, Net Perceptions for Knowledge Management is being designed to
automatically locate documents and data repositories containing relevant
information for each user. It is also being designed to help users locate other
users with knowledge and interest in specific subject areas. We believe these
applications will improve the efficiency of employees in working with an
enterprise's existing knowledge database.
Software products as complex as those currently under development by us are
subject to frequent delays, and we may encounter difficulties that could delay
or prevent the successful and timely development, introduction and marketing of
these products under development. Moreover, even if such products under
development are completed and introduced, they may never achieve any significant
degree of market acceptance. Failure to release these products under development
on a timely basis, or failure of these products under development, if and when
released, to achieve any degree of market acceptance, could seriously harm our
business, financial condition and results of operations.
PROFESSIONAL SERVICES
Our professional services organization provides consulting services,
education and training and customer support. We believe that providing a high
level of customer service and technical support is critical to the satisfaction
of our customers and our own success. As of February 28, 1999, our professional
services staff consisted of 11 employees.
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CONSULTING SERVICES. We offer a variety of professional services focused on
providing customers solutions that are delivered either by our specialists or
through one of our regional or national partners trained in the use and
implementation of our products. These services include project management,
in-depth application design and implementation. Fees for professional services
are typically charged separately from our software license fees. We believe
consulting services are strategically valuable to our customers because they
provide customers with a source of technical and personalization expertise to
support the timely and efficient implementation of our products.
EDUCATION AND TRAINING. We offer extensive education and training programs
to our customers. Training classes are offered at our offices in Minneapolis,
San Francisco and New York. We also provide training at our customers'
facilities upon their request. Fees for education and training services are
typically charged separately from our software license fees.
CUSTOMER SUPPORT. We provide our customers with an array of support
services, including telephone support, web-based support and updates to our
products and documentation. Our web-based support is available 24 hours a day
and provides answers to frequently asked questions, technical advice and an area
for downloading product updates. We enter into maintenance and support contracts
separate from our product license agreements. Fees are typically 18% of the
license fees for the associated software product. These contracts are renewable
for an annual fee typically equivalent to 18% of the current list price of the
software licensed by the customer.
TECHNOLOGY
REAL-TIME RECOMMENDATION ENGINE PLATFORM
The Net Perceptions real-time recommendation engine platform is the
foundation of our real-time relationship marketing solutions. Our platform is
designed to integrate easily and effectively with external systems, such as web
servers, electronic commerce servers, on-line ad servers and call center
software systems. Our platform is designed to provide accurate customer
recommendations and to exploit the performance and scalability advantages of
modern, multiple-processor, shared memory computers.
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The platform contains the recommendation engine, a database of customer
preferences and an application programmer's interface. The customer preference
database is a specially structured database in a commercial database management
system, such as Microsoft SQL server or Oracle databases. The recommendation
engine in the platform is independent from the customer interaction environment.
Vertical applications are built on the platform to leverage the technology
investment. The figure below shows our current products, which utilize the
real-time recommendation engine platform.
[GRAPHIC]
The graphic consists of three levels of shapes arranged vertically. The top
level is an oval containing the words "Client Applications" above the words "web
servers - call centers." The second level is directly below the first level and
contains two smaller ovals adjacent to one another. The first oval contains the
words "Net Perceptions for E-commerce." The second oval contains the words "Net
Perceptions for Call Centers." The third level is located directly below the
first and second ovals from the second level. The third level contains a
rectangle containing the words "Application Programmer's Interface." The
rectangle is located directly above an oval containing the words "Net
Perceptions Recommendation Engine." The oval is located above a hexagon
containing the words "Customer Preference Database." The oval and hexagon are
separated by a two-way arrow pointing at each of the oval and hexagon. A dotted
line runs the length of the third level. The dotted line is intersected in the
middle with the words "Real-Time Recommendation Engine Platform."
The customer preference database stores customer preference data used by the
recommendation engine to produce recommendations. The data may include customer
purchasing behavior, statements of preference explicitly made by the customer,
demographic information about the customer and behavioral information about the
customer. The preference database may also contain information supplied by a
marketer, for example groups of products the marketer explicitly wants to be
recommended together or products that are substitutes for one another.
43
<PAGE>
The engine responds to requests for recommendations and applies a series of
predictive algorithms to produce recommendations in real time. Examples of the
types of questions the analytical engine can be used to answer include:
- What is the customer's likely opinion of a specific product?
- What is the customer's propensity to purchase any of the following ten
products?
- Given the contents of his or her shopping basket, what else is this
customer likely to buy?
- Who are other customers similar to this customer?
The application programmer's interface provides the link between the
recommendation engine and other applications and allows applications such as web
servers and call center systems to "ask questions" of the recommendation engine,
which provides answers to drive the interaction with customers.
COLLABORATIVE FILTERING
Our core predictive technology resides in the recommendation engine and
incorporates a base of research and development in collaborative filtering
initiated in 1992 at the University of Minnesota. Collaborative filtering
compares selected attributes of a customer's preferences, opinions and behavior
to the attributes of large customer populations. Groups of customers exhibiting
attributes similar to the specific customer are analyzed to determine the likely
preferences of the customer. The following figure illustrates the process of
producing product recommendations using collaborative filtering:
[GRAPHIC]
Four part graphic depicting the process of producing product recommendations
using collaborative filtering. The first part is a photo of a man's face with a
caption underneath that reads "1 Information about the customer is gathered." A
large arrow points from the photo to part two, a photo of numerous faces, with
three of the faces separated from the group by an encircling line. Underneath
part two, the caption read, "2 A "neighborhood" of similar customers is
identified." A large arrow points to part three. Part three is a photo of the
encircled three faces from part two, but without the background of additional
faces. The caption under part three reads, "3 The "neighborhood" is analyzed." A
large arrow leads from part three to part four, a fuzzy photo of the three faces
without the encircling line, with the text "Recommendations", "A", "B" and "C"
printed over the faces. The caption under part four reads, "4 Recommendations
based on the analysis of the neighborhood are made."
Collaborative filtering is driven by information about customer preferences,
such as explicit statements of preference, and implicit statements of
preference, such as time spent looking at an item and purchasing behavior. Known
customer preference information is used to identify a group or "neighborhood" of
other customers who share preferences with the customer in question. The
collective preferences of the neighborhood are used to predict unknown
preferences of the customer in question, such as which products the customer is
most likely to purchase.
44
<PAGE>
CUSTOMERS
As of December 31, 1998, we had licensed products to more than 70 customers.
These customers are in various stages of deployment of our products. The
following is a representative list of our customers that accounted for at least
$25,000 in bookings to us during the period from January 1, 1997 to December 31,
1998:
<TABLE>
<CAPTION>
BOOKS MUSIC GENERAL RETAIL
- ------------------------------------ ------------------------------------ ------------------------------------
<S> <C> <C>
Audio Book Club CDnow Bluefly
Barnesandnoble.com Musicland/Sam Goody iMall
Bertlesmann (MLG Internet) J.C. Penney Company
Chapters MuZic Depot Petters Company
Computer Book Shops Launch Media Skymall
Indigo Books Seneca Media Group Value America
Soundstone Entertainment
Tower Records
MOVIES GROCERIES/FOOD SOFTWARE/COMPUTERS
- ------------------------------------ ------------------------------------ ------------------------------------
Digital Courier Technologies Digital Chef Buy.com
DVD Express HomeGrocer.com Egghead.com
Millenium Communications Let's Eat Out Chumbo.com
Trans World Entertainment TechWave
Wherehouse.com
ENTERTAINMENT OTHER
- ------------------------------------ ------------------------------------
Billboard TalentNet Action World
City Online Art.com
Ticketmaster Online ASKUL Corporation
Bass Pro
Bid.com
BrainPlay.com
iVillage
Preview Travel
</TABLE>
An example of the manner in which our products may be used to address
specific application needs is set forth below.
CDNOW. CDnow (cdnow.com) is an online music store that wanted to provide
its electronic shoppers with item suggestions quickly and easily. In the fall of
1997, CDnow presented us with the challenge of personalizing its large inventory
for each single visitor. CDnow selected the Net Perceptions Recommendation
Engine because of its collaborative filtering technology and ease of
implementation. The CDnow Gift Selector was created utilizing the Net
Perceptions Recommendation Engine with CDnow's existing customer purchase
history data. Visitors to the CDnow site are able to enter the names of musical
artists to obtain a list of corresponding gift recommendations. This feature was
launched in November 1997. Shortly after the holidays, it was renamed "Album
Advisor" and made a permanent part of the CDnow site. "Album Advisor" became one
of the most popular pages on the CDnow site. In the fall of 1998, CDnow expanded
its use of personalization technology when it launched the "My CDnow" section of
its site. These personalized pages, which use the Net Perceptions for E-commerce
product, allow visitors to combine their personalized music recommendations with
order history and wish list for a satisfying shopping experience.
45
<PAGE>
SALES AND MARKETING
We market our software and services through our direct sales organization
and through indirect distribution channels, including resellers, systems
integrators and original equipment manufacturers. We have sales offices in
Minneapolis, San Francisco and New York.
As of February 28, 1999, our direct sales organization included 25 sales
representatives, managers, business development representatives and support
personnel. We intend to increase our North American sales force as demand
requires by opening additional field sales offices. However, competition for
such personnel is intense, and we may not be able to attract highly qualified
sales and marketing personnel. Additionally, we intend to expand our presence in
international markets by building our international sales force. We believe that
this will be necessary in order to grow our revenues. We may also need to
localize our products in various markets. However, we have limited experience in
developing localized versions of our products and marketing and distributing our
products internationally. Accordingly, we may not be successful in international
markets. See "Risk Factors--We are dependent upon key personnel" and "--We
depend on international sales, and, therefore, our business is susceptible to
numerous risks associated with international operations."
Our sales organization is complemented by distribution partners, including
resellers, systems integrators and original equipment manufacturers. These
partners license our products at a discount for re-licensing, and may provide
training, support and customer service to end users. In 1998, our distribution
partners were responsible for 8% of our product revenues. We anticipate that the
percentage of our total revenues derived from indirect sales will increase in
the future. However, we may not be able to attract or retain resellers, systems
integrators and original equipment manufacturers. We expect that a material
increase in our indirect sales as a percentage of revenues will adversely affect
our average selling prices and gross margins due to the lower unit prices that
we receive when selling through indirect channels. See "Risk Factors--We rely on
resellers and need to develop this sales channel. If our reseller channel does
not perform adequately, our business could be seriously harmed." and "--We rely
on original equipment manufacturers and need to develop this sales channel. If
our original equipment manufacturer channel does not perform adequately, our
business could be seriously harmed."
As of February 28, 1999, our marketing organization consisted of 13
employees primarily engaged in marketing research, producing marketing
materials, product planning, managing press coverage and other public relations,
identifying potential customers, attending and exhibiting at trade shows,
seminars and conferences, creating presentations and sales tools, establishing
and maintaining close relationships with industry analysts and maintaining our
web site. In addition, we rely on various outside consultants to supplement our
marketing organization for various public relations and market research
requirements.
RESEARCH AND DEVELOPMENT
Our research and development organization is responsible for product
architecture, core technology, product testing and quality assurance, writing
product user documentation, and expanding the ability of our products to operate
with the leading hardware platforms, operating systems and database management
systems. In addition, this organization supports some pre-sale and customer
support activities. Our research and development organization is divided into
teams consisting of development engineers, product managers, quality assurance
engineers and technical writers.
As of February 28, 1999, our research and development staff consisted of 31
employees. Our total expenses for research and development were $378,000 in
1996, $1.4 million in 1997 and $2.4 million in 1998. We believe that research
and development expenses will continue to increase in the future. To date, our
development efforts have not resulted in any capitalized software development
costs.
46
<PAGE>
We believe that our future performance will depend in large part on our
ability to:
- Maintain and enhance our current product line;
- Develop new products that achieve market acceptance;
- Maintain technological competitiveness; and
- Meet an expanding range of customer requirements.
We currently plan to introduce and market several potential new products
later in 1999. These potential new products are subject to significant technical
risks. We may experience delays in the commencement of commercial shipments of
potential new products, resulting in delay or loss of product revenues. If the
potential new products do not achieve market acceptance, or we are unable, for
technological or other reasons, to develop, introduce and sell such potential
new products in a timely manner, our business, financial condition and results
of operations will be seriously harmed. Software products as complex as those we
offer may contain undetected errors or failures when first introduced or when
new versions are released. We have in the past discovered software errors in our
new products after their introduction. Although we have not experienced serious
harm from any such errors to date, we may, despite testing by us and by current
and potential customers, discover errors in new versions of existing products or
potential new products after commencement of commercial shipments, resulting in
loss of or delay in market acceptance, which could seriously harm our business,
financial condition and results of operations. See "Risk Factors--We are
dependent on potential new products. If these potential new products are not
launched on a timely basis or do not achieve market acceptance, our business
will be seriously harmed" and "--We recently announced Net Perceptions for Call
Centers, which may not achieve market acceptance."
COMPETITION
The market for our products is intensely competitive, evolving and subject
to rapid technological change. We expect the intensity of competition to
increase in the future. Competitors vary in size and in the scope and breadth of
the products and services offered. In the license of electronic commerce
products, we primarily encounter competition from the LikeMinds division of
Andromedia, the Aptex division of HNC Software and Personify. Microsoft
Corporation recently acquired FireFly Network Inc., a company with collaborative
filtering technology and, as a result, we expect that we will encounter
competition from Microsoft in the future. We expect that if we are successful in
our strategy to leverage our technology into new vertical markets, we will
encounter many additional, market-specific competitors. In addition, because
there are relatively low barriers to entry in the software market, we expect
additional competition from other established and emerging companies as the
Internet software market continues to develop and expand.
We believe that the principal competitive factors affecting our market
include core technology, product features, product quality and performance,
customer service and price. Although we believe that our products currently
compete favorably with respect to such factors, our market is relatively new and
is rapidly evolving. We may not be able to maintain our competitive position
against current and potential competitors, especially those with significantly
greater financial, marketing, service, support, technical and other resources.
Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition and a larger installed base of customers than we have.
In addition, many of our competitors have well-established relationships with
current and potential customers of ours, have extensive knowledge of our
industry and are capable of offering a single-vendor solution. As a result, our
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
development, promotion and sale of their products than we can. In addition,
current and potential competitors have established or may establish cooperative
relationships among themselves or with third
47
<PAGE>
parties to increase the ability of their products to address customer needs.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. We also expect that
competition will increase as a result of software industry consolidations.
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, financial condition and results of operations. We may not be able to
compete successfully against current and future competitors.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
We are a technology company. Our success depends on protecting our
intellectual property, which are our most important assets. If we do not
adequately protect our intellectual property, our business, financial condition
and results of operations would be seriously harmed.
We license our software and require our customers to enter into license
agreements, which impose restrictions on our customers' ability to utilize the
software. In addition, we seek to avoid disclosure of our trade secrets,
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 and other written materials under trade secret and copyright laws,
which afford only limited protection.
We have four pending U.S. patent applications. We also have license rights
to two issued U.S. patents and one pending U.S. patent application from the
University of Minnesota. We have no issued foreign patents, nor do we have any
pending foreign patent applications. It is possible that no patents will issue
from the currently pending patent applications. It is also possible that our
current patents or potential future patents may be found invalid or
unenforceable, or otherwise be successfully challenged. It is also possible that
any patent issued to us may not provide us with any competitive advantages. It
is also possible 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.
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
our software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect our
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 and our
competitors may independently develop similar technology, duplicate our products
or design around patents issued to us or our other intellectual property.
There has been a substantial amount of litigation in the software industry
regarding intellectual property rights. We have from time to time received
claims that we are infringing third parties' intellectual property rights. It is
possible that in the future third parties may claim that our current or
potential future products infringe their intellectual property. We expect that
software developers will increasingly be subject to infringement claims as the
number of products and competitors in our industry segment grows and the
functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require us to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms acceptable to us or at all, which could seriously harm our
business, financial condition and results of operations.
48
<PAGE>
We license personalization screening and collaborative filtering technology
known as the "GroupLens" technology from the University of Minnesota pursuant to
an exclusive, worldwide, license agreement. The exclusive rights granted are
subject to non-exclusive rights retained by:
- AT&T Corporation, for portions of the technology funded by AT&T;
- The United States government, for government-funded aspects of the
technology, but solely for government purposes; and
- The University of Minnesota, for its own educational and research
purposes.
The license agreement also provides that for the three academic years ending
in the spring of 2000, we will pay research fees to the University of Minnesota
for exclusive rights to commercial applications that the research may produce
related to improvements to the GroupLens technology. If the agreement is
terminated prior to the end of the 1999-2000 academic year or if we are unable
to renew the agreement, we will no longer have access to the research conducted
by the University of Minnesota, which could result in an increased burden on our
product development department, as well as a reduction in improvements to our
core technology. We may not be able to renew the agreement, hire adequate
personnel to meet any increased demands on our product development department,
or continue to advance our technology on a timely basis. If we are unable to
renew the agreement, hire sufficient personnel or develop product improvements
in a timely manner, our business, financial condition and results of operations
would be seriously harmed.
We integrate third-party software in our software products. For instance, we
license the Orbix object request broker from IONA Technologies for use in our
Net Perceptions for E-commerce, Net Perceptions for Call Centers and Net
Perceptions Recommendation Engine products. The agreement expires in July 2001.
The third-party software may not continue to be available to us on commercially
reasonable terms. We may not be able to renew this agreement or develop
alternative technology. If we cannot maintain licenses to key third-party
software, such as Orbix, develop similar technology or license similar
technology from another source on a timely or commercially feasible basis, our
business, financial condition and results of operations could be seriously
harmed.
EMPLOYEES
As of February 28, 1999, we had a total of 92 employees, including 38 in
sales and marketing, 31 in research and development, 11 in customer support and
12 in administration. All of these employees were located in 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.
FACILITIES
Our principal sales, marketing, research and development, and administrative
facility occupies approximately 23,000 square feet in Minneapolis, pursuant to a
lease that expires on December 31, 2003. In addition, we also lease sales and
support offices in the metropolitan areas of San Francisco and New York. We
believe that our existing facilities are adequate for our current needs and that
suitable additional or alternative space will be available in the future on
commercially reasonable terms.
49
<PAGE>
MANAGEMENT
OFFICERS AND DIRECTORS
The executive officers and directors of Net Perceptions, and their ages as
of February 28, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- --------------------------------------------------------
<S> <C> <C>
Steven J. Snyder.............. 44 President, Chief Executive Officer and Director
Nanci Anderson................ 42 Vice President of Customer Solutions
Paul Bieganski................ 34 Chief Technical Officer
Thomas M. Donnelly............ 35 Chief Financial Officer and Secretary
P. Stephen Larsen............. 48 Vice President of Marketing and Business Development
Bradley N. Miller............. 34 Vice President of Product Development
George E. Moser............... 43 Vice President of Worldwide Sales
John T. Riedl................. 37 Director and Chief Scientist
Douglas J. Burgum............. 42 Director and Member of the Audit and Compensation
Committees
Ann L. Winblad................ 48 Director and Member of the Audit and Compensation
Committees
</TABLE>
Dr. Snyder co-founded Net Perceptions in July 1996 and since such time has
served as our President and Chief Executive Officer and as a director. From
January 1996 to July 1996, Dr. Snyder served as an independent consultant. From
July 1993 to December 1995, Dr. Snyder served as Vice President of Software
Development at Personnel Decisions International, Inc., a human resources
consulting firm. Dr. Snyder pursued his doctorate in psychology from 1988 to
1994. From 1983 to 1988 Dr. Snyder was employed by Microsoft Corporation, a
software company, where he held several posts including IBM Account Manager and
General Manager of the Language Business Unit. Dr. Snyder holds a B.S. in
mathematics from Drexel University, an M.B.A. from Harvard University and an
M.A. and a Ph.D. in psychology from the University of Minnesota.
Ms. Anderson joined Net Perceptions in September 1998 as our General Manager
of Customer Solutions, and in March 1999 was promoted to Vice President of
Customer Solutions. From February 1998 to September 1998, Ms. Anderson was
Technology Services Practice Director for Oracle Corporation, a software
company. From December 1996 to February 1998, Ms. Anderson was General
Manager/COO for KeyTech, LLC, a software development firm specializing in
object-oriented and internet application development services. From April 1995
to December 1996, Ms. Anderson was Area Services Director for Lawson Software
Corporation, a software company. From June 1994 to April 1995, Ms. Anderson was
Regional Services Manager for Lawson Software. From May 1993 to June 1994, Ms.
Anderson served as Vice President of Customer Support and Services for ONTOS
Corporation, a vendor of object-oriented database and software tools.
Previously, Ms. Anderson was Director of U.S. Client Services for Cognos
Corporation, a software company.
Dr. Bieganski joined Net Perceptions in August 1997, as our Director of
Algorithm Development, and in November 1998 became Net Perceptions' Chief
Technical Officer. From September 1995 to August 1997, Dr. Bieganski was the
Vice President of Research and Development at Signum Systems, a manufacturer of
embedded systems software and hardware development tools. From January 1994 to
September 1995, Dr. Bieganski co-founded and served as President at TeleMedical,
Inc., a medical services company. From June 1990 to January 1994, Dr. Bieganski
served as Vice President of Research and Development of Advanced Medical
Systems, a manufacturer of medical diagnostic devices. From September 1988 to
June 1990, Dr. Bieganski served as Chief Engineer of Advanced Medical Systems.
Dr. Bieganski holds a B.S., an M.S. and a Ph.D. in computer science from the
University of Minnesota.
50
<PAGE>
Mr. Donnelly joined Net Perceptions in March 1997 as our Corporate
Controller, and in March 1998 became Net Perceptions' Chief Financial Officer.
In February 1999, Mr. Donnelly was appointed Secretary. From March 1995 to March
1997, Mr. Donnelly served as a financial and management consultant in the
capacity of chief financial officer or corporate controller for various public
and private companies and partnerships, including Net Perceptions from September
1996 to March 1997. From December 1992 to March 1995, Mr. Donnelly was the Chief
Financial Officer of Medical Documenting Systems, Inc., a medical software
company. Prior to 1994, Mr. Donnelly was employed by Marshall Financial Group,
Inc., a merchant banking company, and Staats International, Inc., an
architectural company. Mr. Donnelly holds a B.A. in economics from St. Olaf
College.
Mr. Larsen joined Net Perceptions in June 1997 as our Vice President of
Marketing and Business Development. From August 1996 to June 1997, Mr. Larsen
served as Vice President of Business Development for CitySearch, Inc., a
community-based information service. From July 1995 to August 1996, Mr. Larsen
was President and Managing Partner of Digital Dynamics, a consulting company.
Previously, Mr. Larsen led new business units at Prodigy Services Company, an
Internet company, and at AT&T Corporation, a telecommunications company. Mr.
Larsen holds an A.A. from Rochester State College.
Mr. Miller co-founded Net Perceptions in July 1996 and since such time has
served as our Vice President of Product Development. From September 1992 to July
1996, Mr. Miller was a Ph.D. candidate in Computer Science at the University of
Minnesota. From August 1990 to July 1992, Mr. Miller was a project leader at
Apertus Technologies, Inc., a software company, for an enterprise database
synchronization product. From June 1986 to August 1990, Mr. Miller was an
engineer in the artificial intelligence research group at the energy management
systems division of Control Data, a software company. Mr. Miller holds a B.A. in
physics and computer science from Luther College, and an M.S. in computer
science from the University of Minnesota.
Mr. Moser joined Net Perceptions in January 1997 as our Regional Director of
Sales, East Region. In September 1997, Mr. Moser was appointed Vice President of
Worldwide Sales. From March 1993 to December 1996, Mr. Moser was the Director,
East Region for Autodesk, Inc., a software company. From February 1983 to
February 1993, Mr. Moser was employed by the technology division of Schlumberger
Inc., an oil field services company, as Director of Worldwide Major Accounts.
Mr. Moser holds a B.S. in management and an M.B.A. from the University of
Hartford.
Dr. Riedl co-founded Net Perceptions in July 1996 and since such time has
served as a director. In November 1998, Dr. Riedl became our Chief Scientist.
From July 1996 until November 1998, Dr. Riedl served as our Chief Technical
Officer. Dr. Riedl has been a professor in the computer science department at
the University of Minnesota since March 1990. Dr. Riedl holds a B.S. in
mathematics from the University of Notre Dame and an M.S. and a Ph.D. in
computer science from Purdue University.
Mr. Burgum became a director of Net Perceptions in January 1999. Mr. Burgum
has served as President of Great Plains Software, Inc., a software company,
since March 1984, Chief Executive Officer since September 1991 and Chairman of
the Board since January 1996. Mr. Burgum served as Vice President and a director
of Great Plains Software from March 1983 to March 1984. Before joining Great
Plains Software, Mr. Burgum was a management consultant in the Chicago office of
McKinsey & Company, Inc. Mr. Burgum holds a B.U.S. from North Dakota State
University and an M.B.A. from Stanford University.
Ms. Winblad became a director of Net Perceptions in August 1996. Ms. Winblad
has been a General Partner of Hummer Winblad Venture Partners, a venture capital
investment firm, since 1989. Ms. Winblad is also a director of Hyperion
Solutions, Inc., a software company. Ms. Winblad holds a B.A. in mathematics and
business administration from the College of Saint Catherine and an M.A. in
education with an economics focus from the University of St. Thomas.
51
<PAGE>
Net Perceptions currently has authorized four directors. Each director holds
office until the next annual meeting of stockholders or until a successor is
duly elected and qualified. The officers serve at the discretion of the board of
directors. There are no family relationships among the directors and officers of
Net Perceptions.
BOARD COMMITTEES
The audit committee consists of Mr. Burgum and Ms. Winblad. The audit
committee makes recommendations to the board of directors regarding the
selection of independent accountants, reviews the results and scope of audit and
other services provided by our independent accountants and reviews and evaluates
our audit and control functions.
The compensation committee consists of Mr. Burgum and Ms. Winblad. The
compensation committee makes recommendations regarding our stock plans and makes
decisions concerning salaries and incentive compensation for our employees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the compensation committee is currently or has been,
at any time since the formation of Net Perceptions, an officer or employee of
Net Perceptions. No member of our compensation committee serves as a member of
the board of directors or compensation committee of any entity that has one or
more executive officers serving as a member of our board of directors or
compensation committee.
DIRECTOR COMPENSATION
We do not currently provide our directors with cash compensation for their
services as members of the board of directors, although members are reimbursed
for some expenses in connection with attendance at board and committee meetings.
Mr. Burgum received an option to purchase 30,000 shares of common stock at an
exercise price of $5.50 per share. The option is immediately exercisable. The
shares purchasable thereunder are subject to repurchase by us at the original
exercise price paid per share upon the optionee's cessation of service prior to
vesting in such shares. The repurchase right lapses as to the option shares in a
series of 24 equal monthly installments from the grant date, but will become
fully vested if the board deems it desirable to avoid adverse accounting
treatment with respect to the option. Directors are eligible to participate in
our stock plans, and beginning in 1999, employee directors will also be able to
participate in our 1999 Equity Incentive Plan, and non-employee directors will
receive periodic option grants under our 1999 Non-Employee Director Option Plan.
See "Management--1999 Equity Incentive Plan."
EXECUTIVE COMPENSATION
The following table sets forth information with respect to compensation we
paid in 1998 for services to us by our Chief Executive Officer and our four
other highest-paid executive officers whose
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<PAGE>
total salary and bonus for such fiscal year exceeded $100,000. Such officers are
referred to in this prospectus as the "Named Executive Officers."
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
--------------
NUMBER OF
ANNUAL SHARES OF
COMPENSATION(1) COMMON STOCK
-------------------- UNDERLYING ALL OTHER
SALARY($) BONUS($) OPTIONS COMPENSATION($)(4)
--------- -------- -------------- ---------------
<S> <C> <C> <C> <C>
Steven J. Snyder ....................... 130,000 10,000 -- (3) --
President and Chief Executive Officer
P. Stephen Larsen ...................... 175,000 23,500 140,000 --
Vice President of Marketing and
Business Development
Bradley N. Miller ...................... 105,000 10,000 -- (3) --
Vice President of Product Development
Paul Bieganski ......................... 120,000 20,000 -- 9,000
Chief Technical Officer
George E. Moser ........................ 122,500 82,500(2) 140,000 50,000
Vice President of Worldwide Sales
</TABLE>
- ---------
(1) Includes amounts deferred under our 401(k) plan.
(2) Includes commissions of $72,500.
(3) Dr. Snyder holds 792,832 shares of restricted stock purchased on July 3,
1996. Mr. Miller holds 606,282 shares of restricted stock purchased on July
3, 1996.
(4) Represents relocation expenses.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options in 1998 to each
of the Named Executive Officers. No stock appreciation rights were granted
during such fiscal year.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE
------------------------------------------------------------ AT ASSUMED ANNUAL
NUMBER OF RATES OF
SHARES OF STOCK PRICE
COMMON PERCENT OF TOTAL APPRECIATION
STOCK OPTIONS GRANTED TO EXERCISE FOR OPTION
UNDERLYING EMPLOYEES IN PRICE TERM (4)
OPTIONS 1998 ($/SHARE) EXPIRATION --------------------
GRANTED (1) (2) (3) DATE 5%($) 10%($)
----------- ------------------- ------------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Steven J. Snyder.............. -- -- -- -- -- --
P. Stephen Larsen............. 100,000 8.4% 0.25 5/26/08 15,722 39,844
40,000 3.3% 1.125 11/15/08 28,300 71,718
Bradley N. Miller............. -- -- -- -- -- --
Paul Bieganski................ -- -- -- -- -- --
George E. Moser............... 100,000 8.4% 0.25 5/26/08 15,722 39,844
40,000 3.3% 0.50 7/8/08 12,578 31,875
</TABLE>
- ---------
(1) Each of the options listed in the table is immediately exercisable. The
shares purchasable thereunder are subject to repurchase by us at the
original exercise price paid per share upon the optionee's cessation of
service prior to vesting in such shares. The repurchase right lapses and the
optionee vests in a series of 48 equal monthly installments. The option
shares will vest upon an acquisition of Net Perceptions by merger or asset
sale, unless our repurchase right with respect to
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<PAGE>
the unvested option shares is transferred to the acquiring entity. Each of
the options has a ten year term, subject to earlier termination in the event
of the optionee's cessation of service with us.
(2) Based on an aggregate of 1,196,564 options granted to employees of Net
Perceptions under the 1996 Stock Plan during the 12 months ended December
31, 1998.
(3) The exercise price was equal to the fair market value of our common stock as
valued by the board of directors on the date of grant. The exercise price
may be paid in cash, in shares of our common stock valued at fair market
value on the exercise date or through a cashless exercise procedure
involving a same-day sale of the purchased shares. We may also finance the
option exercise by loaning the optionee sufficient funds to pay the exercise
price for the purchased shares, together with any federal and state income
tax liability incurred by the optionee in connection with such exercise.
(4) The potential realizable value is calculated based on the term of the option
at the time of grant (ten years). Stock price appreciation of 5% and 10% is
assumed pursuant to rules promulgated by the Securities and Exchange
Commission and does not represent our prediction of our stock price
performance. The potential realizable values at 5% and 10% appreciation are
calculated by assuming that the exercise price on the date of grant
appreciates at the indicated rate for the entire term of the option and that
the option is exercised at the exercise price and sold on the last day of
its term at the appreciated price.
In addition to the options listed in the table, in 1999 Dr. Bieganski
received an option to purchase 40,000 shares of common stock at an exercise
price of $5.50 per share. The option is immediately exercisable. The shares
purchasable thereunder are subject to repurchase by us at the original exercise
price paid per share upon the optionee's cessation of service prior to vesting
in such shares. The repurchase right lapses and optionee vests in a series of 48
equal monthly installments.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth for each of the Named Executive Officers
options exercised in 1998 and the number and value of the shares of common stock
underlying unexercised options that are held by the Named Executive Officers as
of December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, DECEMBER 31,
NUMBER OF VALUE 1998(2) 1998($)(3)
SHARES ACQUIRED REALIZED ------------------- ------------------
NAME ON EXERCISE ($)(1) VESTED UNVESTED VESTED UNVESTED
- ------------------------- --------------- ------------- ------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Steven J. Snyder......... -- -- -- -- -- --
P. Stephen Larsen........ -- -- 15,414 124,586 41,660 308,339
Bradley N. Miller........ -- -- -- -- -- --
Paul Bieganski........... -- -- 46,666 93,334 134,164 268,335
George E. Moser.......... 120,000 93,000 29,166 160,834 80,988 437,762
</TABLE>
- ---------
(1) Equal to the fair market value of the purchased shares on the option
exercise date, less the exercise price paid for such shares.
(2) The options are immediately exercisable for all the option shares, but any
shares purchased under those options will be subject to repurchase by us, at
the original exercise price paid per share, upon the optionee's cessation of
service with us, prior to the vesting in such shares. The heading "Vested"
refers to shares no longer subject to repurchase as of December 31, 1998;
the heading "Unvested" refers to shares subject to repurchase as of December
31, 1998.
(3) Based on the fair market value of our common stock at the end of 1998 as
determined by our board of directors, $3.00, less the exercise price payable
for such shares.
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<PAGE>
CHANGE OF CONTROL ARRANGEMENTS/EMPLOYMENT AGREEMENTS
The compensation committee of the board of directors, as administrator of
the 1999 Equity Incentive Plan, can provide for accelerated vesting of the
shares of common stock subject to outstanding options held by any employee or
director of Net Perceptions in connection with certain changes in control of Net
Perceptions. The accelerated vesting may be conditioned on the termination of
the individual's employment following the change in control event.
On January 23, 1999, we entered into a severance agreement with George E.
Moser whereby we agreed to pay Mr. Moser three months' salary if his employment
with us is terminated without cause on or before October 31, 1999.
All of our executive officers are eligible to participate in our Change in
Control Severance Plan. Under the Change in Control Severance Plan, if an
officer's employment is involuntarily terminated within 18 months after a change
in control or the officer declines a position with the acquiror in a change in
control, we will pay the officer severance benefits equal to six months of
salary.
1999 EQUITY INCENTIVE PLAN
The 1999 Equity Incentive Plan was adopted by the board of directors on
February 4, 1999 and our stockholders will also be asked to approve the adoption
of the plan. We have reserved 800,000 shares of common stock for issuance under
the 1999 Equity Incentive Plan. Any shares not yet issued under our 1996 Stock
Plan as of the date of this offering will also be available for grant under the
1999 Equity Incentive Plan. No additional shares or options will be issued under
our 1996 Stock Plan after the completion of this offering. As of January 1 of
each year, commencing with the year 2000 and ending with the year 2002, the
number of shares reserved for issuance under the 1999 Equity Incentive Plan will
be increased automatically by 5% of the total number of shares of common stock
then outstanding or, if less, by 1,500,000 shares. Under the 1999 Equity
Incentive Plan, the eligible individuals are: employees, non-employee members of
the board of directors and consultants. The types of awards that may be made
under the 1999 Equity Incentive Plan are options to purchase shares of common
stock, stock appreciation rights, restricted shares and stock units. Options may
be incentive stock options that qualify for favorable tax treatment for the
optionee under Section 422 of the Internal Revenue Code of 1986 or nonstatutory
stock options not designed to qualify for such favorable tax treatment. With
limited restrictions, if shares awarded under the 1999 Equity Incentive Plan or
the 1996 Stock Plan are forfeited, then those shares will again become available
for new awards under the 1999 Equity Incentive Plan.
Outstanding options under the 1996 Stock Plan will be incorporated into the
1999 Equity Incentive Plan at the time of this offering and no further option
grants will be made under the 1996 Stock Plan. The incorporated options will
continue to be governed by their existing terms, unless the committee elects to
extend one or more features of the 1999 Equity Incentive Plan to those options
or to other outstanding shares. The committee has elected to extend the change
in control acceleration feature of the 1999 Equity Incentive Plan to all
outstanding options and unvested shares. Previously, options granted under the
1996 Stock Plan provided that the shares would accelerate upon an acquisition
only if not assumed by the acquiring entity. The outstanding options under the
1996 Stock Plan contain substantially the same terms and conditions as specified
below for options granted under the 1999 Equity Incentive Plan.
The compensation committee of our board of directors administers the 1999
Equity Incentive Plan. The committee has complete discretion to make all
decisions relating to the interpretation and operation of the 1999 Equity
Incentive Plan, including the discretion to determine which eligible individuals
are to receive any award, and to determine the type, number, vesting
requirements and other features and conditions of each award.
The exercise price for incentive stock options granted under the 1999 Equity
Incentive Plan may not be less than 100% of the fair market value of the common
stock on the option grant date. The
55
<PAGE>
exercise price for non-qualified options granted under the 1999 Equity Incentive
Plan may not be less than 85% of the fair market value of the common stock on
the option grant date. The exercise price may be paid in cash or in outstanding
shares of common stock. The exercise price may also be paid by using a cashless
exercise method, a pledge of shares to a broker or promissory note. The purchase
price for newly issued restricted shares awarded under the 1999 Equity Incentive
Plan may be paid in cash, by promissory note or by the rendering of past or
future services.
The committee may reprice options and may modify, extend or assume
outstanding options and stock appreciation rights. The committee may accept the
cancellation of outstanding options or stock appreciation rights in return for
the grant of new options or stock appreciation rights. The new option or right
may have the same or a different number of shares and the same or a different
exercise price.
Upon certain defined events causing a change in control of Net Perceptions,
an option or other award under the 1999 Equity Incentive Plan will become fully
exercisable or fully vested if the option or award is not assumed by the
surviving corporation or its parent or if the surviving corporation or its
parent does not substitute another award on substantially the same terms. An
option or award will become fully exercisable or fully vested if the holder's
employment or service is involuntarily terminated within 18 months following the
change in control. Change in control includes:
- A merger or consolidation of Net Perceptions after which our then current
stockholders own less than 50% of the surviving corporation;
- Sale of all or substantially all of the assets of Net Perceptions;
- A proxy contest that results in replacement of more than one-third of the
directors over a 24-month period; or
- An acquisition of 50% or more of Net Perceptions' outstanding stock by a
person other than by a person related to Net Perceptions, such as a
corporation owned by the stockholders of Net Perceptions.
In the event of a merger or other reorganization, the agreement of merger or
reorganization may provide that outstanding options and other awards under the
1999 Equity Incentive Plan shall be assumed by the surviving corporation or its
parent, shall be continued by us if we are a surviving corporation, shall have
accelerated vesting and then expire early or shall be cancelled for a cash
payment.
The board of directors may amend or terminate the 1999 Equity Incentive Plan
at any time. If the board of directors amends the plan, stockholder approval of
the amendment will be sought only if required by an applicable law. The 1999
Equity Incentive Plan will continue in effect indefinitely unless the board of
directors decides to terminate the plan.
EMPLOYEE STOCK PURCHASE PLAN
The board of directors adopted our Employee Stock Purchase Plan on February
4, 1999, and our stockholders will also be asked to approve the adoption of the
plan. We have reserved 1,000,000 shares of common stock for issuance under the
Employee Stock Purchase Plan. As of January 1 each year, the number of shares
reserved for issuance under the Employee Stock Purchase Plan will be increased
automatically by 2% of the total number of shares of common stock outstanding
or, if less, 600,000 shares. The Employee Stock Purchase Plan is intended to
qualify under Section 423 of the Internal Revenue Code. Two offering periods
each with a duration of 6 months will commence on May 1 and November 1 each
calendar year. However, the first offering period will commence on the effective
date of this offering and end on October 31, 1999. Purchases of common stock
will occur on April 30 and October 31 each calendar year. The Employee Stock
Purchase Plan will be administered by the compensation committee of the board of
directors. Each employee of Net Perceptions is eligible to participate if he or
she is employed by us for at least 20 hours per week and for more than five
months per year.
56
<PAGE>
The Employee Stock Purchase Plan permits each eligible employee to purchase
common stock through payroll deductions. Each employee's payroll deductions may
not exceed 15% of the employee's cash compensation. The initial period during
which payroll deductions will be accumulated will begin on the effective date of
this offering and end on October 31, 1999. No more than 4,000 shares may be
purchased on any purchase date. The price of each share of common stock
purchased under the Employee Stock Purchase Plan will be 85% of the lower of (A)
the fair market value per share of common stock on the date immediately before
the first date of the applicable offering period or (B) the fair market value
per share of common stock on the purchase date. In the case of the first
offering period, the price per share under the plan will be 85% of the price
offered to the public in this offering. Employees may end their participation in
the Employee Stock Purchase Plan at any time. Participation ends automatically
upon termination of employment with us.
In the event of a change in control of Net Perceptions, the Employee Stock
Purchase Plan will end and shares will be purchased with the payroll deductions
accumulated to date by participating employees. The board of directors may amend
or terminate the Employee Stock Purchase Plan at any time. If the board of
directors increases the number of shares of common stock reserved for issuance
under the Employee Stock Purchase Plan, it must seek the approval of our
stockholders.
1999 NON-EMPLOYEE DIRECTOR OPTION PLAN
Our 1999 Non-Employee Director Option Plan was adopted by the board of
directors on February 4, 1999, and our stockholders will also be asked to
approve the adoption of the plan. Under the 1999 Non-Employee Director Option
Plan, non-employee members of the board of directors will be eligible for
automatic option grants.
A maximum of 500,000 shares of common stock has been authorized for issuance
under the 1999 Non-Employee Director Option Plan. No shares have been issued yet
under the 1999 Non-Employee Director Option Plan.
The compensation committee of the board of directors will make any
administrative determinations under the 1999 Non-Employee Director Option Plan.
The exercise price for options granted under the 1999 Non-Employee Director
Option Plan may be paid in cash or in outstanding shares of common stock.
Options may also be exercised on a cashless basis through the same-day sale of
the purchased shares.
Each individual who first joins the board of directors as a non-employee
director on or after the effective date of this offering will receive at that
time an option grant for 20,000 shares of common stock. Each 20,000-share option
will vest over 24 months from the grant date, but vesting will accelerate to the
extent the Board deems it necessary to avoid adverse accounting treatment for
these options. Immediately prior to this offering, each non-employee director
will automatically be granted a stock option to purchase 10,000 shares of common
stock at the offering price. In addition, at each annual stockholders meeting,
beginning in 2000, each non-employee director will automatically be granted at
that meeting, whether or not he or she is standing for re-election at that
particular meeting, a stock option to purchase 10,000 shares of common stock.
Each 10,000-share option will become exercisable for 100% of the shares at
grant. Each option will have an exercise price equal to the fair market value of
the common stock on the automatic grant date. Each option will have a maximum
term of ten years, but will terminate earlier if the optionee ceases to be a
member of the board of directors. Each option will fully vest automatically upon
a change in control.
The board of directors may amend or modify the 1999 Non-Employee Director
Option Plan at any time. The 1999 Non-Employee Director Option Plan will
terminate on February 3, 2009, unless the board of directors decides to
terminate the plan sooner.
57
<PAGE>
CERTAIN TRANSACTIONS
Since July 3, 1996 (inception), we have issued and sold preferred stock to
the following persons who are our principal stockholders or directors.
<TABLE>
<CAPTION>
SHARES OF SHARES OF SHARES OF
SERIES A SERIES B SERIES C
PREFERRED PREFERRED PREFERRED
INVESTOR STOCK STOCK STOCK
- ---------------------------------------------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
Entities affiliated with Hummer Winblad Venture Partners........ 2,034,798 772,948 407,168
Vulcan Ventures Inc............................................. -- 1,932,368 407,168
Entities affiliated with St. Paul Fire & Marine Insurance
Company....................................................... -- 1,159,420 488,600
London Pacific Life & Annuity Company........................... -- -- 2,605,864
Entities affiliated with JAFCO Co., Ltd......................... -- -- 651,462
</TABLE>
Shares held by all affiliated persons and entities have been aggregated. See
"Principal Stockholders" for more detail on shares held by these purchasers. The
per share purchase price for the Series A Preferred Stock was $0.30 on August 2,
1996. The per share purchase price for the Series B Preferred Stock was $1.035
on December 4, 1996. The per share purchase price for the Series C Preferred
Stock was $1.535 on December 18, 1997 and February 20, 1998. Ann L. Winblad, one
of our directors, is an affiliate of each of the entities affiliated with Hummer
Winblad Venture Partners.
On January 23, 1999, we entered into a severance agreement with George E.
Moser whereby we agreed to pay Mr. Moser three-months salary if his employment
with us is terminated without cause on or before October 31, 1999.
In addition, we have granted options to some of our directors and executive
officers. See "Management--Option grants in last fiscal year" and "Principal
Stockholders."
We have entered into an indemnification agreement with each of our officers
and directors.
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. All future transactions, including loans, between us and our officers,
directors, principal stockholders and their affiliates will be approved by a
majority of the board of directors, including a majority of the independent and
disinterested outside directors on the board of directors, and will continue to
be on terms no less favorable to us than could be obtained from unaffiliated
third parties.
58
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership of
our common stock as of December 31, 1998, and as adjusted to reflect the sale of
shares offered hereby by (A) each person who we know to own beneficially more
than five percent of our common stock and one additional investor, (B) each of
the Named Officers, (C) each of our directors, and (D) all current directors and
executive officers as a group.
Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of common stock.
The number of shares of common stock deemed outstanding prior to this
offering includes the shares issuable pursuant to stock options and warrants
that may be exercised within 60 days after December 31, 1998. The number of
shares of common stock outstanding after this offering includes the 3,650,000
shares of common stock we are offering in this offering and the 369,697 shares
of common stock issuable upon conversion of a convertible promissory note as of
the closing of this offering. The number of shares of common stock outstanding
after this offering assumes no exercise of the underwriters' over-allotment
option. Douglas J. Burgum joined our board of directors on January 26, 1999 and
was granted options immediately exercisable for 30,000 shares. The principal
stockholders table does not reflect Mr. Burgum's stock options.
<TABLE>
<CAPTION>
PERCENT
BENEFICIALLY
NUMBER OF OWNED
SHARES --------------
5% STOCKHOLDERS, NAMED OFFICERS, DIRECTORS, BENEFICIALLY BEFORE AFTER
AND DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP OWNED OFFERING OFFERING
- ------------------------------------------------------------ ---------- ----- -----
<S> <C> <C> <C>
Entities Affiliated with Hummer Winblad Venture 3,214,914 18.6% 15.1%
Partners(1) ..............................................
Two South Park, 2nd Floor
San Francisco, California 94107
London Pacific Life & Annuity Company ...................... 2,605,864 15.1% 12.2%
3109 Poplarwood Court, Suite 108
Raleigh, North Carolina 27604
Vulcan Ventures Inc.(2) .................................... 2,339,536 13.5% 11.0%
10 110th Avenue, N.E., Suite 550
Bellevue, Washington 98004
Steven J. Snyder ........................................... 2,002,944 11.6% 9.4%
7901 Flying Cloud Drive
Minneapolis, Minnesota 55344
Entities Affiliated with St. Paul Fire & Marine Insurance 1,648,020 9.5% 7.7%
Company(3) .
8500 Normandale Lake Blvd.
Suite 1940
Bloomington, Minnesota 55437
Bradley N. Miller .......................................... 1,531,662 8.9% 7.2%
7901 Flying Cloud Drive
Minneapolis, Minnesota 55344
John T. Riedl .............................................. 1,119,294 6.5% 5.2%
7901 Flying Cloud Drive
Minneapolis, Minnesota 55344
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
PERCENT
BENEFICIALLY
NUMBER OF OWNED
SHARES --------------
5% STOCKHOLDERS, NAMED OFFICERS, DIRECTORS, BENEFICIALLY BEFORE AFTER
AND DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP OWNED OFFERING OFFERING
- ------------------------------------------------------------ ---------- ----- -----
<S> <C> <C> <C>
Entities affiliated with JAFCO Co., Ltd.(4) ................ 651,462 3.8% 3.1%
One Boston Place, Suite 3320
Boston, Massachusetts 02108
P. Stephen Larsen(5)........................................ 420,000 2.4% 2.0%
George E. Moser(6).......................................... 310,000 1.8% 1.4%
Paul Bieganski(7)........................................... 140,000 * *
Ann L. Winblad(1)........................................... 3,214,914 18.6% 15.1%
Kevin Ober(2)............................................... 2,339,536 13.5% 11.0%
All directors and executive officers as a group(8) (9 11,238,350 62.9% 51.3%
persons)..................................................
</TABLE>
- ---------
* Less than 1%.
(1) Consists of 2,695,434 shares held by Hummer Winblad Venture Partners II,
L.P., 95,464 shares held by Hummer Winblad Technology Fund II, L.P., 16,848
shares held by Hummer Winblad Technology Fund IIA, L.P., 386,810 shares held
by Hummer Winblad Venture Partners III, L.P., and 20,358 shares held by
Hummer Winblad Technology Fund III, L.P. Ms. Winblad, one of our directors,
is an affiliate of Hummer Winblad Venture Partners. Ms. Winblad disclaims
beneficial ownership of the shares held by the entities affiliated with
Hummer Winblad Venture Partners, except to the extent of her pecuniary
interest therein.
(2) Mr. Ober is an affiliate of Vulcan Ventures Inc. Mr. Ober resigned from our
board of directors in January 1999. Mr. Ober disclaims beneficial ownership
of the shares held by Vulcan Ventures Inc., except to the extent of his
pecuniary interest therein.
(3) Consists of 1,159,420 shares held by St. Paul Fire & Marine Insurance
Company and 488,600 shares held by St. Paul Venture Capital IV, LLC.
(4) Includes 521,168 shares held by U.S. Information Technology No. 2 Investment
Partnership, 52,118 shares held by JAFCO G-6(B) Investment Partnership, and
52,118 shares held by JAFCO G-6(A) Investment Partnership.
(5) Includes options immediately exercisable for 140,000 shares.
(6) Includes options immediately exercisable for 190,000 shares.
(7) Includes options immediately exercisable for 140,000 shares. Excludes
options immediately exercisable for 40,000 shares, which were granted in
January 1999.
(8) Includes options immediately exercisable for 566,000 shares.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares of common stock,
$.0001 par value, and 10,000,000 shares of preferred stock, $.0001 par value,
after giving effect to the amendment and restatement of our certificate of
incorporation to delete references to Series A, Series B and Series C Preferred
Stock, which will occur upon conversion of such preferred stock into common
stock upon the closing of this offering, and the subsequent authorization of
shares of undesignated preferred stock, as described below.
COMMON STOCK
As of December 31, 1998, there were 17,302,008 shares of common stock
outstanding that were held of record by approximately 41 stockholders after
giving effect to the conversion of our Series A, Series B and Series C Preferred
Stock into common stock at a one-to-one ratio. There will be 21,321,705 shares
of common stock outstanding (assuming no exercise of the underwriters'
over-allotment option and assuming no exercise after December 31, 1998 of
outstanding options) after giving effect to the sale of the shares of common
stock to the public offered hereby, the issuance of 369,697 shares of common
stock upon conversion of a convertible promissory note as of the closing of this
offering and the conversion of our Series A, Series B and Series C Preferred
Stock into common stock at a one-to-one ratio.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the board of directors out of funds legally available therefor. See
"Dividend Policy." In the event of the liquidation, dissolution or winding up of
Net Perceptions, the holders of our common stock are entitled to share ratably
in all assets remaining after payment of liabilities, subject to prior
distribution rights of preferred stock, if any, then outstanding. The common
stock has no preemptive or conversion rights or other subscription rights. There
are no redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable, and the
shares of common stock to be issued upon completion of this offering will be
fully paid and nonassessable.
PREFERRED STOCK
On the closing of this offering, our amended and restated certificate of
incorporation will authorize 10,000,000 shares of preferred stock. The board of
directors has the authority to issue the preferred stock in one or more series
and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series or the designation of such series, without
further vote or action by the stockholders. The issuance of preferred stock may
have the effect of delaying, deferring or preventing a change in control of Net
Perceptions without further action by the stockholders. For example, the board
of directors could issue preferred stock that has the power to prevent a change
of control transaction. The issuance of preferred stock with voting and
conversion rights may adversely affect the voting power of the holders of common
stock, including the loss of voting control to others. We currently have no
plans to issue any of the preferred stock.
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND
DELAWARE LAW
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
The Amended and Restated Certificate of Incorporation provides that all
stockholder actions must be effected at a duly called meeting and not by a
consent in writing. This provision could discourage
61
<PAGE>
potential acquisition proposals and could delay or prevent a change of control
of Net Perceptions because a potential acquisition of Net Perceptions could not
be approved by the stockholders without a duly called meeting.
DELAWARE TAKEOVER STATUTE
We are subject to Section 203 of the Delaware General Corporation Law,
which, subject to various exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that such stockholder became an
interested stockholder, unless:
- Prior to such date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
- Upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned
- by persons who are directors and also officers and
- by employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or
- On or subsequent to such date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines business combination to include:
- Any merger or consolidation involving the corporation and the interested
stockholder;
- Any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
- Subject to various exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation to
the interested stockholder;
- Any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
- The receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
REGISTRATION RIGHTS
After this offering, the holders of 16,764,663 shares of common stock will
be entitled to rights with respect to the registration of such shares under the
Securities Act of 1933. The holders of registration rights are those investors
that purchased shares of our Series A, Series B and Series C Preferred Stock,
and the holder of a convertible promissory note, as well as some of our present
and former officers and founders. Under the terms of the agreements between us
and the holders of such registrable securities, if we propose to register any of
our securities under the Securities Act, either for our own account or for the
account of other security holders exercising registration rights, such holders
are entitled to notice of such registration and are entitled to include shares
of such common stock in such registration.
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<PAGE>
Some of such stockholders benefiting from these rights may also require us to
file a registration statement under the Securities Act at our expense with
respect to their shares of common stock, and we are required to use our diligent
reasonable efforts to effect such registration. Further, holders may require us
to file additional registration statements on Form S-3 at our expense. These
rights are subject to conditions and limitations, among them the right of the
underwriters of an offering to limit the number of shares included in such
registration in certain circumstances.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the common stock is Norwest Bank
Minnesota, N.A.
63
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Therefore, future sales of substantial amounts of our common stock in the public
market could adversely affect market prices prevailing from time to time.
Furthermore, since only a limited number of shares will be available for sale
shortly after this offering because of existing contractual and legal
restrictions on resale (as described below), sales of substantial amounts of our
common stock in the public market after the restrictions lapse could adversely
affect the prevailing market price and our ability to raise equity capital in
the future.
Upon completion of this offering, we will have 21,321,705 shares of common
stock outstanding assuming no exercise of options and warrants outstanding as of
December 31, 1998, the conversion of all outstanding shares of preferred stock
and the conversion of a convertible promissory note upon the closing of this
offering. Of these shares, 3,650,000 shares sold in this offering will be freely
transferable without restriction or registration under the Securities Act,
except for any shares purchased by one of our existing "affiliates," as that
term is defined by the Securities Act, which shares will be subject to the
resale limitations of Rule 144 adopted under the Securities Act. The remaining
17,671,705 shares of common stock existing are "restricted shares" as defined in
Rule 144. Restricted shares may be sold in the public market only if registered
or if they qualify for an exemption from registration under Rules 144 or 701 of
the Securities Act. As a result of the contractual restrictions described below
and the provisions of Rules 144 and 701, additional shares will be available for
sale in the public market as follows:
- No restricted shares will be eligible for immediate sale on the date of
this prospectus;
- 17,302,008 restricted shares will be eligible for sale upon expiration of
lock-up agreements 180 days after the date of this prospectus subject to
Rule 144; and
- 369,697 restricted shares will be eligible for sale one year after the
date of this prospectus, subject to Rule 144.
All officers, directors and stockholders have agreed not to offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly, any shares of common
stock or any securities convertible into or exercisable or exchangeable for
common stock, or enter into any swap or similar agreement that transfers, in
whole or in part, the economic risk of ownership of the common stock, for a
period of 180 days after the date of this prospectus, without the prior written
consent of BancBoston Robertson Stephens. However, these contractual
restrictions may be released prior to expiration of the lock-up period.
In general, under Rule 144 of the Securities Act as currently in effect,
beginning 90 days after this offering, a person (or persons whose shares are
aggregated) who owns shares that were purchased from us (or any affiliate) at
least one year previously, is entitled to sell within any three-month period a
number of shares that does not exceed the greater of 1% of our then-outstanding
shares of common stock (213,217 shares immediately after this offering) or the
average weekly trading volume of our common stock on the Nasdaq National Market
during the four calendar weeks preceding the date on which notice of the sale is
filed with the Securities and Exchange Commission. Sales under Rule 144 are also
subject to manner of sale provisions, notice requirements and the availability
of current public information about us. Any person (or persons whose shares are
aggregated) who is not deemed to have been one of our affiliates at any time
during the three months preceding a sale, and who owns shares within the
definition of "restricted securities" under Rule 144 that were purchased from us
(or any affiliate) at least two years previously, would be entitled to sell such
shares under Rule 144(k) without regard to the volume limitations, manner of
sale provisions, public information requirements or notice requirements.
Subject to limitations on the aggregate offering price of a transaction and
other conditions, Rule 701 may be relied upon with respect to the resale of
securities originally purchased from us by
64
<PAGE>
our employees, directors, officers, consultants or advisers prior to the date we
become subject to the reporting requirements of the Securities Exchange Act of
1934, or the Exchange Act, pursuant to written compensatory benefit plans or
written contracts relating to the compensation of such persons. In addition, the
Securities and Exchange Commission has indicated that Rule 701 will apply to
typical stock options granted by an issuer before it becomes subject to the
reporting requirements of the Exchange Act, along with the shares acquired upon
exercise of such options (including exercises after the date of this
prospectus). Securities issued in reliance on Rule 701 are restricted securities
and, subject to the contractual restrictions described above, beginning 90 days
after the date of this prospectus, may be sold by persons other than affiliates
subject only to the manner of sale provisions of Rule 144 and by affiliates
under Rule 144 without compliance with its minimum holding period requirements.
After this offering pursuant to this prospectus, the holders of 16,764,663
shares of common stock, or their transferees, will be entitled to various rights
with respect to the registration of such shares under the Securities Act.
Registration of such shares under the Securities Act would result in such shares
becoming freely tradable without restriction under the Securities Act (except
for shares purchased by affiliates) immediately upon the effectiveness of such
registration. See "Description of Capital Stock--Registration rights."
We have agreed not to offer, pledge, sell, contract to sell, sell any option
or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities convertible
into or exercisable or exchangeable for common stock, or enter into any swap or
similar agreement that transfers, in whole or in part, the economic risk of
ownership of the common stock, for a period of 180 days after the date of this
prospectus, without the prior written consent of BancBoston Robertson Stephens,
subject to limited exceptions.
As of December 31, 1998, options to purchase a total of 1,408,564 shares of
common stock pursuant to our 1996 Stock Plan were outstanding and exercisable.
All of the shares subject to options are subject to lock-up agreements. As of
December 31, 1998, a warrant to purchase up to 11,982 shares of common stock was
outstanding and exercisable. An additional 1,058,128 shares of common stock were
available for future option grants under the 1996 Stock Plan. On February 4,
1999, we adopted, subject to stockholder approval, the 1999 Equity Incentive
Plan to replace the 1996 Stock Plan, with an increase of shares available for
issuance thereunder of 800,000 shares, plus an additional number of shares equal
to 5% of the shares outstanding on the first day of 2000, 2001 and 2002. In
addition, on February 4, 1999, we adopted, subject to stockholder approval, the
Employee Stock Purchase Plan, and reserved 1,000,000 shares of common stock for
issuance thereunder, and the 1999 Non-Employee Director Option Plan, and
reserved 500,000 shares of common stock for issuance thereunder. See
"Management--1999 Equity Incentive Plan," "--Employee Stock Purchase Plan,"
"--1999 Non-Employee Director Option Plan" and Note 7 of Notes to Financial
Statements.
We intend to file registration statements under the Securities Act covering
approximately 3,766,692 shares of common stock subject to outstanding options or
issuable pursuant to our 1999 Equity Incentive Plan and 1999 Non-Employee
Director Option Plan, and 1,000,000 shares of common stock issuable pursuant to
our Employee Stock Purchase Plan. We expect to file the registration statement
covering shares issuable pursuant to the Employee Stock Purchase Plan on the
effective date of this offering and to file the registration statement covering
shares offered pursuant to the 1999 Equity Incentive Plan and 1999 Non-Employee
Director Option Plan approximately 30 days after the closing of this offering.
Shares registered under such registration statements will, subject to Rule 144
volume limitations applicable to affiliates, be available for sale in the open
market, except to the extent that such shares are subject to vesting
restrictions with us or the contractual restrictions described above. See
"Management--1999 Equity Incentive Plan," "--Employee Stock Purchase Plan" and
"--1999 Non-Employee Director Option Plan."
65
<PAGE>
UNDERWRITING
The Underwriters, BancBoston Robertson Stephens Inc., Hambrecht & Quist LLC,
U.S. Bancorp Piper Jaffray Inc. and Wit Capital Corporation acting as
e-Manager-TM-, have severally agreed, subject to the terms and conditions of the
Underwriting Agreement, to purchase from us the numbers of shares of common
stock set forth opposite their respective names below. The Underwriters are
committed to purchase and pay for all such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
BancBoston Robertson Stephens Inc................................................
Hambrecht & Quist LLC............................................................
U.S. Bancorp Piper Jaffray Inc...................................................
Wit Capital Corporation..........................................................
----------
Total.......................................................................... 3,650,000
----------
----------
</TABLE>
The Underwriters have advised us that the Underwriters propose to offer the
shares of common stock to the public at the price to the public set forth on the
cover page of this prospectus and to certain dealers at such price less a
concession of not more than $ per share, of which $ may be reallowed
to other dealers. After the public offering, the public offering price,
concession and reallowance to dealers may be reduced by the Underwriters. No
such reduction shall change the amount of proceeds to be received by us as set
forth on the cover page of this prospectus.
We have granted to the Underwriters an option, exercisable during the 30-day
period after the date of this prospectus, to purchase up to an aggregate of
547,500 additional shares of common stock at the initial public offering price
per share set forth on the cover of this prospectus. To the extent that the
Underwriters exercise such option, each of the Underwriters will have a firm
commitment to purchase approximately the same percentage of such additional
shares that the number of shares of common stock to be purchased by it shown in
the above table represents as a percentage of the total number of shares offered
hereby. If purchased, such additional shares will be sold by the Underwriters on
the same terms as those on which the shares offered hereby are being sold.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters and us against enumerated civil liabilities, including liabilities
under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Pursuant to the terms of lock-up agreements, the holders of 17,671,705
shares of our common stock (including 10,668,700 shares of common stock issuable
upon conversion of outstanding preferred stock and 369,697 shares issuable upon
conversion of an outstanding convertible promissory note), have agreed, for a
period of up to 180 days after the date of this prospectus, that, subject to
exceptions, they will not contract to sell or otherwise dispose of any shares of
common stock, any options or warrants to purchase shares of common stock or any
securities convertible into, or exchangeable for, shares of common stock, owned
directly by such holders or with respect to which they have the power of
disposition, without the prior written consent of BancBoston Robertson Stephens.
BancBoston Robertson Stephens may, in its sole discretion, and at any time
without notice, release all or any portion of the securities subject to the
lock-up agreements. All of the shares of common stock subject to the lock-up
agreements will be eligible for sale in the public market upon the expiration of
the lock-up agreements, subject in the case of any restricted shares to Rule
144.
66
<PAGE>
In addition, we have agreed that until 180 days after the date of this
prospectus, we will not, without the prior written consent of BancBoston
Robertson Stephens, subject to exceptions, offer, sell, contract to sell or
otherwise dispose of any shares of common stock, any options or warrants to
purchase any shares of common stock or any securities convertible into,
exercisable for or exchangeable for shares of common stock other than our sale
of shares in this offering, the issuance of shares of common stock upon the
exercise of outstanding options and warrants and the conversion of shares of
preferred stock and the grant of options to purchase shares of common stock
under existing employee stock option or stock purchase plans. See "Shares
Eligible for Future Sale."
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for the common stock
offered hereby was determined through negotiations among us and the
Underwriters. Among the factors considered in such negotiations were prevailing
market conditions, our financial information, market valuations of other
companies that we and the Underwriters believe to be comparable to us, estimates
of our business potential, our present state of development and other factors
deemed relevant.
At the request of Net Perceptions, the Underwriters have reserved up to
192,500 shares of common stock to be issued by Net Perceptions and offered
hereby for sale, at the initial public offering price, to directors, officers,
employees, business associates and related persons of Net Perceptions. The
number of shares of common stock available for sale to the general public will
be reduced to the extent such individuals purchase such reserved shares. Any
reserved shares that are not so purchased will be offered by the Underwriters to
the general public on the same basis as the other shares offered hereby.
A prospectus in electronic format is being made available on an Internet Web
site maintained by Wit Capital Corporation. In addition, pursuant to an e-Dealer
Agreement, all dealers purchasing shares from Wit Capital Corporation in the
offering (the "e-Dealers") similarly have agreed to make a prospectus in
electronic format available on Web sites maintained by each of the e-Dealers.
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
The Underwriters have advised us that, pursuant to Regulation M under the
Securities Act, some persons participating in the offering may engage in
transactions, including stabilizing bids, syndicate covering transactions or the
imposition of penalty bids, which may have the effect of stabilizing or
maintaining the market price of the common stock at a level above that which
might otherwise prevail in the open market. A "stabilizing bid" is a bid for or
the purchase of the common stock on behalf of the Underwriters for the purpose
of fixing or maintaining the price of the common stock. A "syndicate covering
transaction" is the bid for or the purchase of the common stock on behalf of the
Underwriters to reduce a short position incurred by the Underwriters in
connection with the offering. A "penalty bid" is an arrangement permitting the
Underwriters to reclaim the selling concession otherwise accruing to an
Underwriter or syndicate member in connection with the offering if the common
stock originally sold by such Underwriter or syndicate member is purchased by
the Underwriters in a syndicate covering transaction and has therefore not been
effectively placed by such Underwriter or syndicate member. The Underwriters
have advised us that such transactions may be effected on the Nasdaq National
Market or otherwise and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the issuance of the common stock offered hereby will be
passed upon for us by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian,
LLP, Menlo Park, California. Members of Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP, participating in the consideration of legal matters
relating to the common stock offered in this offering are the beneficial owners
of 66,666 shares of our common stock. Legal matters in connection with this
offering will be passed upon for the underwriters by Cooley Godward LLP, San
Francisco, California.
67
<PAGE>
EXPERTS
The financial statements as of December 31, 1997 and 1998 and for the period
from July 3, 1996 to December 31, 1996 and for each of the two years in the
period ended December 31, 1998 included in this Prospectus have been so included
in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form S-1 under the Securities Act with
respect to the common stock offered hereby. 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 such common stock offered hereby, reference is made 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 referred to are not necessarily complete;
reference is made in each instance to the copy of such contract or document
filed as an exhibit to the registration statement. Each such statement is
qualified in all respects by such reference to such exhibit. The registration
statement, including exhibits and schedules thereto, may be inspected without
charge at the Commission's principal office in Washington, D.C., and copies of
all or any part thereof may be obtained from such office after payment of fees
prescribed by the Commission.
68
<PAGE>
NET PERCEPTIONS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Financial Statements:
Balance Sheet as of December 31, 1997 and 1998........................................................... F-3
Statement of Operations for the Period from July 3, 1996 (Inception) to December 31, 1996 and for the
Years Ended December 31, 1997 and 1998................................................................. F-4
Statement of Stockholders' Equity for the Period from July 3, 1996 (Inception) to December 31, 1996 and
for the Years Ended December 31, 1997 and 1998......................................................... F-5
Statement of Cash Flows for the Period from July 3, 1996 (Inception) to December 31, 1996 and for the
Years Ended December 31, 1997 and 1998................................................................. F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Net Perceptions, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Net Perceptions, Inc. at December
31, 1997 and 1998, and the results of its operations and its cash flows for the
period from July 3, 1996 (inception) to December 31, 1996 and for each of the
two years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of Net Perceptions' management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 4, 1999, except as to Note
10, which is as
of March 22, 1999
F-2
<PAGE>
NET PERCEPTIONS, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1998
--------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................. $ 1,407 $ 972
Short-term investments.................................................................... 3,439 --
Accounts receivable, net.................................................................. 164 3,382
Prepaid expenses and other current assets................................................. 133 142
--------- ----------
Total current assets.................................................................... 5,143 4,496
--------- ----------
Property and equipment, net................................................................. 389 1,019
Other assets................................................................................ 43 122
--------- ----------
Total assets............................................................................ $ 5,575 $ 5,637
--------- ----------
--------- ----------
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................................... $ 280 $ 256
Accrued expenses.......................................................................... 222 1,410
Deferred revenue.......................................................................... 81 2,107
Current portion of capital lease obligations.............................................. 118 255
--------- ----------
Total current liabilities............................................................... 701 4,028
--------- ----------
Long-term liabilities:
Capital lease obligations, net of current portion......................................... 345 538
--------- ----------
Total liabilities....................................................................... 1,046 4,566
--------- ----------
Commitments and contingencies (Notes 7 and 8)
Series A Convertible Redeemable Preferred Stock; $.0001 par value; 2,170,000 shares
authorized; 2,168,130 shares issued and outstanding at redemption value................... 650 650
--------- ----------
Stockholders' equity:
Series B Convertible Preferred Stock; $.0001 par value; 4,000,000 shares authorized;
3,864,736 shares issued and outstanding................................................. -- --
Series C Convertible Preferred Stock; $.0001 par value; 4,800,000 shares authorized;
3,919,224 and 4,635,834 shares issued and outstanding, respectively..................... -- --
Common stock; $.0001 par value; 60,000,000 shares authorized; 6,277,392 and 6,633,308
shares issued and outstanding, respectively............................................. 1 1
Additional paid-in capital................................................................ 9,627 11,137
Accumulated deficit....................................................................... (5,749) (10,717)
--------- ----------
Total stockholders' equity.............................................................. 3,879 421
--------- ----------
Total liabilities, convertible redeemable preferred stock and stockholders' equity...... $ 5,575 $ 5,637
--------- ----------
--------- ----------
</TABLE>
See accompanying notes to the financial statements.
F-3
<PAGE>
NET PERCEPTIONS, INC.
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FROM JULY 3,
1996
(INCEPTION) TO YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
--------------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Product.......................................................... $ -- $ 284 $ 3,955
Service and maintenance.......................................... 4 33 522
------- ------------ ------------
Total revenues................................................. 4 317 4,477
------- ------------ ------------
Cost of revenues:
Product.......................................................... -- 14 52
Service and maintenance.......................................... 2 30 373
------- ------------ ------------
Total cost of revenues......................................... 2 44 425
------- ------------ ------------
Gross margin....................................................... 2 273 4,052
------- ------------ ------------
Operating expenses:
Sales and marketing.............................................. 454 3,063 5,238
Research and development......................................... 378 1,372 2,372
General and administrative....................................... 210 585 1,474
------- ------------ ------------
Total operating expenses....................................... 1,042 5,020 9,084
------- ------------ ------------
Loss from operations............................................... (1,040) (4,747) (5,032)
------- ------------ ------------
Other income (expense):
Interest income.................................................. 18 87 197
Interest expense................................................. (3) (56) (89)
Other expense.................................................... (2) (6) (44)
------- ------------ ------------
Total other income............................................. 13 25 64
------- ------------ ------------
Net loss........................................................... $ (1,027) $ (4,722) $ (4,968)
------- ------------ ------------
------- ------------ ------------
Basic and diluted net loss per share............................... $ (3.40) $ (3.01) $ (1.40)
------- ------------ ------------
------- ------------ ------------
Shares used in computing basic and diluted net loss per share...... 302,140 1,569,244 3,545,516
------- ------------ ------------
------- ------------ ------------
Unaudited pro forma basic and diluted net loss per share........... $ (0.35)
------------
------------
Shares used in computing unaudited pro forma basic and diluted net
loss per share................................................... 14,112,696
------------
------------
</TABLE>
See accompanying notes to the financial statements.
F-4
<PAGE>
NET PERCEPTIONS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SERIES B CONVERTIBLE SERIES C CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ---------------------- ---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
--------- ----------- --------- ----------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sale of common stock to
founders in July 1996....... -- $ -- -- $ -- 5,931,142 $ 1 $ 3 $ --
Sale of common stock from
September - November 1996... -- -- -- -- 222,000 -- 7 --
Sale of Series B Preferred
Stock in December 1996, net
of $33 of issuance costs.... 3,864,736 -- -- -- -- -- 3,966 --
Net loss...................... -- -- -- -- -- -- -- (1,027)
--------- ----------- --------- ----------- --------- ----- ----------- ------------
Balance, December 31, 1996.... 3,864,736 -- -- -- 6,153,142 1 3,976 (1,027)
Repurchase of common stock.... -- -- -- -- (182,000) -- (5) --
Exercise of stock options..... -- -- -- -- 306,250 -- 31 --
Sale of Series C Preferred
Stock in December 1997, net
of $391 of issuance costs... -- -- 3,919,224 -- -- -- 5,625 --
Net loss...................... -- -- -- -- -- -- -- (4,722)
--------- ----------- --------- ----------- --------- ----- ----------- ------------
Balance, December 31, 1997.... 3,864,736 -- 3,919,224 -- 6,277,392 1 9,627 (5,749)
Exercise of stock options..... -- -- -- -- 355,916 -- 54 --
Compensation relating to stock
options..................... -- -- -- -- -- -- 366 --
Sale of Series C Preferred
Stock in February 1998, net
of $9 of issuance costs..... -- -- 716,610 -- -- -- 1,090 --
Net loss...................... -- -- -- -- -- -- -- (4,968)
--------- ----------- --------- ----------- --------- ----- ----------- ------------
Balance, December 31, 1998.... 3,864,736 $ -- 4,635,834 $ -- 6,633,308 $ 1 $ 11,137 $ (10,717)
--------- ----------- --------- ----------- --------- ----- ----------- ------------
--------- ----------- --------- ----------- --------- ----- ----------- ------------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Sale of common stock to
founders in July 1996....... $ 4
Sale of common stock from
September - November 1996... 7
Sale of Series B Preferred
Stock in December 1996, net
of $33 of issuance costs.... 3,966
Net loss...................... (1,027)
-------------
Balance, December 31, 1996.... 2,950
Repurchase of common stock.... (5)
Exercise of stock options..... 31
Sale of Series C Preferred
Stock in December 1997, net
of $391 of issuance costs... 5,625
Net loss...................... (4,722)
-------------
Balance, December 31, 1997.... 3,879
Exercise of stock options..... 54
Compensation relating to stock
options..................... 366
Sale of Series C Preferred
Stock in February 1998, net
of $9 of issuance costs..... 1,090
Net loss...................... (4,968)
-------------
Balance, December 31, 1998.... $ 421
-------------
-------------
</TABLE>
See accompanying notes to the financial statements.
F-5
<PAGE>
NET PERCEPTIONS, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FROM JULY 3,
1996
(INCEPTION) TO YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
--------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................................... $ (1,027) $ (4,722) $ (4,968)
Reconciliation of net loss to net cash used by operating
activities:
Depreciation and amortization.................................. 6 140 284
Provision for doubtful accounts................................ -- 28 294
Compensation related to stock options.......................... -- -- 366
Changes in assets and liabilities:
Accounts receivable.......................................... (5) (187) (3,512)
Prepaid expenses and other current assets.................... (139) 6 (9)
Accounts payable............................................. 232 48 (24)
Accrued expenses............................................. 153 68 1,188
Deferred revenue............................................. -- 81 2,026
Other assets................................................. (22) (25) (79)
------- ------------ ------------
Net cash used by operating activities...................... (802) (4,563) (4,434)
------- ------------ ------------
Cash flows from investing activities:
Purchases of short-term investments.............................. (1,757) (3,439) --
Sales of short-term investments.................................. -- 1,757 3,439
Purchases of property and equipment.............................. (2) -- (442)
------- ------------ ------------
Net cash provided (used) by investing activities........... (1,759) (1,682) 2,997
------- ------------ ------------
Cash flows from financing activities:
Principal payments under capital lease obligations............... (2) (63) (142)
Proceeds from sale of preferred stock............................ 4,616 5,625 1,090
Proceeds from the sale of common stock........................... 11 -- --
Proceeds from exercise of stock options, net of redemptions...... -- 26 54
------- ------------ ------------
Net cash provided by financing activities.................. 4,625 5,588 1,002
------- ------------ ------------
Net increase (decrease) in cash and cash equivalents............... 2,064 (657) (435)
Cash and cash equivalents at beginning of period................... -- 2,064 1,407
------- ------------ ------------
Cash and cash equivalents at end of period......................... $ 2,064 $ 1,407 $ 972
------- ------------ ------------
------- ------------ ------------
Supplemental schedule of non-cash investing and financing
activities:
Capital lease obligations incurred............................... $ 115 $ 414 $ 472
Supplemental schedule of cash activity:
Interest paid.................................................... $ 2 $ 52 $ 91
</TABLE>
See accompanying notes to the financial statements.
F-6
<PAGE>
NET PERCEPTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. ORGANIZATION
Net Perceptions, Inc. was incorporated under the laws of the state of
Delaware on July 3, 1996. Net Perceptions develops, markets and supports
real-time relationship marketing software solutions. Since inception, Net
Perceptions has operated in one segment, selling Internet tool software products
and related services. Net Perceptions' core technology, the Net Perceptions
Recommendation Engine, enables these capabilities to be embedded in a variety of
applications offered over the web and in other environments. Substantially all
product and service revenues through December 31, 1998 have been attributable to
the Net Perceptions for E-commerce product. Sales to customers located outside
of the United States totaled 27% and 13% of total revenues in 1997 and 1998,
respectively. International sales to one customer in Japan totaled 22% of total
1997 revenues. International sales to customers in any one individual foreign
country were not material in 1998.
Net Perceptions is subject to risks and uncertainties common to rapidly
growing technology-based companies, including rapid technological change, growth
of the Internet and electronic commerce, dependence on principal products and
third-party technology, new product development and acceptance, actions of
competitors, dependence on key personnel, international expansion, lengthy sales
cycle and limited operating history.
Net Perceptions has sustained losses and negative cash flows from operations
since inception and expects these conditions to continue for the foreseeable
future. As of December 31, 1998, Net Perceptions had an accumulated deficit of
$10,717. The implementation of Net Perceptions' business plan is dependent on
sufficient capital. In January 1999, the board of directors authorized Net
Perceptions to proceed with an initial public offering ("IPO"). On February 4,
1999, a foreign corporate investor loaned $4,000 to Net Perceptions at an
interest rate of 8.0%. The note and accrued interest will automatically convert
into the same class and series of equity security as issued in Net Perceptions'
next round of equity financing at the price per share in such financing. The
note is unsecured and due with accrued interest on January 31, 2000, unless
previously converted. Assuming Net Perceptions' IPO closes in mid-April 1999 at
an assumed offering price of $11.00 per share, the note and accrued interest
would convert into appproximately 369,697 shares of unregistered common stock.
Net Perceptions expects that the net proceeds from this offering will be
sufficient to meet its working capital and capital expenditure needs for at
least the next 12 months. After that, Net Perceptions may need to raise
additional funds, and it cannot be certain that it will be able to obtain
additional financing on favorable terms, if at all. If Net Perceptions cannot
raise funds, if needed, on acceptable terms, it may not be able to develop or
enhance its products, take advantage of future opportunities or respond to
competitive pressures or unanticipated requirements, which could seriously harm
its business, financial condition and results of operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements
F-7
<PAGE>
NET PERCEPTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
REVENUE RECOGNITION
Net Perceptions' revenues are derived from licenses for its software as well
as software maintenance and support, training and consulting services. Net
Perceptions adopted American Institute of Certified Public Accountants Statement
of Position ("SOP") 97-2, "Software Revenue Recognition," as amended by SOP 98-4
effective January 1, 1998. The adoption did not have a material effect on the
timing of Net Perceptions' revenue recognition or cause changes to its revenue
recognition policies.
Revenues derived from software licenses are recognized upon (a) the
execution of a license agreement, (b) delivery of the software product, (c)
reasonable assurance of collectibility of the receivable, and (d) fulfillment of
any other of Net Perceptions' significant contract obligations. For software
provided for demonstration purposes, or where significant post-delivery
obligations exist, revenues are deferred until execution of a license agreement
and fulfillment of all revenue recognition requirements. Under arrangements
where both services and software are sold under one contract, revenue is
allocated to each element based on their respective fair values, with these fair
values being determined using the price charged when that element is sold
separately. Revenues generated by distribution partners are recognized when the
sale to the end customer is completed. The Company does not offer its customers
a right of return.
Maintenance and support revenues are deferred and recognized ratably over
the term of the contract, which is typically twelve months. Revenues from
training and consulting are recognized when the services are performed.
The allowance for doubtful accounts was $28 and $300 at December 31, 1997
and 1998, respectively. A separate allowance for estimated future returns is
recorded as a liability at the time revenue is recognized based on Net
Perceptions' return policies.
CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments that potentially subject Net Perceptions to credit
risk consist primarily of accounts receivable. To minimize this risk, ongoing
credit evaluations of customers' condition are performed. Net Perceptions grants
credit to customers in the ordinary course of business. Two customers accounted
for approximately 22% and 19% of total revenues during 1997. Receivables from
one customer in 1997 represented approximately 43% of total receivables at
December 31, 1997. There were no customers in 1998 that exceeded 10% of total
revenues or 10% of total receivables at December 31, 1998.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents consist principally of money market funds with original
maturities of three months or less, are readily convertible to cash and are
stated at cost, which approximates fair value. Short-term investments were
classified in the balance sheet based on their maturity date. At December 31,
1997 all of Net Perceptions' short-term investments were classified as
available-for-sale.
F-8
<PAGE>
NET PERCEPTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
At December 31, 1997, the estimated fair value of the securities approximated
their amortized cost and any unrealized holding gains or losses were not
significant.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of Net Perceptions' financial instruments, which
include cash equivalents, accounts receivable, accounts payable, accrued
expenses and capital lease obligations, approximate their fair values at
December 31, 1998.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The majority of Net Perceptions'
property and equipment have been acquired with capital leases. Depreciation and
amortization are computed using the straight-line method over the shorter of the
estimated useful lives of the individual assets or the lease term. Estimated
useful lives generally range from three to five years.
OTHER ASSETS
Other assets consist primarily of capital and operating lease deposits.
RESEARCH AND DEVELOPMENT
Research and development expenditures, which include software development
costs, are expensed as incurred. Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased or Otherwise Marketed," requires the capitalization of certain software
development costs once technological feasibility is established, which Net
Perceptions defines as the completion of a working model. To date, the period
between achieving technological feasibility and the general availability of such
software has been short and software development costs qualifying for
capitalization have been insignificant. Accordingly, Net Perceptions has not
capitalized any software development costs.
INCOME TAXES
Net Perceptions calculates income taxes in accordance with the provisions of
SFAS No. 109, "Accounting for Income Taxes", which requires the use of the
liability method of accounting for income taxes. Income taxes are deferred for
all temporary differences between the financial statement and income tax basis
of assets and liabilities. Deferred taxes are recorded using the enacted tax
rates scheduled by tax law to be in effect when the temporary differences are
expected to be settled or realized. Deferred tax assets are reduced by a
valuation allowance to the extent that utilization is not presently likely.
ADVERTISING EXPENSE
Net Perceptions recognizes advertising expense as incurred. Advertising
expense has been immaterial since inception.
F-9
<PAGE>
NET PERCEPTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY
Upon the closing of Net Perceptions' IPO, all of the outstanding shares of
preferred stock (Series A, B and C) will automatically convert into 10,668,700
shares of common stock. Net Perceptions' unaudited pro forma stockholders'
equity as of December 31, 1998, as adjusted to reflect these conversions, but
not to reflect shares or proceeds from the planned IPO, is as follows:
<TABLE>
<S> <C>
Common stock; 17,302,008 shares issued and outstanding............ $ 1
Additional paid-in capital........................................ 11,787
Accumulated deficit............................................... (10,717)
---------
Total stockholders' equity.................................... $ 1,071
---------
---------
</TABLE>
NET LOSS PER SHARE
Net loss per share is computed under SFAS No. 128, "Earnings Per Share."
Basic net loss per share is computed using the weighted-average number of shares
of common stock outstanding, excluding shares of common stock subject to
repurchase. Such shares of common stock subject to repurchase, which consisted
primarily of founders' shares, aggregated 5,354,364, 3,675,232 and 2,270,370 at
December 31, 1996, 1997 and 1998, respectively (see Note 7). Diluted net loss
per share does not differ from basic net loss per share since potential shares
of common stock from conversion of preferred stock, stock options and warrants
and outstanding shares of common stock subject to repurchase are anti-dilutive
for all periods presented. Unaudited pro forma basic and diluted net loss per
share has been calculated assuming the conversion of all outstanding shares of
preferred stock into shares of common stock, as if the shares had converted
immediately upon their issuance.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new statement establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Net Perceptions
does not expect SFAS No. 133 to materially affect its financial position or
results of operations.
In November 1998, the FASB cleared for issuance SOP 98-9, "Modification of
SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions,"
which will retain the limitations of SOP 97-2 on what constitutes
vendor-specific objective evidence of fair value. SOP 98-9 will be effective for
transactions entered into in fiscal years beginning after March 15, 1999. Net
Perceptions believes that its current revenue recognition policies and practices
are consistent with the provisions of the new guidance.
In February 1998, the Accounting Standards Executive Committee issued SOP
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 establishes the accounting for costs of software
products developed or purchased for internal use, including when
F-10
<PAGE>
NET PERCEPTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
such costs should be capitalized. Net Perceptions does not expect SOP 98-1,
which is effective for Net Perceptions beginning January 1, 1999, to materially
affect its financial position or results of operations.
3. FINANCIAL STATEMENT COMPONENTS
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Computer hardware.......................................................... $ 339 $ 710
Leasehold improvements..................................................... 11 233
Computer software.......................................................... 56 230
Furniture, fixtures and equipment.......................................... 125 218
--------- ---------
531 1,391
Less: Accumulated depreciation and amortization............................ (142) (372)
--------- ---------
$ 389 $ 1,019
--------- ---------
--------- ---------
</TABLE>
Property and equipment include assets under capital leases of $529 and
$1,001 at December 31, 1997 and 1998, respectively. Generally, all property and
equipment with the exception of leasehold improvements and certain furniture,
fixtures and equipment, were acquired under capital leases.
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Accrued wages and benefits................................................... $ 89 $ 626
Accrued leasehold improvements............................................... -- 225
Other accrued expenses....................................................... 133 559
--------- ---------
$ 222 $ 1,410
--------- ---------
--------- ---------
</TABLE>
4. INCOME TAXES
For income tax purposes, Net Perceptions has available net operating loss
carryforwards of approximately $9,100 and research and development credit
carryforwards of $258 at December 31, 1998. The net operating loss and research
and development credit carryforwards expire in 2011 through 2018 if not
previously utilized. The utilization of these carryforwards may be subject to
limitations based on future changes in ownership of Net Perceptions pursuant to
Internal Revenue Code Section 382. Future tax benefits have not been recognized
in the financial statements as their utilization is not presently likely based
on the weight of available information.
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax
F-11
<PAGE>
NET PERCEPTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
4. INCOME TAXES (CONTINUED)
purposes. Net Perceptions has no deferred tax liabilities as of December 31,
1997 and 1998. Significant components of Net Perceptions' deferred tax assets
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................................... $ 2,161 $ 3,574
Research and development credit carryforwards.......................... 109 258
Vacation and other accruals............................................ 12 237
Accounts receivable allowance.......................................... 11 98
--------- ---------
Total deferred tax assets............................................ 2,293 4,167
--------- ---------
Valuation allowance...................................................... (2,293) (4,167)
--------- ---------
Total net deferred income taxes...................................... $ -- $ --
--------- ---------
--------- ---------
</TABLE>
5. TECHNOLOGY LICENSE
Effective July 31, 1996, Net Perceptions entered into a license agreement
with the University of Minnesota. Under the terms of the agreement, Net
Perceptions received a worldwide license to use and sell certain information and
intellectual property rights relating to an information filtering technique
developed by the University of Minnesota. Net Perceptions has further developed
this technology. The license agreement ends upon the expiration of the legal
life of the patents underlying the technology or invalidation of the licensed
technology by other third-party patents. The license may also be terminated by
Net Perceptions with sixty-day notice and by the University of Minnesota if Net
Perceptions has a material breach or default of the terms of the agreement (i.e.
related to diligent efforts for the sale of Net Perceptions products and
financing).
On October 13, 1997, Net Perceptions entered into an amendment to the July
31, 1996 license agreement whereas Net Perceptions has obtained all rights and
licenses relating to improvements resulting from continued research by the
University of Minnesota relating to the information filtering technology.
Research fees payable to the University of Minnesota under the amendment equal
$20 for each of three planned academic research years (1998-2000). In October
1997 and 1998, Net Perceptions paid the University of Minnesota $20 under the
terms of the amendment. For the years ended December 31, 1997 and 1998,
approximately $5 and $20 were recognized as research and development expenses
under this agreement and the final $20,000 is payable on October 1, 1999. Under
the amendment, Net Perceptions may also have to potentially issue up to 18,000
stock options for each of the three academic research years based on
improvements to the information technology which are patentable. Any stock
options granted would have an exercise price based on the fair market value of
Net Perceptions' common stock on the date of grant and would be accounted for in
the financial statements. To date no such options have been granted. The
amendment is cancelable by Net Perceptions prior to the beginning of each of
three research years.
F-12
<PAGE>
NET PERCEPTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
6. CAPITAL LEASES
Net Perceptions maintains a lease line of credit with a leasing company for
the acquisition of property and equipment under capital lease arrangements. The
current lease line of credit expires on December 31, 1999 and has approximately
$1,000 available at December 31, 1998. The initial term of any loan under the
agreement is forty-two months from the borrowing date and has an effective
interest rate of 14%. Monthly payments are equal to 2.8% of the original amount
borrowed. Existing borrowings bear interest at 15.9% to 19.0% and are due in
varying monthly installments through July 2002. As of December 31, 1997 and
1998, $529 and $1,001, respectively, had been drawn on the lease line of credit,
exclusive of any repayments. Future minimum payments are as follows:
<TABLE>
<S> <C>
YEAR ENDING DECEMBER 31,
1999............................................................. $ 370
2000............................................................. 316
2001............................................................. 220
2002............................................................. 101
---------
Total minimum lease payments..................................... 1,007
Less: Amount representing interest............................... (214)
---------
Present value of net minimum lease payments...................... 793
Less: Current portion............................................ (255)
---------
$ 538
---------
---------
</TABLE>
7. STOCKHOLDERS' EQUITY AND CONVERTIBLE REDEEMABLE PREFERRED STOCK
Net Perceptions is authorized to issue two classes of stock designated as
common and preferred. As of December 31, 1998, the total number of shares that
Net Perceptions was authorized to issue was 90,000,000 shares, of which
60,000,000 were common stock and 30,000,000 were preferred stock. As of December
31, 1998, 2,170,000, 4,000,000 and 4,800,000 shares of the preferred stock have
been designated Series A, Series B, and Series C Preferred Stock, respectively.
In February 1999, subject to certain conditions, the board of directors
authorized the amendment and restatement of Net Perceptions' Certificate of
Incorporation. Upon the closing of Net Perceptions' IPO, the authorized capital
stock will consist of 100,000,000 shares of common stock, $.0001 par value, and
10,000,000 shares of preferred stock, $.0001 par value.
PREFERRED STOCK
The shares of preferred stock are convertible, at the option of the holder,
into common stock on a share for share basis, subject to adjustment for certain
events, have voting rights and provide for certain preferential dividend,
liquidation, redemption and other rights. Net Perceptions has reserved
10,668,700 shares of common stock to satisfy these conversion rights. The
preferred stock will automatically convert into common stock if Net Perceptions
issues common stock in a public offering, pursuant to a registration statement
under the Securities Act of 1933, as amended, in which the net proceeds received
by Net Perceptions equals or exceeds $7,500 and the public offering price equals
or exceeds $3.105 per share, as adjusted for certain events.
F-13
<PAGE>
NET PERCEPTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
7. STOCKHOLDERS' EQUITY AND CONVERTIBLE REDEEMABLE PREFERRED STOCK (CONTINUED)
Voting rights for the shares of preferred stock are on an "as if converted
to common stock" basis. In addition, an affirmative vote of the majority of the
preferred stockholders is required to sell Net Perceptions and to amend Net
Perceptions' Certificate of Incorporation relating to the preferred stock.
Redemption of the Series A Preferred Stock is mandatory, at the election of
certain holders, at $.30 per share plus any declared but unpaid dividends in
three annual installments commencing August 1, 2002, if not previously converted
or otherwise redeemed. Future redemptions of the Series A Preferred Stock
outstanding at December 31, 1998 are $217 in each of the years ending December
31, 2002, 2003 and 2004. The Series A Preferred Stock is reflected at redemption
value at December 31, 1997 and 1998. Shares of the Series B and Series C
Preferred Stock are not redeemable. No dividends have been declared.
In the event of a liquidation, dissolution, merger or acquisition of Net
Perceptions, preferred stockholders will be entitled to receive in cash, out of
the assets of Net Perceptions, an amount equal to their cost ($.30 per share for
Series A, $1.035 per share for Series B and $1.535 per share for Series C
Preferred Stock), plus an amount equal to declared but unpaid dividends on such
shares (the "Preference Amount"). The Preference Amount will be paid before any
distribution or payment is made to the holders of common stock of Net
Perceptions. Following the payment of the Preference Amount, the remaining
assets of Net Perceptions available for distribution to stockholders shall be
distributed among the holders of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock and common stock pro rata based on the number of
shares of common stock held (assuming conversion of all Series A, Series B and
Series C Preferred Stock), except that the Series A, Series B, and Series C
preferred stockholders have a liquidation ceiling of six times, three times and
two times, respectively, of their initial investment (inclusive of the
Preference Amount). The liquidation ceilings as of December 31, 1998 for the
Series A, B and C preferred stockholders are $3,903, $12,000 and $14,232,
respectively.
PREFERRED STOCK WARRANT
On October 28, 1997, Net Perceptions issued a warrant to purchase Series C
Preferred Stock to a bank pursuant to a business loan agreement that expired in
1998. The warrant is for 11,982 shares of Series C Preferred Stock at $1.535 per
share, but converts to a warrant for 11,982 shares of common stock upon the
closing of Net Perceptions' IPO. The warrant expires on the earlier of October
28, 2002 or two years following Net Perceptions' IPO. The warrant had a nominal
value on the date of issuance.
COMMON STOCK
Total shares of common stock outstanding at December 31, 1998 were
6,633,308, of which 2,270,370 are subject to a repurchase option, which is at
Net Perceptions' discretion, at the original sale price in the event the
employee holding the shares leaves Net Perceptions. In general, Net Perceptions'
repurchase option expires to the extent of 25% of the applicable shares after
the first year of service and then in equal amounts over the next 36 months. The
remaining repurchase option on shares of common stock, including common stock
underlying unexercised stock options may be accelerated in the event of a change
in control.
F-14
<PAGE>
NET PERCEPTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
7. STOCKHOLDERS' EQUITY AND CONVERTIBLE REDEEMABLE PREFERRED STOCK (CONTINUED)
STOCK OPTION PLANS
Net Perceptions' stock option plan (the "1996 Plan"), provides for the
issuance of both incentive and nonqualified stock options. The incentive options
allow the holder to purchase shares of Net Perceptions' common stock at fair
market value (as determined by the Board of Directors) on the date of the grant,
subject to certain repurchase rights held by Net Perceptions. For options
granted to holders of more than 10% of the outstanding common stock, the option
price at the date of the grant must be at least equal to 110% of the fair market
value of the stock. A total of 2,466,692 shares of common stock are reserved for
issuance under the 1996 Plan. Stock options are immediately exercisable but are
subject to certain discretionary repurchase rights by Net Perceptions, and
generally expire ten years from the date of grant. In general, common stock
underlying options are subject to repurchase by Net Perceptions at the original
exercise price. The repurchase feature generally expires for 25% of the shares
after the first year of service and then expires ratably over the next 36
months.
Net Perceptions records compensation related to stock options using the
intrinsic value method of APB No. 25. Compensation related to stock options
granted in 1998 below fair market value was approximately $1,639. Such
compensation is considered deferred compensation and amortized over the four
year repurchase period of the common stock underlying the related options. Stock
compensation expense of approximately $366 was recognized during the year ended
December 31, 1998.
A summary of activity of the Plan is presented below:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- -----------------
<S> <C> <C>
Outstanding, December 31, 1996................................. -- --
Granted...................................................... 1,212,000 $ 0.11
Exercised.................................................... (306,250) $ 0.10
Forfeited.................................................... (275,750) $ 0.10
----------
Outstanding, December 31, 1997................................. 630,000 $ 0.12
Granted...................................................... 1,196,564 $ 0.61
Exercised.................................................... (355,916) $ 0.16
Forfeited.................................................... (62,084) $ 0.16
----------
Outstanding, December 31, 1998................................. 1,408,564 $ 0.52
----------
----------
</TABLE>
F-15
<PAGE>
NET PERCEPTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
7. STOCKHOLDERS' EQUITY AND CONVERTIBLE REDEEMABLE PREFERRED STOCK (CONTINUED)
The following table summarizes information about fixed-price stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------ OPTIONS EXERCISABLE
RANGE OF WEIGHTED-AVERAGE -----------------------------
EXERCISE NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------- ----------- ---------------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
$0.10-$0.25 851,000 9.2 years $ 0.19 851,000 $ 0.19
$0.50-$0.88 277,300 9.6 $ 0.78 277,300 $ 0.78
$0.98-$1.13 238,264 9.8 $ 1.03 238,264 $ 1.03
$2.25-$3.00 42,000 9.9 $ 2.59 42,000 $ 2.59
----------- ----------
1,408,564 1,408,564
----------- ----------
----------- ----------
</TABLE>
All outstanding options at December 31, 1998 are exercisable but the common
stock underlying the options are subject to certain repurchase rights by Net
Perceptions. As of December 31, 1998, only 193,514 options were not subject to
repurchase.
Net Perceptions has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." For the purposes of the pro forma
disclosures under SFAS No. 123 below, the estimated fair value of the options is
amortized to expense over the four year repurchase period of the common stock
underlying the related options. Had compensation cost for Net Perceptions' stock
plan been determined based on the minimum value at the grant date for awards
during 1997 and 1998 consistent with the provisions of SFAS No. 123, Net
Perceptions' net loss and basic and diluted net loss per share for the years
ended December 31, 1997 and 1998 would have been the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Net loss:
As reported............................................................ $ (4,722) $ (4,968)
Pro forma.............................................................. (4,734) (4,979)
Basic and diluted net loss per share
As reported............................................................ $ (3.01) $ (1.40)
Pro forma.............................................................. (3.02) (1.40)
</TABLE>
The minimum value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997 and 1998, respectively; dividend yield of
0%; risk-free interest rates of 6.1% and 5.4%; and expected lives of 5 years.
Volatility factors are not applicable to non-public companies for these fair
value calculations. The weighted-average fair value of options granted during
1997 and 1998 using the Black-Scholes option-pricing model was $0.03 and $1.56
per share, respectively. Because the determination of the fair value of all
options granted after Net Perceptions becomes a public entity will include an
expected volatility factor and because additional option grants are expected to
be made in 1999, the pro forma effects of applying the fair value method may be
material to reported net income or loss in future years.
F-16
<PAGE>
NET PERCEPTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
7. STOCKHOLDERS' EQUITY AND CONVERTIBLE REDEEMABLE PREFERRED STOCK (CONTINUED)
In February 1999, Net Perceptions' board of directors adopted, subject to
stockholder approval, the 1999 Equity Incentive Plan (the "1999 Plan") and the
1999 Non-Employee Director Option Plan (the "1999 Non-Employee Plan"). The
number of shares of common stock reserved for issuance under the 1999 Plan is
equal to 800,000, plus the number of remaining shares available for grant under
the Company's 1996 Plan at the effective date of Net Perceptions' IPO. The
number of shares of common stock reserved for issuance under the 1999
Non-Employee Plan is 500,000.
EMPLOYEE STOCK PURCHASE PLAN
In February 1999, Net Perceptions' board of directors adopted, subject to
stockholder approval, the Employee Stock Purchase Plan (the "Purchase Plan").
The number of shares of common stock reserved for issuance under the Purchase
Plan is 1,000,000.
8. OPERATING LEASES
Net Perceptions has entered into operating lease commitments for its office
space. Minimum future lease payments due under the agreements are as follows:
<TABLE>
<S> <C>
YEAR ENDING DECEMBER 31,
1999............................................................ $ 466
2000............................................................ 546
2001............................................................ 554
2002............................................................ 554
---------
$ 2,120
---------
---------
</TABLE>
Rent expense totaled $29, $145 and $214 for the periods ended December 31,
1996, 1997 and 1998, respectively.
9. BENEFIT PLAN
Net Perceptions has adopted a 401(k) employee retirement plan under which
eligible employees may contribute up to 25% of their annual compensation,
subject to certain limitations. Employees vest immediately in their
contributions and earnings thereon. The plan allows for, but does not require,
Net Perceptions matching contributions. Net Perceptions has not made any such
matching contributions.
10. SUBSEQUENT EVENTS
From January 1, 1999 through March 22, 1999, Net Perceptions granted options
to purchase 524,936 shares of common stock to employees and a director with
exercise prices ranging from $4.00 to $11.00 per share. Compensation expense
related to these stock options granted below fair market value is approximately
$1,507. Such compensation will be amortized over the four-year repurchase period
of the common stock underlying the related options.
On March 22, 1999, Net Perceptions' board of directors authorized a 2-for-1
stock split of the then issued and outstanding capital stock. All references to
common stock amounts and preferred stock amounts, shares and per share data
included in the financial statements and related notes have been adjusted to
give retroactive effect to the stock split.
F-17
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of common stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fees.
<TABLE>
<S> <C>
SEC Registration fee............................................ $ 14,003
NASD fee........................................................ 4,500
Nasdaq National Market listing fee.............................. 95,000
Printing and engraving.......................................... 150,000
Legal fees and expenses......................................... 350,000
Accounting fees and expenses.................................... 225,000
Directors and Officers Liability Insurance...................... 140,000
Blue sky fees and expenses...................................... 10,000
Transfer agent fees............................................. 5,000
Miscellaneous................................................... 6,497
---------
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 indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933
(the "Act"). Article VII of the Registrant's Bylaws provides for mandatory
indemnification of its directors and officers and permissible indemnification of
employees and other agents to the maximum extent permitted by the Delaware
General Corporation Law. The Registrant's Amended and Restated Certificate of
Incorporation provides that, pursuant to Delaware law, its directors shall not
be liable for monetary damages for breach of the directors' fiduciary duty as
directors to the Registrant and its stockholders. This provision in the Amended
and Restated Certificate of Incorporation does not eliminate the directors'
fiduciary duty, and in appropriate circumstances equitable remedies such as
injunctive or other forms of non-monetary relief will remain available under
Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Registrant for
acts or omissions not in good faith or involving intentional misconduct, for
knowing violations of law, for actions leading to improper personal benefit to
the director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws. The Registrant has
entered into Indemnification Agreements with its officers and directors, a form
of which is attached as Exhibit 10.1 hereto and incorporated herein by
reference. The Indemnification Agreements provide the Registrant's officers and
directors with further indemnification to the maximum extent permitted by the
Delaware General Corporation Law. The Registrant maintains liability insurance
for its directors and officers. Reference is also made to Section 8 of the
Underwriting Agreement contained in Exhibit 1.1 hereto, indemnifying officers
and directors of the Registrant against certain liabilities, and Section 1.10 of
the Amended and Restated Investor Rights Agreement contained in Exhibit 4.1
hereto, indemnifying certain of the Company's stockholders, including
controlling stockholders, against certain liabilities.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) Since July 3, 1996 (inception), the Registrant has issued and sold the
following securities:
1. On July 3, 1996, the Registrant issued and sold an aggregate of
5,714,284 shares of its common stock to five founders of the Company
for an aggregate purchase price of $2,857.
2. On July 22, 1996, the Registrant issued and sold an aggregate of 30,000
shares of its common stock to six individuals in consideration for
their personal efforts associated with the development of the
University of Minnesota's technology and for the assignment by the
individuals to the Company of any possible rights to certain
technology.
3. On July 22, 1996, the Registrant issued and sold an aggregate of 44,000
shares of its common stock to three employees of the Company for an
aggregate purchase price of $220.
4. On July 25, 1996, the Registrant issued and sold an aggregate of
142,858 shares of its common stock to the University of Minnesota for
an aggregate purchase price of $714.29.
5. The Registrant issued and sold 662,166 shares (assuming no exercise of
stock options after December 31, 1998) of its common stock to
employees, consultants and directors of the Company pursuant to
exercises of options under its 1996 Stock Plan (Exhibit 10.2).
6. The Registrant granted options to purchase 2,408,564 shares of common
stock to employees and consultants of the Company under its 1996 Stock
Plan, of which 662,166 shares have been exercised as of December 31,
1998.
7. On August 2, 1996, the Registrant issued and sold 2,168,130 shares of
Series A Preferred Stock for an aggregate purchase price of $650,439 to
a group of five investors.
8. On December 4, 1996, the Registrant issued and sold 3,864,736 shares of
Series B Preferred Stock for an aggregate purchase price of
$4,000,001.76 to a group of five investors.
9. On October 28, 1997, the Registrant issued and sold warrants to
purchase approximately 11,982 shares of Series C Preferred Stock to
Silicon Valley Bank.
10. Between December 18, 1997 and February 20, 1998, the Registrant issued
and sold 4,635,834 shares of Series C Preferred Stock for an aggregate
purchase price of $7,116,005.19 to a group of 11 investors.
11. On February 4, 1999, the Registrant issued and sold a convertible
promissory note with a principal balance of $4,000,000.00 to one
foreign corporation.
The issuances described in Items 15(a)(1) through 15(a)(3), 15(a)(5) and
15(a)(6) were deemed exempt from registration under the Act in reliance upon
Rule 701 promulgated under the Act. The issuances of the securities described in
Items 15(a)(4) and 15(a)(7) through 15(a)(10) were deemed to be exempt from
registration under the Act in reliance on Section 4(2) of such Act as
transactions by an issuer not involving any public offering. The issuance
described in Item 15(a)(11) was deemed exempt from registration under the Act in
reliance on Regulation S. In addition, the recipients of securities in each such
transaction represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and warrants issued in such transactions. All recipients had
adequate access, through their relationships with the Registrant, to information
about the Registrant.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1+ Amended and Restated Certificate of Incorporation of the Registrant, as amended to date.
3.2 Form of Amended and Restated Certificate of Incorporation of the Registrant to be filed prior to the
closing of the offering made pursuant to this Registration Statement.
3.3+ Form of Amended and Restated Certificate of Incorporation of the Registrant to be filed after the
closing of the offering made pursuant to this Registration Statement.
3.4+ Bylaws of the Registrant.
3.5 Form of Amended and Restated Bylaws of the Registrant to be effective after the closing of the
offering made pursuant to this Registration Statement.
4.1+ Amended and Restated Investor Rights Agreement, dated December 18, 1997, among the Registrant and the
investors and founders named therein, as amended.
4.2* Specimen Certificate of the Registrant's common stock.
5.1+ Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel to the Registrant.
10.1+ Form of Indemnification Agreement entered into between the Registrant and its directors and officers.
10.2+ 1996 Stock Plan.
10.3+ 1999 Equity Incentive Plan.
10.4+ 1999 Non-Employee Director Option Plan.
10.5+ Employee Stock Purchase Plan.
10.6**+ License Agreement between Registrant and Regents of the University of Minnesota, dated July 31, 1996.
10.7**+ Amendment to License Agreement between Registrant and Regents of the University of Minnesota, dated
October 13, 1997.
10.8**+ Orbix Development and Runtime License Agreement between IONA Technologies PLC and the Registrant,
dated July 9, 1998.
10.9**+ Agreement Amendment to Orbix Development and Runtime License Agreement between IONA Technologies PLC
and the Registrant, dated October 12, 1998.
10.10+ Lease between the Protective Group and the Registrant, dated November 12, 1998 (Minneapolis office).
10.11+ Form of Master Purchase Agreement.
10.12+ Severance agreement between Registrant and George Moser, executed January 23, 1999.
10.13 Registrant's Change in Control Severance Plan and Summary Plan Description.
10.14+ Note Purchase Agreement between the Registrant and Trans Cosmos, Inc., dated February 4, 1999.
23.1+ Consent of PricewaterhouseCoopers LLP, independent accountants.
23.2+ Consent of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel to the Registrant.
Reference is made to Exhibit 5.1.
24.1+ Power of Attorney. (See page II-5)
</TABLE>
- ---------
* To be supplied by amendment.
** Confidential treatment requested as to certain portions of these exhibits.
+ Previously filed with the Commission.
II-3
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULE
Schedule II--Valuation and qualifying accounts.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the Delaware General Corporation Law, the Amended and Restated
Certificate of Incorporation or the Bylaws of the Registrant, Indemnification
Agreements entered into between the Registrant and its officers and directors,
the Underwriting Agreement, or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act, and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered hereunder,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Minneapolis, State of Minnesota, on this 14th day of April, 1999.
NET PERCEPTIONS, INC.
By: /s/ STEVEN J. SNYDER
-----------------------------------------
Steven J. Snyder
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
President, Chief Executive
/s/ STEVEN J. SNYDER Officer and Director
- ---------------------------- (Principal Executive April 14, 1999
Steven J. Snyder Officer)
Chief Financial Officer
/s/ THOMAS M. DONNELLY (Principal Financial and
- ---------------------------- Accounting Officer) and April 14, 1999
Thomas M. Donnelly Secretary
*
- ---------------------------- Director April 14, 1999
John T. Riedl
*
- ---------------------------- Director April 14, 1999
Ann L. Winblad
*
- ---------------------------- Director April 14, 1999
Douglas J. Burgum
<TABLE>
<S> <C> <C> <C>
*By: /s/ STEVEN J. SNYDER
-------------------------
(Steven J. Snyder,
Attorney-in-Fact)
</TABLE>
II-5
<PAGE>
SCHEDULE II
NET PERCEPTIONS, INC.
VALUATION AND QUALIFYING ACCOUNTS
PERIODS ENDED DECEMBER 31, 1996, 1997 AND 1998
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
ADDITIONS-
BALANCE AT CHARGED
BEGINNING TO COSTS BALANCE AT
OF AND DEDUCTIONS- END OF
PERIOD ENDED DECEMBER 31, PERIOD EXPENSES WRITE-OFFS PERIOD
- --------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1996............................. $ -- $ -- $ -- $ --
1997............................. -- 28,181 -- 28,181
1998............................. 28,181 294,309 22,337 300,154
</TABLE>
S-1
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. EXHIBIT PAGE
- ----------- --------------------------------------------------------------------------------------- ---------------
<C> <S> <C>
1.1 Form of Underwriting Agreement.........................................................
3.1+ Amended and Restated Certificate of Incorporation of the Registrant, as amended to
date.................................................................................
3.2 Form of Amended and Restated Certificate of Incorporation of the Registrant to be filed
prior to the closing of the offering made pursuant to this Registration Statement....
3.3+ Form of Amended and Restated Certificate of Incorporation of the Registrant to be filed
after the closing of the offering made pursuant to this Registration Statement.......
3.4+ Bylaws of the Registrant...............................................................
3.5 Form of Amended and Restated Bylaws of the Registrant to be effective after the closing
of the offering made pursuant to this Registration Statement.
4.1+ Amended and Restated Investor Rights Agreement, dated December 18, 1997, among the
Registrant and the investors and founders named therein, as amended..................
4.2* Specimen Certificate of the Registrant's common stock..................................
5.1+ Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel to
the Registrant.......................................................................
10.1+ Form of Indemnification Agreement entered into between the Registrant and its directors
and officers.........................................................................
10.2+ 1996 Stock Plan........................................................................
10.3+ 1999 Equity Incentive Plan.............................................................
10.4+ 1999 Non-Employee Director Option Plan.................................................
10.5+ Employee Stock Purchase Plan...........................................................
10.6**+ License Agreement between Registrant and Regents of the University of Minnesota, dated
July 31, 1996........................................................................
10.7**+ Amendment to License Agreement between Registrant and Regents of the University of
Minnesota, dated October 13, 1997....................................................
10.8**+ Orbix Development and Runtime License Agreement between IONA Technologies PLC and the
Registrant, dated July 9, 1998.......................................................
10.9**+ Agreement Amendment to Orbix Development and Runtime License Agreement between IONA
Technologies PLC and the Registrant, dated October 12, 1998..........................
10.10+ Lease between the Protective Group and the Registrant, dated November 12, 1998
(Minneapolis office).................................................................
10.11+ Form of Master Purchase Agreement......................................................
10.12+ Severance agreement between Registrant and George Moser, executed January 23, 1999.....
10.13 Registrant's Change in Control Severance Plan and Summary Plan Description.............
10.14+ Note Purchase Agreement between the Registrant and Trans Cosmos, Inc., dated February
4, 1999..............................................................................
23.1+ Consent of PricewaterhouseCoopers LLP, independent accountants.........................
23.2+ Consent of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel to
the Registrant. Reference is made to Exhibit 5.1.....................................
24.1+ Power of Attorney. (See page II-5).....................................................
</TABLE>
- ---------
* To be supplied by amendment.
** Confidential treatment requested as to certain portions of these exhibits.
+ Previously filed with the Commission.
<PAGE>
3,650,000 SHARES(1)
NET PERCEPTIONS, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
___________ __, 1999
BANCBOSTON ROBERTSON STEPHENS INC.
HAMBRECHT & QUIST LLC
PIPER JAFFRAY INC.
WIT CAPITAL CORPORATION
As Representatives of the several Underwriters
c/o BancBoston Robertson Stephens Inc.
555 California Street
Suite 2600
San Francisco, California 94104
Ladies/Gentlemen:
NET PERCEPTIONS, INC., a Delaware corporation (the "Company"), addresses
you as the Representatives of each of the persons, firms and corporations
listed in Schedule A hereto (herein collectively called the "Underwriters")
and hereby confirms its agreement with the several Underwriters as follows:
1. DESCRIPTION OF SHARES. The Company proposes to issue and sell
_________ shares of its authorized and unissued common stock, par value $0.0001
per share (the "Firm Shares"), to the several Underwriters. The Company also
proposes to grant to the Underwriters an option to purchase up to ________
additional shares of the Company's common stock, par value $0.0001 per share
(the "Option Shares"), as provided in Section 7 hereof. As used in this
Agreement, the term "Shares" shall include the Firm Shares and the Option
Shares. All shares of common stock, par value $0.0001 per share, of the Company
to be outstanding after giving effect to the sales contemplated hereby,
including the Shares, are hereinafter referred to as "Common Stock."
2. Representations, Warranties and Agreements of the Company.
The Company represents and warrants to and agrees with each
Underwriter that:
(a) A registration statement on Form S-1 (File No. 333-71919) with
respect to the Shares, including a prospectus subject to completion, has been
prepared by the Company in conformity with the requirements of the Securities
Act of 1933, as amended (the "Act"), and the applicable rules and regulations
(the "Rules and Regulations") of the Securities and Exchange Commission (the
"Commission") under the Act and has been filed with the Commission; such
amendments to such registration statement, such amended prospectuses subject to
completion and such abbreviated registration statements pursuant to Rule 462(b)
of the Rules and Regulations as may have been required prior to the date hereof
have been similarly prepared and filed with the Commission; and the Company will
file such additional amendments to such registration statement, such amended
prospectuses subject to completion and such abbreviated registration statements
as may hereafter be required. Copies of such registration statement and
amendments, of each related prospectus subject to completion (the
- --------------------
(1) Plus an option to purchase up to 547,500 additional shares from the Company
to cover over-allotments.
1.
<PAGE>
"Preliminary Prospectuses") and of any abbreviated registration statement
pursuant to Rule 462(b) of the Rules and Regulations have been delivered to you.
If the registration statement relating to the Shares has been declared
effective under the Act by the Commission, the Company will prepare and promptly
file with the Commission the information omitted from the registration statement
pursuant to Rule 430A(a) or, if BancBoston Robertson Stephens Inc., on behalf of
the several Underwriters, shall agree to the utilization of Rule 434 of the
Rules and Regulations, the information required to be included in any term sheet
filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and
Regulations pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules
and Regulations or as part of a post-effective amendment to the registration
statement (including a final form of prospectus). If the registration statement
relating to the Shares has not been declared effective under the Act by the
Commission, the Company will prepare and promptly file an amendment to the
registration statement, including a final form of prospectus, or, if BancBoston
Robertson Stephens Inc., on behalf of the several Underwriters, shall agree to
the utilization of Rule 434 of the Rules and Regulations, the information
required to be included in any term sheet filed pursuant to Rule 434(b) or (c),
as applicable, of the Rules and Regulations. The term "Registration Statement"
as used in this Agreement shall mean such registration statement, including
financial statements, schedules and exhibits, in the form in which it became or
becomes, as the case may be, effective (including, if the Company omitted
information from the registration statement pursuant to Rule 430A(a) or files a
term sheet pursuant to Rule 434 of the Rules and Regulations, the information
deemed to be a part of the registration statement at the time it became
effective pursuant to Rule 430A(b) or Rule 434(d) of the Rules and Regulations)
and, in the event of any amendment thereto or the filing of any abbreviated
registration statement pursuant to Rule 462(b) of the Rules and Regulations
relating thereto after the effective date of such registration statement, shall
also mean (from and after the effectiveness of such amendment or the filing of
such abbreviated registration statement) such registration statement as so
amended, together with any such abbreviated registration statement. The term
"Prospectus" as used in this Agreement shall mean the prospectus relating to the
Shares as included in such Registration Statement at the time it becomes
effective (including, if the Company omitted information from the Registration
Statement pursuant to Rule 430A(a) of the Rules and Regulations, the information
deemed to be a part of the Registration Statement at the time it became
effective pursuant to Rule 430A(b) of the Rules and Regulations); PROVIDED,
HOWEVER, that if in reliance on Rule 434 of the Rules and Regulations and with
the consent of BancBoston Robertson Stephens Inc., on behalf of the several
Underwriters, the Company shall have provided to the Underwriters a term sheet
pursuant to Rule 434(b) or (c), as applicable, prior to the time that a
confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the
term "Prospectus" shall mean the "prospectus subject to completion" (as defined
in Rule 434(g) of the Rules and Regulations) last provided to the Underwriters
by the Company and circulated by the Underwriters to all prospective purchasers
of the Shares (including the information deemed to be a part of the Registration
Statement at the time it became effective pursuant to Rule 434(d) of the Rules
and Regulations). Notwithstanding the foregoing, if any revised prospectus
shall be provided to the Underwriters by the Company for use in connection with
the offering of the Shares that differs from the prospectus referred to in the
immediately preceding sentence (whether or not such revised prospectus is
required to be filed with the Commission pursuant to Rule 424(b) of the Rules
and Regulations), the term "Prospectus" shall refer to such revised prospectus
from and after the time it is first provided to the Underwriters for such use.
If in reliance on Rule 434 of the Rules and Regulations and with the consent of
BancBoston Robertson Stephens Inc., on behalf of the several Underwriters, the
Company shall have provided to the Underwriters a term sheet pursuant to Rule
434(b) or (c), as applicable, prior to the time that a confirmation is sent or
given for purposes of Section 2(10)(a) of the Act, the Prospectus and the term
sheet, together, will not be materially different from the prospectus in the
Registration Statement.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus or instituted proceedings for that
purpose, and each such Preliminary Prospectus has conformed in all material
respects to the requirements of the Act and the Rules and Regulations and, as of
its date, has not included any untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; and at the time
the Registration Statement became or becomes, as the case may be, effective and
at all times subsequent thereto up to and on the Closing Date (hereinafter
defined) and on any later date on which Option Shares are to be purchased,
(i) the Registration Statement and the Prospectus, and any amendments or
supplements thereto, contained and will contain all material information
required to be included therein by the Act and the Rules and Regulations and
will in all material respects conform to the requirements of the Act and the
Rules and Regulations, (ii) the Registration Statement, and any amendments or
supplements thereto, did not and will not include any untrue statement of a
2.
<PAGE>
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (iii) the
Prospectus, and any amendments or supplements thereto, did not and will not
include any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; PROVIDED, HOWEVER, that none of the
representations and warranties contained in this subparagraph (b) shall apply to
information contained in or omitted from the Registration Statement or
Prospectus, or any amendment or supplement thereto, in reliance upon, and in
conformity with, written information relating to any Underwriter furnished to
the Company by such Underwriter specifically for use in the preparation thereof.
(c) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the jurisdiction of its
incorporation with full power and authority (corporate and other) to own, lease
and operate its properties and conduct its business as described in the
Prospectus; the Company is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction in which the ownership
or leasing of its properties or the conduct of its business requires such
qualification, except where the failure to be so qualified or be in good
standing would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company;
no proceeding has been instituted in any such jurisdiction, revoking, limiting
or curtailing, or seeking to revoke, limit or curtail, such power and authority
or qualification; the Company is in possession of and operating in compliance
with all authorizations, licenses, certificates, consents, orders and permits
from state, federal and other regulatory authorities which are material to the
conduct of its business, all of which are valid and in full force and effect;
the Company is not in violation of its charter or bylaws or in default in the
performance or observance of any material obligation, agreement, covenant or
condition contained in any material bond, debenture, note or other evidence of
indebtedness, or in any material lease, contract, indenture, mortgage, deed of
trust, loan agreement, joint venture or other agreement or instrument to which
the Company is a party or by which its properties may be bound; the Company is
not in material violation of any law, order, rule, regulation, writ, injunction,
judgment or decree of any court, government or governmental agency or body,
domestic or foreign, having jurisdiction over the Company or over its
properties. The Company does not own or control, directly or indirectly, any
corporation, association or other entity.
(d) The Company has full legal right, power and authority to enter
into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and is
a valid and binding agreement on the part of the Company, enforceable in
accordance with its terms, except as rights to indemnification hereunder may be
limited by applicable law and except as the enforcement hereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles; the performance of this Agreement and the consummation of
the transactions herein contemplated will not result in a material breach or
violation of any of the terms and provisions of, or constitute a default under,
(i) any bond, debenture, note or other evidence of indebtedness, or under any
lease, contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument to which the Company is a party or by
which it or its properties may be bound, (ii) the charter or bylaws of the
Company, or (iii) any law, order, rule, regulation, writ, injunction, judgment
or decree of any court, government or governmental agency or body, domestic or
foreign, having jurisdiction over the Company or its properties. No consent,
approval, authorization or order of or qualification with any court, government
or governmental agency or body, domestic or foreign, having jurisdiction over
the Company or over its properties is required for the execution and delivery of
this Agreement and the consummation by the Company of the transactions herein
contemplated, except such as may be required under the Act or under state or
other securities or Blue Sky laws, all of which requirements have been satisfied
in all material respects.
(e) There is not any pending or, to the best of the Company's
knowledge, threatened action, suit, claim or proceeding against the Company, any
of its officers or any of its properties, assets or rights before any court,
government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or any of its officers or its properties or
otherwise which (i) might result in any material adverse change in the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company or might materially and adversely affect its properties, assets
or rights, (ii) might prevent consummation of the transactions contemplated
hereby or (iii) is required to be disclosed in the Registration Statement or
Prospectus and is not so disclosed; and there are no agreements, contracts,
leases or documents of the Company of a character required to be described or
referred to in the Registration Statement or Prospectus or to be filed as an
exhibit to the Registration
3.
<PAGE>
Statement by the Act or the Rules and Regulations which have not been
accurately described in all material respects in the Registration Statement
or Prospectus or filed as exhibits to the Registration Statement.
(f) All outstanding shares of capital stock of the Company have been
duly authorized and validly issued and are fully paid and nonassessable, have
been issued in compliance with all federal and state securities laws, were not
issued in violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities, and the authorized and outstanding capital
stock of the Company is as set forth in the Prospectus under the caption
"Capitalization" and conforms in all material respects to the statements
relating thereto contained in the Registration Statement and the Prospectus (and
such statements correctly state the substance of the instruments defining the
capitalization of the Company); the Firm Shares and the Option Shares have been
duly authorized for issuance and sale to the Underwriters pursuant to this
Agreement and, when issued and delivered by the Company against payment therefor
in accordance with the terms of this Agreement, will be duly and validly issued
and fully paid and nonassessable, and will be sold free and clear of any pledge,
lien, security interest, encumbrance, claim or equitable interest; and no
preemptive right, co-sale right, registration right, right of first refusal or
other similar right of stockholders exists with respect to any of the Firm
Shares or Option Shares to be purchased from the Company hereunder or the
issuance and sale thereof other than those that have been expressly waived prior
to the date hereof and those that will automatically expire upon and will not
apply to the consummation of the transactions contemplated on the Closing Date.
No further approval or authorization of any stockholder, the Board of Directors
of the Company or others is required for the issuance and sale or transfer of
the Shares except as may be required under the Act or under state or other
securities or Blue Sky laws. Except as disclosed in the Prospectus and the
financial statements of the Company, and the related notes thereto, included in
the Prospectus, the Company has no outstanding options to purchase, or
preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the options or
other rights granted and exercised thereunder, set forth in the Prospectus
accurately and fairly presents the information required to be shown with respect
to such plans, arrangements, options and rights.
(g) PricewaterhouseCoopers LLP, which has examined the financial
statements of the Company, together with the related schedules and notes, as of
December 31, 1997 and 1998 and for each of the periods from inception to
12/31/96 and each of the years in the two (2) years ended December 31, 1998
filed with the Commission as a part of the Registration Statement, which are
included in the Prospectus, are independent accountants within the meaning of
the Act and the Rules and Regulations; the audited financial statements of the
Company, together with the related schedules and notes, forming part of the
Registration Statement and Prospectus, fairly present the financial position and
the results of operations of the Company at the respective dates and for the
respective periods to which they apply; and all audited financial statements of
the Company, together with the related schedules and notes, filed with the
Commission as part of the Registration Statement, have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods involved except as may be otherwise stated therein. The
selected and summary financial and statistical data included in the Registration
Statement present fairly the information shown therein and have been compiled on
a basis consistent with the audited financial statements presented therein. No
other financial statements or schedules are required to be included in the
Registration Statement.
(h) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been (i) any
material adverse change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company, (ii) any transaction
that is material to the Company, except transactions entered into in the
ordinary course of business, (iii) any obligation, direct or contingent, that is
material to the Company and incurred by the Company, except obligations incurred
in the ordinary course of business, (iv) any change in the capital stock or
outstanding indebtedness of the Company that is material to the Company, (v) any
dividend or distribution of any kind declared, paid or made on the capital stock
of the Company, or (vi) any loss or damage (whether or not insured) to the
property of the Company which has been sustained or will have been sustained
which has a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company.
(i) Except as set forth in the Registration Statement and Prospectus,
(i) the Company has good and marketable title to all properties and assets
described in the Registration Statement and Prospectus as
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owned by it, free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest, other than such as would not have a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company, (ii) the
agreements to which the Company is a party described in the Registration
Statement and Prospectus are valid agreements, enforceable by the Company,
except as the enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles and,
to the best of the Company's knowledge, the other contracting party or
parties thereto are not in material breach or material default under any of
such agreements, and (iii) the Company has valid and enforceable leases for
all properties described in the Registration Statement and Prospectus as
leased by it, except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles. Except as set forth in the Registration Statement and
Prospectus, the Company owns or leases all such properties as are necessary
to its operations as now conducted or as proposed to be conducted.
(j) The Company has timely filed all necessary federal, state and
foreign income and franchise tax returns and has paid all taxes shown thereon as
due, and there is no tax deficiency that has been or, to the best of the
Company's knowledge, might be asserted against the Company that might have a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company; and all tax
liabilities are adequately provided for on the books of the Company.
(k) The Company maintains insurance with insurers of recognized
financial responsibility of the types and in the amounts generally deemed
adequate for its businesses and consistent with insurance coverage maintained by
similar companies in similar businesses, including, but not limited to,
insurance covering real and personal property owned or leased by the Company
against theft, damage, destruction, acts of vandalism and all other risks
customarily insured against, all of which insurance is in full force and effect;
the Company has never been refused any insurance coverage sought or applied for;
and the Company has no reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company.
(l) To the best of Company's knowledge, no labor disturbance by the
employees of the Company exists or is imminent; and the Company is not aware of
any existing or imminent labor disturbance by the employees of any of its
principal suppliers, subassemblers, value added resellers, subcontractors,
original equipment manufacturers, authorized dealers or international
distributors that might be expected to result in a material adverse change in
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company. No collective bargaining agreement exists
with any of the Company's employees and, to the best of the Company's knowledge,
no such agreement is imminent.
(m) The Company owns or possesses adequate rights to use all patents,
patent rights, inventions, trade secrets, know-how, trademarks, service marks,
trade names and copyrights which are necessary to conduct its businesses as
described in the Registration Statement and Prospectus; the expiration of any
patents, patent rights, trade secrets, trademarks, service marks, trade names or
copyrights would not have a material adverse effect on the condition (financial
or otherwise), earnings, operations, business or business prospects of the
Company; the Company has not received any notice of, and has no knowledge of,
any infringement of or conflict with asserted rights of the Company by others
with respect to any patent, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names or copyrights; and the Company has not
received any notice of, and has no knowledge of, any infringement of or conflict
with asserted rights of others with respect to any patent, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade names or
copyrights which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, might have a material adverse effect on the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company.
(n) The Common Stock has been approved for quotation on The Nasdaq
National Market, subject to official notice of issuance.
(o) The Company has been advised concerning the Investment Company
Act of 1940, as amended (the "1940 Act"), and the rules and regulations
thereunder, and has in the past conducted, and intends in
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the future to conduct, its affairs in such a manner as to ensure that it will
not become an "investment company" or a company "controlled" by an
"investment company" within the meaning of the 1940 Act and such rules and
regulations.
(p) The Company has not distributed and will not distribute prior to
the later of (i) the Closing Date, or any date on which Option Shares are to be
purchased, as the case may be, and (ii) completion of the distribution of the
Shares, any offering material in connection with the offering and sale of the
Shares other than any Preliminary Prospectuses, the Prospectus, the Registration
Statement and other materials, if any, permitted by the Act.
(q) The Company has not at any time during the last five (5) years
(i) made any unlawful contribution to any candidate for foreign office or failed
to disclose fully any contribution in violation of law, or (ii) made any payment
to any federal or state governmental officer or official, or other person
charged with similar public or quasi-public duties, other than payments required
or permitted by the laws of the United States or any jurisdiction thereof.
(r) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares.
(s) Each officer and director of the Company and each beneficial
owner of Common Stock has agreed in writing that such person will not, for a
period of 180 days from the date that the Registration Statement is declared
effective by the Commission (the "Lock-up Period"), offer to sell, contract to
sell, or otherwise sell, dispose of, loan, pledge or grant any rights with
respect to (collectively, a "Disposition") any shares of Common Stock, any
options or warrants to purchase any shares of Common Stock or any securities
convertible into or exchangeable for shares of Common Stock (collectively,
"Securities") now owned or hereafter acquired directly by such person or with
respect to which such person has or hereafter acquires the power of disposition,
otherwise than (i) as a bona fide gift or gifts, provided the donee or donees
thereof agree in writing to be bound by this restriction, (ii) as a distribution
to partners or shareholders of such person, provided that the distributees
thereof agree in writing to be bound by the terms of this restriction,
(iii) shares acquired from the Underwriters in the Public Offering or acquired
in the public market after the effectiveness of the Registration Statement, or
(iv) with the prior written consent of BancBoston Robertson Stephens Inc. The
foregoing restriction has been expressly agreed to preclude the holder of the
Securities from engaging in any hedging or other transaction which is designed
to or reasonably expected to lead to or result in a Disposition of Securities
during the Lock-up Period, even if such Securities would be disposed of by
someone other than such holder. Such prohibited hedging or other transactions
would include, without limitation, any short sale (whether or not against the
box) or any purchase, sale or grant of any right (including, without limitation,
any put or call option) with respect to any Securities or with respect to any
security (other than a broad-based market basket or index) that includes,
relates to or derives any significant part of its value from Securities.
Furthermore, such person has also agreed and consented to the entry of stop
transfer instructions with the Company's transfer agent against the transfer of
the Securities held by such person except in compliance with this restriction.
The Company has provided to counsel for the Underwriters a complete and accurate
list of all securityholders of the Company and the number and type of securities
held by each securityholder. The Company has provided to counsel for the
Underwriters true, accurate and complete copies of all of the agreements
pursuant to which its officers, directors and stockholders have agreed to such
or similar restrictions (the "Lock-up Agreements") presently in effect or
effected hereby. The Company hereby represents and warrants that it will not
release any of its officers, directors or other stockholders from any Lock-up
Agreements currently existing or hereafter effected without the prior written
consent of BancBoston Robertson Stephens Inc.
(t) To the Company's knowledge, except as set forth in the
Registration Statement and Prospectus, (i) the Company is in compliance with all
rules, laws and regulations relating to the use, treatment, storage and
disposal of toxic substances and protection of health or the environment
("Environmental Laws") which are applicable to its business, (ii) the Company
has received no notice from any governmental authority or third party of an
asserted claim under Environmental Laws, which claim is required to be disclosed
in the Registration Statement and the Prospectus, (iii) the Company will not be
required to make future material capital expenditures to comply with
Environmental Laws and (iv) no property which is owned, leased or occupied by
the Company has been designated as a Superfund site pursuant to the
Comprehensive Response, Compensation, and Liability Act of
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1980, as amended (42 U.S.C. Section 9601, ET SEQ.), or otherwise designated
as a contaminated site under applicable state or local law.
(u) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorizations,
(ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(v) There are no outstanding loans, advances (except normal advances
for business expenses in the ordinary course of business) or guarantees of
indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them,
except as disclosed in the Registration Statement and the Prospectus.
(w) The Company has complied with all provisions of Section 517.075,
Florida Statutes relating to doing business with the Government of Cuba or with
any person or affiliate located in Cuba.
3. PURCHASE, SALE AND DELIVERY OF SHARES. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company, at a purchase price of $_____ per share, the
respective number of Firm Shares as hereinafter set forth. The obligation of
each Underwriter to the Company shall be to purchase from the Company that
number of Firm Shares which is set forth opposite the name of such Underwriter
in Schedule A hereto (subject to adjustment as provided in Section 10).
Delivery of definitive certificates for the Firm Shares to be purchased by
the Underwriters pursuant to this Section 3 shall be made against payment of the
purchase price therefor by the several Underwriters by certified or official
bank check or checks drawn in next-day funds, payable to the order of the
Company (and the Company agrees not to deposit any such check in the bank on
which it is drawn, and not to take any other action with the purpose or effect
of receiving immediately available funds, until the business day following the
date of its delivery to the Company, and, in the event of any breach of the
foregoing, the Company shall reimburse the Underwriters for the interest lost
and any other expenses borne by them by reason of such breach), at the offices
of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP (or at such
other place as may be agreed upon among the Representatives and the Company, at
7:00 A.M., San Francisco time (a) on the third (3rd) full business day following
the first day that Shares are traded, (b) if this Agreement is executed and
delivered after 1:30 P.M., San Francisco time, the fourth (4th) full business
day following the day that this Agreement is executed and delivered or (c) at
such other time and date not later than seven (7) full business days following
the first day that Shares are traded as the Representatives and the Company may
determine (or at such time and date to which payment and delivery shall have
been postponed pursuant to Section 10 hereof), such time and date of payment and
delivery being herein called the "Closing Date"; PROVIDED, HOWEVER, that if the
Company has not made available to the Representatives copies of the Prospectus
within the time provided in Section 4(d) hereof, the Representatives may, in
their sole discretion, postpone the Closing Date until no later than two (2)
full business days following delivery of copies of the Prospectus to the
Representatives. The certificates for the Firm Shares to be so delivered will
be made available to you at such office or such other location including,
without limitation, in New York City, as you may reasonably request for checking
at least one (1) full business day prior to the Closing Date and will be in such
names and denominations as you may request, such request to be made at least two
(2) full business days prior to the Closing Date. If the Representatives so
elect, delivery of the Firm Shares may be made by credit through full fast
transfer to the accounts at The Depository Trust Company designated by the
Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the Closing
Date for the Firm Shares to be purchased by such Underwriter or Underwriters.
Any such payment by you shall not relieve any such Underwriter or Underwriters
of any of its or their obligations hereunder.
7.
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After the Registration Statement becomes effective, the several
Underwriters intend to make an initial public offering (as such term is
described in Section 11 hereof) of the Firm Shares at an initial public offering
price of $_____ per share. After the initial public offering, the several
Underwriters may, in their discretion, vary the public offering price.
The information set forth in the last paragraph on the front cover
page (insofar as such information relates to the Underwriters), on the inside
front cover concerning stabilization and over-allotment by the Underwriters,
legends required by Item 502(d) of Regulation S-K under the Act and information
under the caption "Underwriting" in any Preliminary Prospectus and in the
Prospectus, constitutes the only information furnished by the Underwriters to
the Company for inclusion in any Preliminary Prospectus, the Prospectus or the
Registration Statement, and you, on behalf of the respective Underwriters,
represent and warrant to the Company that the statements made therein do not
include any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
4. FURTHER AGREEMENTS OF THE COMPANY. The Company agrees with the
several Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective as promptly as possible; the Company will use its best efforts to
cause any abbreviated registration statement pursuant to Rule 462(b) of the
Rules and Regulations as may be required subsequent to the date the Registration
Statement is declared effective to become effective as promptly as possible; the
Company will notify you, promptly after it shall receive notice thereof, of the
time when the Registration Statement, any subsequent amendment to the
Registration Statement or any abbreviated registration statement has become
effective or any supplement to the Prospectus has been filed; if the Company
omitted information from the Registration Statement at the time it was
originally declared effective in reliance upon Rule 430A(a) of the Rules and
Regulations, the Company will provide evidence satisfactory to you that the
Prospectus contains such information and has been filed, within the time period
prescribed, with the Commission pursuant to subparagraph (1) or (4) of
Rule 424(b) of the Rules and Regulations or as part of a post-effective
amendment to such Registration Statement as originally declared effective which
is declared effective by the Commission; if the Company files a term sheet
pursuant to Rule 434 of the Rules and Regulations, the Company will provide
evidence satisfactory to you that the Prospectus and term sheet meeting the
requirements of Rule 434(b) or (c), as applicable, of the Rules and Regulations,
have been filed, within the time period prescribed, with the Commission pursuant
to subparagraph (7) of Rule 424(b) of the Rules and Regulations; if for any
reason the filing of the final form of Prospectus is required under
Rule 424(b)(3) of the Rules and Regulations, it will provide evidence
satisfactory to you that the Prospectus contains such information and has been
filed with the Commission within the time period prescribed; it will notify you
promptly of any request by the Commission for the amending or supplementing of
the Registration Statement or the Prospectus or for additional information;
promptly upon your request, it will prepare and file with the Commission any
amendments or supplements to the Registration Statement or Prospectus which, in
the opinion of counsel for the several Underwriters ("Underwriters' Counsel"),
may be necessary or advisable in connection with the distribution of the Shares
by the Underwriters; it will promptly prepare and file with the Commission, and
promptly notify you of the filing of, any amendments or supplements to the
Registration Statement or Prospectus which may be necessary to correct any
statements or omissions, if, at any time when a prospectus relating to the
Shares is required to be delivered under the Act, any event shall have occurred
as a result of which the Prospectus or any other prospectus relating to the
Shares as then in effect would include any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading; in
case any Underwriter is required to deliver a prospectus nine (9) months or more
after the effective date of the Registration Statement in connection with the
sale of the Shares, it will prepare promptly upon request, but at the expense of
such Underwriter, such amendment or amendments to the Registration Statement and
such prospectus or prospectuses as may be necessary to permit compliance with
the requirements of Section 10(a)(3) of the Act; and it will file no amendment
or supplement to the Registration Statement or Prospectus which shall not
previously have been submitted to you a reasonable time prior to the proposed
filing thereof or to which you shall reasonably object in writing, subject,
however, to compliance with the Act and the Rules and Regulations and the
provisions of this Agreement.
8.
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(b) The Company will advise you, promptly after it shall receive
notice or obtain knowledge, of the issuance of any stop order by the Commission
suspending the effectiveness of the Registration Statement or of the initiation
or threat of any proceeding for that purpose; and it will promptly use its best
efforts to prevent the issuance of any stop order or to obtain its withdrawal at
the earliest possible moment if such stop order should be issued.
(c) The Company will use its best efforts to qualify the Shares for
offering and sale under the securities laws of such jurisdictions as you may
designate and to continue such qualifications in effect for so long as may be
required for purposes of the distribution of the Shares, except that the Company
shall not be required in connection therewith or as a condition thereof to
qualify as a foreign corporation or to execute a general consent to service of
process in any jurisdiction in which it is not otherwise required to be so
qualified or to so execute a general consent to service of process. In each
jurisdiction in which the Shares shall have been qualified as above provided,
the Company will make and file such statements and reports in each year as are
or may be required by the laws of such jurisdiction.
(d) The Company will furnish to you, as soon as available, and, in
the case of the Prospectus and any term sheet or abbreviated term sheet under
Rule 434, in no event later than the first (1st) full business day following the
first day that Shares are traded, copies of the Registration Statement (three of
which will be signed and which will include all exhibits), each Preliminary
Prospectus, the Prospectus and any amendments or supplements to such documents,
including any prospectus prepared to permit compliance with Section 10(a)(3) of
the Act, all in such quantities as you may from time to time reasonably request.
Notwithstanding the foregoing, if BancBoston Robertson Stephens Inc., on behalf
of the several Underwriters, shall agree to the utilization of Rule 434 of the
Rules and Regulations, the Company shall provide to you copies of a Preliminary
Prospectus updated in all respects through the date specified by you in such
quantities as you may from time to time reasonably request.
(e) The Company will make generally available to its securityholders
as soon as practicable, but in any event not later than the forty-fifth (45th)
day following the end of the fiscal quarter first occurring after the first
anniversary of the effective date of the Registration Statement, an earnings
statement (which will be in reasonable detail but need not be audited) complying
with the provisions of Section 11(a) of the Act and covering a twelve (12) month
period beginning after the effective date of the Registration Statement.
(f) During a period of five (5) years after the date hereof, the
Company will furnish to its stockholders as soon as practicable after the end of
each respective period, annual reports (including financial statements audited
by independent certified public accountants) and unaudited quarterly reports of
operations for each of the first three quarters of the fiscal year, and will
furnish to you and the other several Underwriters hereunder, upon request
(i) concurrently with furnishing such reports to its stockholders, statements of
operations of the Company for each of the first three (3) quarters in the form
furnished to the Company's stockholders, (ii) concurrently with furnishing to
its stockholders, a balance sheet of the Company as of the end of such fiscal
year, together with statements of operations, of stockholders' equity, and of
cash flows of the Company for such fiscal year, accompanied by a copy of the
certificate or report thereon of independent certified public accountants,
(iii) as soon as they are available, copies of all reports (financial or other)
mailed to stockholders, (iv) as soon as they are available, copies of all
reports and financial statements furnished to or filed with the Commission, any
securities exchange or the National Association of Securities Dealers, Inc.
("NASD"), (v) every material press release and every material news item or
article in respect of the Company or its affairs which was generally released to
stockholders or prepared by the Company, and (vi) any additional information of
a public nature concerning the Company, or its business which you may reasonably
request. During such five (5) year period, if the Company shall have active
subsidiaries, the foregoing financial statements shall be on a consolidated
basis to the extent that the accounts of the Company and its subsidiaries are
consolidated, and shall be accompanied by similar financial statements for any
significant subsidiary which is not so consolidated.
(g) The Company will apply the net proceeds from the sale of the
Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar (which may
be the same entity as the transfer agent) for its Common Stock.
9.
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(i) The Company will comply with the requirement of Rule 463 under
the Act.
(j) If the transactions contemplated hereby are not consummated by
reason of any failure, refusal or inability on the part of the Company to
perform any agreement on its part to be performed hereunder or to fulfill any
condition of the Underwriters' obligations hereunder, or if the Company shall
terminate this Agreement pursuant to Section 11(a) hereof, or if the
Underwriters shall terminate this Agreement pursuant to Section 11(b)(i), the
Company will reimburse the several Underwriters for all out-of-pocket expenses
(including fees and disbursements of Underwriters' Counsel) incurred by the
Underwriters in investigating or preparing to market or marketing the Shares.
(k) If at any time during the ninety (90) day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
after written notice from you advising the Company to the effect set forth
above, forthwith prepare, consult with you concerning the substance of and
disseminate a press release or other public statement, reasonably satisfactory
to you, responding to or commenting on such rumor, publication or event.
(l) During the Lock-up Period, the Company will not, without the
prior written consent of BancBoston Robertson Stephens Inc., effect the
Disposition of, directly or indirectly, any Securities other than the sale of
the Firm Shares and the Option Shares hereunder provided, however, the Company
may issue Securities pursuant to its 1999 Equity Incentive Plan and Employee
Stock Purchase Plan or any other employee benefit plan if no Disposition of such
Securities may occur during the Lock-up Period.
5. EXPENSES.
(a) The Company agrees with each Underwriter that:
(i) The Company will pay and bear all costs and expenses in
connection with the preparation, printing and filing of the Registration
Statement (including financial statements, schedules and exhibits), Preliminary
Prospectuses and the Prospectus and any amendments or supplements thereto; the
printing of this Agreement, the Master Agreement Among Underwriters, the Master
Selected Dealers Agreement, the Preliminary Blue Sky Survey and any Supplemental
Blue Sky Survey, the Master Underwriters' Questionnaire and Power of Attorney,
and any instruments related to any of the foregoing; the issuance and delivery
of the Shares hereunder to the several Underwriters, including transfer taxes,
if any, the cost of all certificates representing the Shares and transfer
agents' and registrars' fees; the fees and disbursements of counsel for the
Company; all fees and other charges of the Company's independent certified
public accountants; the cost of furnishing to the several Underwriters copies of
the Registration Statement (including appropriate exhibits), Preliminary
Prospectus and the Prospectus, and any amendments or supplements to any of the
foregoing; NASD filing fees and the cost of qualifying the Shares under the laws
of such jurisdictions as you may designate (including filing fees and fees and
disbursements of Underwriters' Counsel in connection with such NASD filings and
Blue Sky qualifications); and all other expenses directly incurred by the
Company in connection with the performance of their obligations hereunder.
(ii) In addition to its other obligations under Section 8(a)
hereof, the Company agrees that, as an interim measure during the pendency of
any claim, action, investigation, inquiry or other proceeding described in
Section 8(a) hereof, it will reimburse the Underwriters on a monthly basis for
all reasonable legal or other expenses incurred in connection with investigating
or defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Company's obligation to reimburse the Underwriters for
such expenses and the possibility that such payments might later be held to have
been improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the Underwriters
shall promptly return such payment to the Company together with interest,
compounded daily, determined on the basis of the prime rate (or other commercial
lending rate for borrowers of the highest credit standing) listed from time to
time in The Wall Street Journal which represents the base rate on corporate
loans posted by a substantial majority of the nation's thirty (30) largest banks
(the "Prime Rate"). Any such interim reimbursement payments which are not made
to the
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Underwriters within thirty (30) days of a request for reimbursement shall
bear interest at the Prime Rate from the date of such request.
(b) In addition to their other obligations under Section 8(c) hereof,
the Underwriters severally and not jointly agree that, as an interim measure
during the pendency of any claim, action, investigation, inquiry or other
proceeding described in Section 8(c) hereof, they will reimburse the Company on
a monthly basis for all reasonable legal or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company shall
promptly return such payment to the Underwriters together with interest,
compounded daily, determined on the basis of the Prime Rate. Any such interim
reimbursement payments which are not made to the Company within thirty (30) days
of a request for reimbursement shall bear interest at the Prime Rate from the
date of such request.
(c) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Sections 5(a)(ii) and 5(b)
hereof, including the amounts of any requested reimbursement payments, the
method of determining such amounts and the basis on which such amounts shall be
apportioned among the reimbursing parties, shall be settled by arbitration
conducted under the provisions of the Constitution and Rules of the Board of
Governors of the New York Stock Exchange, Inc. or pursuant to the Code of
Arbitration Procedure of the NASD. Any such arbitration must be commenced by
service of a written demand for arbitration or a written notice of intention to
arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Any such arbitration will be limited to the operation of
the interim reimbursement provisions contained in Sections 5(a)(ii) and 5(b)
hereof and will not resolve the ultimate propriety or enforceability of the
obligation to indemnify for expenses which is created by the provisions of
Sections 8(a) and 8(b) hereof or the obligation to contribute to expenses which
is created by the provisions of Section 8(d) hereof.
6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Shares as provided herein shall
be subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and warranties of the Company herein, to the performance by
the Company of their respective obligations hereunder and to the following
additional conditions:
(a) The Registration Statement shall have become effective not later
than 2:00 P.M., San Francisco time, on the date following the date of this
Agreement, or such later date as shall be consented to in writing by you; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge of
the Company or any Underwriter, threatened by the Commission, and any request of
the Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise) shall have been complied with to the
satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in connection
with this Agreement, the form of Registration Statement and the Prospectus, and
the registration, authorization, issue, sale and delivery of the Shares, shall
have been reasonably satisfactory to Underwriters' Counsel, and such counsel
shall have been furnished with such papers and information as they may
reasonably have requested to enable them to pass upon the matters referred to in
this Section.
(c) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date, or any later date on which Option Shares are to be
purchased, as the case may be, there shall not have been any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company from that set forth in the Registration Statement or
Prospectus, which, in your sole judgment, is material and adverse and that makes
it, in your sole judgment, impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus.
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(d) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, the following
opinion of counsel for the Company, dated the Closing Date, or such later date
on which Option Shares are to be purchased, addressed to the Underwriters and
with reproduced copies or signed counterparts thereof for each of the
Underwriters, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the jurisdiction of
its incorporation;
(ii) The Company has the corporate power and authority to
own, lease and operate its properties and to conduct its business as described
in the Prospectus;
(iii) The Company is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction, if any, in
which the ownership or leasing of its properties or the conduct of its business
requires such qualification, except where the failure to be so qualified or be
in good standing would not have a material adverse effect on the condition
(financial or otherwise), earnings, operations or business of the Company. To
such counsel's knowledge, the Company does not own or control, directly or
indirectly, any corporation, association or other entity;
(iv) The authorized and outstanding capital stock of the
Company is as set forth in the Prospectus under the caption "Capitalization" as
of the dates stated therein, the outstanding shares of capital stock of the
Company have been duly and validly issued and, to counsel for the Company's
knowledge, are fully paid and nonassessable, and, to such counsel's knowledge,
have not been issued in violation of or subject to any preemptive right, co-sale
right, registration right, right of first refusal or other similar right;
(v) The Firm Shares or the Option Shares, as the case may
be, to be issued by the Company pursuant to the terms of this Agreement have
been duly authorized and, upon issuance and delivery against payment therefor in
accordance with the terms hereof, will be duly and validly issued and fully paid
and nonassessable, and will not have been issued in violation of or subject to
any preemptive right, co-sale right, registration right, right of first refusal
or other similar right;
(vi) The Company has the corporate power and authority to
enter into this Agreement and to issue, sell and deliver to the Underwriters the
Shares to be issued and sold by it hereunder;
(vii) This Agreement has been duly authorized by all
necessary corporate action on the part of the Company and has been duly executed
and delivered by the Company and, assuming due authorization, execution and
delivery by you, is a valid and binding agreement of the Company;
(viii) The Registration Statement has become effective under
the Act and, to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose have been instituted or are pending or threatened under the
Act;
(ix) The Registration Statement and the Prospectus, and each
amendment or supplement thereto (other than the financial statements (including
supporting schedules) and financial data derived therefrom as to which such
counsel need express no opinion), as of the effective date of the Registration
Statement, complied as to form in all material respects with the requirements of
the Act and the applicable Rules and Regulations;
(x) The information in the Prospectus under the caption
"Description of Capital Stock" and "Shares Eligible For Future Sale" and to such
counsel's knowledge, "Management" (solely with respect to discussions of the
Company's 1996 Stock Plan, 1999 Equity Incentive Plan, 1999 Non-employee
Director Stock Option Plan and Employee Stock Purchase Plan) and "Certain
Transactions", to the extent that it constitutes matters of law or legal
conclusions, has been reviewed by such counsel and accurately summarizes such
matters in all material respects, and the forms of certificates evidencing the
Common Stock and filed as exhibits to the Registration Statement comply with
Delaware law;
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(xi) The description in the Registration Statement and the
Prospectus of the charter and bylaws of the Company are accurate in all material
respects;
(xii) To such counsel's knowledge, there are no agreements,
contracts, leases or documents to which the Company is a party of a character
required to be described or referred to in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement which are
not described or referred to therein or filed as required;
(xiii) The issue and sale of the Firm Shares and the Option
Shares will not (a) result in any violation of the Company's charter or bylaws
or (b) to such counsel's knowledge, result in a material breach or violation of
any of the material terms and provisions of, or constitute a material default
under any agreement or instrument filed as an exhibit to the Registration
Statement, or any applicable Federal, California or Delaware corporate statute,
rule or regulation known to such counsel or, to such counsel's knowledge, any
order, writ or decree of any court, government or governmental agency or body
having jurisdiction over the Company, or over any of its properties or
operations;
(xiv) No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or body having
jurisdiction over the Company, or any of its properties or operations is
necessary in connection with the consummation by the Company of the transactions
herein contemplated, except such as have been obtained under the Act or such as
may be required under state or other securities or Blue Sky laws in connection
with the purchase and the distribution of the Shares by the Underwriters;
(xv) To such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened against the Company of a
character required to be disclosed in the Registration Statement or the
Prospectus by the Act or the Rules and Regulations, other than those described
therein;
(xvi) To such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus, no holders of Common Stock or other
securities of the Company have registration rights with respect to securities of
the Company and, except as set forth in the Registration Statement and
Prospectus, all holders of securities of the Company having rights known to such
counsel to registration of such shares of Common Stock or other securities,
because of the filing of the Registration Statement by the Company have, with
respect to the offering contemplated thereby, waived such rights or such rights
have expired by reason of lapse of time following notification of the Company's
intent to file the Registration Statement or have included securities in the
Registration Statement pursuant to the exercise of and in full satisfaction of
such rights.
Such counsel shall state that in addition to rendering legal
advice and assistance to the Company in the course of the preparation of the
Registration Statement and the Prospectus, involving, among other things,
discussions and inquiries concerning various legal matters and the review of
certain corporate records, documents and proceedings, such counsel also
participated in conferences with certain officers and other representatives of
the Company, including its independent certified public accountants and with the
underwriters and the underwriter's counsel, at which the contents of the
Registration Statement and the Prospectus, and related matters were discussed.
Such counsel shall not, however, independently have verified the accuracy,
completeness or fairness of the information contained in the Registration
Statement and Prospectus.
However, based upon such counsel's participation as described in
the preceding paragraph: (a) nothing has come to such counsel's attention that
leads such counsel to believe at the time the Registration Statement became
effective and at all times subsequent thereto up to and on the Closing Date and
on any later date on which Option Shares are to be purchased, that: (i) the
Registration Statement (except as to the financial statements and schedules and
other financial and statistical data derived therefrom, as to which such counsel
need express no belief) contained or contains any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; or (ii) the Prospectus
(except as to the financial statements and schedules and other financial and
statistical data derived therefrom, as to which such counsel need express no
belief) contained or contains any untrue statement of material fact or omitted
or omits to state a material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and (b) the Registration Statement and the Prospectus (except as to
financial statements and schedules and other financial and statistical data
derived therefrom, as to
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which such counsel need express no belief) comply as to form in all material
respects with the requirements of the Act and the applicable rules and
regulations of the Commission thereunder.
Counsel rendering the foregoing opinion may rely as to questions
of law not involving the laws of the United States or the State of California or
the General Corporate Law of the State of Delaware upon opinions of local
counsel, and as to questions of fact upon representations or certificates of
officers of the Company, and of government officials, in which case their
opinion is to state that they are so relying and that they have no knowledge of
any material misstatement or inaccuracy in any such opinion, representation or
certificate. Copies of any opinion, representation or certificate so relied
upon shall be delivered to you, as Representatives of the Underwriters, and to
Underwriters' Counsel.
(e) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, an opinion of
Cooley Godward LLP, in form and substance satisfactory to you, with respect to
the sufficiency of all such corporate proceedings and other legal matters
relating to this Agreement and the transactions contemplated hereby as you may
reasonably require, and the Company shall have furnished to such counsel such
documents as they may have requested for the purpose of enabling them to pass
upon such matters.
(f) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, a letter from
PricewaterhouseCoopers LLP addressed to the Underwriters, dated the Closing Date
or such later date on which Option Shares are to be purchased, as the case may
be, confirming that they are independent certified public accountants with
respect to the Company within the meaning of the Act and the applicable
published Rules and Regulations and based upon the procedures described in such
letter delivered to you concurrently with the execution of this Agreement
(herein called the "Original Letter"), but carried out to a date not more than
five (5) business days prior to the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, (i) confirming, to the
extent true, that the statements and conclusions set forth in the Original
Letter are accurate as of the Closing Date or such later date on which Option
Shares are to be purchased, as the case may be, and (ii) setting forth any
revisions and additions to the statements and conclusions set forth in the
Original Letter which are necessary to reflect any changes in the facts
described in the Original Letter since the date of such letter, or to reflect
the availability of more recent financial statements, data or information. The
letter shall not disclose any change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company from that
set forth in the Registration Statement or Prospectus, which, in your sole
judgment, is material and adverse and that makes it, in your sole judgment,
impracticable or inadvisable to proceed with the public offering of the Shares
as contemplated by the Prospectus. The Original Letter from
PricewaterhouseCoopers LLP shall be addressed to or for the use of the
Underwriters in form and substance satisfactory to the Underwriters and shall
(i) represent, to the extent true, that they are independent certified public
accountants with respect to the Company within the meaning of the Act and the
applicable published Rules and Regulations, (ii) set forth their opinion with
respect to their examination of the balance sheet of the Company as of
December 31, 1998 and related statements of operations, stockholders' equity,
and cash flows for the twelve (12) months ended December 31, 1998, and (iii)
address other matters agreed upon by PricewaterhouseCoopers LLP and you. In
addition, you shall have received from PricewaterhouseCoopers LLP a letter
addressed to the Company and made available to you for the use of the
Underwriters stating that their review of the Company's system of internal
accounting controls, to the extent they deemed necessary in establishing the
scope of their examination of the Company's financial statements as of
December 31, 1998, did not disclose any weaknesses in internal controls that
they considered to be material weaknesses.
(g) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, legal opinions
of Merchant, Gould, Smith, Edell, Welter & Schmidt, P.A. dated the Closing
Date or the Option Closing Date, as the case may be, with respect to certain
intellectual property matters, which shall opine to the effect that:
(i) To the best of such counsel's knowledge, the Company
owns all patents, trademarks, trademark registrations, service marks, service
mark registrations and rights described in the Prospectus as being owned by it
or necessary for the conduct of its business, and such counsel is not aware of
any claim to the contrary or any challenge by any other person or organization
to the rights of the Company with respect to the foregoing other than those
expressly identified in the Registration Statement;
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(ii) To the best of such counsel's knowledge, there are no
legal actions, claims or proceedings pending or threatened against the Company
alleging that the Company is infringing or otherwise violating any patents or
trade secrets owned by others other than those identified in the Registration
Statement;
(iii) To the best of such counsel's knowledge, to the extent
they constitute matters of law or legal conclusions, the descriptions of patents
and patent applications under the captions "Risk Factors-We Depend Significantly
on Proprietary Technology" and "Business-Intellectual Property and Other
Proprietary Rights" in the Registration Statement are accurate and fairly and
completely present the patent situation of the Company; and
(iv) To the best of such counsel's knowledge, the
descriptions of patents and patent applications under the captions "Risk Factors
- - We Depend Significantly on Proprietary Technology" and "Business-Intellectual
Property and Other Proprietary Rights" in the Registration Statement do not
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made therein, in light of the circumstances
under which they were made, not misleading, including without limitation, any
undisclosed material issue with respect to the subsequent validity or
enforceability of such patent or patent issuing from any such pending patent
application.
(h) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, a certificate of
the Company, dated the Closing Date or such later date on which Option Shares
are to be purchased, as the case may be, signed by the Chief Executive Officer
and Chief Financial Officer of the Company, to the effect that, and you shall be
satisfied that:
(i) The representations and warranties of the Company in
this Agreement are true and correct, as if made on and as of the Closing Date or
any later date on which Option Shares are to be purchased, as the case may be,
and the Company has complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or prior to the Closing
Date or any later date on which Option Shares are to be purchased, as the case
may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are pending or threatened under the Act;
(iii) When the Registration Statement became effective and at
all times subsequent thereto up to the delivery of such certificate, the
Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained all material information required to be included therein by
the Act and the Rules and Regulations and in all material respects conformed to
the requirements of the Act and the Rules and Regulations, the Registration
Statement, and any amendment or supplement thereto, did not and does not include
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, the Prospectus, and any amendment or supplement thereto, did not and
does not include any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and, since the
effective date of the Registration Statement, there has occurred no event
required to be set forth in an amended or supplemented Prospectus which has not
been so set forth; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, there has not
been (a) any material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company, (b) any
transaction that is material to the Company, except transactions entered into in
the ordinary course of business, (c) any obligation, direct or contingent, that
is material to the Company and incurred by the Company, except obligations
incurred in the ordinary course of business, (d) any change in the capital stock
or outstanding indebtedness of the Company that is material to the Company,
(e) any dividend or distribution of any kind declared, paid or made on the
capital stock of the Company, or (f) any loss or damage (whether or not insured)
to the property of the Company which has been sustained or will have been
sustained which has a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company.
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(i) The Company shall have obtained and delivered to you an agreement
in writing from each officer and director of the Company and each beneficial
owner of Common Stock prior to the date hereof that such person will not, during
the Lock-up Period, effect the Disposition of any Securities now owned or
hereafter acquired directly by such person or with respect to which such person
has or hereafter acquires the power of disposition, otherwise than (i) as a bona
fide gift or gifts, provided the donee or donees thereof agree in writing to be
bound by this restriction, (ii) as a distribution to partners or stockholders of
such person, provided that the distributees thereof agree in writing to be bound
by the terms of this restriction, (iii) shares acquired from the Underwriters in
the Public Offering or acquired in the public market after the effectiveness of
the Registration Statement, or (iv) with the prior written consent of BancBoston
Robertson Stephens Inc. The foregoing restriction shall have been expressly
agreed to preclude the holder of the Securities from engaging in any hedging or
other transaction which is designed to or reasonably expected to lead to or
result in a Disposition of Securities during the Lock-up Period, even if such
Securities would be disposed of by someone other than the such holder. Such
prohibited hedging or other transactions would including, without limitation,
any short sale (whether or not against the box) or any purchase, sale or grant
of any right (including, without limitation, any put or call option) with
respect to any Securities or with respect to any security (other than a
broad-based market basket or index) that includes, relates to or derives any
significant part of its value from Securities. Furthermore, such person will
have also agreed and consented to the entry of stop transfer instructions with
the Company's transfer agent against the transfer of the Securities held by such
person except in compliance with this restriction.
(j) The Company shall have furnished to you such further certificates
and documents as you shall reasonably request (including certificates of
officers of the Company as to the accuracy of the representations and warranties
of the Company herein, as to the performance by the Company of its obligations
hereunder and as to the other conditions concurrent and precedent to the
obligations of the Underwriters hereunder.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company will furnish you with such number of
conformed copies of such opinions, certificates, letters and documents as you
shall reasonably request.
7. OPTION SHARES.
(a) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company hereby grants to the several Underwriters, for the purpose of covering
over-allotments in connection with the distribution and sale of the Firm
Shares only, a nontransferable option to purchase up to an aggregate of ________
Option Shares at the purchase price per share for the Firm Shares set forth in
Section 3 hereof. Such option may be exercised by the Representatives on behalf
of the several Underwriters on one (1) or more occasions in whole or in part
during the period of thirty (30) days after the date on which the Firm Shares
are initially offered to the public, by giving written notice to the Company.
The number of Option Shares to be purchased by each Underwriter upon the
exercise of such option shall be the same proportion of the total number of
Option Shares to be purchased by the several Underwriters pursuant to the
exercise of such option as the number of Firm Shares purchased by such
Underwriter (set forth in SCHEDULE A hereto) bears to the total number of Firm
Shares purchased by the several Underwriters (set forth in SCHEDULE A hereto),
adjusted by the Representatives in such manner as to avoid fractional shares.
Delivery of definitive certificates for the Option Shares to be
purchased by the several Underwriters pursuant to the exercise of the option
granted by this Section 7 shall be made against payment of the purchase price
therefor by the several Underwriters by certified or official bank check or
checks drawn in next-day funds, payable to the order of the Company (and the
Company agrees not to deposit any such check in the bank on which it is drawn,
and not to take any other action with the purpose or effect of receiving
immediately available funds, until the business day following the date of its
delivery to the Company). In the event of any breach of the foregoing, the
Company shall reimburse the Underwriters for the interest lost and any other
expenses borne by them by reason of such breach. Such delivery and payment
shall take place at the offices of Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP, 155 Constitution Drive, Menlo Park, CA 94025 or at
such other place as may be agreed upon among the Representatives and the Company
(i) on the Closing Date, if written notice of the exercise of such option is
received by the Company at least two (2) full business days prior to the Closing
Date, or (ii) on a date which shall not be later than the third (3rd) full
business day following the date the Company receives
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written notice of the exercise of such option, if such notice is received by
the Company less than two (2) full business days prior to the Closing Date.
The certificates for the Option Shares to be so delivered will be
made available to you at such office or such other location including, without
limitation, in New York City, as you may reasonably request for checking at
least one (1) full business day prior to the date of payment and delivery and
will be in such names and denominations as you may request, such request to be
made at least two (2) full business days prior to such date of payment and
delivery. If the Representatives so elect, delivery of the Option Shares may be
made by credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the date of
payment and delivery for the Option Shares to be purchased by such Underwriter
or Underwriters. Any such payment by you shall not relieve any such Underwriter
or Underwriters of any of its or their obligations hereunder.
(b) Upon exercise of any option provided for in Section 7(a) hereof,
the obligations of the several Underwriters to purchase such Option Shares will
be subject (as of the date hereof and as of the date of payment and delivery for
such Option Shares) to the accuracy of and compliance with the representations,
warranties and agreements of the Company herein, to the accuracy of the
statements of the Company and officers of the Company made pursuant to the
provisions hereof, to the performance by the Company of its obligations
hereunder, to the conditions set forth in Section 6 hereof, and to the condition
that all proceedings taken at or prior to the payment date in connection with
the sale and transfer of such Option Shares shall be satisfactory in form and
substance to you and to Underwriters' Counsel, and you shall have been furnished
with all such documents, certificates and opinions as you may request in order
to evidence the accuracy and completeness of any of the representations,
warranties or statements, the performance of any of the covenants or agreements
of the Company or the satisfaction of any of the conditions herein contained.
8. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including, without
limitation, in its capacity as an Underwriter or as a "qualified independent
underwriter" within the meaning of Schedule E of the Bylaws of the NASD), under
the Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act") or
otherwise, specifically including, but not limited to, losses, claims, damages
or liabilities (or actions in respect thereof) arising out of or based upon
(i) any breach of any representation, warranty, agreement or covenant of the
Company herein contained, (ii) any untrue statement or alleged untrue statement
of any material fact contained in the Registration Statement or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (iii) any untrue statement or alleged untrue
statement of any material fact contained in any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, and agrees to reimburse each
Underwriter for any legal or other expenses reasonably incurred by it in
connection with investigating or defending any such loss, claim, damage,
liability or action; PROVIDED, HOWEVER, that the Company shall not be liable in
any such case to the extent that any such loss, claim, damage, liability or
action arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in the Registration Statement,
such Preliminary Prospectus or the Prospectus, or any such amendment or
supplement thereto, in reliance upon, and in conformity with, written
information relating to any Underwriter furnished to the Company by such
Underwriter, directly or through you, specifically for use in the preparation
thereof and, PROVIDED FURTHER, that the indemnity agreement provided in this
Section 8(a) with respect to any Preliminary Prospectus shall not inure to the
benefit of any Underwriter from whom the person asserting any losses, claims,
damages, liabilities or actions based upon any untrue statement or alleged
untrue statement of material fact or omission or alleged omission to state
therein a material fact purchased Shares, if a copy of the Prospectus in which
such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the time
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required by the Act and the Rules and Regulations, unless such failure is the
result of noncompliance by the Company with Section 4(d) hereof.
The indemnity agreement in this Section 8(a) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter within the meaning of the Act or
the Exchange Act. This indemnity agreement shall be in addition to any
liabilities which the Company may otherwise have.
(b) Each Underwriter, severally and not jointly, agrees to indemnify
and hold harmless the Company against any losses, claims, damages or
liabilities, joint or several, to which the Company may become subject under the
Act or otherwise, specifically including, but not limited to, losses, claims,
damages or liabilities (or actions in respect thereof) arising out of or based
upon (i) any breach of any representation, warranty, agreement or covenant of
such Underwriter herein contained, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (iii) any untrue statement or alleged
untrue statement of any material fact contained in any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, in the case of subparagraphs (ii) and (iii) of this
Section 8(b) to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by such
Underwriter, directly or through you, specifically for use in the preparation
thereof, and agrees to reimburse the Company for any legal or other expenses
reasonably incurred by the Company in connection with investigating or defending
any such loss, claim, damage, liability or action.
The indemnity agreement in this Section 8(b) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each officer of
the Company who signed the Registration Statement and each director of the
Company, and each person, if any, who controls the Company within the meaning of
the Act or the Exchange Act. This indemnity agreement shall be in addition to
any liabilities which each Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against any indemnifying
party under this Section 8, notify the indemnifying party in writing of the
commencement thereof but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under this Section 8. In case any such action is brought against
any indemnified party, and it notified the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it shall elect by written notice delivered to
the indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party; PROVIDED, HOWEVER, that if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party to such indemnified
party of the indemnifying party's election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section 8 for any legal
or other expenses subsequently incurred by such indemnified party in connection
with the defense thereof unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding sentence
(it being understood, however, that the indemnifying party shall not be liable
for the expenses of more than one separate counsel (together with appropriate
local counsel) approved by the indemnifying party representing all the
indemnified parties under Section 8(a) or Section 8(b) hereof who are parties to
such action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of the action or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. In no event shall any
indemnifying party be liable in respect of any amounts paid in settlement of any
action unless
18.
<PAGE>
the indemnifying party shall have approved the terms of such settlement;
PROVIDED that such consent shall not be unreasonably withheld. No
indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnification could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release
of such indemnified party from all liability on all claims that are the
subject matter of such proceeding.
(d) In order to provide for just and equitable contribution in any
action in which a claim for indemnification is made pursuant to this Section 8
but it is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 8 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that the Underwriters
severally and not jointly are responsible pro rata for the portion represented
by the percentage that the underwriting discount bears to the initial public
offering price, and the Company are responsible for the remaining portion,
PROVIDED, HOWEVER, that (i) no Underwriter shall be required to contribute any
amount in excess of the amount by which the underwriting discount applicable to
the Shares purchased by such Underwriter exceeds the amount of damages which
such Underwriter has otherwise required to pay and (ii) no person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. The contribution agreement in this Section 8(d)
shall extend upon the same terms and conditions to, and shall inure to the
benefit of, each person, if any, who controls any Underwriter, the Company
within the meaning of the Act or the Exchange Act and each officer of the
Company who signed the Registration Statement and each director of the Company.
(e) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 8, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 8 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act.
9. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties, covenants and agreements of the
Company and the Underwriters herein or in certificates delivered pursuant
hereto, and the indemnity and contribution agreements contained in Section 8
hereof shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter within the meaning of the Act or the Exchange Act, or by or on
behalf of the Company or any of its officers, directors or controlling persons
within the meaning of the Act or the Exchange Act, and shall survive the
delivery of the Shares to the several Underwriters hereunder or termination of
this Agreement.
10. SUBSTITUTION OF UNDERWRITERS. If any Underwriter or Underwriters
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such Firm
Shares in accordance with the terms hereof, and if the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter
or Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters agreed
but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for
twenty-four (24) hours to allow the several Underwriters the privilege of
substituting within twenty-four (24) hours (including non-business hours)
another underwriter or underwriters (which may include any nondefaulting
Underwriter) satisfactory to the Company. If no such underwriter or
underwriters shall have been substituted as aforesaid by such postponed Closing
Date, the Closing Date may, at the option of the Company, be
19.
<PAGE>
postponed for a further twenty-four (24) hours, if necessary, to allow the
Company the privilege of finding another underwriter or underwriters,
satisfactory to you, to purchase the Firm Shares which the defaulting
Underwriter or Underwriters so agreed but failed to purchase. If it shall be
arranged for the remaining Underwriters or substituted underwriter or
underwriters to take up the Firm Shares of the defaulting Underwriter or
Underwriters as provided in this Section 10, (i) the Company shall have the
right to postpone the time of delivery for a period of not more than seven
(7) full business days, in order to effect whatever changes may thereby be
made necessary in the Registration Statement or the Prospectus, or in any
other documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement, supplements to the Prospectus or
other such documents which may thereby be made necessary, and (ii) the
respective number of Firm Shares to be purchased by the remaining
Underwriters and substituted underwriter or underwriters shall be taken as
the basis of their underwriting obligation. If the remaining Underwriters
shall not take up and pay for all such Firm Shares so agreed to be purchased
by the defaulting Underwriter or Underwriters or substitute another
underwriter or underwriters as aforesaid and the Company shall not find or
shall not elect to seek another underwriter or underwriters for such Firm
Shares as aforesaid, then this Agreement shall terminate.
In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 10, neither the Company shall be liable to
any Underwriter (except as provided in Sections 5 and 8 hereof) nor shall any
Underwriter (other than an Underwriter who shall have failed, otherwise than for
some reason permitted under this Agreement, to purchase the number of Firm
Shares agreed by such Underwriter to be purchased hereunder, which Underwriter
shall remain liable to the Company, and the other Underwriters for damages, if
any, resulting from such default) be liable to the Company (except to the extent
provided in Sections 5 and 8 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 10.
11. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION.
(a) This Agreement shall become effective at the earlier of (i) 6:30
A.M., San Francisco time, on the first full business day following the effective
date of the Registration Statement, or (ii) the time of the initial public
offering of any of the Shares by the Underwriters after the Registration
Statement becomes effective. The time of the initial public offering shall mean
the time of the release by you, for publication, of the first newspaper
advertisement relating to the Shares, or the time at which the Shares are first
generally offered by the Underwriters to the public by letter, telephone,
telegram or telecopy, whichever shall first occur. By giving notice as set
forth in Section 12 before the time this Agreement becomes effective, you, as
Representatives of the several Underwriters, or the Company, may prevent this
Agreement from becoming effective without liability of any party to any other
party, except as provided in Sections 4(j), 5 and 8 hereof.
(b) You, as Representatives of the several Underwriters, shall have
the right to terminate this Agreement by giving notice as hereinafter specified
at any time on or prior to the Closing Date or on or prior to any later date on
which Option Shares are to be purchased, as the case may be, (i) if the Company
shall have failed, refused or been unable to perform any agreement on its part
to be performed, or because any other condition of the Underwriters' obligations
hereunder required to be fulfilled is not fulfilled, including, without
limitation, any change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company from that set forth in
the Registration Statement or Prospectus, which, in your sole judgment, is
material and adverse, or (ii) if additional material governmental restrictions,
not in force and effect on the date hereof, shall have been imposed upon trading
in securities generally or minimum or maximum prices shall have been generally
established on the New York Stock Exchange or on the American Stock Exchange or
in the over the counter market by the NASD, or trading in securities generally
shall have been suspended on either such exchange or in the over the counter
market by the NASD, or if a banking moratorium shall have been declared by
federal, New York or California authorities, or (iii) if the Company shall have
sustained a loss by strike, fire, flood, earthquake, accident or other calamity
of such character as to interfere materially with the conduct of the business
and operations of the Company regardless of whether or not such loss shall have
been insured, or (iv) if there shall have been a material adverse change in the
general political or economic conditions or financial markets as in your
reasonable judgment makes it inadvisable or impracticable to proceed with the
offering, sale and delivery of the Shares, or (v) if there shall have been an
outbreak or escalation of hostilities or of any other insurrection or armed
conflict or the declaration by the United States of a national emergency which,
in the reasonable opinion of the Representatives,
20.
<PAGE>
makes it impracticable or inadvisable to proceed with the public offering of
the Shares as contemplated by the Prospectus. In the event of termination
pursuant to subparagraph (i) above, the Company shall remain obligated to pay
costs and expenses pursuant to Sections 4(j), 5 and 8 hereof. Any
termination pursuant to any of subparagraphs (ii) through (v) above shall be
without liability of any party to any other party except as provided in
Sections 5 and 8 hereof.
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 11, you shall promptly
notify the Company by telephone, telecopy or telegram, in each case confirmed by
letter. If the Company shall elect to prevent this Agreement from becoming
effective, the Company shall promptly notify you by telephone, telecopy or
telegram, in each case, confirmed by letter.
12. NOTICES. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to you c/o BancBoston Robertson Stephens Inc., 555
California Street, Suite 2600, San Francisco, California 94104, telecopier
number (415) 781-0278, Attention: General Counsel; if sent to the Company, such
notice shall be mailed, delivered, telegraphed (and confirmed by letter) or
telecopied (and confirmed by letter) to Net Perceptions, Inc., telecopier number
(617) 903-9425, Attention: Steven J. Snyder, Chief Executive Officer.
13. PARTIES. This Agreement shall inure to the benefit of and be binding
upon the several Underwriters and the Company and their respective executors,
administrators, successors and assigns. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person or entity, other
than the parties hereto and their respective executors, administrators,
successors and assigns, and the controlling persons within the meaning of the
Act or the Exchange Act, officers and directors referred to in Section 8 hereof,
any legal or equitable right, remedy or claim in respect of this Agreement or
any provisions herein contained, this Agreement and all conditions and
provisions hereof being intended to be and being for the sole and exclusive
benefit of the parties hereto and their respective executors, administrators,
successors and assigns and said controlling persons and said officers and
directors, and for the benefit of no other person or entity. No purchaser of
any of the Shares from any Underwriter shall be construed a successor or assign
by reason merely of such purchase.
In all dealings with the Company under this Agreement, you shall act
on behalf of each of the several Underwriters, and the Company shall be entitled
to act and rely upon any statement, request, notice or agreement made or given
by you jointly or by BancBoston Robertson Stephens Inc. on behalf of you.
(a) APPLICABLE LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California.
(b) COUNTERPARTS. This Agreement may be signed in several
counterparts, each of which will constitute an original.
If the foregoing correctly sets forth the understanding among the
Company and the several Underwriters, please so indicate in the space provided
below for that purpose, whereupon this letter shall constitute a binding
agreement among the Company and the several Underwriters.
Very Truly Yours,
NET PERCEPTIONS, INC.
By:
-----------------------------
Print Name:
---------------------
Title:
--------------------------
21.
<PAGE>
Accepted as of the date first above written:
BANCBOSTON ROBERTSON STEPHENS INC.
HAMBRECHT & QUIST LLC
PIPER JAFFRAY INC.
WIT CAPITAL CORPORATION
On their behalf and on behalf of each of the several Underwriters named in
Schedule A hereto.
By: BANCBOSTON ROBERTSON STEPHENS INC.
By:
------------------------------
Print Name:
----------------------
Title:
---------------------------
Authorized Signatory
22.
<PAGE>
SCHEDULE A
<TABLE>
NUMBER OF FIRM SHARES
UNDERWRITERS TO BE PURCHASED
- ---------------------------------------------------- ---------------------
<S> <C>
BANCBOSTON ROBERTSON STEPHENS INC.
HAMBRECHT & QUIST LLC
PIPER JAFFRAY INC.
WIT CAPITAL CORPORATION
Total
</TABLE>
<PAGE>
Exhibit 3.2
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF NET PERCEPTIONS, INC.,
a Delaware corporation
Net Perceptions, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware, which was originally
incorporated on July 3, 1996 (the "Corporation"), certifies as follows:
ONE: The undersigned Steven J. Snyder and Thomas M. Donnelly are the
duly elected and acting President and Secretary, respectively, of said
corporation.
TWO: The Certificate of Incorporation of said corporation shall be
amended and restated to read in full as follows:
ARTICLE I
The name of this corporation is Net Perceptions, Inc.
ARTICLE II
The address of the registered office of this corporation in the State
of Delaware is 15 East North Street, in the City of Dover, County of Kent. The
name of its registered agent at such address is Incorporating Services, Ltd.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
ARTICLE IV
A. CLASSES OF STOCK. This corporation is authorized to issue two
classes of stock to be designated, respectively, "Common Stock" and "Preferred
Stock." The total number of shares that this corporation is authorized to issue
is ninety million (90,000,000) shares. Sixty million (60,000,000) shares shall
be Common Stock, par value $.0001 per share, and thirty million (30,000,000)
shares shall be Preferred Stock, par value $.0001 per share.
B. RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK. The
Preferred Stock authorized by this Amended and Restated Certificate of
Incorporation may be issued from time to time in one or more series. The
rights, preferences, privileges, and restrictions granted to and imposed on the
Series A Preferred Stock, which series shall consist of two million one hundred
seventy thousand (2,170,000) shares, the Series B Preferred Stock, which series
shall consist of four million (4,000,000) shares, and the Series C Preferred
Stock, which series shall consist of four million eight hundred thousand
(4,800,000) shares, are as set forth below in this Article IV(B).
<PAGE>
Upon the filing of this Amended and Restated Certificate of Incorporation (the
"Effective Time"), (i) each one (1) share of this corporation's outstanding
Common Stock shall be automatically split into two (2) shares of this
corporation's Common Stock, without any action by the holder thereof; (ii) each
one (1) share of this corporation's outstanding Series A Preferred Stock shall
be automatically split into two (2) shares of this corporation's Series A
Preferred Stock, without any action by the holder thereof; (iii) each one (1)
share of this corporation's outstanding Series B Preferred Stock shall be
automatically split into two (2) shares of this corporation's Series B Preferred
Stock, without any action by the holder thereof; and (iv) each one (1) share of
this corporation's outstanding Series C Preferred Stock shall be automatically
split into two (2) shares of this corporation's Series C Preferred Stock,
without any action by the holder thereof (which split of the Common Stock,
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
of the corporation shall hereinafter be referred to as the "Stock Split").
The Board of Directors is hereby authorized to fix or alter the rights,
preferences, privileges and restrictions granted to or imposed upon additional
series of Preferred Stock, and the number of shares constituting any such series
and the designation thereof, or of any of them. Subject to compliance with
applicable protective voting rights that have been or may be granted to the
Preferred Stock or series thereof in Certificates of Determination or this
corporation's Certificate of Incorporation ("Protective Provisions"), but
notwithstanding any other rights of the Preferred Stock or any series thereof,
the rights, privileges, preferences and restrictions of any such additional
series may be subordinated to, PARI PASSU with (including, without limitation,
inclusion in provisions with respect to liquidation and acquisition preferences,
redemption and/or approval of matters by vote or written consent), or senior to
any of those of any present or future class or series of Preferred or Common
Stock. Subject to compliance with applicable Protective Provisions, the Board
of Directors is also authorized to increase or decrease the number of shares of
any series (other than the Series A Preferred Stock, Series B Preferred Stock or
Series C Preferred Stock), prior or subsequent to the issue of that series, but
not below the number of shares of such series then outstanding. In case the
number of shares of any series shall be so decreased, the shares constituting
such decrease shall resume the status that they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
1. DIVIDEND PROVISIONS. Subject to the rights of series of
Preferred Stock that may from time to time come into existence, the holders of
shares of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock shall be entitled to receive dividends, out of any assets
legally available therefor, prior and in preference to any declaration or
payment of any dividend (payable other than in Common Stock or other securities
and rights convertible into or entitling the holder thereof to receive, directly
or indirectly, additional shares of Common Stock of this corporation) on the
Common Stock of this corporation, at the rate of (i) in the case of the Series A
Preferred Stock, $0.027 per share per annum, (ii) in the case of the Series B
Preferred Stock, $0.09315 per share per annum, and (iii) in the case of the
Series C Preferred Stock, $0.13815 per share per annum, or, if greater (as
determined on a per annum basis and an as converted basis for the Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock), an
amount equal to that paid on any other outstanding shares of this corporation,
payable quarterly when, as and if declared by the Board of Directors. Such
dividends shall not be cumulative.
2
<PAGE>
2. LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution or winding up
of this corporation, either voluntary or involuntary, subject to the rights of
series of Preferred Stock that may from time to time come into existence, the
holders of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets of this corporation to the holders of Common
Stock by reason of their ownership thereof, (A) in the case of the Series A
Preferred Stock, an amount per share equal to the sum of (i) $0.30 for each
outstanding share of Series A Preferred Stock (the "Original Series A Issue
Price") and (ii) an amount equal to declared but unpaid dividends on such share,
(B) in the case of the Series B Preferred Stock, an amount per share equal to
the sum of (i) $1.035 for each outstanding share of Series B Preferred Stock
(the "Original Series B Issue Price") and (ii) an amount equal to declared but
unpaid dividends on such share, and (C) in the case of the Series C Preferred
Stock, an amount per share equal to the sum of (i) $1.535 for each outstanding
share of Series C Preferred Stock (the "Original Series C Issue Price") and (ii)
an amount equal to declared but unpaid dividends on such share. If upon the
occurrence of such event, the assets and funds thus distributed among the
holders of the Series A Preferred Stock, Series B Preferred Stock, and Series C
Preferred Stock shall be insufficient to permit the payment to such holders of
the full aforesaid preferential amounts, then, subject to the rights of series
of Preferred Stock that may from time to time come into existence, the entire
assets and funds of this corporation legally available for distribution shall be
distributed ratably among the holders of the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock so that each holder receives the
same percentage of the applicable preferential amount.
(b) Upon the completion of the distribution required by
subparagraph (a) of this Section 2 and any other distribution that may be
required with respect to series of Preferred Stock that may from time to time
come into existence, the remaining assets of this corporation available for
distribution to stockholders shall be distributed among the holders of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Common
Stock pro rata based on the number of shares of Common Stock held by each
(assuming conversion of all such Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock) until (i) with respect to the holders of
Series A Preferred Stock, such holders shall have received an aggregate of $1.80
per share (including amounts paid pursuant to subsection (a) of this Section 2),
(ii) with respect to the holders of Series B Preferred Stock, such holders shall
have received an aggregate of $3.105 per share (including amounts paid pursuant
to subsection (a) of this Section 2), and (iii) with respect to the holders of
Series C Preferred Stock, such holders shall have received an aggregate of $3.07
per share (including amounts paid pursuant to subsection (a) of this Section 2);
thereafter, subject to the rights of series of Preferred Stock that may from
time to time come into existence, if assets remain in this corporation, the
holders of the Common Stock of this corporation shall receive all of the
remaining assets of this corporation pro rata based on the number of shares of
Common Stock held by each.
(c) (i) For purposes of this Section 2, a liquidation,
dissolution or winding up of this corporation shall be deemed to be occasioned
by, or to include, (A) the acquisition of this corporation by another entity by
means of any transaction or series of related transactions (including, without
limitation, any reorganization, merger or consolidation) that
3
<PAGE>
results in the transfer of fifty percent (50%) or more of the outstanding voting
power of this corporation; or (B) a sale of all or substantially all of the
assets of this corporation.
(ii) In any of such events, if the consideration
received by this corporation is other than cash, its value will be deemed its
fair market value. Any securities shall be valued as follows:
(A) Securities not subject to investment letter or
other similar restrictions on free marketability covered by (B) below:
(1) If traded on a securities exchange or through
NASDAQ-NMS, the value shall be deemed to be the average of the closing prices of
the securities on such exchange over the thirty (30) day period ending three (3)
days prior to the closing;
(2) If actively traded over-the-counter, the
value shall be deemed to be the average of the closing bid or sale prices
(whichever is applicable) over the thirty (30) day period ending three (3) days
prior to the closing; and
(3) If there is no active public market, the
value shall be the fair market value thereof, as mutually determined by this
corporation and the holders of at least a majority of the voting power of all
then outstanding shares of Preferred Stock.
(B) The method of valuation of securities subject to
investment letter or other restrictions on free marketability (other than
restrictions arising solely by virtue of a stockholder's status as an affiliate
or former affiliate) shall be to make an appropriate discount from the market
value determined as above in (A) (1), (2) or (3) to reflect the approximate fair
market value thereof, as mutually determined by this corporation and the holders
of at least a majority of the voting power of all then outstanding shares of
such Preferred Stock.
(iii) In the event the requirements of this subsection
2(c) are not complied with, this corporation shall forthwith either:
(A) cause such closing to be postponed until such time
as the requirements of this Section 2 have been complied with; or
(B) cancel such transaction, in which event the
rights, preferences and privileges of the holders of the Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock shall revert to and
be the same as such rights, preferences and privileges existing immediately
prior to the date of the first notice referred to in subsection 2(c)(iv) hereof.
(iv) This corporation shall give each holder of record
of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock written notice of such impending transaction not later than twenty (20)
days prior to the stockholders' meeting called to approve such transaction, or
twenty (20) days prior to the closing of such transaction, whichever is earlier,
and shall also notify such holders in writing of the final approval of such
4
<PAGE>
transaction. The first of such notices shall describe the material terms and
conditions of the impending transaction and the provisions of this Section 2,
and this corporation shall thereafter give such holders prompt notice of any
material changes. The transaction shall in no event take place sooner than
twenty (20) days after this corporation has given the first notice provided for
herein or sooner than ten (10) days after this corporation has given notice of
any material changes provided for herein; provided, however, that such periods
may be shortened upon the written consent of the holders of Preferred Stock that
are entitled to such notice rights or similar notice rights and that represent
at least a majority of the voting power of all then outstanding shares of such
Preferred Stock.
3. REDEMPTION.
(a) Subject to the rights of series of Preferred Stock that may
from time to time come into existence, at any time after August 1, 2002, but
within ninety (90) days after the receipt by this corporation of a written
request from the holders of not less than sixty-six and two-thirds percent (66
2/3%) of the then outstanding Series A Preferred Stock that all or, if less than
all, a specified percentage of such holders' shares of Series A Preferred Stock
be redeemed, this corporation shall, to the extent it may lawfully do so, redeem
in three (3) equal annual installments (each payment date being referred to
herein as a "Redemption Date") the shares specified in such request by paying in
cash therefor a sum per share equal to $0.30 per share of Series A Preferred
Stock (as adjusted for any stock dividends, combinations or splits with respect
to such shares effected subsequent to the Effective Time) plus all declared but
unpaid dividends on such share (the "Series A Redemption Price"). Any
redemption of Series A Preferred Stock effected pursuant to this subsection 3(a)
shall be made on a pro rata basis among the holders of the Series A Preferred
Stock in proportion to the number of shares of Series A Preferred Stock proposed
to be redeemed by such holders.
(b) Subject to the rights of series of Preferred Stock that may
from time to time come into existence, at least fifteen (15) but no more than
thirty (30) days prior to each Redemption Date, written notice shall be mailed,
first class postage prepaid, to each holder of record (at the close of business
on the business day next preceding the day on which notice is given) of the
Series A Preferred Stock to be redeemed, at the address last shown on the
records of this corporation for such holder, notifying such holder of the
redemption to be effected, specifying the number of shares to be redeemed from
such holder, the Redemption Date, the Redemption Price, the place at which
payment may be obtained and calling upon such holder to surrender to this
corporation, in the manner and at the place designated, his, her or its
certificate or certificates representing the shares to be redeemed (the
"Redemption Notice"). Except as provided in subsection (3)(c), on or after the
Redemption Date, each holder of Series A Preferred Stock to be redeemed shall
surrender to this corporation the certificate or certificates representing such
shares, in the manner and at the place designated in the Redemption Notice, and
thereupon the applicable Redemption Price of such shares shall be payable to the
order of the person whose name appears on such certificate or certificates as
the owner thereof and each surrendered certificate shall be cancelled. In the
event less than all the shares represented by any such certificate are redeemed,
a new certificate shall be issued representing the unredeemed shares.
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(c) From and after the Redemption Date, unless there shall have
been a default in payment of the Redemption Price, all rights of the holders of
shares of Series A Preferred Stock designated for redemption in the Redemption
Notice as holders of Series A Preferred Stock (except the right to receive the
applicable Redemption Price without interest upon surrender of their certificate
or certificates) shall cease with respect to such shares, and such shares shall
not thereafter be transferred on the books of this corporation or be deemed to
be outstanding for any purpose whatsoever. Subject to the rights of series of
Preferred Stock that may from time to time come into existence, if the funds of
this corporation legally available for redemption of shares of Series A
Preferred Stock on the Redemption Date are insufficient to redeem the total
number of shares of Series A Preferred Stock to be redeemed on such date, those
funds that are legally available will be used to redeem the maximum possible
number of such shares ratably among the holders of such shares to be redeemed
such that each holder of a share of Series A Preferred Stock receives the same
percentage of the applicable Series A Redemption Price. The shares of Series A
Preferred Stock not redeemed (including shares to be redeemed in subsequent
installments) shall remain outstanding and entitled to all the rights and
preferences provided herein. Subject to the rights of series of Preferred Stock
that may from time to time come into existence, at any time thereafter when
additional funds of this corporation are legally available for the redemption of
shares of Series A Preferred Stock, such funds will immediately be used to
redeem the balance of the shares that this corporation has become obliged to
redeem on any Redemption Date but that it has not redeemed.
(d) Neither the Series B Preferred Stock nor the Series C
Preferred Stock is redeemable.
4. CONVERSION. The holders of the Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock shall have conversion
rights as follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT. Each share of Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock shall be convertible, at
the option of the holder thereof, at any time after the date of issuance of such
share and, in the case of the Series A Preferred Stock, on or prior to the fifth
day prior to the first Redemption Date, if any, as may have been fixed in any
Redemption Notice with respect to the Series A Preferred Stock, at the office of
this corporation or any transfer agent for such stock, into such number of fully
paid and nonassessable shares of Common Stock as is determined by dividing the
Original Issue Price for such series by the Conversion Price applicable to such
share, determined as hereafter provided, in effect on the date the certificate
is surrendered for conversion. The initial Conversion Price per share for
shares of Series A Preferred Stock shall be the Original Series A Issue Price,
the initial Conversion Price per share for shares of Series B Preferred Stock
shall be the Original Series B Issue Price, and the initial Conversion Price per
share for shares of Series C Preferred Stock shall be the Original Series C
Issue Price; provided, however, that the Conversion Price for the Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be
subject to adjustment as set forth in subsection 4(d).
(b) AUTOMATIC CONVERSION. Each share of Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock shall automatically
be converted into shares of Common Stock at the Conversion Price at the time in
effect for such series immediately
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upon the earlier of (i) this corporation's sale of its Common Stock in a firm
commitment underwritten public offering pursuant to a registration statement on
Form S-1 or Form SB-2 under the Securities Act of 1933, as amended, the public
offering price of which was not less than $3.105 per share (adjusted to reflect
subsequent stock dividends, stock splits or recapitalizations) and $7,500,000 in
the aggregate, or (ii) the date specified by written consent or agreement of the
holders of a majority of the then outstanding Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock (voting together as a single class
and not as separate series, and on an as-converted basis).
(c) MECHANICS OF CONVERSION. Before any holder of Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock shall be
entitled to convert the same into shares of Common Stock, he shall surrender the
certificate or certificates therefor, duly endorsed, at the office of this
corporation or of any transfer agent for the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock, and shall give written notice to
this corporation at its principal corporate office, of the election to convert
the same and shall state therein the name or names in which the certificate or
certificates for shares of Common Stock are to be issued. This corporation
shall, as soon as practicable thereafter, issue and deliver at such office to
such holder of Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock, or to the nominee or nominees of such holder, a certificate or
certificates for the number of shares of Common Stock to which such holder shall
be entitled as aforesaid. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of the
shares of Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock to be converted, and the person or persons entitled to receive
the shares of Common Stock issuable upon such conversion shall be treated for
all purposes as the record holder or holders of such shares of Common Stock as
of such date. If the conversion is in connection with an underwritten offering
of securities registered pursuant to the Securities Act of 1933, as amended, the
conversion may, at the option of any holder tendering Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock for conversion, be
conditioned upon the closing with the underwriters of the sale of securities
pursuant to such offering, in which event the person(s) entitled to receive the
Common Stock upon conversion of the Series A Preferred Stock, Series B Preferred
Stock or Series C Preferred Stock shall not be deemed to have converted such
Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock
until immediately prior to the closing of such sale of securities.
(d) CONVERSION PRICE ADJUSTMENTS OF PREFERRED STOCK FOR CERTAIN
DILUTIVE ISSUANCES, SPLITS AND COMBINATIONS. The Conversion Price of the
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
shall be subject to adjustment from time to time as follows:
(i) (A) If after the date upon which any shares of
Series C Preferred Stock were first issued (the "Purchase Date"), this
corporation shall issue any Additional Stock (as defined below) without
consideration or for a consideration per share less than the Conversion Price
for the Series A Preferred Stock, Series B Preferred Stock or Series C Preferred
Stock in effect immediately prior to the issuance of such Additional Stock, the
Conversion Price for such series in effect immediately prior to each such
issuance shall forthwith (except as otherwise provided in this clause (i)) be
adjusted to a price determined by multiplying such Conversion Price by a
fraction, the numerator of which shall be the number of shares of
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Common Stock outstanding immediately prior to such issuance plus the number of
shares of Common Stock that the aggregate consideration received by this
corporation for such issuance would purchase at such Conversion Price, and the
denominator of which shall be the number of shares of Common Stock outstanding
immediately prior to such issuance plus the number of shares of such Additional
Stock.
(B) No adjustment of the Conversion Price for the
Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock
shall be made in an amount less than one cent per share, provided that any
adjustments that are not required to be made by reason of this sentence shall be
carried forward and shall be either taken into account in any subsequent
adjustment made prior to three years from the date of the event giving rise to
the adjustment being carried forward, or shall be made at the end of three years
from the date of the event giving rise to the adjustment being carried forward.
Except to the limited extent provided for in subsections (E)(3) and (E)(4), no
adjustment of such Conversion Price pursuant to this subsection 4(d)(i) shall
have the effect of increasing the Conversion Price above the Conversion Price in
effect immediately prior to such adjustment.
(C) In the case of the issuance of Common Stock for
cash, the consideration shall be deemed to be the amount of cash paid therefor
before deducting any reasonable discounts, commissions or other expenses
allowed, paid or incurred by this corporation for any underwriting or otherwise
in connection with the issuance and sale thereof.
(D) In the case of the issuance of Common Stock for a
consideration in whole or in part other than cash, the consideration other than
cash shall be deemed to be the fair value thereof as reasonably determined by
the Board of Directors irrespective of any accounting treatment.
(E) In the case of the issuance (whether before, on or
after the Purchase Date) of options to purchase or rights to subscribe for
Common Stock, securities by their terms convertible into or exchangeable for
Common Stock, or options to purchase or rights to subscribe for such convertible
or exchangeable securities, the following provisions shall apply for all
purposes of this subsection 4(d)(i) and subsection 4(d)(ii):
(1) The aggregate maximum number of shares of
Common Stock deliverable upon exercise (assuming the satisfaction of any
conditions to exercisability, including without limitation, the passage of time,
but without taking into account potential antidilution adjustments) of such
options to purchase or rights to subscribe for Common Stock shall be deemed to
have been issued at the time such options or rights were issued and for a
consideration equal to the consideration (determined in the manner provided in
subsections 4(d)(i)(C) and (d)(i)(D)), if any, received by this corporation upon
the issuance of such options or rights plus the minimum exercise price provided
in such options or rights (without taking into account potential antidilution
adjustments) for the Common Stock covered thereby.
(2) The aggregate maximum number of shares of
Common Stock deliverable upon conversion of or in exchange (assuming the
satisfaction of any conditions to convertibility or exchangeability, including,
without limitation, the passage of time, but without taking into account
potential antidilution adjustments) for any such convertible
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or exchangeable securities or upon the exercise of options to purchase or rights
to subscribe for such convertible or exchangeable securities and subsequent
conversion or exchange thereof shall be deemed to have been issued at the time
such securities were issued or such options or rights were issued and for a
consideration equal to the consideration, if any, received by this corporation
for any such securities and related options or rights, plus the minimum
additional consideration, if any, to be received by this corporation (without
taking into account potential antidilution adjustments) upon the conversion or
exchange of such securities or the exercise of any related options or rights
(the consideration in each case to be determined in the manner provided in
subsections 4(d)(i)(C) and (d)(i)(D)).
(3) In the event of any change in the number of
shares of Common Stock deliverable or in the consideration payable to this
corporation upon exercise of such options or rights or upon conversion of or in
exchange for such convertible or exchangeable securities, including, but not
limited to, a change resulting from the antidilution provisions thereof (unless
such options or rights or convertible or exchangeable securities were merely
deemed to be included in the numerator and denominator for purposes of
determining the number of shares of Common Stock outstanding for purposes of
subsection 4(d)(i)(A)), the Conversion Price of the Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock, to the extent in any way
affected by or computed using such options, rights or securities, shall be
recomputed to reflect such change, but no further adjustment shall be made for
the actual issuance of Common Stock or any payment of such consideration upon
the exercise of any such options or rights or the conversion or exchange of such
securities.
(4) Upon the expiration of any such options or
rights, the termination of any such rights to convert or exchange, or the
expiration of any options or rights related to such convertible or exchangeable
securities, the Conversion Price of the Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock, to the extent in any way affected
by or computed using such options, rights or securities, or options or rights
related to such securities (unless such options or rights were merely deemed to
be included in the numerator and denominator for purposes of determining the
number of shares of Common Stock outstanding for purposes of
subsection 4(d)(i)(A)), shall be recomputed to reflect the issuance of only the
number of shares of Common Stock (and convertible or exchangeable securities
that remain in effect) actually issued upon the exercise of such options or
rights, upon the conversion or exchange of such securities, or upon the exercise
of the options or rights related to such securities.
(5) The number of shares of Common Stock deemed
issued and the consideration deemed paid therefor pursuant to subsections
4(d)(i)(E)(1) and (2) shall be appropriately adjusted to reflect any change,
termination or expiration of the type described in either
subsection 4(d)(i)(E)(3) or (4).
(ii) "Additional Stock" shall mean any shares of Common
Stock issued (or deemed to have been issued pursuant to subsection 4(d)(i)(E))
by this corporation after the Purchase Date other than
(A) Common Stock issued pursuant to a transaction
described in subsection 4(d)(iii) hereof;
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(B) shares of Common Stock issuable or issued to
employees consultants, directors or vendors (if in transactions with primarily
non-financing purposes) of this corporation directly or pursuant to a stock
option plan or restricted stock plan approved by the Board of Directors of this
corporation;
(C) Common Stock issued upon conversion of shares of
Preferred Stock; or
(D) shares of Common Stock and Preferred Stock
issuable or issued as a result of the Stock Split.
(iii) In the event this corporation should at any
time or from time to time after the Effective Time fix a record date for the
effectuation of a split or subdivision of the outstanding shares of Common
Stock or the determination of holders of Common Stock entitled to receive a
dividend or other distribution payable in additional shares of Common Stock
or other securities or rights convertible into, or entitling the holder
thereof to receive directly or indirectly, additional shares of Common Stock
(hereinafter referred to as "Common Stock Equivalents") without payment of
any consideration by such holder for the additional shares of Common Stock or
the Common Stock Equivalents (including the additional shares of Common Stock
issuable upon conversion or exercise thereof), then, as of such record date
(or the date of such dividend distribution, split or subdivision if no record
date is fixed), the Conversion Price of the Series A Preferred Stock, Series
B Preferred Stock and Series C Preferred Stock shall be appropriately
decreased so that the number of shares of Common Stock issuable on conversion
of each share of such series shall be increased in proportion to such
increase of the aggregate of shares of Common Stock outstanding and those
issuable with respect to such Common Stock Equivalents.
(iv) If the number of shares of Common Stock
outstanding at any time after the Purchase Date is decreased by a combination of
the outstanding shares of Common Stock, then, following the record date of such
combination, the Conversion Price for the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock shall be appropriately increased so
that the number of shares of Common Stock issuable on conversion of each share
of such series shall be decreased in proportion to such decrease in outstanding
shares.
(e) OTHER DISTRIBUTIONS. In the event this corporation shall
declare a distribution payable in securities of other persons, evidences of
indebtedness issued by this corporation or other persons, assets (excluding cash
dividends) or options or rights not referred to in subsection 4(d)(iii) or the
Stock Split referred to in Article IV of this Amended and Restated Certificate
of Incorporation, then, in each such case for the purpose of this subsection
4(e), the holders of the Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock shall be entitled to a proportionate share of any such
distribution as though they were the holders of the number of shares of Common
Stock of this corporation into which their shares of Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock are convertible as of the
record date fixed for the determination of the holders of Common Stock of this
corporation entitled to receive such distribution.
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(f) RECAPITALIZATIONS. If at any time or from time to time
there shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 4 or in Section 2 or the Stock Split referred to in Article IV of
this Amended and Restated Certificate of Incorporation) provision shall be made
so that the holders of the Series A Preferred Stock, Series B Preferred Stock
and Series C Preferred Stock shall thereafter be entitled to receive upon
conversion of the Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock the number of shares of stock or other securities or
property of the Company or otherwise, to which a holder of Common Stock
deliverable upon conversion would have been entitled on such recapitalization.
In any such case, appropriate adjustment shall be made in the application of the
provisions of this Section 4 with respect to the rights of the holders of the
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
after the recapitalization to the end that the provisions of this Section 4
(including adjustment of the Conversion Price then in effect and the number of
shares purchasable upon conversion of the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock) shall be applicable after that
event as nearly equivalent as may be practicable.
(g) NO IMPAIRMENT. This corporation will not, by amendment of
its Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by this corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 4 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock against impairment.
(h) NO FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS.
(i) No fractional shares shall be issued upon the
conversion of any share or shares of the Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock, and the number of shares of Common
Stock to be issued shall be rounded to the nearest whole share. Whether or not
fractional shares are issuable upon such conversion shall be determined on the
basis of the total number of shares of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock the holder is at the time
converting into Common Stock and the number of shares of Common Stock issuable
upon such aggregate conversion.
(ii) Upon the occurrence of each adjustment or
readjustment of the Conversion Price of Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock pursuant to this Section 4, this
corporation, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
This corporation shall, upon the written request at any time of any holder of
Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock,
furnish or cause to be furnished to such holder a like certificate setting forth
(A) such adjustment and readjustment, (B) the Conversion Price for the Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock at the
time in effect, and (C) the number
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of shares of Common Stock and the amount, if any, of other property that at the
time would be received upon the conversion of a share of Series A Preferred
Stock, Series B Preferred Stock or Series C Preferred Stock.
(i) NOTICES OF RECORD DATE. In the event of any taking by this
corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, this
corporation shall mail to each holder of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock, at least twenty (20) days prior to
the date specified therein, a notice specifying the date on which any such
record is to be taken for the purpose of such dividend, distribution or right,
and the amount and character of such dividend, distribution or right.
(j) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. This
corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock, such number of its shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock; and if at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the conversion
of all then outstanding shares of the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock, in addition to such other remedies
as shall be available to the holder of such Preferred Stock, this corporation
will take such corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purposes, including, without
limitation, engaging in best efforts to obtain the requisite stockholder
approval of any necessary amendment to this certificate.
(k) NOTICES. Any notice required by the provisions of this
Section 4 to be given to the holders of shares of Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock shall be deemed given if
deposited in the United States mail, postage prepaid, and addressed to each
holder of record at his address appearing on the books of this corporation.
5. VOTING RIGHTS.
(a) GENERAL VOTING RIGHTS. The holder of each share of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall
have the right to one vote for each share of Common Stock into which such
Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock
could then be converted, and with respect to such vote, such holder shall have
full voting rights and powers equal to the voting rights and powers of the
holders of Common Stock, and shall be entitled, notwithstanding any provision
hereof, to notice of any stockholders' meeting in accordance with the bylaws of
this corporation, and shall be entitled to vote, together with holders of Common
Stock, with respect to any question upon which holders of Common Stock have the
right to vote. Fractional votes shall not, however, be permitted and any
fractional voting rights available on an as-converted basis (after aggregating
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all shares into which shares of Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock held by each holder could be converted) shall
be rounded to the nearest whole number (with one-half being rounded upward).
(b) VOTING FOR THE ELECTION OF DIRECTORS. As long as at least a
majority of the shares of Series A Preferred Stock originally issued remain
outstanding, the holders of such shares of Series A Preferred Stock shall be
entitled to elect one (1) director of this corporation at each annual election
of directors. As long as at least a majority of the shares of Series B
Preferred Stock originally issued remain outstanding, the holders of such shares
of Series B Preferred Stock shall be entitled to elect one (1) director of this
corporation at each annual election of directors. The holders of outstanding
Common Stock shall be entitled to elect two (2) directors of this corporation at
each annual election of directors. The holders of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and Common Stock (voting
together as a single class and not as separate series, and on an as-converted
basis) shall be entitled to elect any remaining directors of this corporation.
In the case of any vacancy (other than a vacancy caused by removal) in
the office of a director occurring among the directors elected by the holders of
a class or series of stock pursuant to this Section 5(b), the remaining
directors so elected by that class or series may by affirmative vote of a
majority thereof (or the remaining director so elected if there be but one, or
if there are no such directors remaining, by the affirmative vote of the holders
of a majority of the shares of that class or series), elect a successor or
successors to hold office for the unexpired term of the director or directors
whose place or places shall be vacant. Any director who shall have been elected
by the holders of a class or series of stock or by any directors so elected as
provided in the immediately preceding sentence hereof may be removed during the
aforesaid term of office, either with or without cause, by, and only by, the
affirmative vote of the holders of a majority of the shares of the class or
series of stock entitled to elect such director or directors, given either at a
special meeting of such stockholders duly called for that purpose or pursuant to
a written consent of stockholders, and any vacancy thereby created may be filled
by the holders of that class or series of stock represented at the meeting or
pursuant to unanimous written consent.
6. PROTECTIVE PROVISIONS. Subject to the rights of series of
Preferred Stock that may from time to time come into existence, so long as at
least 3,000,000 shares of Series A Preferred Stock, Series B Preferred Stock
and/or Series C Preferred Stock are outstanding (as adjusted for any stock
dividends, combinations or splits with respect to such shares after the
Effective Time), this corporation shall not without first obtaining the approval
(by vote or written consent, as provided by law) of the holders of at least a
majority of the then outstanding shares of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock (voting together as a single class
and not as separate series, and on an as-converted basis):
(a) sell, convey, or otherwise dispose of all or substantially
all of its assets or business or merge into or consolidate with any other
corporation (other than a wholly-owned subsidiary corporation) or effect any
transaction or series of related transactions in which more than fifty percent
(50%) of the voting power of this corporation is disposed of;
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(b) alter or change the rights, preferences or privileges of the
shares of Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock;
(c) increase or decrease (other than by redemption or
conversion) the total number of authorized shares of Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock;
(d) effectuate any transaction covered by Internal Revenue Code
Section 305;
(e) authorize or issue, or obligate itself to issue, any other
equity security, including any other security convertible into or exercisable
for any equity security, having a preference over, or being on a parity with,
the Series A Preferred Stock, Series B Preferred Stock or Series C Preferred
Stock with respect to voting, redemption, dividends or upon liquidation; or
(f) increase the authorized number of directors of this
corporation to greater than seven (7) directors.
7. STATUS OF CONVERTED OR REDEEMED STOCK. In the event any shares
of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred
Stock shall be redeemed or converted pursuant to Section 3 or Section 4 hereof,
the shares so converted or redeemed shall be cancelled and shall not be issuable
by this corporation. The Certificate of Incorporation of this corporation shall
be appropriately amended to effect the corresponding reduction in this
corporation's authorized capital stock.
C. COMMON STOCK.
1. DIVIDEND RIGHTS. Subject to the prior rights of holders of all
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of this corporation
legally available therefor, such dividends as may be declared from time to time
by the Board of Directors.
2. LIQUIDATION RIGHTS. Upon the liquidation, dissolution or winding
up of this corporation, the assets of this corporation shall be distributed as
provided in Section 2 of Division (B) of this Article IV hereof.
3. REDEMPTION. The Common Stock is not redeemable.
4. VOTING RIGHTS. The holder of each share of Common Stock shall
have the right to one vote, and shall be entitled to notice of any stockholders'
meeting in accordance with the bylaws of this corporation, and shall be entitled
to vote upon such matters and in such manner as may be provided by law.
ARTICLE V
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Except as otherwise provided in this Amended and Restated Certificate
of Incorporation, in furtherance and not in limitation of the powers conferred
by statute, the Board of Directors is expressly authorized to make, repeal,
alter, amend and rescind any or all of the bylaws of this corporation.
ARTICLE VI
Subject to Article IV, Division B, Section 6(f) above, the number of
directors of this corporation shall be fixed from time to time by a bylaw or
amendment thereof duly adopted by the Board of Directors or by the stockholders.
ARTICLE VII
Elections of directors need not be by written ballot unless the bylaws
of this corporation shall so provide.
ARTICLE VIII
Meetings of stockholders may be held within or without the State of
Delaware, as the bylaws may provide. The books of this corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the bylaws of this corporation.
ARTICLE IX
A director of this corporation shall, to the full extent permitted by
the Delaware General Corporation Law as it now exists or as it may hereafter be
amended, not be liable to this corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director. Neither any amendment nor
repeal of this Article IX, nor the adoption of any provision of this Amended and
Restated Certificate of Incorporation inconsistent with this Article IX, shall
eliminate or reduce the effect of this Article IX in respect of any matter
occurring, or any cause of action, suit or claim that, but for this Article IX,
would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.
ARTICLE X
This corporation reserves the right to amend, alter, change or repeal
any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
ARTICLE XI
To the fullest extent permitted by applicable law, this corporation is
authorized to provide indemnification of (and advancement of expenses to) agents
of this corporation (and any other persons to which General Corporation Law
permits this corporation to provide indemnification) through bylaw provisions,
agreements with such agents or other persons, vote of stockholders or
disinterested directors or otherwise, in excess of the indemnification and
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advancement otherwise permitted by Section 145 of the General Corporation Law,
subject only to limits created by applicable General Corporation Law (statutory
or non-statutory), with respect to actions for breach of duty to this
corporation, its stockholders, and others.
Any amendment, repeal or modification of the foregoing provisions of
this Article XI shall not adversely affect any right or protection of a
director, officer, agent, or other person existing at the time of, or increase
the liability of any director of this corporation with respect to any acts or
omissions of such director, officer or agent occurring prior to, such amendment,
repeal or modification.
* * *
THREE: That thereafter said amendment and restatement was duly
adopted in accordance with the provisions of Section 242 and Section 245 of the
General Corporation Law by obtaining a majority vote of the Common Stock in
favor of said amendment and restatement in the manner set forth in Section 222
of the General Corporation Law.
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IN WITNESS WHEREOF, the undersigned have executed this certificate on
April __, 1999.
---------------------------------------
Steven J. Snyder, President
---------------------------------------
Thomas M. Donnelly, Secretary
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<PAGE>
BYLAWS OF
NET PERCEPTIONS, INC.,
A DELAWARE CORPORATION
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE I OFFICE AND RECORDS. . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1 Delaware Office. . . . . . . . . . . . . . . . . . . . . 1
Section 1.2 Other Offices. . . . . . . . . . . . . . . . . . . . . . 1
Section 1.3 Books and Records. . . . . . . . . . . . . . . . . . . . 1
ARTICLE II STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2.1 Annual Meeting . . . . . . . . . . . . . . . . . . . . . 1
Section 2.2 Special Meeting. . . . . . . . . . . . . . . . . . . . . 1
Section 2.3 Place of Meeting . . . . . . . . . . . . . . . . . . . . 2
Section 2.4 Notice of Meeting. . . . . . . . . . . . . . . . . . . . 2
Section 2.5 Quorum and Adjournment . . . . . . . . . . . . . . . . . 2
Section 2.6 Proxies. . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 2.7 Notice of Stockholder Business and Nominations . . . . . 2
Section 2.8 Procedure for Election of Directors. . . . . . . . . . . 4
Section 2.9 Inspectors of Elections; Opening and Closing the Polls . 5
Section 2.10 Consent of Stockholders in Lieu of Meeting. . . . . . . 5
ARTICLE III BOARD OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . 6
Section 3.1 General Powers . . . . . . . . . . . . . . . . . . . . . 6
Section 3.2 Number, Tenure and Qualifications. . . . . . . . . . . . 6
Section 3.3 Regular Meetings . . . . . . . . . . . . . . . . . . . . 6
Section 3.4 Special Meetings . . . . . . . . . . . . . . . . . . . . 6
Section 3.5 Notice . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.6 Conference Telephone Meetings. . . . . . . . . . . . . . 6
Section 3.7 Quorum . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 3.8 Vacancies. . . . . . . . . . . . . . . . . . . . . . . . 7
Section 3.9 Committee. . . . . . . . . . . . . . . . . . . . . . . . 7
Section 3.10 Removal . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE IV OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.1 Elected Officers . . . . . . . . . . . . . . . . . . . . 8
Section 4.2 Election and Term of Office. . . . . . . . . . . . . . . 8
Section 4.3 Chairman of the Board. . . . . . . . . . . . . . . . . . 8
Section 4.4 President and Chief Executive Officer. . . . . . . . . . 8
Section 4.5 Secretary. . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.6 Treasurer. . . . . . . . . . . . . . . . . . . . . . . . 9
Section 4.7 Removal. . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 4.8 Vacancies. . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE V STOCK CERTIFICATES AND TRANSFERS. . . . . . . . . . . . . . . . 9
Section 5.1 Stock Certificates and Transfers . . . . . . . . . . . . 9
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ARTICLE VI INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . 10
Section 6.1 Right to Indemnification . . . . . . . . . . . . . . . . 10
Section 6.2 Prepayment of Expenses . . . . . . . . . . . . . . . . . 10
Section 6.3 Claims . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 6.4 Nonexclusivity of Rights . . . . . . . . . . . . . . . . 10
Section 6.5 Amendment or Repeal. . . . . . . . . . . . . . . . . . . 11
Section 6.6 Other Indemnification and Prepayment of Expenses . . . . 11
ARTICLE VII MISCELLANEOUS PROVISIONS. . . . . . . . . . . . . . . . . . . 11
Section 7.1 Fiscal Year. . . . . . . . . . . . . . . . . . . . . . . 11
Section 7.2 Dividends. . . . . . . . . . . . . . . . . . . . . . . . 11
Section 7.3 Seal . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 7.4 Waiver of Notice . . . . . . . . . . . . . . . . . . . . 11
Section 7.5 Audits . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 7.6 Resignations . . . . . . . . . . . . . . . . . . . . . . 11
Section 7.7 Contracts. . . . . . . . . . . . . . . . . . . . . . . . 12
Section 7.8 Proxies. . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE VIII AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 8.1 Amendments . . . . . . . . . . . . . . . . . . . . . . . 12
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ARTICLE I
OFFICES AND RECORDS
Section 1.1 DELAWARE OFFICE. The registered office of the
Corporation in the State of Delaware shall be located in the City of Dover,
County of Kent.
Section 1.2 OTHER OFFICES. The Corporation may have such other
offices, either within or without the State of Delaware, as the Board of
Directors may designate or as the business of the Corporation may from time to
time require.
Section 1.3 BOOKS AND RECORDS. The books and records of the
Corporation may be kept at the Corporation's headquarters in Minneapolis,
Minnesota or at such other locations outside the State of Delaware as may from
time to time be designated by the Board of Directors.
ARTICLE II
STOCKHOLDERS
Section 2.1 ANNUAL MEETING. The annual meeting of the stockholders
of the Corporation shall be held at such date, place and/or time as may be fixed
by resolution of the Board of Directors.
Section 2.2 SPECIAL MEETING.
A. Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute or by the Certificate of
Incorporation, may be called by the president and shall be called by the
president or secretary at the request in writing of a majority of the Board of
Directors, or at the request in writing of stockholders owning at least fifty
percent (50%) in amount of the entire capital stock of the corporation issued
and outstanding and entitled to vote. Such request shall state the purpose or
purposes of the proposed meeting.
B. Notwithstanding the above provisions of this Section 2.2(A),
effective upon a closing of an initial public offering of the Corporation's
securities pursuant to a registration statement filed under the Securities Act
of 1933, as amended, a special meeting of the stockholders of the corporation
may be called only by the President, the Chairman of the Board or by the Board
of Directors pursuant to a resolution adopted by a majority of the total number
of directors which the Corporation would have if there were no vacancies (the
"Whole Board"), or at the request in writing of stockholders owning at least
fifty percent (50%) in amount of the entire capital stock of the corporation
issued and outstanding and entitled to vote.
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Section 2.3 PLACE OF MEETING. The Board of Directors may designate
the place of meeting for any meeting of the stockholders. If no designation is
made by the Board of Directors, the place of meeting shall be the principal
office of the Corporation.
Section 2.4 NOTICE OF MEETING. Written or printed notice, stating
the place, day and hour of the meeting and the purposes for which the meeting is
called, shall be prepared and delivered by the Corporation not less than ten
days nor more than sixty days before the date of the meeting, either personally,
or by mail, to each stockholder of record entitled to vote at such meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the United
States mail with postage thereon prepaid, addressed to the stockholder at his
address as it appears on the stock transfer books of the Corporation. Such
further notice shall be given as may be required by law. Meetings may be held
without notice if all stockholders entitled to vote are present (except as
otherwise provided by law), or if notice is waived by those not present. Any
previously scheduled meeting of the stockholders may be postponed and (unless
the Certificate of Incorporation otherwise provides) any special meeting of the
stockholders may be cancelled, by resolution of the Board of Directors upon
public notice given prior to the time previously scheduled for such meeting of
stockholders.
Section 2.5 QUORUM AND ADJOURNMENT. Except as otherwise provided
by law or by the Certificate of Incorporation, the holders of a majority of the
voting power of the outstanding shares of the Corporation entitled to vote
generally in the election of directors (the "Voting Stock"), represented in
person or by proxy, shall constitute a quorum at a meeting of stockholders,
except that when specified business is to be voted on by a class or series
voting separately as a class or series, the holders of a majority of the voting
power of the shares of such class or series shall constitute a quorum for the
transaction of such business. The chairman of the meeting or a majority of the
shares of Voting Stock so represented may adjourn the meeting from time to time,
whether or not there is such a quorum (or, in the case of specified business to
be voted on by a class or series, the chairman or a majority of the shares of
such class or series so represented may adjourn the meeting with respect to such
specified business). No notice of the time and place of adjourned meetings need
be given except as required by law. The stockholders present at a duly
organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum.
Section 2.6 PROXIES. At all meetings of stockholders, a
stockholder may vote by proxy executed in writing by the stockholder or as may
be permitted by law, or by his duly authorized attorney-in-fact. Such proxy
must be filed with the Secretary of the Corporation or his representative at or
before the time of the meeting.
Section 2.7 NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS.
A. ANNUAL MEETING OF STOCKHOLDERS.
(1) Nominations of persons for election to the Board of
Directors of the Corporation and the proposal of business to be considered by
the stockholders may be made at an annual meeting of stockholders: (a) pursuant
to the Corporation's notice of meeting delivered pursuant to Section 2.4 of
these Bylaws; (b) by or at the direction of the
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Chairman of the Board or the Board of Directors; or (c) by any stockholder of
the Corporation who is entitled to vote at the meeting, who has complied with
the notice procedures set forth in clauses (2) and (3) of this paragraph (A) of
this Bylaw and who was a stockholder of record at the time such notice was
delivered to the Secretary of the Corporation.
(2) For nominations or other business to be properly
brought before an annual meeting by a stockholder pursuant to a clause (c) of
paragraph (A)(1) of this Bylaw, the stockholder must have given timely notice
thereof in writing to the Secretary of the Corporation and such other business
must otherwise be a proper matter for stockholder action. To have such proposal
included in the proxy materials for such annual meeting, a stockholder's notice
shall be delivered to the Secretary at the principal executive offices of the
Corporation not less than one hundred twenty days before the date of the
Corporation's proxy statement released to stockholders in connection with the
previous year's annual meeting (the "Prior Proxy Release Date"); PROVIDED,
HOWEVER, that if the date of the current year's annual meeting has been changed
by more than thirty days from the date of the previous year's meeting, then the
deadline to have such proposal included in the proxy materials for such annual
meeting is seventy-five days before the Corporation releases its proxy
materials. For proposals received after the deadlines set forth in the
preceding sentence, except as required by Rule 14a-4(c)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), proxy holders shall be
entitled to use their discretion when voting on stockholder proposals received
before the date which is seventy-five days before the Prior Proxy Release Date.
The Corporation shall have no obligation to include in its proxy materials for
such annual meeting proposals received after the date which is seventy-five days
before the Prior Proxy Release Date. Such stockholder's notice shall comply
with the requirements of Rule 14a-8. In no event shall the public announcement
of an adjournment of an annual meeting commence a new time period for the giving
of a stockholder's notice as described above.
(3) Notwithstanding anything in the second sentence of
paragraph (A)(2) of this Bylaw to the contrary, in the event that the number of
directors to be elected to the Board of Directors of the Corporation is
increased and there is no public announcement naming all of the nominees for
director or specifying the size of the increased Board of Directors made by the
Corporation at least one hundred days prior to the first anniversary of the
preceding year's annual meeting, a stockholder's notice required by this Bylaw
shall also be considered timely, but only with respect to nominees for any new
positions created by such increase, if it shall be delivered to the Secretary at
the principal executive offices of the Corporation not later than the close of
business on the tenth day following the day on which such public announcement is
first made by the Corporation.
B. SPECIAL MEETINGS OF STOCKHOLDERS. Only such business shall
be conducted at a special meeting of stockholders as shall have been brought
before the meeting pursuant to the Corporation's notice of meeting pursuant to
Section 2.4 of these Bylaws. Nominations of persons for election to the Board
of Directors may be made at a special meeting of stockholders at which directors
are to be elected pursuant to the Corporation's notice of meeting (a) by or at
the direction of the Board of Directors or (b) by any stockholder of the
Corporation who is entitled to vote at the meeting, who complies with the notice
procedures set
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forth in this Bylaw and who is a stockholder of record at the time such notice
is delivered to the Secretary of the Corporation. In the event the Corporation
calls a special meeting of stockholders for the purpose of electing one or more
directors to the Board of Directors, any such stockholder may nominate a person
or persons (as the case may be), for election to such position(s) as are
specified in the Corporation's Notice of Meeting, if the stockholder's notice as
required by paragraph (A)(2) of this Bylaw shall be delivered to the Secretary
at the principal executive offices of the Corporation not earlier than the
ninetieth day prior to such special meeting and not later than the close of
business on the later of the seventieth day prior to such special meeting or the
tenth day following the day on which public announcement is first made of the
date of the special meeting and of the nominees proposed by the Board of
Directors to be elected at such meeting. In no event shall the public
announcement of an adjournment of a special meeting commence a new time period
for the giving of a stockholder's notice as described above.
C. GENERAL.
(1) Only persons who are nominated in accordance with the
procedures set forth in this Bylaw shall be eligible to serve as directors and
only such business shall be conducted at a meeting of stockholders as shall have
been brought before the meeting in accordance with the procedures set forth in
this Bylaw. Except as otherwise provided by law, the Certificate of
Incorporation or these Bylaws, the chairman of the meeting shall have the power
and duty to determine whether a nomination or any business proposed to be
brought before the meeting was made in accordance with the procedures set forth
in this Bylaw and, if any proposed nomination or business is not in compliance
with this Bylaw, to declare that such defective proposal or nomination shall be
disregarded.
(2) For purposes of this Bylaw, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the Corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Bylaw,
a stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this Bylaw. Nothing in this Bylaw shall be deemed to affect any rights
of stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
Section 2.8 PROCEDURE FOR ELECTION OF DIRECTORS. Election of
directors at all meetings of the stockholders at which directors are to be
elected shall be by written ballot, and, except as otherwise set forth in the
Certificate of Incorporation with respect to the right of the holders of any
series of Preferred Stock or any other series or class of stock to elect
additional directors under specified circumstances, a plurality of the votes
cast thereat shall elect directors. Except as otherwise provided by law, the
Certificate of Incorporation or these Bylaws, all matters other than the
election of directors submitted to the stockholders at any meeting shall be
decided
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by the affirmative vote of a majority of the voting power of the outstanding
Voting Stock present in person or represented by proxy at the meeting and
entitled to vote thereon.
Section 2.9 INSPECTORS OF ELECTIONS; OPENING AND CLOSING THE POLLS.
A. The Board of Directors by resolution shall appoint one or
more inspectors, which inspector or inspectors may include individuals who serve
the Corporation in other capacities, including, without limitation, as officers,
employees, agents or representatives of the Corporation, to act at the meeting
and make a written report thereof. One or more persons may be designated as
alternate inspectors to replace any inspector who fails to act. If no inspector
or alternate has been appointed to act, or if all inspectors or alternates who
have been appointed are unable to act, at a meeting of stockholders, the
chairman of the meeting shall appoint one or more inspectors to act at the
meeting. Each inspector, before discharging his or her duties, shall take and
sign an oath faithfully to execute the duties of inspector with strict
impartiality and according to the best of his or her ability. The inspectors
shall have the duties prescribed by the General Corporation Law of the State of
Delaware.
B. The chairman of the meeting shall fix and announce at the
meeting the date and time of the opening and the closing of the polls for each
matter upon which the stockholders will vote at a meeting.
Section 2.10 CONSENT OF STOCKHOLDERS IN LIEU OF MEETING.
A. Unless otherwise provided in the Certificate of
Incorporation, any action required to be taken at any annual or special meeting
of stockholders of the Corporation, or any action which may be taken at any
annual or special meeting of such stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, shall be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted. Prompt notice of the taking of the corporate action
without a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing. Any written consent may be
revoked by a writing received by the Secretary of the Corporation prior to the
time that written consents of the number of shares required to authorize the
proposed action have been filed with the Secretary.
B. Notwithstanding the above provisions of this Section
2.10(A), effective upon a closing of an initial public offering of the
Corporation's securities pursuant to a registration statement filed under the
Securities Act of 1933, as amended, the stockholders of the Corporation may not
take action by written consent without a meeting but must take any such actions
at a duly called annual or special meeting.
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ARTICLE III
BOARD OF DIRECTORS
Section 3.1 GENERAL POWERS. The business and affairs of the
Corporation shall be managed by or under the direction of its Board of
Directors. In addition to the powers and authorities by these Bylaws expressly
conferred upon them, the Board of Directors may exercise all such powers of the
Corporation and do all such lawful acts and things as are not by law, by the
Certificate of Incorporation or by these Bylaws required to be exercised or done
by the stockholders.
Section 3.2 NUMBER, TENURE AND QUALIFICATIONS. Subject to the
rights of the holders of any series of Preferred Stock, or any other series or
class of stock as set forth in the Certificate of Incorporation, to elect
directors under specified circumstances, the number of directors shall initially
be four (4) and shall be fixed from time to time thereafter by a majority of the
Board of Directors.
Section 3.3 REGULAR MEETINGS. A regular meeting of the Board of
Directors shall be held without notice other than this Bylaw immediately after,
and at the same place as, each annual meeting of stockholders. The Board of
Directors may, by resolution, provide the time and place for the holding of
additional regular meetings without notice other than such resolution.
Section 3.4 SPECIAL MEETINGS. Special meetings of the Board of
Directors shall be called at the request of the Chairman of the Board, the
President or a majority of the Board of Directors. The person or persons
authorized to call special meetings of the Board of Directors may fix the place
and time of the meetings.
Section 3.5 NOTICE. Notice of any special meeting shall be given
to each director at his business or residence in writing or by telegram or by
telephone communication. If mailed, such notice shall be deemed adequately
delivered when deposited in the United States mails so addressed, with postage
thereon prepaid, at least five days before such meeting. If by telegram, such
notice shall be deemed adequately delivered when the telegram is delivered to
the telegraph company at least twenty-four hours before such meeting. If by
facsimile transmission, such notice shall be transmitted at least twenty-four
hours before such meeting. If by telephone, the notice shall be given at least
twelve hours prior to the time set for the meeting. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the Board
of Directors need be specified in the notice of such meeting, except for
amendments to these Bylaws as provided under Section 8.1 of Article VIII hereof.
A meeting may be held at any time without notice if all the directors are
present (except as otherwise provided by law) or if those not present waive
notice of the meeting in writing, either before or after such meeting.
Section 3.6 CONFERENCE TELEPHONE MEETINGS. Members of the Board of
Directors, or any committee thereof, may participate in a meeting of the Board
of Directors or such committee by means of conference telephone or similar
communications equipment by
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means of which all persons participating in the meeting can hear each other, and
such participation in a meeting shall constitute presence in person at such
meeting.
Section 3.7 QUORUM. A whole number of directors equal to at least
a majority of the Whole Board shall constitute a quorum for the transaction of
business, but if at any meeting of the Board of Directors there shall be less
than a quorum present, a majority of the directors present may adjourn the
meeting from time to time without further notice. The act of the majority of
the directors present at a meeting at which a quorum is present shall be the act
of the Board of Directors.
Section 3.8 VACANCIES. Subject to the rights of the holders of any
series of Preferred Stock, or any other series or class of stock as set forth in
the Certificate of Incorporation, to elect additional directors under specified
circumstances, and unless the Board of Directors otherwise determines, vacancies
resulting from death, resignation, retirement, disqualification, removal from
office or other cause, and newly created directorships resulting from any
increase in the authorized number of directors, may be filled only by the
affirmative vote of a majority of the remaining directors, though less than a
quorum of the Board of Directors, and directors so chosen shall hold office for
a term expiring at the annual meeting of stockholders at which the term of
office of the class to which they have been elected expires and until such
director's successor shall have been duly elected and qualified. No decrease in
the number of authorized directors constituting the Whole Board shall shorten
the term of any incumbent director.
Section 3.9 COMMITTEE.
A. The Board of Directors may designate one or more committees,
each committee to consist of one or more of the directors of the Corporation.
The Board of Directors may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of a member of the
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in place of any such absent or disqualified member. Any such committee,
to the extent permitted by law and to the extent provided in the resolution of
the Board of Directors, shall have and may exercise all the powers and authority
of the Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may require it.
B. Unless the Board of Directors otherwise provides, each
committee designated by the Board of Directors may make, alter and repeal rules
for the conduct of its business. In the absence of such rules each committee
shall conduct its business in the same manner as the Board of Directors conducts
its business pursuant to these Bylaws.
Section 3.10 REMOVAL. Subject to the rights of the holders of any
series of Preferred Stock, or any other series or class of stock as set forth in
the Certificate of Incorporation, to elect additional directors under specified
circumstances, any director, or the
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entire Board of Directors, may be removed from office at any time, with or
without cause, only by the affirmative vote of the holders of at least sixty-six
and two-thirds percent (66 2/3 %) of the voting power of the then outstanding
Voting Stock, voting together as a single class.
ARTICLE IV
OFFICERS
Section 4.1 ELECTED OFFICERS. The elected officers of the
Corporation shall be a Chairman of the Board, a President, a Secretary, a
Treasurer, and such other officers as the Board of Directors from time to time
may deem proper. The Chairman of the Board shall be chosen from the directors.
All officers chosen by the Board of Directors shall each have such powers and
duties as generally pertain to their respective offices, subject to the specific
provisions of this Article IV. Such officers shall also have powers and duties
as from time to time may be conferred by the Board of Directors or by any
committee thereof.
Section 4.2 ELECTION AND TERM OF OFFICE. The elected officers of
the Corporation shall be elected annually by the Board of Directors at the
regular meeting of the Board of Directors held after each annual meeting of the
stockholders. If the election of officers shall not be held at such meeting,
such election shall be held as soon thereafter as convenient. Subject to
Section 4.7 of these Bylaws, each officer shall hold office until his successor
shall have been duly elected and shall have qualified or until his death or
until he shall resign.
Section 4.3 CHAIRMAN OF THE BOARD. The Chairman of the Board shall
preside at all meetings of the Board.
Section 4.4 PRESIDENT AND CHIEF EXECUTIVE OFFICER. The President
and Chief Executive Officer shall be the general manager of the Corporation,
subject to the control of the Board of Directors, and as such shall preside at
all meetings of shareholders, shall have general supervision of the affairs of
the Corporation, shall sign or countersign or authorize another officer to sign
all certificates, contracts, and other instruments of the Corporation as
authorized by the Board of Directors, shall make reports to the Board of
Directors and shareholders, and shall perform all such other duties as are
incident to such office or are properly required by the Board of Directors. If
the Board of Directors creates the office of Chief Executive Officer as a
separate office from President, the President shall be the chief operating
officer of the corporation and shall be subject to the general supervision,
direction, and control of the Chief Executive Officer unless the Board of
Directors provides otherwise.
Section 4.5 SECRETARY. The Secretary shall give, or cause to be
given, notice of all meetings of stockholders and directors and all other
notices required by law or by these Bylaws, and in case of his absence or
refusal or neglect so to do, any such notice may be given by any person
thereunto directed by the Chairman of the Board or the President, or by the
Board of Directors, upon whose request the meeting is called as provided in
these Bylaws. He shall record all the proceedings of the meetings of the Board
of Directors, any committees thereof and the stockholders of the Corporation in
a book to be kept for that purpose, and shall perform such
8
<PAGE>
other duties as may be assigned to him by the Board of Directors, the Chairman
of the Board or the President. He shall have custody of the seal of the
Corporation and shall affix the same to all instruments requiring it, when
authorized by the Board of Directors, the Chairman of the Board or the
President, and attest to the same.
Section 4.6 TREASURER. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate receipts and
disbursements in books belonging to the Corporation. The Treasurer shall
deposit all moneys and other valuables in the name and to the credit of the
Corporation in such depositaries as may be designated by the Board of Directors.
The Treasurer shall disburse the funds of the Corporation as may be ordered by
the Board of Directors the Chairman of the Board, or the President, taking
proper vouchers for such disbursements. The Treasurer shall render to the
Chairman of the Board, the President and the Board of Directors, whenever
requested, an account of all his transactions as Treasurer and of the financial
condition of the Corporation. If required by the Board of Directors, the
Treasurer shall give the Corporation a bond for the faithful discharge of his
duties in such amount and with such surety as the Board of Directors shall
prescribe.
Section 4.7 REMOVAL. Any officer elected by the Board of Directors
may be removed by the Board of Directors whenever, in their judgment, the best
interests of the Corporation would be served thereby. No elected officer shall
have any contractual rights against the Corporation for compensation by virtue
of such election beyond the date of the election of his successor, his death,
his resignation or his removal, whichever event shall first occur, except as
otherwise provided in an employment contract or an employee plan.
Section 4.8 VACANCIES. A newly created office and a vacancy in any
office because of death, resignation, or removal may be filled by the Board of
Directors for the unexpired portion of the term at any meeting of the Board of
Directors.
ARTICLE V
STOCK CERTIFICATES AND TRANSFERS
Section 5.1 STOCK CERTIFICATES AND TRANSFERS.
A. The interest of each stockholder of the Corporation shall be
evidenced by certificates for shares of stock in such form as the appropriate
officers of the Corporation may from time to time prescribe. The shares of the
stock of the Corporation shall be transferred on the books of the Corporation by
the holder thereof in person or by his attorney, upon surrender for cancellation
of certificates for the same number of shares, with an assignment and power of
transfer endorsed thereon or attached thereto, duly executed, and with such
proof of the authenticity of the signature as the Corporation or its agents may
reasonably require.
B. The certificates of stock shall be signed, countersigned and
registered in such manner as the Board of Directors may by resolution prescribe,
which
9
<PAGE>
resolution may permit all or any of the signatures on such certificates to be in
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate has ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the Corporation with the same effect as if he were such
officer, transfer agent or registrar at the date of issue.
ARTICLE VI
INDEMNIFICATION
Section 6.1 RIGHT TO INDEMNIFICATION. The Corporation shall
indemnify and hold harmless, to the fullest extent permitted by applicable law
as it presently exists or may hereafter be amended, any person (an "Indemnitee")
who was or is made or is threatened to be made a party or is otherwise involved
in any action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "Proceeding"), by reason of the fact that he, or a person for
whom he is the legal representative, is or was a director or officer of the
Corporation or, while a director or officer of the Corporation, is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation or of a partnership, joint venture, trust,
enterprise or nonprofit entity, including service with respect to employee
benefit plans, against all liability and loss suffered and expenses (including
attorneys' fees) reasonably incurred by such Indemnitee. Notwithstanding the
preceding sentence, except as otherwise provided in Section 6.3, the Corporation
shall be required to indemnify an Indemnitee in connection with a proceeding (or
part thereof) commenced by such Indemnitee only if the commencement of such
proceeding (or part thereof) by the Indemnitee was authorized by the Board of
Directors of the Corporation.
Section 6.2 PREPAYMENT OF EXPENSES. The Corporation shall pay the
expenses (including attorneys' fees) incurred by an Indemnitee in defending any
proceeding in advance of its final disposition, PROVIDED, HOWEVER, that, to the
extent required by law, such payment of expenses in advance of the final
disposition of the proceeding shall be made only upon receipt of an undertaking
by the Indemnitee to repay all amounts advanced if it should be ultimately
determined that the Indemnitee is not entitled to be indemnified under this
Article VI or otherwise.
Section 6.3 CLAIMS. If a claim for indemnification or payment of
expenses under this Article VI is not paid in full within sixty days after a
written claim therefor by the Indemnitee has been received by the Corporation,
the Indemnitee may file suit to recover the unpaid amount of such claim and, if
successful in whole or in part, shall be entitled to be paid the expense of
prosecuting such claim. In any such action the Corporation shall have the
burden of proving that the Indemnitee is not entitled to the requested
indemnification or payment of expenses under applicable law.
Section 6.4 NONEXCLUSIVITY OF RIGHTS. The rights conferred on any
Indemnitee by this Article VI shall not be exclusive of any other rights which
such Indemnitee may have or
10
<PAGE>
hereafter acquire under any statute, provision of the Certificate of
Incorporation, these Bylaws, agreement, vote of stockholders or disinterested
directors or otherwise.
Section 6.5 AMENDMENT OR REPEAL. Any repeal or modification of the
foregoing provisions of this Article VI shall not adversely affect any right or
protection hereunder of any Indemnitee in respect of any act or omission
occurring prior to the time of such repeal or modification.
Section 6.6 OTHER INDEMNIFICATION AND PREPAYMENT OF EXPENSES. This
Article VI shall not limit the right of the Corporation, to the extent and in
the manner permitted by law, to indemnify and to advance expenses to persons
other than Indemnitees when and as authorized by appropriate corporate action.
ARTICLE VII
MISCELLANEOUS PROVISIONS
Section 7.1 FISCAL YEAR. The fiscal year of the Corporation shall
begin on the first day of January and end on the thirty-first day of December of
each year.
Section 7.2 DIVIDENDS. The Board of Directors may from time to
time declare, and the Corporation may pay, dividends on its outstanding shares
in the manner and upon the terms and conditions provided by law and its
Certificate of Incorporation.
Section 7.3 SEAL. The corporate seal shall have inscribed the name
of the Corporation thereon and shall be in such form as may be approved from
time to time by the Board of Directors.
Section 7.4 WAIVER OF NOTICE. Whenever any notice is required to
be given to any stockholder or director of the Corporation under the provisions
of the General Corporation Law of the State of Delaware, a waiver thereof in
writing, signed by the person or persons entitled to such notice, whether before
or after the time stated therein, shall be deemed equivalent to the giving of
such notice. Neither the business to be transacted at, nor the purpose of, any
annual or special meeting of the stockholders of the Board of Directors need be
specified in any waiver of notice of such meeting.
Section 7.5 AUDITS. The accounts, books and records of the
Corporation shall be audited upon the conclusion of each fiscal year by an
independent certified public accountant selected by the Board of Directors, and
it shall be the duty of the Board of Directors to cause such audit to be made
annually.
Section 7.6 RESIGNATIONS. Any director or any officer, whether
elected or appointed, may resign at any time by serving written notice of such
resignation on the Chairman of the Board, the President or the Secretary, and
such resignation shall be deemed to be effective as of the close of business on
the date said notice is received by the Chairman of the Board, the
11
<PAGE>
President, or the Secretary or at such later date as is stated therein. No
formal action shall be required of the Board of Directors or the stockholders to
make any such resignation effective.
Section 7.7 CONTRACTS. Except as otherwise required by law, the
Certificate of Incorporation or these Bylaws, any contracts or other instruments
may be executed and delivered in the name and on the behalf of the Corporation
by such officer or officers of the Corporation as the Board of Directors may
from time to time direct. Such authority may be general or confined to specific
instances as the Board may determine. The Chairman of the Board, the President
or any Vice President may execute bonds, contracts, deeds, leases and other
instruments to be made or executed for or on behalf of the Corporation. Subject
to any restrictions imposed by the Board of Directors or the Chairman of the
Board, the President or any Vice President of the Corporation may delegate
contractual powers to others under his jurisdiction, it being understood,
however, that any such delegation of power shall not relieve such officer of
responsibility with respect to the exercise of such delegated power.
Section 7.8 PROXIES. Unless otherwise provided by resolution
adopted by the Board of Directors, the Chairman of the Board, the President or
any Vice President may from time to time appoint any attorney or attorneys or
agent or agents of the Corporation, in the name and on behalf of the
Corporation, to cast the votes which the Corporation may be entitled to cast as
the holder of stock or other securities in any other corporation or other
entity, any of whose stock or other securities may be held by the Corporation,
at meetings of the holders of the stock and other securities of such other
corporation or other entity, or to consent in writing, in the name of the
Corporation as such holder, to any action by such other corporation or other
entity, and may instruct the person or persons so appointed as to the manner of
casting such votes or giving such consent, and may execute or cause to be
executed in the name and on behalf of the Corporation and under its corporate
seal or otherwise, all such written proxies or other instruments as he may deem
necessary or proper in the premises.
ARTICLE VIII
AMENDMENTS
Section 8.1 AMENDMENTS. These Bylaws may be amended, altered,
added to, rescinded or repealed at any meeting of the Board of Directors or of
the stockholders, provided notice of the proposed change was given in the notice
of the meeting and, in the case of a meeting of the Board of Directors, in a
notice given no less than twenty-four hours prior to the meeting; PROVIDED,
HOWEVER, that, notwithstanding any other provisions of these Bylaws or any
provision of law which might otherwise permit a lesser vote or no vote, but in
addition to any affirmative vote of the holders of any particular class or
series of the stock required by law, the Certificate of Incorporation or these
Bylaws, the affirmative vote of the holders of at least 80 percent of the voting
power of the then outstanding Voting Stock, voting together as a single class,
shall be required in order for stockholders to alter, amend or repeal any
provision of these Bylaws or to adopt any additional bylaw.
12
<PAGE>
CERTIFICATE OF SECRETARY OF
NET PERCEPTIONS, INC.
The undersigned, Thomas M. Donnelly, hereby certifies that he is the
duly elected and acting Secretary of Net Perceptions, Inc., a Delaware
corporation (the "Corporation"), and that the Bylaws attached hereto constitute
the Bylaws of said Corporation as duly adopted by the Directors on ____________,
1999.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his name
this _____ day of __________, 1999.
---------------------------------------
Thomas M. Donnelly
Secretary
<PAGE>
NET PERCEPTIONS, INC.
CHANGE IN CONTROL SEVERANCE PLAN
AND
SUMMARY PLAN DESCRIPTION
Plan Effective Date: March __, 1999
<PAGE>
NET PERCEPTIONS, INC.
CHANGE IN CONTROL SEVERANCE PLAN
AND
SUMMARY PLAN DESCRIPTION
The Net Perceptions, Inc. Change in Control Severance Plan (the "Plan") is
primarily designed to provide eligible officers and other key employees of Net
Perceptions, Inc. (the "Company") whose employment is terminated in connection
with a change in control occurring after an initial public offering with
separation pay and other benefits in the event of involuntary termination.
This Plan is designed to be an "employee welfare benefit plan," as defined in
Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"). This Plan is governed by ERISA and, to the extent applicable, the
laws of the State of California. This document constitutes both the official
plan document and the required summary plan description under ERISA.
I. ELIGIBILITY
You will be eligible for severance benefits under the Plan if:
- you are an officer of the Company or you are a key employee of the
Company named on Schedule A;
- your active employment is Involuntarily Terminated other than for
Cause within the eighteen (18) month period following a Change in
Control or you decline to accept a position with the successor
corporation;
- you execute the General Release of All Claims, a copy of which is
attached, within the prescribed number of days following your date
of termination, as set forth in the attached General Release of
All Claims; and
- you are NOT in one of the excluded categories listed below.
You are NOT eligible for severance benefits under this Plan if:
- you are employed with a successor employer following a Change in
Control. However, you would be eligible for severance benefits
pursuant to the terms of the plan upon a subsequent Involuntary
Termination other than for Cause within 18 months following a
Change in Control; or
- you are dismissed for Cause.
II. HOW THE PLAN WORKS
If you are eligible for severance benefits under the Plan, the amount of your
severance pay will be
<PAGE>
determined in accordance with the guidelines set forth
below, subject to the Golden Parachute Tax limitation set forth below:
- Six (6) months of Salary, payable in a single lump sum within ten
(10) days of your cessation of employment. If you (and, if
applicable, your dependents) elect COBRA continuation coverage,
the Company will pay the entire cost of such coverage for the
lesser of a six (6) month period or until your COBRA eligibility
ends.
SALARY generally means your base salary at your date of termination and does NOT
include, for example, bonuses, overtime compensation, incentive pay, sales
commissions or expense allowances.
INVOLUNTARY TERMINATION shall mean the termination of your employment with the
Company:
(A) involuntarily upon your discharge or dismissal other
than for Cause, or
(B) voluntarily or involuntarily following (I) a change in
your position with the Company which materially reduces your level
of responsibility, (II) a reduction in your level of cash
compensation (including base salary and bonuses) or (III) a change
in your place of employment which is more than 25 miles from your
place of employment prior to the change, PROVIDED AND ONLY IF such
change or reduction is effected without your written concurrence.
CAUSE means your willful breach of duty unless waived by the Company (which
willful breach is limited to your deliberate and consistent refusal to perform
your duties or the deliberate and consistent refusal to conform to or follow any
reasonable policy adopted by the Company provided you have had prior written
notice of such refusal and an opportunity to cure), your unauthorized use or
disclosure of the confidential information or trade secrets of the Company, your
conviction of a felony under the laws of the United States or any state thereof,
or your gross negligence.
CHANGE IN CONTROL shall have the meaning assigned to such term in the Company's
1999 Equity Incentive Plan.
GOLDEN PARACHUTE TAX LIMITATION
The Internal Revenue Code imposes a 20% excise tax on certain payments and other
benefits received by certain officers and shareholders in connection with a
change of control involving the Company. Such payments can include severance pay
and acceleration of option vesting. In the event that the cash severance payment
you would receive under this Plan, when added to any other payments or benefits
received by you, would (i) constitute a "parachute payment" within the meaning
of Section 280G of the Internal Revenue Code ("Code") and (ii) be subject to the
20% excise tax imposed by Section 4999 of the Code, then your cash severance
payments shall be either
payable in full or
2
<PAGE>
payable as to such lesser amount which would result in no portion
of the compensation payable to you being subject to excise tax
under Section 4999 of the Code,
whichever of the foregoing amounts, taking into account the applicable Federal,
state and local income taxes and the 20% excise tax imposed by Code Section
4999, results in your receipt, on an after-tax basis, of the greatest amount. No
payments due you outside of this Plan shall be reduced by reason of this
paragraph. Unless you and the Company agree otherwise in writing, any
determination required to make this adjustment shall be made in writing by the
Company's independent public accountants or other outside auditors selected by
the Company immediately prior to the change of control triggering the parachute
payments, whose determination shall be binding upon you and the Company. You and
the Company are obligated to furnish to the accountants such information and
documents as the accountants may reasonably request. The Company shall bear all
costs of engaging the accountants in connection with these calculations.
III. OTHER IMPORTANT INFORMATION
PLAN ADMINISTRATION. As the Plan Administrator, the Company has full
discretionary authority to administer and interpret the Plan, including
discretionary authority to determine eligibility for benefits under the Plan and
the amount of benefits (if any) payable per participant. Any determination by
the Plan Administrator will be final and conclusive upon all persons. The Plan
Administrator hereby delegates to the Chief Financial Officer all of its
administrative duties. Accordingly, the Chief Financial Officer, on behalf of
the Plan Administrator, has full discretionary authority to carry out its
delegated duties. Any determination by the Chief Financial Officer will be final
and conclusive upon all persons. The Company, as the Plan Administrator, will
indemnify and hold harmless the Chief Financial Officer for carrying out the
responsibilities of the Plan Administrator; provided, however, such person does
not act with gross negligence or willful misconduct.
BENEFITS. When benefits are due, they will be paid from the general assets of
the Company. The Company is not required to establish a trust to fund the Plan.
The benefits provided under this Plan are not assignable and may be conditioned
upon your compliance with any confidentiality agreement you have entered into
with the Company or upon your compliance with any Company policy or program.
CLAIMS PROCEDURE. If you believe you are incorrectly denied a benefit or are
entitled to a greater benefit than the benefit you receive under the Plan, you
may submit a signed, written application to the Plan Administrator within ninety
(90) days of your Termination Date. You will be notified of the approval or
denial of this claim within ninety (90) days of the date that the Plan
Administrator receives the claim, unless special circumstances require an
extension of time for processing the claim. If your claim is denied, the
notification will state specific reasons for the denial and you will have sixty
(60) days from receipt of the written notification of the denial of your claim
to file a signed, written request for a review of the denial with the Plan
Administrator. This request should include the reasons you are requesting a
review, facts supporting your request and any other relevant comments. Pursuant
to its discretionary authority to administer and interpret the Plan and to
determine eligibility for benefits under the Plan, the Plan
3
<PAGE>
Administrator will generally make a final, written determination of your
eligibility for benefits within sixty (60) days of receipt of your request for
review.
PLAN TERMS. This Plan supersedes any and all prior separation, severance and
salary continuation arrangements, programs and plans which were previously
offered by the Company, for which you are eligible, but excluding terms of the
Company's stock option plans and individual letter agreements which address the
vesting of stock options or restricted stock.
PLAN AMENDMENT OR TERMINATION. The Company, acting through its Board of
Directors or its Compensation Committee, reserves the right to terminate or
amend the Plan at any time and in any manner. Any termination or amendment of
the Plan may be made effective immediately with respect to any benefits not yet
paid, whether or not prior notice of such amendment or termination has been
given to affected employees. However, no amendment or termination may be
approved following any Change in Control involving the Company.
TAXES. The Company will withhold taxes and other payroll deductions from any
severance payment.
NO RIGHT TO EMPLOYMENT. This Plan does not provide you with any right to
continue employment with the Company or affect the Company's right, which right
is hereby expressly reserved, to terminate the employment of any individual at
any time for any reason with or without cause.
IV. STATEMENT OF ERISA RIGHTS
As a participant in the Plan, you are entitled to certain rights and protections
under the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
ERISA provides that all Plan participants shall be entitled to:
1. Examine, without charge, at the Plan Administrator's office, all
Plan documents, including all documents filed by the Plan with the
U.S. Department of Labor.
2. Obtain copies of all Plan documents and other Plan information upon
written request to the Plan Administrator. The Plan Administrator
may make a reasonable charge for the copies.
3. File suit in a federal court, if you, as a participant, request
materials and do not receive them within thirty (30) days of your
request. In such a case, the court may require the Plan
Administrator to provide the materials and to pay you a fine of up
to $100 for each day's delay until the materials are received,
unless the materials were not sent because of reasons beyond the
control of the Plan Administrator.
In addition to creating rights for certain employees of the Company under the
Plan, ERISA imposes obligations upon the people who are responsible for the
operation of the Plan. The people who operate the Plan (called "fiduciaries")
have a duty to do so prudently and in the interest of the Company's employees
who are covered by the Plan.
No one, including your employer or any other person, may fire you or otherwise
discriminate
4
<PAGE>
against you in any way to prevent you from obtaining a benefit to
which you are entitled under the Plan or from exercising your rights under
ERISA.
If your claim for a severance benefit is denied or ignored, in whole or in part,
you have a right to file suit in a federal or a state court. If Plan fiduciaries
are misusing the Plan's assets (if any) or if you are discriminated against for
asserting your rights, you may seek assistance from the U.S. Department of Labor
or file suit in a federal court. The court will decide who will pay court costs
and legal fees. If you are successful in your lawsuit, the court may, if it so
decides, order the party you have sued to pay your legal costs, including
attorney fees. However, if you lose, the court may order you to pay these costs
and fees, for example, if it finds that your claim or suit is frivolous.
If you have any questions about the Plan, this statement or your rights under
ERISA, you should contact the Plan Administrator or the nearest Area Office of
the U.S. Labor-Management Services Administration, Department of Labor.
5
<PAGE>
ADDITIONAL PLAN INFORMATION
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Name of Plan: Net Perceptions, Inc. Change in Control Severance Plan
- ---------------------------------------------------------------------------------------------
<S> <C>
Company Sponsoring Plan: Net Perceptions, Inc.
7901 Flying Cloud Drive
Minneapolis, Minnesota 55344
(612) 903-9424
- ---------------------------------------------------------------------------------------------
Employer Identification 41-1844584
Number:
- ---------------------------------------------------------------------------------------------
Plan Number: 50_
- ---------------------------------------------------------------------------------------------
Plan Year: The calendar year; the first plan year shall end
December 31, 1999
- ---------------------------------------------------------------------------------------------
Plan Administrator: Net Perceptions, Inc.
7901 Flying Cloud Drive
Minneapolis, Minnesota 55344
(612) 903-9424
- ---------------------------------------------------------------------------------------------
Agent for Service of Plan Administrator
Legal Process:
- ---------------------------------------------------------------------------------------------
Type of Plan: Severance Plan/Employee Welfare Benefit Plan
- ---------------------------------------------------------------------------------------------
Plan Costs: The cost of the Plan is paid by Net Perceptions, Inc.
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
SCHEDULE A
LIST OF KEY EMPLOYEE PARTICIPANTS
7
<PAGE>
GENERAL RELEASE OF ALL CLAIMS
In consideration of the severance benefit to be paid to me by Net
Perceptions, Inc. under the Net Perceptions, Inc. Severance Plan, I hereby fully
and forever release and discharge Net Perceptions, Inc. and its directors,
officers, employees, agents, successors, predecessors, subsidiaries,
shareholders, employee benefit plans and assigns (together called "the
Company"), from all claims and causes of action arising out of or relating in
any way to my employment with the Company, including the termination of my
employment.
1. I understand and agree that this RELEASE is a full and complete
waiver of all claims, including (without limitation) claims of wrongful
discharge, breach of contract, breach of the covenant of good faith and fair
dealing, violation of public policy, defamation, personal injury or emotional
distress and claims under Title VII of the Civil Rights Act of 1964, as amended,
the Fair Labor Standards Act, the Equal Pay Act of 1963, the Americans With
Disabilities Act, the Civil Rights Act of 1866, the California Fair Employment
and Housing Act or any other federal or state law or regulation relating to
employment or employment discrimination. I further understand and agree that
this RELEASE is a full and complete waiver of all claims, including (without
limitation) claims under the Employee Retirement Income Security Act of 1974, as
amended (ERISA), related to severance benefits. I further understand that by
this RELEASE I agree not to assist, encourage, institute or cause to be
instituted the filing of any administrative charge or legal proceeding against
the Company relating to employment discrimination.
2. I also hereby agree that nothing contained in this RELEASE shall
constitute or be treated as an admission of liability or wrongdoing by the
Company or me.
3. I agree to abide by the Company's Proprietary Information and
Inventions Agreement that I previously executed.
4. In addition, I hereby expressly waive any and all rights and
benefits conferred upon me by the provisions of Section 1542 of the Civil Code
of the State of California or any analogous provision under any other state law,
which states as follows:
A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the release,
which if known by him must have materially affected his settlement with the
debtor.
5. I understand that I have until the close of business on ________ __,
199_, to review and consider this RELEASE, discuss it with an attorney of my own
choosing, and decide to execute it or not execute it. I hereby acknowledge that
I have read and understand the foregoing RELEASE and that I sign it voluntarily
and without coercion. I further acknowledge that I was given an opportunity to
consider and review this RELEASE and to consult with an attorney of my own
choosing concerning the waivers contained in this RELEASE and that the waivers
are knowing, conscious and with full appreciation that I am forever foreclosed
from pursuing any of the rights that I waived.
, 199
- -------- -- - -------------------------------------------------
Signature
- -----------------------------------------
Print Full Name
<PAGE>
-------------------------------------------------
YOU ARE ADVISED TO CONSULT AN ATTORNEY BEFORE
SIGNING THIS RELEASE.
-------------------------------------------------
GENERAL RELEASE OF ALL CLAIMS
In consideration of the severance benefit to be paid to me by Net
Perceptions, Inc. under the Net Perceptions, Inc. Severance Plan, I hereby fully
and forever release and discharge Net Perceptions, Inc. and its directors,
officers, employees, agents, successors, predecessors, subsidiaries,
shareholders, employee benefit plans and assigns (together called "the
Company"), from all claims and causes of action arising out of or relating in
any way to my employment with the Company, including the termination of my
employment.
1. I understand and agree that this RELEASE is a full and complete waiver of
all claims, including (without limitation) claims of wrongful discharge, breach
of contract, breach of the covenant of good faith and fair dealing, violation of
public policy, defamation, personal injury or emotional distress and claims
under Title VII of the Civil Rights Act of 1964, as amended, the Fair Labor
Standards Act, the Equal Pay Act of 1963, the Americans With Disabilities Act,
the Civil Rights Act of 1866, the Age Discrimination in Employment Act of 1967,
as amended (ADEA), the California Fair Employment and Housing Act or any other
federal or state law or regulation relating to employment or employment
discrimination. I further understand and agree that this RELEASE is a full and
complete waiver of all claims, including (without limitation) claims under the
Employee Retirement Income Security Act of 1974, as amended (ERISA), related to
severance benefits. I further understand that by this RELEASE I agree not to
assist, encourage, institute or cause to be instituted the filing of any
administrative charge or legal proceeding against the Company relating to
employment discrimination.
2. I also hereby agree that nothing contained in this RELEASE
shall constitute or be treated as an admission of liability or wrongdoing by me
or by the Company.
3. I agree to abide by the Company's Proprietary Information
and Inventions Agreement that I previously executed.
4. In addition, I hereby expressly waive any and all rights
and benefits conferred upon me by the provisions of Section 1542 of the Civil
Code of the State of California, or any analogous provision under any other
state law, which states as follows:
A general release does not extend to claims which the creditor does not know or
suspect to exist in his favor at the time of executing the release, which if
known by him must have materially affected his settlement with the debtor.
5. I hereby acknowledge that I have read and understand the
foregoing RELEASE and that I sign it voluntarily and without coercion. I further
acknowledge that I was given an opportunity to consider and review this RELEASE
and to consult with an attorney of my own choosing concerning the waivers
contained in this RELEASE and that the waivers are knowing, conscious and with
full appreciation that I am forever foreclosed from pursuing any of the rights
that I waived.
6. I understand that I have the right to consult with an
attorney before signing this Release. I also understand that, as provided under
the Older Workers Benefit Protection Act of 1990, I have 45 days after receipt
of this RELEASE to review and consider this RELEASE, discuss it with an attorney
of my own choosing, and decide to execute it or not execute it. I also
understand that I may
<PAGE>
revoke this RELEASE during a period of seven days after I sign it and that
this RELEASE will not become effective for seven days after I sign it (and
then only if I do not revoke it). In order to revoke this RELEASE, I must
deliver to the __________ of Net Perceptions, Inc., within seven days after I
executed this RELEASE, a letter stating that I am revoking it.
7. I acknowledge that I have been provided with a notice, as required by
the Older Workers Benefit Protection Act of 1990, that contains information
about the individuals covered under the Net Perceptions, Inc. Change in Control
Severance Plan, the eligibility factors for participation in the Plan, the time
limits applicable to the Plan, the job titles and ages of the employees
designated to participate in the Plan, and the job titles and ages of the
employees who have not been designated to participate in the Plan. (See
ATTACHMENT 1.)
8. I understand that if I choose to revoke this RELEASE within seven days
after I signed it, I will not receive any severance benefit and the RELEASE will
have no effect.
9. Before signing my name to this RELEASE, I state that:
I have read it,
I understand it,
I know that I am giving up important rights,
I am aware of my right to consult an attorney before signing it, and
I have signed it knowingly and voluntarily.
, 199
- -------- -- - --------------------------------
Signature
- ----------------------------------
Print Full Name
<PAGE>
ATTACHMENT 1
NOTICE ABOUT
THE NET PERCEPTIONS, INC. CHANGE IN CONTROL SEVERANCE PLAN
As required by the Older Workers Benefit Protection Act of 1990, this
notice contains information about the individuals covered under the Net
Perceptions, Inc. Change in Control Severance Plan (the "Plan"), the eligibility
factors for participation in the Plan, the time limits applicable to the Plan,
the job titles and ages of the employees designated to participate in the Plan,
and the job titles and ages of the employees who have not been designated to
participate in the Plan.
1. The Plan applies to regular employees of the Company whose employment
is terminated following a Change in Control on or after ________ __, 199_, and
on or before ________ __, 199_ (provided that they meet the other requirements
of the Plan).
Employees are not eligible to receive a benefit under the Plan unless they
sign a General Release of All Claims (the "Release"). Employees who have
attained age 40 must return the Release to the Company within 45 days after
receiving the form. Once the signed Release is returned to the Company, the
employees have seven days to revoke the Release.
The following is a listing of the ages and job titles of employees of the
Company who were and were not selected for termination and participation in the
Plan:
<TABLE>
<CAPTION>
- -------------------------------------------------- ----------- ------------------------ -----------------------------
JOB TITLE AGE NUMBER SELECTED NUMBER NOT SELECTED
<S> <C> <C> <C>
- -------------------------------------------------- ----------- ------------------------ -----------------------------
- -------------------------------------------------- ----------- ------------------------ -----------------------------
- -------------------------------------------------- ----------- ------------------------ -----------------------------
- -------------------------------------------------- ----------- ------------------------ -----------------------------
- -------------------------------------------------- ----------- ------------------------ -----------------------------
- -------------------------------------------------- ----------- ------------------------ -----------------------------
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 4, 1999, except
as to Note 10 which is as of March 22, 1999, relating to the financial
statements of Net Perceptions, Inc., which appears in such Prospectus. We also
consent to the application of such report to the Financial Statement Schedule
for the period from July 3, 1996 (inception) to December 31, 1998 and for each
of the two years in the period ended December 31, 1998 listed under Item 16(b)
of this Registration Statement when such schedule is read in conjunction with
the financial statements referred to in our report. The audits referred to in
such report also included this schedule. We also consent to the reference to us
under the heading "Experts" in such Prospectus.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
April 13, 1999
