<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 28, 2000
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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NET PERCEPTIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<TABLE>
<S> <C> <C>
DELAWARE 7372 41-1844584
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
7901 FLYING CLOUD DRIVE
MINNEAPOLIS, MINNESOTA 55344
(612) 903-9424
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF 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:
<TABLE>
<S> <C>
KENT A. COIT, ESQ. JODIE M. BOURDET, ESQ.
SKADDEN, ARPS, SLATE, COOLEY GODWARD LLP
MEAGHER & FLOM LLP ONE MARITIME PLAZA
ONE BEACON STREET 20TH FLOOR
BOSTON, MASSACHUSETTS 02108-3194 SAN FRANCISCO, CALIFORNIA 94111
TELEPHONE: (617) 573-4800 TELEPHONE: (415) 693-2000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date hereof.
If any of the securities being registered on this Form are being 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, 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 the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE(1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------
Common stock, $.0001 par value per
share.................................. 3,277,500 $48.3125(2) $158,344,219 $41,803
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</TABLE>
(1) Includes 427,500 shares of common stock which the underwriters have the
option to purchase from Net Perceptions and the selling stockholders solely
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(c) of the Securities Act of 1933, as amended, and
based upon the average high and low prices on February 22, 2000, as reported
on the Nasdaq National Market.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
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 SECURITIES, AND WE ARE NOT SOLICITING
OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS
NOT PERMITTED.
SUBJECT TO COMPLETION, DATED , 2000
[NET PERCEPTIONS LOGO]
2,850,000 SHARES
COMMON STOCK
Net Perceptions is offering 2,000,000 shares of common stock and the
selling stockholders are selling an additional 850,000 shares. Net Perceptions'
common stock is currently quoted on the Nasdaq National Market under the symbol
"NETP." The last reported sale price of the common stock on the Nasdaq National
Market on February 25, 2000 was $48.875 per share.
-------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 8.
-------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -------
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discounts and Commissions...................... $ $
Proceeds to Net Perceptions................................. $ $
Proceeds to Selling Stockholders............................ $ $
</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.
We and the selling stockholders together have granted the underwriters a
30-day option to purchase up to an additional 427,500 shares of common stock to
cover over-allotments.
-------------------------
ROBERTSON STEPHENS
CHASE H&Q
U.S. BANCORP PIPER JAFFRAY
DAIN RAUSCHER WESSELS
ADAMS, HARKNESS & HILL, INC.
THE DATE OF THIS PROSPECTUS IS , 2000.
<PAGE> 3
[Text of inside front cover:
Net Perceptions is a leading provider of real time personalization and precision
marketing software solutions for Internet and multi-channel retailers.
Net Perceptions' solutions are designed to help retailers understand customers
individually, optimize product assortments, prices and inventories and offer the
right product to the right customer at the right price.]
<PAGE> 4
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. 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, UNLESS THE
CONTEXT OTHERWISE REQUIRES, "NET PERCEPTIONS," "WE," "US" AND "OUR" REFER TO NET
PERCEPTIONS, INC. AND OUR SUBSIDIARIES.
UNTIL , 2000 (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
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PAGE
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Summary..................................................... 4
Risk Factors................................................ 8
Forward-Looking Statements.................................. 22
Use of Proceeds............................................. 23
Price Range of Common Stock................................. 23
Dividend Policy............................................. 23
Capitalization.............................................. 24
Dilution.................................................... 25
Selected Consolidated Financial Data........................ 26
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 27
Business.................................................... 37
Management.................................................. 52
Certain Transactions........................................ 61
Principal and Selling Stockholders.......................... 62
Description of Capital Stock................................ 64
Shares Eligible for Future Sale............................. 68
Underwriting................................................ 70
Legal Matters............................................... 72
Experts..................................................... 72
Where You Can Find Additional Information................... 73
Index to Financial Statements............................... F-1
</TABLE>
-------------------------
Industry data included in this prospectus has been obtained from third
parties and has not been independently verified by us.
We have the following registered trademarks in the United States: Net
Perceptions, the Net Perceptions logo and GroupLens. This prospectus also
includes common law trademarks, including common law trademarks that are the
subject of pending trademark applications, belonging to Net Perceptions and
trademarks of other companies that are the property of their respective owners.
3
<PAGE> 5
SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read this summary together with the more detailed information, our
financial statements and notes and Knowledge Discovery One's financial
statements and notes appearing elsewhere in this prospectus. This summary 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. Our 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.
NET PERCEPTIONS
Net Perceptions is a leading provider of real time personalization and
precision marketing software solutions for Internet and multi-channel retailers.
Our solutions are designed to help retailers understand customers individually,
optimize product assortments, prices and inventories and offer the right product
to the right customer at the right price.
We design our solutions to benefit retailers by converting browsers into
buyers, increasing cross-sell and up-sell success rates and enhancing overall
customer satisfaction. In addition, we help retailers reduce customer
acquisition and retention costs, improve advertising effectiveness, optimize
in-store and on-line retail floor space and improve customer service. Our
customers currently include major Internet and multi-channel retailers such as
Art.com, Bertelsmann, CDNOW, Egghead.com, eToys.com, Fingerhut, Hudson's Bay
Company, J.C. Penney, Procter & Gamble, Tower Records and Walgreens.
Using sophisticated, proprietary analytical techniques, our solutions
analyze and report on past and current customer behavior, including purchase
history, stated preferences and Internet browsing behavior. Our solutions also
provide analysis of item placement and item price effectiveness in
advertisements, typical item purchase combinations, segmentation of customers
based on purchasing and demographic data and customer-specific and
product-specific profitability reporting. We base our solutions on a distributed
architecture that is flexible enough to integrate with our customers' new or
existing systems, including website, call center, marketing campaign management
and point of sale software.
We offer three principal product lines: commerce solutions; knowledge
management solutions; and products for original equipment manufacturers.
- Our commerce solutions include the following products:
Net Perceptions for E-commerce, which allows on-line retailers to create a
personalized shopping experience for their customers by dynamically
predicting which products to recommend to each customer browsing an
electronic commerce site;
Net Perceptions for Call Centers, which allows retailers that use call
centers to recommend products to customers using real time personalization,
resulting in improved cross-sell and up-sell rates;
Net Perceptions for Marketing Campaigns, which is designed to manage and
personalize outbound promotional electronic mail campaigns;
GreenLight Ad, which uses sophisticated analytical techniques to help
retailers maximize the return they receive from newspaper circular
advertising;
GreenLight Go!, which provides on-line retailers with an in-depth
assessment of how customers are shopping on their website; and
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<PAGE> 6
GreenLight RDS, which is a strategic reporting and analysis solution that
helps retailers understand customer purchase behavior across all customer
touch-points, from the Web to the retail store.
- Our current knowledge management offering is Net Perceptions for
Knowledge Management, which applies our real time personalization
capabilities to corporate intranets.
- Our products for original equipment manufacturers include the following:
Net Perceptions Recommendation Engine, which allows our original equipment
manufacturers to add our real time personalization capabilities to their
existing applications; and
Knowledge Refinery, which is a scalable data processing and analysis
engine that underlies our GreenLight family of products and creates models
that enable precision marketing.
Our objective is to extend our leadership position in providing real time
personalization and precision marketing solutions to Internet and multi-channel
retailers. To achieve this objective, we intend to:
- maintain and extend our technological leadership through continued
investment in the development of our proprietary recommendation engine
and other analytical technologies;
- expand our application service provider offerings;
- broaden our distribution channels;
- leverage our technology investments into new applications;
- expand our service offerings; and
- continue to build our international presence to address international
demand for real time personalization and precision marketing software
solutions.
ACQUISITION OF KNOWLEDGE DISCOVERY ONE
In February 2000, we completed our acquisition of Knowledge Discovery One,
Inc., which we refer to in this prospectus as KD One. KD One is a leading
supplier of advanced data analysis solutions for multi-channel retailers. We
believe that our acquisition of KD One will enable us to provide enhanced
services and solutions to our customers across all touch points, including call
centers, points of sale and websites. In this transaction we acquired all of
the outstanding securities of KD One in exchange for 1,969,013 shares of our
common stock. These shares were allocated as follows:
- 1,759,013 of these shares were delivered to the former KD One
stockholders at the closing of the acquisition; and
- 210,000 of these shares were placed in escrow for a one-year period to
satisfy potential indemnification claims that we may have against the
former stockholders of KD One.
In the acquisition, we also assumed all outstanding options to purchase KD
One common stock. We have reserved 268,914 shares of our common stock for
issuance upon the exercise of these options. This transaction has been accounted
for under the purchase method of accounting.
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<PAGE> 7
CORPORATE INFORMATION
We were incorporated in Delaware on July 3, 1996. Our principal executive
offices are located at 7901 Flying Cloud Drive, Minneapolis, Minnesota 55344,
and we lease offices in other locations, including San Francisco, California,
New York, New York, Austin, Texas, Richardson, Texas and Berkshire, United
Kingdom. Our telephone number is (612) 903-9424. Our website address is
www.netperceptions.com. The information on our website is not incorporated by
reference into this prospectus and should not be considered as part of this
prospectus.
THE OFFERING
Common stock offered by Net Perceptions......... 2,000,000 shares
Common stock offered by the selling
stockholders.................................... 850,000 shares
Common stock to be outstanding after the
offering........................................ 25,994,729 shares
Over-allotment option granted by us............. 300,000 shares
Over-allotment option granted by selling
stockholders.................................... 127,500 shares
Use of proceeds................................. For working capital and
general corporate purposes
and for potential
acquisitions of complementary
businesses, products or
technologies. See "Use of
Proceeds."
Nasdaq National Market symbol................... NETP
Common stock to be outstanding after the offering is based on 22,025,716
shares of common stock outstanding as of December 31, 1999 plus the 1,969,013
shares of common stock issued in the KD One acquisition. This number does not
include:
- 2,528,766 shares of common stock subject to outstanding options under our
1996 Stock Plan and our 1999 Equity Incentive Plan as of December 31,
1999; and
- 20,000 shares of common stock subject to outstanding options under our
1999 Non-Employee Director Option Plan as of December 31, 1999.
As of February 1, 2000, we had granted options to purchase an additional
280,000 shares of common stock. In February 2000, in connection with the KD One
acquisition, we also assumed all outstanding options to purchase KD One common
stock. We have reserved 268,914 shares of our common stock for issuance upon the
exercise of these options. We also have reserved 36,000 shares of our common
stock for issuance under options that we may grant to a business partner.
Except as otherwise noted, all information in this prospectus:
- assumes that the underwriters' over-allotment option is not exercised;
and
- reflects our acquisition of KD One.
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED DECEMBER 31,
JULY 3, 1996 ---------------------------------------------
(INCEPTION) TO 1999
DECEMBER 31, -----------------------
1996 1997 1998 ACTUAL PRO FORMA
-------------- ------- ------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues................ $ 4 $ 317 $ 4,477 $ 15,129 $ 18,644
Gross margin.................. 2 273 4,052 12,108 12,795
Amortization of intangibles... -- -- -- -- 30,017
Operating expenses............ 1,042 5,020 9,084 25,513 64,304
Loss from operations.......... (1,040) (4,747) (5,032) (13,405) (51,509)
Net loss...................... (1,027) (4,722) (4,968) (12,039) (50,223)
Basic and diluted net loss per
share....................... $ (3.40) $ (3.01) $ (1.40) $ (0.78) $ (2.91)
Shares used in computing basic
and diluted net loss per
share....................... 302 1,569 3,546 15,402 17,274
Pro forma basic and diluted
net loss per share.......... $ (0.64) $ (2.42)
Shares used in computing pro
forma basic and diluted net
loss per share.............. 18,851 20,723
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short term investments..... $36,854 $ 37,935 $129,898
Working capital....................................... 37,372 35,675 127,638
Total assets.......................................... 58,748 180,135 272,098
Long-term liabilities, net of current portion......... 707 1,120 1,120
Total stockholders' equity............................ 48,388 164,364 256,327
</TABLE>
See Note 2 of the notes to Net Perceptions' financial statements for an
explanation of the methods used to determine the number of shares used in
computing net loss per share data.
The pro forma financial information reflects the acquisition of KD One and
is derived from the unaudited pro forma combined financial statements, and
should be read in conjunction with those pro forma financial statements and the
notes thereto, which are included elsewhere in this prospectus. The unaudited
pro forma financial information is intended for informational purposes only and
is not necessarily indicative of the future financial position or future results
of the operations of the consolidated company, or of the financial position or
results of operations of the consolidated company that would have actually
occurred had the acquisition been effected as of the dates indicated above.
The pro forma as adjusted amounts reflect the receipt of the estimated net
proceeds from the sale of the 2,000,000 shares of common stock offered by us, at
an estimated offering price of $48.875 per share, after deducting the
underwriting discount and estimated offering expenses payable by us.
7
<PAGE> 9
RISK FACTORS
An investment in shares of our common stock involves a high degree of risk.
You should consider carefully the following information about these risks,
together with the other information contained in this prospectus, before you
decide to buy our common stock. If any of the following risks actually occur,
our business, results of operations and financial condition would likely suffer.
In these circumstances, the market price of our common stock could decline, and
you may lose all or part of the money you paid to buy our common stock.
RISKS ASSOCIATED WITH OUR BUSINESS
WE ARE AN EARLY-STAGE COMPANY AND WE EXPECT TO ENCOUNTER RISKS AND DIFFICULTIES
FREQUENTLY ENCOUNTERED BY EARLY-STAGE COMPANIES IN NEW AND RAPIDLY EVOLVING
MARKETS.
We were founded in July 1996. We began shipping product in the first
quarter of 1997. The market for our products is unproven and 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, we may not
achieve profitability and we could suffer increased operating losses.
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 this event,
the market price of our common stock may decrease significantly.
We cannot predict our future quarterly revenues with any degree of
certainty for a variety of reasons. For example:
- because we operate with a limited order backlog, revenues in any quarter
are substantially dependent on orders booked and shipped in that quarter;
- the market in which we compete is relatively new and rapidly evolving and
has many new entrants;
- 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 or revenue recognition 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
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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, $5.0 million in 1998 and $12.0
million in 1999. As of December 31, 1999, we had an accumulated deficit of $22.8
million. We have not had a profitable quarter and do not expect to have a
profitable quarter in 2000 or 2001. We expect that our losses will continue to
increase in 2000. We expect to continue to incur significant sales and
marketing, research and development and general and administrative expenses. As
a result of the KD One acquisition, we expect to have substantial expenses
associated with the amortization of goodwill and other intangible assets. We
will need to generate significant additional 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
these growth rates are indicative of future revenue growth rates.
A DECLINE IN THE PRICE OF, 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 result in decreased revenues and increased operating losses.
WE FACE INTENSE COMPETITION AND, IF WE ARE UNABLE TO COMPETE SUCCESSFULLY, WE
MAY BE UNABLE TO INCREASE OUR PRODUCT SALES AND MARKET SHARE.
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 commerce solutions, we
primarily encounter competition from Accrue Software, Andromedia (a division of
Macromedia), Broadbase, the EHNC division of HNC Software, E.piphany and
Personify. Microsoft has acquired FireFly Network, a company with collaborative
filtering technology and, as a result, we expect that we may encounter
competition from Microsoft in the future.
In the marketing of Net Perceptions for Marketing Campaigns, we primarily
encounter competition from Exchange Applications, Annuncio Software, Prime
Response and Rubric, which was recently acquired by Broadbase. 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. For
example, RightPoint Software, recently acquired by E.piphany, is an established
firm serving call centers that we expect to increasingly encounter in the
marketing of Net Perceptions for Call Centers. 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 also expect increasing
competition from network-based providers of personalization technology such as
Cogit and TriVida, which was recently acquired by Be Free.
In the marketing of our GreenLight RDS product, we primarily encounter
competition from Brio, Seagate, Comshare, IBM and SAS.
In the marketing of our Net Perceptions for Knowledge Management, we
primarily encounter competition from Orbital Software and Tacit Knowledge
Systems.
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
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<PAGE> 11
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 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. We
may not be able to compete successfully against current and future competitors.
THERE ARE NUMEROUS RISKS AND UNCERTAINTIES ASSOCIATED WITH OUR RECENT
ACQUISITION OF KD ONE THAT MAY AFFECT THE PRICE OF OUR COMMON STOCK.
If the costs associated with the acquisition of KD One exceed the benefits
realized, we may experience increased losses and the market price of our common
stock may decline.
We cannot account for the acquisition of KD One as a pooling of interests.
A significant portion of the purchase price for the acquisition will be
allocated to goodwill and other intangible assets, which will be amortized by us
over their estimated useful lives. As a result, we will record non-cash charges
against our future operating results, which will adversely affect our reported
financial results. If we had completed the acquisition on December 31, 1999, we
would have recorded approximately $117.4 million in goodwill and other
intangible assets in connection with the acquisition. The actual amount of
goodwill and other intangible assets will be higher due to KD One's net losses
between December 31, 1999 and the closing of the acquisition on February 14,
2000. The actual amount of goodwill and other intangible assets recorded will be
amortized primarily over a four-year period. If the benefits of this transaction
do not ultimately exceed the associated costs, including any dilution to our
stockholders resulting from the issuance of shares of our common stock in
connection with the acquisition, we could continue to incur increased losses, or
be required to write down some or all of the unamortized goodwill and other
intangible assets.
In addition, the market price of our common stock may decline as a result
of the acquisition if the integration of Net Perceptions and KD One is
unsuccessful, if we do not achieve the perceived benefits of the acquisition as
rapidly as, or to the extent anticipated by, financial or industry analysts, or
if the effect of the acquisition on our financial results is not consistent with
the expectations of financial or industry analysts.
If we do not successfully integrate KD One's operations and personnel or
effectively manage the combined company, the benefits of the acquisition may not
be achieved and key personnel and customers may be lost.
We acquired KD One with the expectation that the transaction would result
in significant benefits. Achieving these benefits depends on the timely,
efficient and successful execution of a number of post-acquisition events,
including integrating the operations and personnel of the two companies. The
successful execution of these post-acquisition events involves considerable risk
and
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may not be successful. For example, KD One's principal executive offices are
located in Austin, Texas, while our principal executive offices are located in
Minneapolis, Minnesota. There are currently no plans to combine these offices.
In addition, current and prospective KD One employees may experience
uncertainty about their future roles with us until our strategies with regard to
KD One are executed. This uncertainty may result in a loss of employees or may
adversely affect KD One's ability to attract and retain key management, sales,
marketing and technical personnel.
If we do not integrate KD One's technology quickly and effectively, many of the
potential benefits of the acquisition may not be realized.
We intend to integrate KD One's technology into our own products in
addition to offering KD One's products separately. We may not be able to
integrate KD One's technology quickly and effectively. In order to obtain the
benefits of the acquisition, we must make KD One's technology, products and
services operate together with our technology, products and services. We may be
required to spend additional time or money on integration that would otherwise
be spent on developing our products and services or other matters. If we do not
integrate our technology effectively or if management and technical staff spend
too much time on integration issues, we could experience increased operating
expenses and the costs of the acquisition could exceed the benefits.
If we fail to successfully cross-market our products and KD One's products, or
to develop new products, we may be unable to increase or maintain our customer
base or revenues.
We and KD One initially intend to offer our respective products and
services to each other's customers. We cannot assure you that either company's
customers will purchase the other company's products and services. The failure
of these cross-marketing efforts could diminish or eliminate any potential
benefits of the transaction. We also intend to develop new products and services
that combine the knowledge and resources of both businesses. We cannot assure
you that these integrated products or services will be successful. As a result,
we may not be able to increase or maintain our customer base. To date, the
companies have not thoroughly investigated the obstacles, including
technological, market-driven or other obstacles, to developing and marketing
these new products and services in a timely and efficient way. We may not be
able to overcome these obstacles in developing new products and services.
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 personalization and
precision marketing solutions. As a result, we must use significant resources to
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.
OUR PRODUCTS HAVE A LENGTHY IMPLEMENTATION CYCLE. IN ADDITION, ONLY A LIMITED
NUMBER OF OUR CUSTOMERS HAVE A DEPLOYED AND OPERATING APPLICATION THAT UTILIZES
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 commitment of resources by our customers. The time required
for implementation of our products has varied depending on the customer's
application of the product. Additionally, implementation of Net Perceptions for
E-commerce often does not begin until a customer otherwise undertakes to update
its website, which generally occurs only once or twice per year.
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We have currently licensed one or more of our products to more than 160
customers, including customers of KD One. However, only a limited number of
these customers have a deployed and operating application that utilizes 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 repeat customers and customer
references.
If implementation services performed by us constitute a significant part of
a product sales transaction, we recognize a substantial portion of our revenues
from the sales transaction upon the delivery of the implementation services. As
a result, delays in service delivery could cause significant reduction in our
license revenues and operating results for any particular period.
WE HAVE SEVERAL NEW PRODUCTS WHICH MAY NOT ACHIEVE MARKET ACCEPTANCE.
We recently announced the commercial launch of the following new products:
- Net Perceptions for Marketing Campaigns, which is a solution designed to
manage and personalize outbound promotional electronic mail campaigns;
- Net Perceptions for Knowledge Management, which applies our real time
personalization capabilities to corporate intranets;
- Net Perceptions Recommendation Engine, which allows original equipment
manufacturers to add our real time personalization capabilities to their
existing applications;
- GreenLight Ad, which uses sophisticated analytical techniques to help
retailers maximize the return they receive from newspaper circular
advertising; and
- GreenLight Go!, which provides retailers with an in-depth assessment of
how customers are shopping on their websites.
These new products have not received any degree of market acceptance. There
are significant risks inherent in product introductions such as these. These
products 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 the products will likely result in loss or delay of market
acceptance. We expect that our future financial performance will depend
significantly on the successful sales, implementation and market acceptance of
these new products which may not occur on a timely basis or at all.
Our new products are subject to significant technical risks. We may fail to
introduce or deploy new products on a timely basis, or at all. In the past, we
have experienced some 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 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. We could experience increased expenses or lost revenues 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 and 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
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our current and potential customers. This may result in loss of or delay in
market acceptance of our products, which could seriously impair our ability to
achieve profitability.
IF WE FAIL TO GENERATE REPEAT OR EXPANDED BUSINESS FROM OUR CURRENT AND FUTURE
CUSTOMERS, WE MAY BE UNABLE TO BUILD A CRITICAL MASS OF CUSTOMERS NECESSARY TO
ACHIEVE INCREASED SALES AND MARKET SHARE.
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, we may be unable to build a critical mass of customers necessary to
achieve increased sales and market share.
IF WE FAIL TO SUBSTANTIALLY EXPAND OUR DIRECT SALES OPERATIONS, WE MAY BE UNABLE
TO INCREASE MARKET AWARENESS AND SALES OF OUR PRODUCTS AND SERVICES.
Our products and services require a sophisticated sales effort targeted at
the senior management of our prospective customers. As of December 31, 1999, our
direct sales organization consisted of 64 employees, including KD One employees.
We plan to hire additional direct sales personnel. 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. If we are unable to
hire additional skilled sales personnel as needed, we may not be able to capture
increased market share for our products and services.
IF WE CANNOT EXPAND OUR INDIRECT SALES CHANNEL, WE MAY BE UNABLE TO INCREASE OUR
CUSTOMER BASE AND ACHIEVE PROFITABILITY.
We intend to increase the proportion of our customers licensed through our
indirect channel, which includes resellers, systems integrators and original
equipment manufacturers. Our agreements with 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. In
addition, 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 additional
resellers. Events or occurrences of this nature could seriously impair our
ability to increase our sales and market share. In addition, any sales through
resellers will have lower gross margins than direct sales.
We intend to increase sales through original equipment manufacturers. We
are currently investing, and intend to continue to invest, resources to develop
this sales channel. These 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
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technological changes. Our original equipment manufacturers may not effectively
meet these 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.
Our original equipment manufacturers may not continue to carry our
products. In addition, any sales through original equipment manufacturers will
have lower gross margins than direct sales. Our inability to recruit, or our
loss of, important original equipment manufacturers could seriously impair our
ability to increase our customer base and achieve profitability.
We recently established a sales force dedicated to the development of the
indirect sales channel for our products. As of December 31, 1999, our indirect
sales organization consisted of nine employees. We plan to hire additional
indirect sales personnel. Competition for qualified sales personnel is intense,
and we might not be able to retain our existing personnel or hire and retain 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.
IF WE ARE UNSUCCESSFUL IN IMPROVING AND INCREASING THE SIZE OF OUR PROFESSIONAL
SERVICES ORGANIZATION, WE MAY LOSE CURRENT CUSTOMERS OR BE UNABLE TO ATTRACT NEW
CUSTOMERS.
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 customers 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.
As of December 31, 1999, our professional services and customer support
organization consisted of 41 employees, including KD One 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.
WE DEPEND ON INTERNATIONAL SALES AND, THEREFORE, OUR BUSINESS IS SUSCEPTIBLE TO
NUMEROUS RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.
Licenses and services sold to customers outside of the United States
accounted for approximately 13% of our total revenues in 1998 and 16% in 1999.
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:
- expand our international operations;
- hire international personnel; and
- recruit additional international resellers and systems integrators.
This will require significant management attention and financial resources
and could seriously harm our operating margins. We have very limited experience
in marketing, selling, distributing and supporting our products and services
internationally.
During the third quarter of 1999, we established operations in the United
Kingdom. During the third quarter of 1999, we established operations in Japan
through a joint venture that created Net
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Perceptions Japan. As of December 31, 1999, we had 10 employees located in
Europe and all other employees were located in North America.
The acceptance and use of the Internet in international markets are in
earlier stages of development than in the United States, particularly the use of
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, we may be
unable to generate sufficient revenues to cover our expenses related to
international operations. In addition, we may fail to maintain or increase
international market demand for our products.
IF OUR INTELLECTUAL PROPERTY IS NOT PROTECTED ADEQUATELY, WE MAY LOSE OUR
COMPETITIVE ADVANTAGE IN THE MARKET.
We are a technology company. Our success depends in large part on
protecting our intellectual property, which is our most important asset. We rely
upon a combination of trademark, copyright, patent and trade secret laws to
protect our rights in our technology. 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 the source code for our software.
We have 11 pending United States patent applications. We also have license
rights to two issued United States patents and one allowed United States patent
application from the University of Minnesota. We have four pending foreign
patent applications, but we have no issued foreign patents. It is possible that
no patents will issue from the currently pending patent applications. It is also
possible that our current patents and potential future patent may be invalid or
unenforceable. It is also possible that any patent issued to us may not provide
us with any competitive advantages. Moreover, we may not develop future
proprietary products or technologies that are patentable, and the patents of
others may seriously limit our ability to conduct our business. In this regard,
we have not performed any comprehensive analysis of patents of others that may
limit our ability to conduct our business.
Our efforts to protect our proprietary rights may not succeed. Copyright
and trade secret laws afford only limited protection for our proprietary rights
in our software, documentation and other written materials. Unauthorized parties
may be able to copy aspects of our products or to obtain and use information
that we regard as confidential and 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 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. We may not be able to detect infringement or enforce our patent or
other rights and, as a result, our competitive position in the market may
suffer.
THIRD-PARTY INFRINGEMENT CLAIMS AGAINST US OR OUR TECHNOLOGY SUPPLIERS COULD
RESULT IN DELAYS IN PRODUCT DEVELOPMENT, THE LOSS OF CUSTOMERS, OR COSTLY AND
TIME CONSUMING LITIGATION.
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 rights. We expect
that software companies such as Net Perceptions 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
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litigation, cause product shipment delays or require us to enter into royalty or
licensing agreements in order to secure continued access to required technology.
Royalty or licensing agreements, if required, may not be available on terms
acceptable to us or at all. Claims of intellectual property infringement may
also require us to pay significant damages or subject us to an injunction
against the use of our products. Any successful claim of intellectual property
infringement against us could have an immediate and significant impact on our
ability to carry on our business and market our products.
In addition, in all of our paid software license agreements, we generally
indemnify our customer against losses attributable to intellectual property
infringement by our software. Should a third party bring a suit against a
customer alleging that the customer's use of our software infringes its
intellectual property rights, we could incur substantial costs in defending and
resolving such suit.
IF WE ENGAGE IN FUTURE ACQUISITIONS, WE WILL INCUR A VARIETY OF COSTS AND MAY
NEVER REALIZE THE ANTICIPATED BENEFITS OF THE ACQUISITION.
If appropriate opportunities become available, we may attempt to acquire
businesses, products or technologies that we believe are a strategic fit with
our business. We currently have no commitments or agreements for any
acquisitions. If we do undertake any transaction of this sort, the process of
integrating an acquired business, product or technology may result in unforeseen
operating difficulties and expenditures and may absorb significant management
attention that would otherwise be available for ongoing development of our
business. Moreover, we may fail to realize the anticipated benefits of any
acquisition. Future acquisitions could dilute your ownership interest in us and
could cause us to incur debt, expose us to future liabilities and result in
amortization expenses related to goodwill and other intangible assets.
IF WE ARE UNABLE TO CONTINUE TO UTILIZE TECHNOLOGY LICENSED FROM THIRD PARTIES,
WE MAY BE UNABLE TO CONDUCT OUR BUSINESS.
We license technology from various third parties for integration into our
products. Licenses to such third-party technology may not continue to be
available to us on commercially reasonable terms. We may not be able to renew
existing agreements or to license or develop alternative technology. If we
cannot maintain license rights to key third-party software, develop similar
technology or license similar technology from another source on a timely or
commercially-feasible basis, we may be unable to market our current products or
develop new products in a timely manner.
OUR ABILITY TO INCREASE OUR CUSTOMER BASE AND OUR SALES DEPENDS ON THE
CONTINUING CONTRIBUTION OF OUR KEY PERSONNEL AND OUR ABILITY TO ATTRACT,
ASSIMILATE AND RETAIN OTHER HIGHLY QUALIFIED PERSONNEL.
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 ability to increase
our customer base and sales. As of December 31, 1999, we had 213 employees, not
including KD One employees. We do not carry any significant key person life
insurance policies.
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 skilled
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, we
may be unable to service our current customers, attract new customers and
increase our sales.
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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, not including
KD One employees, has increased from 14 at December 31, 1996 to 34 at December
31, 1997 to 70 at December 31, 1998 and to 213 at December 31, 1999. In
addition, at December 31, 1999, KD One had 51 full-time employees. We may not be
able to manage our growing operations effectively, and, as a result, we may have
difficulty in retaining current, or attracting additional, employees.
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.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE ON REASONABLE
TERMS, OR AT ALL.
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,
or at all. If we raise additional funds through the issuance of equity or
convertible debt, the percentage ownership of our stockholders will be reduced,
and these newly issued securities may have rights, preferences or privileges
senior to those of our existing stockholders, including investors acquiring
shares in this offering. If we cannot raise funds as 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.
WE ARE SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN COSTLY
AND TIME-CONSUMING LITIGATION.
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 these limitation of liability provisions. Any product
liability claim brought against us, even if unsuccessful, would likely be
time-consuming and costly, and potential liabilities could exceed our available
insurance coverage.
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 97-2, "Software Revenue Recognition," in October 1997 and amended it by
Statements of Position 98-4 and 98-9. However, full implementation guidelines
for these standards have not yet been issued and there may be additional
pronouncements issued in the future. Our current revenue accounting practices
may need to change and such changes could seriously harm our future revenues and
earnings.
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RISKS ASSOCIATED WITH THE INTERNET INDUSTRY
OUR BUSINESS COULD BE SERIOUSLY IMPACTED BY PRIVACY AND SECURITY CONCERNS.
Typically, our products capture user preference and profile information
each time a user interacts with the application utilizing our products or
volunteers information in response to survey questions. Privacy concerns may
cause users to resist providing the personal data necessary to support this
profiling capability. Our customers generally have implemented security measures
to protect customer data from unauthorized disclosure or interception by third
parties. However, the security measures may not be effective against all
potential security threats. If a breach of customer data security were to be
publicized, our products may be perceived as less desirable, and our future
sales negatively impacted. More importantly, even the perception of privacy and
security concerns, whether or not valid, may indirectly inhibit market
acceptance of our products. In addition, legislative or regulatory requirements
may heighten such concerns if users must be notified that the data captured
after these interactions may be used by marketing entities to 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. However,
various other countries and political entities, such as the European Economic
Community, have adopted these types of legislation or regulatory requirements.
The federal and state governments may adopt similar legislation or regulatory
requirements. If user privacy concerns are not adequately addressed or if
restrictive legislation is adopted in the United States, our business could be
seriously harmed and we could experience increased operating losses.
Our products 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. 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 laws of this
type are passed, our business could be adversely impaired and we could suffer
increased operating losses. In addition, Internet users can, if they choose,
configure their Web browsers to limit the collection of user data. Should many
Internet users choose to limit the collection of user data in this matter, or if
major countries or regions adopt legislation or other restrictions on the use of
customer data, our software would be less useful to our customers and market
acceptance of our products could be adversely impacted.
IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR PRODUCTS COULD BECOME
OBSOLETE AND WE COULD LOSE OUR COMPETITIVE ADVANTAGE IN THE MARKET.
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.
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;
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- 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.
If any of these events occur, we may be unable to compete successfully in
the market for our products and services, and as a result, our business could
fail.
THE GROWTH OF THE MARKET FOR OUR PRODUCTS AND SERVICES WOULD BE IMPAIRED IF THE
USE OF THE INTERNET AND ELECTRONIC COMMERCE DO NOT GROW AS ANTICIPATED, AND
THIRD PARTIES DO NOT CONTINUE TO DEVELOP AND IMPROVE THE INTERNET
INFRASTRUCTURE.
Our future revenues depend upon the increased acceptance and use of the
Internet and other on-line services as a medium of commerce. Rapid growth in the
use of the Internet, the Web and on-line 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 on-line 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.
The growth of the market for our products and services would be impaired
if:
- use of the Internet, the Web and other on-line services does not continue
to increase or increases more slowly than expected;
- the infrastructure for the Internet, the Web and other on-line services
does not effectively support expansion that may occur; or
- the Internet, the Web and other on-line 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.
INCREASING GOVERNMENT REGULATION COULD LIMIT THE MARKET FOR OUR PRODUCTS AND
SERVICES, WHICH COULD SERIOUSLY IMPAIR THE GROWTH OF OUR BUSINESS OR EXPOSE US
TO UNANTICIPATED LIABILITIES.
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. 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 transmitted over
the Internet. The prohibitions' 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
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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.
RISKS ASSOCIATED WITH THIS OFFERING
WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR 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.
MANAGEMENT MAY APPLY THE PROCEEDS OF THIS OFFERING TO USES THAT DO NOT INCREASE
OUR PROFITS OR MARKET VALUE.
Our management will have complete discretion in the application of our net
proceeds from this offering and you will not have the opportunity, as part of
your investment decision, to assess whether the proceeds are being used
appropriately. The net proceeds may be used for corporate purposes that do not
increase our profitability or our market value. Pending application of the
proceeds, they may be placed in investments that do not produce income or that
lose value.
PROVISIONS OF OUR CORPORATE CHARTER DOCUMENTS COULD DELAY OR PREVENT A CHANGE OF
CONTROL.
Various provisions of our certificate of incorporation and bylaws could
have the effect of delaying or preventing a change in control and make it more
difficult for a third party to acquire us, even if doing so would be beneficial
to our stockholders. These provisions, if used by our management, could
negatively affect our stock price. See "Description of Capital Stock."
FUTURE SALES OF OUR COMMON STOCK COULD CAUSE THE PRICE OF OUR SHARES TO DECLINE.
Upon completion of this offering, we will have 25,994,729 shares of common
stock outstanding. Of these shares, 23,777,104 will be transferable without
restriction or registration under the Securities Act of 1933, as amended, or
pursuant to the volume and other limitations of Rule 144 promulgated under the
Securities Act.
Shares of common stock held by our directors and officers and some of our
stockholders are subject to lock-up agreements between the holders of those
shares and the representatives of the underwriters, under which the holders have
agreed not to offer, sell, contract to sell or grant any option to purchase or
otherwise dispose of their common stock until 90 days after the effective date
of this prospectus, subject to limited exceptions. FleetBoston Robertson
Stephens Inc. may release stockholders from the lock-up agreement at any time
and without notice. Following the expiration of this lock-up period, these
shares will become available for immediate resale in the public market subject,
in some instances, to vesting restrictions or the volume and other limitations
of Rule 144. Resales of a substantial number of shares of our common stock into
the public market could cause its price to decline. This is particularly the
case because a substantial portion of our outstanding shares of common stock are
held by persons who purchased their shares at prices below recent market prices
of our stock. For additional information, please refer to the section in this
prospectus entitled "Shares Eligible for Future Sale."
20
<PAGE> 22
YOU WILL EXPERIENCE AN IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF
YOUR INVESTMENT.
The public offering price of our common stock is substantially higher than
what the net tangible book value per share of the common stock will be
immediately after this offering. If you purchase our common stock in this
offering, you will incur immediate dilution of approximately $43.531 in the net
tangible book value per share of our common stock from the price you pay for our
common stock based upon an assumed public offering price of $48.875 per share
and after deducting estimated underwriting discounts and commissions and
estimated offering expenses. The exercise of outstanding options and warrants
may result in further dilution. For additional information, please see the
section in this prospectus entitled "Dilution."
21
<PAGE> 23
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. The forward-looking
statements are contained principally in the sections entitled "Prospectus
Summary," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." These statements involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from any future
results, performances or achievements expressed or implied by the
forward-looking statements. Forward-looking statements include, but are not
limited to, statements about:
- our limited operating history;
- our estimates for future revenue and profitability;
- the progress of and delays in our product development;
- the market for our products and services and the status of our sales and
marketing efforts;
- changes in our product pricing policies;
- the development of Internet markets;
- our estimates regarding our capital requirements and our needs for
additional financing; and
- our ability to integrate recently acquired businesses or technologies and
our strategy regarding future acquisitions.
In some cases, you can identify forward-looking statements by terms such as
"may," "will," "should," "could," "would," "expects," "plans," "anticipates,"
"believes," "estimates," "projects," "predicts," "potential" and similar
expressions intended to identify forward-looking statements. These statements
reflect our current views with respect to future events and are based on
assumptions and subject to risks and uncertainties. Given these uncertainties,
you should not place undue reliance on these forward-looking statements. We
discuss many of these risks in this prospectus in greater detail under the
heading "Risk Factors." Also, these forward-looking statements represent our
estimates and assumptions only as of the date of this prospectus.
You should read this prospectus and the documents that we incorporate by
reference in this prospectus completely and with the understanding that our
actual future results may be materially different from what we expect. We
qualify all of our forward-looking statements by these cautionary statements.
22
<PAGE> 24
USE OF PROCEEDS
We estimate that we will receive net proceeds of approximately $92.0
million from the sale of 2,000,000 shares of common stock offered by us, or
$105.9 million if the over-allotment to purchase 300,000 shares granted to the
underwriters by us is exercised in full, based on an assumed public offering
price of $48.875 per share and after deducting the underwriting discounts and
commissions and estimated offering expenses payable by us. We will not receive
any portion of the proceeds from the sale of shares of common stock by the
selling stockholders.
The primary purposes of this offering are to obtain additional equity
capital, create a larger public float for our common stock, facilitate our
future access to public markets and allow for the orderly liquidation of a
portion of the investments made by some of our stockholders.
We expect to use the net proceeds for general corporate purposes, including
working capital. In addition, we also may use a portion of the net proceeds for
the acquisition of complementary businesses, products or technologies. We have
no current plans, agreements or commitments and are not currently engaged in any
negotiations with respect to any such transaction. Pending these uses, we will
invest the net proceeds of this offering in investment grade, interest-bearing
securities.
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the Nasdaq National Market under the
symbol "NETP" since April 23, 1999. The following table sets forth, for the
periods indicated, the high and low sale prices per share of our common stock as
reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
------------------
HIGH LOW
------ ------
<S> <C> <C>
1999
Second Quarter (from April 23, 1999)........................ $35.00 $15.00
Third Quarter............................................... $23.50 $ 9.75
Fourth Quarter.............................................. $43.13 $14.75
2000
First Quarter (through February 25, 2000)................... $60.38 $45.31
</TABLE>
On February 25, 2000, the last reported sale price of our common stock on
the Nasdaq National Market was $48.875 per share. As of February 15, 2000, there
were 214 stockholders of record registered with our transfer agent, Norwest Bank
Minnesota, N.A.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our capital stock since
our inception and do not intend to pay any cash dividends in the foreseeable
future. We currently intend to retain future earnings, if any, to fund the
development and growth of our business. Our board of directors will determine
future dividends, if any, based upon our financial condition, results of
operations, capital requirements, general business condition and other factors
that the board deems relevant. Therefore, you will not receive any funds without
selling your shares.
23
<PAGE> 25
CAPITALIZATION
The following table sets forth the following information:
- the actual capitalization of Net Perceptions at December 31, 1999;
- our pro forma capitalization as of December 31, 1999 giving effect to the
KD One acquisition; and
- our pro forma as adjusted capitalization giving effect to the receipt of
the estimated net proceeds from the sale by us of 2,000,000 shares of
common stock in this offering at an assumed offering price of $48.875 per
share, after deducting the underwriting discounts and commissions and
estimated offering expenses payable by us.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ------------ --------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
Long-term liabilities, less current portion...... $ 707 $ 1,120 $ 1,120
Stockholders' equity:
Preferred stock, $.0001 par value per share,
5,000,000 shares authorized; no shares issued
or outstanding actual, pro forma and pro forma
as adjusted.................................... -- -- --
Common stock, $.0001 par value per share,
50,000,000 shares authorized; 22,025,716 shares
issued and outstanding actual; 23,994,729
shares issued and outstanding pro forma;
25,994,729 shares issued and outstanding pro
forma as adjusted.............................. 2 2 2
Additional paid-in capital....................... 71,231 187,207 279,170
Accumulated other comprehensive loss............. (89) (89) (89)
Accumulated deficit.............................. (22,756) (22,756) (22,756)
-------- -------- --------
Total stockholders' equity.................. 48,388 164,364 256,327
-------- -------- --------
Total capitalization........................ $ 49,095 $165,484 $257,447
======== ======== ========
</TABLE>
This table excludes, as of December 31, 1999:
- 2,548,766 shares of common stock issuable upon the exercise of stock
options outstanding under our stock option plans, at a weighted average
exercise price of $8.04 per share;
- 1,035,578 shares of common stock reserved for grant of future options
under our stock option plans and 957,616 shares of common stock reserved
for issuance under our Employee Stock Purchase Plan; and
- options to purchase up to 36,000 shares of common stock that we may grant
to a business partner.
As of February 1, 2000, we had granted options to purchase an additional
280,000 shares of common stock. On February 14, 2000, in connection with the KD
One acquisition, we also assumed all outstanding options to purchase KD One
common stock. We have reserved 268,914 shares of our common stock for issuance
upon the exercise of these options, at a weighted average exercise price of
$1.30 per share.
24
<PAGE> 26
DILUTION
On a pro forma basis as of December 31, 1999, giving effect to the
acquisition of KD One, the net tangible book value of our common stock was
$46,964,000, or approximately $1.957 per share. Net tangible book value per
share represents the amount of our total tangible assets less total liabilities,
divided by 23,994,729 shares of common stock outstanding.
Dilution in pro forma net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of our
common stock in this offering and the pro forma net tangible book value per
share of our common stock immediately after this offering. After giving effect
to our sale of 2,000,000 shares of common stock in this offering at an assumed
public offering price of $48.875 per share and after deducting the underwriting
discount and estimated offering expenses payable by us, our pro forma net
tangible book value would have been approximately $138,927,000, or $5.344 per
share. This represents an immediate increase in pro forma net tangible book
value of $3.387 per share to existing stockholders and an immediate dilution in
pro forma net tangible book value of $43.531 per share to new investors
purchasing shares of common stock in this offering. The following table
illustrates this dilution.
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $48.875
Pro forma net tangible book value per share as of December
31, 1999............................................... $1.957
Increase per share attributable to new investors.......... 3.387
------
Pro forma net tangible book value per share after this
offering.................................................. 5.344
-------
Pro forma net tangible book value dilution per share to new
investors................................................. $43.531
=======
</TABLE>
This information excludes options for the purchase of 2,548,766 shares of
common stock, at a weighted average exercise price of $8.04 per share,
outstanding as of December 31, 1999 under stock option plans. As of February 1,
2000, we had granted options to purchase an additional 280,000 shares of common
stock. On February 14, 2000, in connection with the KD One acquisition, we also
assumed all outstanding options to purchase KD One common stock. We have
reserved 268,914 shares of our common stock for issuance upon the exercise of
these options, at a weighted average exercise price of $1.30 per share. We also
have reserved 36,000 shares of common stock for issuance under options that we
may grant to a business partner. To the extent outstanding options are
exercised, there will be further dilution to new investors.
25
<PAGE> 27
SELECTED CONSOLIDATED FINANCIAL DATA
In the tables below we provide you with selected historical financial data
of Net Perceptions, which 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
each of the three years in the period ended December 31, 1999, and the balance
sheet data at December 31, 1998 and 1999, are derived from, and are qualified by
reference to, the audited financial statements included elsewhere in this
prospectus. The statement of operations data for the period from July 3, 1996
(inception) to December 31, 1996, and the balance sheet data at December 31,
1996 and 1997 are derived from audited financial statements not included in this
prospectus. The pro forma financial information reflects the acquisition of KD
One and is derived from the unaudited pro forma combined financial statements
and should be read in conjunction with those pro forma financial statements and
notes thereto, which are included elsewhere in this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED DECEMBER 31,
JULY 3, 1996 ------------------------------------------
(INCEPTION) TO 1999
DECEMBER 31, ----------------------
1996 1997 1998 ACTUAL PRO FORMA
-------------- ------- ------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product................................................... $ -- $ 284 $ 3,955 $ 11,408 $ 12,326
Service and maintenance................................... 4 33 522 3,721 6,318
------- ------- ------- -------- ---------
Total revenues.......................................... 4 317 4,477 15,129 18,644
------- ------- ------- -------- ---------
Cost of revenues:
Product................................................... -- 14 52 286 935
Service and maintenance................................... 2 30 373 2,735 4,914
------- ------- ------- -------- ---------
Total cost of revenues.................................. 2 44 425 3,021 5,849
------- ------- ------- -------- ---------
Gross margin................................................ 2 273 4,052 12,108 12,795
------- ------- ------- -------- ---------
Operating expenses:
Sales and marketing....................................... 454 3,063 4,980 12,099 15,421
Research and development.................................. 378 1,372 2,314 8,194 11,174
General and administrative................................ 210 585 1,424 3,725 5,887
Stock compensation expense................................ -- -- 366 1,495 1,805
Amortization of intangibles............................... -- -- -- -- 30,017
------- ------- ------- -------- ---------
Total operating expenses................................ 1,042 5,020 9,084 25,513 64,304
------- ------- ------- -------- ---------
Loss from operations........................................ (1,040) (4,747) (5,032) (13,405) (51,509)
Other income, net........................................... 13 25 64 1,366 1,286
------- ------- ------- -------- ---------
Net loss.................................................... $(1,027) $(4,722) $(4,968) $(12,039) $ (50,223)
======= ======= ======= ======== =========
Basic and diluted net loss per common share................. $ (3.40) $ (3.01) $ (1.40) $ (0.78) $ (2.91)
======= ======= ======= ======== =========
Shares used in computing basic and diluted net loss per
share(1).................................................. 302 1,569 3,546 15,402 17,274
======= ======= ======= ======== =========
Pro forma basic and diluted net loss per share.............. $ (0.64) $ (2.42)
======== =========
Shares used in computing pro forma basic and diluted net
loss per share(1)......................................... 18,851 20,723
======== =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1999
----------------------
1996 1997 1998 ACTUAL PRO FORMA
------ ------ ------ ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $3,821 $4,846 $ 972 $36,854 $ 37,935
Working capital............................................. 3,554 4,442 468 37,372 35,675
Total assets................................................ 4,099 5,575 5,637 58,748 180,135
Long-term liabilities, net of current portion............... 87 345 538 707 1,120
Total stockholders' equity.................................. 2,950 3,879 421 48,388 164,364
</TABLE>
- -------------------------
(1) See Note 2 of the notes to Net Perceptions' financial statements for an
explanation of the methods used to determine the number of shares used in
computing net loss per share data.
26
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Consolidated
Financial Data" and our financial statements, pro forma combined financial
information 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
Net Perceptions is a leading provider of real time personalization and
precision marketing software solutions for Internet and multi-channel retailers.
Our solutions are designed to help retailers understand customers individually,
optimize product assortments, prices and inventories and offer the right product
to the right customer at the right price.
Through December 31, 1999, we focused on providing solutions to electronic
commerce retailers, and most of our product revenues through December 31, 1999
were attributable to our Net Perceptions for E-commerce product. In 1999, we
expanded our product suite by introducing new applications for Internet sales
channels and other markets, including Net Perceptions for Marketing Campaigns,
Net Perceptions for Call Centers and Net Perceptions for Knowledge Management.
In addition, in 1999, we introduced the Net Perceptions Recommendation Engine,
which is a product designed for original equipment manufacturers.
We incorporated in Delaware in July 1996 and shipped our initial product in
January 1997. In the period from our inception through 1999, we expanded our
organization by hiring personnel in key areas, particularly marketing, sales and
research and development. We grew from 34 employees at December 31, 1997, to 70
employees at December 31, 1998 and to 213 employees at December 31, 1999.
Prior to the third quarter of 1999, substantially all of our product
revenues were attributable to Net Perceptions for E-commerce and the Net
Perceptions Recommendation Engine and their predecessor products. In the third
quarter of 1999, we recognized initial product revenues from our Net Perceptions
for Call Centers and Net Perceptions for Knowledge Management products. In 2000,
we expect to recognize initial product revenues from Net Perceptions for
Marketing Campaigns, although we anticipate Net Perceptions for E-commerce to
continue to account for a substantial portion of our revenues in this period.
We sell our products and services worldwide through a direct sales force,
original equipment manufacturers and resellers. Sales derived through indirect
channels accounted for approximately 12% of our total revenues in 1999 and 8% in
1998. We are seeking to increase sales derived through indirect channels 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 under various pricing plans, such as per stored
profile, per user, per e-mail, per CPU, per site and per enterprise. We grant
licenses on both a term and perpetual basis. License fees for our products range
from $50,000 to several hundred thousand dollars. The price of our annual
maintenance contracts is based on a percentage of the related product license
price and is generally paid in advance. Professional service fees for
implementation and training are generally priced on a per hour or per class
basis.
27
<PAGE> 29
We recognize revenues in accordance with the Statement of Position 97-2,
"Software Revenue Recognition," as amended by Statement of Position 98-4,
"Deferral of the Effective Date of a Provision of Statement of Position 97-2."
We derive revenues from software licenses, software maintenance and professional
services. Maintenance includes telephone and Web-based technical support, bug
fixes and rights to unspecified upgrades on a when-and-if available basis.
Professional services include implementation, training and consulting. In
software arrangements that include rights to multiple software products,
specified upgrades, maintenance or services, we allocate the total arrangement
fee among each deliverable based on the relative fair value of each of the
deliverables determined based on vendor-specific objective evidence. In software
arrangements in which we do not have vendor-specific objective evidence, we
defer revenue until the earlier of when vendor-specific objective evidence is
determined for all elements or when all elements have been delivered. We
recognize revenues from license fees when persuasive evidence of an agreement
exists, delivery of the product has occurred, no significant company obligations
with regard to implementation remain, the fee is fixed or determinable and
collection is probable. If the fee due from the customer is not fixed or
determinable, we recognize revenues as payments become due from the customer. If
we do not consider collection to be probable, then we recognize revenues when
the fee is collected. We recognize revenues allocable to maintenance on a
straight-line basis over the periods in which it is provided. We evaluate
arrangements that include professional services to determine whether those
services are essential to the functionality of other elements of the
arrangement. When professional services are considered essential, we recognize
revenues from the arrangement using contract accounting, generally on a
percentage of completion basis. When we do not consider the professional
services to be essential, we recognize the revenues allocable to the services as
they are performed.
We have sustained losses on a quarterly and an annual basis since
inception. As of December 31, 1999, we had an accumulated deficit of $22.8
million. Our net loss was $12.0 million in 1999, $5.0 million in 1998 and $4.7
million in 1997. These losses resulted from significant costs incurred in the
development and sale of our products and services. We expect to experience
significant increases in our operating expenses for the foreseeable future,
particularly research and development and sales and marketing expenses.
Accordingly, we anticipate that our operating expenses, as well as planned
capital expenditures, will constitute a material use of our cash resources. We
also expect to incur additional losses and continued negative cash flow from
operations for the foreseeable future, and these losses may increase
significantly from current levels. We do not expect to achieve profitability in
2000 or 2001.
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 stage 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.
THE KD ONE ACQUISITION
We acquired Knowledge Discovery One, Inc. in February 2000, as a result of
which KD One is now our wholly owned subsidiary. In connection with the
transaction, we acquired all of the outstanding shares of KD One in exchange for
1,969,013 shares of our common stock. In addition, options of KD One were
converted into options to purchase approximately 268,914 shares of our common
stock.
KD One was incorporated in Delaware in December 1996 and was in development
stage from inception through December 1997. KD One shipped its first products in
May 1998. KD One had total revenues of $3.5 million in 1999 and $3.2 million in
1998. KD One's cost of revenues increased
28
<PAGE> 30
to $2.8 million in 1999 from $2.0 million in 1998, and its operating expenses
increased to $8.8 million in 1999 from $5.7 million in 1998. As of December 31,
1999, KD One had accumulated net losses, excluding accretion on redeemable
convertible preferred stock, of $16.2 million since inception. KD One grew to 51
employees as of December 31, 1999 from 38 employees as of December 31, 1998.
We expect to incur additional expenses across all departments to build and
integrate our direct sales force and our professional service organization,
increase our indirect sales activities, increase our investment in the
development of technology and expand general and administrative infrastructure.
We expect that these investments will cause all operating expense categories to
increase in absolute dollars and could result in an increase in expense
categories as a percentage of revenues. In addition, this expansion will place
significant demands on our management and operational resources.
We will account for the KD One acquisition using the purchase method of
accounting. Under the purchase method, the purchase price of KD One will be
allocated to the assets and liabilities that we acquired from KD One. As a
result, we will record non-cash charges against our future operating results,
which will adversely affect our reported financial results. If we had completed
the acquisition on December 31, 1999, we would have recorded approximately
$117.4 million in goodwill and other intangible assets in connection with the
acquisition. We would have recorded an amortization expense of $26.2 million in
2000, $30.0 million in 2001, $30.0 million in 2002, $30.0 million in 2003 and
$1.2 million in the first quarter of 2004. The actual amount of goodwill and
other intangible assets will be higher due to KD One's net losses between
December 31, 1999 and the closing of the acquisition on February 14, 2000.
RESULTS OF OPERATIONS
The following table sets forth certain items in our statement of operations
expressed as a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1997 1998 1999
------ ---- ----
<S> <C> <C> <C>
Revenues:
Product................................................... 90% 88% 75%
Service and maintenance................................... 10 12 25
------ ---- ---
Total revenues......................................... 100 100 100
Cost of revenues:
Product................................................... 4 1 2
Service and maintenance................................... 10 8 18
------ ---- ---
Total cost of revenues................................. 14 9 20
------ ---- ---
Gross margin................................................ 86 91 80
Operating expenses:
Sales and marketing....................................... 966 111 80
Research and development.................................. 433 52 54
General and administrative................................ 185 32 25
Stock compensation expense................................ -- 8 10
------ ---- ---
Total operating expenses............................... 1,584 203 169
------ ---- ---
Loss from operations........................................ (1,498) (112) (89)
Other income, net........................................... 8 1 9
------ ---- ---
Net loss.................................................... (1,490)% (111)% (80)%
====== ==== ===
</TABLE>
29
<PAGE> 31
RESULTS OF OPERATIONS FOR 1999, 1998 AND 1997
REVENUES
Our revenues increased 238% to $15.1 million in 1999, from $4.5 million in
1998. During 1997, our software products were in the early stages of development
and total revenues were $317,000, consisting principally of product revenues.
The increase in total revenues is primarily the result of increased sales of our
cornerstone product, Net Perceptions for E-commerce. Revenues from our Net
Perceptions Recommendation Engine and the introduction in 1999 of two new
products, Net Perceptions for Call Centers and Net Perceptions for Knowledge
Management, also contributed to the increase in total revenues.
Revenues from United States sales were $12.7 million in 1999, $3.9 million
in 1998 and $232,000 in 1997, or 84% of total revenues in 1999, 87% in 1998 and
73% in 1997. Revenues from international sales were $2.4 million in 1999,
$600,000 in 1998 and $85,000 in 1997, representing 16% of total revenues in
1999, 13% in 1998 and 27% in 1997. The majority of international sales to date
were made in Europe and Asia by our direct sales force located in the United
States and the United Kingdom. International sales are generally denominated in
United States dollars. Purchases by one customer represented 11% of our revenues
in 1999. During 1998, no single customer accounted for 10% or more of total
revenues. During 1997, two customers accounted for approximately 22% and 19% of
total revenues. We do not expect any single customer to account for 10% or more
of total revenues in 2000.
Product revenues. Product revenues increased 188% to $11.4 million in 1999
from $4.0 million in 1998. We currently derive the majority of our product
revenues from our Net Perceptions for E-commerce product. The growth of revenues
in absolute dollars is attributable to an increase in the average size of
license transactions recognized during the year, increased sales and marketing
efforts, specifically the expansion of our direct sales force, and increased
sales of our products. Product revenues from United States sales increased 178%
to $9.6 million in 1999 from $3.4 million in 1998, representing 84% of total
product revenues in 1999 and 87% in 1998. Product revenues from international
sales increased to $1.8 million in 1999, from $507,000 in 1998, or 16% of total
product revenues in 1999 and 13% in 1998. We anticipate that revenues from
product licenses will continue to represent a majority of our revenues in the
foreseeable future. In addition, we expect that prior percentage growth rates of
our product revenues will not be sustainable in the future.
Service and maintenance revenues. Service and maintenance revenues consist
primarily of professional and maintenance services. Our professional service
revenues include business consulting, implementation support and educational
services and are generally offered on a time and material basis. Maintenance
revenues are generally derived from annual service agreements and are recognized
ratably over the period of the agreement. Total service and maintenance revenues
increased 613% to $3.7 million in 1999 from $522,000 in 1998. Service and
maintenance revenues were 25% of total revenues in 1999 and 12% in 1998. During
1997, our company was in the early stages of development and our service and
maintenance revenues were $33,000.
Professional service revenues increased 750% to $2.3 million in 1999 from
$274,000 in 1998. Professional service revenues were nominal in 1997.
Professional service revenues were 63% of total service and maintenance revenues
in 1999, 52% in 1998 and 27% in 1997. The increase in professional service
revenues in 1999 is a result of higher business volumes and additional personnel
in our professional services group. Our professional service revenues as a
percentage of total revenues may decline to the extent our strategy of
developing alliances with systems integrators continues to expand.
Maintenance revenues increased 461% to $1.4 million in 1999 from $248,000
in 1998. Maintenance revenues were nominal in 1997. Maintenance revenues were
37% of total service and maintenance revenues in 1999, 48% in 1998 and 73% in
1997. The increase in maintenance revenues
30
<PAGE> 32
is a result of expanded software sales and corresponding maintenance fees
relating to a larger installed base of software licenses. We expect our
maintenance revenues to increase as a percentage of total revenues in 1999 to
the extent our installed license base grows. Our maintenance revenues as a
percentage of total revenues may continue to increase as the installed license
base increases.
COST OF REVENUES
Cost of product revenues. Cost of product revenues consists primarily of
the cost of royalties paid to third-party vendors, product media and
duplication, manuals, packaging materials and shipping expenses. Cost of product
revenues increased 450% to $286,000 in 1999 from $52,000 for 1998, representing
3% and 1% of the related product revenues. Cost of product revenues was $14,000
in 1997. The increase in cost of product revenues as a percentage of total
product revenues from 1998 to 1999 is attributable to increased royalties
payable to vendors. The increase in absolute dollar amount of cost of product
revenues was due to higher volumes of product shipped. Because all development
costs incurred in the research and development of new 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. We believe that the cost of product revenues will increase in dollar
amounts and as a percentage of product revenues in the future.
Cost of service and maintenance revenues. Cost of service and maintenance
revenues consists primarily of personnel-related costs incurred in providing
telephone and Web-based support, professional and educational services to
customers. Cost of service and maintenance revenues increased 633% to $2.7
million in 1999, from $373,000 in 1998, representing 74% and 71% of the related
services and maintenance revenues. Cost of service and maintenance revenues was
$30,000 in 1997. The increase in cost of services and maintenance revenues in
absolute dollars and as a percentage of revenues is due primarily to recruiting
and training costs associated with increased personnel in our service
organization, as well as to increased costs for third-party contractors used to
staff consulting engagements. We believe that the cost of service and
maintenance revenues will increase in dollar amounts in the future as we expand
our service capacity to meet anticipated demand. In addition, cost of service
and maintenance revenues may vary significantly from quarter to quarter
depending upon the mix of services that we provide and the utilization rate of
our service personnel.
OPERATING EXPENSES
Sales and marketing. Sales and marketing expenses consist primarily of
salaries, other employee related costs, commissions and other incentive
compensation, travel and entertainment and expenditures for marketing programs
such as collateral materials, trade shows, public relations and creative
services. Sales and marketing expenses were $12.1 million in 1999, $5.0 million
in 1998 and $3.1 million in 1997. Sales and marketing expenses increased 143%
from 1998 to 1999, and 63% from 1997 to 1998. Sales and marketing expenses were
80% of total revenues in 1999, 111% in 1998 and 966% in 1997. The overall
increase in sales and marketing expenses in absolute dollar amounts reflects the
cost of hiring additional sales and marketing personnel, developing and
expanding our sales and distribution channels, deploying new products and
expanding promotional activities. We believe that sales and marketing expenses
will continue to increase in absolute dollar amounts in the future as we
continue to expand our direct sales and marketing efforts for all of our product
lines.
Research and development. Research and development expenses consist
primarily of salaries, other employee related costs and consulting fees relating
to the development of our products. Research and development expenses were $8.2
million in 1999, $2.3 million in 1998 and $1.4 million in 1997. Research and
development expenses increased 254% from 1998 to 1999 and 69% from 1997 to 1998.
Research and development expenses were 54% of total revenues in 1999, 52% in
1998 and
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433% in 1997. The increase in research and development expenses in absolute
dollars is primarily due to the cost of hiring additional research and
development personnel for the enhancement of existing products and the
development of new products. We believe that continued investment in research
and development is critical to attaining our strategic objectives and, as a
result, expect research and development expenses to increase in absolute dollars
in future periods.
General and administrative. General and administrative expenses consist
primarily of salaries, other employee related costs and professional service
fees. General and administrative expenses were $3.7 million in 1999, $1.4
million in 1998 and $585,000 in 1997. General and administrative expenses
increased 162% from 1998 to 1999, and 143% from 1997 to 1998. General and
administrative expenses were 25% of total revenues in 1999, 32% in 1998 and 185%
in 1997. The overall increase in general and administrative expenses in absolute
dollar amounts reflects the cost of hiring additional general and administrative
personnel, increased professional fees, additional provision for doubtful
accounts and additional infrastructure to support our expanded operations. We
expect to continue to add administrative staff to support broadened operations.
As a result, general and administrative expenses will increase in absolute
dollar amounts in the future.
Stock compensation. Compensation charges related to granted stock options
were $1.5 million in 1999 and $366,000 in 1998. There were no compensation
charges related to stock options granted in 1997. 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 the grants. Stock
compensation expense is recognized over the vesting period of the options, which
is generally four years. As a result, the recognition of stock compensation will
impact our reported results of operations through early 2003.
Other income, net. Other income, net consists of interest income, interest
expense, equity losses of a joint venture and other expense and was $1.4 million
in 1999, $64,000 in 1998 and $25,000 in 1997. Other income, net increased
substantially in 1999 due to interest income on the proceeds from our initial
public offering in April 1999.
PROVISION FOR INCOME TAXES
As of December 31, 1999, we had net operating loss carryforwards of
approximately $18.1 million available to reduce future taxable income expiring
at various dates beginning in 2011. In addition, as of December 31, 1999, we had
$140,000 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 realization of the future tax benefit is presently
not likely.
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SELECTED CONSOLIDATED QUARTERLY OPERATING RESULTS
The following table sets forth our unaudited statement of operations data
for the eight quarters ended December 31, 1999, 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. You should not draw any
conclusions from the operating results for any quarter.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS AND AS A PERCENTAGE OF REVENUES)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product............................ $ 617 $ 889 $ 993 $ 1,456 $ 1,561 $ 2,104 $ 3,035 $ 4,708
Service and maintenance............ 53 100 163 206 334 710 1,079 1,598
------ ------- ------- ------- ------- ------- ------- -------
Total revenues................... 670 989 1,156 1,662 1,895 2,814 4,114 6,306
Cost of revenues:
Product............................ 6 9 10 27 36 59 32 159
Service and maintenance............ 35 65 106 167 313 491 782 1,149
------ ------- ------- ------- ------- ------- ------- -------
Total cost of revenues........... 41 74 116 194 349 550 814 1,308
------ ------- ------- ------- ------- ------- ------- -------
Gross margin......................... 629 915 1,040 1,468 1,546 2,264 3,300 4,998
Operating expenses:
Sales and marketing................ 933 1,106 1,145 1,795 1,737 2,558 3,275 4,529
Research and development........... 367 507 607 834 1,536 2,033 2,270 2,355
General and administrative......... 226 293 383 522 574 813 1,169 1,169
Stock compensation expense......... 7 59 112 188 503 364 339 289
------ ------- ------- ------- ------- ------- ------- -------
Total operating expenses......... 1,533 1,965 2,247 3,339 4,350 5,768 7,053 8,342
------ ------- ------- ------- ------- ------- ------- -------
Loss from operations................. (904) (1,050) (1,207) (1,871) (2,804) (3,504) (3,753) (3,344)
Other income, net.................... 28 38 24 (26) (72) 381 735 322
------ ------- ------- ------- ------- ------- ------- -------
Net loss............................. $ (876) $(1,012) $(1,183) $(1,897) $(2,876) $(3,123) $(3,018) $(3,022)
====== ======= ======= ======= ======= ======= ======= =======
PERCENTAGE OF TOTAL REVENUES:
Revenues:
Product............................ 92% 90% 86% 88% 82% 75% 74% 75%
Service and maintenance............ 8 10 14 12 18 25 26 25
------ ------- ------- ------- ------- ------- ------- -------
Total revenues................... 100 100 100 100 100 100 100 100
Cost of revenues:
Product............................ 1 1 1 2 2 2 1 3
Service and maintenance............ 5 7 9 10 16 18 19 18
------ ------- ------- ------- ------- ------- ------- -------
Total cost of revenues........... 6 8 10 12 18 20 20 21
------ ------- ------- ------- ------- ------- ------- -------
Gross margin......................... 94 92 90 88 82 80 80 79
Operating expenses:
Sales and marketing................ 139 112 99 108 92 91 80 72
Research and development........... 55 51 53 50 81 72 55 37
General and administrative......... 34 30 33 32 30 29 28 18
Stock compensation expense......... 1 6 10 11 27 13 8 5
------ ------- ------- ------- ------- ------- ------- -------
Total operating expenses......... 229 199 195 201 230 205 171 132
------ ------- ------- ------- ------- ------- ------- -------
Loss from operations................. (135) (107) (105) (113) (148) (125) (91) (53)
Other income, net.................... 4 4 2 (2) (4) 14 18 5
------ ------- ------- ------- ------- ------- ------- -------
Net loss............................. (131)% (103)% (103)% (115)% (152)% (111)% (73)% (48)%
====== ======= ======= ======= ======= ======= ======= =======
</TABLE>
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We expect to experience significant fluctuations in our quarterly operating
results in the future and therefore, we will continue to have difficulty
providing an accurate forecast of our quarterly revenues and operating results.
We believe that period-to-period comparisons of our operating results may not be
meaningful, and you should not rely upon them as any indication of future
performance. It is likely that the our operating results in one or more future
quarters may be below the expectations of securities analysts and investors. In
that event, the trading price of our common stock would almost certainly
decline.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through the sale
of equity securities, and to a lesser extent, loans and capital equipment
leases. At December 31, 1999, we had $36.9 million of cash, cash equivalents and
short-term investments, compared to $972,000 at December 31, 1998. Cash used in
operations was $10.2 million in 1999, $4.4 million in 1998 and $4.6 million in
1997. Cash used in operations resulted primarily from net losses and increases
in our accounts receivable, offset in part by the growth in accrued liabilities,
deferred revenues and non-cash expenses, including depreciation and stock
compensation.
We used $30.8 million net cash in investing activities in 1999 and $1.7
million in 1997. In 1998, net cash provided by investing activities was $3.0
million. Our investing activities consisted primarily of purchases and sales of
marketable securities and property and equipment. To date, we have not invested
in financial instruments that involve a high level of complexity or risk. We
expect that, in the future, cash in excess of current requirements will be
invested in investment grade, interest bearing securities.
Net cash provided by financing activities was $57.5 million in 1999, $1.0
million in 1998 and $5.6 million in 1997. Financing activities consisted
primarily of the sale of our common and preferred stock. On April 28, 1999, we
completed an initial public offering, selling 3,650,000 shares of common stock
at a price of $14 per share, raising a total of $46.1 million in net proceeds
after payment of underwriting discounts and commissions and offering expenses.
In May 1999, the underwriters of our initial public offering exercised their
right to purchase additional shares of common stock to cover over-allotments.
Accordingly, we sold 547,500 additional shares of common stock, generating an
additional $7.1 million in net proceeds after payment of underwriting discounts
and commissions and estimated offering expenses. Including the over-allotment
shares, we sold a total of 4,197,500 shares of common stock in our initial
public offering, raising a total of $53.2 million net of underwriting discounts
and commissions and estimated offering expenses.
Capital expenditures were $4.6 million in 1999, $914,000 in 1998 and
$414,000 in 1997. Our capital expenditures consisted of leasehold improvements
and purchases of property and equipment, primarily computer equipment and
software, for our growing employee base. From inception through 1998, we
generally funded the purchase of property and equipment with capital leases.
During 1999, we purchased property and equipment with cash balances. We expect
that the rate of purchases of property and equipment will continue to increase
in the future as our employee base grows.
We have also used loans and leases to partially finance our operations. At
December 31, 1999, we had $853,000 in current and noncurrent loans, including
current and noncurrent lease obligations. Included in the amounts above are
installment loans with a third-party financing source that are secured by the
equipment financed by the third party. The loans bear interest at rates between
15.9% and 16.8% and mature between November 2000 and July 2002. The total amount
outstanding under these loans as of December 31, 1999 was approximately
$534,000. At December 31, 1999, we also had noncancellable operating leases for
office space of approximately $5.8 million which are payable through 2010.
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Although we have no material long-term commitments for capital
expenditures, we anticipate a substantial increase in our capital expenditures
and lease commitments consistent with anticipated growth in operations,
infrastructure and personnel. We intend to fund the intended increase in
expenses and capital expenditures through the proceeds of this offering,
together with existing cash, cash equivalents and short-term investments, and
believe that these funds will be sufficient to meet our working capital needs
for at least the next 12 months. However, we may need to raise additional funds
in order to support more rapid expansion of our sales force, develop new or
enhanced products or services, respond to competitive pressures, acquire
complementary businesses or technologies or respond to unanticipated
requirements. If we seek to raise additional funds, we may not be able to obtain
funds on terms which are favorable or otherwise acceptable to us. If we raise
additional funds through the issuance of equity securities, the percentage
ownership of our stockholders would be reduced.
YEAR 2000 ISSUES
"Year 2000 issues" refer generally to the problems that some software and
hardware 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 or recognize the year
2000 as a leap year, which may result in failures or the creation of erroneous
results.
We designed our current products to be year 2000 compliant when configured
and used in accordance with the related documentation, 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. We have sought
assurances from our vendors that the hardware and software we have obtained from
third parties is year 2000 compliant. In addition, we have assessed our material
internal information technology systems and non-information technology systems
for year 2000 compliance. Based upon these assurances and assessments, we do not
expect to incur material costs related to year 2000-related issues. To date, we
have not experienced any problems or failures with our products or internal
systems associated with year 2000-related issues. However, we may experience
significant unanticipated problems and costs caused by undetected year 2000
problems, or problems with KD One's products or internal systems.
MARKET RISK
Through December 31, 1999, substantially all of our recognized revenues
were denominated in United States dollars and primarily from customers in the
United States, and our exposure to foreign currency exchange rate changes has
been immaterial. We expect, however, that future product license and service
revenues may also be derived from international markets and may be denominated
in the currency of the applicable market. As a result, our operating results may
become subject to significant fluctuations based upon changes in the exchange
rates of certain currencies in relation to the United States dollar.
Furthermore, to the extent that we engage in international sales denominated in
United States dollars, an increase in the value of the United States dollar
relative to foreign currencies could make our products less competitive in
international markets. Although we will continue to monitor our exposure to
currency fluctuations, and, when appropriate, may use financial hedging
techniques in the future to minimize the effect of these fluctuations, exchange
rate fluctuations may adversely affect our financial results in the future.
Our exposure to market risk is otherwise limited to interest income
sensitivity, which is affected by changes in the general level of United States
interest rates, particularly because the majority of our investments are in
short-term debt securities issued by corporations. We place our investments with
high-quality issuers and limit the amount of credit exposure to any one issuer.
Due to the nature
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of our short-term investments, we believe that we are not subject to any
material market risk exposure. We do not have any derivative financial
instruments.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities." Financial Accounting Standards Statement No. 133
establishes accounting and reporting standards for derivative financial
instruments and hedging activities related to those instruments, as well as
other hedging activities. We will be required to adopt Financial Accounting
Standards Statement No. 133 for our year ending December 31, 2001. However,
because we do not utilize derivative financial instruments, we do not believe
the impact of Financial Accounting Standards Statement No. 133 will be material
to our consolidated financial position or results of operations.
In January 1999, the American Institute of Certified Public Accountants
issued Statement of Position 98-9, "Modification of Statement of Position 97-2,
Software Revenue Recognition, With Respect to Certain Transactions." Statement
of Position 98-9 requires use of the residual method for recognition of revenue
when vendor-specific objective evidence exists for undelivered elements but does
not exist for delivered elements of a software arrangement. We will be required
to comply with the provisions of Statement of Position 98-9 for transactions
entered into beginning January 1, 2000. The adoption of Statement of Position
98-9 is not expected to have a material impact on our financial position or
operating results.
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BUSINESS
INTRODUCTION
Net Perceptions is a leading provider of real time personalization and
precision marketing software solutions for Internet and multi-channel retailers.
Our solutions are designed to help retailers understand customers individually,
optimize product assortments, prices and inventories and offer the right product
to the right customer at the right price.
We design our solutions to benefit retailers by converting browsers into
buyers, increasing cross-sell and up-sell success rates and enhancing overall
customer satisfaction and customer loyalty. In addition, we help retailers
reduce customer acquisition and retention costs, improve advertising
effectiveness, optimize in-store and on-line retail floor space and improve
customer service. Our customers currently include major Internet and
multi-channel retailers such as Art.com, Bertelsmann, CDNow, Egghead.com,
eToys.com, Fingerhut, Hudson's Bay Company, J.C. Penney, Procter & Gamble, Tower
Records and Walgreens.
Using sophisticated, proprietary analytical techniques, our solutions
analyze and report on past and current customer behavior, including purchase
history, stated preferences and Internet browsing behavior. Our solutions also
provide analysis of item placement and item price effectiveness in
advertisements, typical item purchase combinations, segmentation of customers
based on purchasing and demographic data and customer-specific and
product-specific profitability reporting. We base our solutions on a distributed
architecture that is flexible enough to integrate with our customers' new or
existing systems, including website, call center, marketing campaign management
and point of sale software.
INDUSTRY BACKGROUND
Internet impact on retail marketing
The Internet has had a significant effect on retail marketing. By shopping
on-line, or even just browsing websites, consumers now have more control over
where and when they shop, what products are available and at what price, and how
and when items are picked up or delivered. As a result, retailers are seeking
new and better ways to acquire, retain and satisfy customers while continuing to
pursue increased revenues and profits.
We believe that the relationship between a retailer and a customer has a
direct impact on the vitality of a business. In an on-line shopping environment,
a buyer-seller relationship must be developed without any face-to-face
interaction. We believe this relationship can be enhanced by personalization
technologies. Personalization technologies are systems and applications designed
to create an individualized shopping experience for each customer.
Personalization can occur on the Internet each time a customer interacts with a
retailer. The retailer can observe and record customer data on its website and
solicit preference information. These data can be processed using
personalization technologies to generate an understanding of the customer's
interests and recommend appropriate products, services and information.
Real time personalization
Instead of planning sales activities in aggregate across a large market
such as a geographic area or income level, many retailers now seek to
distinguish themselves by satisfying the unique needs of individual customers
through personalized marketing efforts. These personalized marketing techniques
use customer databases, computer technology and interactive communications to
help customers find the products they want to purchase, thereby increasing the
number of products sold and generating
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repeat sales. Personalized marketing enables retailers to manage individual
customers in addition to products, sales channels and marketing programs.
To be effective, personalized marketing solutions must be automated and
deliver customer responses instantaneously, or in "real time," across large
customer populations. Real time personalization enables a retailer to learn a
customer's preferences during each interaction and immediately adjust the
marketing message based on the information received. We believe real time
personalization is essential in any interactive shopping context, including the
Web, call centers, in-store kiosks, point of sale terminals and wireless
devices.
Real time personalization for electronic commerce. The Internet is an
interactive communications and commerce medium through which retailers can
implement personalized marketing across large customer populations. Real time
personalization allows an on-line business to develop an individual connection
with each customer while serving thousands of customers simultaneously. With the
size and tremendous growth of electronic commerce, the opportunity for
personalized marketing on the Internet is potentially large. International Data
Corporation estimates that the amount of Internet commerce spending worldwide
will increase from $111 billion in 1999 to over $1.3 trillion in 2003.
Real time personalization across multiple touch-points. A touch-point is a
point of contact between a retailer and a customer, such as a retail store,
website, call center, in-store kiosk, wireless device or outbound marketing
campaign. Retailers that interact with customers through multiple touch-points
have the opportunity to apply information obtained from a customer interaction
at one touch-point, such as a call center purchase, to interactions at other
touch-points, such as on-line shopping.
For example, retailers can personalize customer contacts at each
touch-point by knowing a customer's purchasing history, product and style
preferences and other information solicited during interactions. In inbound call
centers, personalization software can prompt the sales agent to recommend
additional products to the customer based on information from other
interactions. In outbound call centers, e-mail campaigns or other outbound
marketing campaigns, personalization software can recommend specific customers
that are likely to be interested in a particular product offering based on
information from other interactions.
We believe those retailers that are the most successful in learning from
all of their touch-point interactions will build the strongest relationships
with their customers. To enable this learning, retailers need an effective means
of sharing customer information across multiple touch-points.
Precision marketing
Retailers can also use customer data to more effectively advertise,
merchandise, price and market their products. Traditionally, retailers have
collected customer data through the use of various sales, support and financial
enterprise software systems. Analysis of these data could help retailers to
better understand customer purchasing patterns, thereby enabling them to market
more effectively to individual customers and customer segments. However, the
technologies historically available to analyze this tremendous volume of
information were highly complex and required very specialized skills to deploy.
As a result, retailers have experienced difficulty in managing large amounts of
customer data obtained from multiple sources and using the data effectively.
The opportunity
Traditional marketing techniques have not been able to maximize the full
potential of real time personalization and precision marketing. These techniques
have been unable to automatically learn from customers or to deliver
recommendations in real time. Traditional marketing techniques also
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have failed to effectively collect, analyze and report on large amounts of
customer data collected from multiple sources. A real time personalization and
precision marketing solution must enable retailers to leverage the information
received from all customer interactions to serve each individual customer in a
consistent and improved manner regardless of the touch-points the customer
chooses to employ.
Realizing the potential of real time personalization and precision
marketing requires new solutions that:
- deliver recommendations in real time;
- span multiple customer touch-points;
- provide a measurable economic return to retailers;
- integrate easily with existing software systems; and
- satisfy the volume requirements of the largest Internet and multi-channel
retailers.
THE NET PERCEPTIONS SOLUTION
Net Perceptions is a leading provider of real time personalization and
precision marketing software solutions for Internet and multi-channel retailers.
We believe that retailers who implement our solutions can achieve the following
results:
- More customers. Because retailers are able to present the products that
customers are most likely to purchase, more customers may make purchases.
- More products per order. Retailers are able to increase sales per order
by offering each customer complementary products, known as cross-selling,
and higher-margin products, known as up-selling, that are attractive to
that particular customer.
- Stronger customer relationships. By creating compelling, personalized
experiences for each customer using our solutions, a retailer can make
customers feel as if they are known personally by the retailer. We
believe that if a customer feels that he or she receives personalized
service, he or she is more likely to come back to that retailer for
future purchases.
- More effective advertising. Retailers can analyze customer preferences
and consumer buying patterns to produce the most effective layout
location and price for each item in accurate recommendations for
newspaper advertising circulars.
- Optimized physical and electronic real estate. Retailers can use our
technology to analyze data to improve website layout and product mix. Our
solutions can also predict optimum product mixes on a store-by-store
basis, maximizing shelf and floor space dedicated to items most likely to
sell while limiting store space dedicated to lower profit and lower
volume items.
Our solutions enable effective real time personalization and precision
marketing by analyzing past and current customer behavior, including purchase
history, stated preferences, demographic information and Internet browsing
behavior. Our solutions use proprietary technology to predict the merchandise or
information a customer would be most interested in purchasing or viewing.
Our solutions:
- Deliver recommendations in real time. We design our solutions to meet the
real time requirements of large websites, call centers and retail stores
by delivering personalized recommendations during customer interactions
in less than a second. We believe that the
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response time for producing recommendations must be virtually
unnoticeable to customers for optimal impact on customer transactions.
- Span multiple customer touch-points. We design our solutions to allow
multi-channel retailers to collect and centralize customer data on
software systems that support all their points of customer contact. This
enables retailers to identify a customer at each touch-point and deliver
a highly personalized experience. Currently, our GreenLight RDS, Net
Perceptions Recommendation Engine and Knowledge Refinery products can be
used across multiple touch-points. In addition, retailers can use our
E-commerce and Call Center solutions to share information from call
center and website interactions. We intend to release products in the
future that are readily applicable to multiple touch-points.
- Provide a measurable economic return to retailers. We design our
solutions to generate increased revenues and optimize marketing and
merchandising investments. Some of our solutions currently include
reporting capabilities that enable retailers to accurately measure the
effectiveness of our solutions.
- Integrate easily with existing software systems. We design our solutions
with a distributed architecture that is flexible enough to integrate with
new or existing industry platforms and applications as they evolve. In
addition, we have an engineering team dedicated to developing and
supporting the integration of our products with leading industry
platforms for e-commerce, call centers, campaign management systems and
retail systems.
- Satisfy the volume requirements of the largest Internet and multi-channel
retailers. Our real time personalization solutions are designed to
operate on the busiest and largest e-commerce websites and call centers.
Our precision marketing solutions are designed to process detailed
customer data from the largest retailers.
STRATEGY
Our objective is to extend our leadership position in providing real time
personalization and precision marketing solutions to Internet and multi-channel
retailers. Key elements of our strategy to achieve this objective include the
following:
Maintain and extend our technology leadership
We intend to maintain and extend our technological leadership in real time
personalization and precision marketing through continued investment in the
development of our proprietary recommendation engine and other analytical
technologies. We believe that we are currently the technology leader in real
time personalization because of the accuracy, real time functionality,
scalability and ease of integration of our products. We intend to maintain an
open architecture so that our products will continue to integrate with major
platforms and technologies as they evolve.
Expand our application service provider offerings
In addition to licensing our software directly to end-users, we offer some
of our solutions on a hosted basis, operated on our own servers over the
Internet for a fee. We intend to increase the number of solutions offered in
this fashion and to offer these solutions through third-party Internet-based
application service providers. We believe that the application service provider
option will be attractive to some of our existing customers and to new customers
that choose not to devote resources to hosting our solutions themselves.
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Broaden distribution channels
We intend to expand our indirect distribution channels by recruiting
additional resellers, systems integrators and original equipment manufacturers.
Over time, we expect that our indirect sales will increase as a percentage of
our total sales. We believe that designing our products to interface with the
products of leading vendors of website, call center, marketing campaign
management and point of sale software will make our products more attractive to
resellers, systems integrators and original equipment manufacturers.
Leverage technology investments into new applications
We have leveraged our investment in our proprietary recommendation and
analytic engines into additional industry specific software solutions. For
example, during 1999, we began shipping our knowledge management and marketing
campaign solutions, which were developed from our core real time personalization
technology, and our GreenLight Ad and GreenLight Go! products, which were
developed from our core Knowledge Refinery technology. We intend to continue to
leverage our technology into complementary and new applications.
Expand service offerings
We provide our customers with a comprehensive set of services, including
training and consulting services, software updates, documentation updates,
telephone support and Web-based support. We intend to continue to increase the
value of our solutions to customers by offering additional and improved
professional services. We believe the relationships developed with our customers
by providing services are critical to understanding customer needs and designing
our solutions to satisfy these needs.
Continue to build our international presence
We intend to expand our international presence to address the global
adoption of the Internet and international demand for real time personalization
and precision marketing software solutions. We believe that international
markets present an attractive growth opportunity and that an expanded 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 larger direct sales and support presence in selected European and
Asian markets, adding more international distributors and developing localized
versions of certain products.
PRODUCTS
We offer three principal product lines: commerce solutions; knowledge
management solutions; and products for original equipment manufacturers.
Commerce solutions
Our commerce solutions products are designed to solve specific business
problems for Internet and multi-channel retailers. Each of these products
incorporates our core technologies and has been designed to extract data from
other software systems. Our commerce solutions include the following products:
Net Perceptions for E-commerce. Net Perceptions for E-commerce allows
on-line retailers to create a personalized shopping experience for their
customers. Net Perceptions for E-commerce can be used to dynamically predict
which products to recommend to each customer browsing an
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electronic commerce site, based on past and current customer behavior, including
purchase history, stated preferences and Internet browsing behavior.
In the fourth quarter of 1999, we began shipping Version 5.0 of Net
Perceptions for E-commerce, which includes the following enhanced features:
- Net Perceptions Personal Shopper. Net Perceptions Personal Shopper
provides a set of capabilities used to dynamically tailor recommendations
based on the shopping patterns of a customer at a given point in time.
- Net Perceptions Smart Merchant. Net Perceptions Smart Merchant allows
merchants to control the delivery of personalized recommendations to
better accomplish business objectives such as clearing overstock
situations, allocating selling opportunities to specific product
categories, or delivering unique buying opportunities to top customers.
- Net Perceptions Decision Support. Net Perceptions Decision Support is a
reporting and analysis module that allows retailers to evaluate the
effectiveness of their marketing strategies and adjust those strategies
as needed.
Net Perceptions for Call Centers. Net Perceptions for Call Centers allows
retailers that use call centers to recommend products to customers using real
time personalization. Net Perceptions for Call Centers can be used to create
product recommendations that take into account the context of the current call
while building on customers' past interactions with the call center, including
past purchases, customer inquiries and solicited preference information. We
believe that Net Perceptions for Call Centers is more powerful than a
traditional cross-sell table, because the recommendations are tailored to each
individual customer in real time.
Net Perceptions for Call Centers can be integrated with other call center
systems including:
- the inventory database, so only products with sufficient inventory levels
are recommended;
- the product database, so recommendations can be delivered with additional
information about the products; and
- the pricing database, so only products with certain margins or prices are
recommended.
In the fourth quarter of 1999, we introduced Net Perceptions for Call
Centers Version 2.0, which contains the Sales Coach feature. Sales Coach is
designed to improve a customer service representative's ability to effectively
cross-sell and up-sell by presenting product recommendations in a graphical
interface, complete with an image of the item being sold and a sample selling
script.
Net Perceptions for Marketing Campaigns. Net Perceptions for Marketing
Campaigns is designed to manage and personalize outbound promotional electronic
mail campaigns. It analyzes past customer responses to direct marketing
campaigns and purchase data 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 includes a
graphical user interface that allows a marketer to construct and manage
personalized e-mail campaigns. It includes reporting features that show the
effectiveness of each campaign. We believe that the ability of the
recommendation engine to better tailor message content to the recipient on a
one-to-one basis will yield higher response rates per mailing than other methods
currently employed.
GreenLight Ad. GreenLight Ad uses sophisticated analytical techniques to
help retailers maximize the return they receive from newspaper circular
advertising. Many retailers spend tens or even hundreds of millions of dollars
on this form of mass advertising. GreenLight Ad is designed to increase
advertising effectiveness by recommending which items should be advertised, how
much space should be allocated to each item, where each item should be placed
and at what price each
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item should be offered. By analyzing the resulting item-level sales data across
the retail chain and contrasting it to a baseline reference point, GreenLight Ad
provides retailers with the empirical data they need to make better ad item
selection decisions and substantially improve the return on their advertising
investment.
GreenLight Go! GreenLight Go! provides on-line retailers with a detailed
assessment of how customers are shopping on their websites. It identifies
different buying patterns among visitors to a site, which products influence
which buyers, which products drive the most profitable visits, which items
create the greatest change in rate of sales and which external sites refer the
most profitable customers. We offer GreenLight Go! as an application service
provider so that our customers can gain access to this information with a
minimum of effort and at a lower price than purchasing software with equivalent
capabilities.
GreenLight RDS. GreenLight Retail Discovery Suite is a strategic reporting
and analysis solution that helps retailers understand customer purchase behavior
across all customer touch-points. GreenLight RDS is based on a scalable data
collection and analysis platform that is capable of performing powerful data
analysis in a timely fashion for the largest retail operations. Retailers use
the results provided by GreenLight RDS to understand the relationship between
their products, customers and promotional tactics at a variety of levels.
Examples of such relationships include: which products are purchased most often
by the most profitable customers, which products drive the most related item
sales and which promotions yield the most long-term customers.
Knowledge management solutions
Our current knowledge management offering is Net Perceptions for Knowledge
Management, which applies our real time personalization capabilities to
corporate intranets. Net Perceptions for Knowledge Management integrates with
existing information management systems -- such as search engines, document
management systems, Lotus Notes and the Web -- to track the everyday user
interactions on these systems. Using this interaction information, Net
Perceptions for Knowledge Management can automatically locate documents
containing relevant information for each user. It also enables employees to
locate other people with knowledge and interest in areas of specific interest.
Net Perceptions for Knowledge Management is designed to improve employee
productivity by reducing time spent searching for information, recreating
research already performed by others within the firm as well as creating better
cross-functional sharing of information driven by employees linking up with
others in different parts of the organization that possess relevant expertise.
Products for original equipment manufacturers
Net Perceptions Recommendation Engine. The Net Perceptions Recommendation
Engine is offered to companies interested in adding our real time
personalization capabilities to their existing applications. It offers real time
personalization capabilities similar to those that underlie our Net Perceptions
for E-commerce, Call Centers, Marketing Campaigns and Knowledge Management
offerings. We license the Net Perceptions Recommendation Engine separately to
original equipment manufacturers who may already have applications that overlap
with some of the capabilities in our offerings or who will apply the
functionality of the recommendation engine in markets for which we do not have
specific solutions. 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.
Knowledge Refinery. The Knowledge Refinery is the scalable data processing
and analysis engine that underlies our GreenLight family of products. It is
capable of collecting and transforming
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large amounts of information into a format suitable for analysis. It also
contains a suite of analytical modules that create models to identify the
following information:
- frequent and significant customer purchase patterns;
- print advertising return on investment;
- customer value over time; and
- customer segments with similar spending patterns, item purchase patterns
and demographic or lifestyle characteristics.
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 December 31, 1999, our professional
services staff consisted of 41 employees, including employees of KD One.
Professional services
We offer a variety of professional services that are delivered either by
our specialists or through one of our 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 several education and training programs to our customers. Training
classes are offered at our offices in Minneapolis, Minnesota, San Francisco,
California, New York, New York, Austin, Texas and Berkshire, United Kingdom. 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 and documentation updates. We enter into maintenance and
support contracts separate from our product license agreements. Generally, fees
are approximately 15% of the license fees for the associated software product.
These contracts are renewable for an annual fee typically equivalent to 15% of
the current list price of the software licensed by the customer.
TECHNOLOGY
Real time recommendation engine
Our real time recommendation engine is the foundation of our real time
personalization solutions. Our platform is designed to integrate easily and
effectively with external systems, such as website, call center, marketing
campaign management retail and customer management software. Our
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platform is designed to provide accurate customer recommendations and to exploit
the performance and scalability advantages of modern, multiple-processor, shared
memory computers.
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 the Microsoft SQL server, IBM DB2 or Oracle databases. Vertical
applications are built on the platform to leverage the technology investment.
The customer preference database stores customer preference data used by
the recommendation engine to produce recommendations. These data may include
customer purchasing behavior, statements of preference made by the customer and
demographic information about the customer. The preference database may also
contain information supplied by a marketer, such as groups of products the
marketer explicitly wants to be recommended together or products that are
substitutes for one another. The recommendation engine applies a series of
predictive algorithms to this data to produce recommendations in real time.
An 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 enhance the interaction with customers.
The core predictive technology for our real time personalization is
collaborative filtering. 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.
[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 "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 reads, "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, "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, "Recommendations based on the analysis of the neighborhood are
made."]
Collaborative filtering is driven by information about customer
preferences. This 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.
The Knowledge Refinery analytic engine
The Knowledge Refinery is an integrated application framework that provides
a foundation for advanced decision support capability for the retail
environment, and is the basis of our GreenLight family of products.
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The Knowledge Refinery combines and integrates technology from the
following areas:
- machine learning and artificial intelligence;
- pattern detection and analysis;
- statistical and information theoretical analysis;
- relational on-line analytical processing;
- data modeling and simulation; and
- data warehousing.
The Knowledge Refinery is designed to be:
- scalable -- it can be applied to a wide range of data volumes, on
hardware and database platforms with varied capacity;
- platform-neutral -- it can be deployed on a wide variety of platforms
independent of processor characteristics, database characteristics or
distribution characteristics; and
- highly flexible -- it incorporates a metadata component that contains an
extensible logical application data model, definitions of process and
workflow, business rules and application logic.
The Knowledge Refinery is based on a data-flow, pattern-oriented
architecture. The "data-flow" model allows for straight-forward parallel and
distributed operation of the Knowledge Refinery. The pattern-oriented model
provides a high degree of modularity, flexibility and configurability. The
Knowledge Refinery components are based on neural networks, pattern detection
algorithms and supporting modeling techniques.
STRATEGIC ALLIANCES
We are pursuing marketing, implementation and indirect sales channel
alliances with electronic commerce software vendors, call center software
vendors, point-of-sale system software vendors, outbound e-mail service
providers, systems integrators, professional services organizations and
application service providers. These alliances are intended to increase our
geographic sales coverage worldwide and address new markets. In addition, these
alliances allow us to provide our customers with access to additional resources
to design, install and customize our solutions. As of December 31, 1999, most of
these alliances were in an early phase of development. Since inception through
December 31, 1999, sales to resellers, systems integrators and original
equipment manufacturers accounted for approximately 10% of our total revenues.
As part of our strategy, we have formed marketing and distribution
alliances with certain Internet software vendors. For example, we have entered
into an original equipment manufacturer relationship with Vignette Corporation.
Vignette is a provider of Internet relationship management software products and
services. In addition, we have entered into reseller agreements with, among
others, IBM, Broadvision and Commercialware. These relationships enable us to
broaden the distribution of our products and provide complementary functionality
to our applications. In July 1999, we entered into a joint venture with Trans
Cosmos, NTT Software and Toyo Information Systems to form Net Perceptions Japan.
Net Perceptions Japan will serve as our exclusive distribution channel for our
Japanese language product offerings in the Japanese marketplace.
We have also entered into joint marketing relationships with, among others,
Oracle, net.Genesis and Verbind. Under these joint marketing arrangements, each
party agrees to provide the other with reasonable marketing and sales
assistance. In some cases, these agreements also provide for
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compensation for lead referrals. Our marketing and distribution alliances are
not exclusive and some of our partners provide similar products and services to
other companies. In addition, we have entered into interface agreements with
various software vendors in markets we currently serve and in markets where we
do not have a current application. Under these interface agreements, the parties
agree to develop and support the integration of our software offerings into our
partners' software offering.
During 1999, we also entered into an agreement with IBM to port certain of
our products to AIX and DB2 and we recently entered into an agreement with
Hewlett Packard to port the Net Perceptions Recommendation Engine to HP UX. We
also intend to expand the professional services offered to our customers by
enhancing existing, and developing new, relationships with systems integrators
and professional service organizations.
CUSTOMERS
As of December 31, 1999, we had licensed products to more than 160
customers, including customers of KD One. 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 $100,000 in revenues to us during the
period from our inception to December 31, 1999.
<TABLE>
<S> <C> <C>
BOOKS/MOVIES/MUSIC GENERAL RETAIL SPECIALTY RETAIL
BarnesandNoble.com Eckerd
Bertelsmann Fingerhut Art.com
BMG Online Great Universal Stores Ashford.com
CDNOW Hudson's Bay Company eToys.com
Christian Book Distributors imall.com Furniture.com
ClickRadio J.C. Penney Garden.com
DVD Express LetsBuyIt.com KBkids.com
Follett Higher Education Netmarket Group Lowe's
Group Rite Aid Mattel
HMV Media Group Skymall OurHouse
Launch Media Value America SelfCare
Musician's Friend Walgreens The Children's Place
Tower Records tpuppy.com
Trans World Entertainment GROCERIES/FOOD ZoneNetwork.com
Virgin Online Megastore
AllRecipes.com OTHER
COMPUTERS/ELECTRONICS Dean & Deluca
HomeGrocer ACS Systems
800.com Kraft Foods Bid.com
Egghead.com Pink Dot Carlson Companies
Electronic Boutique Wine.com Libro AG
Micron Electronics miClub.com
Programmer's Paradise.com MPC Limited
ShopNow.com National Computer Board
ZoneTrader.com Procter & Gamble
Publisher's Clearing House
Thompson Direct
</TABLE>
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.
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We have sales offices in Minneapolis, Minnesota, San Francisco, California, New
York, New York, Austin, Texas and Berkshire, United Kingdom.
As of December 31, 1999, our direct sales organization, including KD One
employees, had 64 sales representatives, managers, pre-sales engineers,
telemarketing and support personnel. We intend to increase our North American
sales force as demand requires by opening additional field sales offices. We
recently established a sales force dedicated to the development of the indirect
sales channel for our products. As of December 31, 1999, our indirect sales
organization consisted of nine employees. Additionally, we intend to expand our
presence in international markets by continuing to build our international sales
force. We believe that this will be necessary in order to grow our revenues. We
have started to localize some of our products for sale into the Japanese market
and we may need to localize our products in other markets. However, we have
limited experience in developing localized versions of our products and
marketing and distributing our products internationally. We may not be
successful in international markets.
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 1999, our distribution
partners were responsible for 12% of our product revenues. We anticipate that
the percentage of our total revenues derived from indirect sales will increase
in the future. We expect that a significant 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. In addition, we expect that indirect sales will generate less
services revenues than direct sales because our partners generally provide
support services to their customers.
As of December 31, 1999, our marketing organization consisted of 23
employees, including KD One employees, primarily engaged in marketing research,
producing marketing materials, product planning and management, 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 website. 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 documentation and expanding the ability of our products to operate with
the leading hardware platforms, operating systems, database management systems
and industry platforms. 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, quality assurance
engineers and technical writers.
As of December 31, 1999, our research and development staff consisted of 96
employees, including KD One employees. Our total expenses for research and
development, not including those of KD One, were $1.4 million in 1997, $2.3
million in 1998 and $8.2 million in 1999. 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.
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.
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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 commerce solutions, we
primarily encounter competition from Accrue Software, Andromedia (a division of
Macromedia), Broadbase, the EHNC division of HNC Software, E.piphany and
Personify. Microsoft has acquired FireFly Network, a company with collaborative
filtering technology and, as a result, we expect that we may encounter
competition from Microsoft in the future.
In the marketing of Net Perceptions for Marketing Campaigns, we primarily
encounter competition from Exchange Applications, Annuncio Software, Prime
Response and Rubric, which was recently acquired by Broadbase. 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. For
example, RightPoint Software, recently acquired by E.piphany, is an established
firm serving call centers that we expect to increasingly encounter in the
marketing of Net Perceptions for Call Centers. 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 also expect increasing
competition from network-based providers of personalization technology such as
TriVida, which was recently acquired by Be Free, and Cogit.
In the marketing of our GreenLight RDS product, we primarily encounter
competition from Brio, Seagate, Comshare, IBM and SAS.
In the marketing of our Knowledge Management product, we primarily
encounter competition from Orbital Software and Tacit Knowledge Systems.
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 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. 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 in large part on
protecting our intellectual property, which is our most important asset. We rely
on a combination of trademark, copyright, patent and trade secret laws to
protect our rights in our technology. We license our software and require our
customers to enter into license agreements, which impose restrictions on our
customers'
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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 the source code for our software.
As of December 31, 1999, we had 11 pending United States patent
applications. We also have license rights to two issued United States patents
and one allowed United States patent application from the University of
Minnesota. We have four pending foreign patent applications, but we have no
issued foreign patents. 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. Moreover, we may not
develop future proprietary products or technologies that are patentable, and the
patents of others may seriously limit our ability to conduct our business. In
this regard, we have not performed any comprehensive analysis of patents of
others that may limit our ability to conduct our business.
Our efforts to protect our proprietary rights may not succeed. Copyright
and trade secret laws afford only limited protection for our proprietary rights
in our software, documentation and other written materials. Unauthorized parties
may be able 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. We may
not be able to detect infringement and, as a result, our competitive position in
the market may suffer.
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 rights. We expect
that software companies such as Net Perceptions 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 in order to secure continued access
to required technology. Royalty or licensing agreements, if required, may not be
available on terms acceptable to us, or at all. Claims of intellectual property
infringement also may require us to pay significant damages or subject us to an
injunction against the use of our products. Any successful claim of intellectual
property infringement against us could have an immediate and significant impact
on our ability to carry on our business and market our products.
EMPLOYEES
As of December 31, 1999, including KD One employees, we had a total of 264
employees, including 87 in sales and marketing, 96 in research and development,
41 in customer support and 40 in administration. All of these employees were
located in North America, with the exception of 10 employees who were located in
Europe. 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.
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FACILITIES
The following table sets forth certain information about our principal
executive offices, as well as our other facilities. We lease all of our existing
facilities. 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. We are in the process of negotiating a
new lease for 110,000 square feet to replace our existing facilities in
Minneapolis, which we currently expect to begin in July 2000.
<TABLE>
<CAPTION>
LOCATION SQUARE FOOTAGE LEASE EXPIRATION DATE
-------- -------------- ---------------------
<S> <C> <C>
Minneapolis, Minnesota
Principal office............................. 28,000 December 2003
Administrative facility...................... 9,000 September 2001
Austin, Texas.................................. 14,000 January 2004
Richardson, Texas.............................. 2,000 February 2001
New York, New York............................. 6,500 September 2006
San Francisco, California...................... 5,000 August 2004
Berkshire, United Kingdom...................... 8,000 March 2010
</TABLE>
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth our executive offices and directors, and
their ages as of December 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Steven J. Snyder..................... 45 President, Chief Executive Officer and Director
Nanci Anderson....................... 43 Vice President of Customer Solutions
Paul Bieganski....................... 35 Chief Technical Officer
Thomas M. Donnelly................... 35 Senior Vice President of Finance and Administration,
Chief Financial Officer and Secretary
P. Stephen Larsen.................... 49 Senior Vice President of Marketing and Business
Development
Bradley N. Miller.................... 35 Vice President of Product Development
George E. Moser...................... 44 Senior Vice President of Worldwide Sales
John T. Riedl........................ 38 Director and Chief Scientist
Douglas J. Burgum.................... 43 Director
Ann L. Winblad....................... 49 Director
William Lansing...................... 41 Director
</TABLE>
Steven J. Snyder co-founded Net Perceptions in July 1996 and since that
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.
Nanci 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 Chief Operating
Officer 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.
Paul Bieganski joined Net Perceptions in August 1997 as our Director of
Algorithm Development, and in November 1998 became our 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. Dr. Bieganski holds a B.S., an M.S. and
a Ph.D. in computer science from the University of Minnesota.
Thomas M. Donnelly joined Net Perceptions in March 1997 as our Corporate
Controller, and in March 1998 became our Chief Financial Officer. In February
1999, Mr. Donnelly was appointed Secretary. In July 1999, Mr. Donnelly also
became Senior Vice President of Finance and Administration. 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. Mr. Donnelly holds a B.A. in economics from St. Olaf
College.
52
<PAGE> 54
P. Stephen Larsen joined Net Perceptions in June 1997 as our Vice President
of Marketing and Business Development. In July 1999, Mr. Larsen became Senior
Vice President of Marketing. 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. Mr. Larsen holds an
A.A. from Rochester State College.
Bradley N. Miller co-founded Net Perceptions in July 1996 and since that
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. 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.
George E. 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 and in July 1999, Mr. Moser became Senior Vice
President of Worldwide Sales. From March 1993 to December 1996, Mr. Moser was
the Director, East Region for Autodesk, Inc., a software company. Mr. Moser
holds a B.S. in management and an M.B.A. from the University of Hartford.
John T. 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. Since September 1998, Dr. Riedl has worked with us on a part-time
basis. 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.
Douglas J. 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 holds a B.U.S. from North
Dakota State University and an M.B.A. from Stanford University.
Ann L. 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 The Knot,
Inc. and Liquid Audio, Inc. 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.
William Lansing became a director of Net Perceptions in May 1999. Mr.
Lansing was hired as President of Fingerhut Companies, Inc. in May 1998, became
its Chief Executive Officer in May 1999 and also serves as a director. From
November 1996 to May 1998, Mr. Lansing served as a Vice President for Business
Development of General Electric Corp. From January 1996 to October 1996, he
served as Chief Operating Officer of Prodigy. Mr. Lansing also serves as a
director of Digital River, Inc., Select Comfort Corp., FreeShop.com, Inc. and
BigStar Entertainment, Inc. Mr. Lansing holds a B.A. in English from Wesleyan
University and a J.D. from Georgetown University.
We currently have five 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 our directors and officers.
BOARD COMMITTEES
The audit committee consists of Messrs. Burgum and Lansing 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.
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<PAGE> 55
The compensation committee consists of Messrs. Lansing and 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 our formation, one of our officers or employees. 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.
Directors who are also our employees are eligible to participate in our 1999
Equity Incentive Plan. Non-employee directors are eligible for periodic option
grants under our 1999 Non-Employee Director Option Plan.
In January 1999, Mr. Burgum received an option to purchase 30,000 shares of
common stock at an exercise price of $5.50 per share. This 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. In May 1999, Mr. Lansing
received an option to purchase 20,000 shares of common stock at an exercise
price of $17.00 per share. This option vests in equal installments over a 24
month period from the grant date, but vesting will accelerate to the extent the
board deems it necessary to avoid adverse accounting treatment for those
options.
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<PAGE> 56
EXECUTIVE COMPENSATION
Summary compensation table
The following table sets forth information with respect to compensation we
paid in 1998 and 1999 for services to us by our chief executive officer and our
four other highest-paid executive officers whose total salary and bonus for 1999
exceeded $100,000. We refer to these officers as our named executive officers in
other parts of this prospectus.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
NUMBER OF
ANNUAL SHARES OF
COMPENSATION COMMON STOCK
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS COMPENSATION($)
--------------------------- ---- --------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Steven J. Snyder.................................... 1999 150,000 40,000 -- $ --
President and Chief Executive Officer 1998 130,000 10,000 --
P. Stephen Larsen................................... 1999 175,000 25,000 -- --
Senior Vice President of Marketing 1998 175,000 23,500 140,000
Nanci Andersen...................................... 1999 130,000 21,850 30,000 --
Vice President of Customer Solutions 1998 36,500 -- 40,000
Thomas M. Donnelly.................................. 1999 125,000 40,000 40,000 --
Senior Vice President of Finance and 1998 94,833 10,000 96,000
Administration and Chief Financial Officer
George E. Moser..................................... 1999 125,000 133,600(1) 10,000 --
Senior Vice President of Worldwide Sales 1998 122,500 82,500(2) 140,000 50,000(3)
</TABLE>
- -------------------------
(1) Includes commissions of $113,600.
(2) Includes commissions of $72,500.
(3) Represents relocation expenses.
55
<PAGE> 57
Option grants in last year
The following table sets forth each grant of stock options in 1999 to each
of the named executive officers. We did not grant any stock appreciation rights
during 1999. The exercise price of each option is equal to the fair market value
of our common stock on the date that the grant was approved by the compensation
committee of our board of directors.
The potential realizable values are net of the exercise prices and before
taxes associated with the exercise, and are based on the assumption that our
common stock appreciates at the annual rate shown from the date of the grant
until the expiration of the ten-year option term. These numbers are calculated
based on the rules of the Securities and Exchange Commission and do not
represent our estimate or projection of future common stock prices. The amounts
reflected in the table may not necessarily be achieved. The actual amount the
executive officer may realize will depend upon the extent to which the stock
price exceeds the exercise price of the options on the date the option is
exercised.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE VALUE
NUMBER OF TOTAL AT ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION --------------------------
NAME GRANTED(#/SH)(1) 1999(%)(2) SHARE($) DATE 5%($) 10%($)
---- ---------------- ------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Steven J. Snyder...... -- -- -- -- -- --
P. Stephen Larsen..... -- -- -- -- -- --
Nanci Andersen........ 10,000 0.66 $ 5.50 1/26/09 34,589 87,656
20,000 1.33 14.00 4/21/09 176,091 446,248
Thomas M. Donnelly.... 20,000 1.33 5.50 1/26/09 69,178 175,312
16,306 1.08 15.94 7/30/09 163,435 414,177
3,694 0.25 15.94 7/30/09 37,025 93,829
George E. Moser....... 10,000 0.66 15.94 7/30/09 100,230 254,003
</TABLE>
- -------------------------
(1) Options granted under our 1996 Stock Plan 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, prior to the vesting in those
shares. Options granted under our 1999 Equity Incentive Plan may be
exercised only when, and to the extent, vested. Each of the options has a 10
year term, subject to earlier termination in the event of the optionee's
cessation of service.
(2) Based on an aggregate of 897,936 options granted to our employees under the
1996 Stock Plan and 607,050 options granted to our employees under the 1999
Equity Incentive Plan during the year ended December 31, 1999.
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<PAGE> 58
Fiscal year-end option values
The following table provides information concerning the number and value of
the shares of common stock underlying unexercised options held by each of the
named executive officers as of December 31, 1999. None of the named executive
officers exercised any options in 1999.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1999(#)(1) DECEMBER 31, 1999($)(2)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Steven J. Snyder........................ -- -- -- --
P. Stephen Larsen....................... 50,416 89,584 2,095,389 3,714,611
Nanci Andersen.......................... 18,124 51,876 689,758 1,876,242
Thomas M. Donnelly...................... 43,457 92,543 1,747,679 3,481,471
George E. Moser......................... 81,873 118,127 3,401,711 4,787,664
</TABLE>
- -------------------------
(1) Options granted under our 1996 Stock Plan 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, prior to the vesting in those
shares. Options granted under our 1999 Equity Incentive Plan may be
exercised only when, and to the extent, vested.
(2) The value of unexercised in-the-money options held at December 31, 1999
represents the total gain which would be realized if all of the in-the-money
options held at December 31, 1999 were exercised, and is determined by
multiplying the number of shares of common stock underlying the options by
the difference between $42.00, which was the closing price per share of our
common stock on the Nasdaq National Market on December 31, 1999, and the
applicable per share option exercise price. An option is in-the-money if the
fair market value of the underlying shares exceeds the exercise price of the
option.
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 of our
employees or directors 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.
Some of our officers and employees, including 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 acquirer in a change in control, we will
pay the officer severance benefits equal to six months of base salary.
1999 EQUITY INCENTIVE PLAN
The 1999 Equity Incentive Plan was adopted by the board of directors on
February 4, 1999 and our stockholders approved the adoption of the plan. We
initially reserved 800,000 shares of common stock for issuance under the 1999
Equity Incentive Plan, subject to automatic adjustment as described below. Upon
the closing of our initial public offering in April 1999, the 1999 Equity
Incentive Plan replaced our 1996 Stock Plan. Any shares that were not issued at
that time under our 1996 Stock Plan are available for grant under the 1999
Equity Incentive Plan, but no additional shares or options will be issued under
our 1996 Stock Plan. As of January 1 of each year,
57
<PAGE> 59
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. Employees, non-employee members of
the board of directors and consultants are eligible for awards under the 1999
Equity Incentive Plan. 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 were incorporated into the
1999 Equity Incentive Plan at the time of our initial public offering. The
incorporated options 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 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 that have
been held for more than six months or purchased on the open market. The exercise
price may also be paid by using a cashless exercise method with a securities
broker, a pledge of shares to a securities broker or a full-recourse 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. A change in control includes:
- a merger or consolidation after which our then current stockholders own
less than 50% of the surviving corporation;
- a sale of all or substantially all of our assets;
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<PAGE> 60
- 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 our outstanding stock by a person other
than by a person related to us, such as a corporation owned by our
stockholders.
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.
As of December 31, 1999, options to purchase 2,528,766 shares of common
stock, at a weighted average exercise price of $7.97 per share, were outstanding
under our 1996 Stock Plan and 1999 Equity Incentive Plan.
THE KD ONE 1996 STOCK OPTION/STOCK ISSUANCE PLAN
In connection with our acquisition of KD One, we assumed all outstanding
options granted under the KD One 1996 Stock Option/Stock Issuance Plan. The KD
One 1996 Stock Option/Stock Issuance Plan provided for the grant of incentive
stock options and non-statutory stock options to employees, consultants and
non-employee directors of KD One. We have reserved 268,914 shares of common
stock for issuance upon the exercise of these assumed options. The KD One 1996
Stock Option/Stock Issuance Plan contains provisions that provide for
accelerated vesting of options in certain circumstances. These acceleration
provisions will continue to govern the options that we assumed in the KD One
acquisition. We will not grant any additional options under the KD One 1996
Stock Option/Stock Issuance Plan.
EMPLOYEE STOCK PURCHASE PLAN
The board of directors adopted our Employee Stock Purchase Plan on February
4, 1999, and our stockholders have approved the adoption of the plan. We
initially 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 six months, will commence on May 1 and November 1 each
calendar year. However, the first offering period commenced on April 22, 1999,
the effective date of the registration statement filed in connection with our
initial public offering, and ended on October 31, 1999. Purchases of common
stock will occur on April 30 and October 31 each calendar year. The Employee
Stock Purchase Plan is administered by the compensation committee of the board
of directors. Each of our employees 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.
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. 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 the
fair market value per share of common stock on the date immediately
59
<PAGE> 61
before the first date of the applicable offering period or 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 was $14.00, which was the
per share public offering price for the common stock in our initial public
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 approved the adoption of the
plan. Under the 1999 Non-Employee Director Option Plan, non-employee members of
the board of directors are 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.
The compensation committee of the board of directors makes 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 that
have been held for more than six months or purchased on the open market. Options
may also be exercised using a cashless exercise method with a securities broker.
We will grant each individual who first joins the board of directors as a
non-employee director an option for 20,000 shares of common stock under the 1999
Non-Employee Director Option Plan. 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. 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 10 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.
As of December 31, 1999, options to purchase 20,000 shares of common stock,
at an exercise price of $17.00 per share, were outstanding under our 1999
Non-Employee Director Option Plan.
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<PAGE> 62
CERTAIN TRANSACTIONS
Since January 1, 1997, we have issued and sold preferred stock to the
following persons or entities that are our principal stockholders or directors.
<TABLE>
<CAPTION>
SHARES OF
SERIES C
STOCKHOLDER PREFERRED STOCK
----------- ---------------
<S> <C>
Entities affiliated with Hummer Winblad Venture Partners.... 407,168
London Pacific Life & Annuity Company....................... 2,605,864
</TABLE>
Shares held by all affiliated persons and entities have been aggregated.
For more detail on the shares held by each of these purchasers, please refer to
the information in this prospectus under the heading "Principal and Selling
Stockholders." The per share purchase price for the Series C preferred stock was
$1.535. Ann L. Winblad, one of our directors, is an affiliate of each of the
entities affiliated with Hummer Winblad Venture Partners.
We also have granted options to some of our directors and executive
officers. Please refer to the information under the headings
"Management -- Option grants in last year" and "Principal and Selling
Stockholders."
In addition, William Lansing, one of our directors, is the President, Chief
Executive Officer and director of Fingerhut Companies, Inc., which is one of our
customers. Revenues attributable to sales to Fingerhut between January 1, 1997
and December 31, 1999 totaled approximately $1.4 million.
We have entered into an indemnification agreement with each of our officers
and directors.
We believe that we have executed all of the transactions set forth above on
terms no less favorable to us than could have been obtained from unaffiliated
third parties. It is our intention to ensure that all future transactions,
including loans, between us and our officers, directors, principal stockholders
and their affiliates, are 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 are on terms no less favorable to us than those that
we could obtain from unaffiliated third parties.
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<PAGE> 63
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of February 15, 2000, and as adjusted to
reflect the sale of shares in this offering by:
- each person who is known by us to beneficially own more than five percent
of the outstanding shares of our common stock;
- each of our directors and each named executive officer;
- all of our current directors and executive officers as a group; and
- all stockholders who are selling shares of our common stock in this
offering.
This information is based upon information received from or on behalf of
the individuals named herein.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Except as indicated in the footnotes to this
table, we believe that each person or entity named in the table has sole voting
and investment power with respect to all shares of common stock shown as
beneficially owned by them, subject to applicable community property laws. The
percentage of beneficial ownership set forth below is based upon 23,994,729
shares of common stock outstanding as of February 15, 2000 and 25,994,729 shares
of common stock outstanding after the completion of this offering, assuming no
exercise of the underwriters' over-allotment option. In computing the number of
shares of common stock beneficially owned by a person and the percentage
ownership of that person, shares of common stock that are subject to options
held by that person that are currently exercisable or exercisable within 60 days
of February 15, 2000, are deemed outstanding. These shares are not, however,
deemed outstanding for the purpose of computing the percentage ownership of any
other person.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO THE OFFERING AFTER OFFERING
------------------------------------ ------------------------------------
NUMBER OF NUMBER OF NUMBER OF
NUMBER OF SHARES SUBJECT SHARES BEING NUMBER OF SHARES SUBJECT
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES TO OPTIONS(1) PERCENT OFFERED SHARES TO OPTIONS(1) PERCENT
- ------------------------------------ --------- -------------- ------- ------------ --------- -------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
London Pacific Life & Annuity
Company(2)......................... 2,605,864 -- 10.9% -- 2,605,864 -- 10.0%
3109 Poplarwood Court
Suite 108
Raleigh, North Carolina 27604
Norwest Bank Minnesota, N.A.(3)...... 2,490,378 -- 10.4 -- 2,490,378 -- 9.6
Norwest Center
Sixth and Marquette
Minneapolis, MN 55479
Steven J. Snyder..................... 1,902,944 -- 7.9 190,294 1,712,650 -- 6.6
7901 Flying Cloud Drive
Minneapolis, Minnesota 55344
Bradley N. Miller.................... 1,390,348 832 5.8 139,118 1,251,230 832 4.8
7901 Flying Cloud Drive
Minneapolis, Minnesota 55344
John T. Riedl........................ 1,000,974 -- 4.2 100,170 900,804 -- 3.5
P. Stephen Larsen.................... 251,509 140,416 1.6 39,193 212,316 140,416 1.4
George E. Moser...................... 92,614 192,499 1.2 28,511 64,103 192,499 *
Thomas M. Donnelly................... 64,000 120,165 * 18,417 64,000 101,748 *
Nanci Anderson....................... 2,254 70,000 * 7,225 2,254 62,775 *
Ann L. Winblad(4).................... 309,913 -- 1.3 -- 309,913 -- 1.2
Douglas J. Burgum.................... 7,143 30,000 * -- 7,143 30,000 *
</TABLE>
62
<PAGE> 64
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO THE OFFERING AFTER OFFERING
------------------------------------ ------------------------------------
NUMBER OF NUMBER OF NUMBER OF
NUMBER OF SHARES SUBJECT SHARES BEING NUMBER OF SHARES SUBJECT
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES TO OPTIONS(1) PERCENT OFFERED SHARES TO OPTIONS(1) PERCENT
- ------------------------------------ --------- -------------- ------- ------------ --------- -------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
William Lansing...................... 10,000 8,333 * -- 10,000 8,333 *
All directors and executive officers
as a group (9 persons)............. 5,060,399 693,877 24.0 538,961 4,547,113 668,235 20.1
Other selling stockholders........... -- 311,039 --
</TABLE>
- -------------------------
* Indicates less than 1% of the total number of outstanding shares of common
stock.
(1) Reflects the number of shares issuable upon the exercise of options
exercisable within 60 days of February 15, 2000.
(2) Consists of 1,954,398 shares held by London Pacific Life & Annuity Company
and 651,466 shares held by its affiliate Berkeley International Capital
Limited.
(3) This information is based upon information reported on Wells Fargo &
Company's Schedule 13G filing made with the Securities and Exchange
Commission as of December 31, 1999.
(4) Consists of 386,810 shares held by Hummer Winblad Venture Partners III L.P.
63
<PAGE> 65
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our authorized capital stock consists of 50,000,000 shares of common stock,
$.0001 par value, and 5,000,000 shares of preferred stock, $.0001 par value. We
expect to increase our authorized common stock to 100,000,000 shares and our
authorized preferred stock to 10,000,000 shares at our 2000 Annual Meeting of
Stockholders, which is currently scheduled to be held in May 2000.
COMMON STOCK
As of December 31, 1999, there were 22,025,716 shares of common stock
outstanding that were held of record by approximately 156 stockholders,
excluding 1,969,013 shares issued to former KD One stockholders on February 14,
2000 in connection with our acquisition of KD One. There will be 25,994,729
shares of common stock outstanding after giving effect to the sale of shares
offered to the public by this prospectus, assuming no exercise of the
underwriters' over-allotment option and no exercise after December 31, 1999 of
outstanding options.
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. In
the event of our liquidation, dissolution or winding up, 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
Our amended and restated certificate of incorporation authorizes 5,000,000
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, BYLAWS
AND DELAWARE LAW
Our amended and restated certificate of incorporation and bylaws contain
provisions that could discourage, delay or prevent a tender offer or takeover
attempt at a price which many stockholders may find attractive. The existence of
these provisions could limit the price that investors might otherwise pay in the
future for shares of common stock.
64
<PAGE> 66
Certificate of incorporation and bylaws
Blank check preferred stock. As noted above, our board of directors,
without stockholder approval, has the authority under our certificate of
incorporation to issue preferred stock with rights superior to the rights of the
holders of common stock. As a result, preferred stock could be issued quickly
and easily, could impair the rights of holders of common stock and could be
issued with terms calculated to delay or prevent a change of control or make
removal of management more difficult.
Stockholder action. Our 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 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.
Requirements for advance notification of stockholder nominations and
proposals. Our bylaws provide that a stockholder seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for election
as directors at an annual meeting of stockholders, must provide timely notice of
this intention in writing. To be timely, a stockholder's notice must be
delivered to or mailed and received at our principal executive offices at least
120 days prior to the anniversary date of the proxy statement released to
stockholders in connection with the previous year's annual meeting of
stockholders. The bylaws also include requirement of advance notice for making
nominations at special meetings. These provisions could delay stockholder
actions that are favored by the holders of a majority of our outstanding stock
until the next stockholders' meeting.
Delaware anti-takeover statute
We are subject to section 203 of the Delaware General Corporation Law,
which restricts some types of transactions and business combinations between a
corporation and a 15% stockholder. A 15% stockholder is generally considered
under this provision to be a person owning 15% or more of the corporation's
outstanding voting stock. Delaware law restricts these transactions for a period
of three years from the date the stockholder acquired 15% or more of the
corporation's outstanding voting stock. With some exceptions, unless the
transaction is approved by the board of directors and the holders of at least
two-thirds of the outstanding voting stock, Delaware law prohibits significant
business transactions such as:
- a merger with, disposition of significant assets to or receipt of
disproportionate financial benefits by the 15% stockholder; or
- any other transaction that would increase the 15% stockholder's
proportionate ownership of any class or series of capital stock.
The shares held by the 15% stockholder are not counted as outstanding when
calculating the two-thirds of the outstanding voting stock needed for approval.
The prohibition against these transactions does not apply if:
- prior to the time that any stockholder became a 15% stockholder, the
board of directors approved either the business combination or the
transaction in which such stockholder acquired 15% or more of the
outstanding voting stock; or
- the 15% stockholder owns at least 85% of the outstanding voting stock of
the corporation as a result of the transaction in which such stockholder
acquired 15% or more of the outstanding voting stock.
65
<PAGE> 67
Shares held by persons who are both directors and officers or by some types
of employee stock plans are not counted as outstanding when making this
calculation.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our amended and restated certificate of incorporation and amended and
restated bylaws provide that we shall indemnify our directors and officers to
the full extent permitted by Delaware law. Delaware law permits a corporation to
indemnify any director, officer, employee or agent made or threatened to be made
a party to any threatened, pending or completed proceeding if the person acted
in good faith and in a manner such person reasonably believed to be in the best
interests of the corporation, and, with respect to any criminal proceeding, had
no reasonable cause to believe that his or her conduct was unlawful. In addition
to the indemnification provided for in our certificate of incorporation and
bylaws, we also have entered into agreements to indemnify each of our officers
and directors.
Our certificate of incorporation limits the liability of our directors to
the maximum extent permitted by Delaware law. Delaware law provides that
directors will not be personally liable for monetary damages for breach of their
fiduciary duties as directors, except liability for:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
This provision has no effect on any non-monetary remedies that may be available
to us or our stockholders, nor does it relieve us or our officers or directors
from compliance with federal or state securities laws.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling us pursuant to
the foregoing provisions or otherwise, we have been informed that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.
At the present time, there is no pending litigation or proceeding involving
any director, officer, employee or agent of Net Perceptions in which
indemnification would be required or permitted. We are not aware of any
threatened litigation or proceeding which may result in a claim for
indemnification.
REGISTRATION RIGHTS
The holders of 1,759,013 shares of common stock are entitled to the
following rights with respect to the registration of their shares under the
Securities Act. Approximately 290,703 of those shares are being registered in
this offering and those shares will cease to have registration rights.
The holders of registration rights include investors that purchased shares
of our Series A, Series B and Series C preferred stock, the holder of shares of
common stock issued upon the conversion of a convertible promissory note and
some of our present and former officers and founders. In addition, in connection
with our acquisition of KD One, we granted registration rights to the former KD
One stockholders.
Under the terms of the agreements between us and the holders of these
registrable securities, if we propose to register any of our securities under
the Securities Act, either for our own account or
66
<PAGE> 68
for the account of other security holders exercising registration rights, the
holders with registration rights are entitled to notice of the registration and
are entitled to include shares of their common stock in the registration. Some
of the stockholders benefitting from these rights also may 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, some 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 a
registration in certain circumstances.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Norwest Bank
Minnesota, N.A.
LISTING
Our common stock is currently quoted on the Nasdaq National Market under
the trading symbol "NETP."
67
<PAGE> 69
SHARES ELIGIBLE FOR FUTURE SALE
SALE OF RESTRICTED SHARES
Future sales of substantial amounts of our common stock in the public
market, or the possibility of these sales occurring, could adversely affect
prevailing market prices of our common stock or our future ability to raise
capital through an offering of equity securities.
Upon completion of this offering, we will have 25,994,729 shares of common
stock outstanding, based on shares outstanding as of December 31, 1999 and
giving effect to the KD One acquisition. All of these shares are freely
tradeable without restriction, with the following exceptions:
- 2,068,992 shares that were issued in private transactions currently
constitute "restricted securities" within the meaning of Rule 144 under
the Securities Act of 1933. All but 458,404 of these shares may be resold
publicly at any time, subject to the volume and other restrictions of
Rule 144. A total of 290,911 shares may be resold publicly, subject to
the volume and other restrictions of Rule 144, beginning on April 23,
2000. The remaining 1,319,677 shares may be resold publicly, subject to
the volume and other restrictions of Rule 144, beginning on February 14,
2001.
- shares acquired in the open market but held by our "affiliates," as that
term is defined in Rule 144, are subject to the volume and other
restrictions of Rule 144.
- shares held by our officers and directors, as well as some of our other
stockholders, are subject to "lock-up" agreements that prohibit the
public resale of those shares until 90 days after the effective date of
this prospectus. These prohibitions are described in greater detail under
"-- Lock-up agreements" below.
LOCK-UP AGREEMENTS
We, our officers and directors, and some of our stockholders, including our
selling 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 90 days after the date of
this prospectus, without the prior written consent of FleetBoston Robertson
Stephens Inc., subject to limited exceptions.
RULE 144
In general, under Rule 144, as currently in effect, a person who has
beneficially owned shares of our common stock for at least one year is entitled
to sell within any three-month period a number of shares that does not exceed
the greater of:
- 1% of the number of shares of common stock then outstanding, which is
expected to be approximately 259,947 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 filing of a
notice of the sale on Form 144 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.
68
<PAGE> 70
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the three months preceding a sale and who has
beneficially owned shares proposed to be sold for at least two years is 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.
RULE 701
In general, under Rule 701 of the Securities Act, any of our employees,
consultants or advisors who purchased shares from us under a stock option plan
or other written agreement prior to our initial public offering can resell those
shares excluding the effect of the "lock-up" agreements described above, in
reliance on Rule 144, but without complying with some of the restrictions,
including the holding period, contained in Rule 144. Approximately 458,404
shares of our outstanding common stock are eligible for resale under resale
under Rule 701. Some of these shares are subject to the "lock-up" agreement with
FleetBoston Robertson Stephens Inc. described above.
REGISTRATION RIGHTS
Upon completion of this offering, the holders of approximately 1,319,677
shares of our common stock will be entitled to rights to registration of their
shares under the Securities Act. After registration, these shares will become
freely tradable without restrictions under the Securities Act. Any sales of
securities by these shareholders could decrease the trading price of our common
stock. A more detailed discussion of these registration rights is included in
this prospectus under the heading "Description of Capital Stock -- Registration
rights."
STOCK OPTIONS
We have filed registration statements on Form S-8 to register approximately
6,970,657 shares of common stock reserved for issuance under our stock option
plans and our Employee Stock Purchase Plan. Each year as the number of shares
reserved for issuance under our 1999 Equity Incentive Plan and 1999 Employee
Stock Purchase plan automatically increases, we intend to file amendments to the
registration statements covering the additional shares. As of December 31, 1999,
options to purchase 2,548,766 shares of common stock were issued and outstanding
under our stock option plans and 1,035,578 shares were reserved for issuance
pursuant to future grants of stock options. In addition, as of December 31,
1999, 957,616 shares were reserved for issuance under our 1999 Employee Stock
Purchase Plan. Shares registered under these registration statements will, upon
the optionee's exercise and subject to vesting and lock-up provisions and Rule
144 volume limitations applicable to our affiliates, be available for sale in
the open market. We also intend to file a registration statement on Form S-8 to
register approximately 268,914 shares of our common stock reserved for issuance
under KD One's 1996 Stock Option Plan, which we assumed in connection with our
acquisition of KD One.
69
<PAGE> 71
UNDERWRITING
The underwriters named below, acting through their representatives,
FleetBoston Robertson Stephens Inc., Chase Securities Inc., U.S. Bancorp Piper
Jaffray Inc., Dain Rauscher Incorporated and Adams, Harkness & Hill, Inc. have
severally agreed with us and the selling stockholders, subject to the terms and
conditions of the underwriting agreement, to purchase from us and the selling
stockholders the number of shares of common stock set forth below opposite their
respective names. The underwriters are committed to purchase and pay for all
shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ----------
<S> <C>
FleetBoston Robertson Stephens Inc..........................
Chase Securities Inc........................................
U.S. Bancorp Piper Jaffray Inc..............................
Dain Rauscher Incorporated..................................
Adams, Harkness & Hill, Inc.................................
----------
Total.....................................................
==========
</TABLE>
The representatives have advised us and the selling stockholders that the
underwriters propose to offer the shares of common stock to the public at the
public offering price set forth on the cover page of this prospectus and to
certain dealers at that price less a concession of not in excess of $ per
share, of which $ may be reallowed to other dealers. After this offering,
the public offering price, concession and reallowance to dealers may be reduced
by the representatives. No such reduction shall change the amount of proceeds to
be received by us or the selling stockholders as set forth on the cover page of
this prospectus. The common stock is offered by the underwriters as stated
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part.
The underwriters have advised us that they do not expect sales to
discretionary accounts to exceed 5% of the total number of shares offered.
Over-allotment option
We have granted to the underwriters an option, exercisable during the
30-day period after the date of this prospectus, to purchase up to 300,000
additional shares of common stock and the selling stockholders have granted the
underwriters an option to purchase 127,500 additional shares of common stock at
the same price per share as we and the selling stockholders will receive for the
2,850,000 shares that the underwriters have agreed to purchase. To the extent
that the underwriters exercise their over-allotment option, the underwriters
have severally agreed, subject to certain conditions, to purchase approximately
the same percentage thereof as the number of shares to be purchased by each of
them bears to the total number of shares of common stock offered in this
offering. If purchased, these additional shares will be sold by the underwriters
on the same terms as those on which the shares offered hereby are being sold. We
and the selling stockholders will be obligated, pursuant to the over-allotment
option, to sell shares to the underwriters to the extent the over-allotment
option is exercised. The underwriters may exercise the over-allotment option
only to cover over-allotments made in connection with the sale of the shares of
common stock offered in this offering.
70
<PAGE> 72
The following table summarizes the total compensation to be paid to the
underwriters by us and the selling stockholders who have granted us this option:
<TABLE>
<CAPTION>
WITHOUT WITH
PER OVER- OVER-
SHARE ALLOTMENT ALLOTMENT
----- --------- ---------
<S> <C> <C> <C>
Underwriting discounts and commissions payable by us...... $ $ $
Underwriting discounts and commissions payable by the
selling stockholders.................................... $ $ $
</TABLE>
We estimate expenses payable by us in connection with this offering, other
than the underwriting discounts and commissions referred to above, will be
approximately $900,000.
Indemnity
The underwriting agreement contains covenants of indemnity among the
underwriters, us and the selling stockholders against various civil liabilities,
including liabilities under the Securities Act and liabilities arising from
breaches of representations and warranties contained in the underwriting
agreement.
Lock-up agreements
Each executive officer and director and certain other holders of our common
stock have agreed, during the period of 90 days after the effective date of this
prospectus, subject to specified exceptions, not to offer to sell, contract to
sell, or otherwise sell, dispose of, loan, pledge or grant any rights with
respect to any shares of common stock or any options or warrants to purchase any
shares of common stock, or any securities convertible into or exchangeable for
shares of common stock owned as of the date of this prospectus or thereafter
acquired directly by these holders or with respect to which they have the power
of disposition, without the prior written consent of FleetBoston Robertson
Stephens Inc. However, FleetBoston Robertson Stephens Inc. may, in its sole
discretion, at any time or from time to time, without notice, release all or any
portion of securities subject to the lock-up agreements. There are no existing
agreements between the representatives and any of our stockholders who have
executed a lock-up agreement providing consent to the sale of shares prior to
the expiration of the lock-up period.
In addition, we have agreed that during the lock-up period we will not,
without the prior written consent of FleetBoston Robertson Stephens Inc.,
subject to various exceptions, consent to the disposition of any shares held by
stockholders subject to lock-up agreements prior to the expiration of the
lock-up period, or issue, sell, contract to sell, or otherwise dispose of, any
shares of common stock, any options 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 our
common stock upon the exercise of outstanding options and the issuance of
options under existing stock option and incentive plans provided that those
options do not vest prior to the expiration of the lock-up period. See "Shares
Eligible for Future Sale."
Listing
The common stock is currently quoted on the Nasdaq National Market under
the trading symbol "NETP."
Stabilization
The representatives have advised us that, pursuant to Regulation M under
the Securities Act of 1933, some persons participating in this offering may
engage in transactions, including stabilizing bids,
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<PAGE> 73
syndicate covering transactions or the imposition of penalty bids, that may have
the effect of stabilizing or maintaining the market price of the shares of
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 shares of 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
purchase of 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 representatives 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 representatives in a
syndicate covering transaction and has therefore not been effectively placed by
such underwriter or syndicate member. The representatives 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.
Other compensation
In connection with the KD One acquisition, FleetBoston Robertson Stephens
Inc. was paid a commission of $1.2 million in cash for advisory services
provided to us.
LEGAL MATTERS
The validity of the issuance of the shares of common stock we are offering
will be passed upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, Boston,
Massachusetts. Legal matters in connection with this offering will be passed
upon for the underwriters by Cooley Godward LLP, San Francisco, California.
EXPERTS
The financial statements of Net Perceptions, Inc. and Knowledge Discovery
One, Inc. as of December 31, 1998 and 1999 and for each of the three years in
the period ended December 31, 1999 included in this prospectus have been so
included in reliance on the reports of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
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<PAGE> 74
WHERE YOU CAN FIND 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 of 1933
with respect to the common stock we propose to sell in this offering. This
prospectus, which constitutes a part of the registration statement, 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
about us and the common stock we propose to sell in this offering, we refer you
to the registration statement and the exhibits and schedules filed as a part of
the registration statement. Statements contained in this prospectus concerning
the contents of any contract or any other document filed as an exhibit to the
registration statement are not necessarily complete. If a contract or document
has been filed as an exhibit to the registration statement, we refer you to the
copy of the contract or document that has been filed.
The registration statement, including exhibits and schedules thereto, may
be inspected without charge at the principal office of the Securities and
Exchange Commission in Washington, D.C., and copies of all or any part of the
registration statement may be inspected and copied at the public reference
facilities maintained by the Securities and Exchange Commission at 450 Fifth
Street, N.W., Judiciary Plaza, Room 1024, Washington, D.C. 20549, and at the
Commission's regional offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of this material can also be obtained at
prescribed rates by mail from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain more information
about the Public Reference Room by calling the Securities and Exchange
Commission at 1-800-SEC-0330. In addition, the Securities and Exchange
Commission maintains a website (http://www.sec.gov) that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission.
We are subject to the information and periodic reporting requirements of
the Securities Exchange Act of 1934, and, in accordance with the requirements of
the Securities Exchange Act of 1934, file periodic reports, proxy statements and
other information with the Securities and Exchange Commission. These periodic
reports, proxy statements and other information will be available for inspection
and copying at the regional offices, public reference facilities and website of
the Securities and Exchange Commission referred to above.
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<PAGE> 75
NET PERCEPTIONS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
NET PERCEPTIONS, INC.:
Report of Independent Accountants......................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1999................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1998 and 1999....................... F-4
Consolidated Statement of Stockholders' Equity and
Comprehensive Loss for the Years Ended December 31,
1997, 1998 and 1999.................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999....................... F-6
Notes to Consolidated Financial Statements................ F-7
KNOWLEDGE DISCOVERY ONE, INC.:
Report of Independent Accountants......................... F-19
Balance Sheets as of December 31, 1998 and 1999........... F-20
Statements of Operations for the Years Ended December 31,
1997, 1998 and 1999.................................... F-21
Statement of Stockholders' Deficit for the Years Ended
December 31, 1997, 1998 and 1999....................... F-22
Statements of Cash Flows for the Years Ended December 31,
1997, 1998 and 1999.................................... F-23
Notes to Financial Statements............................. F-24
PRO FORMA COMBINED FINANCIAL INFORMATION (UNAUDITED):
Introduction to Pro Forma Combined Financial
Information............................................ F-33
Pro Forma Combined Balance Sheet as of December 31, 1999
(unaudited)............................................ F-34
Pro Forma Combined Statement of Operations for the Year
Ended December 31, 1999 (unaudited).................... F-35
Notes to the Pro Forma Combined Financial Information
(unaudited)............................................ F-36
</TABLE>
F-1
<PAGE> 76
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Net Perceptions, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and
comprehensive loss and of cash flows present fairly, in all material respects,
the financial position of Net Perceptions, Inc. and its subsidiary at December
31, 1998 and 1999, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, 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
January 27, 2000, except as to Note 12, which is
as of February 14, 2000
F-2
<PAGE> 77
NET PERCEPTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 972 $ 17,457
Short-term investments.................................... -- 19,397
Accounts receivable, net.................................. 3,169 7,663
Royalties receivable, net................................. 213 1,135
Prepaid expenses and other current assets................. 142 1,373
-------- --------
Total current assets.............................. 4,496 47,025
Marketable securities....................................... -- 6,317
Investment in joint venture................................. -- 197
Property and equipment, net................................. 1,019 4,749
Other assets................................................ 122 460
-------- --------
Total assets...................................... $ 5,637 $ 58,748
======== ========
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 256 $ 2,550
Accrued expenses.......................................... 1,410 3,296
Deferred revenue.......................................... 2,107 3,336
Current portion of long-term liabilities.................. 255 471
-------- --------
Total current liabilities......................... 4,028 9,653
Long-term liabilities, net of current portion............... 538 707
-------- --------
Total liabilities................................. 4,566 10,360
-------- --------
Commitments and contingencies (Notes 7 and 9)
Series A Convertible Redeemable Preferred Stock, at
redemption value; $.0001 par value; 2,170,000 shares
authorized; 2,168,130 shares issued and outstanding at
December 31, 1998......................................... 650 --
-------- --------
Stockholders' equity:
Series B Convertible Preferred Stock; $.0001 par value;
4,000,000 shares authorized; 3,864,736 shares issued
and outstanding at December 31, 1998................... -- --
Series C Convertible Preferred Stock; $.0001 par value;
4,800,000 shares authorized; 4,635,834 shares issued
and outstanding at December 31, 1998................... -- --
Preferred stock; $.0001 par value; 5,000,000 shares
authorized; no shares issued or outstanding............ -- --
Common stock; $.0001 par value; 50,000,000 shares
authorized; 6,633,308 and 22,025,716 shares issued and
outstanding at December 31, 1998 and 1999,
respectively........................................... 1 2
Additional paid-in capital................................ 11,137 71,231
Accumulated other comprehensive loss...................... -- (89)
Accumulated deficit....................................... (10,717) (22,756)
-------- --------
Total stockholders' equity........................ 421 48,388
-------- --------
Total liabilities, convertible redeemable
preferred stock and stockholders' equity........ $ 5,637 $ 58,748
======== ========
</TABLE>
See accompanying notes to the financial statements.
F-3
<PAGE> 78
NET PERCEPTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
Revenues:
Product........................................ $ 284 $ 3,955 $ 11,408
Service and maintenance........................ 33 522 3,721
---------- ---------- -----------
Total revenues......................... 317 4,477 15,129
---------- ---------- -----------
Cost of revenues:
Product........................................ 14 52 286
Service and maintenance........................ 30 373 2,735
---------- ---------- -----------
Total cost of revenues................. 44 425 3,021
---------- ---------- -----------
Gross margin..................................... 273 4,052 12,108
---------- ---------- -----------
Operating expenses:
Sales and marketing............................ 3,063 4,980 12,099
Research and development....................... 1,372 2,314 8,194
General and administrative..................... 585 1,424 3,725
Stock compensation expense (see Note 7)........ -- 366 1,495
---------- ---------- -----------
Total operating expenses............... 5,020 9,084 25,513
---------- ---------- -----------
Loss from operations............................. (4,747) (5,032) (13,405)
---------- ---------- -----------
Other income (expense):
Interest income................................ 87 197 1,841
Interest expense............................... (56) (89) (212)
Other expense.................................. (6) (44) (263)
---------- ---------- -----------
Total other income..................... 25 64 1,366
---------- ---------- -----------
Net loss......................................... $ (4,722) $ (4,968) $ (12,039)
========== ========== ===========
Basic and diluted net loss per share............. $ (3.01) $ (1.40) $ (0.78)
========== ========== ===========
Shares used in computing basic and diluted net
loss per share................................. 1,569,244 3,545,516 15,402,419
========== ========== ===========
Unaudited pro forma basic and diluted net loss
per share...................................... $ (0.64)
===========
Shares used in computing unaudited pro forma
basic and diluted net loss per share........... 18,851,478
===========
</TABLE>
See accompanying notes to the financial statements.
F-4
<PAGE> 79
NET PERCEPTIONS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SERIES B SERIES C
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- ------------------- --------------- ------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ------ ---------- ------ ------ ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996..... 3,864,736 $-- -- $-- -- $-- 6,153,142 $ 1 $ 3,976
Repurchase of unvested common
stock......................... -- -- -- -- -- -- (182,000) -- (5)
Exercise of stock options...... -- -- -- -- -- -- 306,250 -- 31
Sale of Series C Preferred
Stock, net of $391 of issuance
costs......................... -- -- 3,919,224 -- -- -- -- -- 5,625
Net loss....................... -- -- -- -- -- -- -- -- --
---------- --- ---------- --- -- --- ---------- ---- -------
Balance, December 31, 1997..... 3,864,736 -- 3,919,224 -- -- -- 6,277,392 1 9,627
Exercise of stock options...... -- -- -- -- -- -- 355,916 -- 54
Compensation relating to stock
options....................... -- -- -- -- -- -- -- -- 366
Sale of Series C Preferred
Stock, net of $9 of issuance
costs......................... -- -- 716,610 -- -- -- -- -- 1,090
Net loss....................... -- -- -- -- -- -- -- -- --
---------- --- ---------- --- -- --- ---------- ---- -------
Balance, December 31, 1998..... 3,864,736 -- 4,635,834 -- -- -- 6,633,308 1 11,137
Conversion of preferred stock
to common stock............... (3,864,736) -- (4,635,834) -- -- -- 10,668,700 1 650
Proceeds from initial public
offering, net of $5,543 of
offering costs................ -- -- -- -- -- -- 4,197,500 -- 53,213
Conversion of note payable to
common stock.................. -- -- -- -- -- -- 290,911 -- 4,073
Exercise of common stock
warrant....................... -- -- -- -- -- -- 10,565 -- 16
Issuance of common stock under
employee stock purchase
plan.......................... -- -- -- -- -- -- 42,384 -- 505
Exercise of stock options...... -- -- -- -- -- -- 287,984 -- 169
Repurchase of unvested common
stock......................... -- -- -- -- -- -- (105,636) -- (27)
Compensation relating to stock
options....................... -- -- -- -- -- -- -- -- 1,495
Unrealized loss on
available-for-sale
investments................... -- -- -- -- -- -- -- -- --
Foreign currency translation
adjustments................... -- -- -- -- -- -- -- -- --
Net loss....................... -- -- -- -- -- -- -- -- --
---------- --- ---------- --- -- --- ---------- ---- -------
Balance, December 31, 1999..... -- $-- -- $-- -- $-- 22,025,716 $ 2 $71,231
========== === ========== === == === ========== ==== =======
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE ACCUMULATED STOCKHOLDERS' COMPREHENSIVE
LOSS DEFICIT EQUITY LOSS
------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996..... $ -- $ (1,027) $ 2,950
Repurchase of unvested common
stock......................... -- -- (5)
Exercise of stock options...... -- -- 31
Sale of Series C Preferred
Stock, net of $391 of issuance
costs......................... -- -- 5,625
Net loss....................... -- (4,722) (4,722) $ (4,722)
---- -------- -------- --------
Balance, December 31, 1997..... -- (5,749) 3,879 $ (4,722)
========
Exercise of stock options...... -- -- 54
Compensation relating to stock
options....................... -- -- 366
Sale of Series C Preferred
Stock, net of $9 of issuance
costs......................... -- -- 1,090
Net loss....................... -- (4,968) (4,968) $ (4,968)
---- -------- -------- --------
Balance, December 31, 1998..... -- (10,717) 421 $ (4,968)
========
Conversion of preferred stock
to common stock............... -- -- 651
Proceeds from initial public
offering, net of $5,543 of
offering costs................ -- -- 53,213
Conversion of note payable to
common stock.................. -- -- 4,073
Exercise of common stock
warrant....................... -- -- 16
Issuance of common stock under
employee stock purchase
plan.......................... -- -- 505
Exercise of stock options...... -- -- 169
Repurchase of unvested common
stock......................... -- -- (27)
Compensation relating to stock
options....................... -- -- 1,495
Unrealized loss on
available-for-sale
investments................... (89) -- (89) $ (89)
Foreign currency translation
adjustments................... -- -- -- --
Net loss....................... -- (12,039) (12,039) (12,039)
---- -------- -------- --------
Balance, December 31, 1999..... $(89) $(22,756) $ 48,388 $(12,128)
==== ======== ======== ========
</TABLE>
See accompanying notes to the financial statements.
F-5
<PAGE> 80
NET PERCEPTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(4,722) $(4,968) $(12,039)
Reconciliation of net loss to net cash used by operating
activities:
Depreciation and amortization........................... 140 284 826
Provision for doubtful accounts......................... 28 294 534
Compensation related to stock options................... -- 366 1,495
Equity in losses of joint venture....................... -- -- 197
Changes in assets and liabilities:
Accounts receivable.................................. (187) (3,299) (5,028)
Royalties receivable................................. -- (213) (922)
Prepaid expenses and other current assets............ 6 (9) (781)
Other assets......................................... (25) (79) (338)
Accounts payable..................................... 48 (24) 2,294
Accrued expenses..................................... 68 1,188 1,959
Deferred revenue..................................... 81 2,026 1,229
Other long-term liabilities.......................... -- -- 325
------- ------- --------
Net cash used by operating activities.............. (4,563) (4,434) (10,249)
------- ------- --------
Cash flows from investing activities:
Purchases of short-term investments and marketable
securities.............................................. (3,439) -- (26,803)
Sales and maturities of short-term investments............ 1,757 3,439 1,000
Investment in joint venture............................... -- -- (394)
Purchases of property and equipment....................... -- (442) (4,556)
------- ------- --------
Net cash (used) provided by investing activities... (1,682) 2,997 (30,753)
------- ------- --------
Cash flows from financing activities:
Proceeds from initial public offering, net of $5,543 of
offering costs.......................................... -- -- 53,213
Proceeds from borrowings under notes payable.............. -- -- 4,000
Proceeds from sale of preferred stock..................... 5,625 1,090 --
Proceeds from issuance of stock under employee stock
purchase plan........................................... -- -- 505
Proceeds from exercise of stock options and warrants, net
of repurchases.......................................... 26 54 159
Principal payments under capital lease obligations and
notes payable........................................... (63) (142) (390)
------- ------- --------
Net cash provided by financing activities.......... 5,588 1,002 57,487
------- ------- --------
Net (decrease) increase in cash and cash equivalents........ (657) (435) 16,485
Cash and cash equivalents at beginning of year.............. 2,064 1,407 972
------- ------- --------
Cash and cash equivalents at end of year.................... $ 1,407 $ 972 $ 17,457
======= ======= ========
Supplemental schedule of non-cash investing and financing
activities:
Conversions of preferred stock to common stock............ $ -- $ -- $ 651
Conversion of note payable to common stock................ -- -- 4,073
Capital lease obligations incurred........................ 414 472 --
Insurance policy financed with note payable............... -- -- 450
Supplemental schedule of cash activity:
Interest paid............................................. 52 91 123
</TABLE>
See accompanying notes to the financial statements.
F-6
<PAGE> 81
NET PERCEPTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. ORGANIZATION
Net Perceptions, Inc. (the "Company" or "Net Perceptions") was incorporated
under the laws of the state of Delaware on July 3, 1996. Net Perceptions
develops, markets and supports real time personalization and precision marketing
software solutions. The Company's core technology, the real time recommendation
engine, enables these capabilities to be embedded in a variety of applications
offered over the web and in other environments. Sales to customers located
outside of the United States totaled 27%, 13% and 16% of total revenues in 1997,
1998 and 1999, respectively. International sales to one customer in Japan
totaled 22% of total revenues in 1997. International sales to customers in any
one individual foreign country did not exceed 10% of total revenues in 1998 or
1999.
Net Perceptions is subject to risks and uncertainties common to
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, availability of sufficient capital and a limited operating history.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements include accounts of the Company and
its wholly owned subsidiary operating in the United Kingdom. All significant
intercompany accounts and transactions have been eliminated. The Company's
foreign subsidiary was formed in late 1999. Revenues and identifiable assets
attributable to the Company's foreign subsidiary was less than 10% of their
respective totals. The equity method of accounting is used to account for the
Company's equity investment in a Japanese joint venture (see Note 8).
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 and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue recognition
Net Perceptions recognizes revenues in accordance with the American
Institute of Certified Public Accountants ("AICPA") Statement of Position
("SOP") 97-2, "Software Revenue Recognition," as amended by SOP 98-4, "Deferral
of the Effective Date of a Provision of Statement of Position 97-2." The Company
derives revenues from software licenses, software maintenance and professional
services. Maintenance includes telephone and Web-based technical support, bug
fixes and rights to unspecified upgrades on a when-and-if available basis.
Professional services include implementation, training and consulting.
In software arrangements that include rights to multiple software products,
specified upgrades, maintenance or services, the Company allocates the total
arrangement fee among each deliverable based on the relative fair value of each
of the deliverables determined based on vendor-specific
F-7
<PAGE> 82
NET PERCEPTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
objective evidence. In software arrangements in which the Company does not have
vendor-specific objective evidence, revenue is deferred until the earlier of
when vendor-specific objective evidence is determined for all elements or when
all elements have been delivered. Revenues from license fees are recognized when
persuasive evidence of an agreement exists, delivery of the product has
occurred, no significant Company obligations with regard to implementation
remain, the fee is fixed or determinable and collection is probable. If the fee
due from the customer is not fixed or determinable, revenues are recognized as
payments become due from the customer. If the Company does not consider
collection to be probable, then revenues are recognized when the fee is
collected. Revenues allocable to maintenance are recognized on a straight-line
basis over the periods in which it is provided. The Company evaluates
arrangements that include professional services to determine whether those
services are essential to the functionality of other elements of the
arrangement. When professional services are considered essential, revenues from
the arrangement are recognized using contract accounting, generally on a
percentage of completion basis. When the Company does not consider the
professional services to be essential, revenues allocable to the services are
recognized as they are performed.
The allowance for doubtful accounts was $28, $300 and $672 at December 31,
1997, 1998 and 1999, respectively.
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. There were no
customers in 1998 that exceeded 10% of total revenues or 10% of total
receivables at December 31, 1998. One customer accounted for approximately 11%
of total revenues during 1999. Accounts receivable from one customer represented
approximately 22% of total receivables at December 31, 1999. Royalties
receivable are from the same customer at both December 31, 1998 and 1999.
Cash equivalents, short-term investments and marketable securities
Cash equivalents, short-term investments and marketable securities consist
principally of commercial paper, government agency notes and money market funds.
The Company classifies as cash equivalents, investments with original maturities
of 90 days or less and which are readily convertible to cash. The Company
determines the appropriate classification of short-term investments and
marketable securities at the time of purchase and reevaluates such designation
as of each balance sheet date. Currently, all of the Company's short-term
investments and marketable securities are classified as available-for-sale.
Available-for-sale securities are stated at fair market value with unrealized
holding gains or losses recorded as separate component of stockholders' equity.
Fair value of financial instruments
The carrying amounts of the Company's financial instruments, which include
cash equivalents, short-term investments, marketable securities, accounts
receivable, accounts payable, accrued expenses and capital lease obligations,
approximate their fair values at December 31, 1998 and 1999.
F-8
<PAGE> 83
NET PERCEPTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Property and equipment
Property and equipment are stated at cost. Depreciation and amortization
are computed using the straight-line method over the shorter of the estimated
useful lives of the individual assets or the underlying lease term (in the case
of capital lease equipment). 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, the Company 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 considered more likely
than not.
Advertising expense
Net Perceptions recognizes advertising expense as incurred. Advertising
expense has been insignificant since inception.
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 3,675,232, 2,270,370 and 818,681 at
December 31, 1997, 1998 and 1999, 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 have been calculated assuming the conversion of all outstanding shares of
F-9
<PAGE> 84
NET PERCEPTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
preferred stock into shares of common stock, as if the shares had converted
immediately upon their issuance.
Foreign currency translation
All assets and liabilities of the Company's foreign subsidiary and
affiliate are translated from local currencies to United States dollars at
period end rates of exchange, while revenues and expenses are translated at the
average exchange rates during the period. The functional currency for each of
the Company's foreign subsidiary and affiliate is the respective local currency.
Translation adjustments arising from the translation of net assets located
outside of the United States into United States dollars are recorded as a
separate component of stockholders' equity. Gains or losses resulting from
foreign currency transactions (transactions denominated in a currency other than
the entity's local currency) are included in the consolidated statement of
operations and are not significant.
Comprehensive income
Comprehensive income, as defined by SFAS No. 130, "Reporting Comprehensive
Income," includes net income (loss) and items defined as other comprehensive
income. SFAS No. 130 requires that items defined as other comprehensive income
(loss), such as foreign currency translation adjustments and unrealized gains
and losses on certain investments in debt securities, be separately classified
in the financial statements. Such disclosures are included in the consolidated
statements of stockholders' equity and comprehensive loss.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosures provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation."
Recently issued accounting pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The new
statement establishes accounting and reporting standards for derivative
financial instruments and hedging activities related to those instruments, as
well as other hedging activities. SFAS No. 133, as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133," is effective for the Company
beginning January 1, 2001. Net Perceptions does not expect SFAS No. 133 to
materially affect its financial position or results of operations.
In January 1999, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions." This SOP
requires use of the residual method for recognition of revenue when
vendor-specific objective evidence exists for undelivered elements but does not
exist for delivered elements of software arrangements. SOP 98-9 is effective for
the Company for transactions entered into beginning January 1, 2000. Net
Perceptions does not expect SOP 98-9 to materially affect its financial position
or results of operations.
F-10
<PAGE> 85
NET PERCEPTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
3. FINANCIAL STATEMENT COMPONENTS
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1999
------ -------
<S> <C> <C>
Computer hardware........................................... $ 710 $ 2,561
Leasehold improvements...................................... 233 1,223
Purchased computer software................................. 230 908
Furniture, fixtures and equipment........................... 218 1,255
------ -------
1,391 5,947
Less: Accumulated depreciation and amortization............. (372) (1,198)
------ -------
$1,019 $ 4,749
====== =======
</TABLE>
Property and equipment include assets under capital leases of $1,001 at
both December 31, 1998 and 1999.
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1999
------ ------
<S> <C> <C>
Accrued wages and benefits.................................. $ 626 $1,650
Accrued equipment and leasehold improvements................ 225 226
Other accrued expenses...................................... 559 1,420
------ ------
$1,410 $3,296
====== ======
</TABLE>
4. INCOME TAXES
For income tax purposes, Net Perceptions has available net operating loss
carryforwards of approximately $18,100 and research and development credit
carryforwards of $140 at December 31, 1999. The net operating loss and research
and development credit carryforwards expire in 2011 through 2019 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 considered more likely
than not based on the weight of available information.
F-11
<PAGE> 86
NET PERCEPTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 purposes. Significant components of
Net Perceptions' deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1999
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $ 3,574 $ 6,156
Research and development credit carryforwards........... 88 140
Accrued vacation and other current liabilities.......... 407 664
Accounts receivable allowance........................... 98 262
------- -------
Total deferred tax assets............................ 4,167 7,222
Valuation allowance....................................... (4,167) (7,222)
------- -------
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 a sixty-day notice and by the University of Minnesota if
Net Perceptions has a material breach or default of the terms of the agreement.
On October 13, 1997, Net Perceptions entered into an amendment to the July
31, 1996 license agreement whereby Net Perceptions obtained all rights and
licenses relating to improvements resulting from continued research by the
University of Minnesota relating to the information filtering technology.
Research and development 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, 1998 and 1999, Net Perceptions paid the University
of Minnesota $20 in each year under the terms of the amendment. For the years
ended December 31, 1997, 1998 and 1999, $5, $20 and $20, respectively, were
recognized as research and development expenses under this agreement. Under the
amendment, Net Perceptions may be required to issue up to 36,000 stock options
for each of the three academic research years based on improvements to the
information technology that 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 based on the fair value of the options. To date no such options have
been granted.
F-12
<PAGE> 87
NET PERCEPTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
6. LONG-TERM LIABILITIES
Long-term liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1998 1999
----- ------
<S> <C> <C>
Capital leases.............................................. $ 793 $ 534
Note payable................................................ -- 319
Deferred rent............................................... -- 325
----- ------
793 1,178
Less: Current portion....................................... (255) (471)
----- ------
$ 538 $ 707
===== ======
</TABLE>
Capital leases
Net Perceptions maintained a lease line of credit with a leasing company
for the acquisition of property and equipment under capital lease arrangements.
The lease line of credit expired on December 31, 1999. The initial term of any
loan under the agreement is 42 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 16.8%
and are due in varying monthly installments through July 2002. As of December
31, 1998 and 1999, $1,001 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,
2000.................................................. $ 315
2001.................................................. 220
2002.................................................. 101
-----
Total minimum lease payments.......................... 636
Less: Amount representing interest.................... (102)
-----
Present value of net minimum lease payments........... 534
Less: Current portion................................. (246)
-----
$ 288
=====
</TABLE>
Note payable
In June 1999, the Company financed a multi-year directors' and officers'
insurance policy with a $450 note payable. The note bears interest at 6.0% and
is due in 24 monthly installments of $20, including interest. Principal payments
on the note payable are $225 in 2000 and $94 in 2001.
7. STOCKHOLDERS' EQUITY
Net Perceptions is authorized to issue two classes of stock designated as
common and preferred. As of December 31, 1999, the total number of shares that
Net Perceptions was authorized to issue was 55,000,000 shares, of which
50,000,000 were common stock and 5,000,000 were preferred stock.
F-13
<PAGE> 88
NET PERCEPTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Series A, Series B and Series C Preferred stock
At December 31, 1998, shares of the Company's preferred stock were
convertible, at the option of the holder, into common stock on a share for share
basis, had voting rights and provided for certain preferential dividend,
liquidation, redemption and other rights. All shares of the Company's preferred
stock outstanding at December 31, 1998 (10,668,700 shares) were converted to
common stock in connection with Net Perceptions' April 1999 initial public
offering ("IPO"). There was no preferred stock outstanding at December 31, 1999.
Redemption of the Series A Preferred Stock was mandatory, at the holder's
election, 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. The Series A Preferred Stock was reflected at redemption
value at December 31, 1998. Shares of the Series B and Series C Preferred Stock
were not redeemable. No dividends have been declared.
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 was for shares of Series C Preferred Stock at $1.535 per
share, but converted to a warrant for shares of common stock upon the closing of
the IPO in April 1999. The warrant had a nominal value on the date of issuance
and was exercised in August 1999.
Common stock
Total shares of common stock outstanding at December 31, 1999 were
22,025,716, of which 818,681 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.
Loan converted to common stock
On February 4, 1999, a foreign corporate investor loaned $4,000 to Net
Perceptions at an interest rate of 8%. The note and accrued interest were
converted into 290,911 shares of unregistered common stock in April 1999 in
connection with Net Perceptions' IPO. The note and accrued interest converted to
common stock at the IPO offering price of $14 per share.
Stock option plans
Net Perceptions' 1996 stock option plan (the "1996 Plan") provides for the
issuance of both incentive and nonqualified stock options to employees. The
incentive options allow the holder to purchase shares of Net Perceptions' common
stock at fair market value 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 1,932,216 shares of common stock are
F-14
<PAGE> 89
NET PERCEPTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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.
In February 1999, Net Perceptions' board of directors adopted the 1999
Equity Incentive Plan (the "1999 Plan"), which provides for the issuance of both
incentive and nonqualified stock options. The options allow the holder to
purchase shares of Net Perceptions' common stock at fair market value on the
date of the grant, subject to certain repurchase rights held by Net Perceptions.
The total number of options available for future grant under the 1999 Plan is
555,578. The 1999 Plan replaced the 1996 Plan upon the closing of the IPO in
April 1999. On January 1, 2000, 2001 and 2002, the number of options available
for future grant under the 1999 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. Stock options typically vest over four years and generally
expire ten years from the date of grant.
In February 1999, the board of directors adopted the 1999 Non-Employee
Director Option Plan (the "1999 Non-Employee Plan") under which incentive and
nonqualified stock options are granted to non-employee directors of the Company.
During the year ended December 31, 1999, 20,000 options were granted under the
plan. A total of 480,000 options are available for future grant under the 1999
Non-Employee Plan. Stock options typically become exercisable over a two year
period after issuance and expire ten years from the date of grant.
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 and 1999 below fair market value was $3,146. 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 $366 and $1,495 was recognized during the years ended December 31,
1998 and 1999, respectively. No stock compensation expense was recognized in
1997. With respect to options granted through December 31, 1999, stock
compensation expense of $704, $377, $138 and $66 will be recognized in the years
ending December 31, 2000, 2001, 2002 and 2003, respectively.
If stock compensation expense for the years ended December 31, 1998 and
1999 had been allocated across all relevant functional expense categories within
operating expenses, it would be allocated as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1998 1999
---- ------
<S> <C> <C>
Sales and marketing......................................... $258 $ 784
Research and development.................................... 58 431
General and administrative.................................. 50 280
---- ------
$366 $1,495
==== ======
</TABLE>
F-15
<PAGE> 90
NET PERCEPTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
A summary of activity of the Company's stock option plans 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........................................... 1,204,564 $ 0.61
Exercised......................................... (355,916) $ 0.16
Forfeited......................................... (62,084) $ 0.16
---------
Outstanding, December 31, 1998...................... 1,416,564 $ 0.52
Granted........................................... 1,524,986 $13.67
Exercised......................................... (287,984) $ 0.62
Forfeited......................................... (104,800) $ 8.84
---------
Outstanding, December 31, 1999...................... 2,548,766 $ 8.04
=========
</TABLE>
The following table summarizes information about fixed-price stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED-AVERAGE ------------------------------
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.10 - $0.25 621,806 8.08 $ 0.20 621,806 $ 0.20
$0.50 - $0.98 373,200 8.17 $ 0.85 373,200 $ 0.85
$1.13 - $5.50 384,626 9.02 $ 4.24 384,626 $ 4.24
$7.50 - $14.00 552,584 9.26 $12.27 552,584 $12.27
$15.75 - $16.75 373,300 9.76 $16.01 4,934 $15.91
$17.00 - $25.00 193,250 9.52 $20.05 7,833 $17.29
$35.88 50,000 9.92 $35.88 -- --
--------- ---------
2,548,766 8.88 $ 8.04 1,944,983 $ 4.66
========= =========
</TABLE>
At December 31, 1999, 1,827,255 outstanding options are subject to certain
repurchase rights by the Company.
F-16
<PAGE> 91
NET PERCEPTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
For the purposes of the SFAS No. 123 pro forma disclosures 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, 1998 and 1999 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, 1998 and 1999
would have been the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Net loss:
As reported............................................ $(4,722) $(4,968) $(12,039)
Pro forma.............................................. (4,734) (4,979) (12,202)
Basic and diluted net loss per share:
As reported............................................ $ (3.01) $ (1.40) $ (0.78)
Pro forma.............................................. (3.02) (1.40) (0.79)
</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, 1998 and 1999, respectively; dividend yield
of 0% for all years; risk-free interest rates of 6.1%, 5.4% and 5.8%; expected
lives of 5 years, and a volatility factor of 66% for 1999 grants after the IPO
in April 1999. Volatility factors were not used for periods prior to the IPO as
this factor is not applicable to non-public companies for these fair value
calculations. The weighted-average fair value of options granted during 1997,
1998 and 1999 using the Black-Scholes option-pricing model was $0.03, $1.56 and
$8.24 per share, respectively.
Employee Stock Purchase Plan
In February 1999, Net Perceptions' board of directors adopted 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. During 1999, 42,384
shares were issued under the Purchase Plan.
Stock split
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.
8. JOINT VENTURE
In July 1999, Net Perceptions entered into a joint venture agreement under
which the Company and three other companies formed Net Perceptions Japan
("NPJ"), for the purpose of distributing Net Perceptions' and other
non-competing software products in Japan. Under the agreement, Net Perceptions
contributed capital of $394 for a 45% interest in the joint venture. Net
Perceptions accounts for this joint venture investment using the equity method
of accounting, recording its share of income or loss in the income statement and
correspondingly adjusting the carrying value of the investment. In 1999, Net
Perceptions, recorded its 45% share of losses in NPJ, which were $197.
F-17
<PAGE> 92
NET PERCEPTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
9. 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>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
2000.................................................. $1,206
2001.................................................. 1,121
2002.................................................. 991
2003.................................................. 1,001
2004.................................................. 405
2005 and after........................................ 1,027
------
$5,751
======
</TABLE>
Rent expense totaled $145, $214 and $847 for the years ended December 31,
1997, 1998 and 1999, respectively.
10. 401(k) 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.
11. SEGMENT DATA
Segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the Company's
chief operating decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance. Net Perceptions operates in one
segment, selling software products and related services. Substantially all
product and service revenues through December 31, 1999 have been attributable to
the Net Perceptions for E-commerce and Net Perceptions Recommendation Engine
software products. Service revenues through December 31, 1999 have been derived
principally from implementation and support of the Company's software products.
The Company's chief operating decision maker evaluates revenue and profitability
performance on an enterprise-wide basis to make operating and strategic
decisions. In addition, the Company does not allocate operating expenses to any
segments, nor does it allocate specific assets to any segments. Therefore,
segment information is identical to the consolidated balance sheet and
consolidated statement of operations.
12. SUBSEQUENT EVENT
On February 14, 2000, Net Perceptions completed the acquisition of
Knowledge Discovery One, Inc. ("KD One"). KD One is a leading supplier of
advanced data analysis solutions for multi-channel retailers. In this
transaction, the Company acquired all of the outstanding securities of KD One in
exchange for 1,969,013 shares of common stock. As part of the acquisition, the
Company also assumed all outstanding options to purchase KD One common stock.
The Company has reserved 268,914 shares of its common stock for issuance upon
the exercise of these options. The transaction will be accounted for under the
purchase method of accounting. The total purchase price was approximately $118.2
million.
F-18
<PAGE> 93
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Knowledge Discovery One, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, stockholders' deficit and cash flows present fairly, in all
material respects, the financial position of Knowledge Discovery One, Inc. at
December 31, 1998 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, 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
Austin, Texas
February 25, 2000
F-19
<PAGE> 94
KNOWLEDGE DISCOVERY ONE, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 1,444 $ 1,081
Accounts receivable, net allowance for doubtful accounts
of $0 and $25, respectively............................ 1,235 1,708
Prepaid expenses and other current assets................. 452 266
Restricted cash........................................... -- 246
------- --------
Total current assets.............................. 3,131 3,301
Property and equipment, net................................. 806 665
Restricted cash............................................. 246 --
Deposits and other assets................................... 22 21
------- --------
Total assets...................................... $ 4,205 $ 3,987
======= ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Borrowings under line of credit........................... $ 250 $ 600
Current maturities of long-term obligations............... 141 241
Accounts payable.......................................... 531 683
Accrued liabilities....................................... 384 722
Deferred revenue.......................................... 114 867
------- --------
Total current liabilities......................... 1,420 3,113
Long-term obligations, net of current maturities............ 690 413
Commitments (Note 6)
Redeemable convertible preferred stock, $.001 par value,
8,000,000 and 10,650,000 shares authorized, respectively;
7,570,810 and 10,490,192 shares issued and outstanding,
respectively; liquidation value $10,178 and $16,016,
respectively.............................................. 10,607 73,431
Stockholders' deficit:
Common stock, $.001 par value, 12,000,000, and 15,000,000
shares authorized, respectively; 209,811 and 2,038,093
shares issued and outstanding, respectively............ -- 2
Additional paid-in capital................................ -- --
Deferred stock-based compensation......................... -- (1,962)
Accumulated deficit....................................... (8,512) (71,004)
Treasury stock at cost (0 and 26,208 shares,
respectively).......................................... -- (6)
------- --------
Total stockholders' deficit....................... (8,512) (72,970)
------- --------
Total liabilities, redeemable convertible
preferred stock and stockholders' deficit...... $ 4,205 $ 3,987
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE> 95
KNOWLEDGE DISCOVERY ONE, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Revenue:
License................................................... $ -- $ 1,301 $ 918
Maintenance and services.................................. 647 1,864 2,597
------- ------- --------
Total revenue..................................... 647 3,165 3,515
Cost of revenue:
License................................................... -- 428 649
Maintenance and services.................................. 768 1,554 2,179
------- ------- --------
Total cost of revenue............................. 768 1,982 2,828
Gross profit (loss)......................................... (121) 1,183 687
Operating expenses:
Sales and marketing....................................... 914 1,558 3,322
Research and development.................................. 1,387 2,473 2,980
General and administrative................................ 706 1,631 2,162
Amortization of stock-based compensation (see Note 8)..... -- -- 310
------- ------- --------
Total operating expenses.......................... 3,007 5,662 8,774
------- ------- --------
Operating loss.............................................. (3,128) (4,479) (8,087)
Other income (expense):
Interest income........................................... 95 80 68
Interest expense.......................................... (13) (64) (143)
Loss on disposal of equipment............................. -- (141) (5)
------- ------- --------
Net loss.................................................... (3,046) (4,604) (8,167)
Accretion on redeemable convertible preferred stock......... (133) (351) (57,018)
------- ------- --------
Net loss attributable to common stock....................... $(3,179) $(4,955) $(65,185)
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 96
KNOWLEDGE DISCOVERY ONE, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL DEFERRED TOTAL
------------------ PAID-IN STOCK-BASED ACCUMULATED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT STOCK DEFICIT
--------- ------ ---------- ------------ ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997........ 62,000 $-- $ 13 $ -- $ (402) $-- $ (389)
Issuance of common stock to vendor
for services.................... 1,000 -- -- -- -- -- --
Issuance of common stock upon
exercise of employee stock
options......................... 40,000 -- -- -- -- -- --
Accretion on redeemable
convertible preferred stock..... -- -- (13) -- (120) -- (133)
Net loss.......................... -- -- -- -- (3,046) -- (3,046)
--------- --- ------- ------- -------- --- --------
Balance at December 31, 1997...... 103,000 -- -- -- (3,568) -- (3,568)
Issuance of common stock upon
exercise of employee stock
options......................... 106,811 -- 11 -- -- -- 11
Accretion on redeemable
convertible preferred stock..... -- -- (11) -- (340) -- (351)
Net loss.......................... -- -- -- -- (4,604) -- (4,604)
--------- --- ------- ------- -------- --- --------
Balance at December 31, 1998...... 209,811 -- -- -- (8,512) -- (8,512)
Issuance of common stock upon
exercise of employee stock
options......................... 1,828,282 2 284 -- -- -- 286
Stock options issued to vendor.... -- -- 21 -- -- -- 21
Purchase of treasury stock........ -- -- -- -- -- (6) (6)
Stock-based compensation.......... -- -- 2,388 (1,962) -- -- 426
Accretion on redeemable
convertible preferred stock..... -- -- (2,693) -- (54,325) -- (57,018)
Net loss.......................... -- -- -- -- (8,167) -- (8,167)
--------- --- ------- ------- -------- --- --------
Balance at December 31, 1999...... 2,038,093 $ 2 $ -- $(1,962) $(71,004) $(6) $(72,970)
========= === ======= ======= ======== === ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 97
KNOWLEDGE DISCOVERY ONE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(3,046) $(4,604) $(8,167)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 100 314 378
Non-cash stock based compensation...................... -- -- 447
Loss on disposal of equipment.......................... -- 141 2
Provision for doubtful accounts........................ -- -- 25
Changes in assets and liabilities:
Accounts receivable.................................. (160) (998) (498)
Prepaid expenses and other current assets............ (27) (425) 186
Restricted cash...................................... -- (246) --
Deposits and other assets............................ (15) (6) 1
Accounts payable..................................... 289 162 152
Deferred revenue..................................... -- 114 753
Accrued liabilities.................................. (67) 346 338
------- ------- -------
Net cash used in operating activities............. (2,926) (5,202) (6,383)
------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment....................... (716) (630) (249)
Proceeds from the sale of property and equipment.......... -- -- 10
------- ------- -------
Net cash used in investing activities............. (716) (630) (239)
------- ------- -------
Cash flows from financing activities:
Borrowings under line of credit........................... -- 250 350
Proceeds from notes payable............................... 268 604 --
Repayments of notes payable............................... -- (327) (118)
Proceeds from sale leaseback transaction.................. -- 310 --
Repayments of capital lease obligations................... -- (23) (59)
Repayment of note payable to related party................ (70) -- --
Proceeds from issuance of redeemable convertible preferred
stock.................................................. 3,770 6,178 5,839
Offering costs of issuing redeemable convertible preferred
stock.................................................. (35) (20) (33)
Proceeds from issuance of common stock.................... -- 5 286
Purchase of treasury stock................................ -- -- (6)
Proceeds from common stock purchased but unissued......... 6 -- --
------- ------- -------
Net cash provided by financing activities......... 3,939 6,977 6,259
------- ------- -------
Net increase in cash and cash equivalents................... 297 1,145 (363)
Cash and cash equivalents at beginning of year.............. 2 299 1,444
------- ------- -------
Cash and cash equivalents at end of year.................... $ 299 $ 1,444 $ 1,081
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 13 $ 64 $ 140
Supplemental disclosure of non-cash investing and financing
activities:
Conversion of bridge loan into Series A redeemable
convertible preferred stock............................ 230 -- --
Issuance of previously unissued common stock.............. -- 6 --
Accretion on redeemable convertible preferred stock....... 133 351 57,018
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 98
KNOWLEDGE DISCOVERY ONE, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. ORGANIZATION
Knowledge Discovery One, Inc. (the "Company"), formerly known as J.L.
Supercomputing Resource, Inc., was founded as a Texas corporation on February
22, 1995 for the purpose of developing, marketing and supporting decision
support products for retail applications. The Company has developed a retail
software suite that allows customers to accurately forecast demand, measure
promotion effectiveness, optimize inventory and allocations, and predict
customer loyalty. The Company currently sells its product and provides
consulting and data processing services to customers throughout North America.
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 and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and on deposit at banks.
The Company considers highly liquid investments with original maturities of
three months or less to be cash equivalents. Cash equivalents consist of
deposits in money market funds at December 31, 1998 and 1999.
Fair value of financial instruments
The carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, restricted cash and accrued liabilities,
approximated fair value as of December 31, 1998 and 1999 due to the relatively
short maturity of these instruments. The carrying amounts of the Company's
borrowings under variable rate short-term and long-term debt instruments
approximated their fair value at December 31, 1998 and 1999 due to their
variable nature.
Property and equipment
Property and equipment are recorded at cost. Depreciation is provided for
using the straight-line method over the estimated useful lives of the respective
assets or the term of the lease for capital leases and leasehold improvements.
The useful lives are generally three to five years. Expenditures that increase
the value or extend the life of the asset are capitalized, while the cost of
maintenance and repairs are expensed as incurred. Upon disposal or retirement of
assets, the cost and related accumulated depreciation are removed from the
accounts, and the related gains or losses are reflected in operations.
Revenue recognition
The Company's revenues are derived from product licensing revenues and fees
for consulting, data processing and maintenance services.
Product licensing revenues are recognized after shipment of the product,
provided persuasive evidence of an arrangement exists, collection of the
resulting receivable is probable and the fee for
F-24
<PAGE> 99
KNOWLEDGE DISCOVERY ONE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
the arrangement is fixed or determinable. Consulting and data processing
revenues are recognized over the period in which the services are rendered.
Maintenance revenue consists of maintenance and renewal fees for providing
unspecified product updates on an if and when available basis and technical
support for the Company's software products. Maintenance revenue is recognized
ratably over the related service period, generally twelve months.
Advertising expenses
Advertising expenses consist primarily of costs incurred promoting the
Company's products and services, including public relations, trade shows,
marketing collateral, etc. The Company expenses all advertising costs as
incurred. The Company had $193, $119 and $188 in advertising expenses for the
years ended December 31, 1997, 1998 and 1999, respectively.
Research and development
Research and development costs are charged to operations as incurred. The
Company capitalizes certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion of
a working model. Costs incurred by the Company between the completion of a
working model and the point at which the product is ready for general release
have been insignificant.
Impairment of long-lived assets
The Company evaluates its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying value of an asset may not
be recoverable.
Federal income taxes
The Company accounts for income taxes in accordance with the liability
method. This method requires that deferred taxes be computed annually utilizing
the effective tax rates in effect when the temporary difference are expected to
reverse and adjusted when new tax laws or rates are enacted. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
Risks and uncertainties
The Company's products are concentrated in the software industry which is
highly competitive and subject to rapid technological change. The Company's
operating results are significantly dependent on the Company's ability to market
and develop its products. The inability of the Company to successfully market
its products as a result of competition or other factors would have a material
adverse effect on the Company's business financial condition and results of
operations.
F-25
<PAGE> 100
KNOWLEDGE DISCOVERY ONE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
3. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1999
------ ------
<S> <C> <C>
Computer equipment.......................................... $ 804 $ 978
Equipment under capital lease............................... 310 310
Furniture and fixtures...................................... 30 69
Leasehold improvements...................................... 22 33
------ ------
1,166 1,390
Less: accumulated depreciation and amortization............. (360) (725)
------ ------
$ 806 $ 665
====== ======
</TABLE>
Amortization of equipment under capital leases is included in depreciation
expense.
4. LINE OF CREDIT
On August 1998, the Company entered into a revolving credit agreement with
a commercial bank that provides up to $2,000 in borrowings based on a formula
using eligible assets. The line is collateralized by substantially all of the
Company's assets. The maturity date of the line of credit is February 28, 2000.
There is no commitment fee on the unused line of credit. The line of credit
bears interest at the prime rate, which was 8.5% at December 31, 1999. At
December 31, 1999, $600 was outstanding under this line of credit.
5. LONG-TERM OBLIGATIONS
Long-term obligations are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1998 1999
----- -----
<S> <C> <C>
Note payable................................................ $ 544 $ 431
Capital lease obligations................................... 287 223
----- -----
831 654
Less: current maturities.................................... (141) (241)
----- -----
$ 690 $ 413
===== =====
</TABLE>
The note payable relates to the purchase of property and equipment and is
due in monthly payments of $18 which includes principle and interest. The note
bears interest at 15% and matures in February 2002. The note is collateralized
by the purchased property. A full recourse, additional interest payment of 20%
of the original borrowing amount is payable at the end of the term of the loan,
but the Company has the option to extend payments for an additional year.
Additionally, the lender received a warrant to purchase 23,121 shares of the
Company's Series B redeemable convertible preferred stock (see Note 7).
The Company's capital lease obligations are collaterialized by the
underlying equipment. The Company is required to maintain a compensating balance
relating to a leasing agreement deposit which is shown on the balance sheet as
restricted cash.
F-26
<PAGE> 101
KNOWLEDGE DISCOVERY ONE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Maturity of debt including line of credit, excluding capital lease
obligations:
<TABLE>
<CAPTION>
FISCAL YEAR TOTAL
----------- ------
<S> <C>
2000............................................ $ 768
2001............................................ 221
2002............................................ 42
------
$1,031
======
</TABLE>
6. COMMITMENTS
The Company leases its facilities and certain other equipment under
operating lease agreements. Rental expense under operating leases was $108, $380
and $556 for the years ended December 31, 1997, 1998 and 1999, respectively.
As of December 31, 1999, future minimum rental commitments under these
leases are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR CAPITAL OPERATING
----------- ------- ---------
<S> <C> <C>
2000........................................................ $101 $ 604
2001........................................................ 101 456
2002........................................................ 68 300
2003........................................................ -- 315
2004........................................................ -- 26
---- ------
270 $1,701
======
Less amount representing interest on capital lease
obligations............................................... (47)
----
Present value of minimum lease payments..................... 223
Less current portion of capital lease obligations........... (74)
----
$149
====
</TABLE>
7. CONVERTIBLE PREFERRED STOCK
As of December 31, 1999, the Company had authorization for the issuance of
10,650,000 shares of $.001 par value preferred stock and had designated the
following series:
<TABLE>
<CAPTION>
SHARES SHARES LIQUIDATION
DESIGNATED OUTSTANDING PREFERENCE
---------- ----------- -----------
<S> <C> <C> <C>
Series A convertible preferred stock................ 4,000,000 4,000,000 $4,000
Series B convertible preferred stock................ 3,593,931 3,570,810 6,177
Series C convertible preferred stock................ 2,919,382 2,919,382 5,839
</TABLE>
The Series A, B and C preferred stock (the "preferred stock") carry a
liquidation preference of $1.00, $1.73 and $2.00 per share, respectively.
The preferred stock is convertible into common stock at the option of the
holder on a one-for-one basis, subject to certain adjustments. Each series of
preferred stock will automatically convert upon the earliest of (i) the closing
date of an underwritten public offering of the Company's common stock with
aggregate proceeds of more than $15,000 and a per share offering price of at
least $6.50 or (ii) the date of an affirmative election of the holders of a
majority of the outstanding shares of
F-27
<PAGE> 102
KNOWLEDGE DISCOVERY ONE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
preferred stock. The Company has reserved 10,490,192 shares of common stock to
permit conversion of the preferred stock in accordance with its terms.
Holders of the preferred stock are entitled to one vote for each share of
common stock into which such shares may be converted. Each share of preferred
stock entitles the holder to receive dividends, if and when declared by the
board of directors, prior to any dividend paid on the common stock. Dividends,
if any, on preferred stock shall be declared at an annual rate of 10% of the
original price paid per share per annum. Prior to January 1, 2002, such
dividends shall not accumulate. As of December 31, 1999, no dividends have been
declared. In the event of liquidation, the preferred stock has preference over
the common stock in the amount equal to the original issue price plus declared
but unpaid dividends. If at any time after January 13, 2004, the holders of at
least 67% of the outstanding shares of Series A, B and C preferred stock then
outstanding voting together as one class request, the Company will be required
to redeem up to 50% of such holders' shares at the greater of (i) the original
issue price per share plus any accrued but unpaid dividends or (ii) the fair
market value per share as determined by an independent qualified appraiser. At
any time after January 13, 2005, the holders of at least 67% of the outstanding
shares of Series A, B and C preferred stock then outstanding voting together as
one class request, the Company will be required to redeem up to 100% of such
holders' shares at the greater of the original issue price per share plus any
accrued but unpaid dividends and the fair market value per share as determined
by an independent qualified appraiser.
As of December 31, 1999, the value of the preferred stock included $57,502
of accretion relating to the increase in the fair market value of the preferred
stock as it relates to the redemption value as noted above.
A summary of the preferred stock activity for the years ended December 31,
1997, 1998 and 1999 is presented below:
<TABLE>
<CAPTION>
PREFERRED STOCK
---------------------
SHARES AMOUNT
---------- -------
<S> <C> <C>
Balance, January 1, 1997.................................... -- $ --
Issuance of Series A at $1.00 per share, net issuance
costs.................................................. 4,000,000 3,965
Accretion of preferred stock.............................. -- 133
---------- -------
Balance, December 31, 1997.................................. 4,000,000 4,098
Issuance of Series B at $1.73 per share, net issuance
costs.................................................. 3,570,810 6,158
Accretion of preferred stock.............................. -- 351
---------- -------
Balance, December 31, 1998.................................. 7,570,810 10,607
Issuance of Series C at $2.00 per share, net issuance
costs.................................................. 2,919,382 5,806
Accretion of preferred stock.............................. -- 57,018
---------- -------
Balance, December 31, 1999.................................. 10,490,192 $73,431
========== =======
</TABLE>
8. STOCKHOLDERS' DEFICIT
The Company has adopted a 1996 Stock Option/Stock Issuance Plan (the
"Plan"), providing for two separate equity programs: (i) the Option Grant
Program providing for the granting of both incentive and non-statutory stock
options and (ii) the Stock Issuance Program providing for the issuance of common
stock directly, either through the immediate purchase of such shares or as a
bonus for services rendered to the Company.
F-28
<PAGE> 103
KNOWLEDGE DISCOVERY ONE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The Plan, as amended, provides for a maximum number of common shares to be
issued of 3,709,727. Accordingly, the Company has reserved a sufficient number
of shares of common stock to permit exercise of options or issuance of shares in
accordance with the terms of the Plan. If an option expires or becomes
unexercisable for any reason, options related to the unpurchased shares become
available for grant. Generally, options granted under the Plan have a term of
ten years from the date of grant and vest 25% of the total after the first year
and ratably for the remaining three years of the vesting term. These options can
be immediately exercised on the date of grant. The Company has the right to
repurchase shares purchased through the exercise of options at the original
exercise price. Incentive stock options can not be granted for less than 100% of
the fair market value of the stock and non-statutory stock options can not be
granted for less than 110% of the fair market value of the stock to any
shareholder of the Company with a 10% or greater interest in the common stock of
the Company.
A summary of activity under the Company's Plan for the years ended December
31, 1997, 1998 and 1999 is presented below:
<TABLE>
<CAPTION>
WEIGHTED
AVAILABLE EXERCISE AVERAGE
FOR OUTSTANDING PRICE EXERCISE
GRANT OPTIONS PER SHARE PRICE AMOUNT
----------- ----------- ------------ -------- ------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997.......... 2,801,636 -- -- -- --
Options approved for grant.......... 408,091 -- -- -- --
Options granted..................... (1,927,264) 1,927,264 $0.10 - 0.11 $0.11 $ 204
Options exercised................... -- (40,000) -- 0.00 --
Options forfeited................... 6,000 (6,000) 0.10 0.10 (1)
----------- ---------- -----
Balance at December 31, 1997........ 1,288,463 1,881,264 0.10 - 0.11 0.11 203
Options granted..................... (1,062,935) 1,062,935 0.10 - 0.19 0.13 140
Options exercised................... -- (106,811) 0.10 - 0.17 0.10 (11)
Options forfeited................... 407,345 (407,345) 0.10 - 0.17 0.10 (42)
----------- ---------- -----
Balance at December 31, 1998........ 632,873 2,430,043 0.10 - 0.19 290
Options approved for grant.......... 500,000 --
Options granted..................... (1,404,965) 1,404,965 0.17 - 0.40 0.30 421
Options exercised................... -- (1,828,282) 0.10 - 0.40 0.16 (286)
Options forfeited................... 338,510 (338,510) 0.10 - 0.40 0.18 (61)
Options repurchased................. 26,208 -- -- -- --
----------- ---------- -----
Balance at December 31, 1999........ 92,626 1,668,216 0.10 - 0.40 $ 364
=========== ========== =====
Weighted-average fair value of
options granted:
Year ended December 31, 1997...... $ 0.03
Year ended December 31, 1998...... $ 0.04
Year ended December 31, 1999...... $ 1.75
</TABLE>
The Company has applied Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, in
accounting for the Plan. Accordingly, no compensation expense has been
recognized for the Plan. Had compensation cost for the Plan been determined
based upon the fair value at the grant date for awards under the Plan consistent
with the methodology prescribed under Statement of Financial Accounting
Standards No. 123, "Accounting
F-29
<PAGE> 104
KNOWLEDGE DISCOVERY ONE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
for Stock-Based Compensation," the Company's net loss would have increased for
the years ended December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Net loss:
As reported..................................... $(3,046) $(4,604) $(8,167)
Pro forma....................................... (3,047) (4,637) (8,189)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following weighted average assumptions used
for grants in 1997, 1998 and 1999: dividend yield of 0%, risk-free interest rate
of 6.5% and expected lives of five years. Volatility of the Company's common
stock underlying the options granted was not considered because the Company's
equity securities are not publicly traded as of December 31, 1999.
The following table summarizes information about fixed stock options
outstanding and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
NUMBER WEIGHTED-AVERAGE
OUTSTANDING REMAINING CONTRACTUAL WEIGHTED-AVERAGE
EXERCISE PRICE AT 12/31/99 LIFE (YEARS) EXERCISE PRICE
- -------------- ----------- --------------------- ----------------
<S> <C> <C> <C>
$0.10 - $0.19 1,206,366 7.9 $0.13
$0.40 461,850 9.7 $0.40
---------
1,668,216 8.4 $0.20
=========
</TABLE>
Stock based compensation
In connection with certain stock option grants during the year ended
December 31, 1999, the Company recorded unearned stock-based compensation
totaling $2,272, which is being amortized over the vesting periods of the
related options which is generally four years. Amortization of this stock-based
compensation recognized during the year ended December 31, 1999 totaled $310. No
stock-based compensation was recorded in fiscal years 1997 and 1998. If the
stock-based compensation for the year ended December 31, 1999 had been allocated
across the relevant functional expense categories, it would be allocated as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
Cost of revenues............................................ $ 30
Sales and marketing......................................... 102
Research and development.................................... 61
General and administrative.................................. 117
----
$310
====
</TABLE>
Warrants
In connection with an equipment finance line of credit entered into in
1997, the Company issued a warrant to a bank for the purchase of 23,121 shares
of the Company's Series B convertible preferred stock at an exercise price of
$1.73 per share. The warrant is fully exercisable and expires on
F-30
<PAGE> 105
KNOWLEDGE DISCOVERY ONE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
the later of 2008 or five years after an initial public offering. The Company
has reserved 23,121 shares of Series B convertible preferred stock and common
stock for issuance under this warrant. The fair value of the warrant was not
significant.
9. EMPLOYEE BENEFITS
During 1997, the Company established a 401(k) retirement savings plan for
its full time employees. All employees meeting minimum age requirements are
eligible to enroll in the savings plan 90 days after commencement of employment.
As of December 31, 1999, the Company has not provided discretionary matching
contributions to employee accounts.
10. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash equivalents and
accounts receivable. Cash and cash equivalents at times exceed FDIC insurance
coverage limits. The Company maintains its cash and cash equivalents in major,
creditworthy financial institutions and has not experienced any losses on its
deposits. The Company's accounts receivable result primarily from sales to large
consumer retail companies. The Company performs credit evaluations of its
customers and generally does not require collateral. Management does not believe
that significant credit risk for trade receivables exist at December 31, 1998.
Information regarding sales to and accounts receivable from major
customers, to the extent amounts were 10% or greater, is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Sales for the period ended December 31,
Customer A........................................... 60% 33% 28%
Customer B........................................... -- 25 --
Customer C........................................... -- 18 14
Customer D........................................... -- 16 15
Customer G........................................... -- -- 13
Accounts receivable at December 31,
Customer A........................................... -- 14% 14%
Customer B........................................... -- 42 --
Customer C........................................... -- 23 14
Customer D........................................... -- 18 --
Customer E........................................... -- -- 17
Customer F........................................... -- -- 18
</TABLE>
F-31
<PAGE> 106
KNOWLEDGE DISCOVERY ONE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
11. INCOME TAXES
The components of the net deferred tax assets are as follows at December
31:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1999
------- -------
<S> <C> <C>
Deferred tax asset:
Net operating loss carryforwards.......................... $ 2,873 $ 5,896
Deferred tax liabilities:
Depreciation.............................................. (18) (22)
Accrued expense........................................... 76 24
------- -------
Net deferred tax asset before valuation allowance........... 2,931 5,898
Valuation allowance......................................... (2,931) (5,898)
------- -------
Net deferred tax asset...................................... $ -- $ --
======= =======
</TABLE>
Federal income tax operating loss carryforwards begin to expire in 2010.
Under the Tax Reform Act of 1986, the amount of and the benefit from net
operating losses that can be carried forward may be impaired in certain
circumstances. Events which may cause changes in the Company's tax carryovers
include, but are not limited to, a cumulative ownership change of more than 50%
over a three years period. Certain of the Company's operating losses that can be
utilized in any one taxable year for federal tax purposes may be limited by
future ownership changes.
Following is a reconciliation of the amount of the income tax benefit that
would result from applying the statutory Federal income tax rates to pretax loss
and the reported amount of income tax benefit for the years ended December 31,
1997, 1998 and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Tax benefit at statutory rate of 34%...................... $ 1,036 $ 1,565 $ 2,737
State income tax benefit.................................. 91 138 242
Permanent differences..................................... -- (3) (12)
Net increase in valuation allowance....................... (1,127) (1,700) (2,967)
------- ------- -------
$ -- $ -- $ --
======= ======= =======
</TABLE>
12. RELATED PARTY TRANSACTIONS
On February 10, 1997, the Company paid the balance of $70 on a loan to a
shareholder bearing no interest.
13. SUBSEQUENT EVENT
On February 14, 2000 all of the Company's capital stock was acquired by Net
Perceptions, Inc. for 1,969,013 shares of Net Perceptions, Inc. common stock.
Additionally, all of the Company's outstanding stock options were assumed by Net
Perceptions, Inc.
F-32
<PAGE> 107
NET PERCEPTIONS, INC.
PRO FORMA COMBINED FINANCIAL INFORMATION
(UNAUDITED)
On February 14, 2000, Net Perceptions, Inc. ("Net Perceptions") completed
its acquisition of Knowledge Discovery One, Inc. ("KD One"). The following
unaudited pro forma combined statement of operations for the year ended December
31, 1999 gives effect to the acquisition as if it had occurred on January 1,
1999 using the purchase method of accounting. The pro forma combined statement
of operations is based on historical results of operations of Net Perceptions
and KD One for the year ended December 31, 1999. The unaudited pro forma
combined balance sheet as of December 31, 1999 gives effect to the acquisition
as if it had occurred on that date and is based on the historical financial
position of Net Perceptions and KD One. The pro forma combined statement of
operations and pro forma combined balance sheet and the accompanying notes (the
"Pro Forma Combined Financial Information") should be read in conjunction with
and are qualified by the historical financial statements of Net Perceptions and
KD One and the notes thereto.
The pro forma adjustments are based on estimates and assumptions available
at the time of the filing of this Registration Statement that Net Perceptions
and KD One believe are reasonable under the circumstances. The fair value of the
consideration will be allocated to the assets and liabilities acquired based
upon the fair values of such assets and liabilities at the effective time of the
acquisition. The estimates and assumptions will be adjusted upon issuance of the
final valuation report.
The Pro Forma Combined Financial Information has been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission. The Pro Forma Combined Financial Information is intended for
informational purposes only and is not necessarily indicative of the future
financial position or future results of operations of the consolidated company
after the acquisition, or of the financial position or results of operations of
the consolidated company that would have actually occurred had the acquisition
been effected as of the dates indicated above.
F-33
<PAGE> 108
NET PERCEPTIONS, INC.
PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)
AS OF DECEMBER 31, 1999
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
NET ADJUSTMENTS PRO FORMA
PERCEPTIONS KD ONE (NOTE 2) COMBINED
----------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.............. $ 17,457 $ 1,081 $ -- $ 18,538
Short-term investments................. 19,397 -- -- 19,397
Accounts receivable, net............... 7,663 1,708 -- 9,371
Royalties receivable, net.............. 1,135 -- -- 1,135
Prepaid expenses and other current
assets.............................. 1,373 512 -- 1,885
-------- -------- -------- --------
Total current assets........... 47,025 3,301 -- 50,326
Marketable securities.................... 6,317 -- -- 6,317
Property and equipment, net.............. 4,749 665 -- 5,414
Intangible assets........................ -- -- 117,400(b) 117,400
Other assets............................. 657 21 -- 678
-------- -------- -------- --------
Total assets................... $ 58,748 $ 3,987 $117,400 $180,135
======== ======== ======== ========
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
expenses............................ $ 5,846 $ 1,405 $ 2,100(a) $ 9,351
Deferred revenue....................... 3,336 867 (215)(a) 3,988
Borrowings under line of credit........ -- 600 -- 600
Current portion of long-term
liabilities......................... 471 241 -- 712
-------- -------- -------- --------
Total current liabilities...... 9,653 3,113 1,885 14,651
Long-term liabilities, net of current
portion................................ 707 413 -- 1,120
-------- -------- -------- --------
Total liabilities.............. 10,360 3,526 1,885 15,771
-------- -------- -------- --------
Redeemable convertible preferred stock... -- 73,431 (73,431)(c) --
Stockholders' equity:
Common stock........................... 2 2 (2)(d) 2
Treasury stock......................... -- (6) 6(d) --
Additional paid-in capital............. 71,231 -- 115,976(a)(b) 187,207
Accumulated other comprehensive loss... (89) -- -- (89)
Deferred stock-based compensation...... -- (1,962) 1,962(d) --
Accumulated deficit.................... (22,756) (71,004) 71,004(d) (22,756)
-------- -------- -------- --------
Total stockholders' equity..... 48,388 (72,970) 188,946 164,364
-------- -------- -------- --------
Total liabilities, convertible
redeemable preferred stock
and stockholders' equity.... $ 58,748 $ 3,987 $117,400 $180,135
======== ======== ======== ========
</TABLE>
See accompanying notes to pro forma financial information.
F-34
<PAGE> 109
NET PERCEPTIONS, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
NET ADJUSTMENTS PRO FORMA
PERCEPTIONS KD ONE (NOTE 2) COMBINED
----------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Product.............................. $ 11,408 $ 918 $ -- $ 12,326
Service and maintenance.............. 3,721 2,597 -- 6,318
-------- -------- -------- ---------
Total revenues............... 15,129 3,515 -- 18,644
-------- -------- -------- ---------
Cost of revenues:
Product.............................. 286 649 -- 935
Service and maintenance.............. 2,735 2,179 -- 4,914
-------- -------- -------- ---------
Total cost of revenues....... 3,021 2,828 -- 5,849
-------- -------- -------- ---------
Gross margin........................... 12,108 687 -- 12,795
-------- -------- -------- ---------
Operating expenses:
Sales and marketing.................. 12,099 3,322 -- 15,421
Research and development............. 8,194 2,980 -- 11,174
General and administrative........... 3,725 2,162 -- 5,887
Stock compensation expense........... 1,495 310 -- 1,805
Amortization of intangibles.......... -- -- 30,017(b) 30,017
-------- -------- -------- ---------
Total operating expenses..... 25,513 8,774 30,017 64,304
-------- -------- -------- ---------
Loss from operations................... (13,405) (8,087) (30,017) (51,509)
Other income (loss), net............... 1,366 (80) -- 1,286
-------- -------- -------- ---------
Net loss............................... (12,039) (8,167) (30,017) (50,223)
Accretion on redeemable convertible
preferred stock...................... -- (57,018) 57,018(c) --
-------- -------- -------- ---------
Net loss attributable to common
stock................................ $(12,039) $(65,185) $ 27,001 $ (50,223)
======== ======== ======== =========
Net loss per share:
Basic and diluted.................... $ (0.78) $ (2.91)(f)
======== =========
Shares used in computing basic and
diluted........................... 15,402 17,274(f)
======== =========
Pro forma basic and diluted.......... $ (0.64)(e) $ (2.42)(f)
======== =========
Shares used in computing pro forma
basic and diluted................. 18,851(e) 20,723(f)
======== =========
</TABLE>
See accompanying notes to pro forma financial information.
F-35
<PAGE> 110
NET PERCEPTIONS, INC.
NOTES TO THE PRO FORMA COMBINED FINANCIAL INFORMATION
(UNAUDITED)
1. GENERAL
Net Perceptions will account for the acquisition of KD One under the
purchase method. The accompanying pro forma combined financial information
reflect an aggregate purchase price of approximately $118.2 million, consisting
of the fair value of common stock issued ($101.5 million), the fair value of
options for common stock assumed ($14.6 million), and transaction costs ($2.1
million), and is for illustrative purposes only. Actual fair values of the
assets and liabilities acquired will be based on financial information as of the
closing date of the acquisition (February 14, 2000) and the final valuation
report. The preliminary purchase price allocation is as follows (in thousands):
<TABLE>
<S> <C>
Acquired technology......................................... $ 4,000
Customer List............................................... 3,000
Workforce................................................... 1,000
Excess of purchase price over fair value of net assets
acquired (goodwill)....................................... 109,400
Fair value of net assets.................................... 769
--------
Total............................................. $118,169
========
</TABLE>
2. PRO FORMA ADJUSTMENTS AND ASSUMPTIONS
(a) Adjustments to record estimated transaction costs and adjust deferred
license revenues to estimated cost in accordance with Accounting Principles
Board Opinion No. 16.
(b) Represents the excess of the purchase consideration over the assigned
values of net assets acquired. Goodwill is being amortized over four years.
Other identified intangibles are being amortized over three years.
(c) The pro forma adjustment reflects the conversion of KD One preferred
stock (including accretion) into KD One common stock, which was exchanged for
Net Perceptions common stock pursuant to the acquisition.
(d) Adjustment reflects the elimination of KD One's historical
stockholders' equity.
(e) See Note 2 of the notes to financial statements for Net Perceptions for
an explanation of the methods used in computing net loss per share data.
(f) Shares used in computing net loss per share have been adjusted to
reflect the shares of Net Perceptions common stock to be issued to the
stockholders of KD One whose shares of KD One common stock are vested, as
consideration in the acquisition. Approximately 97,095 of the shares of Net
Perceptions common stock to be issued to the stockholders of KD One will be
subject to a repurchase option, which is at Net Perceptions' discretion, at the
original sale price in the event the individual holding the shares terminates
his or her employment with Net Perceptions. The total number of shares of Net
Perceptions common stock issued as consideration at the closing of the
acquisition was 1,969,013, of which 210,000 were placed in escrow.
F-36
<PAGE> 111
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses, other than underwriting discounts and commissions, expected
to be incurred by us in connection with the sale of common stock being
registered are estimated to be as follows:
<TABLE>
<S> <C>
SEC Registration fee........................................ $ 42,000
NASD fee.................................................... 17,000
Printing and engraving...................................... 150,000
Legal fees and expenses..................................... 300,000
Accounting fees and expenses................................ 150,000
Transfer agents' fees....................................... 7,750
Miscellaneous............................................... 233,250
--------
Total............................................. $900,000
========
</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 our Amended and Restated Bylaws provides for
mandatory indemnification of our directors and officers and permissible
indemnification of employees and other agents to the maximum extent permitted by
the Delaware General Corporation Law. Our Amended and Restated Certificate of
Incorporation provides that, pursuant to Delaware law, a director shall not be
liable for monetary damages for breach of the directors' fiduciary duty as
directors to us and our stockholders. This provision in our 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 us for acts or omissions not in good faith or
involving intentional misconduct, for knowing violations of laws, 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.
We have entered into Indemnification Agreements with our officers and
directors, a form of which is attached as Exhibit 10.1 hereto and incorporated
herein by reference. The Indemnification Agreements provide our officers and
directors with further indemnification to the maximum extent permitted by the
Delaware General Corporation Law. We also maintain liability insurance for our
directors and officers. Reference is also made to the form of underwriting
agreement filed as Exhibit 1.1 hereto, indemnifying our officers and directors
against certain liabilities, and Section 1.10 of the Amended and Restated
Investor Rights Agreement contained in Exhibit 4.1 hereto and Section 1.10 of
the Registration Rights Agreement contained in Exhibit 4.2 hereto, each
indemnifying certain of our stockholders, including controlling stockholders,
against certain liabilities.
II-1
<PAGE> 112
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) In the three years preceding the filing of this registration statement,
we issued and sold the following securities that were not registered under the
Securities Act:
1. We issued and sold 950,150 shares (assuming no exercise of stock
options after December 31, 1999) of our common stock to our employees,
consultants and directors pursuant to exercises of options under our stock
plans for an aggregate consideration of $253,890.
2. We granted options to purchase 3,941,550 shares of common stock, at
a weighted average exercise price of $5.51 per share, to our employees and
consultants under our stock plans, of which 950,150 shares have been
exercised as of December 31, 1999.
3. On October 28, 1997, we issued and sold warrants to purchase
approximately 11,982 shares of Series C preferred stock to Silicon Valley
Bank.
4. On August 17, 1999, we issued 10,565 shares of our common stock to
Silicon Valley Bank pursuant to the net exercise of the warrant described
in 15(a)(3).
5. Between December 18, 1997 and February 20, 1998, we 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.
6. On February 4, 1999, we issued and sold a convertible promissory
note with a principal balance of $4,000,000.00 to Trans Cosmos, Inc.
7. On April 28, 1999, we issued 290,911 shares of our common stock to
Trans Cosmos, Inc. pursuant to the conversion of the promissory note
described in 15(a)(7).
8. On February 14, 2000 we issued and sold 1,969,013 shares of common
stock in connection with our acquisition of Knowledge Discovery One, Inc.
The issuances described in 15(a)(1) and 15(a)(2) 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)(3) through 15(a)(5) and
15(a)(7) and 15(a)(8) were deemed to be exempt from registration under the Act
in reliance on Section 4(2) of the Act as transactions by an issuer not
involving any public offering. The issuance described in Item 15(a)(6) 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 us, to information about us.
II-2
<PAGE> 113
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
1.1* Form of Underwriting Agreement.
2.1 Agreement and Plan of Merger, dated as of January 15, 2000,
as amended February 3, 2000, by and among Net Perceptions,
Inc., Kentucky Acquisition Corporation and Knowledge
Discovery One, Inc.
3.1** Amended and Restated Certificate of Incorporation.
3.2** Amended and Restated Bylaws.
4.1** Amended and Restated Investor Rights Agreement, dated
December 18, 1997, among Net Perceptions, Inc. and the
investors and founders named therein, as amended.
4.2 Registration Rights Agreement, dated February 14, 2000, by
and among Net Perceptions, Inc. and the stockholders named
therein.
4.3** Specimen common stock certificate.
5.1* Opinion of Skadden, Arps, Slate, Meagher & Flom LLP.
10.1** Form of Indemnification Agreement entered into between Net
Perceptions, Inc. 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 Net Perceptions, Inc. and Regents
of the University of Minnesota, dated July 31, 1996.
10.7**+ Amendment to License Agreement between Net Perceptions, Inc.
and Regents of the University of Minnesota, dated October
13, 1997.
10.8 Knowledge Discovery One, Inc. 1996 Stock Option/Stock
Issuance Plan.
10.9**+ Orbix Development and Runtime License Agreement between IONA
Technologies PLC and Net Perceptions, Inc., dated July 9,
1998.
10.10**+ Agreement Amendment to Orbix Development and Runtime License
Agreement between IONA Technologies PLC and Net Perceptions,
Inc., dated October 12, 1998.
10.11** Lease between the Protective Group and Net Perceptions,
Inc., dated November 12, 1998.
10.12** Form of Master Purchase Agreement.
10.13** Change in Control Severance Plan and Summary Plan
Description.
10.15** Note Purchase Agreement between Net Perceptions, Inc. and
Trans Cosmos, Inc., dated February 4, 1999.
21 List of Subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants.
23.2 Consent of PricewaterhouseCoopers LLP, independent
accountants.
23.3* Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 5.1).
24.1 Power of Attorney (included on the signature page of this
registration statement).
27 Financial Data Schedule.
</TABLE>
- -------------------------
* To be filed by amendment.
** Incorporated by reference to Net Perceptions' Registration Statement on Form
S-1 (Registration No. 333-71919).
+ Confidential treatment has been granted for certain portions of this Exhibit
pursuant to Rule 406 under the Securities Act. Confidential portions have
been omitted and filed separately with the Securities and Exchange
Commission.
II-3
<PAGE> 114
(b) FINANCIAL STATEMENT SCHEDULES
No financial statement schedules are required. 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 undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in the
denominations and registered in the 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> 115
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, hereunto duly authorized, in the City of Minneapolis,
State of Minnesota, on this 28th day of February, 2000.
NET PERCEPTIONS, INC.
By: /s/ STEVEN J. SNYDER
------------------------------------
Steven J. Snyder
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOWN ALL PERSONS BY THESE PRESENTS, that the persons whose signatures
appear below, constitute and appoint Steven J. Snyder, President and Chief
Executive Officer, and Thomas M. Donnelly, Chief Financial Officer and
Secretary, and each of them individually, as their true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for them in their names, places and steads, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement and to sign any subsequent registration statement
filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and
any and all amendments thereto, and to file the same, with all exhibits thereto,
and the other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as they might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his or her substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
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:
<TABLE>
<C> <S> <C>
/s/ STEVEN J. SNYDER President, Chief Executive Officer February 28, 2000
- ------------------------------------------ and Director (Principal Executive
Steven J. Snyder Officer)
/s/ THOMAS M. DONNELLY Chief Financial Officer and February 28, 2000
- ------------------------------------------ Secretary (Principal Financial and
Thomas M. Donnelly Accounting Officer)
/s/ JOHN T. RIEDL Director February 28, 2000
- ------------------------------------------
John T. Riedl
/s/ ANN L. WINBLAD Director February 28, 2000
- ------------------------------------------
Ann L. Winblad
/s/ DOUGLAS J. BURGUM Director February 28, 2000
- ------------------------------------------
Douglas J. Burgum
/s/ WILLIAM LANSING Director February 28, 2000
- ------------------------------------------
William Lansing
</TABLE>
II-5
<PAGE> 116
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<C> <S> <C>
1.1* Form of Underwriting Agreement.
2.1 Agreement and Plan of Merger, dated as of January 15, 2000,
as amended February 3, 2000, by and among Net Perceptions,
Inc., Kentucky Acquisition Corporation and Knowledge
Discovery One, Inc.
3.1** Amended and Restated Certificate of Incorporation.
3.2** Amended and Restated Bylaws.
4.1** Amended and Restated Investor Rights Agreement, dated
December 18, 1997, among Net Perceptions, Inc. and the
investors and founders named therein, as amended.
4.2 Registration Rights Agreement dated February 14, 2000, by
and among Net Perceptions, Inc. and the stockholders named
therein.
4.3** Specimen common stock certificate.
5.1* Opinion of Skadden, Arps, Slate, Meagher & Flom LLP.
10.1** Form of Indemnification Agreement entered into between Net
Perceptions, Inc. 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 Net Perceptions, Inc. and Regents
of the University of Minnesota, dated July 31, 1996.
10.7**+ Amendment to License Agreement between Net Perceptions, Inc.
and Regents of the University of Minnesota, dated October
13, 1997.
10.8 Knowledge Discovery One, Inc. 1996 Stock Option/Stock
Issuance Plan.
10.9**+ Orbix Development and Runtime License Agreement between IONA
Technologies PLC and Net Perceptions, Inc., dated July 9,
1998.
10.10**+ Agreement Amendment to Orbix Development and Runtime License
Agreement between IONA Technologies PLC and Net Perceptions,
Inc., dated October 12, 1998.
10.11** Lease between the Protective Group and Net Perceptions,
Inc., dated November 12, 1998.
10.12** Form of Master Purchase Agreement.
10.13** Change in Control Severance Plan and Summary Plan
Description.
10.15** Note Purchase Agreement between Net Perceptions, Inc. and
Trans Cosmos, Inc., dated February 4, 1999.
21 List of Subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants.
23.2 Consent of PricewaterhouseCoopers LLP, independent
accountants.
23.3* Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 5.1).
24.1 Power of Attorney (included on the signature page of this
registration statement).
27 Financial Data Schedule.
</TABLE>
- -------------------------
* To be filed by amendment.
** Incorporated by reference to Net Perceptions' Registration Statement on Form
S-1 (Registration No. 333-71919).
+ Confidential treatment has been granted for certain portions of this Exhibit
pursuant to Rule 406 under the Securities Act. Confidential portions have
been omitted and filed separately with the Securities and Exchange
Commission.
<PAGE> 1
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
NET PERCEPTIONS, INC.,
KENTUCKY ACQUISITION CORPORATION,
AND
KNOWLEDGE DISCOVERY ONE, INC.
DATED AS OF JANUARY 15, 2000
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I - THE MERGER
Section 1.1 The Merger.......................................................2
Section 1.2 Effective Time...................................................2
Section 1.3 Effects of the Merger............................................2
Section 1.4 Certificate of Incorporation of the Surviving Corporation........2
Section 1.5 By-Laws of the Surviving Corporation.............................2
Section 1.6 Directors and Officers of the Surviving Corporation..............2
Section 1.7 Closing..........................................................3
ARTICLE II
DETERMINATION OF EXCHANGE RATIO AND
CONVERSION AND EXCHANGE OF SECURITIES
Section 2.1 Determination of Exchange Ratio..................................3
Section 2.2 Conversion of Capital Stock......................................4
Section 2.3 Exchange of Certificates.........................................5
Section 2.4 Closing of Company Transfer Books................................6
Section 2.5 No Fractional Shares.............................................7
Section 2.6 Legends..........................................................7
Section 2.7 No Liability.....................................................8
Section 2.8 Dissenting Shares................................................8
ARTICLE IIII
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Section 3.1 Organization, Qualification and Corporate Power..................9
Section 3.2 Company Capital Structure.......................................10
Section 3.3 Authority; No Conflict; Required Filings and Consents...........12
Section 3.4 Financial Statements............................................14
Section 3.5 Absence of Undisclosed Liabilities..............................14
Section 3.6 Accounts Receivable.............................................15
Section 3.7 Intellectual Property...........................................15
Section 3.8 Absence of Changes..............................................20
Section 3.9 Tax Matters.....................................................22
Section 3.10 Compliance with Laws............................................23
Section 3.11 Action and Proceedings..........................................24
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 3.12 Contracts and Other Agreements..................................24
Section 3.13 Bank Accounts and Powers of Attorney............................26
Section 3.14 Properties......................................................26
Section 3.15 Customers, Distributors and Suppliers...........................27
Section 3.16 Employee Benefit Plans..........................................27
Section 3.17 Employee Relations..............................................30
Section 3.18 Employment Matters..............................................30
Section 3.19 Employee Conflicts..............................................31
Section 3.20 Management Relationships........................................31
Section 3.21 Insurance.......................................................31
Section 3.22 Brokerage and Finders; Third Party Expenses.....................32
Section 3.23 Hazardous Materials.............................................32
Section 3.24 Certain Business Practices......................................33
Section 3.25 Stockholder Composition.........................................33
Section 3.26 Information Statement...........................................33
Section 3.27 Termination of Existing Agreements with Holders of
Company Stock...................................................34
Section 3.28 Certain Waivers.................................................34
Section 3.29 Disclosure......................................................34
ARTICLE IV - REPRESENTATIONS AND WARRANTIES
OF THE BUYER
Section 4.1 Organization....................................................35
Section 4.2 Capitalization..................................................35
Section 4.3 Authority; No Conflict; Required Filings and Consents...........36
Section 4.4 Filings; Financial Statements...................................38
Section 4.5 Consent Solicitation/Information Statement......................38
Section 4.6 Brokers and Finders.............................................38
ARTICLE V - CONDUCT OF BUSINESS
Section 5.1 Covenants of the Company........................................39
Section 5.2 Audited 1999 Financial Statements...............................41
Section 5.3 Cooperation.....................................................41
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE VI - ADDITIONAL AGREEMENTS
Section 6.1 No Solicitation.................................................42
Section 6.2 Approval of Stockholders; Consent Solicitation/Information
Statement; Blue Sky.............................................43
Section 6.3 Access to Information...........................................44
Section 6.4 Supplements to Disclosure Schedule..............................44
Section 6.5 Legal Conditions to Merger......................................44
Section 6.6 Listing Application.............................................45
Section 6.7 Company Stock Plan..............................................45
Section 6.8 Consents........................................................46
Section 6.9 Reasonable Efforts..............................................46
Section 6.10 Voting Agreement................................................46
Section 6.11 Financial Statement Preparation and Review......................46
Section 6.12 Company Director and Officer Indemnification; Insurance.........46
Section 6.13 Tax-Free Reorganization.........................................47
Section 6.14 Employee Matters................................................47
Section 6.15 Ancillary Agreements............................................48
ARTICLE VII - CONDITIONS TO MERGER
Section 7.1 Conditions to Each Party's Obligation to Effect the Merger......48
Section 7.2 Additional Conditions to Obligations of the Buyer and Sub.......49
Section 7.3 Additional Conditions to Obligations of the Company.............51
ARTICLE VIII - SURVIVAL AND INDEMNIFICATION
Section 8.1 Survival of Company Obligations.................................52
Section 8.2 Company Stockholder Obligation to Indemnify.....................52
Section 8.3 Limitations on Company Stockholder Indemnification..............53
Section 8.4 Survival of Buyer Obligations...................................54
Section 8.5 Buyer Obligation to Indemnify...................................54
Section 8.6 Limitations on Buyer Indemnification............................55
Section 8.7 Procedures Relating to Indemnification..........................56
Section 8.8 Stockholder Representative......................................57
</TABLE>
iii
<PAGE> 5
<TABLE>
<CAPTION>
Page
---
<S> <C> <C>
ARTICLE IX - TERMINATION; FEES AND EXPENSES
Section 9.1 Termination.....................................................59
Section 9.2 Effect of Termination...........................................60
Section 9.3 Fees and Expenses...............................................60
ARTICLE X - DEFINITIONS AND INTERPRETATION
Section 10.1 Certain Definitions.............................................61
Section 10.2 Interpretation..................................................63
ARTICLE XI - MISCELLANEOUS
Section 11.1 Press Releases and Announcements................................64
Section 11.2 [Intentionally Omitted].........................................65
Section 11.3 Entire Agreement................................................65
Section 11.4 Succession and Assignment.......................................65
Section 11.5 Counterparts....................................................65
Section 11.6 Notices.........................................................65
Section 11.7 Governing Law...................................................66
Section 11.8 Amendments and Waivers..........................................66
Section 11.9 Severability....................................................67
Section 11.10 Incorporation of Exhibits and Schedules.........................67
Section 11.11 Enforcement.....................................................67
Section 11.12 Arbitration.....................................................67
Schedule 1 Closing Stockholder Schedule......................................
Schedule 2 Company Stockholder Affiliates....................................
Schedule 3 Disclosure Schedule...............................................
Schedule 4 Key Employees.....................................................
Exhibit A Form of Investment Representation and Affiliate's
Lock-Up Agreement..............................................A-1
Exhibit B Form of Non-Affiliate Investment Representation Agreement......B-1
Exhibit C Form of Escrow Agreement.......................................C-1
Exhibit D Form of Voting Agreement.......................................D-1
Exhibit E Form of Registration Rights Agreement..........................E-1
Exhibit F Form of Opinion of Company Counsel.............................F-1
</TABLE>
iv
<PAGE> 6
<TABLE>
<S> <C> <C>
Exhibit G Form of Opinion of Buyer Counsel...............................G-1
</TABLE>
v
<PAGE> 7
AGREEMENT AND PLAN OF MERGER
Agreement and Plan of Merger entered into as of January 15,
2000 (this "Agreement") by and among Net Perceptions, Inc., a Delaware
corporation (the "Buyer"), Kentucky Acquisition Corporation, a Delaware
corporation and a wholly owned subsidiary of the Buyer ("Sub"), and Knowledge
Discovery One, Inc., a Delaware corporation (including its predecessor company,
the "Company"). The Buyer, Sub and the Company are sometimes referred to herein
as the "Parties." Certain capitalized terms used in this Agreement have the
meanings ascribed to them in Article X.
WHEREAS, each of the board of directors of the Buyer and the
board of directors of Sub has determined that it is advisable and in the best
interests of its stockholders to acquire the Company upon the terms and subject
to the conditions set forth in this Agreement, and the board of directors of the
Company (the "Company Board") has determined that it is advisable and in the
best interests of the Company and its stockholders to be acquired by the Buyer
upon the terms and subject to the conditions set forth in this Agreement; and
WHEREAS, the Company Board has unanimously recommended
that the Company's stockholders adopt this Agreement; and
WHEREAS, for federal income tax purposes, it is intended that
the Merger (as defined herein) will qualify as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended
(together with the rules and regulations thereunder, the "Code"), and that this
Agreement shall be, and hereby is, adopted as a plan of reorganization for
purposes of Section 368 of the Code.
NOW, therefore, in consideration of the foregoing, and the
representations, warranties and covenants herein contained, and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Parties, intending to be legally bound, agree as follows:
<PAGE> 8
ARTICLE I
THE MERGER
1.1 The Merger. Subject to the terms and conditions of this
Agreement, at the Effective Time (as defined in Section 1.2), Sub shall merge
with and into the Company in accordance with the General Corporation Law of the
State of Delaware (the "DGCL"), and the separate corporate existence of Sub
shall thereupon cease and the Company shall continue as the surviving
corporation. The Company, in its capacity as the corporation surviving the
Merger, is sometimes hereinafter referred to as the "Surviving Corporation."
1.2 Effective Time. In order to effectuate the Merger, on the
Closing Date (as defined in Section 1.7), the Company shall cause a certificate
of merger (the "Certificate of Merger") to be filed with the Secretary of State
of Delaware, in such form as required by, and executed in accordance with, the
DGCL. The Merger shall be effective as of the time of filing of the Certificate
of Merger (the "Effective Time").
1.3 Effects of the Merger. The Merger shall have the effects
provided for in Section 259 of the DGCL.
1.4 Certificate of Incorporation of the Surviving Corporation. At
and after the Effective Time, the certificate of incorporation of Sub, as in
effect immediately prior to the Effective Time, shall be the certificate of
incorporation of the Surviving Corporation, until amended in accordance with the
DGCL, except that from and after the Effective Time, Article I of such
certificate of incorporation will read in its entirety as follows:
"The name of the corporation is "Knowledge Discovery One, Inc."
1.5 By-Laws of the Surviving Corporation. At and after the
Effective Time, the by-laws of Sub, as in effect immediately prior to the
Effective Time, shall be the by-laws of the Surviving Corporation, until amended
in accordance with the DGCL, except that the name of the Surviving Corporation
as set forth in such by-laws shall be "Knowledge Discovery One, Inc."
1.6 Directors and Officers of the Surviving Corporation. The
directors and officers of the Surviving Corporation shall be determined by The
Buyer, each to hold office in accordance with the certificate of incorporation
and by-laws of the Surviving Corporation.
2
<PAGE> 9
1.7 Closing. The closing of the Merger (the "Closing") shall take
place at 10:00 a.m., E.S.T., on the later of (a) February 10, 2000 or (b) the
third business day after satisfaction of the conditions set forth in Sections
7.1(a) and (b) (provided, in the case of (a) or (b), that all the closing
conditions set forth in Article VII have been met or waived as provided in
Article VII at or prior to the Closing), at the offices of Skadden, Arps, Slate,
Meagher & Flom LLP, One Beacon Street, Boston, Massachusetts, 02108, or on such
other date, or at such other time or place, as is agreed to in writing by The
Buyer and the Company. The date on which the Closing shall occur is referred to
herein as the "Closing Date."
ARTICLE II
DETERMINATION OF EXCHANGE RATIO AND
CONVERSION AND EXCHANGE OF SECURITIES
2.1 Determination of Exchange Ratio.
(a) At the Closing, the Company shall deliver to the
Buyer a certificate, in form and substance satisfactory to The Buyer and signed
by the Company's President and Chief Financial Officer (the "Company Closing
Certificate"), certifying (i) that the warrant ("Warrant") issued to Phoenix
Leasing Incorporated (the "Warrant Holder") in connection with an equipment
finance line of credit has been fully exercised (the "Warrant Exercise") for
Common Stock (as defined below); (ii) that pursuant to clause (B) of ARTICLE IV,
Section 3(b) of the Certificate of Incorporation (as defined in Section 3.1(b)),
all outstanding shares of (x) Series A Preferred Stock, par value $0.001 per
share, of the Company ("Series A Preferred Stock"), (y) Series B Preferred
Stock, par value $0.001 per share, of the Company ("Series B Preferred Stock"),
and (z) Series C Preferred Stock, par value $0.001 per share, of the Company
("Series C Preferred Stock" and, together with Series A Preferred Stock and
Series B Preferred Stock, "Preferred Stock") have been mandatorily converted,
effective immediately prior to the Effective Time (the "Preferred Stock
Conversion"), into an equivalent number of shares of Common Stock, par value
$.0001 per share, of the Company ("Common Stock", and, together with Preferred
Stock, "Company Stock"); (iii) as to the number of shares of Common Stock
underlying all options to purchase Common Stock ("Options") granted and
outstanding under the Company's 1996 Stock Option/Stock Issuance Plan (the
"Company Stock Plan") and related Option Agreements (each an "Option
Agreement"), whether or not vested or exercisable, outstanding as of immediately
prior to the Effective Time; (iv) the number of shares of Common Stock
outstanding immediately prior to the Effective Time, calculated on a fully
diluted basis, giving effect to the exercise and the conversion referred to in
(i) and (ii) above and assuming that all Options referred to in (iii) above,
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whether or not vested, have been exercised in full (such number of shares of
Common Stock being referred to as the "Fully Diluted Common Stock Number"); and
(v) by reference to a schedule to the Company Closing Certificate, as to a list
of all the holders of shares of Common Stock (after giving effect to the
exercise and conversion referred to in (i) and (ii) above) as such names appear
on the stock transfer books of the Company (individually, a "Company
Stockholder" and collectively, the "Company Stockholders"), the number of shares
of Common Stock held by each Company Stockholder and the ownership interest
percentage of each Company Stockholder (with respect to each Company
Stockholder, such Company Stockholder's "Ownership Percentage Interest")
determined by dividing the number of shares of Common Stock held by such Company
Stockholder (after giving effect to the exercise and conversion referred to in
(i) and (ii) above) by the number of outstanding shares of Common Stock, in each
case, as of immediately prior to the Effective Time. The Schedule containing the
information referred to in clause (v) of the immediately preceding sentence,
upon acceptance by the Buyer at the Closing (such acceptance not to be
unreasonably withheld), shall be appended as Schedule 1 to this Agreement and
shall be deemed incorporated herein and made a part hereof and shall hereinafter
be referred to as the "Closing Stockholder Schedule."
(b) The fraction of share of common stock, $.0001 par
value per share, of the Buyer ("Buyer Common Stock") to be issued in the Merger
per share of Common Stock outstanding immediately prior to the Effective Time in
accordance with this Article II shall be the quotient obtained by dividing (i)
2,237,927, which is the aggregate number of shares to be issued in the Merger
and upon the exercise of Options assumed by the Buyer pursuant to Section 6.7
hereof (the "Merger Shares"), by (ii) the Fully Diluted Common Stock Number
(such quotient being referred to as the "Exchange Ratio"). 2,027,927 of such
aggregate number of Merger Shares are hereinafter referred to as the "Fixed
Shares" and the remaining 210,000 of such aggregate number of Merger Shares are
hereinafter referred to as the "Escrow Shares".
2.2 Conversion of Capital Stock. At the Effective Time, by virtue
of the Merger and without any action on the part of the holder of any shares of
Common Stock or of capital stock of Sub:
(a) Capital Stock of Sub. Each issued and outstanding
share of common stock, par value $.01 per share, of Sub shall be converted into
and become one fully paid and nonassessable share of common stock, par value
$.01 per share, of the Surviving Corporation.
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(b) Cancellation of Treasury Stock. All shares of Common
Stock that are owned by the Company as treasury stock, if any, shall be
cancelled and retired and shall cease to exist and no stock of the Buyer or
other consideration shall be delivered in exchange therefor.
(c) Company Stock. Subject to Sections 2.3, 2.5 and 2.6,
each issued and outstanding share of Common Stock (other than shares of Common
Stock cancelled in accordance with Section 2.2(b) and any Dissenting Shares (as
defined in Section 2.8)) shall be converted into the right to receive a number
of fully paid and nonassessable shares (or fraction of a share) of Buyer Common
Stock equal to the Exchange Ratio. All such shares of Common Stock, when so
converted, shall no longer be outstanding and shall automatically be cancelled
and retired and shall cease to exist, and each holder of a certificate formerly
representing any such shares shall cease to have any rights with respect
thereto, except the right to receive the shares of Buyer Common Stock pursuant
to this Section 2.2(c), and any cash in lieu of fractional shares payable
pursuant to Section 2.5, upon the surrender of such certificate and the other
documents referred to in Section 2.3(a), in accordance with such Section
(collectively, the "Merger Consideration").
(d) Adjustment of Exchange Ratio. In the event the Buyer
changes the number of shares of Buyer Common Stock issued and outstanding prior
to the Effective Time pursuant to a stock split, stock dividend,
recapitalization, subdivision, reclassification, combination, exchange of shares
or similar transaction with respect to the outstanding Buyer Common Stock and
the record date therefor shall be prior to the Effective Time, the Exchange
Ratio (for purposes of this Article II and Section 6.7) shall be proportionately
adjusted to reflect such stock split, stock dividend, recapitalization,
subdivision, reclassification, combination, exchange of shares or similar
transaction.
(e) Company Stock Options. All Options which are
outstanding and not exercised as of the Effective Time, will be assumed by The
Buyer in accordance with Section 6.7.
2.3 Exchange of Certificates.
(a) At the Closing (after the Effective Time), each
Company Stockholder shall surrender and deliver to the Buyer:
(i) Certificates representing all of such Company
Stockholder's ownership of Common Stock;
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(ii) A properly completed letter of transmittal in a
form reasonably satisfactory to the Buyer and the Buyer's transfer agent; and
(iii) (A) In the case of Company Stockholders who or
which are Affiliates of the Company as of the date hereof (which Company
Stockholders are listed on Schedule 2 hereto), a duly executed Investment
Representation and Affiliate Lock-Up Agreement substantially in the form of
Exhibit A hereto (an "Investment Representation and Affiliate Lock-Up
Agreement"), and (B) in the case of each other Company Stockholder, a duly
executed Non-Affiliate Investment Representation Agreement substantially in the
form of Exhibit B hereto (a "Non-Affiliate Investment Representation
Agreement").
(b) At the Closing (after the Effective Time), the Buyer
shall (i) deliver (or cause to be delivered) to each Company Stockholder a
certificate representing the number of whole shares of Buyer Common Stock into
which such Company's Stockholder's shares of Common Stock have been converted
pursuant to Section 2.2(c), which number of shares of Buyer Common Stock shall,
subject to Section 2.5, be equal to such Stockholder's Ownership Percentage
Interest (as set forth on the Closing Stockholder Schedule) in the Fixed Shares
and (ii) deposit (or cause to be deposited) in escrow on behalf of each Company
Stockholder a number of whole shares of Buyer Common Stock equal to such Company
Stockholder's Ownership Percentage Interest (as set forth on the Closing
Stockholder Schedule) in the Escrow Shares, to be held and released in
accordance with an escrow agreement among the Buyer, the Stockholder
Representative (as defined in Section 8.8) and the Escrow Agent referred to
therein (the "Escrow Agent") substantially in the form of Exhibit C hereto (the
"Escrow Agreement").
(c) If any certificate(s) representing Common Stock held
by a Company Stockholder immediately prior to the Effective Time are not
surrendered at the Closing as provided in Section 2.3(a), after the Effective
Time, the Buyer will deliver (or cause to be delivered) to such Stockholder the
certificate representing Buyer Common Stock referred to in clause (i) of Section
2.3(b) at such time as such Company Stockholder surrenders and delivers to the
Buyer such certificate(s) and the other documents required to be surrendered and
delivered pursuant to Section 2.3(a).
2.4 Closing of Company Transfer Books. At the Effective Time, the
stock transfer books of the Company shall be closed and no transfer of Company
Stock shall thereafter be made.
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2.5 No Fractional Shares. No certificates representing fractional
shares of Buyer Common Stock shall be issued upon the surrender for exchange of
certificates representing Common Stock in accordance with Section 2.3, and no
fractional interest shall entitle a Company Stockholder to vote or to any rights
of a security holder. In lieu of fractional shares, each Company Stockholder who
would otherwise have been entitled to a fractional share of Buyer Common Stock,
will receive, upon the surrender and delivery by such Company Stockholder of the
certificate(s) and other documents required to be surrendered and delivered
pursuant to Section 2.3(a), an amount in cash (without interest) determined by
multiplying such fraction by 42.45.
2.6 Legends. The shares of Buyer Common Stock issued in the
Merger shall be characterized as "restricted securities" for purposes of Rule
144 under the Securities Act, and each certificate representing any of such
shares shall bear a legend identical or similar in effect to the following
legend (together with any other legend or legends required by applicable state
securities laws or otherwise including, if applicable, any legend with respect
to repurchase or other restrictions on any such shares under the Company Stock
Plan or related agreements as contemplated by Section 6.7(b)):
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAW, AND MAY NOT
BE OFFERED, SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, AND ANY APPLICABLE STATE
SECURITIES LAWS, OR AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE. [THESE SECURITIES ARE
ALSO SUBJECT TO AN INVESTMENT REPRESENTATION AND
LOCK-UP AGREEMENT WITH THE CORPORATION WHICH
RESTRICTS THE TRANSFER THEREOF UNTIL AUGUST 15,
2000, A COPY OF WHICH CAN BE OBTAINED FROM THE
CORPORATION AT ITS EXECUTIVE OFFICES.](1)
- --------
(1) Bracketed language included only on certificates for shares of Buyer
Common Stock issued to Affiliates.
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The Buyer may issue appropriate stop transfer instructions to the
transfer agent for Buyer Common Stock to the foregoing effect.
2.7 No Liability. Notwithstanding any other provision of this
Agreement, neither the Buyer, the Surviving Corporation, the Buyer's transfer
agent nor any other Person shall be liable for any amount properly paid to a
public official pursuant to any applicable abandoned property, escheat or
similar laws.
2.8 Dissenting Shares.
(a) Notwithstanding any other provision of this
Agreement to the contrary, shares of Common Stock that are outstanding
immediately prior to the Effective Time and which are held by Company
Stockholders who shall not have voted in favor of the Merger or consented
thereto in writing and who shall have demanded properly in writing appraisal for
such shares in accordance with Section 262 of the DGCL and who shall not have
withdrawn such demand or otherwise have forfeited appraisal rights
(collectively, the "Dissenting Shares") shall not be converted into or represent
the right to receive the Merger Consideration. Such Company Stockholders shall
be entitled to receive payment of the appraised value of such shares of Common
Stock held by them in accordance with the provisions of such Section 262, except
that all Dissenting Shares held by Company Stockholders who shall have failed to
perfect or who effectively shall have withdrawn or lost their rights to
appraisal of such shares of Common Stock under such Section 262 shall thereupon
be deemed to have been converted into and to have become exchangeable, as of the
Effective Time, for the right to receive, without interest, the Merger
Consideration upon surrender, in the manner provided in Section 2.3(a), of the
certificate or certificates which immediately prior to the Effective Time
represented such shares of Common Stock and the delivery of the other documents
required to be delivered pursuant to such Section 2.3.
(b) The Company shall give the Buyer (i) prompt notice of
any demands for appraisal received by the Company, withdrawals of such demands,
and any other instruments served pursuant to the DGCL and received by the
Company and (ii) the opportunity to direct all negotiations and proceedings with
respect to demands for appraisal under the DGCL. The Company shall not, except
with the prior written consent of the Buyer, make any payment with respect to
any demands for appraisal, or offer to settle, or settle, any such demands.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth on the disclosure schedule executed and
delivered by the Company to the Buyer on or prior the date hereof and attached
hereto as Schedule 3 (the "Disclosure Schedule"), the section numbers of which
are numbered to correspond to the section numbers of this Agreement to which
they refer, the Company represents and warrants to the Buyer and Sub as set
forth below:
3.1 Organization, Qualification and Corporate Power.
(a) The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. The
Company is duly qualified or licensed as a foreign corporation to conduct
business and is in good standing under the laws of each jurisdiction listed in
Section 3.1(a) of the Disclosure Schedule, which jurisdictions constitute every
jurisdiction where the nature of the Company's business or the ownership or
leasing of its properties requires such qualification, except for failures, if
any, to be so qualified or licensed which, individually or in the aggregate,
have not had and would not be reasonably likely to have a Material Adverse
Effect. The Company has all requisite corporate power and authority to own,
lease and operate its assets and to carry on its business as now being and as
heretofore conducted.
(b) The Company has furnished to the Buyer true and
complete copies of its Certificate of Incorporation, as amended (the
"Certificate of Incorporation"), and By-laws, as amended (the "Amended
By-laws"), each as in effect on the date hereof. The Company is not in default
under or in violation of any provision of the Certificate of Incorporation or
the Amended By-laws.
(c) All minute books, stock record books and other similar
records of the Company have been provided or made available to the Buyer or its
counsel prior to the execution of this Agreement, and are complete and correct
in all material respects. Such minute books contain a true and complete record
of all actions taken at all meetings and by all written consents in lieu of
meetings of the directors, stockholders and committees of the Board of Directors
of the Company from inception through the date hereof.
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(d) The Company has no Subsidiaries and does not own,
directly or indirectly, any equity or similar interest in, or any interest
convertible into or exchangeable or exercisable for, any equity or similar
interest in, any corporation, partnership, limited liability company, joint
venture or other business organization or entity.
3.2 Company Capital Structure.
(a) The authorized capital stock of the Company consists
of (i) 15,000,000 shares of Common Stock and (ii) 10,650,000 shares of preferred
stock, par value $0.001 per share, of which 4,000,000 shares are designated
Series A Preferred Stock, 3,570,810 are designated Series B Preferred Stock and
2,919,382 are designated Series C Preferred Stock. As of the date of this
Agreement, (i) 1,998,093 shares of Common Stock are issued and outstanding, of
which (A) 1,935,093 shares were issued upon the exercise of Options ("Purchased
Shares") and are subject to repurchase rights of the Company ("Purchased Share
Repurchase Rights") pursuant to the Company Stock Plan and the applicable
Purchase Agreement thereunder (each, a "Purchase Agreement") to the extent
unvested, (B) no shares were issued pursuant to the Stock Issuance Program
provided for in Article Three of the Company Stock Plan ("Restricted Shares")
and remain subject to repurchase rights of the Company (Restricted Share
Repurchase Rights and, together with Purchased Share Repurchase Rights, "Company
Repurchase Rights") in accordance with a Stock Issuance Agreement thereunder (a
"Stock Issuance Agreement"), and (C) no shares of Common Stock are held in the
treasury of the Company, (ii) 4,000,000, 3,570,810 and 2,919,382 shares of
Common Stock are reserved for future issuance upon conversion of the Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock,
respectively; (iii) 75,918 shares of Common Stock remain authorized and reserved
for issuance pursuant to the Company Stock Plan, and 1,698,716 shares are
reserved for issuance upon the exercise of currently outstanding Options; (iv)
4,000,000 shares of Series A Preferred Stock are issued and outstanding; (v)
3,570,810 shares of Series B Preferred Stock are issued and outstanding; and
(vi) 2,919,382 shares of Series C Preferred Stock are issued and outstanding.
All of the issued and outstanding shares of the Company's capital stock have
been duly authorized, and are valid issued, fully paid, nonassessable and free
of preemptive rights. None of the issued and outstanding shares of the Company's
capital stock has been issued in violation of any applicable federal or state
law or any preemptive rights or rights to subscribe for or purchase securities.
All shares of Company Stock subject to issuance as specified above, upon
issuance on the terms and conditions specified in the instruments pursuant to
which they are issuable, will be duly authorized, validly issued, fully paid,
nonassessable, and free of preemptive rights, and, assuming such issuance prior
to the Effective Time, will not have been issued in violation of any
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<PAGE> 17
applicable federal or state law or any preemptive rights or rights to subscribe
for or purchase securities.
(b) Except as set forth in Section 3.2(a), there are no
equity securities of any class or series of the Company, or any security
directly or indirectly convertible into or exchangeable or exercisable for any
such equity securities ("Convertible Securities"), issued, reserved for issuance
or outstanding. Except as set forth in Section 3.2(a), there are no options,
warrants, calls, rights, commitments or agreements of any character to which the
Company is a party, or by which the Company is bound, obligating the Company to
issue, deliver or sell, or cause to be issued, delivered or sold, additional
shares of capital stock of the Company, or any security directly or indirectly
convertible into or exchangeable or exercisable for any such shares of capital
stock, or obligating the Company to grant, extend or accelerate the vesting of
or enter into any such option, warrant, call, right, commitment or agreement
("Equity Rights"). Except for the Voting Agreement being entered into by certain
stockholders of the Company and the Buyer on the date hereof substantially in
the form of Exhibit D hereto (the "Voting Agreement"), there are no voting
trusts, proxies or other agreements or understandings with respect to any
Company Stock to which the Company or, to the knowledge of the Company, any
other Person is a party or by which it or any such other Person is bound. There
are no obligations, contingent or otherwise, of the Company to repurchase,
redeem or otherwise acquire any Company Stock or to provide funds to or make any
investment (in the form of a loan, capital contribution or otherwise) in any
entity.
(c) Section 3.2(c) of the Disclosure Schedule sets forth
lists of (i) all holders of Company Stock as of the Record Date (as defined in
Section 3.3(b)), the address of each such holder, as well as the class, series
and number of shares of Company Stock held by each such holder and, if
applicable, the number of such shares held by each such holder which are
Purchased Shares, the vesting schedule with respect thereto (including a
description of the circumstances under which such vesting schedule can or will
be accelerated) and (ii) all holders of Options, Convertible Securities or
Equity Rights as of the date hereof, the number of shares of Common Stock
subject thereto, the vesting schedule with respect thereto (including a
description of the circumstances under which such vesting schedule can or will
be accelerated) and the exercise, conversion or exchange price per share of each
such Option, Convertible Security or Equity Right. No action is required to be
taken by the Company, its Board of Directors, the Plan Administrator (as such
term is defined in the Company Stock Plan) or any holder of Options, Purchased
Shares or Restricted Shares to effect the treatment of Options, Purchased Shares
and Restricted Shares described in Section 6.7. No Options (or any portion
thereof, and including after the Buyer's assumption thereof as described in
Section 6.7) will vest, and no Company
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Repurchase Rights will lapse or terminate with respect to any Purchased Shares
or Restricted Shares (including after conversion of such shares in the Merger
into shares of Buyer Common Stock), solely as a result of the Merger.
(d) The Company has delivered to the Buyer an instrument
duly executed by the Warrant Holder, irrevocably agreeing with the Company to
exercise the Warrant for a number of shares of Common Stock equal to the number
of shares of Series B Preferred Stock for which the Warrant was exercisable,
effective immediately prior to the Effective Time.
(e) The Company has never declared, nor is there accrued,
any dividend or other distribution with respect to any Company Stock.
3.3 Authority; No Conflict; Required Filings and Consents.
(a) The Company has all requisite corporate power and
authority to enter into this Agreement, to perform its obligations hereunder and
to consummate the transactions contemplated hereby. The execution and delivery
by the Company of this Agreement, the performance by the Company of its
obligations hereunder and the consummation by the Company of the transactions
contemplated hereby have been duly authorized by all necessary corporate action
on the part of the Company, subject, in the case of such consummation, only to
the approvals and actions of the Company's stockholders specified in Section
3.3(b). This Agreement has been duly executed and delivered by the Company and,
assuming the due authorization, execution and delivery hereof by the Buyer and
Sub, constitutes a valid and binding obligation of the Company, enforceable in
accordance with its terms, subject to any applicable bankruptcy, insolvency,
reorganization or similar laws now or hereafter in effect relating to creditors'
rights generally or to general principles of equity.
(b) The affirmative vote or action by written consent of
(i) the holders of a majority of the outstanding shares of Company Stock, voting
together as a single class, and (ii) the holders of a majority of the
outstanding shares of Preferred Stock, voting together as a single class (with
each share of Preferred Stock having such number of votes equal to the whole
number of shares of Common Stock into which such share of Preferred Stock is
convertible), is the only action by the holders of any class or series of
Company Stock necessary to adopt this Agreement and approve the Merger (the
"Merger Stockholder Approval Action"). The consent of the holders of 51% of the
outstanding shares of each series of Preferred Stock, in each case consenting as
a separate series (the "Preferred Stock Conversion Consent"), is the only action
by the holders of any class or series of Company Stock, and no other
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action by the Company or any other Person is, required to effect the Preferred
Stock Conversion. The Board of Directors of the Company has unanimously (w)
approved this Agreement and the Merger, (x) determined that this Agreement and
the Merger fair to and in the best interests of the holders of Company Stock and
declared the advisability of this Agreement, (y) determined to recommend that
the Company's stockholders vote, or act by written consent, in favor of adoption
of this Agreement, and (z) fixed the date of this Agreement as the record date
for the determination of stockholders entitled to execute a written consent
adopting this Agreement (the "Record Date"). The shares of Company Stock held by
stockholders of the Company listed on the signature pages of the Voting
Agreement represent, as of the Record Date, (i) a majority of the voting power
represented by all outstanding shares of Company Stock, (ii) a majority of the
outstanding shares of Preferred Stock, voting together as a single class and
(iii) at least 51% of the voting power represented by all outstanding shares of
each series of Preferred Stock (for purposes of this clause (ii), assuming each
such series is consenting as a separate series).
(c) The execution and delivery of this Agreement by the
Company does not, and the performance by the Company of its obligations
hereunder and the consummation by the Company of the transactions contemplated
hereby will not, (i) conflict with, or result in any violation or breach of any
provision of the Certificate of Incorporation or the Bylaws, (ii) conflict with,
result in any violation or breach of, or constitute (with or without notice or
lapse of time, or both) a default (or give rise to a payment obligation,
termination or right of termination, cancellation or right of cancellation,
acceleration or right of acceleration, of any right or obligation or loss of any
benefit), or require the consent, approval or waiver of any third party in order
to assign to the Buyer or for the Company to continue to enjoy the benefits of
or exercise any right, under, any note, bond, mortgage, indenture, lease,
contract or other agreement, instrument or obligation to which the Company is a
party or by which it or any properties or assets may be bound, or (iii) conflict
with or violate any permit, concession, franchise, license, judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to the Company or
any of its properties or assets, except, in the case of (iii), for any such
violations, breaches, defaults, terminations, cancellations, accelerations or
conflicts which would not, either individually or in the aggregate, have or be
reasonably likely to have a Material Adverse Effect.
(d) No consent, approval, order or authorization of, or
registration, declaration or filing with, any court, administrative agency or
commission or other governmental authority or instrumentality ("Governmental
Entity") or other Person is required to be obtained by, or given to or with
respect to, the Company in connection with the execution and delivery of this
Agreement by the Company, the performance by the Company of its obligations
hereunder or the
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consummation by the Company of the transactions contemplated hereby, except for
(i) the filing of the Certificate of Merger with the Delaware Secretary of
State, and (ii) any such other consents, approvals, orders, authorizations,
registrations, declarations or filings which, if not obtained or made, would
not, either individually or in the aggregate, have or be reasonably likely to
have a Material Adverse Effect.
3.4 Financial Statements. The Company has previously delivered to
the Buyer true and complete copies of (i) the Company's audited balance sheets
as of December 31, 1998 and December 31, 1997 and the related statements of
operations, changes in stockholders' equity and cash flows and notes to
financial statements for the years then ended, along with the audit report of
the Company's independent auditors, PricewaterhouseCoopers LLP, on such balance
sheets and statements and (ii) its unaudited balance sheet as of December 31,
1999 (the "Company Balance Sheet"), and the related statements of operations,
changes in stockholders' equity and cash flows for the year then ended
(collectively, the "Company Financial Statements"). The Company Financial
Statements have been prepared from, and are in accordance with, the books and
records of the Company and present fairly the financial position and the results
of operations of the Company as of the dates and for the years indicated, in
each case in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, subject, in the case of
Company Financial Statements referred to in clause (ii), to normal and recurring
year end adjustments which will not be material. The Company Balance Sheet is
the Company's most recent regularly prepared balance sheet, and the statement of
operations for the period then ended referred to above is the Company's most
recent regularly prepared statement of operation or income, in each case for
purposes of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the
rules and regulations thereunder.
3.5 Absence of Undisclosed Liabilities. As of the date of the
Company Balance Sheet, the Company had no liabilities of any nature, whether
accrued, absolute, contingent or otherwise (including, without limitation,
liabilities as guarantor or otherwise with respect to obligations of others,
written or oral customer commitments, or liabilities for taxes due or then
accrued or to become due), other than liabilities (a) adequately reflected or
reserved against on the Company Balance Sheet or (b) incurred since the date of
the Company Balance Sheet in the ordinary course of business which have not had
and are not reasonably likely to have a Material Adverse Effect.
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3.6 Accounts Receivable. All accounts receivable of the Company,
whether reflected on the Company Balance Sheet or otherwise, represent sales
actually made in the ordinary course of business. Allowances for doubtful
accounts and returns have been prepared in accordance with past practices of the
Company.
3.7 Intellectual Property.
(a) Company Intellectual Property. All trademarks,
service marks, trade names, Internet domain names, designs, logos, slogans, and
general intangibles of like nature, together with all goodwill, registrations
and applications related to the foregoing (collectively, "Trademarks"); patents
and industrial design registrations or applications (including any
continuations, divisionals, continuations- in-part, renewals, reissues, and
applications for any of the foregoing); copyrights (including any registrations
and applications therefor); computer software programs or applications (in both
source and object code form) ("Software Programs"); technical documentation
relating to the Software Programs ("Technical Documentation"); "mask works" (as
defined under 17 USC Section 901) and any registrations and applications for
"mask works"; technology, trade secrets and proprietary or other confidential
information, know-how, proprietary processes, formulae, algorithms, models, and
methodologies (collectively, "Trade Secrets"); moral rights; rights of publicity
and privacy relating to the use of the names, likenesses, voices, signatures and
biographical information of real persons; in each case that are or have been
used in (including without limitation in the development of) the Company's
business, or that are used in or necessary for the conduct of the Company's
business as currently conducted or contemplated to be conducted, are hereinafter
referred to as the "Company Intellectual Property."
(b) Applications and Registrations. Section 3.7(b) of
the Disclosure Schedule contains a true and complete list of all of the
Company's U.S. and foreign (i) patents and patent applications, (ii) Trademark
registrations and applications therefor and material unregistered Trademarks;
(iii) copyright registrations and applications therefor; and (iv) other filings
and formal actions made or taken pursuant to federal, state, local and foreign
laws by the Company to protect its interests in the Company Intellectual
Property. The Company is listed in the records of the appropriate U.S., state or
foreign registry as the sole current owner of record for each listed application
or registration. With respect to the listed applications, each such application
has been prosecuted in full compliance in all material respects with all
applicable rules, policies and procedures of the United States Patent and
Trademark Office.
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(c) Rights to Company Intellectual Property. The Company
Intellectual Property consists solely of items and rights which are: (i) owned
by the Company; (ii) in the public domain; or (iii) rightfully used by the
Company and its successors pursuant to a valid license. The Company has all
rights in the Company Intellectual Property necessary to carry out the Company's
business as currently conducted and as currently contemplated to be conducted.
(d) Third Party Claims. To the Company's knowledge, the
conduct of the Company's business as conducted in the past did not infringe
(when conducted), and as currently conducted or as currently contemplated to be
conducted does not infringe (either directly or indirectly, such as through
contributory infringement), any intellectual property right owned or controlled
by any third party. There is no pending or, to the best of the Company's
knowledge, threatened claim, suit, arbitration or other adversarial proceeding
before any court, agency, arbitral tribunal, or registration authority in any
jurisdiction (collectively, "Claims") (i) involving the Company Intellectual
Property owned by the Company, or, to the best of the Company's knowledge, the
Company Intellectual Property licensed to the Company or (ii) alleging that the
activities or the conduct of the Company's business does or will infringe upon,
violate or constitute the unauthorized use of the intellectual property rights
of any third party or challenging the ownership, use, validity, enforceability
or registrability of any Company Intellectual Property, nor to the knowledge of
the Company are there any facts which could reasonably be expected to give rise
to any such Claim. There are no settlements, forebearances to sue, consent
judgments or orders or similar obligations other than license agreements in the
ordinary course of business which (a) restrict the Company's rights to use any
Company Intellectual Property, (b) restrict the Company's business in order to
accommodate a third party's intellectual property rights or (c) permit third
parties to use any Intellectual Property owned or controlled by the Company. To
the knowledge of the Company (x) all registered, granted or issued patents, mask
works, Trademarks and copyrights held by the Company are valid, enforceable and
subsisting and (y) there has been no denial, refusal or similar action by any
governmental authority with respect to any patent, copyright or Trademark
application filed by or on behalf of the Company. To the Company's knowledge,
there is no unauthorized use, infringement or misappropriation of any of the
Company Intellectual Property by any third party, employee or former employee.
(e) Royalties. Except as set forth on Section 3.7(e)
of the Disclosure Schedule, to the best knowledge of the Company there are no
royalties, fees, honoraria or other payments payable by the Company to any
person or entity by reason of the ownership, development, use, license, sale or
disposition of the
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Company Intellectual Property, other than salaries and sales commissions paid to
employees and sales agents in the ordinary course of business.
(f) Personnel. All personnel of the Company, including
employees, agents, consultants and contractors, who have contributed to or
participated in the conception and development of any part of the Company
Intellectual Property on behalf of the Company have executed nondisclosure
agreements or employment agreements containing nondisclosure provisions, that
adequately protect the Company's proprietary interests in the Company
Intellectual Property and either (i) have been a party to a "work-for-hire"
arrangement or agreements with the Company in accordance with applicable
national and state law that has accorded the Company full, effective, exclusive
and original ownership of all tangible and intangible property thereby arising,
or (ii) have executed appropriate instruments of assignment in favor of the
Company as assignee that have conveyed to the Company effective and exclusive
ownership of all tangible and intangible property thereby arising. No current or
former partner, director, officer, or employee of the Company (or any
predecessor in interest) will, after giving effect to the transactions
contemplated herein, own or retain any rights in or to any of the Company
Intellectual Property.
(g) Third Party Agreements. Except as set forth in
Section 3.7(g) of the Disclosure Schedule, the Company is not, nor as a result
of the execution or delivery of this Agreement, or performance by the Company of
its obligations hereunder or the consummation by the Company of the transactions
contemplated hereby, will the Company be, in violation of any license,
sublicense, agreement or instrument to which the Company is a party or otherwise
bound, nor will execution or delivery of this Agreement, or performance of the
Company's obligations hereunder or the consummation by the Company of the
transactions contemplated hereby, cause the diminution, termination or
forfeiture of any of the Company's rights in the Company Intellectual Property
or require the consent of any governmental authority or third party in respect
of any such Company Intellectual Property. Each such license, sublicense,
agreement or instrument constitutes the valid and binding obligation of the
Company and, to the knowledge of the Company, each other party thereto,
enforceable in accordance with its terms, and there exists no event or condition
which will result in a violation or breach of, or constitute (with or without
due notice or lapse of time or both) a default by any party thereto.
(h) Protection. The Company has taken reasonable measures
to protect the confidentiality of its Trade Secrets. To the best of the
Company's knowledge, there has been no misuse or misappropriation of any Company
Trade Secret by any person or entity. Without limitation of the foregoing,
except as set forth
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in Section 3.7(h) of the Disclosure Schedule, the source code and system
documentation relating to the Software Programs owned by the Company (i) have at
all times been maintained in strict confidence, (ii) have been disclosed by the
Company only to employees who have had a "need to know" the contents thereof in
connection with the performance of their duties to the Company and who have
executed appropriate nondisclosure agreements, (iii) have not been licensed or
disclosed to any third party, and (iv) are not the subject of any escrow or
similar agreement giving any third party rights in such source code and/or
system documentation upon the occurrence of certain events.
(i) Third-Party Software. Section 3.7(i) of the
Disclosure Schedule contains a complete list of (i) all software libraries,
compilers and other third-party software sold with, incorporated into or used in
the development of the Software Programs and (ii) all material software systems
and applications used by the Company in the operation of its business other than
off-the-shelf software. Section 3.7(i) of the Disclosure Schedule also lists all
license agreements by which the Company is bound for the use of such software
and, if any such software is not licensed, the basis of the use of such software
by the Company. All use of each such software item by the Company has been in
full compliance in all material respects with the respective license agreement
or other right of use listed for such item in Section 3.7(i) of the Disclosure
Schedule.
(j) Integrity. Except with respect to demonstration or
trial copies, to the best knowledge of the Company no portion of any Software
Program contains or will contain any "back door," "time bomb," "Trojan horse,"
"worm," "drop dead device," "virus" or other software routines or hardware
components designed to permit unauthorized access; to disable or erase software,
hardware, or data; or to perform any other similar actions.
(k) Adequacy of Technical Documentation. The Technical
Documentation includes the source code (with comments) for all Software
Programs, as well as any additional documentation and other materials that may
be necessary to render such Software Programs understandable and usable to a
person ordinarily skilled in such matters. The Technical Documentation also
includes any programs (including compilers), "workbenches," tools and higher
level (or "proprietary") languages necessary for the development, maintenance
and/or implementation of the Software Programs.
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(1) Year 2000.
(i) All of (a) the internal systems used in the
business or operations of the Company, including without limitation computer
hardware systems, software, applications, firmware, equipment containing
embedded microchips and other embedded systems, and (b) the software, hardware,
firmware and other technology that constitute part of the products and services
manufactured, marketed, licensed, sold or offered for license or sale by the
Company to third parties are Year 2000 Compliant (as defined below).
(ii) The Company is not aware of any failure to be
Year 2000 Compliant of any third-party system used in connection with the
business, products, services or operations of the Company, including without
limitation any system belonging to any of the Company's vendors, co-venturers,
service providers or customers.
(iii) The Company has not provided any
representation, warranty or guarantee for any product sold or licensed, or
service provided, by the Company to the effect that such product or service (a)
complies with or accounts for the fact of the year change from December 31, 1999
to January 1, 2000, (b) will not be adversely affected with respect to
functionality, interoperability, connectivity, performance, reliability or
volume capacity (including without limitation the processing storage, recall and
reporting of data) by virtue of the year change from December 31, 1999 to
January 1, 2000 or (c) is otherwise Year 2000 Compliant.
(iv) The Company has received satisfactory written
assurances and warranties from all of its key vendors, co-venturers, service
providers and customers that are material to the ongoing operation of the
business of the Company that past and future products, software, equipment,
components, or systems provided by such parties are (or in the case of future
products, will be) Year 2000 Compliant.
(v) The Company has conducted Year 2000 audits with
respect to (a) each of the Software Programs, (b) each of the internal systems
used in the business, products, services and operations of the Company,
including without limitation computer hardware systems, software, applications,
firmware, equipment containing embedded microchips and other embedded systems,
and (c) all of the software, applications, hardware, firmware and other
technology which constitute part of the products and services manufactured,
marketed, performed, sold or licensed to third parties by the Company.
(vi) For purposes of this Agreement, "Year 2000
Compliant" means that the applicable system, product, service or item (a) will
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accurately receive, record, store, provide, recognize, recall and process all
date and time data from, during, into and between the years 1999, 2000 and 2001,
and all years thereafter; (b) will accurately perform all date-dependent
calculations and operations (including without limitation, mathematical
operations, sorting, comparing and reporting) from, during, into and between the
years 1999, 2000 and 2001, and all years thereafter; and (c) will not
malfunction, cease to function or provide invalid or incorrect results as a
result of (1) the change of years from 1999 to 2000 or from 2000 to 2001, (2)
date data, including date data which represents or references different
centuries or dates during 1999, 2000 and 2001 or (3) the occurrence of any
particular date; in each case without human intervention, provided, in each
case, that all software, applications, hardware and other systems used in
conjunction with such system or item that are not owned or licensed by the
Company correctly exchange date data with or provide date data to such system or
item.
3.8 Absence Of Changes. Since December 31, 1998, there has not
been:
(a) any event or occurrence which would be reasonably
likely to have a Material Adverse Effect;
(b) any transaction, commitment, contract or agreement
entered into by the Company or any relinquishment by the Company of any contract
or other right in any case having a value of or involving aggregate payments or
value in excess of $50,000 other than in the ordinary course of business;
(c) any redemption or other acquisition of any capital
stock of the Company by the Company or any declaration, setting aside, or
payment of any dividend or distribution of any kind with respect to any shares
of capital stock of the Company;
(d) any increase in compensation, bonus or other benefits
payable or to become payable by the Company to any of its directors, officers or
employees, other than in the ordinary course of business;
(e) any entering into or granting by the Company of any
new employment agreement providing for annual compensation over $100,000, any
new employee benefit, deferred compensation or other similar employee benefit
arrangement, or any new consulting arrangement providing for annual compensation
over $100,000 and any grant of any severance or termination rights to any
director, officer or employee of the Company or any increase in benefits payable
under existing severance or termination pay policies or employment agreements;
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(f) any change in accounting policies, principles,
methods or practices, including any material change with respect to reserves
(whether for bad debts, contingent liabilities or otherwise) of the Company;
(g) any making by the Company of any loan or advance to
any stockholder, officer, director or consultant (other than expense advances
made in the ordinary course of business), or any other loan or advance otherwise
than in the ordinary course of business;
(h) except for inventory or equipment acquired in the
ordinary course of business, any acquisition by the Company of all or any part
of the assets, properties, capital stock or business of any other person or
entity;
(i) any destruction of, damage to or loss of any assets
material to the business of the Company (whether or not covered by insurance);
(j) a material adverse change in a material customer,
supplier, licensee or licensor relationship (including, without limitation any
cancellation, termination or adverse modification or threatened cancellation,
termination or adverse modification of any such relationship;
(k) claim of wrongful discharge or claim of other unlawful
labor practice or action made or brought against the Company;
(l) any litigation commenced or, to the Company's
knowledge, threatened against the Company or any litigation commenced or
threatened by the Company;
(m) except in the ordinary course of business, any sale,
abandonment or any other disposition of any of the Company's assets or
properties;
(n) any disposition or lapse of rights with respect to
any Company Intellectual Property or any disclosure to third parties with
respect thereto except under valid and binding confidentiality agreements,
copies of which have previously been delivered to the Buyer; or
(o) any commitment, understanding or agreement by the
Company or any of its directors, officers or employees to do any of the things
described in the preceding clauses (a) through (n).
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3.9 Tax Matters.
(a) The Company has filed all Tax Returns required to be
filed by it, and all such Tax Returns are correct and complete. The Company has
timely paid all Taxes due and owing and has established adequate reserves in its
financial statements for any Taxes accrued but not yet due and owing. The
Company has complied in all respects with all applicable laws, rules and
regulations relating to Taxes required to be withheld or collected, including,
without limitation, Taxes required to be withheld pursuant to Sections 1441 and
1442 of the Code and Taxes required to be withheld from employee wages. There
are no Tax liens on any assets of the Company except liens for current Taxes not
yet due.
(b) There has not been any audit of any Tax Return filed
by the Company and no audit of any such Tax Return is in progress and the
Company has not been notified by any tax authority that any such audit is
contemplated or pending. No Tax deficiency or claim for additional Taxes has
been asserted or, to the Company's knowledge, threatened to be asserted against
the Company by any taxing authority. No extension of time with respect to any
date on which a Tax Return was or is to be filed by the Company is in force, and
no waiver or agreement by the Company is in force for the extension of time for
the assessment or payment of any Tax. The Company has not been informed by any
jurisdiction that the jurisdiction believes that the Company was required to
file any Tax Return that was not filed.
(c) The Company has not agreed to, and is not required
to, make any adjustments under Section 481(a) of the Code by reason of a change
in accounting method or otherwise.
(d) The Company (i) is not a "consenting corporation"
within the meaning of Section 341(f) of the Code, and none of the assets of the
Company are subject to an election under Section 341(f) of the Code; (ii) has
not been a United States real property holding corporation within the meaning of
Section 897(c)(2) of the Code during the applicable period specified in Section
897(c)(l)(A)(ii) of the Code; or (iii) has no actual or potential liability for
any Taxes of any person (other than the Company) under Treasury Regulation
Section 1.1502-6 (or any similar provision of law in any jurisdiction), or as a
transferee or successor, by contract, or otherwise; and (iv) has been a valid "C
corporation" for federal, state and local tax purposes at all times since
inception.
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(e) The Company (i) is not or has never been a member of
a group of corporations with which it has filed (or been required to file)
consolidated, combined or unitary Tax Returns or (ii) is a party to or bound by
any Tax indemnity, Tax sharing or Tax allocation agreement.
(f) The Company has delivered to the Buyer correct and
complete copies of all of its Tax Returns.
(g) For purposes of this Agreement, the term "Tax"
includes all federal, state, local and foreign taxes or assessments, including
income, sales, gross receipts, excise, use, value added, royalty, franchise,
payroll, withholding, property and import taxes and any additions to tax,
interest or penalties applicable thereto. For purposes of this Agreement, the
term "Tax Return" means any report, return, statement, declaration or other
written information required to be supplied to a taxing authority in connection
with Taxes (collectively "returns") and any amended returns.
(h) No state or federal "net operating loss" of the
Company determined as of the Closing Date is subject to limitation on its use
pursuant to Section 382 of the Code or comparable provisions of state law as a
result of any ownership change within the meaning of Section 382(g) of the Code
or comparable provisions of any state law occurring prior to the Closing Date.
3.10 Compliance with Laws.
(a) The Company has all material licenses, permits,
franchises, orders or approvals of any federal, state, local or foreign
governmental or regulatory body required for the conduct of the Company's
business as currently conducted (collectively, "Permits"). All Permits are in
full force and effect and no proceeding is pending or, to the Company's
knowledge, threatened to revoke or limit any Permit.
(b) The Company is not in violation of any applicable
law, ordinance or regulation or any order, judgment, injunction, decree or other
requirement of any court, arbitrator or governmental or regulatory body, except
for violations that would not, individually or in the aggregate, have a Material
Adverse Effect. Since its organization, the Company has not received written
notice of, and there has not been any citation, fine or penalty imposed against
the Company for, any such violation or alleged violation.
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3.11 Actions and Proceedings. There are no outstanding orders,
awards, judgments, injunctions, decrees or other requirements of any court,
arbitrator or governmental or regulatory body against the Company. There are no
actions, suits, investigations or claims or legal, administrative or arbitration
proceedings pending or, to the knowledge of the Company, threatened against the
Company that, individually or in the aggregate, would, or would be reasonably
likely to, have a Material Adverse Effect. To the Company's knowledge, there is
no fact, event or circumstance now in existence that could be expected to give
rise to any action, suit, claim, proceeding or investigation that, individually
or in the aggregate, would, or would be reasonably likely to, have a Material
Adverse Effect.
3.12 Contracts and Other Agreements. Section 3.12 of the
Disclosure Schedule sets forth a list of the following contracts and other
agreements to which the Company is a party or by or to which any of its assets,
properties or securities are bound or subject (each, a "Material Contract"):
(a) any agreement or series of related agreements
requiring aggregate payments by or to the Company of more than $50,000;
(b) any agreement with or for the benefit of any current
or former officer, director, holder of any security, employee or consultant of
the Company under which the Company has any obligations as of the date hereof;
(c) any agreement with any labor union or association
representing any employee of the Company;
(d) any agreement for the purchase or sale of materials,
supplies, equipment, merchandise or services that contains an escalation clause
or that obligates the Company to purchase all or substantially all of its
requirements of a particular product or service from a supplier or to make
periodic minimum purchases of a particular product or service from a supplier,
which is not terminable on not more than 30 days notice (without penalty or
premium);
(e) any agreement for the sale of any of the assets or
properties of the Company other than in the ordinary course of business or for
the grant to any person of any options, rights of first refusal, or preferential
or similar rights to purchase any such assets or properties;
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(f) any agreement of surety, guarantee or
indemnification, other than agreements in the ordinary course of business with
respect to obligations in an aggregate amount not in excess of $50,000;
(g) any agreement which contains covenants of the Company
not to compete in any line of business, in any geographic area or with any
Person or covenants of any other Person not to compete with the Company or in
any line of business of the Company;
(h) any agreement with customers or suppliers for the
sharing of fees, the rebating of charges or other similar arrangements;
(i) any agreement obligating the Company to deliver
maintenance services or future product enhancements or containing a "most
favored nation" pricing clause;
(j) any agreement relating to the acquisition by the
Company of any operating business or the capital stock of any other Person;
(k) any agreement requiring the payment to any Person of
a brokerage or sales commission or a finder's or referral fee (other than
arrangements to pay commissions or fees to employees in the ordinary course of
business);
(l) any agreements, notes or other instruments relating
to or evidencing outstanding indebtedness of the Company for borrowed money
(including capitalized lease obligations);
(m) any lease, sublease or other agreement under which the
Company is lessor or lessee of any real property or equipment or other tangible
property;
(n) any agreement with a change of control provision or
otherwise requiring any consent, approval, waiver or other action by any Person
in connection with the Merger;
(o) any stock option agreement, restricted stock
agreement, employment or severance agreement, phantom stock plan or bonus,
incentive or similar agreement, arrangement or understanding;
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(p) any agreement involving the assignment, transfer,
license (whether as licensee or licensor) or pledge or encumbrance of any
Company Intellectual Property;
(q) any distribution or sales representative agreement or
agreement appointing any agent; and
(r) any other material agreement whether or not made in
the ordinary course of business.
True and complete copies of all Material Contracts (and all amendments, waivers
or other modifications thereto) have been furnished or made available to the
Buyer. Each Material Contract is valid, subsisting, in full force and effect,
binding upon the Company and, to the Company's knowledge, the other parties
thereto in accordance with their terms, and the Company is not in default under
any of them, nor, to the Company's knowledge, is any other party to any Material
Contract in default thereunder, nor, to the Company's knowledge, does any
condition exist that with notice or lapse of time or both would constitute a
default thereunder, except, in each of the foregoing cases, such defaults as
would not, either individually or in the aggregate, have, or be reasonably
likely to have, a Material Adverse Effect.
3.13 Bank Accounts and Powers of Attorney. Section 3.13 of the
Disclosure Schedule identifies all bank and brokerage accounts of the Company,
whether or not such accounts are held in the name of the Company, lists the
respective signatories therefor and lists the names of all persons holding a
power of attorney from the Company with respect to such accounts.
3.14 Properties.
(a) The Company owns and has good title to all of its
assets and properties reflected as owned on the Company Balance Sheet, free and
clear of any lien, claim or other encumbrance, except for (i) assets and
properties disposed of, or subject to purchase or sales orders, in the ordinary
course of business since the date of the Company Balance Sheet, (ii) liens or
other encumbrances securing the liens of materialmen, carriers, landlords and
like persons, all of which are not yet due and payable and (iii) statutory liens
for Taxes not yet delinquent.
(b) The Company does not own any real property and does
not have any options or contractual obligations to purchase or acquire any
interest in real property. The Company has a valid leasehold interest in all of
the buildings, structures and leasehold improvements, and owns or has a valid
leasehold interest in
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all equipment and other tangible property, used in the conduct of its business
as currently conducted, all of which are in good and sufficient operating
condition and repair, ordinary wear and tear excepted. There is no equipment
located on the premises of the Company or used in the business of the Company
that is on loan from another party.
3.15 Customers, Distributors and Suppliers. Section 3.15 of the
Disclosure Schedule sets forth (a) all representatives or distributors of the
Company (whether pursuant to commission, royalty or other arrangement), (b) the
five largest customers of the Company in terms of revenue recognized during the
period from January 1, 1999 through December 31, 1999 and (c) the ten largest
suppliers of Company in terms of costs recognized for the purchase of products
or services during the period from January 1, 1999 through December 31, 1999
(collectively, the "Distributors, Customers and Suppliers"). The Company does
not know of any plan or intention of any of the Distributors, Customers or
Suppliers, and the Company has not received any written or oral threat from any
of the Distributors, Customers or Suppliers, to terminate, cancel or otherwise
adversely modify its relationship with the Company or to decrease materially or
limit its products to or services to the Company or its usage, purchase or
distribution of the services or products of the Company.
3.16 Employee Benefit Plans.
(a) Definitions. The following terms shall have the
meanings set forth below:
(i) "Affiliate" shall mean any other person or
entity controlled by or under common control with the Company within the meaning
of Section 414(b), (c), (m) or (o) of the Code and the regulations thereunder;
(ii) "DOL" shall mean the United States Department
of Labor.
(iii) "ERISA" shall mean the Employee Retirement
Income Security Act of 1974, as amended;
(iv) "Employee" shall mean any current, former, or
retired employee, officer, or director of the Company or any Affiliate;
(v) "Employee Agreement" shall refer to each
management, employment, severance, consulting, relocation, repatriation,
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expatriation, visas, work permit or similar agreement or contract between the
Company or any Affiliate and any Employee or consultant;
(vi) "IRS" shall mean the United States Internal
Revenue Service;
(vii) "Pension Plan" shall refer to each Company
Employee Plan that is an "employee pension benefit plan" within the meaning of
Section 3(2) of ERISA;
(viii) "Company Employee Plan" shall refer to any
plan, program, policy, practice, contract, agreement or other arrangement
providing for compensation, deferred compensation, incentive compensation,
severance, termination pay, performance awards, stock or stock-related awards,
fringe benefits or other employee benefits or remuneration of any kind, whether
formal or informal, funded or unfunded, including without limitation, each
"employee benefit plan", within the meaning of Section 3(3) of ERISA that is or
has been maintained, contributed to, or required to be contributed to, by the
Company or any Affiliate for the benefit of any Employee, and pursuant to which
the Company or any Affiliate has any liability, contingent or otherwise;
(b) Schedule. Section 3.16(b) of the Company Disclosure
Schedule contains an accurate and complete list of each Company Employee Plan
and each Employee Agreement. Neither the Company nor any Affiliate has any plan
or commitment, to establish any new Company Employee Plan or written Employee
Agreement, or to modify any Company Employee Plan or Employee Agreement (except
to the extent required by law).
(c) Documents. The Company has provided or made available
to The Buyer true and complete copies of (i) all documents comprising each
written Company Employee Plan and each written Employee Agreement, including all
amendments thereof and any trust agreements, insurance contracts, and other
funding agreements; (ii) the two most recent annual reports (Series 5500 and all
schedules thereto), if any, required under ERISA or the Code in connection with
each Company Employee Plan or related trust; (iii) the most recent actuarial
reports, if any, prepared for each of the Company Employee Plans for which such
report is required or was prepared and the most recent certified financial
statements for each of the Company Employee Plans, if any, for which such report
is required or was prepared; (iv) the most recent summary plan description
together with the most recent summary of material modifications thereto, if any,
required under ERISA with respect to each Company Employee Plan; and (v) all IRS
determination letters and rulings, if any,
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relating to Company Employee Plans and copies of all material applications and
correspondence to or from the IRS or the DOL with respect to any Company
Employee Plan.
(d) Employee Plan Compliance. (i) The Company and each
Affiliate has performed in all material respects all obligations required to be
performed by it under each Company Employee Plan, and each Company Employee Plan
has been established and maintained in all material respects in accordance with
its terms and in material compliance with all applicable laws, statutes, orders,
rules and regulations, including but not limited to ERISA or the Code; (ii) no
"prohibited transaction," within the meaning of Section 4975 of the Code or
Section 406 of ERISA, that is not otherwise exempt, has occurred with respect to
any Company Employee Plan; (iii) there are no actions, suits or claims pending,
or, to the knowledge of Company, threatened or anticipated (other than routine
claims for benefits) against any Company Employee Plan or against the assets of
any Company Employee Plan; (iv) each Company Employee Plan (other than any
401(k) or option plan) can be amended, terminated or otherwise discontinued
after the Effective Time in accordance with its terms, without material
liability to the Company, the Surviving Corporation or any of its Affiliates
(other than for ordinary administration expenses typically incurred in a
termination event and benefits accrued through the effective date of such
amendment, termination or discontinuance); (v) to the knowledge of the Company
there are no inquiries or proceedings pending or threatened by the IRS or DOL
with respect to any Company Employee Plan; (vi) neither the Company nor any
Affiliate is subject to any material penalty or tax with respect to any Company
Employee Plan under Section 406(i) of ERISA or Section 4975 through 4980 of the
Code; and (vii) all contributions, premiums or other payments due and owing from
the Company or its Affiliates with respect to any Company Employee Plan have
been timely paid or adequately provided for on the Company Balance Sheet.
(e) Pension Plan Qualification Funding.
(i) With respect to each Pension Plan, if any,
which is intended to be qualified under Section 401(a) of the Code, (A) such
Pension Plan has received a favorable determination opinion, notification or
advisory letter as to its qualification from the IRS, or has remaining a period
of time under applicable law in which to apply for such a letter, and (B)
nothing has occurred, whether by action or failure to act, which would cause the
loss or denial of such qualification.
(ii) No Pension Plan is or has been subject to
Section 302 or Title IV of ERISA or Section 412 of the Code.
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(f) No Post-Employment Obligations. Except as required
under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, or
other applicable law or pursuant to a Pension Plan, no Company Employee Plan
provides, or has any liability to provide, life insurance, medical benefits, or
other employee benefits to any Employee upon his or her retirement or
termination of employment for any reason, except for benefits accrued through
the date of termination and as may be required by statute, and neither the
Company nor any Affiliate has ever represented, promised or contracted (whether
in oral or written form) to any Employee (either individually or to Employees as
a group) that such Employee(s) would be provided with medical welfare benefits
upon their retirement or termination of employment, except to the extent
required by statute.
(g) Effect of Transaction. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby will
not, constitute an event under any Company Employee Plan, Employee Agreement,
trust or loan or applicable law that will result in any payment (whether of
severance pay, unemployment compensation, golden parachute, bonus or otherwise),
acceleration, forgiveness of indebtedness, vesting, distribution, increase in
benefits or obligation to fund benefits with respect to any Employee. No amount
payable under any Company Employee Plan or Employee Agreement or otherwise will
fail to be deductible for federal income tax purposes by virtue of Section 280G
of the Code.
3.17 Employee Relations. The Company has approximately 54
full-time equivalent employees. The Company is not delinquent in payments to any
of its employees or consultants for any wages, salaries, commissions, bonuses or
other direct compensation for any services performed by them to the date hereof
or amounts required to be reimbursed to such employees. Upon termination of the
employment of any employees, neither the Company nor the Buyer or the Surviving
Corporation will be liable to any of such employees for severance pay or any
other payments (other than accrued salary, vacation or sick pay in accordance
with the Company's normal policies) as a result of any oral or written
agreements made by the Company prior to the Closing. True and complete
information as to the name, current job title, base salary, bonus potential,
commissions and termination obligations of all current directors, officers,
employees or consultants of the Company, has been previously furnished to the
Buyer.
3.18 Employment Matters. The Company is in compliance in all
material respects with all applicable foreign, federal, state and local laws,
rules and regulations respecting employment, employment practices, terms and
conditions of employment and wages and hours, in each case, with respect to
employees. No work stoppage or labor strike against the Company is pending or,
to the Company's
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knowledge, threatened. The Company is not involved in or, to the Company's
knowledge, threatened with, any labor dispute, grievance, or litigation relating
to labor, safety or discrimination matters involving any of the Company's
employee, including, without limitation, charges of unfair labor practices or
discrimination complaints. To the Company's knowledge, it has not engaged in any
unfair labor practices within the meaning of the National Labor Relations Act.
The Company is not presently, nor has it been in the past, a party to, or bound
by, (i) any collective bargaining agreement or union contract with respect to
employees and no collective bargaining agreement is being negotiated by the
Company or (ii) any statutory works council or other agreement, statute, rule or
regulation that mandates employee approval, participation, consultation or
consent with regard to the transactions contemplated hereby.
3.19 Employee Conflicts. To the Company's knowledge, no
employee of the Company (a) is in violation of any term of any employment
contract, inventions disclosure agreement, confidentiality agreement,
non-competition agreement, or any restrictive covenant to a former employer
relating to the right of any such employee to be employed by the Company because
of the nature of the business conducted or presently proposed to be conducted by
the Company or relating to the use of trade secrets or proprietary information
of others or (b) has given notice to the Company nor is the Company otherwise
aware, that any such employee intends to terminate his or her employment with
the Company.
3.20 Management Relationships. No executive officer or
director of the Company owns any interest in (a) any property or assets of the
Company (except as a stockholder), (b) any current competitor, customer or
supplier of the Company, or (c) any Person which is currently a party to any
material contract or agreement with the Company, other than holdings of less
than 1% of a class of a company's publicly traded securities and ownership
interests held by investment funds affiliated with the Company's directors (and
personal ownership interests of such directors and their families related to the
ownership interests of such funds).
3.21 Insurance. Section 3.21 of the Company Disclosure
Schedule sets forth a list of all policies or binders of fire, liability,
product liability, workmen's compensation, vehicular, directors' and officers'
and other insurance held by or on behalf of the Company. Such policies and
binders are in full force and effect, are reasonably believed by the Company to
be adequate for the businesses engaged in by the Company, as applicable, and are
in conformity in all material respects with the requirements of all leases or
other agreements to which the Company is a party and are valid and enforceable
in accordance with their terms. The Company is not in default with respect to
any provision contained in any such policy or binder nor has
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the Company failed to give any notice or present any claim under any such policy
or binder in due and timely fashion. There are no outstanding unpaid claims
under any such policy or binder. The Company has not received notice of
cancellation or non-renewal of any such policy or binder.
3.22 Brokers and Finders; Third Party Expenses.
(a) No Person has acted as broker, finder, agent,
investment banker, financial adviser or similar intermediary on behalf of the
Company or any stockholder of the Company in connection with this Agreement or
the transactions contemplated hereby, and there are no other brokerage
commissions, investment banking or financial adviser fees, finders' fees or
similar fees or commissions payable in connection herewith based on any
agreement, arrangement or understanding with the Company or any Affiliate,
director or stockholder of the Company, or any action taken by any of them.
(b) Section 3.22(b) of the Disclosure Schedule sets
forth a reasonable estimate of the amount of all fees and expenses, including
without limitation of attorneys and accountants, expected to be payable by the
Company to any third parties in connection with this Agreement or the
transactions contemplated hereby.
3.23 Hazardous Materials.
(a) To the Company's knowledge, there has been no
generation, use, handling, storage or disposal of any Hazardous Materials (as
defined in this Section 3.23) in violation of any applicable Environmental Law
(as defined in this Section 3.23) at any site owned or premises leased by the
Company during the period of the Company's lease or prior thereto, nor has there
been or is there any release of any Hazardous Materials on or at any such site
or premises during such period or prior thereto in violation of any applicable
Environmental Law or which created or will create an obligation on the part of
the Company to report or remediate such release. "Hazardous Materials" means any
"hazardous waste" as defined in either the United States Resource Conservation
and Recovery Act or regulations adopted pursuant to said Act, and any "hazardous
substances" or "hazardous materials" as defined in the United States
Comprehensive Environmental Response, Compensation and Liability Act.
"Environmental Laws" means all national, federal, state, and local laws and
regulations relating to pollution or protection of human health or the
environment, including without limitation, laws relating to releases or
threatened releases of Hazardous Materials or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, release,
disposal, transport or
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handling of Hazardous Materials, and all laws and regulations with regard to
recordkeeping, notification, disclosure and reporting requirements respecting
Hazardous Materials.
(b) The Company has previously furnished or made
available to the Buyer copies of any environmental audits or risk assessments,
site assessments, documentation regarding off-site disposal of Hazardous
Materials, spill control plans and material correspondence with any governmental
agency available to it regarding the foregoing.
3.24 Certain Business Practices. The Company has not (i) used
any funds for unlawful contributions, gifts, entertainment or other unlawful
payments related to a political activity, (ii) made any unlawful payment to any
foreign or domestic government official or employee or to any foreign or
domestic political party or campaign or violated any provision of the Foreign
Corrupt Practices Act of 1977, as amended, (iii) consummated any transaction or
made any payment or entered into any agreement or arrangement or taken any other
action in violation of Section 1128B(b) of the Social Security Act, as amended,
or (iv) to its knowledge, made any other unlawful payment.
3.25 Stockholder Composition. As of the Record Date, the
Company has 61 record holders of Company Stock, which, to the Company's
knowledge, except for 30 holders, are all Accredited Investors. The Company has
obtained, or will obtain promptly (and in any event within seven days after the
date hereof), agreements from certain of its holders of Options, in form and
substance reasonably satisfactory to the Buyer, restricting the exercise of such
Options (each an "Optionholder Lock-Up Agreement"), and has taken or will take
all other actions necessary, so that as of the Record Date and immediately prior
to the Effective Time there will be no more than 35 holders of Company Stock who
or which are not Accredited Investors. For purposes of this Section 3.25, the
number of holders of Company Stock shall be calculated in the same manner as the
number of "purchasers" is calculated pursuant to Rule 501(e) under the
Securities Act (for this purpose excluding clause (iv) of subparagraph (1) of
such Rule).
3.26 Information Statement. The information supplied by the
Company for inclusion in the Consent Solicitation/Information Statement (the
"Consent Solicitation/Information Statement") to be sent to the stockholders of
the Company in connection with the solicitation of written consents to adopt
this Agreement and to effect the Preferred Stock Conversion ("Written Consents")
will not, on the date the Consent Solicitation/Information Statement is first
mailed or otherwise provided to stockholders of the Company or at the Effective
Time, contain
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any statement which, at such time and in light of the circumstances under which
it is made, is false or misleading with respect to any material fact, or omit to
state any material fact necessary in order to make the statements made in the
Consent Solicitation/Information Statement not false or misleading or necessary
to correct any statement in any earlier communication with respect to the
solicitation of the Written Consents which has become false or misleading.
3.27 Termination of Existing Agreements with Holders of
Company Stock. The Company has taken or, prior to Closing, will have taken all
action, and has obtained the written consent, approval or agreement of any
Person, required to terminate in their entirety, effective at the Effective
Time, all agreements or instruments between or among the Company and any
stockholders of the Company, including without limitation the Second Amended and
Restated Rights Agreement entered into as of June 2, 1999, but excluding
agreements relating to the employment of any Company Stockholder by the Company
(including any Proprietary Information and Inventions Agreement) and any
agreements entered into pursuant to the Company Stock Plan (such terminated
agreements being referred to as the "Existing Company Stockholder Agreements"),
so that as of the Effective Time, the Existing Company Stockholder Agreements
shall be void and of no further force or effect and no Person shall have any
rights or obligations whatsoever thereunder.
3.28 Certain Waivers. The Company has obtained agreements from
the Company employees listed on Schedule 4 hereto ("Key Employees"), in favor of
the Company and the Buyer and in form and substance satisfactory to the Buyer
(the "Key Employee Agreements"), copies of which have previously been delivered
to the Buyer, (i) accepting employment with the Buyer after the Effective Time
on the terms set forth therein and (ii) waiving, to the extent provided therein,
certain rights of accelerated vesting under the Company Stock Plan, any Option
Agreement, Purchase Agreement or Stock Issuance Agreement.
3.29 Disclosure. The representations and warranties and
statements of the Company contained in this Agreement (together with the
Disclosure Schedule) do not contain any untrue statement of a material fact, and
do not omit to state any material fact necessary to make such representations,
warranties and statements, in light of the circumstances under which they are
made, not misleading. There is no fact specifically relating to the Company and
known to the Company that has not been disclosed to the Buyer in this Agreement
(including the Disclosure Schedule) that has had or is reasonably likely to have
a Material Adverse Effect.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE BUYER
The Buyer represents and warrants to the Company as follows:
4.1 Organization. The Buyer is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
Sub is a corporation duly organized, validly existing and in good standing under
the laws of the State of Delaware, and all of the outstanding capital stock of
Sub is directly owned by The Buyer. Each of the Buyer and the Sub is duly
qualified or licensed as a foreign corporation to conduct business and is in
good standing under the laws of each jurisdiction in which the nature of its
business or the ownership or leasing of its properties requires such
qualification, except where the failure to be so qualified or licensed which,
individually or in the aggregate, would not, and would not reasonably be likely
to, have a Buyer Material Adverse Effect. The Buyer has all requisite corporate
power and authority to own, lease and operate its assets and to carry on its
business as now being and as heretofore conducted.
4.2 Capitalization.
(a) The authorized capital stock of The Buyer consists
of 100,000,000 shares of Buyer Common Stock and 10,000,000 shares of preferred
stock, $.0001 par value per share ("Buyer Preferred Stock"). As of December 31,
1999: (i) (A) 22,025,716 shares of Buyer Common Stock were issued and
outstanding, all of which are validly issued, fully paid and nonassessable and
no shares of Buyer Common Stock were held in the treasury of the Buyer or by
Subsidiaries of the Buyer, (B) 2,531,266 shares of Buyer Common Stock were
reserved for issuance pursuant to outstanding awards granted under the Buyer's
1996 Stock Plan and 1999 Equity Incentive Plan (collectively, the "Buyer Stock
Plans") and 553,078 shares of Buyer Common Stock were reserved for issuance
pursuant to future grants of awards under the Buyer Stock Plans, (C) 20,000
shares of Buyer Common Stock were reserved for issuance pursuant to outstanding
stock options granted under the Buyer's 1999 Non-Employee Director Option Plan
(the "Non-Employee Director Stock Plan") and 480,000 shares of Buyer Common
Stock were reserved for issuance pursuant to future grants of stock options
under the Non-Employee Director Stock Plan, and (D) 957,616 shares of Buyer
Common Stock were reserved for issuance under the Buyer's Employee Stock
Purchase Plan; and (ii) no shares of Buyer Preferred Stock were issued or
outstanding. No material change in such capitalization has occurred between
December 31, 1999 and the date of this Agreement. All shares of Buyer Common
Stock subject to issuance as specified above, upon issuance on the
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terms and conditions specified in the instruments pursuant to which they are
issuable, shall be duly authorized, validly issued, fully paid and
nonassessable.
(b) The issuance of the Merger Shares pursuant to the
Merger has been duly authorized by all necessary corporate action and, when
issued in accordance with this Agreement, the Merger Shares will be duly
authorized, validly issued, fully paid and nonassessable.
4.3 Authority; No Conflict; Required Filings and Consents.
(a) Each of the Buyer and Sub has all requisite
corporate power and authority to enter into this Agreement (and, in the case of
the Buyer, the Escrow Agreement and the Registration Rights Agreement), to
perform its obligations hereunder (and, in the case of the Buyer, thereunder)
and to consummate the transactions contemplated hereby (and, in the case of the
Buyer, thereby). The execution and delivery by each of the Buyer and Sub of this
Agreement (and, in the case of the Buyer, the Escrow Agreement and the
Registration Rights Agreement), the performance by each of the Buyer and Sub of
its obligations hereunder (and, in the case of the Buyer, thereunder) and the
consummation by each of the Buyer and Sub of the transactions contemplated
hereby (and, in the case of the Buyer, thereby) have been duly authorized by the
boards of directors of the Buyer and Sub and by the Buyer as the sole
stockholder of Sub, and no other corporate proceedings on the part of the Buyer
or Sub are necessary to authorize this Agreement or for the Buyer or Sub to
consummate the transactions contemplated hereby. This Agreement has been duly
executed and delivered by the Buyer and Sub and constitutes (and, the Escrow
Agreement and the Registration Rights Agreement, when executed and delivered by
the Buyer will constitute) the valid and binding obligation of the Buyer and Sub
(in the case of Sub, solely with respect to this Agreement), enforceable in
accordance with its terms.
(b) The execution and delivery of this Agreement by the
Buyer and Sub does not (and, in the case of the Buyer, the execution and
delivery by the Buyer of the Escrow Agreement and the Registration Rights
Agreement will not), the performance by each of the Buyer and Sub of its
obligations hereunder (and, in the case of the Buyer, thereunder) and the
consummation by each of the Buyer and Sub of the transactions contemplated
hereby (and in the case of the Buyer, thereby) will not, (i) conflict with, or
result in any violation or breach of any provision of the Amended and Restated
Certificate of Incorporation of the Buyer or the certificate of incorporation of
Sub, the Amended and Restated Bylaws of the Buyer or the by-laws of Sub, (ii)
result in any violation or breach of, or constitute (with or without notice or
lapse of time, or both) a default (or give rise to a right of termination,
cancellation or
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acceleration of any obligation or loss of any benefit) under any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, lease, contract
or other agreement, instrument or obligation to which the Buyer is a party or by
which the Buyer or any of its properties or assets may be bound, or (iii)
assuming the truth and accuracy as of the date hereof and as of the Effective
Time of the Company's representations and warranties contained in clause (i) of
Section 3.2(c), and Sections 3.4 and 3.25, and the truth and accuracy of the
representations and warranties of the Company Stockholders contained in the
Investment Representation and Affiliate Lock-Up Agreements and the Non-Affiliate
Investment Representation Agreements, conflict with or violate any permit,
concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to the Buyer or any of its properties
or assets, except, in the case of (ii) and (iii), for any such violations,
breaches, defaults, terminations, cancellations, accelerations or conflicts
which would not, in the aggregate, have or result in a Buyer Material Adverse
Effect.
(c) Assuming the truth and accuracy as of the date
hereof and as of the Effective Time of the Company's representations and
warranties contained in clause (i) of Section 3.2(c), and Sections 3.4 and 3.25,
and the truth and accuracy of the representations and warranties of the Company
Stockholders contained in the Investment Representation and Affiliate Lock-Up
Agreements and the Non-Affiliate Investment Representation Agreements, no
consent, approval, order or authorization of, or registration, declaration or
filing with, any Governmental Entity, is required by or with respect to the
Buyer or Sub in connection with the execution and delivery by the Buyer or Sub
of this Agreement, the Escrow Agreement, or the Registration Rights Agreement,
the performance by the Buyer or Sub, as applicable, of their obligations
hereunder or thereunder, or the consummation by the Buyer or Sub, as applicable,
of the transactions contemplated hereby or thereby, except for the (i) filing of
the Certificate of Merger with the Delaware Secretary of State, (ii) the filing
of a Form D under the Securities Act pursuant to Rule 503 under the Securities
Act, (iii) such consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required (A) under applicable state
securities laws and (B) in connection with the Registration Rights Agreement,
(iv) filings with the Nasdaq National Market in connection with the listing on
the Nasdaq National Market of the Merger Shares, (v) filings under the Exchange
Act, and (vi) such other consents, approvals, orders, authorizations,
registrations, declarations and filings which, if not obtained or made, would
not, individually or in the aggregate, have or be reasonably likely to have, a
Buyer Material Adverse Effect.
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4.4 Filings; Financial Statements.
(a) The Buyer has made available to the Company all
registration statements, prospectuses, reports and documents filed by the Buyer
with the SEC since April 22, 1999 (collectively, the "Buyer SEC Reports"). The
Buyer SEC Reports (i) at the time filed, complied in all material respects with
the applicable requirements of the Securities Act and the Exchange Act, as the
case may be, and (ii) did not at the time they were filed (or if amended or
superseded by a filing prior to the date of this Agreement, then on the date of
such filing) contain any untrue statement of a material fact or omit to state a
material fact required to be stated in such Buyer SEC Reports or necessary in
order to make the statements in such Buyer SEC Reports, in the light of the
circumstances under which they were made, not misleading.
(b) Each of the consolidated financial statements
(including, in each case, any related notes) contained in the Buyer SEC Reports,
complied, as of their respective dates, in all material respects with all
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, was prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved and fairly presented the consolidated financial position of the Buyer
and its Subsidiaries as at the respective dates and the consolidated results of
its operations and cash flows for the periods indicated, except that the
unaudited interim financial statements were or are subject to normal and
recurring year-end adjustments which were not or are not expected to be material
in amount.
4.5 Consent Solicitation/Information Statement. The
information supplied by the Buyer for inclusion in the Consent
Solicitation/Information Statement will not, on the date the Consent
Solicitation/Information Statement is first mailed or otherwise provided to
stockholders of the Company, or at the Effective Time, contain any statement
which, at such time and in light of the circumstances under which it is made, is
false or misleading with respect to any material fact, or omit to state any
material fact necessary in order to make the statements made in the Consent
Solicitation/Information Statement not false or misleading or necessary to
correct any statement in any earlier communication with respect to the
solicitation of Written Consents which has become false or misleading.
4.6 Brokers and Finders. No Person (other than Robertson
Stephens & Co., whose fees and expenses will be paid by the Buyer) has acted as
broker, finder, agent, investment banker, financial adviser or similar
intermediary on behalf of the Buyer or Sub in connection with this Agreement or
the transactions contemplated
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hereby, and there are no brokerage commissions, investment banking or financial
adviser fees, finders' fees or similar fees or commissions payable in connection
herewith based on any agreement, arrangement or understanding with the Buyer or
Sub, or any action taken by either of them.
ARTICLE V
CONDUCT OF BUSINESS
5.1 Covenants of the Company. During the period from the date
of this Agreement and continuing until the earlier of the termination of this
Agreement in accordance with its terms or the Effective Time, the Company will
(except to the extent that the Buyer shall otherwise consent in writing), carry
on its business in the usual, regular and ordinary course in substantially the
same manner as previously conducted, pay or perform its obligations when due,
and, to the extent consistent with such business, use all reasonable efforts
consistent with past practices and policies to preserve intact its present
business organization, keep available the services of its present officers and
key employees and preserve its relationships with customers, suppliers,
distributors, licensors, licensees and others having business dealings with it,
to the end that its goodwill and ongoing businesses shall be unimpaired at the
Effective Time. Except as expressly contemplated by this Agreement, the Company
will not, without the prior written consent of the Buyer:
(a) Grant any additional Options, accelerate, amend or
change the period of vesting or exercisability of any Options or the vesting
schedule with respect to any Option Shares or Restricted Shares or authorize
cash payments in cancellation of any Options, or amend or waive any term or
provision of any Option Agreement, Stock Issuance Agreement, Optionholder
Lock-Up Agreement or Key Employee Agreement;
(b) Transfer or license to any person or entity or
otherwise extend, amend or modify any rights to any Company Intellectual
Property;
(c) Declare, set aside or pay any dividends on or make
any other distributions (whether in cash, stock or property) in respect of any
of its capital stock, or split, combine or reclassify any of its capital stock
or issue or authorize the issuance of any other securities in respect of, in
lieu of or in substitution for shares of its capital stock, or redeem or
otherwise acquire, directly or indirectly, any shares of its capital stock;
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(d) Issue, deliver or sell or authorize or propose the
issuance, delivery or sale of any shares of its capital stock or securities
directly or indirectly convertible into, or exercisable or exchangeable for,
shares of its capital stock, or subscriptions, rights, warrants or options to
acquire, or other agreements or commitments of any character obligating it to
issue, any such shares or securities, other than the issuance of shares of
Common Stock issuable upon the exercise of Options outstanding on the date
hereof, the Warrant or upon conversion of shares of Preferred Stock;
(e) Merge or consolidate with another Person, or acquire
or purchase an equity or similar interest in or a substantial portion of the
assets of another corporation, partnership or other business organization or
otherwise acquire any assets outside the ordinary course of business consistent
with past practices or otherwise enter into any material contract, commitment or
transaction outside the ordinary course of business consistent with past
practices;
(f) Sell, lease, license, waive, release, transfer,
encumber or otherwise dispose of any of its properties or assets, except in the
ordinary course of business consistent with past practices;
(g) (i) Incur, assume or prepay any indebtedness or any
other liabilities other than in the ordinary course of business consistent with
past practices; (ii) assume, guarantee, endorse or otherwise become liable or
responsible (whether directly, contingently or otherwise) for the obligations of
any other person or entity; (iii) make any loans, advances (other than travel
advances consistent with current Company policy) or capital contributions to, or
investments in, any other person; (iv) authorize or make capital expenditures in
excess of the amounts currently budgeted therefor as set forth in Section 5.1 of
the Disclosure Schedule; or (v) permit any insurance policy naming the Company
as a beneficiary or a loss payee to be cancelled or terminated other than in the
ordinary course of business consistent with past practices;
(h) (i) Increase in any manner the compensation or
fringe benefits of, or pay any bonus to, any director, officer or employee,
except for normal increases in salaried compensation in the ordinary course of
business consistent with past practices; (ii) grant any severance or termination
pay to, or enter into any employment or severance agreement, with any director,
officer or employee; (iii) enter into any collective bargaining agreement; (iv)
establish, adopt, enter into or amend any Company Employee Plan, except as
required by law;
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(i) Take any action with respect to, or make any
material change in its accounting or tax policies or procedures in effect on the
date of the Company Balance Sheet, except as may be required by changes in
generally accepted accounting principles upon the advice of its independent
accountants;
(j) Revalue any of its assets, including writing down
the value of inventory or writing off notes or accounts receivable, other than
revaluations in the ordinary course of business consistent with past practices
not exceeding $50,000 in the aggregate;
(k) Amend or propose to amend the Certificate of
Incorporation or Bylaws;
(l) Amend, take or fail to take any action that would
constitute a violation of or default under, or waive and right under, any
Material Contract, or waive or release any other material claim or right; or
(m) Make or rescind any material election relating to
Taxes, settle any claim, action, suit, litigation, proceeding, arbitration,
investigation, audit or controversy relating to Taxes, or file any amended Tax
Return or claim for refund.
(n) Enter into any contract, agreement, commitment,
arrangement or understanding with respect to any of the actions described in
Sections (a) through (m) above, or take (or fail to take) any action which would
be reasonably likely to make any of the representations or warranties contained
in this Agreement untrue or incorrect in any material respect as of the date of
this Agreement or the Closing Date.
5.2 Audited 1999 Financial Statements. As soon as practicable
and in any event within five business days prior to the Closing, the Company
will deliver to the Buyer the Company's audited balance sheet as of December 31,
1999 (the "Audited Balance Sheet") and the related statement of operations,
changes in stockholders' equity and cash flows and notes to financial statements
for the year then ended, along with the audit report of the Company's
independent auditors, PricewaterhouseCoopers LLP, on such balance sheets and
statements.
5.3 Cooperation. Subject to compliance with applicable law,
from the date hereof until the Effective Time, each of the Company and the Buyer
shall confer on a regular and frequent basis to report on material operational
matters and the general status of ongoing operations.
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ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 No Solicitation.
(a) During the period from the date of this Agreement
until the earlier of (i) the termination of this Agreement in accordance with
its terms and (ii) the Effective Time, the Company will not, directly or
indirectly, through any officer, director, employee, stockholder, representative
or agent of the Company (and the Company shall cause such officers, directors,
employees, stockholders, representatives and agents not to, directly or
indirectly), (i) solicit, initiate, facilitate or encourage any inquiries or
proposals that constitute, or could reasonably be expected to lead to, a
proposal or offer for a merger, consolidation, business combination, sale of
substantial assets, sale of shares of capital stock or similar transactions
involving the Company, other than the transactions contemplated by this
Agreement (any of the foregoing inquiries or proposals being referred to in this
Agreement as an "Acquisition Proposal"), (ii) engage in negotiations or
discussions concerning, or provide any information concerning the Company to any
person or entity relating to, any Acquisition Proposal, or (iii) agree to,
approve or recommend any Acquisition Proposal.
(b) The Company shall notify the Buyer immediately (and
no later than 24 hours) after receipt by the Company (or its advisors) of any
Acquisition Proposal or any request for information concerning the Company in
connection with an Acquisition Proposal or for access to the properties, books
or records of the Company by any person or entity that informs the Company that
it is considering making, or has made, an Acquisition Proposal. Such notice to
the Buyer shall be made orally and in writing and shall indicate in reasonable
detail the identity of the offeror and the terms and conditions of such
proposal, inquiry or contact. The Company shall keep the Buyer informed of all
material developments and the status of any Acquisition Proposal, or any request
for information in connection with any Acquisition Proposal or for access to the
properties, books or records of the Company by any person or entity that is
considering making, or has made, an Acquisition Proposal. The Company shall
provide the Buyer with copies of all documents received from or delivered or
sent to any person or entity that is considering making or has made, an
Acquisition Proposal.
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6.2 Approval of Stockholders; Consent Solicitation/Information
Statement; Blue Sky.
(a) The Company shall, subject to and in accordance with
the Certificate of Incorporation, Bylaws and the DGCL, as promptly as
practicable following the date of this Agreement, (i) solicit from the holders
of outstanding shares of Preferred Stock, the Preferred Stock Conversion
Consent, (ii) submit this Agreement to the holders of outstanding shares of
Company Stock as of the Record Date for adoption by written consent in lieu of a
meeting pursuant to Section 228 of the DGCL and (iii) use all reasonable efforts
to obtain, and promptly notify the Buyer upon obtaining, the Preferred Stock
Conversion Consent and the Merger Stockholder Approval Action.
(b) As promptly as practical after the execution of this
Agreement, the Company and the Buyer shall prepare, and the Company shall mail
or otherwise provide to the holders of Company Stock, the Consent
Solicitation/Information Statement. The Consent Solicitation/Information
Statement shall include the recommendation of the Board of Directors of the
Company in favor of adoption of this Agreement by the Company's stockholders.
The respective forms of written consent and Investment Representation Agreement
to be executed by the Company's stockholders shall be enclosed with the Consent
Solicitation/Information Statement. The Company shall furnish the Buyer with all
information concerning the Company and the holders of Company Stock and shall
take such other action as the Buyer may reasonably request in connection with
the Consent Solicitation/Information Statement and the issuance of the shares of
the Buyer Common Stock pursuant to the Merger to assure that such issuance is
exempt from registration under the Securities Act. In addition, the Company
agrees that the Consent Solicitation/Information Statement, the form of written
consent and all other materials to be provided to the Company's stockholders in
connection with obtaining the Merger Stockholder Approval Action and the
Preferred Stock Conversion Consent shall be subject to prior review of and
approval by the Buyer and its counsel, such approval not to be unreasonably
withheld. If at any time prior to the Effective Time any event or circumstance
relating to the Company, the Buyer, Sub or any of their respective affiliates,
officers or directors should be discovered by such party which should be set
forth in an amendment or a supplement to the Consent Solicitation/Information
Statement, such party shall promptly inform the other thereof and take
appropriate action in respect thereof.
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(c) The Buyer shall use all reasonable efforts to take
any action required to be taken under state securities or "blue sky" laws in
connection with the issuance of the shares of Buyer Common Stock in the Merger.
6.3 Access to Information. Upon reasonable notice, during
normal business hours during the period prior to the Effective Time, each party
shall (a) afford to the officers, directors, employees, accountants, counsel and
other representatives of the other party, reasonable access to all its
properties, plants, personnel, books, contracts, commitments and records (other
than privileged documents) and (b) all other information concerning its
business, properties and personnel as the other party may reasonably request
during such period. During such period, each party will hold any such
information which is non-public in confidence in accordance with the Mutual
Non-Disclosure Agreement, dated December 2, 1999 (the "Confidentiality
Agreement"), between the Buyer and the Company. No information or knowledge
obtained in any investigation pursuant to this Section 6.3 shall affect or be
deemed to modify any representation or warranty contained in this Agreement or
the conditions to the obligations of the parties to consummate the Merger.
6.4 Supplements to Disclosure Schedule. From time to time
prior to the Closing, the Company shall give prompt notice to the Buyer and
thereafter promptly supplement or amend the Disclosure Schedule with respect to
any matter hereafter arising which, if existing or occurring at the date of this
Agreement, would have been required to be set forth or described in the
Disclosure Schedule. No supplement or amendment of the Disclosure Schedule made
pursuant to this Section 6.4 shall be deemed to cure any breach of any
representation or warranty made in this Agreement unless the Buyer specifically
agrees thereto in writing.
6.5 Legal Conditions to Merger. Each of the Buyer and, the
Company will take all reasonable actions necessary to comply promptly with all
legal requirements which may be imposed on itself with respect to the Merger
(which actions shall include, without limitation, furnishing all information
required in connection with approvals of or filings with any other Governmental
Entity) and will promptly cooperate with and furnish information to each other
in connection with any such requirements imposed upon any of them in connection
with the Merger. Each of the Buyer and the Company will take (or cause to be
taken) all reasonable actions necessary to obtain (and will cooperate with each
other in obtaining) any consent, authorization, order or approval of, or any
exemption by, any Governmental Entity required to be obtained or made by the
Buyer or the Company in connection with the Merger or the taking of any action
contemplated thereby or by this Agreement.
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6.6 Listing Application. The Buyer will prepare and submit to
the Nasdaq National Market an additional listing application covering the Merger
Shares and will use all reasonable efforts to obtain approval for listing such
shares upon official notice of issuance.
6.7 Company Stock Plan.
(a) At the Effective Time, the Company Stock Plan and
each outstanding Option, whether vested or unvested, will be assumed by the
Buyer and become and represent an option to acquire, on the same terms and
conditions (including vesting provisions, except to the extent modified or
waived pursuant to a Key Employee Agreement) as were applicable to such Option
prior to the Effective Time, a number of shares of Buyer Common Stock (rounded
down to the nearest whole number) determined by multiplying (i) the number of
shares of Common Stock subject to such Option immediately prior to the Effective
Time by (ii) the Exchange Ratio, at an exercise price per share (rounded up to
the nearest whole cent) equal to the exercise price per share of Common Stock
subject to such Option immediately prior to the Effective Time, divided by the
Exchange Ratio. It is the intention of the parties hereto that each Option so
assumed by the Buyer will, to extent permitted by applicable laws, qualify as an
"incentive stock option" within the meaning of Section 422 of the Code to the
extent such Option qualified as such immediately prior to the Effective Time.
Within 20 days after the Effective Time, the Buyer will deliver to each Person
who, immediately prior to the Effective Time, was a holder of an outstanding
Option, an instrument evidencing the assumption of such Option by the Buyer as
provided in this Section 6.7. The Buyer will use reasonable efforts to cause the
issuance of shares of Buyer Common Stock issuable upon exercise of any Options
to have been registered at, or as promptly as reasonably practicable (and in any
event not later than 60 days) following, the Effective Time, pursuant to an
effective registration statement on Form S-8 under the Securities Act.
(b) At the Effective Time the Company will assign to the
Buyer any Company Repurchase Rights to the extent necessary to vest and continue
in the Buyer such Company Repurchase Rights with respect to any Purchased Shares
or Restricted Shares which are converted in the Merger into shares of Buyer
Common Stock. Accordingly, the vesting provisions and Company Repurchase Rights
with respect to Purchased Shares and Restricted Shares shall not be affected by
the Merger, and such vesting provisions and Company Repurchase Rights shall
apply with respect to the shares of Buyer Common Stock into which such Purchased
Shares and Restricted Shares are converted at the Effective Time, except to the
extent such provisions or rights have been modified or waived pursuant to a Key
Employee Agreement.
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6.8 Consents. Each of the Buyer and the Company shall use
reasonable efforts to obtain all necessary consents, waivers and approvals under
any of the Buyer's or the Company's material agreements, contracts, licenses,
leases or commitments in connection with the Merger.
6.9 Reasonable Efforts. Subject to the terms and conditions of
this Agreement, each of the parties agrees to use reasonable efforts to take, or
cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement.
In case at any time after the Effective Time any further action is necessary or
desirable and available to a party to carry out the purposes of this Agreement
or to vest the Surviving Corporation with full title to all properties, assets,
rights, approvals, immunities and franchises of either of Sub or the Company,
each party to this Agreement shall take or cause to be taken all such action.
6.10 Voting Agreement. Concurrently with the execution and
delivery of this Agreement, each stockholder of the Company named on the
signature pages of the Voting Agreement is entering into such Agreement.
6.11 Financial Statement Preparation and Review. The Company
will use all reasonable efforts to cause its respective management and
independent auditors to facilitate on a timely basis (i) the preparation of
financial statements (including pro forma financial statements to be prepared by
the Buyer, if required) to comply or enable the Buyer to comply with applicable
SEC regulations (including without limitation Regulation D under the Securities
Act) both before and after the Effective Time, (ii) the review of any audit or
review work papers including the examination of selected audited financial
statements and data, and (iii) the delivery of such representations from each
party's independent accountants as may be reasonably requested by the other
party or its accountants.
6.12 Company Director and Officer Indemnification; Insurance.
(a) After the Effective Time, The Buyer will, and will
cause the Surviving Corporation to indemnify and hold harmless the present and
former officers, directors, employees and agents of the Company in respect to
acts or omissions occurring on or prior to the Effective Time to the extent
provided under the Company's Certificate of Incorporation and Bylaws in each
case as in effect on the date hereof; provided that such indemnification shall
be subject to any limitation imposed from time to time under applicable law and
shall not be available with respect to an action initiated by an indemnification
party (other than an action to
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enforce this provision); and provided further that indemnification by the Buyer
pursuant to this Section 6.12 shall be provided only to the extent any
directors' and officers' liability insurance policy of the Company does not
provide coverage and actual payment.
(b) The Surviving Corporation shall, and the Buyer shall
cause the Surviving Corporation to, maintain in effect for not less than three
years after the Effective Time the policies of directors' and officers'
liability insurance maintained by the Company as of the date hereof with respect
to matters occurring prior to or at the Effective Time; provided, however, that
(i) the Surviving Corporation may substitute therefor policies of at least the
same coverage containing terms and conditions which are no less advantageous to
the insured persons with an insurance company or companies, the claims paying
ability of which is substantially equivalent to the claims paying ability of the
insurance company or companies providing such insurance coverage as of the date
hereof for directors and officers of the Company, and (ii) the Surviving
Corporation shall not be required to pay an annual premium for such insurance in
excess of four times the last annual premium paid prior to the date hereof, but
in such case shall purchase as much coverage as possible for such amount.
(c) The provisions of this Section 6.12 are intended to
be for the benefit of, and shall be enforceable by, each indemnified or insured
party referred to above in this Section 6.12.
6.13 Tax-Free Reorganization. From and after the date of this
Agreement, each Party shall use reasonable efforts to cause the Merger to
qualify, and shall not knowingly take actions or cause actions to be taken which
could reasonably be expected to prevent the Merger from qualifying, as a
tax-free reorganization under Section 368(a) of the Code.
6.14 Employee Matters.
(a) Employees of the Company whose employment with the
Company is continued by the Buyer, or who are retained as employees of the
Buyer, after the Effective Time, will receive salary and benefits consistent
with the Buyer's practices and policies in effect from time to time.
(b) The Company covenants and agrees that prior to the
Closing it will obtain from each Key Employee a signed addendum or supplement
acknowledging and agreeing that from and after the Effective Time the term
"Company" in the existing Employee Proprietary Information and Inventions
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Agreement of such Key Employee includes The Buyer and any of its Affiliates
(each a "Key Employee Addendum").
6.15 Ancillary Agreements. Concurrently with the Closing, the
Buyer and the Stockholder Representative will execute and deliver the Escrow
Agreement and the Buyer will execute and deliver the Registration Rights
Agreement substantially in the form of Exhibit E hereto (the "Registration
Rights Agreement").
ARTICLE VII
CONDITIONS TO MERGER
7.1 Conditions to Each Party's Obligation to Effect the
Merger. The respective obligations of each party to this Agreement to effect the
Merger shall be subject to the satisfaction prior to the Closing Date of the
following conditions:
(a) Company Stockholder Approvals; Preferred Stock
Conversion. This Agreement shall have been adopted by the requisite Merger
Stockholder Approval Action, the Preferred Stock Conversion Consent shall have
been obtained by the Company and the Preferred Stock Conversion shall have
occurred in accordance with the terms of the Certificate of Incorporation.
(b) Approvals. All consents, approvals, orders or
authorizations of, or registrations, declarations or filings with, any
Governmental Entity required to consummate the Merger shall have been filed,
occurred or been obtained.
(c) No Injunctions or Restraints; Illegality. No order,
ruling or injunction issued by any court of competent jurisdiction or other
Governmental Entity restraining, enjoining or otherwise prohibiting the
consummation of the Merger shall have been issued and then be in effect
(provided, that the Buyer and the Company shall use their reasonable efforts to
have any such order, ruling or injunction vacated or lifted); nor shall there be
any statute, rule or regulation enacted, enforced or deemed applicable to the
Merger which makes the consummation of the Merger illegal.
(d) Escrow Agreement. The Buyer, the Stockholder
Representative and the Escrow Agent shall have executed and delivered the Escrow
Agreement.
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7.2 Additional Conditions to Obligations of the Buyer and Sub.
The obligations of the Buyer and Sub to effect the Merger are subject to the
satisfaction of each of the following conditions, any of which may be waived in
writing exclusively by the Buyer and Sub:
(a) Representations and Warranties. (i) The aggregate
effect of all inaccuracies in the representations and warranties of the Company
set forth in this Agreement (measured as of the date hereof and, except to the
extent such representations and warranties speak as of an earlier date, as of
the Closing Date as though made on and as of the Closing Date), without taking
into account any qualifications as to materiality or Material Adverse Effect
contained in such representations and warranties (except with respect to the
representations and warranties in Sections 3.5, 3.8(a), 3.26 and 3.29), does
not, and is not reasonably likely to, have a Material Adverse Effect and (ii)
the representations and warranties of the Company contained in Sections 3.1, 3.2
and 3.3(a), (b) and (c)(i) shall be true and correct in all material respects as
of the date hereof, and, except to the extent such representations and
warranties speak as of an earlier date, as of the Closing Date as though made on
and as of the Closing Date, except for changes contemplated by this Agreement;
and the Buyer shall have received a certificate, signed on behalf of the Company
by the President and Chief Financial Officer of the Company, to such effect.
(b) Performance of Obligations of the Company. The
Company shall have performed in all material respects all obligations required
to be performed by it under this Agreement at or prior to the Closing Date; and
the Buyer shall have received a certificate, signed on behalf of the Company by
the President and Chief Financial Officer of the Company, to such effect.
(c) No Litigation. There shall not be pending or
threatened in writing any suit, action or proceeding by any Governmental Entity
or other Person (i) seeking to prevent the consummation of the Merger or seeking
significant damages in connection therewith or (ii) which otherwise is
reasonably likely to have a Buyer Material Adverse Effect.
(d) Blue Sky Laws. The Buyer shall have received all
state securities or "blue sky" permits and other authorizations necessary to
issue shares of Buyer Common Stock pursuant to the Merger.
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(e) Stockholder Composition. As of the Record Date there
shall not have been, and immediately prior to the Effective Time there shall not
be, more than 35 holders of Company Stock who or which are not Accredited
Investors. For purposes of this Section 7.2(e), the number of holders of Company
Stock shall be calculated in the same manner as the number of "purchasers" is
calculated pursuant to Rule 501(e) under the Securities Act (for this purpose
excluding clause (iv) of subparagraph (1) of such Rule).
(f) Opinion. The Company shall have delivered to the
Buyer the opinion of Brobeck, Phleger & Harrison LLP, dated the Closing Date,
covering the matters set forth on Exhibit F hereto.
(g) Resignations. All officers and directors of the
Company who the Company has requested resign, shall have resigned.
(h) Third Party Consents. All notices to, and consents,
approvals or waivers of, Persons who or which are not Governmental Entities
under the agreements, instruments or documents listed in Section 3.3(c) of the
Disclosure Schedule shall have been given or obtained in a form and manner
reasonably acceptable to the Buyer.
(i) Key Employees. (A) The Key Employee Agreement with
each of the Key Employees shall be in full force and effect, no Key Employee
shall have disavowed such agreement or otherwise indicated to the Company or the
Buyer that such Key Employee does not intend to continue or accept employment
with the Company or the Buyer after the Effective Time on the terms set forth in
the Key Employee Agreement with such Key Employee and (B) each Key Employee
shall have executed and delivered a Key Employee Addendum which shall be in full
force and effect.
(j) Other Required Employees. At least 30 of the 36
Company employees previously identified by the Buyer to the Company in a letter
dated the date hereof referencing this Section of this Agreement (the "Other
Required Employees") who the Buyer has offered continued employment with the
Company after the Effective Time pursuant to an offer letter prepared by the
Buyer, shall have accepted such offer of employment by executing and delivering
such offer letter to the Buyer, and shall not have disavowed such letter or
otherwise indicated that they do not intend to continue employment with the
Company after the Effective Time pursuant to the terms of such offer letter.
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(k) Customers. After the date hereof, not more than one
of the Company's customers which has paid the Company more than $1 million shall
have terminated, or notified the Company in writing of its intention to
terminate, its relationship with the Company.
7.3 Additional Conditions to Obligations of the Company. The
obligation of the Company to effect the Merger is subject to the satisfaction of
each of the following conditions, any of which may be waived, in writing,
exclusively by the Company:
(a) Representations and Warranties. (i) The aggregate
effect of all inaccuracies in the representations and warranties of the Buyer
set forth in this Agreement (measured as of the date hereof and, except to the
extent such representations and warranties speak as of an earlier date, as of
the Closing Date as though made on and as of the Closing Date), without taking
into account any qualifications as to materiality or Buyer Material Adverse
Effect contained in such representations and warranties (except with respect to
the representations and warranties in Sections 4.4 and 4.5), does not, and is
not reasonably likely to, have a Buyer Material Adverse Effect and (ii) the
representations and warranties of the Company contained in Sections 4.1, 4.2 and
4.3(a) and (b)(i) shall be true and correct in all material respects as of the
date hereof, and, except to the extent such representations and warranties speak
as of an earlier date, as of the Closing Date as though made on and as of the
Closing Date, except for changes contemplated by this Agreement; and the Company
shall have received a certificate, signed on behalf of the Buyer by the Chief
Financial Officer of the Buyer, to such effect.
(b) Performance of Obligations of the Buyer and Sub. The
Buyer and Sub shall have performed in all material respects all obligations
required to be performed by them under this Agreement at or prior to the Closing
Date, and the Company shall have received a certificate, signed on behalf of the
Buyer by the Chief Financial Officer of the Buyer, to such effect.
(c) Registration Rights Agreement. The Buyer shall have
executed and delivered the Registration Rights Agreement.
(d) Listing. The Merger Shares shall have been approved
for listing on the Nasdaq National Market upon official notice of issuance.
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(e) Opinion of Buyer Counsel. The Buyer shall have
delivered to the Company the opinion of Skadden, Arps, Slate, Meagher & Flom
LLP, or other counsel for the Buyer reasonably acceptable to the Company, dated
the Closing Date covering the matters set forth on Exhibit G hereto.
ARTICLE VIII
SURVIVAL AND INDEMNIFICATION
8.1 Survival of Company Obligations.
(a) Subject to Section 8.3(a), the representations,
warranties, covenants and agreements of the Company in this Agreement shall
survive the Effective Time for a period of one year and shall terminate and be
of no further force or effect as of 5:00 p.m., Texas time, on the first
anniversary of the Effective Time.
(b) No investigation by, or furnishing of information
to, the Buyer shall affect the right of the Buyer to rely on the
representations, warranties, covenants and agreements of the Company set forth
herein.
8.2 Company Stockholder Obligation to Indemnify.
(a) After the Effective Time, subject to Sections 8.1
and 8.3, the Company Stockholders shall indemnify and hold harmless the Buyer
and the Surviving Corporation and their respective directors, officers,
employees, agents, affiliates and assigns (collectively, the "Buyer Indemnified
Persons") from and against all losses, liabilities, damages, deficiencies, costs
or expenses, including interest and penalties imposed or assessed by any
judicial, administrative or, subject to Section 11.12, arbitral body, and
reasonable attorneys' fees, whether or not arising out of third-party claims and
including all amounts paid in investigation, defense or settlement of the
foregoing, net of any actual recoveries under existing insurance policies,
amounts actually received pursuant to indemnification from third parties or in
the case of third party claims, any amount actually recovered by the party or
parties seeking indemnification or their Affiliates pursuant to counterclaims
made by any of them directly relating to facts giving rise to such third-party
claims (collectively, "Losses"), suffered or incurred by any Buyer Indemnified
Person based upon, arising out of or otherwise in respect of any inaccuracy in
or breach of any representation or warranty (for purposes of this Section 8.2,
disregarding, in determining the existence of a misrepresentation or breach of
warranty, any requirement in a representation or
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warranty that an event or fact be material or have, or be reasonably likely to
have, a Material Adverse Effect (except with respect to the representations and
warranties contained in Sections 3.5, 3.8(a), 3.26 and 3.29), in order for such
event or fact to constitute a misrepresentation or breach of warranty), or any
breach of any covenant or agreement, of the Company in this Agreement.
(b) No indemnification shall be payable pursuant to
Section 8.2(a) with respect to any inaccuracy or breach of any representation or
warranty or breach of any covenant or agreement after termination thereof in
accordance with Section 8.1, except with respect to claims made prior to such
termination pursuant to Section 8.7 but not then resolved (such representation,
warranty, covenant or agreement surviving with respect to such claim until
resolution of such claim).
(c) The terms and conditions of this Article VIII
constitute essential terms and conditions of this Agreement and the Merger, and
adoption of this Agreement by the Company Stockholders shall constitute the
express agreement of each Company Stockholder with respect to (i) the
obligations of the Company Stockholders pursuant to this Article VIII and (ii)
the appointment of John Dirvin to act as the representative of the Company
Stockholders (the "Stockholder Representative") pursuant to the terms and
conditions of this Agreement and the Escrow Agreement. Without limitation of the
foregoing, as an essential term of this Agreement and the Merger, the Company
Stockholders acknowledge that their indemnification obligations are solely in
their capacity as former stockholders of the Company, and, accordingly, an
obligation to indemnify any Buyer Indemnified Person pursuant to this Section
8.2 shall not itself cause any current or former officer, director, employee or
agent of the Company to be entitled to any indemnification from the Company
pursuant to the Company's Certificate of Incorporation, By-laws or any agreement
with the Company.
8.3 Limitations on Company Stockholder Indemnification.
(a) The limitations of Sections 8.1(a), 8.2(b), 8.3(b),
8.3(c), 8.3(d) and 8.3(e) shall not apply in the case of a fraudulent or
intentional misrepresentation by the Company.
(b) The Company Stockholders shall have no
indemnification obligation pursuant to Section 8.2 unless and until the
aggregate amount of Losses incurred or suffered by the Buyer Indemnified Persons
exceeds $1,000,000, after which, subject to Sections 8.3(c) and 8.3(d), the
obligation of the Company Stockholders shall be to indemnify the Buyer
Indemnified Persons for the entire amount of such Losses (including such initial
$1,000,000).
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(c) The indemnification obligations of the Company
Stockholders pursuant to Section 8.2 shall be several, and not joint, in
proportion to their respective Ownership Percentage Interests as set forth on
the Closing Stockholder Schedule referred to in Section 2.1(a).
(d) The Escrow Shares shall be the sole and exclusive
recourse of the Buyer Indemnified Persons to satisfy the indemnification
obligations of the Company Stockholders pursuant to Section 8.2(a), and the
Company Stockholders shall have no further obligation to indemnify Buyer
Indemnified Persons pursuant to Section 8.2(a) after all the Escrow Shares have
been redelivered to the Buyer pursuant to the Escrow Agreement. For purposes of
satisfying the indemnification obligations of the Company stockholders, the
Escrow Shares shall be valued at $42.45 per share, subject to appropriate
adjustment for splits, combinations and the like affecting Buyer Common Stock.
(e) After the Effective Time, subject to Section 8.3(a),
this Article VIII shall set forth the sole and exclusive remedy and recourse of
the Buyer Indemnified Persons with respect to any representation, warranty,
covenant or agreement of the Company contained herein.
8.4 Survival of Buyer Obligations.
(a) Subject to Section 8.6(a), the representations,
warranties, covenants and agreements of the Buyer in this Agreement shall
survive the Effective Time for a period of one year and shall terminate and be
of no further force or effect as of 5:00 p.m., Texas time, on the first
anniversary of the Effective Time.
(b) The covenants and agreements of the Buyer in this
Agreement shall survive the Effective Time and shall be fully effective and
enforceable for the periods therein indicated or where not indicated, forever.
(c) No investigation by, or furnishing of information
to, the Company shall affect the right of the Company to rely on the
representations, warranties, covenants and agreements of the Buyer set forth
herein.
8.5 Buyer Obligation to Indemnify.
(a) After the Effective Time, subject to Sections 8.4
and 8.6, the Buyer shall indemnify and hold harmless the Company Stockholders
from and against all Losses suffered or incurred by any Company Stockholder
based upon, arising out of or otherwise in respect of any inaccuracy in or
breach of any
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representation or warranty (for purposes of this Section 8.5, disregarding, in
determining the existence of a misrepresentation or breach of warranty, any
requirement in a representation or warranty that an event or fact be material or
have, or be reasonably likely to have, a Material Adverse Effect (except with
respect to the representations and warranties contained in Sections 4.4 and
4.5), in order for such event or fact to constitute a misrepresentation or
breach of warranty), or any breach of any covenant or agreement, of the Buyer in
this Agreement.
(b) No indemnification shall be payable pursuant to
Section 8.5(a) with respect to any inaccuracy or breach of any representation or
warranty or breach of any covenant or agreement after termination thereof in
accordance with Section 8.4, except with respect to claims made prior to such
termination pursuant to Section 8.7 but not then resolved (such representation,
warranty, covenant or agreement surviving with respect to such claim until
resolution of such claim).
8.6 Limitations on Buyer Indemnification.
(a) The limitations of Sections 8.4(a), 8.5(b), 8.6(b),
8.6(c) and 8.6(d) shall not apply in the case of a fraudulent or intentional
misrepresentation or breach by the Buyer or in the case of a breach of the
representation set forth in Section 4.2(b).
(b) The Buyer shall have no obligation to indemnify any
Company Stockholder pursuant to Section 8.5 until the aggregate amount of the
Losses incurred or suffered by the Company Stockholders exceed $1,000,000, after
which, subject to Section 8.6(c), the obligation of the Buyer shall be to
indemnify the Company Stockholders for the entire amount of such Losses
(including such initial $1,000,000).
(c) The Buyer shall have no further obligation to
indemnify any Company Stockholder pursuant to Section 8.5(a) after an amount
equal to the product of (i) the initial number of Escrow Shares deposited in
escrow on the Closing Date pursuant to Section 2.3(b), multiplied by (ii) $42.45
has been paid to the Company Stockholders.
(d) After the Effective Time, subject to Section 8.6(a),
this Article VIII shall set forth the sole and exclusive remedy and recourse of
the Company Stockholders with respect to any representation, warranty, covenant
or agreement of the Buyer contained herein.
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8.7 Procedures Relating to Indemnification. (a) An indemnified
person or entity under Sections 8.2 or 8.5 (the "Indemnified Party") shall give
prompt written notice to the indemnifying party (the "Indemnifying Party") of
any Loss in respect of which such Indemnified Party is seeking indemnification
under Sections 8.2 or 8.5, specifying in reasonable detail the nature of such
Loss, the section or sections of this Agreement to which the Loss relates, and
the amount of such Loss (or if not then determinable, its best estimate of the
amount of such Loss), except that any delay or failure so to notify the
Indemnifying Party shall only relieve the Indemnifying Party of its obligations
hereunder to the extent, if at all, that it is prejudiced by reason of such
delay or failure. Any such notice to be given by or to any Indemnified Party
under Section 8.5 shall be given by or to the Stockholder Representative (as
defined in Section 8.8).
(b) If a Loss is suffered or incurred for or on account
of or arises from or in connection with any demand, claim, suit, action, cause
of action, investigation or inquiry by a person not party to this Agreement (a
"Third Party Claim"), the Indemnifying Party shall assume the defense thereof,
including the employment of counsel reasonably satisfactory to the Indemnified
Party and the payment of all expenses. The Indemnified Party shall have the
right to employ separate counsel in such Third Party Claim and participate in
such defense thereof, but the fees and expenses of such counsel shall be at the
expense of the Indemnified Party. The Indemnifying Party shall not, without the
Indemnified Party's prior written consent, settle or compromise any Third Party
Claim or consent to the entry of any judgment with respect to any Third Party
Claim which would have an adverse effect on the Indemnified Party, except that
the Indemnifying Party may, without the Indemnified Party's prior written
consent, compromise or settle any such Third Party Claim or consent to entry of
any judgment with respect to any Third Party Claim which requires solely money
damages paid by the Indemnifying Party, and which includes as an unconditional
term thereof the release by the claimant or the plaintiff of the Indemnified
Party from all liability in respect of such Third Party Claim. If the
Indemnifying Party fails to assume the defense of any Third Party Claim within
30 business days after notice thereof, the Indemnified Party shall have the
right to undertake the defense, compromise or settlement of such Third Party
Claim for the account of the Indemnifying Party, subject to the right of the
Indemnifying Party to assume the defense of such Third Party Claim with counsel
reasonably satisfactory to the Indemnified Party at any time prior to the
compromise, settlement or final determination thereof. No Indemnified Party
shall, without the Indemnifying Party's prior written consent, settle or
compromise any Third Party Claim or consent to the entry of any judgment with
respect to any Third Party Claim unless such Indemnified Party has undertaken
the defense, compromise or settlement in accordance with this Section 8.7(b) and
the consent compromise or settlement of such Third Party Claim
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requires solely money damages to be paid by the Indemnifying Party, and which
includes as an unconditional term thereof the release by the claimant or the
plaintiff of the Indemnifying Party from all liability in respect of such Third
Party Claim. If an Indemnifying Party refuses to pay, in whole or in part, any
Loss suffered or incurred for or on account of or arising from or in connection
with any Third Party Claim with respect to which an Indemnified Party has
undertaken the defense, compromise or settlement in accordance with this Section
8.7(b) within 30 business days of receipt of notice from such Indemnified Party
of such Loss, the matter shall be resolved in accordance with Section 11.12.
(c) With respect to any Loss (other than any Loss
suffered or incurred for or on account of or arising from or in connection with
any Third Party Claim), the Indemnifying Party shall have 30 business days from
receipt of notice from the Indemnified Party of such Loss within which to
respond thereto. If the Indemnifying Party does not respond within such 30
business day period, the Indemnifying Party shall be deemed to have accepted
responsibility to make payment and shall have no further right to contest the
validity of such Loss. If the Indemnifying Party notifies the Indemnified Party
within such 30 business day period that it rejects such Loss, in whole or in
part, the matter shall be resolved in accordance with Section 11.12.
8.8 Stockholder Representative.
(a) In order to administer the transactions contemplated
by this Agreement and the Escrow Agreement, including the indemnification
obligations of the Company Stockholders under this Article VIII, the Company
Stockholders hereby designate and appoint John Dirvin as their sole and
exclusive representative for purposes of the Merger Agreement and the Escrow
Agreement and as attorneys-in-fact and agent for and on behalf of each
Stockholder (in such capacity, the "Stockholder Representative"), and John
Dirvin accepts such appointment as Stockholder Representative.
(b) The Company Stockholders hereby authorize the
Stockholder Representative to represent the Company Stockholders, and their
successors, with respect to all matters arising under this Agreement and the
Escrow Agreement, including without limitation, (i) to take all action necessary
in connection with the indemnification obligations of the Stockholders under
this Article VIII, including the defense or settlement of any claims and the
making of payments with respect thereto, (ii) to give and receive all notices
required to be given by or to any Company Stockholder under this Agreement and
the Escrow Agreement, (iii) to execute the Escrow Agreement for and on behalf of
the Company Stockholders, and
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(iv) to take any and all additional action as is contemplated to be taken by or
on behalf of the Company Stockholders by the Stockholder Representative pursuant
to this Agreement and the Escrow Agreement.
(c) In the event that John Dirvin or any substitute
Stockholder Representative dies, becomes unable to perform his responsibilities
as Stockholder Representative or resigns from such position, the Company
Stockholders having an aggregate Ownership Percentage Interest, as set forth on
the Closing Stockholder Schedule referred to in Section 2.1(a), greater than 50%
shall select another representative to fill such vacancy and such substituted
Stockholder Representative shall be deemed to be the Stockholder Representative
for all purposes of this Agreement and the Escrow Agreement.
(d) All decisions and actions by the Stockholder
Representative, including without limitation any agreement between the
Stockholder Representative and the Buyer or the Escrow Agent relating to
indemnification obligations of the Stockholders under this Article VIII,
including the defense or settlement of any claims and the making of payments
with respect hereto, shall be binding upon all of the Company Stockholders, and
no Company Stockholders shall have the right to object, dissent, protest or
otherwise contest the same. The Stockholder Representative shall incur no
liability to the Company Stockholders with respect to any action taken or
suffered by the Stockholder Representative in reliance upon any notice,
direction, instruction, consent, statement or other documents believed by him to
be genuinely and duly authorized, nor for any other action or inaction with
respect to the indemnification obligations of the Company Stockholders under
this Article VIII, including the defense or settlement of any claims and the
making of payments with respect thereto, except to the extent resulting from the
Stockholder Representative's own willful misconduct or gross negligence. The
Stockholder Representative may, in all questions arising under this Agreement or
the Escrow Agreement rely on the advice of counsel, and shall not be liable to
the Company Stockholders for anything done, omitted or suffered in good faith by
the Stockholder Representative. The Company Stockholders shall severally
indemnify the Stockholder Representative and hold him or her harmless against
any loss, liability or expense incurred without gross negligence or bad faith on
the part of the Stockholder Representative and arising out of or in connection
with the acceptance or administration of his or her duties hereunder.
(e) The Buyer and the Escrow Agent shall be able to rely
conclusively on the instructions and decisions of the Stockholder Representative
with respect to the indemnification obligations of the Company Stockholders
under this Article VIII, including the defense or settlement of any claims or
the making of
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payments with respect thereto, or as to any other actions required or permitted
to be taken by the Stockholder Representative hereunder, and no party hereunder
shall have any cause of action against the Buyer or the Escrow Agent to the
extent the Buyer or the Escrow Agent has relied upon the instructions or
decisions of the Stockholder Representative.
(f) The Company Stockholders acknowledge and agree that
the Stockholder Representative may incur costs and expenses on behalf of the
Company Stockholders in his capacity as Stockholder Representative
("Representative Expenses"). Each of the Stockholders agrees to pay the
Stockholder Representative, promptly upon demand by the Stockholder
Representative therefor, a percentage of any Representative Expenses equal to
such Company Stockholder's Ownership Percentage Interest as set forth on the
Closing Stockholder Schedule referred to in Section 2.1(a), provided that no
Company Stockholder shall be required to pay, in the aggregate, Representative
Expenses in an amount in excess of the value of such Company Stockholder's
Ownership Percentage Interest in the Escrow Shares initially deposited in escrow
pursuant to Section 2.3(b) (valuing the Escrow Shares for this purpose at $42.45
per share, subject to splits, combinations and the like affecting Buyer Common
Stock).
ARTICLE IX
TERMINATION; FEES AND EXPENSES
9.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time, (with respect to Sections 9.1(b) through 9.1(e), by
written notice by the terminating party to the other party) whether before or
after approval of the matters presented in connection with the Merger by the
stockholders of the Company:
(a) by mutual written consent of the Buyer and the
Company;
(b) by the Buyer or the Company if the Merger shall not
have been consummated by February 28, 2000, provided that the right to terminate
this Agreement under this Section 9.1(b) shall not be available to any party
whose failure to fulfill any obligation under this Agreement has been the cause
of or resulted in the failure of the Merger to occur on or before such date;
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(c) by the Buyer or the Company if a court of competent
jurisdiction or other Governmental Entity shall have issued a nonappealable
final order, ruling or injunction or taken any other action, in each case having
the effect of permanently restraining, enjoining or otherwise prohibiting the
Merger (provided that the party seeking to terminate pursuant to this Section
9.1(c) shall have complied with its obligations under Section 6.6 and used
reasonable efforts to have any such order, ruling, injunction or other action
vacated or lifted);
(d) by the Buyer, if (i) any Company Stockholder party
to the Voting Agreement breaches the Voting Agreement, (without limitation of
other actions or failures to act by any Company Stockholder that may constitute
a breach of the Voting Agreement, such Company Stockholder will be deemed to
have breached the Voting Agreement if such Company Stockholder has not, within
five business days of receiving the Consent Solicitation/Information Statement,
including the form of Written Consent, executed and delivered to the Company
such Written Consent with respect to all of such Company Stockholder's Company
Stock); or (ii) the Company or any director, officer, employee or stockholder of
the Company takes any action prohibited by or otherwise breaches Section 6.1; or
(e) by the Buyer or the Company, if there has been a
breach on the part of the other party of any representation, warranty, covenant
or agreement set forth in this Agreement which is incurable, or which shall not
have been cured prior to February 25, 2000 (and which breach would result in the
condition to Closing in Section 7.2(a) or (b) or 7.3(a) or (b), as the case may
be, not being satisfied as of the Closing).
9.2 Effect of Termination. In the event of termination of this
Agreement as provided in Section 9.1, this Agreement shall immediately become
void and there shall be no liability or obligation hereunder on the part of the
Buyer, Sub, the Company or their respective officers, directors, stockholders or
affiliates, except (a) this Section 9.2 and Section 9.3 shall remain in full
force and effect and survive any termination of this Agreement and (b) such
termination shall not relieve a Party from liability for breach of this
Agreement (which may include, as part of such liability, fees and expenses
incurred by the other Party in connection with this Agreement) prior to such
termination (in the case of the Company, in addition to any fee which may be or
become payable pursuant to Section 9.3).
9.3 Fees and Expenses.
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(a) Except as set forth in Article VIII, Section 9.2(b)
and this Section 9.3, all fees and expenses incurred in connection with this
Agreement and the transactions contemplated hereby (including attorneys' and
accountants' fees) shall be paid by the party incurring such expenses, whether
or not the Merger is consummated.
(b) If (i) the Buyer shall have terminated this
Agreement pursuant to Section 9.1(d) or 9.1(e), and within six months after any
such termination, the Company shall have, directly or indirectly, entered into a
definitive agreement for, or shall have consummated, an Acquisition Transaction,
then, in any such case, the Company shall immediately pay the Buyer a
termination fee of $7,500,000.
(c) As used in this Agreement, "Acquisition Transaction"
means either (i) a transaction or a merger or other business combination
involving the Company pursuant to which any person (or group of persons) other
than the Buyer or its Affiliates (a "Third Party"), acquires 50% or more of the
outstanding equity securities of the Company or the entity surviving such merger
or business combination, (ii) any other transaction pursuant to which any Third
Party acquires control of assets (including for this purpose the outstanding
equity securities of any subsidiaries of the Company) of the Company having a
fair market value (as determined by the Board of Directors of the Buyer, in good
faith) equal to 50% or more of the fair market value of all the assets of the
Company, and its Subsidiaries, taken as a whole, immediately prior to such
transaction or (iii) any public announcement of a proposal, plan or intention to
do any of the foregoing or any agreement to engage in any of the foregoing.
ARTICLE X
DEFINITIONS AND INTERPRETATION
10.1 Certain Definitions. For purposes of this Agreement,
except as otherwise provided or unless the context clearly requires otherwise:
"Accredited Investor" shall mean an Accredited Investor as
defined in Rule 501(a) of the Rules and Regulations under the Securities Act of
1933, as amended.
"Affiliate" of specified Person shall mean any Person who
would be an affiliate of the specified Person pursuant to Rule 12b-2 under the
Securities Exchange Act of 1934, as amended.
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"Buyer Material Adverse Effect" shall mean a material adverse
effect on (i) the assets (including tangible assets), properties, liabilities,
business, financial condition or results of operations of the Buyer and its
Subsidiaries taken as a whole, excluding, for purposes of determining whether
there has been or is reasonably likely to be such an adverse effect, any effect
to the extent (A) attributable to conditions affecting the United States economy
generally or the economy of any nation or region in which the Buyer conducts a
material amount of business (unless such conditions adversely affect the Buyer
in a materially disproportionate matter), (B) attributable to conditions
affecting any industry in which the Buyer competes (unless such conditions
adversely affect the Buyer in a materially disproportionate manner) or (C)
principally attributable to the direct effect of the public announcement of this
Agreement on the Buyer's relationship with its current customers (provided that
with respect to this clause (C), the Buyer shall bear the burden of proof in any
proceeding with regard to establishing that such an effect is so principally
attributable) or (ii) the ability of the Buyer or Sub to timely perform its
obligations under this Agreement and consummate the Merger, excluding, for
purposes of determining whether there has been or is reasonably likely to be
such effect, any effect to the extent attributable to any breach by the Company
of any covenant or obligation set forth in this Agreement.
"Confidentiality Agreement" shall mean the Mutual
Non-Disclosure Agreement dated December 2, 1999 between the Company and The
Buyer.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, and the rules and regulations promulgated thereunder.
"Governmental Entity" shall mean a legislative body, court,
arbitral tribunal, administrative agency or commission or other governmental or
other regulatory authority or agency.
"Material Adverse Effect" shall mean a material adverse effect
on (i) the business, assets (including tangible assets), financial condition,
prospects or results of operations of the Company, excluding, for purposes of
determining whether there has been or is reasonably likely to be such an adverse
effect, any effect to the extent (A) attributable to conditions affecting the
United States economy generally or the economy of any nation or region in which
the Company conducts a material amount of business (unless such conditions
adversely affect the Company in a materially disproportionate matter), (B)
attributable to conditions affecting any industry in which the Company competes
(unless such conditions adversely affect the Company in a materially
disproportionate manner) or (C) principally attributable to the direct effect of
the public announcement of this Agreement on the Company's relationship with its
current customers (provided that with respect to this clause (C),
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the Company shall bear the burden of proof in any proceeding with regard to
establishing that such an effect is so principally attributable) or (ii) the
ability of the Company to timely perform its obligations under this Agreement
and consummate the Merger, excluding, for purposes of determining whether there
has been or is reasonably likely to be such effect, any effect to the extent
attributable to any breach by the Buyer of any covenant or obligation set forth
in this Agreement.
"Person" shall mean any individual, corporation, limited
liability company, partnership, joint venture, trust, association, organization,
Governmental Entity or other entity.
"SEC" shall mean the United States Securities and Exchange
Commission.
"Securities Act" shall mean the Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder.
"Stock Issuance Agreement" shall mean a Stock Issuance
Agreement evidencing an issuance of Common Stock under the Stock Issuance
Program provided for in Article Three of the Company Stock Plan.
"Subsidiary" with respect to any party shall mean any
corporation, limited liability company, partnership, or other business
association or entity, at least a majority of the voting securities or economic
interests of which is directly or indirectly owned or controlled by such party
or by any one or more of its subsidiaries.
10.2 Interpretation.
(a) When a reference is made in this Agreement to a
section or article, such reference shall be to a section or article of this
Agreement unless otherwise clearly indicated to the contrary.
(b) Whenever the words "include", "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation."
(c) The words "hereof", "herein" and "herewith" and
words of similar import shall, unless otherwise stated, be construed to refer to
this Agreement as a whole and not to any particular provision of this Agreement,
and article, section, paragraph, exhibit and schedule references are to the
articles, sections, paragraphs, exhibits and schedules of this Agreement unless
otherwise specified.
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(d) The plural of any defined term shall have a meaning
correlative to such defined term, and words denoting any gender shall include
all genders. Where a word or phrase is defined herein, each of its other
grammatical forms shall have a corresponding meaning.
(e) A reference to any party to this Agreement or any
other agreement or document shall include such party's successors and permitted
assigns.
(f) A reference to any legislation or to any provision
of any legislation shall include any amendment, modification or re-enactment
thereof, any legislative provision substituted therefor and all regulations and
statutory instruments issued thereunder or pursuant thereto.
(g) The parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties, and no presumption or burden of proof
shall arise favoring or disfavoring any party by virtue of the authorship of any
provision of this Agreement.
ARTICLE XI
MISCELLANEOUS
11.1 Press Releases and Announcements. It is expected that
after the execution hereof, the Buyer and the Company will make joint
announcements regarding this Agreement. No Party shall (and each Party will
assure that its officers, directors, employees, Affiliates and agents do not)
issue any press release or announcement or make any disclosure to any other
Person (other than its counsel, financial advisors and accountants and, in the
case of the Company, its stockholders in connection with seeking the Merger
Stockholder Approval Action and obtaining the Preferred Stock Conversion Consent
relating to the subject matter of this Agreement without the prior written
approval of the Buyer and the Company; provided, however, that a Party may,
without any requirement of approval or consent by any other Party, make any
public disclosure it believes in good faith is required by applicable law,
regulation, legal process or, in the case of the Buyer, the requirements of any
stock market on which the Buyer's Common Stock is listed or quoted (in which
case the Party making the disclosure shall advise the other Party of such
disclosure and provide it with a copy of such disclosure).
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11.2 [Intentionally Omitted]
11.3 Entire Agreement. This Agreement (including the
Schedules, Exhibits and other documents referred to herein), together with the
Escrow Agreement and the Confidentiality Agreement, constitute the entire
agreement among the Parties and supersedes all other prior understandings,
agreements or representations by or among the Parties, both written or oral,
that may have related in any way to the subject matter hereof.
11.4 Succession and Assignment. This Agreement shall be
binding upon and inure to the benefit of the Parties named herein and their
respective successors and permitted assigns. No Party may assign either this
Agreement or any of its rights, interests or obligations hereunder without the
prior written approval of the other Parties; provided, however, that Sub may
assign its rights, interests and obligations hereunder to another Affiliate.
11.5 Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original but which together
shall constitute one and the same instrument.
11.6 Notices. Any notice, request, instruction or other
document to be given hereunder by any party to another party shall be in writing
and shall be deemed given when delivered personally, upon receipt of a
transmission confirmation (with a confirming copy sent by overnight courier) if
sent by facsimile or like transmission, and on the next business day when sent
by Federal Express, United Parcel Service, Express Mail, or other reputable
overnight courier, to the party at the following addresses (or such other
addresses for a party as shall be specified by like notice):
(a) If to The Buyer or Sub, to:
Net Perceptions, Inc.
9855 West 78th Street
Suite 350
Eden Prairie, Minnesota 55344
Attention: Chief Financial Officer
Fax No.: 612-918-0999
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With a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
One Beacon Street
Boston, Massachusetts 02108
Attention: Kent A. Coit
Fax No.: (617) 573-4822
(b) If to the Company, to:
Knowledge Discovery One, Inc.
3636 Executive Center Drive
Suite 201
Austin, Texas 78731
Attention: Elaine Wetmore
President
Fax No.: (512) 349-5606
With a copy to:
Brobeck, Phleger & Harrison LLP
301 Congress Avenue
Suite 1200
Austin, Texas 78701
Attention: Carmello Gordian, Esq.
Fax No.: (512) 477-5813
11.7 Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws (and not the law of conflicts) of
the State of Delaware.
11.8 Amendments and Waivers. The Parties may mutually amend
any provision of this Agreement at any time prior to the Effective Time;
provided, however, that any amendment effected subsequent to the approval of the
Agreement by holders of a majority of the Company's Common Stock shall be
subject to the restrictions contained in the DGCL. No amendment of any provision
of this Agreement shall be valid unless the same shall be in writing and signed
by all of the Parties. No waiver by any Party of any default, misrepresentation
or breach of warranty or covenant hereunder, whether intentional or not, shall
be deemed to extend to any prior or subsequent default, misrepresentation or
breach of warranty or
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covenant hereunder or affect in any way rights arising by virtue of any prior or
subsequent such occurrence.
11.9 Severability. Any term or provision of this Agreement
that is invalid or unenforceable in any situation in any jurisdiction shall not
affect the validity or enforceability of the remaining terms and provisions
hereof or the validity or enforceability of the offending term or provision in
any other situation or in any other jurisdiction.
11.10 Incorporation of Exhibits and Schedules. The Exhibits
and Schedules identified in this Agreement are incorporated herein by reference
and made a part hereof.
11.11 Enforcement. The Parties agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the Parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement, this being in addition to any other
remedy to which they are entitled at law (subject to Section 11.12) or in
equity. In addition, each of the Parties hereto (a) consents to submit itself to
the personal jurisdiction of any Federal or state court located in the State of
Delaware in the event any dispute arises out of this Agreement or any of the
transactions contemplated by this Agreement prior to the Effective Time or,
after the Effective Time, to enforce any arbitral award rendered pursuant to
Section 11.12, (b) agrees that it will not attempt to deny or defeat such
personal jurisdiction by motion or other request for leave from any such court
and (c) agrees that it will not bring any action relating to this Agreement or
any of the transactions contemplated by this Agreement in any court other than a
Federal or state court sitting in the State of Delaware.
11.12 Arbitration. After the Effective Time, except with
respect to an action seeking specific performance or another equitable remedy,
any dispute relating to or arising out of this Agreement, or to a breach of this
Agreement, arising among the parties or their successors, shall be settled by
arbitration in accordance with the commercial arbitration rules of the American
Arbitration Association ("AAA"). The arbitration proceeding, including the
rendering of an award, shall take place in Boston, Massachusetts and be
administered by the AAA. The parties agree to act in good faith to mutually
select an arbitrator. If within forty-five (45) days after submission of any
dispute to arbitration, the parties cannot mutually agree on one arbitrator, the
parties shall each select one arbitrator, and the two arbitrators so selected
shall select a third arbitrator, who shall be the sole arbitrator to hear the
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dispute. The decision of the arbitrator shall be binding on the parties hereto
or their successors and any judgment rendered by such arbitrator may be enforced
by any court of competent jurisdiction. Each Party shall bear its own expenses
in connection with such arbitration unless (a) otherwise ordered by the
arbitrator or (b) the arbitration relates to a claim for indemnification under
Sections 8.2 or 8.5 and (i) the arbitrator decides that the Indemnified Party
seeking indemnification is entitled to less than one-half of the amount of the
Loss sought at the time the matter was submitted to arbitration, in which case,
the Indemnified Party shall pay its own expenses, the fee of each arbitrator,
the administrative fee of the AAA, and the reasonable attorney's fees and costs
incurred by the other party in, and to prepare for, the arbitration or (ii) the
arbitrator decides that the Indemnified Party seeking indemnification is
entitled to one-half or more of the amount of the Loss sought at the time the
matter was submitted to arbitration, in which case, the Indemnifying Party shall
pay its own expenses, the fee of each arbitrator, the administrative fee of the
AAA, and the reasonable attorney's fees and costs incurred by the other party
in, and to prepare for, the arbitration, and, in the case of (ii), (A) if the
Indemnified Party is a Buyer Indemnified Person, all such expenses, fees and
costs shall be deemed Losses for purposes of Section 8.2 and (B) if the
Indemnified Party is a Company Stockholder then all such expenses, fees and
costs shall be deemed losses for purposes of Section 8.5.
[End of Agreement except for signature page]
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IN WITNESS WHEREOF, this Agreement has been executed as of the
date first above written.
NET PERCEPTIONS, INC.
By: /s/ Steven J. Snyder
---------------------------------------------
Name: Steven J. Snyder
Title: President and Chief Executive Officer
KENTUCKY ACQUISITION CORPORATION
By: /s/ Steven J. Snyder
---------------------------------------------
Name: Steven J. Snyder
Title: President
KNOWLEDGE DISCOVERY ONE, INC.
By: /s/ Elaine Wetmore
---------------------------------------------
Name: Elaine Wetmore
Title: President, Chief Operating Officer
and Chief Financial Officer
STOCKHOLDER REPRESENTATIVE,
SOLELY FOR PURPOSES OF SECTION 6.15 AND
ARTICLE VIII:
/s/ John Dirvin
------------------------------------------------
John Dirvin, solely in his capacity
as Stockholder Representative
(Signature Page to Agreement and Plan of Merger)
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AMENDMENT
This Amendment, dated as of February 3, 2000 (this "Amendment"),
amends the Agreement and Plan of Merger, dated as of January 15, 2000 (the
"Merger Agreement"), by and among Net Perceptions, Inc., Kentucky Acquisition
Corporation and Knowledge Discovery One, Inc. Capitalized terms used herein and
not otherwise defined shall have the meanings ascribed to them in the Merger
Agreement. All references herein to sections shall be understood to be
references to sections of the Merger Agreement.
WHEREAS, the parties hereto desire to correct an inconsistency
between certain provisions of the Merger Agreement; and
WHEREAS, Section 11.8 of the Merger Agreement provides that the
Merger Agreement may be amended at any time prior to the Effective Time by a
signed writing of the parties.
NOW, therefore, in consideration of the foregoing, and for other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. Amendment. Section 2.3(b) is hereby replaced in its entirety
as follows:
(b) At the Closing (after the Effective Time), the Buyer shall (i)
deliver (or cause to be delivered) to each Company Stockholder a certificate
representing a number of whole shares of Buyer Common Stock equal to the number
of shares of Common Stock held by such Company Stockholder immediately prior to
the Effective Time multiplied by the Exchange Ratio, less a number of whole
shares of Buyer Common Stock equal to such Company Stockholder's Ownership
Percentage Interest (as set forth on the Closing Stockholder Schedule) in the
Escrow Shares and (ii) deposit (or cause to be deposited) in
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escrow on behalf of such Company Stockholder a number of shares of Buyer Common
Stock equal to such Company Stockholder's Ownership Percentage Interest (as set
forth on the Closing Stockholder Schedule) in the Escrow Shares, to be held and
released in accordance with an escrow agreement among the Buyer, the Stockholder
Representative (as defined in Section 8.8) and the Escrow Agent referred to
therein (the "Escrow Agent") substantially in the form of Exhibit C hereto (the
"Escrow Agreement"), which shares shall be included in and represented by the
single certificate for the Escrow Shares which shall be delivered to the Escrow
Agent in accordance with the Escrow Agreement.
2. Parties in Interest. This Amendment shall be binding upon and
inure solely to the benefit of each party hereto and its respective successors
and assigns. Nothing in this Amendment, express or implied, is intended to or
shall confer upon any other person any rights, benefits or remedies of any
nature whatsoever under or by reason of this Amendment.
3. Counterparts. This Amendment may be executed in two or more
counterparts, each of which shall be deemed an original but which together shall
constitute one and the same instrument.
4. Governing Law. This Amendment shall be governed by and
construed in accordance with the internal laws (and not the law of conflicts) of
the State of Delaware.
[The remainder of this page is intentionally left blank.]
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IN WITNESS WHEREOF, this Amendment has been executed as of the
date first above written.
NET PERCEPTIONS, INC.
By: /s/ Steven J. Snyder
----------------------------------------------
Name: Steven J. Snyder
Title: President and Chief Executive Officer
KENTUCKY ACQUISITION CORPORATION
By: /s/ Steven J. Snyder
----------------------------------------------
Name: Steven J. Snyder
Title: President
KNOWLEDGE DISCOVERY ONE, INC.
By: /s/ Elaine Wetmore
----------------------------------------------
Name: Elaine Wetmore
Title: President, Chief Operating Officer
and Chief Financial Officer
(Signature Page to Amendment)
72
<PAGE> 1
EXHIBIT 4.2
FORM OF
NET PERCEPTIONS, INC.
REGISTRATION RIGHTS AGREEMENT
FEBRUARY 14, 2000
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. Registration Rights...................................................... 1
1.1 Definitions....................................................... 1
1.2 Request for Registration.......................................... 3
1.3 Company Registration.............................................. 5
1.4 Obligations of the Company........................................ 5
1.5 Furnish Information............................................... 7
1.6 Expenses of Demand Registration................................... 7
1.7 Expenses of Company Registration.................................. 8
1.8 Underwriting Requirements......................................... 8
1.9 Delay of Registration............................................. 9
1.10 Indemnification................................................... 9
1.11 Reports Under Securities Exchange Act of 1934..................... 12
1.12 Assignment of Registration Rights................................. 12
1.13 Termination of Registration Rights................................ 13
2. Miscellaneous............................................................ 13
2.1 Successors and Assigns............................................ 13
2.2 Governing Law..................................................... 13
2.3 Counterparts...................................................... 14
2.4 Titles and Subtitles.............................................. 14
2.5 Notices........................................................... 14
2.6 Expenses.......................................................... 14
2.7 Amendments and Waivers............................................ 14
2.8 Severability...................................................... 14
2.9 Entire Agreement.................................................. 15
</TABLE>
Schedule A Schedule of Holders
i
<PAGE> 3
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT, dated as of February 14, 2000
(this "Agreement") by and among Net Perceptions, Inc., a Delaware corpora tion
(the "Company"), and the stockholders of Knowledge Discovery One, Inc., a
Delaware corporation ("KD One"), immediately prior to the Effective Time, all of
whom or which are listed on Schedule A hereto (the "Holders").
The Company, Kentucky Acquisition Corporation, a Delaware
corporation and a wholly owned subsidiary of the Company ("Sub"), and KD One are
parties to an Agreement and Plan of Merger, dated as of January 15, 2000, as
amended February 3, 2000 (the "Merger Agreement"), providing for the merger of
Sub with and into KD One (the "Merger"), with KD One surviving the Merger as a
wholly owned subsidiary of the Company. Capitalized terms used and not defined
herein have the meanings ascribed to such terms in the Merger Agreement.
The Buyer and the Holders desire to provide for certain
registration rights with respect to the Buyer Common Stock received by the
Holders pursuant to the Merger Agreement (together with any other securities
issued in respect of or in exchange for such Buyer Common Stock by way of
distribution or in connection with a split or combination of, or
recapitalization or reclassification affecting, Buyer Common Stock, the
"Registrable Securities"), and it is a condition to the obligation of KD One to
consummate the Merger that this Agreement be executed and delivered by the
Company.
In consideration of the foregoing, and the respective covenants
and agreements set forth herein, the parties hereby agree as follows.
1. Registration Rights. The Company covenants and agrees as
follows:
1.1 Definitions. For purposes of this Section 1:
(a) The term "Act" means the Securities Act of 1933, as
amended.
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(b) The term "Form S-3" means such form under the Act as
in effect on the date hereof or any registration form under the Act subsequently
adopted by the SEC that permits inclusion or incorporation of substantial
information by reference to other documents filed by the Company with the SEC.
(c) The term "Holder" is defined on the first page hereof
and also includes any assignee thereof in accordance with Section 1.12 hereof.
(d) The term "1934 Act" shall mean the Securities Exchange
Act of 1934, as amended.
(e) The terms "register," "registered," and "registration"
refer to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Act, and the declaration or
ordering of effectiveness of such registration statement or document.
(f) The term "Registrable Securities" is defined on the
first page hereof, provided that (i) such term shall not include any Registrable
Securities sold by a person in a transaction in which his rights under this
Section 1 are not assigned and (ii) as to any particular Registrable Securities,
such securities shall cease to be Registrable Securities when (A) a registration
statement with respect to the sale of such securities shall have become
effective under the Act and such securities shall have been disposed of under
such registration statement, (B) such securities shall have been transferred
pursuant to Rule 144 under the Act (or any successor provision thereto) or are
transferable in accordance with paragraph (k) of such Rule 144 (or any successor
provision thereto), (C) such securities shall have been otherwise transferred or
disposed of, and, in each of the cases (A) through (C), new certificates
therefor not bearing a legend restricting further transfer shall have been
delivered by the Company, and subsequent transfer or disposition of such
securities shall not require their registration or qualification under the Act
or any similar state law then in force, or (D) such securities shall have ceased
to be out standing.
(g) The term "SEC" shall mean the Securities and Exchange
Commission.
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<PAGE> 5
1.2 Request for Registration.
(a) If the Company shall receive at any time 180 days
after the date hereof a written request from the Holders of a majority of the
Registrable Securities then outstanding that the Company file a registration
statement under the Act covering the registration of at least fifty percent
(50%) of the Registrable Securities then outstanding (or a lesser percent if the
anticipated aggregate offering price, net of underwriting discounts and
commissions, would exceed $40,000,000, then the Company shall:
(i) within ten (10) days of the receipt thereof, give
written notice of such request to all Holders;
(ii) effect as soon as practicable, and in any event
within sixty (60) days of the receipt of such request, the regis tration
under the Act of all Registrable Securities that the Holders request to
be registered, subject to the limitations of subsection 1.2(b), within
twenty (20) days of the mailing of such notice by the Company in
accordance with Section 2.5; and
(iii)effect such registration, at the election of the
Holders, through either (A) an underwritten public offering or (B) a
shelf registration pursuant to Rule 415 under the Act (a "Shelf
Registration").
(b) If the Holders initiating the registration request
hereun der ("Initiating Holders") intend to distribute the Registrable
Securities covered by their request by means of an underwriting, they shall so
advise the Company as a part of their request made pursuant to subsection 1.2(a)
and the Company shall include such information in the written notice referred to
in subsection 1.2(a). The under writer will be selected by a majority in
interest of the Initiating Holders and shall be reasonably acceptable to the
Company. In such event, the right of any Holder to include his Registrable
Securities in such registration shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting (unless otherwise mutually agreed by
a majority in interest of the Initiating Holders and such Holder) to the extent
provided herein. All Holders proposing to distribute their securities through
such underwriting shall (together with the Company as provided in subsection
1.4(e)) enter into an underwriting agreement in customary form with the
underwriter or underwriters selected for such underwriting. Notwithstanding any
other provision of this
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<PAGE> 6
Section 1.2, if the underwriter advises the Initiating Holders in writing that
marketing factors require a limitation of the number of shares to be
underwritten, then the Initiating Holders shall so advise all Holders of
Registrable Securities that would otherwise be underwritten pursuant hereto, and
the number of shares of Registrable Securities that may be included in the
underwriting shall be allocated among all Holders thereof, including the
Initiating Holders, in proportion (as nearly as practica ble) to the amount of
Registrable Securities of the Company owned by each Holder; provided, however,
that the number of shares of Registrable Securities to be included in such
underwriting shall not be reduced unless all other securities are first entirely
excluded from the underwriting, subject to the rights of stockholders under
Section 1 of the Company's Amended and Restated Investors' Rights Agreement,
dated as of December 18, 1997 (the "1997 Rights Agreement").
(c) Notwithstanding the foregoing, if the Company shall
furnish to Holders requesting a registration statement pursuant to this Section
1.2, a certificate signed by the President of the Company stating that in the
good faith judgment of the Board of Directors of the Company, it would be
seriously detrimen tal to the Company and its stockholders for such registration
statement to be filed and it is therefore essential to defer the filing of such
registration statement, the Company shall have the right to defer taking action
with respect to such filing for a period of not more than ninety (90) days after
the receipt of the request of the Initiating Holders; provided, however, that
the Company may not utilize this right more than once in any twelve (12) month
period.
(d) In addition, the Company shall not be obligated to
effect, or to take any action to effect, any registration pursuant to this
Section 1.2:
(i) After the Company has effected one (1)
registration pursuant to this Section 1.2 and such registration has been
declared or ordered effective; or
(ii) During the period starting with the date sixty
(60) days prior to the Company's good faith estimate of the date of
filing of, and ending on a date one hundred eighty (180) days after the
effective date of, a registration subject to Section 1.3 hereof;
provided that the Company is actively employing in good faith all
reasonable efforts to cause such registration statement to become
effective.
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<PAGE> 7
1.3 Company Registration. If (but without any obligation to do
so) the Company proposes to register (including for this purpose a registration
effected by the Company for stockholders other than the Holders) any of its
stock or other securities under the Act in connection with the public offering
of such securi ties solely for cash (other than a registration relating solely
to the sale of securities to participants in a Company stock plan, a
registration on any form that does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of the Registrable Securities or a registration in which the
only Common Stock being registered is Common Stock issuable upon conversion of
debt securities that are also being registered), the Company shall, at such
time, promptly give each Holder written notice of such registration. Upon the
written request of each Holder given within twenty (20) days after mailing of
such notice by the Company in accordance with Section 2.5, the Company shall,
subject to the provisions of Section 1.8, cause to be registered under the Act
all of the Registrable Securities that each such Holder has requested to be
registered. The Company shall be required to include Registrable Securities in
only one registration under this Section 1.3.
1.4 Obligations of the Company. Whenever required under this
Section 1 to effect the registration of any Registrable Securities, the Company
shall, as expeditiously and as reasonably possible:
(a) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use its reasonable efforts to
cause such registration statement to become effective, and, upon the request of
the Holders of a majority of the Registrable Securities registered thereunder,
keep such registra tion statement effective for a period of up to one hundred
twenty (120) days, pro vided, however, that in the case of a Shelf Registration,
the Company will, subject to Section 1.4(b), keep the Shelf Registration
Statement continuously effective for a period of two years from the date of this
Agreement, or such shorter period that will terminate when there are no
Registrable Securities outstanding.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Act with respect to the disposition of all securities covered
by such registration statement and, with respect to a Shelf Registration,
subject to the further provisions of this Section 1.4(b), use reasonable efforts
to enable a Holder to use the prospectus forming a part thereof for offers and
resales of Registrable Securities, including
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<PAGE> 8
without limitation, to identify such Holder as a selling security holder in the
registra tion statement for the Shelf Registration provided, however, if the
Company deter mines based upon the advice of counsel that it is advisable to
disclose in the Shelf Registration Statement a financing, acquisition or other
corporate transaction or other material event affecting the Company or its
securities, and the Board of Directors of the Company (or an executive officer
of the Company duly authorized for such purpose) shall have determined in good
faith that such disclosure would not be in the best interests of the Company and
its stockholders, the Company shall not be required to prepare and file such
amendment or supplement for such period as the Board of Directors of the Company
shall have determined in good faith is in the best interests of the Company and
its stockholders. Upon notification of the Holders whose Registrable Securities
are included in such registration of the occurrence of any event contemplated
above, such Holders shall suspend the use of the prospectus forming a part of
such registration statement until the requisite changes to such prospectus have
been made.
(c) Furnish to the Holders, without charge, such numbers
of copies of a prospectus, including a preliminary prospectus, in conformity
with the requirements of the Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them.
(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as shall be reasonably requested by the
Holders; provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions, unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Act.
(e) In the event of any underwritten public offering,
enter into and perform its obligations under an underwriting agreement, in usual
and customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered
by such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an
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<PAGE> 9
untrue statement of a material fact or omits to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
in the light of the circumstances then existing.
(g) Cause all such Registrable Securities registered
pursuant hereunder to be listed on each securities exchange on which similar
securities issued by the Company are then listed.
(h) Provide a transfer agent and registrar for all
Registrable Securities registered hereunder and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration.
1.5 Furnish Information.
(a) It shall be a condition precedent to the obligations
of the Company to take any action pursuant to this Section 1 with respect to the
Registrable Securities of any selling Holder that such Holder shall furnish to
the Company such information regarding itself, the Registrable Securities held
by it, and the intended method of disposition of such securities as shall be
required to effect the registration of such Holder's Registrable Securities.
(b) The Company shall have no obligation with respect to
any registration requested pursuant to Section 1.2 if, due to the operation of
subsec tion 1.5(a), the number of shares or the anticipated aggregate offering
price of the Registrable Securities to be included in the registration does not
equal or exceed the number of shares or the anticipated aggregate offering price
required to originally trigger the Company's obligation to initiate such
registration as specified in subsec tion 1.2(a).
1.6 Expenses of Demand Registration. All expenses other than
underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications pursuant to Section 1.2, including
(without limitation) all registration, filing and qualification fees, printers'
and accounting fees, fees and disbursements of counsel for the Company and the
reasonable fees and disburse ments of one counsel for the selling Holders shall
be borne by the Company; provided, however, that the Company shall not be
required to pay for any expenses of any registration proceeding begun pursuant
to Section 1.2 if the registration request is subsequently withdrawn at the
request of the Holders of a majority of the Registrable Securities to be
registered (in which case all participating Holders shall
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<PAGE> 10
bear such expenses), unless the Holders of a majority of the Registrable
Securities agree to forfeit their right to a demand registration pursuant to
Section 1.2 (which agreement shall bind all Holders of Registrable Securities,
even if a Holder has not signed such agreement); provided further, however, that
if at the time of such withdrawal, the Holders have learned of a material
adverse change in the condition, business, or prospects of the Company from that
known to the Holders at the time of their request and have withdrawn the request
with reasonable promptness following disclosure by the Company of such material
adverse change, then the Holders shall not be required to pay any of such
expenses and shall retain their right to a demand registration pursuant to
Section 1.2.
1.7 Expenses of Company Registration. The Company shall bear and
pay all expenses incurred in connection with any registration, filing or
qualifica tion of Registrable Securities with respect to the registrations
pursuant to Section 1.3 for each Holder (which right may be assigned as provided
in Section 1.12), including (without limitation) all registration, filing, and
qualification fees, printers and accounting fees relating or apportionable
thereto and the fees and disbursements of one counsel for all the selling
Holders selected by them, but excluding underwriting discounts and commissions
relating to Registrable Securities.
1.8 Underwriting Requirements. In connection with any offering
involving an underwriting of shares of the Company's capital stock, the Company
shall not be required under Section 1.3 to include any of the Holders'
securities in such underwriting unless they accept the terms of the underwriting
as agreed upon between the Company and the underwriters selected by it (or by
other persons entitled to select the underwriters), and then only in such
quantity as the underwriters determine in their sole discretion will not
jeopardize the success of the offering by the Company. If the total amount of
securities, including Registrable Securities, requested by stockholders to be
included in such offering exceeds the amount of securities sold other than by
the Company that the underwriters determine in their sole discretion is
compatible with the success of the offering, then the Company shall be required
to include in the offering only that number of such securities, including
Registrable Securities, that the underwriters determine in their sole discretion
will not jeopardize the success of the offering (the securities so included to
be appor tioned pro rata among the selling stockholders according to the total
amount of securities entitled to be included therein owned by each selling
stockholder or in such other proportions as shall mutually be agreed to by such
selling stockholders) but in no event shall (i) the amount of securities of the
selling Holders included in the offering be reduced below twenty-five percent
(25%) of the total amount of securities
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<PAGE> 11
included in such offering or (ii) notwithstanding (i) above, any shares being
sold by a stockholder exercising a demand registration right similar to that
granted in Section 1.2 be excluded from such offering, including, without
limitation, rights granted in Section 1 of the 1997 Rights Agreement. For
purposes of the preceding parenthetical concerning apportionment, for any
selling stockholder that is a holder of Registrable Securities and that is a
partnership or corporation, the partners, retired partners and stockholders of
such holder, or the estates and family members of any such partners and retired
partners and any trusts for the benefit of any of the foregoing persons shall be
deemed to be a single "selling stockholder," and any pro-rata reduction with
respect to such "selling stockholder" shall be based upon the aggregate amount
of shares carrying registration rights owned by all entities and individuals
included in such "selling stockholder," as defined in this sentence.
1.9 Delay of Registration. No Holder shall have any right to
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Section 1.
1.10 Indemnification. In the event any Registrable Securities are
included in a registration statement under this Section 1:
(a) To the extent permitted by law, the Company will
indemnify and hold harmless each Holder, any underwriter (as defined in the Act)
for such Holder, and each person, if any, who controls such Holder or
underwriter within the meaning of the Act or the 1934 Act, against any losses,
claims, damages, or liabilities (joint or several) to which they may become
subject under the Act, the 1934 Act or other federal or state law, insofar as
such losses, claims, damages, or liabilities (or actions in respect thereof)
arise out of or are based upon any of the following statements, omissions or
violations (collectively a "Violation"): (i) any untrue statement or alleged
untrue statement of a material fact contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, (ii) 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 violation or alleged
violation by the Company of the Act, the 1934 Act, any state securities law or
any rule or regulation promulgated under the Act, the 1934 Act or any state
securities law; and the Company will pay to each such Holder, underwriter or
controlling person, as incurred, any legal or other expenses reasonably incurred
by them in connection with investigating or defending any such loss, claim,
damage,
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<PAGE> 12
liability or action; provided, however, that the indemnity agreement contained
in this subsection 1.10(a) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability or action if such settlement is effected
without the consent of the Company (which consent shall not be unreasonably
withheld), nor shall the Company be liable in any such case for any such loss,
claim, damage, liability or action to the extent that it arises out of or is
based upon a Violation that occurs in reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration by any such Holder, underwriter or controlling person. (b) To the
extent permitted by law, each selling Holder will indemnify and hold harmless
the Company, each of its directors, each of its officers who has signed the
registration statement, each person, if any, who controls the Company within the
meaning of the Act, any underwriter, any other Holder selling securities in such
registration statement and any controlling person of any such underwriter or
other Holder, against any losses, claims, damages or liabilities (joint or
several) to which any of the foregoing persons may become subject under the Act,
the 1934 Act or other federal or state law, insofar as such losses, claims,
damages or liabilities (or actions in respect thereto) arise out of or are based
upon any Violation, in each case to the extent (and only to the extent) that
such Violation occurs in reliance upon and in conformity with written
information furnished by such Holder expressly for use in connection with such
registration; and each such Holder will pay, as incurred, any legal or other
expenses reasonably incurred by any person intended to be indemnified pursuant
to this subsection 1.10(b) in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that the
indemnity agreement contained in this subsection 1.10(b) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Holder, which consent
shall not be unreasonably withheld; provided, that, in no event shall any
indemnity under this subsection 1.10(b) exceed the gross proceeds from the
offering received by such Holder.
(c) Promptly after receipt by an indemnified party under
this Section 1.10 of notice of the commencement of any action (including any
govern mental action), such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this Section 1.10,
deliver to the indemni fying party a written notice of the commencement thereof
and the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however,
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<PAGE> 13
that an indemnified party (together with all other indemnified parties that may
be represented without conflict by one counsel) shall have the right to retain
one separate counsel, with the fees and expenses to be paid by the indemnifying
party, if representation of such indemnified party by the counsel retained by
the indemnifying party would be inappropriate due to actual or potential
differing interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to deliver written
notice to the indemnifying party within a reasonable time of the commencement of
any such action, if prejudicial to its ability to defend such action, shall
relieve such indemnifying party of any liability to the indemnified party under
this Section 1.10, but the omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that it may have to any
indemnified party otherwise than under this Section 1.10.
(d) If the indemnification provided for in this Section
1.10 is held by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any loss, liability, claim, damage or expense
referred to therein, then the indemnifying party, in lieu of indemnifying such
indemnified party hereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such loss, liability, claim, damage or
expense in such proportion as is appropriate to reflect the relative fault of
the indemnifying party on the one hand and of the indemnified party on the other
in connection with the statements or omissions that resulted in such loss,
liability, claim, damage or expense as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
(f) The obligations of the Company and Holders under this
Section 1.10 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 1, and otherwise.
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1.11 Reports Under Securities Exchange Act of 1934. With a view
to making available to the Holders the benefits of Rule 144 promulgated under
the Act and any other rule or regulation of the SEC that may at any time permit
a Holder to sell securities of the Company to the public without registration or
pursuant to a registration on Form S-3, the Company agrees to:
(a) make and keep public information available, as those
terms are understood and defined in SEC Rule 144, at all times after the
effective date of the first registration statement filed by the Company for the
offering of its securities to the general public;
(b) take such action, including the voluntary registration
of its Common Stock under Section 12 of the 1934 Act, as is necessary to enable
the Holders to utilize Form S-3 for the sale of their Registrable Securities,
such action to be taken as soon as practicable after the end of the fiscal year
in which the first registration statement filed by the Company for the offering
of its securities to the general public is declared effective;
(c) file with the SEC in a timely manner all reports and
other documents required of the Company under the Act and the 1934 Act; and
(d) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Com pany that it has complied with the reporting requirements of SEC Rule 144,
the Act and the 1934 Act, or that it qualifies as a registrant whose securities
may be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a
copy of the most recent annual or quarterly report of the Company and such other
reports and documents so filed by the Company, and (iii) such other information
as may be reasonably re quested in availing any Holder of any rule or regulation
of the SEC that permits the selling of any such securities without registration
or pursuant to such form.
1.12 Assignment of Registration Rights. The rights to cause the
Company to register Registrable Securities pursuant to this Section 1 may be
assigned (but only with all related obligations) by a Holder to a transferee or
assignee of such securities who, after such assignment or transfer, holds at
least 75,000 shares of Registrable Securities (subject to appropriate adjustment
for stock splits, stock dividends, combinations and other recapitalizations),
provided: (a) the Company is, within a reasonable time after such transfer,
furnished with written notice of the name and address of such transferee or
assignee and the securities with respect to
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<PAGE> 15
which such registration rights are being assigned; (b) such transferee or
assignee agrees in writing to be bound by and subject to the terms and
conditions of this Agreement, including without limitation the provisions of
Section 1.14 below; and (c) such assignment shall be effective only if
immediately following such transfer the further disposition of such securities
by the transferee or assignee is restricted under the Act. For the purposes of
determining the number of shares of Registrable Securities held by a transferee
or assignee, the holdings of transferees and assignees of a partnership who are
partners or retired partners of such partnership (including spouses and
ancestors, lineal descendants and siblings of such partners or spouses who
acquire Registrable Securities by gift, will or intestate succession) or
otherwise associated with such partnership shall be aggregated together and with
the partner ship; provided that all assignees and transferees who would not
qualify individually for assignment of registration rights shall have a single
attorney-in-fact for the purpose of exercising any rights, receiving notices or
taking any action under this Section 1.
1.13 Termination. This Agreement shall terminate and be of no
further force or effect on the fifth anniversary of the date the Company's
initial public offering was consummated or, as to any Holder, such earlier time
at which all Registrable Securities held by such Holder can be sold in any three
(3) month period without registration in compliance with Rule 144 of the Act.
2. Miscellaneous.
2.1 Successors and Assigns. Except as otherwise provided herein,
the terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
trans ferees of any shares of Registrable Securities). Nothing in this
Agreement, express or implied, is intended to confer upon any party other than
the parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agree ment.
2.2 Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws (and not the law of conflicts) of
the State of Delaware.
-13-
<PAGE> 16
2.3 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
2.4 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
2.5 Notices. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given (i) upon personal delivery to the party to be notified, (ii)
upon deposit with the United States Post Office, by registered or certified
mail, postage prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page hereof, or at such other address
as such party may designate by ten (10) days' advance written notice to the
other parties, or (iii) upon delivery by facsimile transmission to the party to
be notified at the facsimile number indicated for such party on the signature
page hereof, or at such other facsimile number as such party may designate by
ten (10) days' advance written notice to the other parties.
2.6 Expenses. If any action at law or in equity is necessary to
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
2.7 Amendments and Waivers. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
a majority of the Registrable Securities then outstanding. Any amendment or
waiver effected in accordance with this paragraph shall be binding upon each
holder of any Registrable Securities then outstanding, each future holder of all
such Registrable Securities, and the Company.
2.8 Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
-14-
<PAGE> 17
2.9 Entire Agreement. This Agreement constitutes the full and
entire understanding and agreement between the parties with regard to the
subjects hereof and thereof.
-15-
<PAGE> 18
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date first above written.
NET PERCEPTIONS, INC.
By: /s/ Thomas M. Donnelly
-----------------------------------------------
Name: Thomas M. Donnelly
Title: Chief Financial Officer
Address: 7901 Flying Cloud Drive
Eden Prairie, MN 55344
Telephone: (612) 903-9424
Facsimile: (612) 903-9425
HOLDERS:
By: /s/ Chet Aitken
-----------------------------------------------
Name: Chet Aitken
Address: 100 Kingston Road
New Market, Ontario
L34 5W7 Canada
Telephone:
By: /s/ Nathan Beach
-----------------------------------------------
Name: Nathan Beach
Address: 404 Thompson Road
Richardson, Texas 75080
Telephone:
-16-
<PAGE> 19
By: /s/ Brian G. Benton
-----------------------------------------------
Name: Brian G. Benton
Address: 108 Tallstar
Austin, Texas 78734
Telephone:
By: /s/ A. Bhargava
-----------------------------------------------
Name: Ajay Bhargava
Address: 8405 Cornerwood Drive
Austin, Texas 78717
Telephone:
By: /s/ David Boles
-----------------------------------------------
Name: David Boles
Address: 7206 Holly Fern Cove
Austin, Texas 78750
Telephone:
By: /s/ Joe Bulger
-----------------------------------------------
Name: Joe Bulger
Address: 16905 Capri Isle Lane
Austin, Texas 78717
Telephone:
By: /s/ Roger H. Castillo
-----------------------------------------------
Name: Roger H. Castillo
Address: 6800 Austin Center Blvd. #931
Austin, Texas 78731
Telephone:
-17-
<PAGE> 20
By: /s/ Joseph Dalton
-----------------------------------------------
Name: Joseph Dalton
Address: 4104 Hidden Canyon
Austin, Texas 78746
Telephone:
By: /s/ Mark Davis
-----------------------------------------------
Name: Mark Davis
Address: 10120 Scull Creek Drive
Austin, Texas 78730
Telephone:
By: /s/ Paul Dehnert
-----------------------------------------------
Name: Paul Dehnert
Address: 3110 Maywood Avenue
Austin, Texas 78703
Telephone:
By: /s/ Ron Dovich
-----------------------------------------------
Name: Ron Dovich
Address: 5721 Standing Rock Road
Austin, Texas 78730
Telephone:
By: /s/ David Elliott
-----------------------------------------------
Name: David Elliott
Address: 8807 Silverarrow Circle
Austin, Texas 78759
Telephone:
-18-
<PAGE> 21
By: /s/ Peter J. Eppele
-----------------------------------------------
Name: Peter J. Eppele
Address: 1307 Delta Avenue #1
Cincinnati, Ohio 45208
Telephone:
By: /s/ Wes Fox
-----------------------------------------------
Name: Wes Fox
Address: 4908 Reunion Drive
Plano, Texas 75024
Telephone:
By: /s/ Francine R. Frazer
-----------------------------------------------
Name: Francine R. Frazer
Address: 5005 Rainbow End
Culver City, CA 90230
Telephone:
By: /s/ Kent A. Fuka
-----------------------------------------------
Name: Kent A. Fuka
Address: 10904 Low Bridge Lane
Austin, Texas 78750
Telephone:
By: /s/ Coyne A. Gibson
-----------------------------------------------
Name: Coyne A. Gibson
Address: 5946 Cape Coral Drive
Austin, Texas 78746
Telephone:
-19-
<PAGE> 22
By: /s/ Jeff Goke
-----------------------------------------------
Name: Jeff Goke
Address: 517 Academy Drive
Austin, Texas 78704
Telephone:
By: /s/ Gregory P. Goralski
-----------------------------------------------
Name: Gregory P. Goralski
Address: 18548 Aztec Drive
Spring Lake, Michigan 49456
Telephone:
By: /s/ Kay Hackmann
-----------------------------------------------
Name: Kay Hackmann
Address: 11038 Galleria Cove
Austin, Texas 78759
Telephone:
By: /s/ Karen Heath
-----------------------------------------------
Name: Karen Heath
Address: 4100 Triple Crown
Austin, Texas 78746
Telephone:
By: /s/ Barry Higgins
-----------------------------------------------
Name: Barry Higgins
Address: 1000 Madera Court
Allen, Texas 75013
Telephone:
-20-
<PAGE> 23
By: /s/ Leticia Huerta
-----------------------------------------------
Name: Leticia Huerta
Address: 5911 Cedardale Drive
Austin, Texas 78745
Telephone:
By: /s/ Lynn Keeling
-----------------------------------------------
Name: Lynn Keeling
Address: 2709 Benbrook
Austin, Texas 78757
Telephone:
By: /s/ Sue Keller
-----------------------------------------------
Name: Sue Keller
Address: 4814 Timberline Drive
Austin, Texas 78746
Telephone:
By: /s/ Meredith Koester
-----------------------------------------------
Name: Meredith Koester
Address: 8615 Rockwood #123
Austin, Texas 78757
Telephone:
By: /s/ Lee Kunkle
-----------------------------------------------
Name: Lee Kunkle
Address: P.O. Box 192303
San Francisco, California 94119
Telephone:
-21-
<PAGE> 24
By: /s/ Mary S. McCommon
-----------------------------------------------
Name: Mary S. McCommon
Address: 2503 Park View Drive
Austin, Texas 78757
Telephone:
By: /s/ Mark McKnight
-----------------------------------------------
Name: Mark McKnight
Address: 1463 Hargis Creek Trail
Austin, Texas 78717
Telephone:
By: /s/ Mary Mitchell
-----------------------------------------------
Name: Mary Mitchell
Address: 7301 Bluntleaf Cove
Austin, Texas 78750
Telephone:
By: /s/ Jean Nance
-----------------------------------------------
Name: Jean Nance
Address: 25601 River Fern Court
Leander, Texas 78641
Telephone:
By: /s/ John A. Overholt
-----------------------------------------------
Name: John A. Overholt
Address: 10616 Pluchea Cove
Austin, Texas 78733
Telephone:
-22-
<PAGE> 25
By: /s/ Jackie Parker
-----------------------------------------------
Name: Jackie Parker
Address: 11409 Capstan Drive
Upper Marlboro, Maryland 20772
Telephone:
By: /s/ Nick Revezzo
-----------------------------------------------
Name: Nick Revezzo
Address: 404 Innsbrook Drive
Canton, Michigan 48188
Telephone:
By: /s/ Pam Saegert
-----------------------------------------------
Name: Pam Saegert
Address: 5803 Highland Hills Terrace
Austin, Texas 78731
Telephone:
By: /s/ Larry Scroggins
-----------------------------------------------
Name: Larry Scroggins
Address: 3940 Cesar Chavez
San Francisco, California 94131
Telephone:
By: /s/ Lawrence E. Steury
-----------------------------------------------
Name: Lawrence E. Steury
Address: 3913 North Hills Drive
Austin, Texas 78731
Telephone:
-23-
<PAGE> 26
By: /s/ Roger Sunshine
-----------------------------------------------
Name: Roger Sunshine
Address: 5012 China Garden Drive
Austin, Texas 78730
Telephone:
By: /s/ John Thornton
-----------------------------------------------
Name: John Thornton
Address: 114 W. 7th Street, Suite 1300
Austin, Texas 78701
Telephone:
By: /s/ Frank R. Triolo
-----------------------------------------------
Name: Frank R. Triolo
Address: 3 River Otter Lane
Savannah, Georgia 31411
Telephone:
By: /s/ Chien Tung
-----------------------------------------------
Name: Chien Tung
Address: 5404 Merrywing Circle
Austin, Texas 78730
Telephone:
By: /s/ Elaine Wetmore
-----------------------------------------------
Name: Elaine Wetmore
Address: 2908 Maravillas Loop
Austin, Texas 78735
Telephone:
-24-
<PAGE> 27
By: /s/ Larry Wikelius
-----------------------------------------------
Name: Larry Wikelius
Address: 2908 Maravillas Loop
Austin, Texas 78735
Telephone:
By: /s/ Linda Wozniak
-----------------------------------------------
Name: Linda Wozniak
Address: 10000 Walnut Shores
Fenton, Michigan 48430
Telephone:
By: /s/ Mark R. Zuzanek
-----------------------------------------------
Name: Mark R. Zuzanek
Address: 2081 Lakewind Drive
West Bloomfield, Michigan 48324
Telephone:
By: /s/ Lisa Olson
-----------------------------------------------
Name: Phoenix Leasing Incorporated
Address: 2401 Kerner Blvd.
San Rafael, California 94901-5529
Telephone:
By: /s/ Robert J. Paluck
-----------------------------------------------
Name: Centerpoint Venture Partners, L.P.
Address: Two Galleria Tower
13455 Noel Road #1670
Dallas, Texas 75240
Telephone:
-25-
<PAGE> 28
By: /s/ W. Stephen Holmes
-----------------------------------------------
Name: InterWest Partners VI, L.P.
Address: 3000 Sand Hill Road
Building 3, Suite 255
Menlo Park, California 94025
Telephone:
By: /s/ W. Stephen Holmes
-----------------------------------------------
Name: InterWest Investors VI, L.P.
Address: 3000 Sand Hill Road
Building 3, Suite 255
Menlo Park, California 94025
Telephone:
By: /s/ Habib Kairouz
-----------------------------------------------
Name: RHO Management Trust I
Address: 152 West 57th Street
New York, New York 10019
Telephone:
By: /s/ John Thornton
-----------------------------------------------
Name: Austin Ventures V, L.P.
Address: 114 W. 7th Street, Suite 1300
Austin, Texas 78701
Telephone:
By: /s/ John Thornton
-----------------------------------------------
Name: Austin Ventures V Affiliates Fund, L.P.
Address: 114 W. 7th Street, Suite 1300
Austin, Texas 78701
Telephone:
-26-
<PAGE> 29
By: /s/ Donald J. Phillips
-----------------------------------------------
Name: Phillips-Smith Specialty Retail Group III
Address: 5080 Spectrum Drive
Suite 805W
Addison, Texas 75001
Telephone:
By: /s/ L.J. Sevin
-----------------------------------------------
Name: L.J. Sevin
Address: 13455 Noel Road #1670
Dallas, Texas 75240
Telephone:
By: /s/ Dietrich Erdmann
-----------------------------------------------
Name: Dietrich Erdmann
Address: 36 Pengstrasse
CH-6052 Hergiswil
Switzerland
Telephone:
By: /s/ Jon W. Bayless
-----------------------------------------------
Name: Jon W. Bayless
Address: 13455 Noel Road #1670
Dallas, Texas 75240
Telephone:
By: /s/ Terrence L. Rock
-----------------------------------------------
Name: Terrence L. Rock
Address: 1408 E. Jeter Road
Bartonville, Texas 76226
Telephone:
-27-
<PAGE> 30
By: /s/ Cindy Alff Perkins
-----------------------------------------------
Name: Estate of JoAnn K. Eisler
Address: 24 Vaughn's Mill Court
Simpsonville, South Carolina 29681
Telephone:
By: /s/ Harvey B. Cash
-----------------------------------------------
Name: Harvey B. Cash
Address: 13455 Noel Road #1670
Dallas, Texas 75240
Telephone:
By: /s/ John Dirvin
-----------------------------------------------
Name: John Dirvin
Address: 1218 Havre Lafitte Drive
Austin, Texas 78746
Telephone:
By: /s/ Craig Foley
-----------------------------------------------
Name: Craig Foley
Address: 7 Locust Lane
Bronxville, New York 10708
Telephone:
-28-
<PAGE> 31
Schedule A
Schedule of Holders
<TABLE>
<S> <C>
Chet Atiken Jean Nance
Ajay Barghava John Overholt
Nathan Beach Jackie Parker
Brian Benton Nick Revezzo
David Boles Pam Saegert
Joe Bulger Larry Scroggins
Roger Castillo Larry Steury
Joe Dalton Roger Sunshine
Mark Davis John Thornton
Paul Dehnert Frank Triolo
Ron Dovich Chien Tung
David Elliott Elaine Wetmore
Peter Eppele Larry Wikelius
Wes Fox Linda Wozniak
Fran Frazer Mark Zuzanek
Kent Fuka Centerpoint Venture Partners L.P.
Coyne Gibson InterWest Partners VI, L.P.
Jeff Goke InterWest Investors VI, L.P.
Greg Goralski RHO Management Trust I
Kay Hackmann L.J. Sevin
Karen Heath Dietrich Erdmann
Barry Higgins Jon Bayless
Leticia Huerta Terry Rock
Roger Hughes Estate of Jo Eisler
Lynn Keeling H. Berry Cash
Sue Keller Austin Ventures V, L.P.
Meredith Koester Austin Ventures Affiliates Funds V, L.P.
Lee Kunkle John Dirvin
Mary McCommon Phillips-Smith Specialty Retail Group III
Mark McKnight Craig Foley
Mary Mitchell
</TABLE>
<PAGE> 1
EXHIBIT 10.8
KNOWLEDGE DISCOVERY ONE, INC.
1996 STOCK OPTION/STOCK ISSUANCE PLAN
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
This 1996 Stock Option/Stock Issuance Plan is intended to promote the
interests of Knowledge Discovery One, Inc., a Delaware corporation, by providing
eligible persons with the opportunity to acquire a proprietary interest, or
otherwise increase their proprietary interest, in the Corporation as an
incentive for them to remain in the service of the Corporation.
Capitalized terms shall have the meanings assigned to such terms in the
attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into two (2) separate equity programs:
(i) the Option Grant Program under which eligible persons
may, at the discretion of the Plan Administrator, be granted options to
purchase shares of Common Stock, and
(ii) the Stock Issuance Program under which eligible
persons may, at the discretion of the Plan Administrator, be issued
shares of Common Stock directly, either through the immediate purchase
of such shares or as a bonus for services rendered the Corporation (or
any Parent or Subsidiary).
B. The provisions of Articles One and Four shall apply to both equity
programs under the Plan and shall accordingly govern, the interest of all
persons under the Plan.
<PAGE> 2
III. ADMINISTRATION OF THE PLAN
A. The Plan shall be administered by the Board. However, any or all
administrative functions otherwise exercisable by the Board may be delegated to
the Committee. Members of the Committee shall serve for such period of time as
the Board may determine and may he removed by the Board at any time. The Board
may also at any time terminate the functions of the Committee and reassume all
powers and authority previously delegated to the Committee.
B. The Plan Administrator shall have full power and authority to
establish such rules and regulations as it may deem appropriate for proper
administration of the Plan and to make such determinations under, and issue
such interpretations of, the Plan and any outstanding options or stock
issuances thereunder as it may deem necessary or advisable. Decisions of the
Plan Administrator shall be final and binding on all parties who have an
interest in the Plan or any option or stock issuance thereunder.
IV. ELIGIBILITY
A. The persons eligible to participate in the Plan are as follows:
(i) Employees,
(ii) non-employee members of the Board or the board of
directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who
provide services to the Corporation (or any Parent or Subsidiary).
B. The Plan Administrator shall have full authority to determine, (i)
with respect to the option grants under the Option Grant Program, which eligible
persons are to receive option grants, the time or times when such option grants
are to be made, the number of shares to be covered by each such grant, the
status of the granted option as either an Incentive Option or a Non-Statutory
Option, the time or times at which each option is to become exercisable, the
vesting schedule (if any) applicable to the option shares and the maximum term
for which the option is to remain outstanding and (ii) with respect to stock
issuances under the Stock Issuance Program, which eligible persons are to
receive stock issuance, the time or times when such issuances are to be made,
the number of shares to be issued to each Participant,
2
<PAGE> 3
the vesting schedule (if any) applicable to the issued shares and the
consideration to be paid for such shares.
C. The Plan Administrator shall have the absolute discretion either to
grant options in accordance with the Option Grant Program or to effect stock
issuances in accordance with the Stock Issuance Program.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized but
unissued or reacquired Common Stock. The maximum number of shares of Common
Stock which may be issued over the term of the Plan shall not exceed 2,801,636
shares.
B. Shares of Common Stock subject to outstanding options shall be
available for subsequent issuance under the Plan to the extent (i) the options
expire or terminate for any reason prior to exercise in full or (ii) the options
are cancelled in accordance with the cancellation-regrant provisions of Article
Two. Unvested shares issued under the Plan, and subsequently repurchased by the
Corporation, at the original issue price paid per share, pursuant to the
Corporation's repurchase rights under the Plan, shall be added back to the
number of shares of Common Stock reserved for issuance under the Plan and shall
accordingly be available for reissuance through one or more subsequent option
grants or direct stock issuances under the Plan shall be added back to the
number of shares of Common Stock reserved for issuance under the Plan and shall
accordingly be available for reissuance through one or more subsequent option
grants or direct stock issuances under the Plan.
C. Should any change be made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made to (i) the maximum number and/or class of securities issuable under the
Plan and (ii) the number and/or class of securities and the exercise price per
share in effect under each outstanding option in order to prevent the dilution
or enlargement of rights and benefits thereunder. The adjustments determined by
the Plan Administrator shall be final, binding and conclusive. In no event shall
any such adjustments be made in connection with the conversion of one or more
outstanding shares of the Corporation's preferred stock into shares of Common
Stock.
3
<PAGE> 4
ARTICLE TWO
OPTION GRANT PROGRAM
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided however, that each such document
shall comply with the terms specified below. Each document evidencing an Incen-
tive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. Exercise Price.
1. The exercise price per share shall be fixed by the Plan Admin-
istrator and may be less than, equal to or greater than the Fair Market Value
per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon exercise
of the option and shall, subject to the provisions of Section I of Article Four
and the documents evidencing the option, be payable in cash or check made
payable to the Corporation. Should the Common Stock be registered under Section
12(g) of the 1934 Act at the time the option is exercised, then the exercise
price may also be paid as follows:
(i) in shares of Common Stock held for the requisite
period necessary to avoid a charge to the Corporation's earnings for
financial reporting purposes and valued at Fair Market Value on the
Exercise Date, or
(ii) to the extent the option is exercised for vested
shares, through a special sale and remittance procedure pursuant to
which the Optionee shall concurrently provide irrevocable written
instructions to (a) a Corporation designated brokerage firm to effect
the immediate sale of the purchased shares and remit to the Corporation,
out of the sale proceeds available on the settlement date, sufficient
funds to cover the aggregate exercise price payable for the purchased
shares plus all applicable Federal, state and local income and
employment taxes required to be withheld by the Corporation by reason of
such exercise and (b) the Corporation to deliver the
4
<PAGE> 5
certificates for the purchased shares directly to such brokerage firm in
order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. Exercise and Term of Options. Each option shall be exercisable at
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.
C. Effect of Termination of Service.
1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such
period of time thereafter as shall be determined by the Plan
Administrator and set forth in the documents evidencing the option, but
no such option shall be exercisable after the expiration of the option
term.
(ii) Any option exercisable in whole or in part by the
Optionee at the time of death may be exercised subsequently by the
personal representative of the Optionee's estate or by the person or
persons to whom the option is transferred pursuant to the Optionee's
will or in accordance with the laws of descent and distribution.
(iii) During the applicable post-Service exercise period,
the option may not be exercised in the aggregate for more than the
number of vested shares for which the option is exercisable on the date
of the Optionee's cessation of Service. Upon the expiration of the
applicable exercise period or (if earlier) upon the expiration of the
option term, the option shall terminate and cease to be outstanding for
any vested shares for which the option has not been exercised. However,
the option shall, immediately upon the Optionee's cessation of Service,
terminate and cease to be outstanding to the extent the option is not
otherwise at that time exercisable for vested shares.
5
<PAGE> 6
(iv) Should the Optionee's Service be terminated for
Misconduct, then all outstanding options held by the Optionee shall
terminate immediately and cease to be outstanding.
2. The Plan Administrator shall have the discretion, exercisable
either at the time an option is granted or at any time while the option remains
outstanding, to:
(i) extend the period of time for which the option is to
remain exercisable following the Optionee's cessation of Service from
the period otherwise in effect for that option to such greater period of
time as the Plan Administrator shall deem appropriate, but in no event
beyond the expiration of the option term, and/or
(ii) permit the option to be exercised, during the
applicable post-Service exercise period, not only with respect to the
number of vested shares of Common Stock for which such option is
exercisable at the time of the Optionee's cessation of Service but also
with respect to one or more additional installments in which the
Optionee would have vested under the option had the Optionee continued
in Service.
D. Stockholder Rights. The holder of an option shall have no stock
holder rights with respect to the shares subject to the option until such person
shall have exercised the option, paid the exercise price and become a holder of
record of the purchased shares.
E. Repurchase Rights. The Plan Administrator shall have the discretion
to grant options which are exercisable for unvested shares of Common Stock.
Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.
F. First Refusal Rights. Until such time as the Common Stock is first
registered under Section 12(g) of the 1934 Act, the Corporation shall have the
right of first refusal with respect to any proposed disposition by the Optionee
(or any successor in interest) of any shares of Common Stock issued under the
Option Grant
6
<PAGE> 7
Program. Such right of first refusal shall be exercisable in accordance with the
terms established by the Plan Administrator and set forth in the document
evidencing such right.
G. Limited Transferability of Options. During the lifetime of the
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or by the laws of descent
and distribution following the Optionee's death. However, a Non-Statutory
Option may, in connection with the Optionee's estate plan, be assigned in whole
or in part during the Optionee's lifetime to one or more members of the
Optionee's immediate family or to a trust established exclusively for one or
more such family members. The assigned portion may only be exercised by the
person or persons who acquire a proprietary interest in the option pursuant to
the assignment. The terms applicable to the assigned portion shall be the same
as those in effect for the option immediately prior to such assignment and shall
be set forth in such documents issued to the assignee as the Plan Administrator
may deem appropriate.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive Options.
Except as modified by the provisions of this Section II, all the provisions of
Articles One, Two and Four shall be applicable to Incentive Options. Options
which are specifically designated as Non-Statutory Options when issued under the
Plan shall not be subject to the terms of this Section II.
A. Eligibility. Incentive Options may only be granted to Employees.
B. Exercise Price. The exercise price per share shall not be less than
one hundred percent (100%) of the Fair Market Value per share of Common Stock on
the option grant date.
C. Dollar Limitation. The aggregate Fair Market Value of the shares of
Common Stock (determined as of the respective date or dates of grant) for which
one or more options granted to any Employee under the Plan (of any other option
plan of the Corporation or any Parent or Subsidiary) may for the first time
become exercisable as Incentive Options during any one (1) calendar year shall
not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the
Employee holds two (2) or more such options which become exercisable for the
first time in the same calendar year, the foregoing limitation on the
exercisability of such options as
7
<PAGE> 8
Incentive Options shall be applied on the basis of the order in which such
options are granted.
D. 10% Stockholder. If any Employee to whom an Incentive Option is
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date and the option term shall not exceed five
(5) years measured from the option grant date.
III. CORPORATE TRANSACTION
A. In the event of any Corporate Transaction, each outstanding option
shall automatically accelerate so that each such option shall, immediately prior
to the effective date of the Corporate Transaction, become fully exercisable for
all of the shares of Common Stock at the time subject to such option and may be
exercised for any or all of those shares as fully-vested shares of Common Stock.
However, an outstanding option shall not so accelerate if and to the extent: (i)
such option is, in connection with the Corporate Transaction, either to be
assumed by the successor corporation (or parent thereof) or to be replaced with
a comparable option to pur chase shares of the capital stock of the successor
corporation (or parent thereof), (ii) such option is to be replaced with a cash
incentive program of the successor corporation which preserves the spread
existing on the unvested option shares at the time of the Corporate Transaction
and provides for subsequent payout in accordance with the same vesting schedule
applicable to such option or (iii) the acceleration of such option is subject to
other limitations imposed by the Plan Administrator at the time of the option
grant. The determination of option comparability under clause (i) above shall be
made by the Plan Administrator, and its determination shall be final, binding
and conclusive.
B. All outstanding repurchase rights shall also terminate automatically,
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction, except to
the extent (i) those repurchase rights are to be assigned to the successor
corporation (or parent thereof) in connection with such Corporate Transaction or
(ii) such accelerated vesting is precluded by other limitations imposed by the
Plan Administrator at the time the repurchase right is issued.
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<PAGE> 9
C. Immediately following the consummation of the Corporate Transaction,
all outstanding options shall terminate and cease to be outstanding, except to
the extent assumed by the successor corporation (or parent thereof).
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number, and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments to reflect such Corporate Transaction shall also be made
to (i) the number and class of securities available for issuance under the Plan
following the consummation of such Corporate Transaction and (ii) the exercise
price payable per share under each outstanding option, provided the aggregate
exercise price payable for such securities shall remain the same.
E. The Plan Administrator shall have the discretion, exercisable at the
time the option is granted or at any time while the option remains outstanding,
to provide that any options which are assumed or replaced in the Corporate
Transaction and do not otherwise accelerate at that time shall automatically
accelerate (and any of the Corporation's outstanding repurchase rights which do
not otherwise terminate at the time of the Corporate Transaction shall
automatically terminate and the shares of Common Stock subject to those
terminated rights shall immediately vest in full) in the event the Optionee's
Service should subsequently terminate by reason of an Involuntary Termination
within eighteen (18) months following the effective date of such Corporate
Transaction. Any options so accelerated shall remain exercisable for
fully-vested shares until the earlier of (i) the expiration of the option term
or (ii) the expiration of the one (1)-year period measured from the effective
date of the Involuntary Termination.
F. The Plan Administrator shall have the discretion, exercisable either
at the time the option is granted or at any time while the option remains
outstanding to provide for the automatic acceleration of one or more outstanding
options (and the automatic termination of one or more outstanding repurchase
rights with the immediate vesting of the shares of Common Stock subject to
those rights) upon the occurrence of a Corporate Transaction, whether or not
those options are to be assumed or replaced (or those repurchase rights are to
be assigned) in the Corporate Transaction.
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G. The portion of my Incentive Option accelerated in connection with an
Corporate Transaction shall remain exercisable as an Incentive Option only to
the extent the applicable One Hundred Thousand Dollar ($100,000) limitation is
not exceeded. To the extent such dollar limitation is exceeded, the accelerated
portion of such option shall be exercisable as a Non-Statutory Option under the
Federal tax laws.
H. The grant of options under the Plan shall in no way affect the right
of the Corporation to adjust, reclassify, reorganize or otherwise change its
capital or business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Option Grant Program
and to grant in substitution new options covering the same or different number
of shares of Common Stock but with an exercise price per share based on the
Fair Market Value per share of Common Stock on the new grant date.
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ARTICLE THREE
STOCK ISSUANCE TERMS
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below.
A. Purchase Price.
1. The purchase price per share shall be fixed by the Plan
Administrator and may be less than, equal to or greater than the Fair Market
Value per share of Common Stock on the stock issuance date.
2. Subject to the provisions of Section I of Article Four, shares
of Common Stock may be issued under the Stock Issuance Program for one or both
of the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any
Parent or Subsidiary).
B. Vesting Provisions.
1. Shares of Common Stock issued under the Stock Issuance Program
may, in the discretion of the Plan Administrator, be fully and immediately
vested upon issuance or may vest in one or more installments over the
Participant's period of Service or upon attainment of specified performance
objectives.
2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization,
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combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's receipt of
consideration shall be issued subject to (i) the same vesting requirements
applicable to the Participant's unvested shares of Common Stock and (ii) such
escrow arrangements as the Plan Administrator shall deem appropriate.
3. The Participant shall have full stockholder rights with
respect to any shares of Common Stock issued to the Participant under the Stock
Issuance Program, whether or not the Participant's interest in those shares is
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further stockholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for consideration paid in cash or cash equivalent (including the
Participant's purchase-money indebtedness), the Corporation shall repay to the
Participant the cash consideration paid for the surrendered shares and shall
cancel the unpaid principal balance of any outstanding purchase-money note of
the Participant attributable to the surrendered shares.
5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock (or
other assets attributable thereto) which would otherwise occur upon the
cessation of the Participant's Service or the non-attainment of the performance
objectives applicable to such shares. Such waiver shall result in the immediate
vesting of the Participant's interest in the shares of Common Stock as to which
the waiver applies. Such waiver may be effected at any time, whether before or
after the Participant's cessation of Service or the attainment or non-attainment
of the applicable performance objectives.
C. First Refusal Rights. Until such time as the Common Stock is first
registered under Section 12(g) of the 1934 Act, the Corporation shall have the
right of first refusal with respect to any proposed disposition by the
Participant (or any successor in interest) of any shares of Common Stock issued
under the Stock Issuance Program. Such right of first refusal shall be
exercisable in accordance with
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the terms established by the Plan Administrator and set forth in the document
evidencing such right.
II. CORPORATE TRANSACTION
A. All of the outstanding repurchase rights under the Stock Issuance
Program shall terminate automatically, and all the shares of Common Stock
subject to those terminated rights shall immediately vest in full, in the event
of any Corporate Transaction, except to the extent (i) those repurchase rights
are assigned to the successor corporation (or parent thereof) in connection with
such Corporate Transaction or (ii) such accelerated vesting is precluded by
other limitations imposed in the Stock Issuance Agreement.
B. Any cancellation rights that are assigned in the Corporate
Transaction shall automatically terminate, and the shares of Common Stock
subject to those terminated rights shall immediately vest in full, in the event
the Participant's Service should subsequently terminate by reason of an
Involuntary Termination within eighteen (18) months following the effective date
of such Corporate Transaction.
C. The Plan Administrator shall have the discretion, exercisable either
at the time the unvested shares are issued or at any time while the
Corporation's repurchase right remains outstanding, to provide for the automatic
termination of one or more outstanding repurchase rights, and the immediate
vesting of the shares of Common Stock subject to those rights, upon the
occurrence of a Corporate Transaction, whether or not those repurchase rights
are assigned in connection with the Corporate Transaction.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held in
escrow by the Corporation until the Participant's interest in such shares vests
or may be issued directly to the Participant with restrictive legends on the
certificates evidencing those unvested shares.
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ARTICLE FOUR
MISCELLANEOUS
I. FINANCING
A. The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price or the purchase price for shares issued under the Plan
by delivering a promissory note payable in one or more installments. The terms
of any such promissory note (including the interest rate and the terms of
repayment) shall be established by the Plan Administrator in its sole
discretion. Promissory notes may be authorized with or without security or
collateral. In all events, the maximum credit available to the Optionee or
Participant may not exceed the sum of (i) the aggregate option exercise price or
purchase price payable for the purchased shares plus (ii) any Federal, state and
local income and employment tax liability incurred by the Optionee or the
Participant in connection with the option exercise or share purchase.
B. The Plan Administrator may, in its discretion, determine that one or
more such promissory notes shall be subject to forgiveness by the Corporation in
whole or in part upon such terms as the Plan Administrator may deem appropriate.
II. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective when adopted by the Board, but no
option granted under the Plan may be exercised, and no shares shall be issued
under the Plan, until the Plan is approved by the Corporation's stockholders. If
such stockholder approval is not obtained within twelve (12) months after the
date of the Board's adoption of the Plan, then all options previously granted
under the Plan shall terminate and cease to be outstanding, and no further
options shall be granted and no shares shall be issued under the Plan. Subject
to such limitation, the Plan Administrator may grant options and issue shares
under the Plan at any time after the effective date of the Plan and before the
date fixed herein for termination of the Plan.
B. The Plan shall terminate upon the earliest of (i) the expiration of
the ten (10)-year period measured from the date the Plan is adopted by the
Board, (ii) the date on which all shares available for issuance under the Plan
shall have been issued as all fully-vested shares or (iii) the termination of
all outstanding options in connection with a Corporate Transaction. Upon such
Plan termination, all options
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and unvested stock issuances outstanding under the Plan shall continue to have
full force and effect in accordance with the provisions of the documents
evidencing such options or issuances.
III. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects. However, no such amendment or
modification shall adversely affect any rights and obligations with respect to
options or unvested stock issuances at the time outstanding under the Plan,
unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.
B. Options to purchase shares of Common Stock may be granted under the
Plan and shares of Common Stock may be issued under the Plan that are in each
instance in excess of the number of shares then available for issuance under the
Plan, provided any excess shares actually issued under the Plan are held in
escrow until there is obtained stockholder approval of an amendment sufficiently
increasing the number of shares of Common Stock available for issuance under the
Plan. If such stockholder approval is not obtained within twelve (12) months
after the date the first such excess grants or issuances are made, then (i) any
unexercised options granted on the basis of such excess shares shall terminate
and cease to be outstanding and (ii) the Corporation shall promptly refund to
the Optionees and the Participants the exercise or purchase price paid for any
excess shares issued under the Plan and held in escrow, together with interest
(at the applicable Short Term Federal Rate) for the period the shares were held
in escrow, and such shares shall thereupon be automatically cancelled and cease
to be outstanding.
IV. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares of
Common Stock under the Plan shall be used for general corporate purposes.
V. WITHHOLDING
The Corporation's obligation to deliver shares of Common Stock upon the
exercise of any options or upon the issuance or vesting of such shares issued
under
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the Plan shall be subject to the satisfaction of all applicable Federal, state
and local income and employment tax withholding requirements.
VI. REGULATORY APPROVALS
The implementation of the Plan, the granting of any option under the
Plan and the issuance of any shares of Common Stock (i) upon the exercise of any
option or (ii) under the Stock Issuance Program shall be subject to the
Corporation's procurement of all approvals and permits required by regulatory
authorities having jurisdiction over the Plan, the options granted under it and
the shares of Common Stock issued pursuant to it.
VII. NO EMPLOYMENT OR SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
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APPENDIX
The following definitions shall be in effect under the Plan:
A. Board shall mean the Corporation's Board of Directors.
B. Code shall mean the Internal Revenue Code of 1986, as amended.
C. Committee shall mean a committee of one (1) or more Board members
appointed by the Board to exercise one or more administrative functions under
the Plan.
D. Common Stock shall mean the Corporation's common stock.
E. Corporate Transaction shall mean either of the following stockholder-
approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities are transferred to a
person or persons different from the persons holding those securities
immediately prior to such transaction, or
(ii) the sale, transfer or other disposition of an or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
F. Corporation shall mean Knowledge Discovery One, Inc., a Delaware
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Knowledge Discovery One, Inc., which shall by
appropriate action adopt the Plan.
G. Employee shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
H. Exercise Date shall mean the date on which the Corporation shall have
received written notice of the option exercise.
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I. Fair Market Value per share of common stock on any relevant date
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question, as such
price is reported by the National Association of Securities Dealers on
the Nasdaq National Market or any successor system. If there is no
closing selling price for the Common Stock on the date in question, then
the Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question on the Stock
Exchange determined by the Plan Administrator to be the primary market
for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no closing
selling price for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.
(iii) If the Common Stock is at the time neither listed on
any Stock Exchange nor traded on the Nasdaq National Market, then the
Fair Market Value shall be determined by the Plan Administrator after
taking into account such factors as the Plan Administrator shall deem
appropriate.
J. Incentive Option shall mean an option which satisfies the
requirements of Code Section 422.
K. Involuntary Termination shall mean the termination of the Service of
any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge
by the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A)
a change in his or her position with the Corporation which materially
reduces his or her level of responsibility, (B) a reduction in his or
her level of
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compensation (including base salary, fringe benefits and participation
in corporate-performance based bonus or incentive programs) by more than
fifteen percent (15%) or (C) a relocation of such individual's place of
employment by more than fifty (50) miles, provided and only if such
change, reduction or relocation is effected by the Corporation without
the individual's consent.
L. Misconduct shall mean the commission of any act of fraud,
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing definition
shall not be deemed to be inclusive of all the acts or ommissions which the
Corporation (or any Parent or Subsidiary) may consider as grounds for the
dismissal or discharge of any Optionee, Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).
M. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.
N. Non-Statutory Option shall mean an option not intended to satisfy the
requirements of Code Section 422.
O. Option Grant Program shall mean the option grant program in effect
under the Plan.
P. Optionee shall mean any person to whom an option is granted under the
Option Grant Program.
Q. Parent shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
R. Participant shall mean any person who is issued shares of Common
Stock under the Stock Issuance Program.
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S. Permanent Disability shall mean the inability of the optionee or the
Participant to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment expected to result in death
or to be of continuous duration of twelve (12) months or more.
T. Plan shall mean the Corporation's 1996 Stock Option/Stock Issuance
Plan, as set forth in this document.
U. Plan Administrator shall mean either the Board or the Committee, to
the extent the Committee is at the time responsible for the administration of
the Plan.
V. Service shall mean the provision of services to the Corporation (or
any Parent or Subsidiary) by a person in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant or stock issuance.
W. Stock Exchange shall mean either the American Stock Exchange or the
New York Stock Exchange.
X. Stock Issuance Agreement shall mean the agreement entered into by the
Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.
Y. Stock Issuance Program shall mean the stock issuance program in
effect Under the Plan.
Z. Subsidiary shall mean my corporation (other than the Corporation) in
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
AA. 10% Stockholder shall mean the owner of stock (as determined under
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
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KNOWLEDGE DISCOVERY ONE, INC.
STOCK OPTION AGREEMENT
RECITALS
A. The Board has adopted the Plan for the purpose of retaining the services of
selected Employees, non-employee members of the Board or of the board of
directors of any Parent or Subsidiary and consultants and other independent
advisors who provide services to the Corporation (or any Parent or Subsidiary).
B. Optionee is to render valuable services to the Corporation (or a Parent or
Subsidiary), and this Agreement is executed pursuant to, and is intended to
carry out the purposes of, the Plan in connection with the Corporation's grant
of an option to Optionee.
C. All capitalized terms in this Agreement shall have the meaning assigned to
them in the attached Appendix.
NOW, THEREFORE, it is hereby agreed as follows:
1. Grant of Option. The Corporation hereby grants to Optionee, as of the
Grant Date, an option to purchase up to the number of Option Shares specified in
the Grant Notice. The Option Shares shall be purchasable from time to time
during the option term specified in Paragraph 2 at the Exercise Price.
2. Option Term. This option shall have a term of ten (10) years measured
from the Grant Date and shall accordingly expire at the close of business on the
Expiration Date, unless sooner terminated in accordance with Paragraph 5, 6 or
17.
3. Limited Transferability. This option shall be neither transferable
nor assignable by Optionee other than by will or by the laws of descent and
distribution following Optionee's death and may be exercised, during Optionee's
lifetime, only by Optionee. However, if this option is designated a
Non-Statutory Option in the Grant Notice, then this option may, in connection
with Optionee's estate plan, be assigned in whole or in part during Optionee's
lifetime to one or more members of Optionee's immediate family members or to a
trust established exclusively for the benefit of one or more such family
members. The assigned portion may only be exercised by the person or persons who
acquire a proprietary interest in the option pursuant to the
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assignment. The terms applicable to the assigned portion shall be the same as
those in effect for this option immediately prior to such assignment and shall
be set forth in such documents issued to the assignee as the Plan Administrator
may deem appropriate.
4. Exercisability/Vesting.
(a) This option shall be immediately exercisable for any or all
of the Option Shares, whether or not the Option Shares are vested in accordance
with the Vesting Schedule, and shall remain so exercisable until the Expiration
Date or sooner termination of the option term under Paragraph 5, 6 or 17. Any
unvested Option Shares purchased under this option shall be subject to
repurchase by the Corporation, at the Exercise Price paid per share, upon
Optionee's cessation of Service prior to vesting in those Option Shares.
(b) Optionee shall, in accordance with the Vesting Schedule, vest
in the Option Shares in one or more installments over his or her period of
Service. Vesting in the Option Shares may be accelerated pursuant to the
provisions of Paragraph 6. In no event, however, shall any additional Option
Shares vest following Optionee's cessation of Service.
5. Cessation of Service. The option term specified in Paragraph 2 shall
terminate (and this option shall cease to be outstanding) prior to the
Expiration Date should any of the following provisions become applicable:
(i) Should Optionee cease to remain in Service for any
reason (other than death, Permanent Disability or Misconduct) while this
option is outstanding, then Optionee shall have a period of three (3)
months (commencing with the date of such cessation of Service) during
which to exercise this option, but in no event shall this option be
exercisable at any time after the Expiration Date.
(ii) Should Optionee die while this option is outstanding,
then the personal representative of Optionee's estate or the person or
persons to whom the option is transferred pursuant to Optionee's will or
in accordance with the laws of descent and distribution shall have the
right to exercise this option. Such right shall lapse and this option
shall cease to be outstanding upon the earlier of (A) the expiration of
the twelve (12) month period measured from the date of Optionee's death
or (B) the Expiration Date.
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(iii) Should Optionee cease Service by reason of Permanent
Disability while this option is outstanding, then Optionee shall have a
period of twelve (12) months (commencing with the date of such cessation
of Service) during which to exercise this option. In no event shall this
Option be exercisable at any time after the Expiration Date.
(iv) Should Optionee's Service be terminated for
Misconduct, then this option shall terminate immediately and cease to
remain outstanding.
(v) During the limited post-Service exercise period, this
option may not be exercised in the aggregate for more than the number of
Option Shares in which Optionee is, at the time of Optionee's cessation
of Service, vested in accordance with the Vesting Schedule. Upon the
expiration of such limited exercise period or (if earlier) upon the
Expiration Date, this option shall terminate and cease to be outstanding
for any vested Option Shares for which the option has not been
exercised. To the extent Optionee is not vested in the Option Shares at
the time of Optionee's cessation of Service, this option shall
immediately terminate and cease to be outstanding with respect to those
shares.
(vi) In the event of a Corporate Transaction, the
provisions of Paragraph 6 shall govern the period for which this option
is to remain exercisable following Optionee's cessation of Service and
shall supersede any provisions to the contrary in this paragraph.
6. Special Termination of Option.
(a) All the Option Shares subject to this option at the time of a
Corporate Transaction but not otherwise vested shall automatically vest and the
Corporation's repurchase rights with respect to those Option Shares shall
immediately terminate so that this option shall, immediately prior to the
effective date of the Corporate Transaction, become exercisable for all of the
Option Shares as fully-vested shares of Common Stock and may be exercised for
any or all of those Option Shares. No such accelerated vesting of the Option
Shares, however, shall occur if and to the extent: (i) this option is, in
connection with the Corporate Transaction, either to be assumed by the successor
corporation (or parent thereof) or to be replaced with a comparable option to
purchase shares of the capital stock of the successor corporation (or parent
thereof) and the Corporations repurchase rights with respect to the unvested
option shares are to be assigned to such successor corportion (or parent
thereof) or (ii) this option is to be replaced with a cash incentive program
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<PAGE> 24
of the successor corporation which preserves the spread existing on the unvested
Option Shares at the time of the Corporate Transaction (the excess of the Fair
Market Value of those Option Shares over the Exercise Price payable for such
shares) and provides for subsequent payout in accordance with the Vesting
Schedule. The determination of option comparability under clause (i) shall be
made by the Plan Administrator, and its determination shall be final, binding
and conclusive.
(b) Immediately following the Corporate Transaction, this option
shall terminate and cease to be outstanding, except to the extent assumed by the
successor corporation (or parent thereof) in connection with the Corporate
Transaction.
(c) If this option is assumed in connection with a Corporate
Transaction, then this option shall be appropriately adjusted, immediately after
such Corporate Transaction, to apply to the number and class of securities which
would have been issuable in consummation of such Corporate Transaction had the
option been exercised immediately prior to such Corporate Transaction, and
appropriate adjustments shall also be made to the Exercise Price, provided the
aggregate Exercise Price shall remain the same.
(d) Should there occur in Involuntary Termination of Optionee's
Service within eighteen (18) months following a Corporate Transaction in which
this option is assumed or replaced and the Corporation's repurchase rights with
respect to the unvested Option Shares are assigned, all the Option Shares at the
time subject to this option but not otherwise vested shall automatically vest
and the Corporation's repurchase rights with respect to those Option Shares
shall terminate so that this option shall immediately become exercisable for all
those Option Shares as fully- vested shares of Common Stock and may be exercised
for any or all of those vested Option Shares at any time prior to the earlier of
(i) the Expiration Date or (ii) the expiration of the one (1)-year period
measured from the date of such Involuntary Termination.
(e) This Agreement shall not in any way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
7. Adjustment in Option Shares. Should any change be made to the Common
Stock by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding
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Common Stock as a class without the Corporation's receipt of consideration,
appropriate adjustments shall be made to (i) the total number and/or class of
securities subject to this option and (ii) the Exercise Price in order to
reflect such change and thereby preclude a dilution or enlargement of benefits
hereunder.
8. Stockholder Rights. The holder of this option shall not have any
stockholder rights with respect to the Option Shares until such person shall
have exercised the option, paid the Exercise Price and become a holder of record
of the purchased shares.
9. Manner of Exercising Option.
(a) In order to exercise this option with respect to all or any
part of the Option Shares for which this option is at the time exercisable,
Optionee (or any other person or persons exercising the option) must take the
following actions:
(i) Execute and deliver to the Corporation a Purchase
Agreement for the Option Shares for which the option is exercised.
(ii) Pay the aggregate Exercise Price for the purchased
shares in one or more of the following forms:
(A) cash or check made payable to the Corporation; or
(B) a promissory note payable to the Corporation, but only
to the extent authorized by the Plan Administrator in accordance
with Paragraph 14.
Should the Common Stock be registered under Section 12(g) of the 1934
Act at the time the option is exercised, then the Exercise Price may also be
paid as follows:
(C) in shares of Common Stock held by Optionee (or any
other person or persons exercising the option) for the requisite
period necessary to avoid a charge to the Corporation's earnings
for financial reporting purposes and valued at Fair Market Value
on the Exercise Date; or
(D) to the extent the option is exercised for vested
Option Shares, through a special sale and remittance procedure
pursuant to
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<PAGE> 26
which Optionee (or any other person or persons exercising the
option) shall concurrently provide irrevocable written
instructions (I) to a Corporation-designated brokerage firm to
effect the immediate sale of the purchased shares and remit to
the Corporation, out of the sale proceeds available on the
settlement date, sufficient funds to cover the aggregate Exercise
Price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to
be withheld by the Corporation by reason of such exercise and
(II) to the Corporation to deliver the certificates for the
purchased shares directly to such brokerage firm in order to
complete the sale.
Except to the extent the sale and remittance procedure is
utilized in connection with the option exercise, payment of the
Exercise Price must accompany the Purchase Agreement delivered to
the Corporation in connection with the option exercise.
(iii) Furnish to the Corporation appropriate documentation
that the person or persons exercising the option (if other than
Optionee) have the right to exercise this option.
(iv) Execute and deliver to the Corporation such written
representations as may be requested by the Corporation in order for it
to comply with the applicable requirements of Federal and state
securities laws.
(v) Make appropriate arrangements with the Corporation (or
Parent or Subsidiary employing or retaining Optionee) for the
satisfaction of all Federal, state and local income and employment tax
withholding requirements applicable to the option exercise.
(b) As soon as practical after the Exercise Date, the Corporation
shall issue to or on behalf of Optionee (or any other person or persons
exercising this option) a certificate for the purchased Option Shares, with the
appropriate legends affixed thereto. To the extent any such Option Shares are
unvested, the certificates for those Option Shares shall be endorsed with an
appropriate legend evidencing the Corporation's repurchase rights and may be
held in escrow with the Corporation until such shares vest.
(c) In no event may this option be exercised for any fractional
shares.
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<PAGE> 27
10. REPURCHASE RIGHTS. ALL OPTION SHARES ACQUIRED UPON THE EXERCISE OF
THIS OPTION SHALL BE SUBJECT TO CERTAIN RIGHTS OF THE CORPORATION AND ITS
ASSIGNS TO REPURCHASE THOSE SHARES IN ACCORDANCE WITH THE TERMS SPECIFIED IN THE
PURCHASE AGREEMENT.
11. Compliance with Laws and Regulations.
(a) The exercise of this option and the issuance of the Option
Shares upon such exercise shall be subject to compliance by the Corporation and
Optionee with all applicable requirements of law relating thereto and with all
applicable regulations of any stock exchange (or the Nasdaq National Market, if
applicable) on which the Common Stock may be listed for trading at the time of
such exercise and issuance.
(b) The inability of the Corporation to obtain approval from any
regulatory body having authority deemed by the Corporation to be necessary to
the lawful issuance and sale of any Common Stock pursuant to this option shall
relieve the Corporation of any liability with respect to the non-issuance or
sale of the Common Stock as to which such approval shall not have been obtained.
The Corporation, however, shall use its best efforts to obtain all such
approvals.
12. Successors and Assigns. Except to the extent otherwise provided in
Paragraphs 3 and 6, the provisions of this Agreement shall inure to the benefit
of, and be binding upon, the Corporation and its successors and assigns and
Optionee, Optionee's assigns and the legal representatives, heirs and legatees
of Optionee's estate.
13. Notices. Any notice required to be given or delivered to the
Corporation under the terms of this Agreement shall be in writing and addressed
to the Corporation at its principal corporate offices. Any notice required to be
given or delivered to Optionee shall be in writing and addressed to Optionee at
the address indicated below Optionee's signature line on the Grant Notice. All
notices shall be deemed effective upon personal delivery or upon deposit in the
U.S. mail, postage prepaid and properly addressed to the party to be notified.
14. Financing. The Plan Administrator may, in its absolute discretion
and without any obligation to do so, permit Optionee to pay the Exercise Price
for the purchased Option Shares by delivering a full-recourse promissory note
payable to the Corporation. The terms of any such promissory note (including the
interest rate, the
7
<PAGE> 28
requirements for collateral and the terms of repayment) shall be established by
the Plan Administrator in its sole discretion.
15. Construction. This Agreement and the option evidenced hereby are
made and granted pursuant to the Plan and are in all respects limited by and
subject to the terms of the Plan. All decisions of the Plan Administrator with
respect to any question or issue arising under the Plan or this Agreement shall
be conclusive and binding on all persons having an interest in this option.
16. Governing Law. The interpretation, performance and enforcement of
this Agreement shall be governed by the laws of the State of Texas without
resort to that State's conflict-of-laws rules.
17. Stockholder Approval.
(a) The grant of this option is subject to approval of the Plan
by the Corporation's stockholders within twelve (12) months after the adoption
of the Plan by the Board. Notwithstanding any provision of this Agreement to the
contrary, this option may not be exercised in whole or in part until such
stockholder approval is obtained. In the event that such stockholder approval is
not obtained, then this option shall terminate in its entirety and Optionee
shall have no further rights to acquire any Option Shares hereunder.
(b) If the Option Shares covered by this Agreement exceed, as of
the Grant Date, the number of shares of Common Stock which may without
stockholder approval be issued under the Plan, then this option shall be void
with respect to such excess shares, unless stockholder approval of an amendment
sufficiently increasing the number of shares of Common Stock issuable under the
Plan is obtained in accordance with the provisions of the Plan.
18. Additional Terms Applicable to an Incentive Option. In the event
this option is designated an Incentive Option in the Grant Notice, the following
terms and conditions shall also apply to the grant:
(i) This option shall cease to qualify for favorable tax
treatment as an Incentive Option if (and to the extent) this option is
exercised for one or more Option Shares: (A) more than three (3) months
after the date Optionee ceases to be an Employee for any reason other
than death or
8
<PAGE> 29
Permanent Disability or (B) more than twelve (12) months after the date
Optionee ceases to be an Employee by reason of Permanent Disability.
(ii) This option shall not become exercisable in the
calendar year in which granted if (and to the extent) the aggregate Fair
Market Value (determined at the Grant Date) of the Common Stock for
which this option would otherwise first become exercisable in such
calendar year would, when added to the aggregate value (determined as of
the respective date or dates of grant) of the Common Stock and any other
securities for which one or more other Incentive Options granted to
Optionee prior to the Grant Date (whether under the Plan or any other
option plan of the Corporation or any Parent or Subsidiary) first become
exercisable during the same calendar year, exceed One Hundred Thousand
Dollars ($100,000) in the aggregate. To the extent the exercisability of
this option is deferred by reason of the foregoing limitation, the
deferred portion shall become exercisable in the first calendar year or
years thereafter in which the One Hundred Thousand Dollar ($100,000)
limitation of this Paragraph 18(ii) would not be contravened, but such
deferral shall in all events end immediately prior to the effective date
of a Corporate Transaction in which this option is not to be assumed or
the Optionee's Involuntary Termination in connection with a Corporate
Transaction, whereupon the option shall become immediately exercisable
as a Non-Statutory Option for the deferred portion of the Option Shares.
(iii) Should Optionee hold, in addition to this Option,
one or more other options to purchase Common Stock which become
exercisable for the first time in the same calendar year as this option,
then the foregoing limitations on the exercisability of such options as
Incentive Options shall be applied on the basis of the order in which
such options are granted.
9
<PAGE> 30
APPENDIX
The following definitions shall be in effect under the Agreement:
A. Agreement shall mean this Stock Option Agreement.
B. Board shall mean the Corporation's Board of Directors.
C. Code shall mean the Internal Revenue Code of 1986, as amended.
D. Common Stock shall mean the Corporation's common stock.
E. Corporate Transaction shall mean either of the following stockholder-
approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities am transferred to a
person or persons different from the persons holding those securities
immediately prior to such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the corporation.
F. Corporation shall mean Knowledge Discovery One, Inc., a Delaware corporation.
G. Employee shall mean an individual who is in the employ of the Corporation (or
any Parent or Subsidiary), subject to the control and direction of the employer
entity as to both the work to be performed and the manner and method of
performance.
H. Exercise Date shall mean the date on which the option shall have been
exercised in accordance with Paragraph 9 of the Agreement.
I. Exercise Price shall mean the exercise price per share as specified in the
Grant Notice.
10
<PAGE> 31
J. Expiration Date shall mean the date on which the option expires as specified
in the Grant Notice.
K. Fair Market Value per share of the Common Stock on any relevant date shall be
determined in accordance with the following provisions:
(iii) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question, as the
price is reported by the National Association of Securities Dealers on
the Nasdaq National Market or any successor system. If there is no
closing selling price for the Common Stock on the date in question, then
the Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.
(iv) If the Common Stork is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question on the Stock
Exchange determined by the Plan Administrator to be the primary market
for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no closing
selling price for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.
(v) If the Common Stock is at the time neither listed on
any Stock Exchange nor traded on the Nasdaq National Market, then the
Fair Market Value shall be determined by the Plan Administrator after
taking into account such factors as the Plan Administrator shall deem
appropriate.
L. Grant Date shall mean the date of grant of the option as specified in the
Grant Notice.
M. Grant Notice shall mean the Notice of Grant of Stock Option accompanying the
Agreement, pursuant to which Optionee has been informed of the basic terms of
the option evidenced hereby.
N. Incentive Option shall mean an option which satisfies the requirements of
Code Section 422.
11
<PAGE> 32
O. Involuntary Termination shall mean the termination of Optionee's Service
which occurs by reason of:
(vi) Optionee's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or
(vii) Optionee's voluntary resignation following (A) a
change in Optionee's position with the Corporation (or Parent or
Subsidiary employing Optionee) which materially reduces Optionee's level
of responsibility, (B) a reduction in Optionee's level of compensation
(including base salary, fringe benefits and participation in corporate
performance based bonus or incentive programs) by more than fifteen
percent (15%) or (C) a relocation of Optionee's place of employment by
more than fifty (50) miles, provided and only if such change, reduction
or relocation is effected by the Corporation without Optionee's consent.
P. Misconduct shall mean the commission of any act of fraud, embezzlement or
dishonesty by Optionee, any unauthorized use or disclosure by Optionee of
confidential information or trade secrets of the Corporation (or any Parent or
Subsidiary), or any other intentional misconduct by Optionee adversely affecting
the business or affairs of the Corporation (or any Parent or Subsidiary) in a
material manner. The foregoing definition shall not be deemed to be inclusive of
all the acts or omissions which the Corporation (or any Parent or Subsidiary)
may consider as grounds for the dismissal or discharge of Optionee or any other
individual in the Service of the Corporation (or any Parent or Subsidiary).
Q. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.
R. Non-Statutory Option shall mean an option not intended to satisfy the
requirements of Code Section 422.
S. Option Shares shall mean the number of shares of Common Stock subject to the
option as specified in the Grant Notice.
T. Optionee shall mean the person to whom the option is granted as specified in
the Grant Notice.
U. Parent shall mean any corporation (other than the Corporation) in an unbroken
chain of corporations ending with the Corporation, provided each corporation in
the unbroken chain (other than the Corporation) owns, at the time of
12
<PAGE> 33
the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
V. Permanent Disability shall mean the inability of Optionee to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment which is expected to result in death or has lasted or can be
expected to last for a continuous period of twelve (12) months or more.
W. Plan shall mean the Corporation's 1996 Stock Option/Stock Issuance Plan.
X. Plan Administrator shall mean either the Board or a committee of Board
members, to the extent the committee is at the time responsible for the
administration of the Plan.
Y. Purchase Agreement shall mean the stock purchase agreement in substantially
the form of Exhibit B to the Grant Notice.
Z. Service shall mean Optionee's performance of services for the Corporation (or
any Parent or Subsidiary) in the capacity of an Employee, a non-employee member
of the board of directors or a consultant or independent advisor.
AA. Stock Exchange shall mean the American Stock Exchange or the New York Stock
Exchange.
BB. Subsidiary shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
CC. Vesting Schedule shall mean the vesting schedule specified in the Grant
Notice, as such vesting schedule is subject to acceleration in the event of a
Corporate Transaction.
13
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES
Subsidiary Jurisdiction of Incorporation
- ---------- -----------------------------
Knowledge Discovery One, Inc. Delaware
Net Perceptions Limited United Kingdom
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated January 27, 2000, except as to Note 12, which is as of February 14,
2000, relating to the financial statements of Net Perceptions, Inc., which
appear in such Registration Statement. We also consent to the reference to us
under the heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 25, 2000
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated February 25, 2000, relating to the financial statements of
Knowledge Discovery One, Inc., which appears in such Registration Statement. We
also consent to the reference to us under the heading "Experts" in such
Registration Statement.
/s/ PricewaterhouseCoopers LLP
Austin, Texas
February 25, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NET
PERCEPTIONS' CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1999 AND THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 17,457
<SECURITIES> 6,317
<RECEIVABLES> 9,470
<ALLOWANCES> 672
<INVENTORY> 0
<CURRENT-ASSETS> 47,025
<PP&E> 5,947
<DEPRECIATION> 1,198
<TOTAL-ASSETS> 58,748
<CURRENT-LIABILITIES> 9,653
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 48,386
<TOTAL-LIABILITY-AND-EQUITY> 58,748
<SALES> 15,129
<TOTAL-REVENUES> 15,129
<CGS> 3,021
<TOTAL-COSTS> 25,513
<OTHER-EXPENSES> 1,366
<LOSS-PROVISION> 533,532
<INTEREST-EXPENSE> (212)
<INCOME-PRETAX> (12,039)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,039)
<EPS-BASIC> (0.78)
<EPS-DILUTED> 0
</TABLE>
