<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 25, 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
E.PIPHANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 7372 77-0443392
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
1900 SOUTH NORFOLK STREET, SUITE 310
SAN MATEO, CALIFORNIA 94403
(650) 356-3800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ROGER S. SIBONI
PRESIDENT AND CHIEF EXECUTIVE OFFICER
E.PIPHANY, INC.
1900 SOUTH NORFOLK STREET, SUITE 310
SAN MATEO, CALIFORNIA 94403
(650) 356-3800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
AARON J. ALTER, ESQ. STEVEN J. TONSFELDT, ESQ.
N. ANTHONY JEFFRIES, ESQ. SANJAY K. KHARE, ESQ.
WILSON SONSINI GOODRICH & ROSATI VENTURE LAW GROUP,
PROFESSIONAL CORPORATION A PROFESSIONAL CORPORATION
650 PAGE MILL ROAD 2800 SAND HILL ROAD
PALO ALTO, CA 94304 MENLO PARK, CA 94025
(650) 493-9300 (650) 854-4488
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable following the effectiveness of this registration
statement and upon the consummation of the merger described in the merger
agreement
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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(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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES TO AMOUNT TO BE AGGREGATE OFFERING AGGREGATE OFFERING AMOUNT OF
BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) PRICE(2) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------------
Common Stock $0.0001 par
value.................. 12,800,000 $10.0789 $129,010,369 $34,059
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</TABLE>
(1) Represents the maximum number of shares of the common stock of the
Registrant that may be issued to shareholders of Octane Software, Inc.
pursuant to the merger.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(f)(2) of the Securities Act of 1933, as amended,
based on the book value of Octane as of March 31, 2000.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION ACTING PURSUANT
TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
[LOGO]
Dear E.piphany stockholder:
You are cordially invited to attend a special meeting of the stockholders
of E.piphany, Inc. to be held at 9:00 a.m. local time, on May 31, 2000, at the
Hotel Sofitel located at 223 Twin Dolphin Drive, Redwood City, California 94065.
At the meeting, you will be asked to consider and vote upon the following
proposals:
1. To approve the issuance of shares of E.piphany common stock to
shareholders of Octane Software, Inc. in connection with the merger of a
wholly-owned subsidiary of E.piphany with Octane.
2. To transact such other business as may properly come before the special
meeting or at any postponements or adjournments of the special meeting.
The merger between E.piphany and Octane and related transactions are more
fully described in the proxy statement/prospectus and the annexes thereto,
including the merger agreement, accompanying this letter.
AFTER CAREFUL CONSIDERATION, YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY
APPROVED THE MERGER AND THE ISSUANCE OF E.PIPHANY SHARES IN THE MERGER, AND HAS
DETERMINED THESE TRANSACTIONS TO BE FAIR TO AND IN THE BEST INTERESTS OF
E.PIPHANY AND ITS STOCKHOLDERS. YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR
THE ISSUANCE OF E.PIPHANY SHARES IN THE MERGER.
Any action may be taken on any of the foregoing proposals at the special
meeting on the date specified above or on any date to which the special meeting
may properly be postponed or adjourned. Only stockholders of record at the close
of business on April 14, 2000 are entitled to notice of and to vote at the
special meeting or any postponement or adjournment of the meeting.
Your vote is very important. Whether or not you expect to attend the
meeting, please complete, date, sign and promptly return the accompanying proxy
in the enclosed postage paid envelope so that your shares may be represented at
the meeting. Returning the proxy does not deprive you of your right to attend
the meeting and vote your shares in person.
On behalf of the Board of Directors,
Roger S. Siboni
Chairman of the Board
and Chief Executive Officer
San Mateo, California
April , 2000
<PAGE> 3
[Octane Logo]
Dear Octane shareholder:
You are cordially invited to attend a special meeting of the shareholders
of Octane Software, Inc. to be held at 8:00 a.m. local time, on May 31, 2000 at
the offices of Octane, 2929 Campus Drive, San Mateo, CA 94403.
At the special meeting, you will be asked to:
1. Approve and adopt the merger agreement, dated March 14, 2000, pursuant
to which a wholly-owned subsidiary of E.piphany, Inc., will merge into
Octane, causing Octane to become a wholly-owned subsidiary of E.piphany,
and to approve such merger.
2. To approve the conversion of all outstanding shares of Octane preferred
stock into Octane common stock immediately prior to the merger.
3. To transact such other business as may properly come before the special
meeting or at any postponements or adjournments of the special meeting.
Pursuant to the merger agreement, each outstanding share of common stock of
Octane will be converted into the right to receive approximately 0.5 of one
share of the common stock of E.piphany. In addition, each outstanding option and
warrant to purchase Octane common stock will be deemed to constitute the right
to acquire, on the same terms and conditions, a number of shares of E.piphany
common stock and at a price based on the exchange ratio described above. Please
note that the exchange ratio is subject to change based on the actual number of
shares of Octane common stock, and rights to purchase Octane common stock,
outstanding on the date of the merger, as well as other factors.
YOUR BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND HAS DETERMINED
THAT THE MERGER AND THE CONVERSION OF THE PREFERRED STOCK IS IN THE BEST
INTERESTS OF OCTANE AND ITS SHAREHOLDERS. AFTER CAREFUL CONSIDERATION, THE BOARD
UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT, THE MERGER
AND THE CONVERSION OF THE PREFERRED STOCK.
The accompanying proxy statement/prospectus provides detailed information
concerning the proposed merger, the proposed conversion of Octane preferred
stock and additional information concerning E.piphany and Octane, which you are
urged to read carefully. The complete text of the merger agreement is attached
as Annex I to the proxy statement/prospectus.
Only shareholders of record as of the close of business on April 14, 2000
are entitled to notice of and to vote at the special meeting or any postponement
or adjournment of the meeting. It is important that your shares of Octane stock
be represented at the special meeting, regardless of the number of shares you
hold. The required vote of Octane shareholders for approval of the merger
agreement is based on the number of outstanding shares of Octane stock and not
the number of shares which are actually voted. Accordingly, the failure to
submit a proxy card or to vote in person at the special meeting and the
abstention from voting by a shareholder will each have the same effect as a vote
against approval of the merger agreement, the merger and the conversion of
preferred stock. Therefore, please complete, sign, date and return your proxy
card as soon as possible, whether or not you plan to attend the special meeting.
You may revoke your proxy at any time prior to its exercise by filing written
notice of such revocation with the Secretary of Octane or by signing and
delivering
<PAGE> 4
to such Secretary a proxy bearing a later date. In addition, you may attend the
special meeting and vote your shares in person if you wish, even though you have
previously returned your proxy.
OCTANE SHAREHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXIES.
THE OCTANE SHAREHOLDERS' TRANSMITTAL LETTER INCLUDED WITH THIS PROXY
STATEMENT/PROSPECTUS IS ONLY FOR USE AFTER THE MERGER HAS CLOSED. AFTER THE
MERGER IS COMPLETED, E.PIPHANY WILL SEND OCTANE SHAREHOLDERS WRITTEN NOTICE TO
SEND IN THEIR OCTANE STOCK CERTIFICATES IN EXCHANGE FOR E.PIPHANY STOCK
CERTIFICATES.
As a holder of Octane stock you have certain dissenters' rights with
respect to the proposed merger. In order to exercise such rights, you must vote
against approval of the merger agreement. Please note that a signed proxy which
does not vote against approval of the merger agreement will be voted for such
approval. Your dissenters' rights are governed by specific legal provisions
contained in Chapter 13 of the California Corporations Code. A summary of
certain provisions of Chapter 13 of the California Corporations Code pertaining
to the rights of dissenting shareholders in connection with the merger is
included in this proxy statement/prospectus in the section entitled "Dissenters'
Rights of Octane Shareholders." The complete text of Chapter 13 of the
California Corporations Code is set forth as Annex IV to this proxy
statement/prospectus.
On behalf of the Board of Directors,
Aditya (Tim) Guleri
Chairman of the Board of Directors and
Chief Executive Officer
San Mateo, California
April , 2000
<PAGE> 5
THE INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE AND
MAY BE CHANGED. E.PIPHANY MAY NOT SELL THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
IS EFFECTIVE. THIS PROXY STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THOSE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED APRIL 25, 2000
<TABLE>
<S> <C>
PROXY STATEMENT/PROSPECTUS PROXY STATEMENT
OF OF
E.PIPHANY, INC. OCTANE SOFTWARE, INC.
</TABLE>
The boards of directors of E.piphany, Inc. and Octane Software, Inc. have
agreed to merge a wholly-owned subsidiary of E.piphany with and into Octane,
causing Octane to become a wholly-owned subsidiary of E.piphany. The closing of
this merger is subject to the approvals of E.piphany's stockholders and Octane's
shareholders and certain other closing conditions.
Upon the completion of the merger, E.piphany will acquire each outstanding
share of Octane stock from Octane's shareholders in return for approximately 0.5
of a share of E.piphany common stock. Of this number, approximately 0.06 of a
share of E.piphany common stock will be placed into an escrow fund. In addition,
E.piphany will assume each outstanding option, warrant and other rights to
purchase Octane stock. The number of shares of E.piphany common stock for which
these options, warrants and other rights are exercisable, and the related
exercise price, will be adjusted based on the exchange ratio described above.
The exchange ratio is subject to change based on the actual number of shares of
Octane stock, and rights to purchase Octane stock, outstanding on the date of
the merger, as well as other factors.
Assuming this exchange ratio and based on the capitalization of Octane as
of March 31, 2000, the approximately 11,755,138 shares of E.piphany common stock
expected to be issued in the merger, excluding the 1,038,372 shares of E.piphany
common stock subject to stock options held by Octane optionholders and assumed
by E.piphany in the merger, would represent approximately 26.6% of the shares of
E.piphany common stock outstanding and subject to options immediately following
the merger. An aggregate of approximately 1,280,000 shares to be issued in the
merger will be placed into the escrow fund.
E.piphany common stock trades on the Nasdaq Stock Market under the symbol
"EPNY." On April 20, 2000 the closing price of E.piphany common stock was $72.25
per share.
------------------------
WE STRONGLY URGE YOU TO READ AND CONSIDER CAREFULLY THIS PROXY STATEMENT/
PROSPECTUS IN ITS ENTIRETY, INCLUDING THE MATTERS REFERRED TO UNDER "RISK
FACTORS" BEGINNING ON PAGE 16.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE E.PIPHANY COMMON STOCK TO BE ISSUED
IN THE MERGER OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS ACCURATE OR
ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this proxy statement/prospectus is April , 2000 and this
proxy statement/ prospectus and the accompanying proxy cards are first being
mailed to the stockholders of E.piphany and shareholders of Octane on or about
April , 2000.
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE E.PIPHANY/OCTANE MERGER..... 1
ADDITIONAL QUESTIONS AND ANSWERS ABOUT THE MERGER OF
INTEREST TO OCTANE EMPLOYEES.............................. 4
SUMMARY OF THE PROXY STATEMENT/PROSPECTUS................... 5
SELECTED HISTORICAL SUMMARY FINANCIAL INFORMATION........... 11
MARKET PRICE INFORMATION.................................... 15
RISK FACTORS................................................ 16
WHERE YOU CAN FIND MORE INFORMATION......................... 32
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE............. 33
TRADEMARKS.................................................. 33
THE E.PIPHANY SPECIAL MEETING............................... 34
THE OCTANE SPECIAL MEETING.................................. 36
DISSENTERS' RIGHTS OF OCTANE SHAREHOLDERS................... 38
THE MERGER AND RELATED TRANSACTIONS......................... 41
TERMS OF THE MERGER......................................... 58
OTHER AGREEMENTS............................................ 68
CONVERSION OF OCTANE PREFERRED STOCK........................ 69
COMPARISON OF CAPITAL STOCK................................. 71
E.PIPHANY BUSINESS.......................................... 86
E.PIPHANY SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA... 99
E.PIPHANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 101
E.PIPHANY MANAGEMENT........................................ 114
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
OF E.PIPHANY.............................................. 125
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 127
OCTANE BUSINESS............................................. 130
OCTANE SELECTED HISTORICAL FINANCIAL DATA................... 133
OCTANE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 134
OCTANE MANAGEMENT........................................... 140
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS
OF OCTANE................................................. 144
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 145
LEGAL MATTERS............................................... 147
EXPERTS..................................................... 147
CHANGE IN E.PIPHANY'S INDEPENDENT PUBLIC ACCOUNTANTS........ 148
CHANGE IN OCTANE'S INDEPENDENT PUBLIC ACCOUNTANTS........... 148
E.PIPHANY, INC. UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS...................................... 149
NOTES TO THE UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL INFORMATION..................................... 153
E.PIPHANY, INC. INDEX TO FINANCIAL STATEMENTS............... F-1
</TABLE>
Annex I Agreement and Plan of Reorganization
Annex II Form of Octane Voting Agreement
Annex III Form of E.piphany Voting Agreement
Annex IV Dissenters' Rights Statute -- Chapter 13 of California Corporations
Code
Annex V Opinion of Credit Suisse First Boston Corporation
i
<PAGE> 7
QUESTIONS AND ANSWERS
ABOUT THE E.PIPHANY/OCTANE MERGER
Q: WHY ARE THE TWO COMPANIES PROPOSING TO MERGE?
A: E.piphany and Octane believe that E.piphany's acquisition of Octane will
enable the combined company to:
- create a more complete software solution,
- respond more quickly and effectively to technological change, increased
competition and market demands,
- more effectively sell and market its solutions,
- increase market penetration by selling both companies' solutions through
both companies' sales and distribution channels, and
- create a unified applications platform.
Q: WHEN ARE THE SPECIAL STOCKHOLDERS' MEETINGS RELATING TO THE MERGER AND WHAT
SPECIFIC PROPOSALS WILL I BE ASKED TO CONSIDER?
A1: The Octane special shareholders' meeting will take place on May 31, 2000. At
the special meeting:
- Octane shareholders will be asked to approve the merger agreement and the
merger whereby a wholly-owned subsidiary of E.piphany will merge with and
into Octane, resulting in Octane shareholders becoming stockholders of
E.piphany, and
- Holders of Octane preferred stock will also be asked to approve the
automatic conversion of all Octane preferred stock into Octane common
stock immediately prior to the completion of the merger.
The Octane board of directors unanimously recommends voting in favor of these
proposals.
In addition, Octane shareholders will be asked to vote on any other matters
that properly come before the meeting.
A2: The E.piphany special stockholders' meeting will take place on May 31, 2000.
At the special meeting:
- E.piphany stockholders will be asked to approve the issuance of shares of
E.piphany common stock to shareholders of Octane in connection with the
merger.
The E.piphany board of directors unanimously recommends voting in favor of this
proposal.
In addition, E.piphany stockholders will be asked to vote on any other
matters that properly come before the meeting.
Q: IF I AM NOT GOING TO ATTEND THE STOCKHOLDERS' MEETING, SHOULD I RETURN MY
PROXY CARD INSTEAD?
A: Yes. Please fill out and sign your proxy card and return it in the enclosed
envelope as soon as possible. Returning your proxy card ensures that your
shares will be represented at the special meeting.
Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A1: If you are an Octane shareholder, send in a later-dated, signed proxy card
to Octane's Secretary before the special meeting or attend the special
meeting in person and vote.
A2: If you are an E.piphany stockholder, send in a later-dated, signed proxy
card to E.piphany's Secretary before the special meeting or attend the
special meeting in person and vote.
Q: SHOULD OCTANE SHAREHOLDERS SEND IN THEIR STOCK CERTIFICATES NOW?
A: No. Do not send in the letter of transmittal or your stock certificates
until after the merger has closed.
Q: WHAT DO I NEED TO DO NOW?
A: Please mail your signed proxy card in the enclosed return envelope as soon
as possible, so that your shares may be
1
<PAGE> 8
represented at the special meeting. In addition, you may attend the special
meeting in person, rather than signing and mailing your proxy card.
Q: HOW DO OCTANE'S OFFICERS AND DIRECTORS PLAN TO VOTE ON THE MERGER?
A: Octane's board of directors has unanimously approved the merger agreement,
the merger and the conversion of Octane preferred stock into Octane common
stock, and recommends that Octane's shareholders approve the merger
agreement, the merger and the conversion of Octane preferred stock into
Octane common stock. You should also be aware that Octane's executive
officers, directors, certain venture capital firms affiliated with the
directors and all other affiliates of Octane have already agreed to vote in
favor of the merger agreement, the merger and the conversion of Octane
preferred stock into Octane common stock at the Octane special meeting.
These shareholders possess enough votes to approve these matters even if no
other shareholder votes in favor of these matters.
Q: HOW DO E.PIPHANY'S OFFICERS AND DIRECTORS PLAN TO VOTE ON THE ISSUANCE OF
SHARES OF E.PIPHANY COMMON STOCK TO OCTANE SHAREHOLDERS?
A: E.piphany's board of directors has unanimously approved the merger
agreement, the merger, and the issuance of shares of E.piphany common stock
to Octane shareholders, and recommends that E.piphany's stockholders approve
the proposed issuance of E.piphany's common stock to Octane shareholders in
connection with the merger. You should also be aware that E.piphany's
executive officers, directors and certain venture capital firms affiliated
with some of these directors have already agreed to vote in favor of the
proposed issuance of E.piphany's shares of common stock. These stockholders
hold 31.1% of the total shares entitled to vote on these matters.
Q: WHAT WILL HOLDERS OF OCTANE COMMON STOCK RECEIVE AS A RESULT OF THE MERGER?
A: Based on Octane's current stock outstanding and stock subject to outstanding
options and warrants, each Octane shareholder will be entitled to receive
approximately 0.5 of a share of E.piphany common stock for each share of
Octane common stock held by the shareholder at the time of the merger.
For example, if you currently own 10,000 shares of Octane common stock, then
after the merger you will receive approximately 5,000 shares of E.piphany
common stock, subject to the escrow provisions described below.
Q: WHAT IF I CURRENTLY OWN SHARES OF OCTANE PREFERRED STOCK?
A. It is a condition of the merger that all shares of Octane preferred stock
convert into Octane common stock prior to the merger. One of the proposals
to be voted on at the Octane shareholders' special meeting will provide for
automatic conversion of Octane preferred stock if the requisite vote is
obtained. As a result of the conversion, each share of Octane preferred
stock will convert into one share of Octane common stock.
Q: HOW MANY SHARES OF E.PIPHANY COMMON STOCK WILL BE ISSUED IN THE MERGER?
A: E.piphany will issue approximately 12.8 million shares of its common stock
for all of Octane's outstanding shares of stock and shares underlying
options and warrants to purchase Octane stock.
Q: HOW MANY SHARES OF E.PIPHANY COMMON STOCK WILL OCTANE'S SHAREHOLDERS OWN
AFTER THE MERGER?
A: Based on the number of outstanding shares of Octane stock and shares
underlying
2
<PAGE> 9
options and warrants to purchase Octane stock as of March 31, 2000:
- After the merger, shareholders of Octane will own approximately 11,755,138
shares of E.piphany common stock.
- In addition, Octane's outstanding options and warrants will be assumed by
E.piphany and become options and warrants to purchase approximately
1,038,372 shares of E.piphany common stock.
These shares, excluding assumed options and warrants, will represent
approximately 26.6% of E.piphany's total common stock, including options and
warrants to purchase common stock, outstanding as of March 31, 2000.
Q: WHAT IS THE ESCROW FUND?
A: At the time of the merger, approximately 1.28 million shares of E.piphany
common stock, will be placed into the escrow fund. The escrow fund will be
held by U.S. Bank Trust, National Association.
The escrow fund is similar to a security deposit. Octane has made various
representations, warranties and covenants in the merger agreement. If these
representations and warranties are inaccurate or the covenants are breached,
E.piphany will be entitled to be compensated for its resulting losses from
the escrow fund.
Subject to any unresolved claims that E.piphany may have against the escrow
fund, shares of E.piphany common stock will be released from escrow to
Octane shareholders soon after the one year anniversary of the closing of
the merger.
Q: WHO IS THE OCTANE INVESTOR REPRESENTATIVE?
A: Octane has appointed David Strohm, a director of Octane and a general
partner of Greylock Management Corporation, Octane's largest shareholder, as
the securityholder representative for the Octane shareholders. As such, Mr.
Strohm will represent your interests after the merger and will be entitled
to make certain decisions regarding the escrow fund. By approving the merger
agreement, you will consent to the appointment of Mr. Strohm as your
representative.
Q: ARE OCTANE SHAREHOLDERS FREE TO IMMEDIATELY RESELL THE E.PIPHANY COMMON
STOCK RECEIVED IN THE MERGER?
A: Yes. However, Octane's executive officers, directors and affiliates and
their respective affiliates will be able to resell their common stock only
if they comply with certain securities laws that will impose additional
restrictions on their resales.
Q: WILL OCTANE SHAREHOLDERS RECEIVE FRACTIONAL SHARES AS A RESULT OF THE
MERGER?
A: No. All fractional shares of E.piphany common stock will be rounded down to
the nearest whole share, and Octane shareholders who are entitled to receive
less than 200 shares of E.piphany common stock will receive a cash payment
in lieu of any fractional share equal to the fraction multiplied by $192.85.
Q: WHAT ARE THE TAX CONSEQUENCES TO OCTANE SHAREHOLDERS OF THE MERGER?
A: The merger is intended to be treated as a tax-free reorganization for
federal income tax purposes. If the merger qualifies as a reorganization,
Octane shareholders generally will not recognize gain or loss on the
exchange of their stock in the merger. Tax matters, however, are very
complicated and the tax consequences of the merger to you will depend on the
facts of your particular situation. We encourage you to contact your tax
advisors to determine the tax consequences of the merger to you. To review
the tax consequences to Octane shareholders in greater detail, see the
section entitled "The Merger and Related Agreements -- Certain United States
Federal Income Tax Considerations" in this proxy statement/prospectus.
3
<PAGE> 10
Q: DO OCTANE SHAREHOLDERS HAVE DISSENTERS' RIGHTS IN CONNECTION WITH THE
MERGER?
A: Yes. Octane shareholders are entitled to dissenters' rights in connection
with the merger. These rights are described in the section entitled
"Dissenters' Rights of Octane Shareholders" in this proxy
statement/prospectus.
Q: WILL AN OCTANE SHAREHOLDER'S RIGHTS AS AN E.PIPHANY STOCKHOLDER BE DIFFERENT
THAN AN OCTANE SHAREHOLDER'S RIGHTS AS AN OCTANE SHAREHOLDER?
A: Yes. At the time of the merger and upon the exchange of Octane common stock
for E.piphany common stock, each Octane shareholder will become an E.piphany
stockholder. There are important differences between the rights of
shareholders of Octane and stockholders of E.piphany. Please carefully
review the description of these differences in the section entitled
"Comparison of Capital Stock" in this proxy statement/prospectus.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: E.piphany and Octane expect to complete the merger immediately after the
Octane and E.piphany special meetings on May 31, 2000.
Q: WHO SHOULD I CALL WITH QUESTIONS?
A: If you have any questions about the merger, please call James Doehrman, the
Senior Vice President and Chief Financial Officer of Octane, at (650)
295-6200 or Todd Friedman, the Director of Investor Relations of E.piphany
at (650) 356-3800, as appropriate.
ADDITIONAL QUESTIONS AND ANSWERS ABOUT THE MERGER
OF INTEREST TO OCTANE EMPLOYEES
Q: WHAT WILL HAPPEN TO EMPLOYEE STOCK OPTIONS HELD BY OCTANE EMPLOYEES?
A: All outstanding options to purchase shares of Octane common stock under
Octane's 1997 Stock Option Plan, 2000 Nonstatutory Stock Option Plan and
2000 Pennsylvania Plan, whether or not exercisable, will be assumed by
E.piphany and be generally subject to the same terms and conditions
governing outstanding Octane options immediately prior to the completion of
the merger, except that the number of E.piphany common shares into which
each outstanding Octane option will be exercisable and the exercise price
will be appropriately adjusted to reflect the ratio of E.piphany common
stock issuable in exchange for Octane common stock pursuant to the merger
agreement.
Q: MAY AN OCTANE EMPLOYEE EXERCISE OCTANE STOCK OPTIONS BETWEEN NOW AND THE
COMPLETION OF THE MERGER?
A: Yes. Any shares you receive by exercise of stock options prior to completion
of the merger will be exchanged in the merger and subject to the escrow
provisions described above.
4
<PAGE> 11
SUMMARY OF THE PROXY STATEMENT/PROSPECTUS
This proxy statement/prospectus pertains to the merger of a wholly-owned
subsidiary of E.piphany with and into Octane, and is being sent to the holders
of capital stock of both companies. This summary may not contain all of the
information that is important to you. You should read carefully this entire
document and the other documents referenced in it for a more complete
understanding of the merger. In particular, you should read the documents
attached to this proxy statement/prospectus, including the merger agreement
which is attached hereto as Annex I.
THE COMPANIES
E.piphany, Inc. E.piphany develops and markets software that companies can
use to establish, maintain and continually improve customer relationships across
both Internet and traditional sales, marketing and distribution channels. The
E.piphany E.4 System is an integrated set of software solutions that provide
capabilities for analysis of customer data and marketing campaign management.
Companies can implement the E.piphany E.4 System to collect and analyze data
from their existing software systems and from third party data providers to
profile their customers' characteristics and preferences. Business users within
these companies can then act on this information by using the Epiphany E.4
System to design and execute marketing campaigns as well as customize products
and services. The principal executive offices of E.piphany are located at 1900
South Norfolk Street, Suite 310, San Mateo, California 94403 and the telephone
number at that location is (650) 356-3800.
Octane Software, Inc. Octane Software, Inc. develops and markets customer
care software called Internet relationship management software. Octane's
Internet relationship management applications are 100 percent Internet-based and
enable businesses to acquire, build and sustain long-term, loyal customer
relationships. Octane's products facilitate customer interactions across
multiple channels of communication, including Internet, email, text chat, phone
and fax technologies. Covering both automated and human-assisted capabilities,
Octane's products can collect, consolidate, analyze and distribute customer
information captured across multiple communication media to provide a complete
view of the customer. Octane's principal executive offices are located at 2929
Campus Drive #101, San Mateo, California 94403, and the telephone number at that
location is (650) 295-6200.
Orchid Acquisition Corporation. Orchid Acquisition Corporation is a
wholly-owned subsidiary of E.piphany and is a California corporation recently
organized by E.piphany for the purpose of effecting the merger. Orchid
Acquisition Corporation has no material assets and has not engaged in any
activities except in connection with the merger.
SPECIAL MEETING OF STOCKHOLDERS OF E.PIPHANY
Date, Time, Place and Purpose. The date, time and place of the special
meeting are as follows:
MAY 31, 2000
9:00 A.M. LOCAL TIME
HOTEL SOFITEL
223 TWIN DOLPHIN DRIVE
REDWOOD CITY, CA 94065
At the special meeting:
- E.piphany stockholders will be asked to approve the issuance of shares of
E.piphany common stock to shareholders of Octane in connection with the
merger of a wholly-owned subsidiary of E.piphany with Octane.
Holders of E.piphany stock may also consider and vote upon such other
matters as may be properly brought before the special meeting.
Record Date. Only E.piphany stockholders of record at the close of business
on the E.piphany record date, April 14, 2000, are entitled to notice of and to
vote at the special meeting.
5
<PAGE> 12
SPECIAL MEETING OF SHAREHOLDERS OF OCTANE
Date, Time, Place and Purpose. The date, time and place of the Octane
special meeting are as follows:
MAY 31, 2000
8:00 A.M. LOCAL TIME
OCTANE SOFTWARE, INC.
2929 CAMPUS DRIVE
SAN MATEO, CA 94403
At the special meeting:
- Octane shareholders will be asked to approve and adopt the merger
agreement, dated March 14, 2000, pursuant to which a wholly-owned
subsidiary of E.piphany, Inc., will merge into Octane, causing Octane to
become a wholly-owned subsidiary of E.piphany, and to approve such
merger, and
- Octane shareholders will be asked to approve the conversion of all
outstanding shares of Octane preferred stock into Octane common stock
immediately prior to the merger.
Holders of Octane stock may also consider and vote upon such other matters
as may be properly brought before the Octane special meeting.
Record Date. Only Octane shareholders of record at the close of business on
the Octane record date, April 14, 2000, are entitled to notice of and to vote at
the Octane special meeting.
APPROVAL OF THE MERGER AND OTHER MATTERS
E.piphany Required Vote. Under the rules of the Nasdaq Stock Market,
approval of the issuance of shares of E.piphany common stock to Octane
shareholders in connection with the merger requires the affirmative vote of
holders of a majority of the shares of E.piphany common stock voting on this
proposal.
All E.piphany executive officers, directors and certain of their affiliates
have agreed to vote all shares over which they exercise voting control for the
approval of The issuance of shares of E.piphany common stock to Octane
shareholders in connection with the merger. As of April 14, 2000, there were 334
stockholders of record of E.piphany common stock, and a substantially greater
number of beneficial owners, and 32,444,364 shares of E.piphany common stock
outstanding.
Recommendation of the E.piphany Board of Directors. The E.piphany board of
directors has unanimously approved the merger agreement, the merger and the
issuance of shares of E.piphany common stock to Octane shareholders in
connection with the merger, and believes that the merger is fair to, and in the
best interests of, E.piphany and its stockholders. The E.piphany board of
directors, therefore, unanimously recommends that holders of E.piphany stock
vote FOR approval of the proposed issuance of shares of E.piphany common stock
to Octane shareholders.
Opinion of E.piphany's Financial Advisor. E.piphany's financial advisor,
Credit Suisse First Boston, has delivered a written opinion to the E.piphany
board of directors as to the fairness, from a financial point of view, to
E.piphany of the consideration provided for in the merger, which for purposes of
Credit Suisse First Boston's opinion was defined as the aggregate number of
shares of E.piphany common stock and options, warrants and other rights to
purchase E.piphany common stock to be issued to Octane shareholders in the
merger. The full text of Credit Suisse First Boston's written opinion is
attached to this document as Annex V. We encourage you to read this opinion
carefully in its entirety for a description of the procedures followed,
assumptions made, matters considered and limitations on the review undertaken.
CREDIT SUISSE FIRST BOSTON'S OPINION IS DIRECTED TO THE E.PIPHANY BOARD OF
DIRECTORS AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY E.PIPHANY STOCKHOLDER
OR ANY OCTANE SHAREHOLDER AS TO ANY MATTER RELATING TO THE MERGER.
6
<PAGE> 13
Octane Required Vote. Under applicable California law and the charter
documents of Octane, approval of the merger requires the affirmative vote of
holders of:
- a majority of the outstanding shares of Octane common stock,
- a majority of the outstanding shares of Octane preferred stock, and
- a majority of all outstanding shares of Octane common stock and preferred
stock, voting together on an as-converted to common stock basis.
In addition to the merger and the merger agreement, the holders of Octane
preferred stock are being asked to approve the automatic conversion of the
Octane preferred stock into Octane common stock effective immediately prior to
the merger. Approval of the preferred stock conversion requires the affirmative
vote of the holders of 66 2/3% of the outstanding shares of Octane preferred
stock voting together.
All Octane executive officers, directors, venture capital firms affiliated
with the directors and all other affiliates have agreed to vote all shares over
which they exercise voting control for the approval of the merger agreement, the
merger and conversion of the preferred stock.
As of April 14, 2000, there were:
- 214 shareholders of record of Octane common stock and 9,729,189 shares of
Octane common stock outstanding,
- 60 shareholders of record of Octane preferred stock and 12,951,320 shares
of Octane preferred stock outstanding,
- 271 shareholders of record of Octane common stock and preferred stock and
22,680,509 shares of Octane common stock and preferred stock outstanding
on an as-converted to common stock basis.
Recommendation of the Octane Board of Directors. The Octane board of
directors has unanimously approved the merger agreement, the merger and the
conversion of preferred stock and believes that the merger agreement, the merger
and the conversion of preferred stock is fair to, and in the best interests of,
Octane and its shareholders. The Octane board of directors, therefore,
unanimously recommends that holders of Octane stock vote FOR approval of the
merger agreement, the merger and the conversion of preferred stock.
Interests of Octane Officers and Directors in the Merger. In considering
the Octane board of directors' recommendation that you approve the merger
agreement, the merger and the conversion of preferred stock, you should note
that Octane's officers and directors have interests in the merger that are
different from, or in addition to, your interests. Specifically, as a result of
or in connection with the merger:
- certain Octane officers and directors will become officers of E.piphany,
and
- the vesting of some of the stock and stock options held by Octane's
officers and directors will accelerate as a result of the merger.
As a result of, or in connection with, the merger Octane's directors and
officers could be more likely to vote to approve the merger agreement, the
merger and the conversion of preferred stock than Octane shareholders generally.
THE MERGER AND MERGER AGREEMENT
Effective Time of the Merger. The merger will become effective upon the
effectiveness of the filing of articles of merger with the Secretary of State of
California. Assuming all conditions to the merger are met or waived prior
thereto, it is anticipated that the closing of the merger will be on or about
May 31, 2000.
Effect of the Merger. At the closing of the merger, Orchid Acquisition
Corporation, a wholly-owned subsidiary of E.piphany, will be merged with and
into Octane, the separate corporate existence of Orchid Acquisition Corporation
will cease and Octane will continue as the surviving corporation and as a
wholly-owned subsidiary of E.piphany.
Subject to the approval of the holders of Octane preferred stock, all
shares of Octane preferred stock will be converted into Octane common stock
immediately prior to the merger.
7
<PAGE> 14
As of the closing of the merger, by virtue of the merger and without any
action on the part of Orchid Acquisition Corporation, Octane or the holder of
any shares of Octane capital stock, the following will occur in accordance with
the terms and conditions of the merger agreement:
- All outstanding shares of Octane common stock will be converted into the
right to receive approximately 0.5 of a share of E.piphany common stock,
and
- All outstanding options, warrants and other rights to purchase Octane
capital stock will be assumed by E.piphany and will become options,
rights and warrants to purchase E.piphany common stock. The exercise
price and number of shares of E.piphany common stock for which they are
convertible will be adjusted to reflect the exchange ratio of
approximately 0.5 of a share of E.piphany common stock for each share of
Octane common stock.
Escrow Fund. In connection with the merger, approximately 1.28 million
shares of E.piphany common stock issuable in connection with the merger will be
placed in escrow with U.S. Bank Trust, National Association. Each Octane
shareholder will be deemed to have contributed into the escrow fund in
proportion to the aggregate number of shares of E.piphany common stock that such
shareholder would otherwise have been entitled under the merger agreement. The
escrow fund will be available to compensate E.piphany for any losses as a result
of any inaccuracy or breach of a representation or warranty of Octane contained
in the merger agreement or any failure to comply with any covenant contained in
the merger agreement. E.piphany may not receive any shares from the escrow fund
for a breach of a representation, warranty or covenant unless and until
E.piphany suffers cumulative losses in excess of $1.75 million ($500,000 in the
event of representations, warranties or covenants related to intellectual
property issues). Subject to any unresolved claims that E.piphany may have
against the escrow fund, shares of E.piphany common stock will be released from
escrow to Octane shareholders soon after the one year anniversary of the closing
of the merger.
Conduct Prior to the Merger. Octane has generally agreed to operate its
business in the ordinary course and consistent with past practice prior to the
merger. Octane has also agreed not to initiate or engage in discussions
regarding a business combination with any party other than E.piphany unless and
until the merger agreement is terminated.
Conditions to the Merger. Consummation of the merger is subject to the
satisfaction of various conditions, including:
- approval of the issuance of shares of E.piphany common stock to Octane
shareholders in connection with the merger by the requisite vote of the
E.piphany stockholders,
- approval of the merger by the requisite vote of the Octane shareholders,
- the conversion of all Octane preferred stock into Octane common stock,
- the representations and warranties of each of the parties to the merger
agreement being materially true and correct immediately prior to the
closing of the merger,
- there being no restraining orders, injunctions or other orders preventing
the consummation of the merger,
- no more than 5% of the outstanding shares of Octane capital stock having
given notice of an intent to exercise dissenters' rights,
- selected Octane employees having amended their common stock purchase
agreements with Octane and entered into new employment agreements with
E.piphany immediately prior to the closing of the merger,
- at least eighty percent (80%) of Octane's sales, services and technical
and engineering employees, and each of Aditya (Tim) Guleri, Kira Makagon,
Robert Loughan, Robert Gryphon and William Walsh, remaining Octane
8
<PAGE> 15
employees immediately prior to the closing of the merger, and
- there having been no material adverse change in Octane's or E.piphany's
condition.
Termination. The merger agreement may be terminated under certain
circumstances, including:
- by mutual written consent of E.piphany and Octane,
- by either E.piphany or Octane if the other party commits certain breaches
of representations, warranties or covenants contained in the merger
agreement,
- by either E.piphany or Octane if the other suffers a material adverse
change prior to the merger, or
- if the merger is not consummated on or before October 15, 2000.
Conduct of the Combined Companies Following the Merger. E.piphany currently
plans to maintain the operations of Octane as an operating division of E.piphany
following the merger.
RELATED AGREEMENTS
Employment and Noncompetition Agreements. In connection with the merger,
the following Octane employees agreed to enter into employment and
noncompetition agreements with E.piphany:
- Aditya (Tim) Guleri, chairman and chief executive officer,
- William Walsh, president and chief operating officer,
- Kira Makagon, director, senior vice president products, and chief
technology officer,
- James Doehrman, senior vice president finance and administration, chief
financial officer and assistant secretary,
- Robert Loughan, senior vice president worldwide sales,
- Robert Gryphon, vice president product planning,
- Todd Rowe, vice president business development,
- Andrew Sherman, vice president and general counsel,
- Gary Schaumburg, vice president professional services group, and
- Manu Kumar, vice president Octane Interactive.
These employment and noncompetition agreements provide that until the
second anniversary of the merger, the employee is prohibited from engaging in a
business that is competitive with E.piphany or its subsidiaries. In addition,
until the later of the second anniversary of the merger or the first anniversary
of the termination of his or her employment, the employee is prohibited from
hiring, soliciting or inducing any employees of E.piphany to leave E.piphany's
employment or diverting the business of any customers of E.piphany.
Octane Voting Agreements. All Octane executive officers, directors, venture
capital firms affiliated with the directors and all other affiliates have
entered into voting agreements with E.piphany. Under the voting agreements, such
persons have agreed to vote in favor of approval of the merger agreement, the
merger and the conversion of the Octane preferred stock into Octane common stock
effective immediately prior to the consummation of the merger.
E.piphany Voting Agreements. The E.piphany executive officers, directors
and certain of their affiliates have also entered into voting agreements with
Octane. Under the E.piphany voting agreements, such persons have agreed to vote
in favor of the issuance of shares of E.piphany common stock to Octane
shareholders in connection with the merger.
Affiliate Agreements. All Octane executive officers, directors and
affiliates and their respective affiliates have entered into agreements with
E.piphany restricting the sale, transfer or other
9
<PAGE> 16
disposition of the shares of E.piphany common stock issued to such affiliate in
connection with the merger or otherwise held by such affiliate, other than in
compliance with the requirements of the federal securities laws.
Addenda to Common Stock Purchase Agreements. Each of Mr. Walsh, Ms.
Makagon, Mr. Loughan, Mr. Gryphon, Mr. Guleri, Mr. Doehrman, Mr. Rowe, Mr.
Sherman and Mr. Schaumburg have entered into an addendum to his or her common
stock purchase agreement or option agreement, as applicable, with Octane
modifying the vesting of the common stock that he or she purchased under, or is
subject to, such agreement.
OTHER CONSIDERATIONS
Market Price Data. E.piphany common stock has been traded on the Nasdaq
Stock Market's National Market under the symbol "EPNY" since E.piphany's initial
public offering in September 1999. On March 14, 2000, the last trading day
before the announcement by E.piphany and Octane that they had signed the merger
agreement, the closing price of E.piphany common stock as reported on the Nasdaq
Stock Market's National Market was $248.94 per share. On April 20, 2000, the
closing price of E.piphany common stock as reported on the Nasdaq Stock Market's
National Market was $72.25. There can be no assurance as to the actual price of
E.piphany common stock prior to, at, or at any time following the closing of the
merger.
No established trading market exists for Octane stock.
Certain Federal Income Tax Considerations. The merger is intended to
qualify as a reorganization under Section 368(a) of the Internal Revenue Code.
If the merger so qualifies, no gain or loss will generally be recognized by the
holders of shares of Octane stock on the exchange of their shares of Octane
stock for shares of E.piphany common stock. All Octane shareholders should read
carefully the discussion in the "The Merger and Related Transactions -- Certain
United States Federal Income Tax Considerations" section of this proxy
statement/prospectus. FURTHER, ALL OCTANE SHAREHOLDERS ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS AS TO THE TAX CONSEQUENCES OF THE MERGER TO THEM.
Accounting Treatment. E.piphany intends to account for the merger as a
purchase for financial reporting purposes in accordance with generally accepted
accounting principles. See the sections entitled "The Merger and Related
Transactions -- Accounting Treatment" and "E.piphany Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Octane Acquisition"
in this proxy statement/prospectus.
Adjustments to Exchange Ratio. The number of shares of E.piphany common
stock issuable in the merger, and the resulting exchange ratio, are subject to
adjustment in the event that E.piphany effects a stock split, stock dividend,
cash dividend, distribution, reorganization or recapitalization prior to the
merger.
Regulatory Approvals. As required under federal antitrust law, E.piphany
and Octane have notified the Department of Justice and Federal Trade Commission
of the proposed merger. If neither of these agencies request additional
information concerning the merger or object to the merger within thirty days of
the notice, E.piphany and Octane may proceed with the merger.
Dissenters' Rights. Holders of Octane stock who do not vote in favor of the
merger may, under certain circumstances and by following procedures prescribed
by California law, exercise dissenters' rights and receive cash for their shares
of Octane stock. A dissenting shareholder of Octane must follow the appropriate
procedures under California law or he or she will lose such rights. See the
section entitled "Dissenters' Rights of Octane Shareholders" in this proxy
statement/prospectus.
10
<PAGE> 17
SELECTED HISTORICAL SUMMARY FINANCIAL INFORMATION
The following selected historical summary financial information of
E.piphany and Octane has been derived from their respective audited and
unaudited consolidated historical financial statements. The consolidated
financial statements for E.piphany for the three fiscal years ended December 31,
1999 and for Octane for the two fiscal years ended December 31, 1999 are
included elsewhere in this proxy statement/prospectus. The selected historical
consolidated financial information as of March 31, 2000, and for the three month
periods ended March 31, 1999 and 2000 for E.piphany and Octane has been derived
from the unaudited consolidated financial statements of E.piphany and Octane as
of and for such periods which are included elsewhere in this proxy
statement/prospectus, and which, in the opinion of E.piphany's and Octane's
respective management, reflect all adjustments necessary for the fair
presentation of this unaudited interim financial information. The results of
operations for these interim periods are not necessarily indicative of the
results to be expected for the entire year.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
----------------------------------------- ENDED MARCH 31,
PRO FORMA ------------------
1997(1) 1998 1999 1999(2) 1999 2000
E.PIPHANY, INC. ------- -------- -------- --------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.............................. $ -- $ 3,377 $ 19,182 $ 23,890 $ 1,894 $ 14,415
Cost of revenues............................ -- 1,400 9,349 11,051 832 6,129
Gross profit................................ -- 1,977 9,833 12,839 1,062 8,286
In-process research and development
charge.................................... -- -- -- -- -- 22,000
Amortization of goodwill and purchased
intangibles............................... -- -- -- 159,773 -- 39,943
Stock-based compensation.................... 1 799 2,929 4,311 603 477
Loss from operations........................ (3,220) (10,613) (23,473) (197,373) (4,054) (71,361)
Net loss.................................... (3,149) (10,330) (22,390) (196,033) (3,959) (66,968)
======= ======== ======== ========= ======= ========
Basic and diluted net loss per share........ $ (2.90) $ (4.49) $ (2.19) $ (18.89) $ (0.84) $ (2.35)
======= ======== ======== ========= ======= ========
Shares used in computing basic and diluted
net loss per share........................ 1,087 2,299 10,247 10,375 4,733 28,452
======= ======== ======== ========= ======= ========
Pro forma basic and diluted net loss per
share (unaudited)(3)...................... $ (1.07) $ (1.23) $ (9.53) $ (0.26) $ (2.35)
======== ======== ========= ======= ========
Shares used in computing pro forma basic and
diluted net loss per share
(unaudited)(3)............................ 9,694 18,201 20,568 15,355 28,452
======== ======== ========= ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1997 1998 1999 2000
---- ------- ------- -----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments......... $369 $13,595 $81,010 $424,720
Working capital........................................... 131 12,601 78,351 413,144
Total assets.............................................. 801 16,364 93,586 883,866
Long-term obligations, net of current portion............. -- 333 7,824 790
Total stockholders' equity................................ 468 13,440 74,642 858,745
</TABLE>
- ---------------
(1) The statement of operations for the year ended December 31, 1997 is
presented for the period from inception in November 1996 to December 31,
1997. Operating expenses totaled $12,000 for the period from inception in
November 1996 to December 31, 1996.
(2) The pro forma statement of operations data combines the statements of
operations for E.piphany and RightPoint Software, Inc., which was acquired
by E.piphany in January 2000, for the twelve months ended December 31, 1999
as if the acquisition of RightPoint took place on January 1, 1999.
(3) Pro forma per share amounts are computed as if the preferred shares of
E.piphany were converted to common stock from their date of issuance.
11
<PAGE> 18
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------- -------------------
1998 1999 1999 2000
OCTANE SOFTWARE, INC. ------- -------- ------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues............................. $ 2,938 $ 3,482 $ 879 $ 3,502
Cost of revenues........................... 1,651 1,663 570 1,531
Gross profit............................... 1,287 1,819 309 1,971
Stock-based compensation................... -- 1,219 95 4,433
Loss from operations....................... (1,440) (14,516) (1,806) (14,220)
Net loss available to common
shareholders............................ (1,414) (16,891) (1,776) (15,651)
======= ======== ======= ========
Basic and diluted net loss per share....... $ (0.49) $ (4.49) $ (0.54) $ (2.76)
======= ======== ======= ========
Shares used in computing basic and diluted
net loss per share...................... 2,899 3,760 3,301 5,676
======= ======== ======= ========
Pro forma basic and diluted net loss per
share (unaudited)(1).................... $ (0.35) $ (1.71) $ (0.22) $ (0.89)
======= ======== ======= ========
Shares used in computing pro forma basic
and diluted net loss per share
(unaudited)(1).......................... 4,066 9,849 7,951 17,510
======= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1998 1999 2000
------- -------- ---------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 1,928 $ 8,224 $ 30,607
Working capital.............................. 4,274 5,557 26,960
Total assets................................. 5,146 11,274 138,352
Long-term debt, net of current portion....... -- 339 287
Total shareholders' equity (deficiency)...... (1,389) (14,431) 129,010
</TABLE>
- ---------------
(1) Pro forma per share amounts are computed as if the preferred shares of
Octane were converted to common stock from their date of issuance.
12
<PAGE> 19
SUMMARY PRO FORMA UNAUDITED COMBINED
CONDENSED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The unaudited summary pro forma combined condensed financial information of
E.piphany, RightPoint and Octane is derived from, and should be read in
conjunction with, the unaudited pro forma combined condensed financial
statements and the notes thereto, which are included elsewhere in this proxy
statement/prospectus. In preparing the pro forma combined condensed statement of
operations data, the operations of RightPoint and Octane have been included as
if each merger had occurred at the beginning of the earliest period presented.
The unaudited pro forma combined condensed information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have actually occurred if the
acquisitions had been consummated as of the beginning of the earliest period
presented, nor is it necessarily indicative of future operating results or
financial position of the combined companies.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1999 2000
------------ ------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues............................................ $ 27,372 $ 17,917
Cost of revenues.......................................... 12,714 7,660
Gross profit.............................................. 14,658 10,257
Amortization of goodwill and purchased intangibles........ 1,051,186 262,796
Stock-based compensation.................................. 4,311 477
Loss from operations...................................... (1,102,083) (280,414)
Net loss.................................................. (1,100,609) (275,775)
Basic and diluted net loss per share...................... $ (89.28) $ (8.79)
Shares used in computing basic and diluted net loss per
share.................................................. 12,327 31,392
Pro forma basic and diluted net loss per share
(unaudited)............................................ $ (42.09) $ (7.35)
Shares used in computing pro forma basic and diluted net
loss per share (unaudited)............................. 26,146 37,520
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
2000
----------
<S> <C>
BALANCE SHEET DATA AT PERIOD END:
Cash, cash equivalents and short-term investments......... $ 455,327
Working capital........................................... 410,104
Total assets.............................................. 3,594,610
Long-term obligations, net of current portion............. 1,077
Total stockholders' equity................................ 3,532,728
</TABLE>
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<PAGE> 20
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of
E.piphany and Octane and combined per share data on an unaudited pro forma basis
after giving effect to the merger (and the acquisition of RightPoint by
E.piphany) and assuming that 0.5179 of a share of E.piphany common stock is
issued in exchange for each outstanding share of Octane common stock and stock
underlying options and warrants. This data should be read in conjunction with
the selected historical financial information, the pro forma unaudited combined
condensed financial information and the separate historical financial statements
of E.piphany and notes thereto and historical consolidated financial statements
of Octane and notes thereto, included elsewhere in this proxy
statement/prospectus. All historical and pro forma share amounts are computed as
if the preferred shares of E.piphany and Octane were converted to common stock
from their date of issuance. The pro forma unaudited combined condensed
financial information is not necessarily indicative of the operating results
that would have been achieved had the transaction been in effect as of the
beginning of the periods presented and should not be construed as representative
of future operating results.
The equivalent Octane pro forma share amounts are calculated by multiplying
the combined pro forma per share amounts by the estimated exchange ratio of
0.5179 of a share of E.piphany common stock for each share of Octane common
stock, assuming the conversion of all Octane preferred stock into Octane common
stock.
Pro forma combined net loss per share reflects E.piphany's and Octane's
respective net loss for the year ended December 31, 1999 and the three months
ended March 31, 2000 and is based upon E.piphany's weighted average common
shares outstanding for the periods presented, and approximately 11,755,138
shares of E.piphany's common stock assumed to be issued in the merger, which
excludes options and warrants to purchase approximately 1,038,372 shares of
common stock which will be assumed in the merger.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
OR AS OF OR AS OF
DECEMBER 31, 1999 MARCH 31, 2000
----------------- ------------------
<S> <C> <C>
Historical -- E.piphany
Basic and diluted net loss per share............... $ (1.23) $(2.35)
Book value per share............................... $ 2.76 $26.54
Historical -- Octane
Basic and diluted net loss per share............... $ (1.71) $(0.89)
Book value (deficit) per share..................... $ (0.93) $ 5.68
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED OR AS OF
DECEMBER 31, 1999 MARCH 31, 2000
----------------- ------------------
<S> <C> <C>
Pro forma combined net loss per share
Pro forma combined net loss per E.piphany share.... $(33.36) $(6.86)
Equivalent pro forma net loss per Octane share..... $(19.03) $(3.55)
Pro forma combined book value per share
Pro forma book value per E.piphany share........... $80.16
Equivalent pro forma book value per Octane share... $41.51
</TABLE>
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<PAGE> 21
MARKET PRICE INFORMATION
E.piphany's common stock has been traded on the Nasdaq Stock Market's
National Market under the symbol "EPNY" since September 22, 1999. The following
table sets forth, for the periods indicated, the high and low closing prices for
E.piphany common stock as reported by the Nasdaq Stock Market's National Market:
<TABLE>
<CAPTION>
HIGH LOW
------- --------
<S> <C> <C>
Third Quarter 1999 (from September 22, 1999)............... $ 48.75 $ 38.31
Fourth Quarter 1999........................................ 253.37 48.50
First Quarter 2000......................................... 317.48 133.56
Second Quarter 2000 (through April 20, 2000)............... 108.00 47.50
</TABLE>
There is no established trading market for Octane capital stock.
As of April 14, 2000, E.piphany estimates that there were approximately 334
holders of record of E.piphany common stock and a substantially greater number
of beneficial owners. As of April 14, 2000, there were approximately 271 holders
of record of Octane capital stock.
To date, E.piphany has not declared or paid dividends on its common stock.
The board of directors of E.piphany presently intends to retain all earnings for
use in E.piphany's business and therefore does not anticipate declaring or
paying any cash dividends in the foreseeable future. In addition, E.piphany's
credit facilities restrict the payment of dividends. To date, Octane has not
declared or paid dividends on its common stock. In addition, Octane's credit
facilities restrict the payment of dividends. The board of directors of Octane
presently intends to retain all earnings for use in Octane's business and
therefore does not anticipate declaring or paying any cash dividends in the
foreseeable future.
The table below sets forth the high and low sales prices per share of
E.piphany common stock on the Nasdaq Stock Market's National Market on March 14,
2000, the last completed trading day prior to the signing and announcement of
the merger agreement, and on April 20, 2000. Also set forth is the implied
equivalent value of one share of Octane common stock on each such date assuming
an exchange ratio of approximately 0.5 of a share of E.piphany common stock for
each share of Octane common stock and the conversion of all Octane preferred
stock into Octane common stock.
<TABLE>
<CAPTION>
E.PIPHANY COMMON APPROXIMATE OCTANE
STOCK EQUIVALENT
------------------ ------------------
HIGH LOW HIGH LOW
------- ------- ------- -------
<S> <C> <C> <C> <C>
March 14, 2000................................. $290.00 $221.12 $145.00 $110.56
April 20, 2000................................. 80.00 63.00 40.00 31.50
</TABLE>
As the table above indicates, fluctuations in the market price of E.piphany
common stock affect the value of the Octane shares for which they are exchanged.
The table illustrates that between March 14, 2000, and April 20, 2000, the value
of a share of Octane common stock, had it been exchanged for E.piphany common
stock at the assumed exchange ratio, would have fluctuated between $145.00 and
$31.50.
The foregoing table shows only historical comparisons. These comparisons
may not provide meaningful information to you in determining whether to approve
the merger and the merger agreement. Because the number of shares of E.piphany
to be issued to the holders of Octane common stock is fixed, changes in the
market price of E.piphany common stock will affect the dollar value of E.piphany
common stock to be received by shareholders of Octane in the merger. Octane
shareholders are urged to obtain current market quotations for E.piphany common
stock, and to review carefully the other information contained in this proxy
statement/prospectus, prior to considering whether to approve the merger
agreement, the merger and the conversion of preferred stock.
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<PAGE> 22
RISK FACTORS
You should carefully consider the risks described below before making your
decision to consent to the issuance of E.piphany shares to Octane shareholders,
the merger agreement and the merger. The risks and uncertainties described below
are not the only ones facing E.piphany and Octane. Additional risks and
uncertainties not presently known to us or that we do not currently believe are
important to an investor may also harm our business operations.
If any of the events, contingencies, circumstances or conditions described
in the following risks actually occur, our business, financial condition or our
results of operations could be seriously harmed. If that happens, the trading
price of E.piphany common stock could decline, and you may lose part or all of
the value of any E.piphany shares held by you.
RISKS RELATED TO THE MERGER.
E.PIPHANY AND OCTANE MAY NOT REALIZE ANY BENEFITS FROM THE MERGER.
Achieving the benefits of the merger will depend in part on the integration
of technology, operations and personnel. The integration of E.piphany and Octane
will be a complex, time consuming and expensive process and may disrupt
E.piphany's business if not completed in a timely and efficient manner. Among
the challenges involved in this integration are demonstrating to customers and
suppliers that the merger will not result in adverse changes in client service
standards or business focus, persuading our employees that E.piphany's and
Octane's business cultures are compatible and retaining key personnel. Neither
E.piphany nor Octane has experience in integrating operations on the scale
represented by the merger, and it is not certain that E.piphany and Octane can
be successfully integrated in a timely manner or at all or that any of the
anticipated benefits of the merger will be realized. Failure to do so could
seriously harm the business, financial condition and operating results of the
combined company.
BECAUSE THE TOTAL MERGER CONSIDERATION IS FIXED, DECREASES IN E.PIPHANY'S
TRADING PRICE WILL REDUCE THE VALUE OF WHAT OCTANE SHAREHOLDERS RECEIVE IN THE
MERGER.
All of the outstanding shares of Octane capital stock and the options to
purchase shares of Octane's capital stock shall be exchanged for a fixed number
of shares of E.piphany common stock and options to purchase E.piphany common
stock totaling approximately 12.8 million shares. There will be no adjustment
for changes in the market price of E.piphany common stock, and Octane is not
permitted to withdraw from the merger or resolicit the vote of its shareholders
solely because of changes in the market price of E.piphany common stock.
Accordingly, the actual dollar value of E.piphany common stock that Octane
shareholders will receive upon completion of the merger will depend on the
market value of E.piphany common stock at the time of completion of the merger.
For a description of how E.piphany's market price has in the past
fluctuated greatly and may continue to fluctuate in the future, refer to
"-- Risks Related to E.piphany and to the Combined Company Following the
Merger -- Variations in Quarterly Operating Results Due to Such Factors as
Changes in Demand For Our Products and Changes in Our Mix of Revenues May Cause
Our Stock Price to Decline." The market price of E.piphany common stock on a
recent date is set forth under "Market Price Information."
IF E.PIPHANY AND OCTANE DO NOT INTEGRATE THEIR TECHNOLOGY QUICKLY AND
EFFECTIVELY, MANY OF THE POTENTIAL BENEFITS OF THE MERGER MAY NOT BE REALIZED.
E.piphany intends to integrate Octane's technology into its own software
solutions as well as offer Octane's solutions separately. E.piphany and Octane
cannot assure you that they will be able to integrate their technology quickly
and effectively. In order to obtain the benefits of the merger,
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<PAGE> 23
E.piphany must make Octane's technology, products and services operate together
with E.piphany's technology, products and services. E.piphany may be required to
spend additional time or money on integration which would otherwise be spent on
developing its own business and services. If E.piphany does not integrate the
technology effectively or if management spends too much time on integration
issues, it could harm the combined companies' business, financial condition and
results of operations.
THE MERGER MAY RESULT IN A LOSS OF OCTANE OR E.PIPHANY EMPLOYEES.
Despite E.piphany's efforts to hire and retain quality employees, E.piphany
might lose some of Octane's or its own employees following the merger.
Competition for qualified management, engineering and technical employees in the
software industry is intense. E.piphany and Octane have different corporate
cultures, and Octane employees may not want to work for a larger,
publicly-traded company instead of a smaller, start-up company. Some key
employees of Octane hold options which will partially vest as a result of the
merger, and this may affect E.piphany's ability to retain these employees. In
addition, competitors may recruit employees prior to the merger and during
integration, as is common in high technology mergers. As a result, employees of
Octane or the combined company could leave with little or no prior notice.
E.piphany and Octane cannot assure you that the combined company will be able to
attract, retain and integrate employees following the merger.
As a condition to the merger, Aditya (Tim) Guleri, William Walsh, Kira
Makagon, James Doehrman, Robert Loughan, Robert Gryphon, Todd Rowe, Andrew
Sherman, Gary Schaumburg and Manu Kumar have entered into employment and
non-competition agreements which will restrict their ability to compete with
E.piphany if they leave E.piphany. E.piphany and Octane cannot assure you of the
enforceability of these non-competition agreements or that these employees will
continue to work at E.piphany under their employment agreements after the
merger.
THE MERGER MAY RESULT IN A LOSS OF CUSTOMERS.
As a result of the merger some customers or potential customers may not
continue to do business with Octane. In such case, we may lose significant
revenue Octane might have otherwise received had the merger not occurred.
MERGER RELATED ACCOUNTING CHARGES WILL DELAY AND REDUCE E.PIPHANY'S
PROFITABILITY.
The Octane acquisition is being accounted for by E.piphany under the
"purchase" method of accounting. Under the purchase method, the purchase price
of Octane will be allocated to the assets and liabilities acquired from Octane.
As a result, E.piphany will incur accounting charges from the merger which will
delay and reduce E.piphany's profitability. These charges are currently
estimated to include:
- amortization of intangible assets estimated to be approximately $2.7
billion amortized over three years,
- in-process research and development of approximately $25 million, to be
expensed in the quarter ended June 30, 2000, and
- other costs not currently known.
IF THE CONDITIONS TO THE MERGER ARE NOT MET, THE MERGER WILL NOT OCCUR.
Several conditions must be satisfied or waived to complete the merger.
These conditions are described under "Terms of the Merger -- Conditions to the
Merger" and in detail in the merger agreement. E.piphany and Octane cannot
assure you that each of the conditions will be satisfied. If the conditions are
not satisfied or waived, the merger will not occur or will be delayed, and
E.piphany and Octane each may lose some or all of the intended benefits of the
merger. For example, if either
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<PAGE> 24
party's representations and warranties are not materially true and correct at
the closing or either party suffers a material adverse change in its condition
prior to closing, the other party may not be required to close. If the merger is
not completed, Octane will require substantial additional capital resources to
continue its business, which resources may not be available on favorable terms,
or at all.
OCTANE OFFICERS AND DIRECTORS HAVE CONFLICTS OF INTEREST THAT MAY INFLUENCE THEM
TO SUPPORT OR APPROVE THE MERGER.
Some of the directors and officers of Octane have entered into agreements
with E.piphany that provide them with interests in the merger that are different
from, or are in addition to, your interests. In particular, Aditya (Tim) Guleri,
William Walsh, Kira Makagon, James Doehrman, Robert Loughan, Robert Gryphon,
Todd Rowe, Andrew Sherman, Gary Schaumburg and Manu Kumar have entered into
employment agreements with E.piphany, and some of these Octane officers and
directors may become officers of E.piphany following the merger. In addition,
the vesting of a portion of the stock options held by directors and officers of
Octane will accelerate as a result of the merger. As a result, these directors
and officers could be more likely to vote to approve the merger agreement than
if they did not hold these interests. Octane shareholders should consider
whether these interests may have influenced these directors and officers to
support or recommend the merger.
RISKS RELATED TO AN INVESTMENT IN E.PIPHANY AND TO THE COMBINED COMPANY
FOLLOWING THE MERGER.
E.PIPHANY AND OCTANE HAVE A HISTORY OF LOSSES, EXPECT LOSSES IN THE FUTURE AND
THE COMBINED COMPANY MAY NOT EVER BECOME PROFITABLE.
E.piphany incurred net losses of $67.0 million for the quarter ended March
31, 2000, $22.4 million in the year ended December 31, 1999, $10.3 million in
the year ended December 31, 1998 and $3.1 million in the year ended December 31,
1997. E.piphany had an accumulated deficit of $102.8 million as of March 31,
2000, and $35.9 million as of December 31, 1999. Octane incurred net losses of
$14.0 million for the quarter ended March 31, 2000, $14.4 million for the year
ended December 31, 1999 and $1.4 million for the year ended December 31, 1998.
Octane had an accumulated deficit of $33.9 million at March 31, 2000, and $18.3
million at December 31, 1999. E.piphany expects to continue to incur losses
before amortization charges for the foreseeable future. In addition, in
connection with the acquisitions of Octane and RightPoint, E.piphany will incur
significant accounting charges for the amortization of intangible assets over
the three years following these mergers. These losses will be substantial, and
E.piphany may not ever become profitable. In addition, E.piphany expects to
significantly increase its expenses in the near term, especially research and
development and sales and marketing expenses. Therefore, E.piphany's operating
results will be harmed if E.piphany's revenue does not keep pace with its
expected increase in expenses or is not sufficient for E.piphany to achieve
profitability. If E.piphany does achieve profitability in any period, it cannot
be certain that it will sustain or increase profitability on a quarterly or
annual basis.
E.PIPHANY'S AND OCTANE'S LIMITED OPERATING HISTORY MAKES FINANCIAL FORECASTING
AND EVALUATION OF THE COMBINED COMPANY'S BUSINESS DIFFICULT.
E.piphany's and Octane's limited operating history makes it difficult to
forecast the combined company's future operating results. E.piphany was founded
in November 1996 and began developing products in 1997. Octane was founded in
1997 and began developing products in 1998. E.piphany's revenue and income
potential is unproven. E.piphany received its first revenues from licensing its
software and performing related services in early 1998, and began shipping the
E.piphany E.4 System software in June 1999. Octane began offering its products
in the third quarter of 1999. Since neither company has a long history upon
which to base forecasts of future operating results, any predictions about our
future revenues and expenses may not be as accurate as they would be if
E.piphany and Octane had a longer business history.
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<PAGE> 25
VARIATIONS IN QUARTERLY OPERATING RESULTS DUE TO SUCH FACTORS AS CHANGES IN
DEMAND FOR OUR PRODUCTS AND CHANGES IN OUR MIX OF REVENUES MAY CAUSE OUR STOCK
PRICE TO DECLINE.
E.piphany expects its and Octane's quarterly operating results to
fluctuate. We therefore believe that quarter-to-quarter comparisons of our
operating results may not be a good indication of our future performance, and
you should not rely on them to predict our future performance or the future
performance of E.piphany's stock price. Our short-term expense levels are
relatively fixed and are based on our expectations of future revenues. As a
result, a reduction in revenues in a quarter may harm our operating results for
that quarter. Our quarterly revenues, expenses and operating results could vary
significantly from quarter-to-quarter. If our operating results in future
quarters fall below the expectations of market analysts and investors, the
trading price of E.piphany's common stock will fall. Factors that may cause our
operating results to fluctuate on a quarterly basis are:
- varying size, timing and contractual terms of orders for our products,
- our ability to timely complete its service obligations related to product
sales,
- changes in the mix of revenue attributable to higher-margin product
license revenue as opposed to substantially lower-margin service revenue,
- customers' decisions to defer orders or implementations, particularly
large orders or implementations, from one quarter to the next,
- changes in demand for our software or for enterprise software and real
time marketing solutions generally,
- announcements or introductions of new products by our competitors,
- software defects and other product quality problems,
- any increase in our need to supplement our professional services
organization by subcontracting to more expensive consulting organizations
to help provide implementation, support and training services when our
own capacity is constrained, and
- our ability to hire, train and retain sufficient engineering, consulting,
training and sales staff.
THE LOSS OF KEY PERSONNEL OR ANY INABILITY TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL COULD AFFECT E.PIPHANY'S ABILITY TO SUCCESSFULLY GROW ITS BUSINESS.
E.piphany's future success will depend in large part on its ability to hire
and retain a sufficient number of qualified personnel, particularly in sales,
marketing, research and development, service and support. If E.piphany is unable
to do so, this inability could affect its ability to grow its business.
Competition for qualified personnel in high technology is intense, particularly
in the Silicon Valley region of Northern California where E.piphany's principal
offices are located. E.piphany's future success also depends upon the continued
service of its executive officers and other key sales, engineering and technical
staff. The loss of the services of E.piphany's executive officers and other key
personnel would harm E.piphany's operations. None of E.piphany's officers or key
personnel is bound by an employment agreement, other than Gayle Crowell, and the
Octane employees who entered into agreements in connection with the merger, and
E.piphany does not maintain key person insurance on any of its employees.
E.piphany would also be harmed if one or more of E.piphany's officers or key
employees decided to join a competitor or otherwise compete with E.piphany.
The market price of E.piphany's common stock has increased substantially
since its initial public offering in September 1999. Consequently, potential
employees may perceive E.piphany's equity incentives such as stock options as
less attractive. In that case, E.piphany's ability to attract employees will be
adversely affected. Furthermore, a substantial portion of the equity incentives
previously granted to Octane employees will accelerate and become substantially
vested upon the
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<PAGE> 26
closing of the mergers. New options granted to Octane employees at the current
market price of E.piphany's common stock may not be sufficient to retain Octane
employees. Finally, should E.piphany's stock price decline substantially, the
retention value of stock options granted since E.piphany's initial public
offering will decline and E.piphany's employees may choose not to remain
employed by E.piphany.
IF CUSTOMERS DO NOT CONTRACT DIRECTLY WITH CONSULTING ORGANIZATIONS TO IMPLEMENT
AND SUPPORT E.PIPHANY'S AND OCTANE'S PRODUCTS, OUR REVENUES, PROFITABILITY AND
MARGINS MAY BE HARMED.
E.piphany's and Octane's principal focus is providing software solutions
rather than services. As a result, we encourage our customers to purchase
consulting, implementation, maintenance and training services directly from
consulting organizations instead of purchasing these services from us. While we
do not receive any fees directly from these consulting organizations when they
contract directly with our customers, we believe that these consulting
organizations increase market awareness and acceptance of our software solutions
and allow us to focus on software development and licensing. If consulting
organizations are unwilling or unable to provide a sufficient level and quality
of services directly to our customers or if customers are unwilling to contract
directly with these consulting organizations, we may not realize these benefits
and our revenues and profitability may be harmed.
Further, to the extent that consulting organizations do not provide
consulting, implementation, maintenance and training services directly to our
customers, we need to provide these services to our customers. We provide these
services to our customers either directly through our internal professional
services organization or indirectly through subcontractors we hire to perform
the services on our behalf. Because our margins on service revenues are less
than our margins on license revenues, our overall margins decline when we
provide services to customers. This is particularly true if we hire
subcontractors to perform these services because it costs us more to hire
subcontractors to perform these services than to provide the services ourselves.
IF THE COMBINED COMPANY'S INTERNAL PROFESSIONAL SERVICES ORGANIZATION DOES NOT
PROVIDE IMPLEMENTATION SERVICES EFFECTIVELY AND ACCORDING TO SCHEDULE, OUR
REVENUES AND PROFITABILITY WOULD BE HARMED.
Customers that license E.piphany's products typically require consulting,
implementation, maintenance and training services and obtain them from
E.piphany's internal professional services organization, which employed a staff
of 93 as of March 31, 2000, or from outside consulting organizations. Octane
employed a staff of 60 in its internal professional services organization as of
March 31, 2000. When we provide these services, we generally recognize revenue
from the licensing of our software products as the implementation services are
performed. If our internal professional services organization does not
effectively implement and support our products or if we are unable to expand our
internal professional services organization as needed to meet our customers'
needs, our ability to sell software, and accordingly our revenues, will be
harmed.
In addition, when we sell licenses together with professional services for
implementation, we generally recognize the revenue from both the license and the
services as we perform the implementation services. Therefore, delays in
providing implementation services will delay our recognition of revenue. If we
are unable to expand our internal professional services organization to keep
pace with sales, we will be required to increase our use of subcontractors to
help meet our implementation and service obligations, which will result in lower
gross margins. In addition, we may be unable to negotiate agreements with
subcontractors to provide a sufficient level and quality of services. If we fail
to retain sufficient subcontractors, our ability to sell software for which
these services are required will be harmed and our revenues will suffer.
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<PAGE> 27
OUR SERVICES REVENUES HAVE A SUBSTANTIALLY LOWER MARGIN THAN OUR PRODUCT
REVENUES, AND AN INCREASE IN SERVICE REVENUES RELATIVE TO LICENSE REVENUES COULD
HARM OUR GROSS MARGINS.
E.piphany's services revenues, which includes fees for consulting,
implementation, maintenance and training, were 43% of its revenues for the
quarter ended March 31, 2000, 47% of its revenues for the year ended December
31, 1999 and 34% of E.piphany's revenues for the year ended December 31, 1998.
Octane's services revenues were 46% of its revenues for the quarter ended March
31, 2000, 81% of its revenues for the year ended December 31, 1999 and 100% of
revenues for the year ended December 31, 1998. Both companies' services revenues
have substantially lower gross margins than license revenues. E.piphany's cost
of services revenues for the quarter ended March 31, 2000 and the year ended
December 31, 1999 was 98% and 102%, respectively, of its services revenues.
Octane's cost of services revenues for the quarter ended March 31, 2000 and the
year ended December 31, 1999 was 94% and 59%, respectively, of its services
revenues. An increase in the percentage of total revenues represented by
services revenues could adversely affect our overall gross margins.
Services revenues as a percentage of total revenues and cost of services
revenues as a percentage of total revenues have varied significantly from
quarter to quarter due to our relatively early stage of development. The
relative amount of services revenues as compared to license revenues has varied
based on the volume of software solution orders compared to the volume of
additional user orders. In addition, the amount and profitability of services
can depend in large part on:
- the software solution which has been licensed,
- the complexity of the customers' information technology environment,
- the resources directed by customers to their implementation projects,
- the number of users licensed, and
- the extent to which outside consulting organizations provide services
directly to customers.
NEW PRODUCT INTRODUCTIONS AND PRICING STRATEGIES BY E.PIPHANY'S COMPETITORS
COULD ADVERSELY AFFECT E.PIPHANY'S ABILITY TO SELL ITS PRODUCTS AND COULD RESULT
IN PRESSURE TO PRICE E.PIPHANY'S PRODUCTS IN A MANNER THAT REDUCES ITS MARGINS.
Competitive pressures could prevent E.piphany from growing, reduce
E.piphany's market share or require E.piphany to reduce prices on its products
and services, any of which could harm E.piphany's business.
E.piphany competes principally with vendors of:
- data management and data analysis software tools, such as Brio
Technology, Broadbase, Business Objects, Informatica, Microstrategy and
Sagent Technology,
- enterprise application software, such as Oracle, PeopleSoft, SAP and
Siebel Systems,
- marketing campaign management software tools, such as Exchange
Applications, Prime Response, and Recognition Systems,
- software that recommends products to customers in real-time based on
simple analytics rules such as Net Perceptions, and
- electronic customer relations management software, such as Kana
Communications (Silknet Software), eGain, Primus Knowledge Solutions,
Nortel (Clarify), PeopleSoft (Vantive), and Siebel Systems (Scopus).
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<PAGE> 28
Many of these companies have significantly greater financial, technical,
marketing, service and other resources. Many of these companies also have a
larger installed base of users, have been in business longer or have greater
name recognition than we do. For example, in fiscal 1999, Oracle's annual
revenue exceeded $8.0 billion, and the annual revenue of Siebel Systems in
fiscal 1999 exceeded $790 million. Some large companies may attempt to build
capabilities into their products that are similar to the capabilities of our
products. Some of our competitors' products may be more effective than our
products at performing particular functions or be more customized for particular
needs. Even if these functions are more limited than those provided by our
products, our competitors' software products could discourage potential
customers from purchasing our products. For example, our competitors' software
products may incorporate other capabilities, such as recording accounting
transactions, customer orders or inventory management data. A software product
that performs these functions, as well as some of the functions of our software
solutions, may be appealing to some customers because it would reduce the number
of different types of software necessary to effectively run their business.
Further, our competitors may be able to respond more quickly than we can to
changes in customer requirements.
In addition, our products must integrate with software solutions provided
by a number of our existing or potential competitors. These competitors could
alter their products so that our products no longer integrate well with them, or
they could deny or delay access by us to advance software releases that allow us
to timely adapt our products to integrate with their products.
E.piphany's competitors have made and may also continue to make strategic
acquisitions or establish cooperative relationships among themselves or with
other software vendors. This may increase the ability of their products to
address the need for software solutions such as ours which provide both the
ability to collect data from multiple sources and analyze that data to profile
customer characteristics and preferences. E.piphany's competitors may also
establish or strengthen cooperative relationships with our current or future
distributors or other parties with whom we have relationships, thereby limiting
our ability to sell through these channels, reducing promotion of E.piphany's
products and limiting the number of consultants available to implement
E.piphany's software.
E.PIPHANY'S REVENUES MIGHT BE HARMED BY RESISTANCE TO ADOPTION OF E.PIPHANY'S
SOFTWARE BY INFORMATION TECHNOLOGY DEPARTMENTS.
Some businesses may have already made a substantial investment in other
third party or internally developed software designed to integrate data from
disparate sources and analyze this data or manage marketing campaigns. These
companies may be reluctant to abandon these investments in favor of our
software. In addition, information technology departments of potential customers
may resist purchasing our software solutions for a variety of other reasons,
particularly the potential displacement of their historical role in creating and
running software and concerns that packaged software products are not
sufficiently customizable for their enterprises. If the market for our products
does not grow for any of these reasons, our revenues will be harmed.
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IF THE MARKET IN WHICH WE SELL OUR PRODUCTS AND SERVICES DOES NOT GROW AS WE
ANTICIPATE, OUR REVENUES WILL BE REDUCED.
If the market for software that enables companies to establish, manage,
maintain and continually improve customer relationships by collecting and
analyzing data to design and manage marketing campaigns and customize products
and services and providing timely, consistent, multichannel customer interaction
does not grow as quickly or become as large as we anticipate, our revenues will
be reduced. Our market is still emerging, and our success depends on its growth.
Our potential customers may:
- not understand or see the benefits of using these products,
- not achieve favorable results using these products,
- experience technical difficulty in implementing or using these products,
or
- use alternative methods to solve the same business problems.
In addition, because our products can be used in connection with Internet
commerce and we are currently developing additional Internet commerce solutions,
if the Internet commerce market does not grow as quickly as we anticipate, we
may experience sales which are lower than our expectations.
IF THE COMBINED COMPANY FAILS TO DEVELOP NEW PRODUCTS OR IMPROVE ITS EXISTING
PRODUCTS TO MEET OR ADAPT TO THE CHANGING NEEDS AND STANDARDS OF OUR INDUSTRY,
SALES OF OUR PRODUCTS MAY DECLINE.
E.piphany's future success depends on its ability to address the rapidly
changing needs of its customers and potential customers. E.piphany must maintain
and improve its E.piphany E.4 System and the Octane 2000 suite of products and
develop new products that include new technological developments, keep pace with
products of its competitors and satisfy the changing requirements of its
customers. If E.piphany does not, it may not achieve market acceptance and it
may be unable to attract new customers. E.piphany may also lose existing
customers, to whom it seeks to sell additional software solutions and
professional services.
To achieve increased market acceptance of its products, E.piphany must,
among other things, continue to:
- improve and introduce new software solutions for reporting and analysis,
distributed database marketing and e-commerce,
- integrate Octane's offerings with the E.piphany E.4 System offerings,
- improve the effectiveness of its software, particularly in
implementations involving very large databases and large numbers of
simultaneous users,
- enhance its software's ease of administration,
- improve its software's ability to extract data from existing software
systems, and
- adapt to rapidly changing computer operating system and database
standards and Internet technology.
E.piphany may not be successful in developing and marketing these or other
new or improved products. If E.piphany is not successful, it may lose sales to
competitors.
In addition, E.piphany has entered into customer contracts which contain
specific performance goals relating to new product releases or enhancements, and
if we are not able to meet these goals, we may be required to, among other
things, return fees, pay damages and offer discounts.
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<PAGE> 30
IF E.PIPHANY'S PRODUCTS DO NOT STAY COMPATIBLE WITH CURRENTLY POPULAR SOFTWARE
PROGRAMS, WE MAY LOSE SALES AND REVENUES.
The E.piphany E.4 System and the Octane 2000 suite of products must work
with commercially available software programs that are currently popular. If
these software programs do not remain popular, or E.piphany does not update its
software to be compatible with newer versions of these programs, E.piphany may
lose customers.
In order to operate the E.piphany E.4 System or the Octane 2000 suite of
products, each of these systems must be installed on both a computer server
running the Microsoft Windows NT or Windows 2000 computer operating systems and
a computer server running database software from Microsoft or Oracle. E.piphany
and Octane are each currently modifying their respective software to also
operate on UNIX operating systems and IBM DB2 databases. If we fail to
successfully complete these modifications in a timely manner, E.piphany may lose
sales and revenues. In addition, users access the E.piphany E.4 System and
certain of Octane's products through standard Internet browsers such as
Microsoft Internet Explorer. If we fail to obtain access to developer versions
of these software products, we may be unable to build and enhance our products
on schedule.
After installation, each of the E.piphany E.4 System and the Octane 2000
suite of products collects and analyzes data to profile customers'
characteristics and preferences. This data may be stored in a variety of our
customers' existing software systems, including leading systems from Oracle,
PeopleSoft, Siebel Systems, SAP and Vantive, running on a variety of computer
operating systems. If E.piphany fails to enhance its software to collect data
from new versions of these products, it may lose potential customers. If it
loses customers, E.piphany's revenues and profitability may be harmed.
IF DATABASE ACCESS BECOMES STANDARDIZED, DEMAND FOR E.PIPHANY'S PRODUCTS WILL BE
REDUCED.
E.piphany's products are useful for integrating data from a variety of
disparate data sources. Adoption of uniform, industry-wide standards across
various database and analytic software programs could minimize the importance of
the data integration capabilities of our products. This, in turn, could
adversely affect the competitiveness and market acceptance of E.piphany's
products. Also, a single competitor in the market for database and analytic
software programs or Internet relationship management may become dominant, even
if there is no formal industry-wide standard. If large numbers of E.piphany's
customers adopt a single standard, this would similarly reduce demand for
E.piphany's product. If E.piphany loses customers because of the adoption of
standards, E.piphany may have lower revenues and profitability.
E.PIPHANY'S AND OCTANE'S PRODUCTS HAVE LONG SALES CYCLES WHICH MAKES IT
DIFFICULT TO PLAN EXPENSES AND FORECAST RESULTS.
It takes E.piphany between three and six months to complete the majority of
its sales, but it can take E.piphany up to one year or longer. Octane faces
similar sales cycles. It is therefore difficult to predict the quarter in which
a particular sale will occur and to plan expenditures accordingly. The period
between initial contact with a potential customer and their purchase of products
and services is relatively long due to several factors, including:
- the complex nature of our products,
- our need to educate potential customers about the uses and benefits of
its products,
- the purchase of our products requires a significant investment of
resources by a customer,
- our customers have budget cycles which affect the timing of purchases,
- many of E.piphany's customers require competitive evaluation and internal
approval before purchasing E.piphany's products,
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<PAGE> 31
- potential customers may delay purchases due to announcements or planned
introductions of new products by E.piphany or its competitors, and
- many of E.piphany customers are large organizations which may require a
long time to make decisions.
The delay or failure to complete sales in a particular quarter could reduce
E.piphany's revenues in that quarter, as well as subsequent quarters over which
revenues for the sale would likely be recognized. If E.piphany's sales cycle
unexpectedly lengthens in general or for one or more large orders, it would
adversely affect the timing of its revenues. If E.piphany were to experience a
delay of several weeks on a large order, it could harm its ability to meet its
forecasts for a given quarter.
IF E.PIPHANY FAILS TO ESTABLISH, MAINTAIN OR EXPAND ITS RELATIONSHIPS WITH THIRD
PARTIES, OUR ABILITY TO GROW REVENUES COULD BE HARMED.
In order to grow E.piphany's business, we must generate, retain and
strengthen relationships with third parties. To date, E.piphany has established
relationships with several companies, including consulting organizations and
system integrators that implement E.piphany's software, including Cambridge
Technology Partners, Ernst & Young and KPMG; resellers, including Acxiom,
Harte-Hanks and Pivotal; and application service providers that provide access
to E.piphany's software to their customers over the Internet, including Corio,
Exactis.com, Bullseye Interactive and Interrelate. Similarly, Octane has also
entered into reseller agreements with several companies including TeleTech,
Eltrax, RISC Management, e-Assist.com, Brigade Solutions, e-Convergent, and
MISNet. If the third parties with whom E.piphany and Octane have relationships
do not provide sufficient, high-quality service or integrate and support our
software correctly, our revenues may be harmed. In addition, the third parties
with whom we have relationships may offer products of other companies, including
products that compete with our products. We typically enter into contracts with
third parties that generally set out the nature of our relationships. However,
our contracts do not require these third parties to devote resources to
promoting, selling and supporting our products. Therefore we have little control
over these third parties. We cannot assure you that we can generate and maintain
relationships that offset the significant time and effort that are necessary to
develop these relationships.
E.piphany must also effectively take advantage of the resources and
expertise of third parties to help it develop the E.piphany E.4 System and the
Octane 2000 product suite. Our agreements with third parties do not require them
to help us develop new software. If we fail to effectively work with third
parties, our ability to increase revenues by broadening our software solution
offerings, particularly in additional specific industries, will be limited.
IF THE COMBINED COMPANY FAILS TO EXPAND ITS DIRECT AND INDIRECT SALES CHANNELS,
WE WILL NOT BE ABLE TO INCREASE REVENUES.
In order to grow its business, E.piphany needs to increase market awareness
and sales of its and Octane's products and services. To achieve this goal,
E.piphany needs to increase both its direct and indirect sales channels. If
E.piphany fails to do so, this failure could harm its ability to increase
revenues. E.piphany and Octane currently receive substantially all of their
revenues from direct sales, but we intend to increase sales through indirect
sales channels in the future. We also need to expand our direct sales force by
hiring additional salespersons and sales management.
We intend to derive revenues from indirect sales channels by selling our
software through value added resellers. These resellers offer our software
products to their customers together with consulting and implementation services
or integrate our software solutions with other software. We also intend to
increasingly offer our software through application service providers, who
install our software on their
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<PAGE> 32
own computer servers and charge their customers for access to that software. We
need to expand our indirect sales channels by entering into additional
relationships with these third parties.
E.piphany has not derived a material amount of revenues from international
sales to date, but we expect as part of our strategy to increase international
sales principally through the use of indirect sales channels. E.piphany will be
even more dependent on indirect sales channels in the future due to its
international strategy. E.piphany also plans to use international direct sales
personnel and therefore must hire additional sales personnel outside the United
States. E.piphany's ability to develop and maintain these channels will
significantly affect its ability to penetrate international markets.
E.PIPHANY HAS GROWN VERY QUICKLY AND IF E.PIPHANY FAILS TO MANAGE ITS GROWTH,
ITS ABILITY TO GENERATE NEW REVENUES AND ACHIEVE PROFITABILITY WOULD BE HARMED.
E.piphany has grown significantly since its inception and will need to grow
quickly in the future. Any failure to manage this growth could impede
E.piphany's ability to increase revenues and achieve profitability. E.piphany
has increased its number of employees from 21 at December 31, 1997 to 333 as of
March 31, 2000. Following the acquisition of Octane, E.piphany expects to have
over 500 employees. The acquisition of Octane and future expansion could be
expensive and strain E.piphany's management and other resources. In order to
manage growth effectively, E.piphany must:
- hire, train and integrate new personnel,
- continue to augment its financial and accounting systems,
- manage its sales operations, which are in several locations, and
- expand its facilities.
IF OTHERS CLAIM THAT WE ARE INFRINGING THEIR INTELLECTUAL PROPERTY, WE COULD
INCUR SIGNIFICANT EXPENSES OR BE PREVENTED FROM SELLING OUR PRODUCTS.
E.piphany cannot assure you that others will not claim that the combined
company is infringing their intellectual property rights or that we do not in
fact infringe those intellectual property rights. We have not conducted a search
for existing intellectual property registrations and we may be unaware of
intellectual property rights of others that may cover some of its technology.
E.piphany has been contacted by a company which has asked E.piphany to
evaluate the need for a license of a patent the company holds directed to data
extraction technology. This company has filed litigation alleging infringement
of its patent against three of E.piphany's competitors. E.piphany cannot assure
you that the holder of the patent will not file litigation against E.piphany or
that E.piphany would prevail in the case of such litigation. In addition, the
patent holder has informed E.piphany that it has applications pending in
numerous foreign countries. The patent holder may also have applications on file
in the United States covering related subject matter which are confidential
until the patent is issued.
Any litigation regarding intellectual property rights could be costly and
time-consuming and divert the attention of our management and key personnel from
its business operations. The complexity of the technology involved and the
uncertainty of intellectual property litigation increase these risks. Claims of
intellectual property infringement might also require us to enter into costly
royalty or license agreements.
However, we may not be able to obtain royalty or license agreements on
terms acceptable to it, or at all. We also may be subject to significant damages
or an injunction against use of its products. A successful claim of patent or
other intellectual property infringement against us would have an immediate
material adverse effect on its business and financial condition.
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In addition, in all of Octane's software license agreements, Octane has
agreed to indemnify its customers against losses attributable to intellectual
property infringement by Octane's software. Should a third party claim that
Octane infringes their intellectual property, E.piphany could incur substantial
costs in defending and resolving such claims.
IF WE ARE UNABLE TO PROTECT ITS INTELLECTUAL PROPERTY RIGHTS, THIS INABILITY
COULD WEAKEN OUR COMPETITIVE POSITION, REDUCE ITS REVENUES AND INCREASE ITS
COSTS.
The success of the combined company depends in large part on its
proprietary technology. We rely on a combination of patent, copyright, trademark
and trade secrets, confidentiality procedures and licensing arrangements to
establish and protect its proprietary rights. We may be required to spend
significant resources to monitor and police its intellectual property rights. If
we fail to successfully enforce its intellectual property rights, its
competitive position may be harmed.
Our pending patent and trademark registration applications may not be
allowed or competitors may successfully challenge the validity or scope of these
registrations. In addition, our patents may not provide a significant
competitive advantage.
Other software providers could copy or otherwise obtain and use our
products or technology without authorization. They also could develop similar
technology independently which may infringe our proprietary rights. We may not
be able to detect infringement and may lose a competitive position in the market
before it does so. In addition, competitors may design around our technology or
develop competing technologies. The laws of some foreign countries do not
protect proprietary rights to the same extent as do the laws of the United
States.
In addition, one of the ways in which we charge for our software is based
on the number of users at a particular site that will be permitted to use the
software. Organizations that have a site license for a fixed number of users for
E.piphany products could allow unauthorized use of our software by unlicensed
users. Unauthorized use is difficult to detect and, to the extent that
E.piphany's software is used without authorization, we may lose potential
license fees.
PRIVACY AND SECURITY CONCERNS, PARTICULARLY RELATED TO THE USE OF OUR SOFTWARE
ON THE INTERNET, MAY LIMIT THE EFFECTIVENESS OF AND REDUCE THE DEMAND FOR
E.PIPHANY'S PRODUCTS.
The effectiveness of our software products relies on the storage and use of
customer data collected from various sources, including information collected on
Web sites, as well as other data derived from customer registrations, billings,
purchase transactions and surveys. Our collection and use of such data for
customer profiling may raise privacy and security concerns. Our customers
generally have implemented security measures to protect customer data from
disclosure or interception by third parties. However, the security measures may
not be effective against all potential security threats. If a well publicized
breach of customer data security were to occur, our software products may be
perceived as less desirable, impacting our future sales and profitability.
In addition, due to privacy concerns, some Internet commentators, consumer
advocates, and governmental or legislative bodies have suggested legislation to
limit the use of customer profiling technologies. The European Union and some
European countries have already adopted some restrictions on the use of customer
profiling data. In addition, Internet users can, if they choose, configure their
Web browsers to limit the collection of user data for customer profiling. Should
many Internet users choose to limit the use of customer profiling technologies,
or if major countries or regions adopt legislation or other restrictions on the
use of customer profiling data, E.piphany's software would be less useful to
customers, and E.piphany's sales and profits could decrease.
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E.PIPHANY'S AND OCTANE'S PRODUCTS ARE NEW, AND IF THEY CONTAIN DEFECTS OR OUR
SERVICES ARE NOT PERCEIVED AS HIGH QUALITY, WE COULD LOSE POTENTIAL CUSTOMERS OR
BE SUBJECT TO DAMAGES.
E.piphany began shipping its first products in early 1998, and in June
1999, began shipping its E.piphany E.4 System software. Octane began shipping
its current software product in February 2000. These products are complex and
may contain currently unknown errors, defects or failures, particularly since
they are new and recently released. In the past we have discovered software
errors in some of its products after introduction. We may not be able to detect
and correct errors before releasing its products commercially. If its commercial
products contain errors, E.piphany may be required to:
- expend significant resources to locate and correct the error,
- delay introduction of new products or commercial shipment of products, or
- experience reduced sales and harm to its reputation from dissatisfied
customers.
Our customers also may encounter system configuration problems which
require us to spend additional consulting or support resources to resolve these
problems.
In addition, E.piphany's customers generally store their data across
computer networks, which are often connected to the Internet. E.piphany's
software operates across its customers' computer networks and can, at the
customer's option, be accessed through an Internet connection. E.piphany
software contains technology designed to prevent theft or loss of data.
Nevertheless, customers may encounter security issues with their existing
databases installed across networks, particularly the Internet, or with
E.piphany's software. A security breach involving E.piphany's software, or a
widely publicized security breach involving the Internet generally, could harm
E.piphany's sales. A security breach involving E.piphany's software could also
expose E.piphany to claims for damages.
Because E.piphany's software products are used for important
decision-making processes and Octane's software products enable our customers to
interact with their customers, product defects may also give rise to product
liability claims. Although E.piphany's license agreements with customers
typically contain provisions designed to limit E.piphany's exposure, some courts
may not enforce all or part of these limitations. Although E.piphany has not
experienced any product liability claims to date, it may encounter these claims
in the future. Product liability claims, whether or not successful, could:
- divert the attention of E.piphany's management and key personnel from
E.piphany's business,
- be expensive to defend, and
- result in large damage awards.
E.piphany's product liability insurance may not be adequate to cover all of
the expenses resulting from a claim. In addition, if E.piphany's customers do
not find E.piphany's services to be of high quality, they may elect to use other
training, consulting and product integration firms rather than contract for
E.piphany's services. If customers are dissatisfied with E.piphany's services,
E.piphany may lose revenues.
E.PIPHANY INTENDS TO EXPAND ITS INTERNATIONAL SALES EFFORTS BUT WE DO NOT HAVE
SUBSTANTIAL EXPERIENCE IN INTERNATIONAL MARKETS.
Although E.piphany's international sales have been immaterial to date,
E.piphany intends to expand its international sales efforts in the future.
E.piphany has limited experience in marketing, selling and supporting its
products and services abroad. If E.piphany is unable to grow its international
operations successfully and in a timely manner, its business and operating
results could
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be seriously harmed. In addition, doing business internationally involves
greater expense and many additional risks, particularly:
- unexpected changes in regulatory requirements, taxes, trade laws and
tariffs,
- differing intellectual property rights,
- differing labor regulations,
- unexpected changes in regulatory requirements,
- changes in a specific country's or region's political or economic
conditions,
- greater difficulty in establishing, staffing and managing foreign
operations, and
- fluctuating exchange rates.
E.piphany plans to expand its international operations in the near future,
and this will require a significant amount of attention from E.piphany's
management and substantial financial resources. E.piphany has begun its efforts
at international expansion in Europe and, as of March 31, 2000, including
RightPoint's international presence, had nine sales and marketing professionals
located in the United Kingdom and France. Octane has sales operations based in
the United Kingdom, Australia, and Germany including 23 professionals employed
in those locations. E.piphany is also exploring other regions for future
expansion.
IF E.PIPHANY ACQUIRES ADDITIONAL COMPANIES OR TECHNOLOGIES IN THE FUTURE, THEY
COULD PROVE DIFFICULT TO INTEGRATE, DISRUPT E.PIPHANY'S BUSINESS, DILUTE
STOCKHOLDER VALUE OR ADVERSELY AFFECT E.PIPHANY'S OPERATING RESULTS.
In addition to the acquisition of Octane, E.piphany may acquire or make
investments in other complementary companies, services and technologies in the
future. If E.piphany fails to properly evaluate and execute acquisitions and
investments, they may seriously harm E.piphany's business and prospects. To
successfully complete an acquisition, E.piphany must:
- properly evaluate the technology,
- accurately forecast the financial impact of the transaction, including
accounting charges and transactions expenses,
- integrate and retain personnel,
- combine potentially different corporate cultures, and
- effectively integrate products and research and development, sales,
marketing and support operations.
If E.piphany fails to do any of these, it may suffer losses or its
management may be distracted from E.piphany's day-to-day operations. In
addition, if E.piphany conducts acquisitions using convertible debt or equity
securities, existing stockholders may be diluted which could affect the market
price of E.piphany's stock.
SEASONAL TRENDS IN SALES OF BUSINESS SOFTWARE MAY AFFECT E.PIPHANY'S QUARTERLY
REVENUES.
The market for business software has experienced seasonal fluctuations in
demand. The first and third quarters of the year have been typically
characterized by lower levels of revenue growth. E.piphany's believes that these
fluctuations are caused in part by customer buying patterns, which are
influenced by year-end budgetary pressures and by sales force commission
structures. As our revenues grow, we may experience seasonal fluctuations in our
revenues.
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FUTURE SALES OF OUR COMMON STOCK, INCLUDING THOSE PURCHASED IN OUR INITIAL
PUBLIC OFFERING AND THOSE ISSUED IN THE MERGER, MAY DEPRESS OUR STOCK PRICE.
If our stockholders or optionees sell substantial amounts of our common
stock in the public market, the market price of our common stock could fall. In
addition, such sales could create the perception to the public of difficulties
or problems with our products and services. As a result, these sales also might
make it more difficult for us to sell equity or equity-related securities in the
future at a time and price that we deem appropriate.
On April 14, 2000, we had 32,444,364 shares of common stock outstanding. Of
these shares, 31,182,693 are currently available for sale in the public market,
20,515,245 of which first became freely tradeable on April 20, 2000. In
addition, we will issue up to approximately 12,800,000 freely tradable shares to
Octane's shareholders in the merger. The remaining outstanding shares of
E.piphany's common stock will become eligible for sale in the public market as
follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
---------------- ----
<S> <C>
843,376........................................... At June 16, 2000
316,407........................................... At August 19, 2000
21,571............................................ At September 22, 2000
6,250............................................. At September 27, 2000
74,067............................................ At December 14, 2000
</TABLE>
The above table excludes options and warrants (including those assumed in
the merger). Shares issued upon the exercise of outstanding options (including
those assumed in the merger) may generally also be sold in the public market.
E.piphany and its underwriters may remove the lock-up restrictions in advance
without prior notice.
E.PIPHANY DOES NOT INTEND TO PAY DIVIDENDS, YOU WILL NOT RECEIVE FUNDS WITHOUT
SELLING SHARES AND YOU MAY LOSE THE ENTIRE AMOUNT OF YOUR INVESTMENT.
E.piphany has never declared or paid any cash dividends on its capital
stock and does not intend to pay dividends in the foreseeable future. E.piphany
intends to invest its future earnings, if any, to fund our growth. Therefore,
you will not receive any funds without selling your shares. We further cannot
assure you that you will receive a return on your investment when you sell your
shares or that you will not lose the entire amount of your investment.
BECAUSE SOME EXISTING STOCKHOLDERS TOGETHER OWN 22.4% OF E.PIPHANY'S STOCK, THE
VOTING POWER OF OTHER STOCKHOLDERS MAY BE LIMITED.
After the closing of the merger, it is anticipated that E.piphany's
officers, directors and five percent or greater stockholders will beneficially
own or control, directly or indirectly, approximately 10,220,773 shares of
common stock, which in the aggregate represented approximately 22.4% of the
outstanding shares of common stock. As a result, if some of these persons or
entities act together, they may have the ability to control matters submitted to
E.piphany's stockholders for approval, including the election and removal of
directors and the approval of any business combination. This may delay or
prevent an acquisition or cause the market price of E.piphany's stock to
decline. Some of these persons or entities may have interests different than
yours. For example, they may be more interested in selling E.piphany to an
acquiror than other investors or may want E.piphany to pursue strategies that
are different from the wishes of other investors.
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PROVISIONS IN E.PIPHANY'S CHARTER DOCUMENTS AND DELAWARE LAW MAY DELAY OR
PREVENT AN ACQUISITION OF E.PIPHANY.
E.piphany's certificate of incorporation and bylaws contain provisions
which could make it harder for a third party to acquire E.piphany without the
consent of E.piphany's board of directors. For example, if a potential acquiror
were to make a hostile bid for E.piphany, the acquiror would not be able to call
a special meeting of stockholders to remove E.piphany's board of directors or
act by written consent without a meeting. In addition, E.piphany's board of
directors has staggered terms, which makes it difficult to remove them all at
once. The acquiror would also be required to provide advance notice of its
proposal to remove directors at an annual meeting. The acquiror also will not be
able to cumulate votes at a meeting, which will require the acquiror to hold
more shares to gain representation on the board of directors than if cumulative
voting were permitted.
E.piphany's board of directors also has the ability to issue preferred
stock which would significantly dilute the ownership of a hostile acquiror. In
addition, Section 203 of the Delaware General Corporation Law limits business
combination transactions with 15% stockholders that have not been approved by
the board of directors. These provisions and other similar provisions make it
more difficult for a third party to acquire E.piphany without negotiation. These
provisions may apply even if the offer may be considered beneficial by some
stockholders.
E.piphany's board of directors could choose not to negotiate with an
acquiror that it did not feel was in the strategic interests of E.piphany. If
the acquiror was discouraged from offering to acquire E.piphany or prevented
from successfully completing a hostile acquisition by the antitakeover measures,
you could lose the opportunity to sell your shares at a favorable price.
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WHERE YOU CAN FIND MORE INFORMATION
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN AS CONTAINED HEREIN IN CONNECTION WITH THESE MATTERS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY E.PIPHANY OR OCTANE. NEITHER THE DELIVERY
HEREOF NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS
HEREIN SET FORTH SINCE THE DATE HEREOF. THIS PROXY STATEMENT/PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES
OFFERED BY THIS PROXY STATEMENT/PROSPECTUS WHERE, OR TO ANY PERSON TO WHOM, IT
IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
E.piphany is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and, in accordance therewith, files reports,
proxy statements and other information with the Securities and Exchange
Commission. Such reports, proxy statements and other information filed by
E.piphany can be inspected and copied at the public reference facilities of the
SEC located at:
<TABLE>
<S> <C> <C>
Judiciary Plaza Citicorp Center Seven World Trade Center
Room 1024 500 West Madison Street 13th Floor
450 Fifth Street, N.W Suite 1400 New York, NY 10048
Washington, D.C. 20549 Chicago, IL 60661
</TABLE>
Copies of such material can also be obtained from the SEC Public Reference
Section at the addresses noted above at prescribed rates. Information regarding
the operation of the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. The SEC maintains a World Wide Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the SEC. The address of the World Wide Web site is
http://www.sec.gov.
E.piphany's common stock is quoted for trading on the Nasdaq Stock Market's
National Market, and, accordingly, reports, proxy statements and other
information concerning E.piphany may be inspected at:
The Nasdaq Stock Market
Nasdaq Regulatory Filings
9801 Washingtonian Boulevard, 5th Floor
Gaithersburg, MD 20878
E.piphany has filed with the SEC a registration statement on Form S-4 under
the Securities Act with respect to the common stock offered hereby. This
prospectus does not contain all of the information set forth in the registration
statement and its exhibits and schedules. For further information with respect
to E.piphany, reference is made to the registration statement and its exhibits
and schedules. Statements contained in this prospectus as to the contents of any
contract or any other document referred to are not necessarily complete, and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the registration statement, each such statement being
qualified in all respects by such reference. A copy of the registration
statement may be inspected without charge at the offices of the SEC Public
Reference Section at the addresses noted above.
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FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
This proxy statement/prospectus contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These statements
relate to expectations concerning matters that are not historical facts. Words
such as "projects," "believes," "anticipates," "plans," "expects," "intends,"
and similar words and expressions are intended to identify forward-looking
statements. Although each of E.piphany and Octane believes that such
forward-looking statements are reasonable, neither can assure you that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from such expectations are disclosed herein
including, without limitation, in the "Risk Factors" section. All
forward-looking statements are expressly qualified in their entirety by these
factors and all related cautionary statements. Neither E.piphany nor Octane
undertakes any obligation to update any forward-looking statements.
TRADEMARKS
This proxy statement/prospectus contains trademarks and service marks of
E.piphany and Octane and may contain trademarks of others. E.piphany's
trademarks include "Adaptive Schema Generator," "E.4," "EpiCenter E.4 System,"
"E.piphany" and the E.piphany logo. Octane's trademarks include "Octane,"
"Octane Software," "Supportzone.com," "Octane 2000," "Icube," "Ichannels," and
"Octane Studio." All other brand names or trademarks appearing in this proxy
statement/prospectus are the property of their respective holders.
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THE E.PIPHANY SPECIAL MEETING
DATE, TIME AND PLACE OF MEETING
The special meeting of the stockholders of E.piphany will be held at the
Hotel Sofitel located at 223 Twin Dolphin Drive, Redwood City, California 94065,
on May 31, 2000, at 9:00 a.m., local time.
PURPOSE OF THE SPECIAL MEETING
At the special meeting, E.piphany stockholders will consider and vote upon
a proposal to issue shares of E.piphany common stock to shareholders of Octane
in connection with the merger of a wholly-owned subsidiary of E.piphany into
Octane.
E.piphany stockholders will also be asked to consider and vote upon such
other matters as may be properly submitted at the special meeting. Additionally,
E.piphany stockholders may be asked to vote upon a proposal to adjourn or
postpone the special meeting. Any adjournment or postponement could be used for
the purpose of allowing additional time for soliciting additional votes to
approve the proposed issuance of shares of E.piphany common stock in connection
with the merger.
THE E.PIPHANY BOARD HAS UNANIMOUSLY APPROVED THE MERGER, THE MERGER
AGREEMENT AND THE PROPOSED ISSUANCE OF SHARES OF E.PIPHANY COMMON STOCK TO
OCTANE SHAREHOLDERS IN CONNECTION WITH THE MERGER, AND BELIEVES THAT THE TERMS
OF THE MERGER, THE MERGER AGREEMENT AND THE ISSUANCE OF THE SHARES ARE FAIR TO,
AND IN THE BEST INTERESTS OF, E.PIPHANY AND ITS STOCKHOLDERS, AND UNANIMOUSLY
RECOMMENDS THAT HOLDERS OF SHARES OF E.PIPHANY STOCK VOTE "FOR" THE PROPOSED
ISSUANCE OF SHARES OF E.PIPHANY COMMON STOCK TO OCTANE SHAREHOLDERS IN
CONNECTION WITH THE MERGER.
RECORD DATE; VOTING RIGHTS; PROXIES
Only holders of E.piphany capital stock at the close of business on April
14, 2000, the record date, are entitled to notice of and to vote at the special
meeting.
As April 14, 2000, there were 32,444,364 shares of E.piphany common stock
issued and outstanding.
The accompanying form of proxy is for use at the special meeting if a
stockholder will be unable to attend the special meeting. All shares of
E.piphany common stock represented by properly executed proxies will, unless
such proxies have been previously revoked, be voted in accordance with the
instructions indicated in such proxies. IF NO INSTRUCTIONS ARE INDICATED, SHARES
OF E.PIPHANY COMMON STOCK REPRESENTED BY SUCH PROXIES WILL BE VOTED "FOR" THE
ISSUANCE OF SHARES OF E.PIPHANY COMMON STOCK TO OCTANE SHAREHOLDERS IN
CONNECTION WITH THE MERGER OF A WHOLLY-OWNED SUBSIDIARY OF E.PIPHANY INTO
OCTANE. E.piphany does not know of any matters other than as described in the
notice of special meeting of stockholders that are to come before the special
meeting. If any other matter is properly presented for action at the special
meeting, the persons named in the enclosed form of proxy will have the
discretion to vote on such matters in accordance with their best judgment.
A stockholder who has given a proxy may revoke it at any time prior to its
exercise by giving written notice to the Assistant Secretary of E.piphany, by
signing and returning a later-dated proxy, or by voting in person at the special
meeting. However, mere attendance at the special meeting will not in and of
itself have the effect of revoking the proxy. Votes cast by proxy or in person
at the special meeting will be tabulated by the inspector of election appointed
for the special meeting.
SOLICITATION OF PROXIES
Proxies are being solicited by and on behalf of the E.piphany board of
directors. E.piphany will bear all expenses in connection with such
solicitation. In addition to solicitation by use of the mails, proxies may be
solicited by directors, officers and employees of E.piphany in person or by
telephone,
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telegram or other means of communication. Such directors, officers and employees
will not be additionally compensated for, but may be reimbursed by E.piphany for
out-of-pocket expenses incurred in connection with, such solicitation.
Arrangements have also been made with brokerage firms, banks, custodians,
nominees and fiduciaries for the forwarding of proxy and solicitation materials
to owners of E.piphany common stock held of record by such persons, and these
firms will be reimbursed for reasonable expenses incurred in forwarding the
proxy and solicitation materials.
QUORUM; ABSTENTIONS; BROKER NON-VOTES
The presence in person or by properly executed proxy of holders of a
majority of all the issued and outstanding shares of E.piphany common stock
entitled to vote is necessary to constitute a quorum at the special meeting. For
purposes of determining whether a quorum is present, the inspector of election
will include shares that are present or represented by proxy, even if the
holders of such shares abstain from voting on any particular matter. In the
event that a broker, bank, custodian, nominee or other record holder of
E.piphany common stock indicates on a proxy that it does not have discretionary
authority to vote certain shares on a particular proposal -- known as a broker
non-vote -- those shares will not be considered for purposes of determining the
number of shares entitled to vote with respect to a particular proposal on which
the broker has expressly not voted, but will be counted for purposes of
determining the presence or absence of a quorum for the transaction of business.
Accordingly, abstentions and broker non-votes will not affect the outcome of the
voting on a proposal that requires a majority of the shares entitled to vote
thereon.
REQUIRED VOTE
Pursuant to rules promulgated by the National Association of Securities
Dealers relating to the Nasdaq Stock Market, E.piphany stockholders are required
to approve the issuance of shares of E.piphany common stock to the Octane
shareholders in connection with the merger because the number of shares of
E.piphany common stock to be issued will be in excess of 20% of the number of
shares of E.piphany common stock outstanding immediately prior to the proposed
issuance of shares. The approval of the issuance of shares of E.piphany common
stock to the Octane shareholders requires the affirmative vote of the holders of
a majority of the shares of E.piphany common stock present or represented at the
E.piphany special meeting of stockholders. For all purposes, each share of
E.piphany common stock entitles the holder thereof to one vote per share.
For purposes of determining whether the proposed issuance of shares of
E.piphany common stock to the Octane shareholders has been approved, the
inspector of election will include abstentions and broker non-votes as a portion
of the number of shares deemed to have voted on such matters at the special
meeting. Accordingly, abstentions and broker non-votes will have the effect of a
"no" vote on the proposal to approve the proposed issuance of shares of
E.piphany common stock in connection with the merger.
As of April 14, 2000, directors and executive officers of E.piphany and
their affiliates were beneficial owners of an aggregate of 10,220,773 shares of
E.piphany common stock, or approximately 31.1% of the outstanding shares of
common stock.
All of the E.piphany directors, executive officers and certain of their
affiliates have entered into agreements to vote all shares of E.piphany capital
stock beneficially owned by them in favor of the proposed issuance of shares of
E.piphany common stock to the Octane shareholders in connection with the merger.
The matters to be considered at the special meeting are of great importance
to the stockholders of E.piphany. Accordingly, stockholders are urged to read
and carefully consider the information presented in the proxy
statement/prospectus, and to complete, date, sign and promptly return the
enclosed proxy in the enclosed postage-paid envelope.
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THE OCTANE SPECIAL MEETING
DATE, TIME AND PLACE OF MEETING
The special meeting of the shareholders of Octane will be held at the
offices of Octane located at 2929 Campus Drive #101, San Mateo, California
94403, on May 31, 2000, at 8:00 a.m., local time.
PURPOSE OF THE SPECIAL MEETING
At the special meeting, Octane shareholders will consider and vote upon:
- a proposal to approve the merger agreement and the merger, and
- a proposal that all Octane preferred stock be converted into Octane
common stock immediately prior to the closing.
Octane shareholders will also be asked to consider and vote upon such other
matters as may be properly submitted at the special meeting. Additionally,
Octane shareholders may be asked to vote upon a proposal to adjourn or postpone
the special meeting. Any adjournment or postponement could be used for the
purpose of allowing additional time for soliciting additional votes to approve
the merger agreement and the conversion of the Octane preferred stock.
THE OCTANE BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT, THE MERGER
AND THE PREFERRED STOCK CONVERSION, BELIEVES THAT THE TERMS OF THE MERGER
AGREEMENT, THE MERGER AND THE PREFERRED STOCK CONVERSION ARE FAIR TO, AND IN THE
BEST INTERESTS OF, OCTANE AND ITS SHAREHOLDERS, AND UNANIMOUSLY RECOMMENDS THAT
HOLDERS OF SHARES OF OCTANE STOCK VOTE "FOR" ADOPTION AND APPROVAL OF THE MERGER
AGREEMENT, THE MERGER AND THE PREFERRED STOCK CONVERSION.
RECORD DATE; VOTING RIGHTS; PROXIES
Only holders of Octane capital stock at the close of business on April 14,
2000, the record date, are entitled to notice of and to vote at the special
meeting.
As of April 14, there were 9,729,189 shares of Octane common stock issued
and outstanding, and 12,951,320 shares of Octane preferred stock issued and
outstanding.
The accompanying form of proxy is for use at the special meeting if a
shareholder will be unable to attend the special meeting. All shares of Octane
common stock and preferred stock represented by properly executed proxies will,
unless such proxies have been previously revoked, be voted in accordance with
the instructions indicated in such proxies. IF NO INSTRUCTIONS ARE INDICATED,
SHARES OF OCTANE COMMON STOCK AND PREFERRED STOCK REPRESENTED BY SUCH PROXIES
WILL BE VOTED "FOR" ADOPTION AND APPROVAL OF THE MERGER AGREEMENT AND THE MERGER
AND "FOR" THE PREFERRED STOCK CONVERSION. Octane does not know of any matters
other than as described in the notice of special meeting of shareholders that
are to come before the special meeting. If any other matter is properly
presented for action at the special meeting, the persons named in the enclosed
form of proxy will have the discretion to vote on such matters in accordance
with their best judgment.
A shareholder who has given a proxy may revoke it at any time prior to its
exercise by giving written notice to the Secretary of Octane, by signing and
returning a later-dated proxy, or by voting in person at the special meeting.
However, mere attendance at the special meeting will not in and of itself have
the effect of revoking the proxy. Votes cast by proxy or in person at the
special meeting will be tabulated by the inspector of election appointed for the
special meeting.
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SOLICITATION OF PROXIES
Proxies are being solicited by and on behalf of the Octane board of
directors. Octane will bear all expenses in connection with such solicitation.
In addition to solicitation by use of the mails, proxies may be solicited by
directors, officers and employees of Octane in person or by telephone, telegram
or other means of communication. Such directors, officers and employees will not
be additionally compensated for, but may be reimbursed by Octane for
out-of-pocket expenses incurred in connection with, such solicitation.
QUORUM; ABSTENTIONS
The presence in person or by properly executed proxy of holders of a
majority of all the issued and outstanding shares of Octane common stock and
preferred stock entitled to vote is necessary to constitute a quorum at the
special meeting. While there is no definitive statutory or case law authority in
California as to the proper treatment of abstentions, Octane believes that
abstentions should be counted for purposes of determining the presence or
absence of a quorum for the transaction of business, but should not be counted
for purposes of determining the number of shares entitled to vote on a
particular proposal as the shareholder has expressly declined to vote on the
proposal. Accordingly, abstentions and broker non-votes will not affect the
outcome of the voting on a proposal that requires a majority of the shares
entitled to vote thereon.
REQUIRED VOTE
Adoption and approval of the merger agreement and the merger requires the
affirmative vote of the holders of a majority of the outstanding shares of
Octane common stock, a majority of the outstanding shares of Octane preferred
stock, and a majority of the outstanding shares of Octane common stock and
preferred stock voting together as a single class.
Approval of the preferred stock conversion requires the affirmative vote of
the holders of 66 2/3% of the outstanding shares of Octane preferred stock.
For all purposes, each share of Octane common stock entitles the holder
thereof to one vote per share and each share of Octane preferred stock entitles
the holder thereof to one vote per share.
For purposes of determining whether the merger, the merger agreement and
preferred stock conversion have been approved, the inspector of election will
include abstentions as a portion of the number of shares deemed to have voted on
such matters at the special meeting. Accordingly, abstentions will have the
effect of a "no" vote on the proposals to approve merger agreement, the merger
and preferred stock conversion.
As of April 14, 2000, directors and executive officers of Octane and their
affiliates were beneficial owners of an aggregate of 7,271,360 shares of Octane
common stock and 9,626,519 shares of preferred stock, or approximately:
- 74.7% of the outstanding shares of common stock, and
- 74.3% of the outstanding shares of preferred stock.
All of the Octane directors, executive officers, venture capital firms
affiliated with some of the Octane directors, and all other affiliates of Octane
have entered into agreements to vote all shares of Octane common stock and
preferred stock of Octane beneficially owned by them in favor of the merger, the
merger agreement and the preferred stock conversion.
The matters to be considered at the special meeting are of great importance
to the shareholders of Octane. Accordingly, shareholders are urged to read and
carefully consider the information presented in the proxy statement/prospectus,
and to complete, date, sign and promptly return the enclosed proxy in the
enclosed postage-paid envelope.
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DISSENTERS' RIGHTS OF OCTANE SHAREHOLDERS
THE FOLLOWING SUMMARY OF DISSENTERS' RIGHTS UNDER CALIFORNIA LAW IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO CHAPTER 13 OF THE CALIFORNIA GENERAL
CORPORATION LAW, THE COMPLETE TEXT OF WHICH IS ATTACHED HERETO AS ANNEX IV.
FAILURE TO STRICTLY FOLLOW THE PROCEDURES SET FORTH IN CHAPTER 13 OF THE
CALIFORNIA CORPORATIONS CODE MAY RESULT IN THE LOSS, TERMINATION OR WAIVER OF
DISSENTERS' RIGHTS. AN OCTANE SHAREHOLDER WHO SIGNS A PROXY CARD APPROVING AND
AUTHORIZING THE MERGER AND THE MERGER AGREEMENT OR WHO RETURNS A BLANK EXECUTED
PROXY WILL NOT HAVE A RIGHT TO DISSENT FROM THE MERGER OR THE MERGER AGREEMENT.
The rights of Octane shareholders who dissent in connection with the merger
are governed by specific legal provisions contained in Chapter 13 (Sections
1300 - 1312) of the California Corporations Code, the text of which is attached
as Annex IV hereto. The description of dissenters' rights contained in this
proxy statement/prospectus is qualified in its entirety by reference to those
sections of the California Corporations Code. FAILURE TO FOLLOW THE STEPS
REQUIRED BY CHAPTER 13 OF THE CALIFORNIA CORPORATIONS CODE FOR PERFECTING
DISSENTERS' RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS.
If the merger is completed, certain of the Octane shareholders who object
to the merger and who have fully complied with all applicable provisions of
Chapter 13 of the California Corporations Code may have the right to require
Octane to purchase the shares of Octane common stock held by them for cash at
the fair market value of those shares on the day before the terms of the merger
were first announced, excluding any appreciation or depreciation because of the
merger. Persons who are beneficial owners of shares of Octane common stock but
whose shares are held by another person, such as a broker or nominee, should
instruct the record holder to follow the procedures outlined below if such
persons wish to dissent with respect to any or all of their shares. Under the
California Corporations Code, no shareholder who is entitled to exercise
dissenters' rights has any right at law or in equity to attack the validity of
the merger or to have the merger set aside or rescinded, except in an action to
test whether the number of shares required to authorize or approve the merger
had been legally voted in favor of the merger.
Shares of Octane common stock must be purchased by Octane upon demand from
a dissenting shareholder if all applicable requirements are complied with, but
only if (a) demands for payment are filed with respect to 5% or more of the
outstanding shares of such Octane common stock, or (b) the shares are subject to
a restriction on transfer imposed by Octane or by any law or regulation.
Octane is not aware of any restriction on transfer of any of the shares of
Octane common stock except restrictions that may be imposed upon shareholders
who are deemed to be "affiliates" of Octane as that term is defined in Rule 144
under the Securities Act. Those shareholders who believe there is some such
restriction affecting their shares should consult with their own legal counsel
as to the nature and extent of any dissenters' rights they may have.
For an Octane shareholder to exercise the right to have Octane purchase his
or her shares of Octane common stock, the procedures to be followed under
Chapter 13 of the California Corporations Code include the following
requirements:
- The shareholder of record must have voted the shares against the merger.
It is not sufficient to abstain from voting. However, the shareholder may
abstain as to part of his or her shares or
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vote part of those shares for the merger without losing the right to have
purchased those shares which were voted against the merger, and
- Any such shareholder who voted against the merger, and who wishes to have
his or her shares that were voted against the merger purchased by Octane,
must make a written demand to have Octane purchase those shares for cash
at their fair market value. The demand must include the information
specified below and must be received by Octane or its transfer agent not
later than the date of the Octane special meeting, which is May 31, 2000.
Within ten days after the approval of the merger by Octane shareholders,
the respective holders of shares of Octane common stock who voted against the
merger and made a timely demand for purchase (and who are entitled to require
Octane to purchase their shares because either (a) holders of 5% or more of the
outstanding shares filed demands by the date of the Octane special meeting, or
(b) the shares are restricted as to transfer) must be notified by Octane of the
approval and Octane must offer all of these shareholders a cash price for their
shares that Octane considers to be the fair market value of the shares on the
day before the terms of the merger were first announced, excluding any
appreciation or depreciation because of the proposed merger. The notice also
must contain a brief description of the procedures to be followed under Chapter
13 of the California Corporations Code in order for a shareholder to exercise
the right to have Octane purchase his or her shares, including the 30-day time
period for submitting certificates representing shares as to which dissenters'
rights are being exercised, and attach a copy of the relevant provisions of the
California Corporations Code.
DEMAND FOR PURCHASE
Merely voting or delivering a proxy directing a vote against the approval
of the merger does not constitute a demand for purchase. A written demand is
essential.
In all cases, the written demand that the dissenting shareholder must
deliver to Octane must:
- be made by the person who was the shareholder of record, including a
transferee of record, on the Octane record date set for voting on the
merger, April 14, 2000, or his or her duly authorized representative, and
not by someone who is merely a beneficial owner of the shares,
- state the number and class of dissenting shares, and
- include a demand that Octane purchase the shares at what the shareholder
claims to be the fair market value of such shares on the day before the
terms of the merger were first announced, excluding any appreciation or
depreciation because of the proposed merger. It is Octane's position that
this day is March 14, 2000. A shareholder may take the position in the
written demand that a different date is applicable. The shareholder's
statement of fair market value constitutes an offer by such dissenting
shareholder to sell the shares to Octane at such price.
In addition, it is recommended that the following conditions be complied
with to ensure that the demand is properly executed and delivered:
- the demand should be sent by registered or certified mail, return receipt
requested,
- the demand should be signed by the shareholder of record, or his or her
duly authorized representative, exactly as his or her name appears on the
stock certificates evidencing the shares,
- a demand for the purchase of shares owned jointly by more than one person
should identify and be signed by all such holders, and
- any person signing a demand for purchase in any representative
capacity -- such as attorney-in-fact, executor, administrator, trustee or
guardian -- should indicate his or her title and, if
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Octane so requests, furnish written proof of his or her capacity and
authority to sign the demand.
A shareholder may not withdraw a demand for payment without the consent of
Octane. Under the terms of the California Corporations Code, a demand by a
shareholder is not effective for any purchase unless it is received by Octane
(or any transfer agent thereof).
OTHER REQUIREMENTS
Within 30 days after the date on which the notice of the approval of the
merger is mailed by Octane to its shareholders, the shareholders' certificates
representing any shares which any shareholder demands be purchased must be
submitted to Octane at its principal office, or at the office of any transfer
agent thereof, to be stamped with a statement that the shares are dissenting
shares. Upon subsequent transfer of these shares, the new certificates will be
similarly stamped, together with the name of the original dissenting
shareholder.
If Octane and a dissenting shareholder agree that the shares held by such
shareholder are eligible for dissenters' rights and agree upon the price of such
shares, the dissenting shareholder is entitled to receive from Octane the agreed
price with interest thereon at the legal rate on judgments from the date of such
agreement. Any agreement fixing the fair market value of dissenting shares as
between Octane and the holders thereof must be filed with the Secretary of
Octane at the address set forth below. Subject to certain provisions of Section
1306 and Chapter 5 of the California Corporations Code, payment of the fair
market value of the dissenting shares shall be made within 30 days after the
amount thereof has been agreed upon or within 30 days after the statutory or
contractual conditions to the merger are satisfied, whichever is later. Cash
dividends declared and paid by Octane upon the dissenting shares after the date
of approval of the merger by its shareholders and prior to payment for the
shares shall be credited against the total amount to be paid by Octane.
If Octane and a dissenting shareholder fail to agree on either the fair
market value of the shares or on the eligibility of the shares to be purchased,
then either the shareholder or Octane may file a complaint for judicial
resolution of the dispute in the superior court of the proper county. The
complaint must be filed within six months after the date on which the respective
notice of approval is mailed to the shareholders. If a complaint is not filed
within six months, the shares will lose their status as dissenting shares. Two
or more dissenting shareholders may join as plaintiffs or be joined as
defendants in such an action. If the eligibility of the shares is at issue, the
court will first decide this issue. If the fair market value of the shares is in
dispute, the court will determine, or shall appoint one or more impartial
appraisers to assist in its determination of the fair market value. The costs of
the action will be assessed or apportioned as the court considers equitable, but
if the fair market value is determined to exceed 125% of the price offered to
the shareholder, Octane will be required to pay such costs.
Any demands, notices, certificates or other documents required to be
delivered to Octane may be sent to the Secretary, Octane Software, Inc., 2929
Campus Drive #101, San Mateo, CA 94403.
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THE MERGER AND RELATED TRANSACTIONS
The following discussion summarizes the proposed merger and related
transactions. The discussion is not, however, a complete statement of all
provisions of the merger agreement and related agreements. Detailed terms of and
conditions to the merger and related transactions are contained in the merger
agreement, a copy of which is attached to this proxy statement/prospectus as
Annex I. Statements made in this proxy statement/prospectus with respect to the
terms of the merger and related transactions are qualified in their respective
entireties by reference to, and you are urged to read the more detailed
information set forth in the merger agreement and the other documents attached
to the back of this proxy statement/prospectus.
BACKGROUND OF THE MERGER AND RELATED TRANSACTIONS
E.piphany from time to time has evaluated entering into strategic
relationships with and strategic acquisitions of companies with complementary
businesses and technologies. Octane Software, Inc. has been growing its
organization, customer base and revenue and was preparing to file a registration
statement to conduct an initial public offering. Octane was also in the process
of developing strategic partnerships to complement its operational customer
relationship management solutions.
In early 1999, Aditya (Tim) Guleri, Chairman of the Board of Directors,
Chief Executive Officer of Octane, and Roger Siboni, President and Chief
Executive Officer of E.piphany, became aware of each others' companies through
common acquaintances and business partners.
In June 1999, Mr. Siboni and Mr. Guleri met at E.piphany's headquarters to
discuss their respective companies and strategies. The two executives agreed
that a strategic partnership would be beneficial to both companies in the
future.
On November 11, 1999, Phil Fernandez, E.piphany's Executive Vice President
of Engineering and Paul Rodwick, E.piphany's Vice President of Product Marketing
and Strategy, met with Mr. Guleri and Kira Makagon, Octane's Chief Technical
Officer, at E.piphany's headquarters. They briefly discussed their respective
software products and how the two companies might work together. They agreed to
set up another meeting in which they could provide product demonstrations to
each other.
On December 2, 1999, Mr. Rodwick and Don Fornes, E.piphany's Director of
Strategic Planning, met with Mr. Guleri and Tom Clark, Octane's Director of
Product Marketing, at Octane's headquarters. They provided each other with
product demonstrations and again discussed how the two companies might work
together.
On January 26, 2000, Mr. Siboni and Mr. Guleri met at a local restaurant to
discuss the nature of the strategic partnership that was being discussed. At
that meeting, Mr. Siboni suggested that there could be merits to combining the
two companies. Both executives agreed that the idea should be pursued
concurrently with the development of a business relationship.
On February 3, 2000, Mr. Siboni met with Mr. Guleri and David Strohm, a
member of the Octane Board of Directors, and continued the previous discussions
regarding the potential combination of the companies.
On February 8, 2000, Mr. Rodwick and Mr. Fornes met with Todd Rowe,
Octane's Vice President of Business Development and John Diorio, a Product
Manager at Octane, at E.piphany's headquarters. The meeting focused on outlining
the growth strategies of both companies.
On February 9, 2000, Mr. Rodwick, Mr. Fornes and Ron Barale, E.piphany's
Vice President of Application Development, met with Ms. Makagon, Mr. Rowe and
Mr. Diorio at Octane's headquarters. The meeting focused on technical aspects of
the Octane product and how best to integrate that product with E.piphany's
products.
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On February 12, 2000, the executive teams of both companies met at
E.piphany's headquarters. At that meeting, Mr. Siboni made an informal
presentation to the senior Octane executives regarding the synergies and
strategic benefits that could accrue to both companies if a business combination
was effected. Mr. Siboni asked that serious discussions begin toward agreeing on
a business combination. Representatives of the two companies then discussed
their growth strategies and cultures and how the two companies might come
together in a business combination.
Later on February 12, 2000, Octane's management proceeded to have internal
discussions, and, after a discussion with the Octane board of directors on
February 13, 2000, Octane agreed to engage in merger discussions with E.piphany.
At an informal meeting of the Octane board of directors on February 13, 2000,
the board discussed the retention of an investment banking firm to advise Octane
and its board of directors on the merger transaction, but a final decision to
proceed in this direction was not made.
On February 13, 2000, valuation discussions began on an informal basis
between Mr. Siboni and Mr. Guleri.
Between February 15, 2000 and March 15, 2000, Mr. Siboni met with Mr.
Guleri on numerous occasions to discuss the terms of a potential acquisition.
Some of these meetings included Kevin Yeaman, E.piphany's Chief Financial
Officer and James Doehrman, Octane's Chief Financial Officer.
On February 16, 2000, senior executives from both companies met and
performed due diligence so that valuation discussions could be refined.
On February 17, 2000, at the direction of E.piphany, a representative from
Credit Suisse First Boston reviewed mechanics of valuation calculation generally
with the Octane board of directors and senior executives. This meeting was
inconclusive and informal discussions about valuation metrics continued into the
next week.
On February 18, 2000, at a regularly scheduled meeting of the E.piphany
board of directors, Mr. Siboni updated the board on the discussions with Octane
and other strategic alternatives available to E.piphany. The board directed
E.piphany's management to continue its discussions with Octane.
On February 22, 2000, Mr. Guleri and Mr. Siboni reached tentative agreement
on the mechanics of the valuation calculation and that any E.piphany offer would
be presented as a fixed number of E.piphany shares based on a negotiated
ownership percentage to be held by Octane in the combined company. It was
further agreed that the share calculation would be based on the fully diluted
number of shares of E.piphany common stock outstanding at the latest practicable
date prior to the consummation of the merger.
Due diligence meetings were held between various senior executives of both
companies during the weeks of February 21, 2000 and February 28, 2000. On
February 23, 2000, senior executives of Octane met with representatives of
Credit Suisse First Boston to discuss the financial advisor's due diligence
being conducted on behalf of E.piphany. Follow-up discussions were held during
the next several days.
On February 26, 2000, Mr. Guleri had an informal meeting with Mr. Strohm
and Mr. Robert Davoli, another member of the Octane Board of Directors, and
discussed various other strategic alternatives, which included Octane's
continued pursuit of an initial public offering and possible business
combinations with other companies. The Octane board concluded that discussions
should continue between E.piphany and Mr. Guleri, and the board reached
agreement on the range of valuation that the Octane board of directors would
consider acceptable. All parties agreed that if consensus could not be achieved
within that valuation range within one week, Octane should continue to
aggressively pursue its initial public offering. The parties again discussed the
potential need for
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<PAGE> 49
Octane to hire an investment banking firm to advise it and its board of
directors on the transaction, but did not reach a final conclusion.
On February 29, 2000, Mr. Strohm met with Mr. Siboni and had further
informal discussions on the valuation range that was acceptable to Octane and
conducted due diligence on behalf of the Octane board.
On March 3, 2000, Mr. Siboni met with Mr. Guleri, and both began serious
discussions with an intent to reach a consensus on valuation so that drafting of
a definitive agreement of merger could begin. After lengthy discussions, Mr.
Siboni presented Mr. Guleri with a verbal offer for Octane that equaled
approximately 12.8 million shares of E.piphany common stock, or a 26.5% interest
in the combined companies. This offer was accepted verbally by Mr. Guleri. Both
parties agreed to begin negotiation of a definitive merger agreement.
Negotiation of a definitive agreement of merger and legal due diligence
began on March 4, 2000. Shortly after negotiations began, the Octane board made
a final recommendation that Octane retain an investment banking firm to advise
Octane and its board of directors during the negotiations of the definitive
agreement of merger. On March 8, 2000, Octane contacted Morgan Stanley Dean
Witter and hired them to provide advisory services.
Discussions about the final valuation continued on an informal basis until
both parties agreed on March 13, 2000 that the March 3, 2000 agreement of 12.8
million shares of E.piphany common stock, or 26.5% of the combined companies,
would be the final agreed valuation.
On March 13, 2000 the Octane board received copies of the proposed merger
agreement.
On March 14, 2000 the Octane board met again telephonically to discuss the
status of negotiations. Mr. Guleri discussed the status of key points in the
negotiation. Octane's legal counsel then advised the board of its fiduciary
obligations in considering a possible transaction with E.piphany, and reviewed
with the Octane board the terms of the proposed merger agreement and the status
of the negotiation on those terms. Representatives of Morgan Stanley Dean Witter
then further reviewed with the board its analysis of valuations of comparable
companies and comparable transactions and answered the board's questions about
comparable transactions. The board asked numerous questions of Morgan Stanley
Dean Witter and Octane's legal counsel, and a discussion ensued regarding open
issues and strategic alternatives. The board authorized Mr. Guleri and Mr.
Doehrman to proceed with negotiations toward finalizing the definitive agreement
subject to the satisfactory resolution of certain open issues and unanimously
voted to approve the merger.
On March 14, 2000, the E.piphany board of directors met telephonically with
its legal counsel and financial advisors. Mr. Siboni, Mr. Yeaman and E.piphany's
legal counsel reviewed with the board the terms of the merger agreement and the
status of negotiations relating to those terms. Also at this meeting,
representatives of Credit Suisse First Boston reviewed with the board its
financial analysis with respect to the proposed merger consideration.
Representatives of Credit Suisse First Boston then rendered to the E.piphany
board an oral opinion, which opinion was subsequently confirmed by delivery of a
written opinion dated March 14, 2000, to the effect that, as of that date and
based on and subject to the matters described in its opinion, the consideration
provided for in the merger was fair, from a financial point of view, to
E.piphany. The board asked numerous questions and discussed the merits of the
transaction at length. After this discussion, the board unanimously voted to
approve the merger.
The definitive agreement was signed during the evening of March 14, 2000
and a joint press release was issued by E.piphany and Octane announcing the
signing of the merger agreement on March 15, 2000.
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<PAGE> 50
JOINT REASONS FOR THE MERGER
The boards of directors of E.piphany and Octane have each unanimously
approved the merger agreement and the merger, and each of the E.piphany and the
Octane board unanimously recommends approval of the merger agreement and the
merger by their respective stockholders. The boards of both companies have
identified a number of potential benefits which they believe will contribute to
the success of the combined company, including:
- creation of a more complete solution that includes software for both
analyzing customer data as well as automating customer interactions
across all points of customer interaction,
- enabling the combined company to respond more quickly and effectively to
technological change, increased competition and market demands in an
industry experiencing rapid innovation and change,
- enabling the combined company to more effectively sell and market its
solutions,
- enabling the combined company to increase market penetration by selling
both companies' solutions through both companies' sales and distribution
channels, and
- creation of a unified enterprise application platform, allowing the
combined company to more effectively develop and market additional
applications.
E.PIPHANY'S REASONS FOR THE MERGER
The E.piphany board has unanimously approved the merger and has identified
several potential benefits of the merger that it believes will contribute to the
success of the combined entity following the merger. The E.piphany board
believes that Octane possesses technology that will be valuable to E.piphany's
product and service offerings. In the process of approving the merger, the
E.piphany board considered a number of factors, including:
- the opportunity to enhance the E.piphany E.4 System with Octane's
technology,
- the ability to automate customer interactions in addition to analyzing
customer data,
- the ability to integrate multiple channels of customer interaction,
including the Web, call center, email, fax and wireless devices,
- the ability to offer a more complete solution to customers that are
looking to reduce the number of vendors from which they have to purchase
software products,
- the opportunity to accelerate the development of other new product
initiatives by utilizing the greater engineering resources of the
combined company,
- increased capacity across the entire organization through the addition of
over 200 Octane employees,
- the ability to cross-sell E.piphany's and Octane's products, thereby
increasing revenue without a commensurate increase in selling costs, and
- the extent to which the increased size of the combined company will
enable it to compete with larger competitors.
In the course of its deliberations, the E.piphany board reviewed a number
of additional factors relevant to the merger. These factors included:
- information concerning the respective businesses, prospects, historical
financial performance and conditions, operations, technologies,
management, products, competitive positions, customers and future
development plans of both E.piphany and Octane,
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<PAGE> 51
- the terms of the merger agreement,
- the likelihood of realizing superior benefits through alternative
strategies,
- the value of Octane as a part of E.piphany's operations,
- the compatibility of management and businesses of E.piphany and Octane,
and
- results from E.piphany's management's due diligence investigation of
Octane.
The E.piphany board also considered a variety of potentially negative
factors in its deliberations concerning the merger. These factors include:
- the potential loss of revenue from E.piphany's business following the
merger as a result of confusion in the marketplace and the possible
exploitation of such confusion by competitors of E.piphany,
- the possibility of management distraction associated with the
acquisition,
- the risk that benefits sought to be achieved by the acquisition might not
be realized,
- accounting charges from the merger, and
- the risks described above in the section entitled "Risk Factors."
Additionally, in evaluating the proposed acquisition, the E.piphany board
of directors considered the pro forma contribution from Octane to revenue and
net losses of the combined company, both historically and in the near term.
Although based on such analyses the E.piphany board of directors concluded that
the acquisition would increase losses in the near term, for the strategic
reasons set forth above, the board unanimously determined that E.piphany should
proceed with the merger agreement and the merger.
The preceding discussion of the information and factors considered by the
E.piphany board is not, and is not intended to be, exhaustive, but is believed
to include the material factors considered by the E.piphany board in evaluating
the merger and the issuance of shares of E.piphany common stock to Octane
shareholders in connection therewith. In view of the variety of factors
considered in connection with its evaluation of the merger, the E.piphany board
did not find it practicable to, and did not, quantify or otherwise assign
relative weights to the specific factors considered in reaching its
determination. In addition, individual members of the E.piphany board may have
given different weights to different factors. In the course of its
deliberations, the E.piphany board did not establish a range of values for
E.piphany capital stock; however, based on the factors outlined above and after
consultation with its financial advisor, Credit Suisse First Boston, the
E.piphany board unanimously determined that the terms of the merger are fair to,
and that the merger is in the best interest of, E.piphany and its stockholders.
VOTE REQUIRED
Under the rules of the Nasdaq Stock Market, approval of the issuance of
shares of E.piphany common stock to Octane shareholders in connection with the
merger requires the affirmative vote of holders of a majority of the shares of
E.piphany common stock present or represented at the special meeting of
E.piphany stockholders.
RECOMMENDATION OF E.PIPHANY BOARD OF DIRECTORS
After careful consideration, the E.piphany board of directors has
unanimously determined that the merger agreement and the transactions
contemplated thereby, including the merger and the issuance of shares of
E.piphany common stock to Octane shareholders, to be fair and in the best
interests of its stockholders and unanimously approved the merger agreement and
the transactions
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<PAGE> 52
contemplated thereby, including the merger and the proposed issuance of the
shares of E.piphany common stock, and recommend that the E.piphany stockholders
vote for approval of the proposed issuance of shares of E.piphany common stock
to Octane shareholders in connection with the merger.
OPINION OF E.PIPHANY'S FINANCIAL ADVISOR
Credit Suisse First Boston has acted as E.piphany's exclusive financial
advisor in connection with the merger. E.piphany selected Credit Suisse First
Boston based on Credit Suisse First Boston's experience, expertise and
reputation, and familiarity with E.piphany's business. Credit Suisse First
Boston is an internationally recognized investment banking firm and is regularly
engaged in the valuation of businesses and securities in connection with mergers
and acquisitions, leveraged buyouts, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for corporate and other purposes.
In connection with Credit Suisse First Boston's engagement, E.piphany
requested that Credit Suisse First Boston evaluate the fairness, from a
financial point of view, to E.piphany of the consideration provided for in the
merger. On March 14, 2000, at a meeting of the E.piphany board of directors held
to evaluate the merger, Credit Suisse First Boston rendered to the E.piphany
board of directors an oral opinion, which opinion was confirmed by delivery of a
written opinion dated March 14, 2000, to the effect that, as of that date and
based on and subject to the matters described in its opinion, the consideration
provided for in the merger was fair, from a financial point of view, to
E.piphany. For purposes of its opinion, Credit Suisse First Boston defined the
consideration as the aggregate number of shares of E.piphany common stock and
options, warrants and other rights to purchase E.piphany common stock to be
issued to Octane shareholders in the merger.
The full text of Credit Suisse First Boston's written opinion, dated March
14, 2000, to the E.piphany board of directors, which sets forth, among other
things, the procedures followed, assumptions made, matters considered and
limitations on the review undertaken, is attached as Annex V and is incorporated
into this document by reference. Holders of E.piphany common stock are urged to,
and should, read this opinion carefully and in its entirety. Credit Suisse First
Boston's opinion is addressed to the E.piphany board of directors and relates
only to the fairness of the consideration from a financial point of view, does
not address any other aspect of the proposed merger or any related transaction
and does not constitute a recommendation to any E.piphany stockholder or any
Octane shareholder as to any matter relating to the merger. The summary of
Credit Suisse First Boston's opinion in this document is qualified in its
entirety by reference to the full text of the opinion.
In arriving at its opinion, Credit Suisse First Boston reviewed the merger
agreement and related documents, as well as publicly available business and
financial information relating to E.piphany and available business and financial
information relating to Octane. Credit Suisse First Boston also reviewed other
information relating to E.piphany and Octane, including financial forecasts,
that were provided to or discussed with Credit Suisse First Boston by E.piphany
and Octane. Credit Suisse First Boston also met with the managements of
E.piphany and Octane to discuss the businesses and prospects of E.piphany and
Octane, including the ability to integrate the businesses of E.piphany and
Octane. Credit Suisse First Boston considered financial and stock market data of
E.piphany and financial data of Octane, and compared those data with similar
data for publicly held companies in businesses similar to those of E.piphany and
Octane. Credit Suisse First Boston considered, to the extent publicly available,
the financial terms of other business combinations and other transactions which
have recently been effected. Credit Suisse First Boston also considered other
information, financial studies, analyses and investigations and financial,
economic and market criteria which it deemed relevant.
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<PAGE> 53
In connection with its review, Credit Suisse First Boston did not assume
any responsibility for independent verification of any of the foregoing
information and relied on that information being complete and accurate in all
material respects. Credit Suisse First Boston reviewed and discussed with the
management of E.piphany publicly available financial forecasts relating to
E.piphany and was advised, and assumed, that the forecasts represented
reasonable estimates and judgments as to the future financial performance of
E.piphany. With respect to the financial forecasts for Octane, Credit Suisse
First Boston was advised, and assumed, that the forecasts were reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the managements of E.piphany and Octane as to the future financial
performance of Octane. In addition, Credit Suisse First Boston relied on,
without independent verification, the assessment of the managements of E.piphany
and Octane as to E.piphany's and Octane's ability to retain key employees of
Octane, the strategic benefits anticipated by the managements of E.piphany and
Octane to result from the merger, Octane's existing technology and products and
the validity of, and risks associated with, Octane's future technology and
products and the ability to integrate the businesses of E.piphany and Octane.
Credit Suisse First Boston also assumed, with E.piphany's consent, that the
merger would be treated as a tax-free reorganization for federal income tax
purposes. In addition, Credit Suisse First Boston was not requested to make, and
did not make, an independent evaluation or appraisal of the assets or
liabilities, contingent or otherwise, of E.piphany and Octane, nor was Credit
Suisse First Boston furnished with any evaluations or appraisals.
Credit Suisse First Boston's opinion is necessarily based on information
available to it, and financial, economic, market and other conditions as they
existed and could be evaluated, on the date of the Credit Suisse First Boston
opinion. Credit Suisse First Boston did not express any opinion as to what the
value of E.piphany common stock actually will be when issued or the prices at
which E.piphany common stock will trade following the merger. Although Credit
Suisse First Boston evaluated the consideration in the merger from a financial
point of view, Credit Suisse First Boston was not requested to, and did not,
recommend the specific consideration payable in the merger, which consideration
was determined through negotiation between E.piphany and Octane. No other
limitations were imposed on Credit Suisse First Boston with respect to the
investigations made or procedures followed in rendering its opinion.
In preparing its opinion to the E.piphany board of directors, Credit Suisse
First Boston performed a variety of financial and comparative analyses,
including those described below. The summary of Credit Suisse First Boston's
analyses described below is not a complete description of the analyses
underlying Credit Suisse First Boston's opinion. The preparation of a fairness
opinion is a complex process involving various determinations as to the most
appropriate and relevant methods of financial analyses and the application of
those methods to the particular circumstances and, therefore, a fairness opinion
is not readily susceptible to partial analysis or summary description. In
arriving at its opinion, Credit Suisse First Boston made qualitative judgments
as to the significance and relevance of each analysis and factor that it
considered. Accordingly, Credit Suisse First Boston believes that its analyses
must be considered as a whole and that selecting portions of its analyses and
factors or focusing on information presented in tabular format, without
considering all analyses and factors or the narrative description of the
analyses, could create a misleading or incomplete view of the processes
underlying its analyses and opinion.
In its analyses, Credit Suisse First Boston considered industry
performance, regulatory, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of E.piphany
and Octane. No company, transaction or business used in Credit Suisse First
Boston's analyses as a comparison is identical to E.piphany and Octane or the
proposed merger, and an evaluation of the results of those analyses is not
entirely mathematical. Rather, the analyses involve complex considerations and
judgments concerning financial and operating characteristics and other factors
that could affect the acquisition, public trading or other values of the
companies,
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<PAGE> 54
business segments or transactions being analyzed. The estimates contained in
Credit Suisse First Boston's analyses and the ranges of valuations resulting
from any particular analysis are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than those suggested by the analyses. In addition, analyses relating
to the value of businesses or securities do not purport to be appraisals or to
reflect the prices at which businesses or securities actually may be sold.
Accordingly, Credit Suisse First Boston's analyses and estimates are inherently
subject to substantial uncertainty.
Credit Suisse First Boston's opinion and financial analyses were only one
of many factors considered by the E.piphany board of directors in its evaluation
of the proposed merger and should not be viewed as determinative of the views of
the E.piphany board of directors or management with respect to the merger or the
consideration.
The following is a summary of the material financial analyses performed by
Credit Suisse First Boston in connection with the preparation of its opinion and
reviewed with the E.piphany board of directors at a meeting of the E.piphany
board of directors held on March 14, 2000. THE FINANCIAL ANALYSES SUMMARIZED
BELOW INCLUDE INFORMATION PRESENTED IN TABULAR FORMAT. IN ORDER TO FULLY
UNDERSTAND CREDIT SUISSE FIRST BOSTON'S FINANCIAL ANALYSES, THE TABLES MUST BE
READ TOGETHER WITH THE TEXT OF EACH SUMMARY. THE TABLES ALONE DO NOT CONSTITUTE
A COMPLETE DESCRIPTION OF THE FINANCIAL ANALYSES. CONSIDERING THE DATA IN THE
TABLES BELOW WITHOUT CONSIDERING THE FULL NARRATIVE DESCRIPTION OF THE FINANCIAL
ANALYSES, INCLUDING THE METHODOLOGIES AND ASSUMPTIONS UNDERLYING THE ANALYSES,
COULD CREATE A MISLEADING OR INCOMPLETE VIEW OF CREDIT SUISSE FIRST BOSTON'S
FINANCIAL ANALYSES.
Historical Stock Price Analysis. Credit Suisse First Boston analyzed the
prices at which the E.piphany common stock traded since E.piphany's initial
public offering on September 22, 1999 through March 13, 2000. Credit Suisse
First Boston noted that the all-time high closing price for E.piphany common
stock was $317.48 and the all-time low closing price for E.piphany common stock
was $38.31.
Peer Group Comparison. Credit Suisse First Boston compared financial,
operating and stock market data of E.piphany to corresponding data of the
following 17 publicly traded companies in the e-commerce enabling and
e-analytics business categories:
<TABLE>
<CAPTION>
E-COMMERCE ENABLING E-ANALYTICS
------------------- -----------
<S> <C>
- - Broadvision, Inc. - Microstrategy Incorporated
- - Vignette Corporation - Broadbase Software, Inc.
- - Kana Communications, Inc. - Exchange Applications, Inc.
- - Webmethods, Inc.
- - Art Technology Group, Inc.
- - Selectica, Inc.
- - Silknet Software, Inc.
- - Interwoven, Inc.
- - Firepond, Inc.
- - Interworld Corporation
- - Primus Knowledge Solutions, Inc.
- - Egain Communications Corporation
- - Net Perceptions, Inc.
- - Calico Commerce, Inc.
</TABLE>
Credit Suisse First Boston compared aggregate values, calculated as equity
value, plus debt, less cash, as multiples of the latest 12 months and estimated
calendar years 2000 and 2001 revenues for the peer group companies. Credit
Suisse First Boston also compared aggregate values, calculated as equity value,
plus debt, less cash, as multiples of the latest 12 months and estimated
calendar years
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2000 and 2001 revenues for Silknet, prior to the announcement of a definitive
agreement to be acquired by Kana, and on a pro forma basis for the combined
Kana/Silknet. All multiples were based on closing stock prices on March 13,
2000. Estimated financial data for the selected companies and E.piphany were
based on securities research analysts' estimates. This analysis indicated the
following implied multiples, as compared to the implied multiples for E.piphany:
<TABLE>
<CAPTION>
REVENUE MULTIPLES
-----------------------------------------
LATEST ESTIMATED ESTIMATED
12 MONTHS CALENDAR 2000 CALENDAR 2001
--------- ------------- -------------
<S> <C> <C> <C>
E-Commerce Enabling Companies (median)...... 213.5x 93.2x 57.5x
E-Analytics Companies (median).............. 128.4x 86.3x 49.9x
Silknet as of February 4, 2000.............. 120.5x 62.3x 37.6x
Kana/Silknet Combined....................... 419.9x 172.5x 91.9x
E.piphany................................... 510.3x 175.8x 91.7x
</TABLE>
IPO Analysis. Credit Suisse First Boston estimated the present value of
Octane's fully-distributed equity value assuming an initial public offering of
Octane in the third quarter of 2000. Credit Suisse First Boston applied a range
of multiples from 40.0x to 90.0x of estimated calendar year 2001 revenues to the
estimated financial forecasts for Octane as provided by Octane management. This
analysis indicated an implied aggregate reference range for Octane of
approximately $1,260 million to $2,835 million. Credit Suisse First Boston also
applied the multiples of calendar year 2001 revenues observed for two companies
which had recently effected an initial public offering, Selectica, Inc. and
Webmethods, Inc., which resulted in implied aggregate values for Octane of
$5,302 million and $8,959 million. Credit Suisse First Boston noted that the
implied fully-diluted aggregate transaction value of the consideration based on
the closing price for E.piphany common stock as of March 13, 2000 was $3,624
and, based on the average price of E.piphany common stock over the 30 trading
days preceding March 14, 2000 was $2,438 million.
Transaction Matrix Analysis. Credit Suisse First Boston reviewed the
implied aggregate transaction value of the consideration based on the closing
price for E.piphany as of March 13, 2000 and the average price of E.piphany
common stock over the 30 trading days preceding March 14, 2000 and the implied
multiples of estimated calendar years 2000 and 2001 revenues for Octane. The
revenues of Octane were based upon both the estimates of Octane management,
referred to as the Octane case, and E.piphany management, referred to as the
E.piphany case. This analysis indicated the following implied aggregate
transaction values and multiples of calendar year 2000 and 2001 revenues, as
compared to the multiples for E.piphany on a stand-alone basis and for selected
companies in the e-commerce enabling and e-analytics business categories:
<TABLE>
<CAPTION>
IMPLIED AGGREGATE TRANSACTION VALUE
AS MULTIPLES OF OCTANE REVENUES
---------------------------------------------
OCTANE CASE E.PIPHANY CASE
--------------------- ---------------------
IMPLIED AGGREGATE ESTIMATED ESTIMATED ESTIMATED ESTIMATED
PERIOD PRIOR TO TRANSACTION VALUE CALENDAR CALENDAR CALENDAR CALENDAR
MARCH 13, 2000 (IN MILLIONS) 2000 2001 2000 2001
--------------- ----------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Current market.................... $3,624 169.4x 75.3x 177.8x 72.0x
30 trading days average........... $2,438 114.0x 50.6x 119.6x 48.5x
</TABLE>
<TABLE>
<CAPTION>
MEDIAN TRADING STATISTICS AGGREGATE VALUE
------------------------- -----------------
<S> <C> <C> <C> <C> <C>
E.piphany......................... $9,789 175.8x 91.7x N/A N/A
E-Commerce Enabling............... N/A 93.2x 57.5x N/A N/A
E-Analytics....................... N/A 86.3x 49.9x N/A N/A
</TABLE>
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Credit Suisse First Boston compared the results of this analysis to the
aggregate values and multiples of revenue implied by Kana's acquisition of
Silknet. The results of this analysis are as follows:
<TABLE>
<CAPTION>
IMPLIED AGGREGATE TRANSACTION VALUE
AS MULTIPLES OF SILKNET REVENUES
---------------------------------------------------
AGGREGATE
TRANSACTION VALUE ESTIMATED ESTIMATED
(IN MILLIONS) CALENDAR 2000 CALENDAR 2001
----------------- ------------- -------------
<S> <C> <C> <C>
Silknet as of February 4, 2000............. $ 2,687 62.3x 37.6x
Silknet at announcement.................... $ 4,189 97.2x 58.6x
Silknet as of March 13, 2000............... $ 5,059 117.4x 70.7x
Kana/Silknet Combined...................... $15,028 172.5x 91.9x
</TABLE>
Contribution Analysis. Credit Suisse First Boston analyzed the relative
contributions of E.piphany and Octane to the revenue of the combined company for
the estimated second half of calendar year 2000 and estimated calendar years
2000 and 2001. E.piphany's revenue estimates were based on securities research
analysts' estimates, and Octane's revenue estimates were based on both the
E.piphany case and the Octane case. Credit Suisse First Boston then analyzed the
pro forma ownership of the combined company implied by Octane's relative
contribution. This analysis indicated the following:
<TABLE>
<CAPTION>
IMPLIED OCTANE STOCKHOLDER PRO FORMA
OWNERSHIP LEVEL BASED ON VARIOUS PERIODS
-------------------------------------------------------
ESTIMATED SECOND-HALF ESTIMATED ESTIMATED
CALENDAR 2000 CALENDAR 2000 CALENDAR 2001
--------------------- ------------- -------------
<S> <C> <C> <C>
E.piphany Case......................... 29.1% 26.1% 31.2%
Octane Case............................ 28.6% 27.0% 30.3%
</TABLE>
The above estimates yielded a mean implied Octane stockholder pro forma
ownership of 28.7%. Credit Suisse First Boston noted that the pro forma fully
diluted ownership of the Octane stockholders in the combined company implied by
the merger was 26.3%.
Pro Forma Impact Analysis. Credit Suisse First Boston analyzed the
potential pro forma effects of the merger on the estimated revenues per share
for E.piphany for the second half of calendar year 2000 and for calendar year
2001. Estimated financial data for E.piphany were based on securities research
analysts' estimates and estimated financial data for Octane were considered
based upon both the E.piphany case and the Octane case. This analysis indicated
the following accretion to E.piphany's estimated revenues per share:
<TABLE>
<CAPTION>
ACCRETION TO EPIPHANY'S REVENUES
PER SHARE FOR VARIOUS PERIODS
--------------------------------
SECOND-HALF
CALENDAR 2000 CALENDAR 2001
-------------- --------------
<S> <C> <C>
E.piphany Case...................................... 5.2% 8.4%
Octane Case......................................... 4.4% 6.9%
</TABLE>
Pro Forma Trading Analysis. Credit Suisse First Boston reviewed the
potential pro forma effects of the merger on the aggregate value of the combined
company as multiples of estimated calendar years 2000 and 2001 revenues for the
combined company under both the E.piphany case and the Octane case using average
closing stock prices for E.piphany over various periods. Credit Suisse First
Boston compared the results of this analysis with the aggregate value of
E.piphany, the four software companies listed below and the median of the
selected e-commerce enabler companies as
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multiples of estimated calendar years 2000 and 2001 revenues. This analysis was
performed based on research analysts' estimates. The results of this analysis
are as follows:
<TABLE>
<CAPTION>
PRO FORMA AGGREGATE VALUE
AS MULTIPLES OF COMBINED COMPANY REVENUES
--------------------------------------------------------------
OCTANE CASE E.PIPHANY CASE
----------------------------- ------------------------------
ESTIMATED ESTIMATED ESTIMATED ESTIMATED
PERIOD PRIOR TO MARCH 13, 2000 CALENDAR 2000 CALENDAR 2001 CALENDAR 2000 CALENDAR 2001
------------------------------ ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Since IPO........................... 87.5x 43.5x 88.6x 42.9x
90 trading days average............. 106.1x 52.8x 107.5x 52.1x
60 trading days average............. 114.1x 56.8x 115.6x 56.0x
45 trading days average............. 109.0x 54.2x 110.5x 53.5x
30 trading days average............. 114.8x 57.1x 116.4x 56.3x
20 trading days average............. 124.2x 61.8x 125.8x 60.9x
10 trading days average............. 167.9x 83.5x 170.1x 82.4x
March 13, 2000...................... 174.1x 86.6x 176.4x 85.4x
PEER GROUP COMPANIES
E.piphany at March 13, 2000......... 175.8x 91.7x
Kana................................ 226.6x 108.4x
Kana/Silknet Combined............... 172.5x 91.9x
Broadvision, Inc.................... 99.8x 67.5x
Vignette Corporation................ 99.6x 65.4x
Median of E-Commerce Enablers....... 93.2x 57.5x
</TABLE>
E.piphany has agreed to pay Credit Suisse First Boston for its financial
advisory services customary fees based on the aggregate value of the merger, a
significant portion of which is contingent upon the consummation of the merger.
Credit Suisse First Boston also received a fee upon delivery of its opinion.
E.piphany also has agreed to reimburse Credit Suisse First Boston for its
out-of-pocket expenses, including fees and expenses of legal counsel and any
other advisor retained by Credit Suisse First Boston, and to indemnify Credit
Suisse First Boston and related parties against liabilities, including
liabilities under the federal securities laws, arising out of its engagement.
Credit Suisse First Boston and its affiliates have in the past provided and
are currently providing financial services to E.piphany unrelated to the
proposed merger, for which services Credit Suisse First Boston and its
affiliates have received and in the future may receive compensation. In the
ordinary course of business, Credit Suisse First Boston and its affiliates may
actively trade the securities of E.piphany for their own accounts and for the
accounts of customers and, accordingly, may at any time hold long or short
positions in such securities.
OCTANE'S REASONS FOR THE MERGER
The board of directors of Octane has unanimously approved the merger. In
reaching its determination, the Octane board consulted with Octane's management,
as well as its financial advisor and legal counsel, and gave significant
consideration to a number of factors bearing on its decision.
The Octane board believes that the proposed merger would afford Octane the
following advantages:
- the merger would allow the integration of Octane's Internet-based
customer relationship products, services and technology with the customer
information collection and analysis products and technology of E.piphany,
creating a product offering which is broader than Octane's current
offering. The Board considered Octane's prospects for developing
products,
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<PAGE> 58
services and technology similar to E.piphany's on a stand-alone basis and
determined that the merger would give the combined enterprise a greater
competitive advantage and technological lead than Octane could achieve on
its own,
- the merger would potentially create increased sales of Octane's products
and services by exposing Octane to E.piphany's customer base, as well as
creating additional cross-selling opportunities with Octane's existing
customers,
- the merger would allow Octane to more rapidly establish indirect
distribution channels by leveraging E.piphany's existing relationships,
- the merger would allow Octane and E.piphany to combine their sales and
marketing forces, giving Octane greater resources than it could achieve
on its own for at least twelve months,
- the merger would give Octane access to E.piphany's substantial capital
resources to accelerate the development of Octane's products, services
and technology, and
- the merger would provide liquidity for Octane's shareholders through
their ownership of E.piphany common stock.
In the course of its deliberations, the Octane board also considered a
number of additional factors relevant to the merger. These factors included:
- information concerning the respective businesses, prospects, historical
financial results and condition, operations, management and future
development plans of Octane and E.piphany,
- the limited trading history and volume of E.piphany common stock,
- the market value of the E.piphany common stock to be issued or issuable
in respect of Octane capital stock, including options and warrants to
purchase Octane capital stock,
- the terms of the merger agreement and the transactions contemplated by
the merger agreement,
- the compatibility of the respective management teams and employees of
Octane and E.piphany,
- levels of interest in and potential valuations of Octane offered by other
potential investors or acquirors,
- the results of financial and operational due diligence on E.piphany,
- the expectation that the merger will qualify as a tax-free
reorganization, and
- the fact that the merger will be accounted for as a purchase.
The Octane board also considered a variety of potential negative factors
relating to the proposed merger, including:
- the volatility of E.piphany's stock price and the volatility of the
prices for technology companies generally,
- the potential disruption of existing and prospective relationships with
Octane's customers that could result from the announcement or
consummation of the merger,
- the potential disruption of Octane's management team and employees that
could result from the announcement or consummation of the merger,
- the risk that the anticipated benefits of the merger might not be
realized,
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<PAGE> 59
- the risk that Octane shareholders might incur liability for claims of
indemnification by E.piphany after the merger, and
- the risks described above in the section entitled "Risk Factors."
The Octane board also considered the possibility of pursuing an initial
public offering, or IPO, of Octane's common stock as an alternative to the
merger. The board considered, among other things:
- the value that Octane's stockholders could be expected to realize after
an IPO, based on comparable public companies, relative to the
consideration to be received in the merger,
- uncertainties with respect to future market conditions and the
receptivity of the market to Octane's common stock, and
- the anticipated restrictions on liquidity for Octane's existing
shareholders after an IPO relative to those after the merger.
Considering each of the above factors and the relative risks and merits of
an IPO and the merger, the Octane board concluded that, on balance, the merger
was likely to be more favorable to Octane's shareholders than a possible future
IPO.
The preceding discussion of the information and factors considered by the
Octane board is not, and is not intended to be, exhaustive, but is believed to
include the material factors considered by the Octane board in evaluating the
merger. In view of the variety of factors considered in connection with its
evaluation of the merger, the Octane board did not find it practicable to, and
did not, quantify or otherwise assign relative weights to the specific factors
considered in reaching its determination. In addition, individual members of the
Octane board may have given different weights to different factors. Based on the
factors outlined above and after consultation with its financial adviser, Morgan
Stanley Dean Witter, the Octane board unanimously determined that the terms of
the merger are fair to, and that the merger is in the best interest of, Octane
and its shareholders.
VOTE REQUIRED
Under applicable California law and the charter documents of Octane,
approval of the merger and the merger agreement requires the affirmative vote of
holders of:
- a majority of the outstanding shares of Octane common stock,
- a majority of the outstanding shares of Octane preferred stock, and
- a majority of all outstanding shares of Octane common stock and preferred
stock, voting together on an as-converted basis.
RECOMMENDATION OF OCTANE'S BOARD OF DIRECTORS
After careful consideration of the foregoing factors, the Octane board of
directors has unanimously determined that the merger agreement and the
transactions contemplated thereby, including the merger and the automatic
conversion of Octane preferred stock into Octane common stock to be fair and in
the best interests of its shareholders and unanimously approved the merger
agreement and the transactions contemplated thereby, including the merger and
the automatic conversion of Octane preferred stock into Octane common stock and
recommend that the Octane shareholders vote to approve and adopt the merger
agreement, the merger and the automatic conversion of the Octane preferred stock
into Octane common stock.
INTERESTS OF CERTAIN OFFICERS, DIRECTORS AND AFFILIATES OF OCTANE IN THE MERGER
In considering the recommendation of the Octane board with respect to the
merger agreement and the transactions contemplated thereby, including the merger
and the automatic conversion of
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<PAGE> 60
Octane preferred stock, shareholders of Octane should be aware that certain
members of the Octane board and management have certain interests in the merger
that are in addition to the interests of Octane's shareholders generally. These
interests are as follows:
- In accordance with the merger agreement, Aditya (Tim) Guleri, William
Walsh, Kira Makagon, James Doehrman, Robert Loughan, Robert Gryphon and
Manu Kumar have entered into employment and noncompetition agreements
with E.piphany. E.piphany will pay each of these executives a base salary
and target incentive in the same amount as such executive had previously
agreed with Octane, subject to annual review and adjustment.
<TABLE>
<CAPTION>
OFFICER SALARY BONUS
------- -------- --------
<S> <C> <C>
Aditya (Tim) Guleri..................................... $250,000 $100,000
William Walsh........................................... 175,000 100,000
Kira Makagon............................................ 175,000 100,000
James Doehrman.......................................... 175,000 50,000
Robert Loughan.......................................... 120,000 175,000
Robert Gryphon.......................................... 175,000 75,000
Manu Kumar.............................................. 140,000 TBD
</TABLE>
- Certain directors, officers and consultants of Octane hold common stock
or options to purchase common stock that are subject to accelerated
vesting upon a change of control of Octane, such as the merger, pursuant
to terms set forth in their respective common stock purchase agreements
or option award agreements, as applicable. Such individuals and entities
are as follows: Aditya (Tim) Guleri, William Walsh, Kira Makagon, James
Doehrman, Robert Gryphon, Robert Loughan, Robert Davoli, David Strohm,
Elias Blawie, Sanjay Khare, VLG Investments 1998 and VLG Investments
2000.
<TABLE>
<CAPTION>
NUMBER OF OCTANE SHARES SUBJECT TO
ACCELERATED VESTING AS A RESULT OF
OFFICER/ENTITY/CONSULTANT THE MERGER AS OF MAY 31, 2000
------------------------- ----------------------------------
<S> <C>
Aditya (Tim) Guleri........................... 500,312
William Walsh................................. 275,000
Kira Makagon.................................. 319,071
James Doehrman................................ 50,000
Robert Loughan................................ 267,359
Robert Gryphon................................ 500,315
Robert Davoli................................. 50,000
David Strohm.................................. 50,000
Elias Blawie.................................. 750
Sanjay Khare.................................. 4,500
VLG Investments 1998.......................... 5,250
VLG Investments 2000.......................... 7,000
</TABLE>
- In addition, the following officers, directors and consultants of Octane
hold stock options or common stock that are subject to certain
accelerated vesting upon the termination of such officer, director or
consultant following consummation of the merger pursuant to terms set
forth in their respective common stock purchase or option award
agreements, as applicable: Aditya (Tim) Guleri, William Walsh, Kira
Makagon, Rob Loughan, Robert Gryphon, Manu Kumar, Elias Blawie, Sanjay
Khare and VLG Investments 1998.
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<PAGE> 61
<TABLE>
<CAPTION>
NUMBER OF OCTANE SHARES SUBJECT TO ACCELERATED
OFFICER/CONSULTANT VESTING UPON TERMINATION AFTER THE MERGER
------------------ ----------------------------------------------
<S> <C>
Aditya (Tim) Guleri.................. 166,772
William Walsh........................ 275,000
Kira Makagon......................... 106,357
Rob Loughan.......................... 89,120
Robert Gryphon....................... 166,772
Jeff Pulver.......................... 22,500
Manu Kumar........................... 264,181
Elias Blawie......................... 375
Sanjay Khare......................... 750
VLG Investments 1998................. 2,625
</TABLE>
- E.piphany currently anticipates that most employees of Octane, including
all of its officers, will be employed by E.piphany after the merger.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
consequences of the exchange of shares of Octane capital stock for E.piphany
common stock pursuant to the merger. This discussion is based on currently
existing provisions of the Internal Revenue Code, referred to herein as the
Code, existing Treasury Regulations thereunder and current administrative
rulings and court decisions, all of which are subject to change. Any such
change, which may or may not be retroactive, could alter the U.S. federal income
tax consequences to E.piphany, Octane or the Octane shareholders.
Octane shareholders should be aware that this discussion does not address
all U.S. federal income tax considerations that may be relevant to particular
shareholders of Octane in light of their particular circumstances, such as
shareholders who are banks, insurance companies, tax-exempt organizations,
dealers in securities, foreign persons, shareholders who do not hold their
Octane stock as capital assets, shareholders who acquired their shares in
connection with stock option or stock purchase plans or in other compensatory
transactions, shareholders who hold Octane capital stock as part of an
integrated investment (including a "straddle") comprised of shares of Octane
capital stock and one or more other positions, or shareholders who have
previously entered into a constructive sale of Octane capital stock. In
addition, the following discussion does not address the tax consequences of the
merger under foreign, state or local tax laws.
It is a condition to the obligation of each of E.piphany and Octane to
complete the merger that E.piphany receive an opinion of Wilson Sonsini Goodrich
& Rosati, Professional Corporation, and Octane receive an opinion of Venture Law
Group, A Professional Corporation, to the effect that the merger will be treated
for federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Code. However, if either tax counsel does not render an
opinion, such condition nonetheless will be satisfied if tax counsel to the
other party renders an opinion to such other party. Tax counsel's opinions
neither bind the Internal Revenue Service, referred to herein as the IRS, nor
preclude the IRS or the courts from adopting a contrary position. Neither
E.piphany nor Octane intends to obtain a ruling from the IRS on the tax
consequences of the merger.
In delivering their opinions, tax counsel will rely on certain customary
representations made by E.piphany and Octane, including those contained in
certificates of officers of E.piphany and Octane. Provided that such
representations are correct as of the effective time of the merger, that the
merger is consummated in the manner described in the merger agreement and this
proxy statement/ prospectus and that there are no changes in the Code or other
applicable law, the merger will be a
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<PAGE> 62
reorganization within the meaning of Section 368(a) of the Code. Assuming that
the merger is a reorganization, the merger will have the following federal
income tax consequences:
- No gain or loss will be recognized by holders of Octane stock upon their
receipt of E.piphany common stock solely in exchange for Octane stock in
the merger.
- The aggregate tax basis of the E.piphany common stock received by Octane
shareholders in the merger (including the escrow shares) will be the same
as the aggregate tax basis of Octane stock surrendered in exchange
therefor.
- The holding period of the E.piphany common stock (including the escrow
shares) received in the merger will include the period for which the
Octane stock surrendered in exchange therefor was held.
- A shareholder who exercises dissenters' rights with respect to a share of
Octane stock and who receives payment for such stock in cash will
generally recognize capital gain or loss measured by the difference
between the shareholder's tax basis in such share and the amount of cash
received, provided that such payment is neither essentially equivalent to
a dividend nor has the effect of a distribution of a dividend. Generally,
a disposition of Octane stock pursuant to an exercise of dissenters'
rights will not be essentially equivalent to a dividend and will not have
the effect of the distribution of a dividend if the shareholder
exercising such rights will no longer own any shares of E.piphany or
Octane stock after such exercise (either actually or constructively
pursuant to certain attribution rules in Section 318 of the Code).
Any Octane shareholder who exercises dissenters' rights may be subject to
backup withholding at a rate of 31% on cash payments received. Backup
withholding will not apply, however, if the shareholder exercising
dissenters' rights is an exempt recipient (such as a corporation or
financial institution) or is otherwise exempt from backup withholding, if
the shareholder furnishes a correct taxpayer identification number and
certifies that he, she or it is not subject to backup withholding on the
substitute Form W-9 included in the letter of transmittal, or if the
shareholder provides a certificate of foreign status on Form W-8.
- E.piphany, Orchid Acquisition Corporation and Octane will not recognize
any gain solely as a result of the merger.
A failure of the merger to qualify as a reorganization would result in
Octane shareholders recognizing taxable capital gain or loss with respect to
each share of Octane stock surrendered equal to the difference between the
shareholder's tax basis in such share and the fair market value, as of the
closing of the merger, of the E.piphany common stock received in exchange
therefor. In such event, a shareholder's aggregate basis in the E.piphany common
stock so received would equal its fair market value as of the closing of the
merger and the holding period for such stock would begin the day after the
closing of the merger.
This discussion of material federal income tax consequences is intended to
provide only a general summary, and is not a complete analysis or description of
all potential federal income tax consequences of the merger. This discussion
does not address tax consequences that may vary with, or are contingent on,
individual circumstances. In addition, it does not address any non-income tax or
any foreign, state or local tax consequences of the merger. Accordingly, Octane
shareholders are urged to consult their own tax advisors as to the specific tax
consequences of the merger, including the applicable federal, state, local and
foreign tax consequences to them of the merger in their particular
circumstances.
ACCOUNTING TREATMENT
The merger will be accounted for under the "purchase" method of accounting
in accordance with generally accepted accounting principles.
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<PAGE> 63
LISTING ON THE NASDAQ STOCK MARKET'S NATIONAL MARKET
The shares of E.piphany common stock to be issued in the merger will be
listed on the Nasdaq Stock Market's National Market.
REGULATORY APPROVALS
As required under federal antitrust law, E.piphany and Octane notified the
Department of Justice and Federal Trade Commission of the proposed merger. If
neither of these agencies request additional information concerning the merger,
or object to the merger, within thirty days of the filing, then E.piphany and
Octane may proceed with the merger.
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<PAGE> 64
TERMS OF THE MERGER
The following is a summary of the material terms of the merger agreement. A
copy of the merger agreement is attached as Annex I to this proxy
statement/prospectus and is incorporated herein by reference. The following is
not a complete statement of all of the terms of the merger agreement. Statements
made in this proxy statement/prospectus are qualified by reference to the more
detailed information set forth in the merger agreement. You are encouraged to
read the entire merger agreement.
THE MERGER
Upon the merger, Orchid Acquisition Corporation, a wholly-owned subsidiary
of E.piphany will merge with and into Octane and Octane will become a
wholly-owned subsidiary of E.piphany. The closing of the merger will take place
no later than one business day following (a) approval by Octane shareholders of
the merger, the merger agreement and the conversion of the Octane preferred
stock into Octane common stock, (b) approval by E.piphany stockholders of the
issuance of shares of E.piphany common stock to Octane shareholders in
connection with the merger, and (c) the satisfaction or waiver of the conditions
set forth in the merger agreement unless the parties agree otherwise. If all of
these conditions are met, the closing of the merger is anticipated to occur on
or about May 31, 2000.
MERGER CONSIDERATION
A total of approximately 12.8 million shares of E.piphany common stock,
less an amount of shares of E.piphany common stock equal to the amount by which
estimated third party expenses exceed $1,500,000 divided by $192.85 (as
appropriately adjusted for stock splits, dividends, combinations and the like),
will be issued or issuable in the merger to Octane shareholders, optionholders
and warrantholders, subject to the escrow provisions described below.
DIRECTORS AND OFFICERS OF OCTANE AFTER THE MERGER
The current directors and officers of Octane will not be directors and
officers of Octane after the merger. Upon consummation of the merger, the
directors of Octane will be:
- Roger S. Siboni, the President and Chief Executive Officer of E.piphany,
- Kevin J. Yeaman, the Chief Financial Officer of E.piphany, and
- Deborah E. Townsend, the Director, Legal Affairs of E.piphany.
In addition, the officers of Octane will be:
- Roger S. Siboni, as President,
- Kevin J. Yeaman, as Treasurer, and
- Deborah E. Townsend, as Secretary.
ARTICLES OF INCORPORATION AND BYLAWS OF OCTANE AFTER THE MERGER
The current articles of incorporation and bylaws of Orchid Acquisition
Corporation will become the articles of incorporation and bylaws of Octane upon
the merger.
CONVERSION OF OCTANE CAPITAL STOCK AS A RESULT OF THE MERGER
As a condition to the closing of the merger, all outstanding shares of
Octane preferred stock must be converted into shares of Octane common stock. For
a more detailed explanation of the
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<PAGE> 65
conversion of Octane shares, see "Conversion of Octane Preferred Stock." As
specified in the merger agreement, each share of Octane common stock issued and
outstanding immediately prior to the merger -- excluding shares held by a holder
who has demanded and perfected dissenters' rights for his or her shares in
accordance with the applicable provisions of California law and has not
withdrawn or lost his or her rights -- will be cancelled and extinguished and be
converted automatically into the right to receive a number of shares of
E.piphany common stock equal to the exchange ratio calculated in accordance with
the merger agreement. No fractional shares of E.piphany common stock will be
issued in the merger. Instead, any fractional share will be rounded down to the
nearest whole share of E.piphany common stock. The number of shares of E.piphany
common stock to be received by Octane shareholders is an approximation based on
information available at this time. The actual numbers may differ based on the
actual number of shares of Octane common stock and options and warrants for
Octane common stock outstanding at the time of the merger.
CALCULATION OF EXCHANGE RATIO
Upon the completion of the merger, E.piphany will acquire all outstanding
shares of Octane stock. Octane shareholders will receive approximately 0.5179 of
a share of E.piphany common stock for each share of Octane stock held by Octane
shareholders. Of this number, approximately 0.0564 of a share of E.piphany
common stock will be placed into an escrow fund. In addition, E.piphany will
assume each outstanding option, warrant and other rights to purchase Octane
stock. The exchange ratio represents the fraction of a share of E.piphany common
stock to be issued for each share of Octane stock in the merger, and is
calculated as follows:
- the quotient of 12,793,510 shares of E.piphany common stock minus the
number of shares of E.piphany common stock equivalent to the dollar
amount by which estimated third party expenses, excluding investment
banking advisory fees, exceed $1,500,000, and
- the aggregate number of shares of Octane common stock, including all
shares underlying convertible securities, options and warrants to
purchase Octane common stock, outstanding immediately prior to the
effective time of the merger.
As of March 31, 2000, there were no estimated third party expenses,
excluding investment banking advisory fees, exceeding $1,500,000 and the
aggregate amount of outstanding shares of Octane common stock plus aggregate
shares issuable upon exercise or conversion of all outstanding convertible
securities, options and warrants equaled 24,700,281 shares. Thus, a holder of
one share of Octane stock would receive approximately 0.5179, less the
approximately 0.0564 of a share to be placed into the escrow fund, of one share
of E.piphany common stock for each share of Octane stock.
Assuming the same exchange ratio and based on the capitalization of
E.piphany and Octane as of March 31, 2000, the approximately 11,755,138 shares
of E.piphany common stock expected to be issued in the merger, excluding the
1,038,372 shares of E.piphany common stock subject to stock options held by
Octane optionholders -- and assumed by E.piphany in the merger -- would
represent approximately 26.6% of the shares of E.piphany common stock
outstanding and subject to options immediately following the merger.
Octane Stock Options and Warrants
In the merger, all outstanding options and warrants to purchase shares of
Octane common stock at the effective time of the merger will be assumed by
E.piphany and remain outstanding. However, each Octane option will be
exercisable for E.piphany common stock. The number of shares of E.piphany common
stock issuable upon exercise of an Octane option or warrant and the exercise
price of Octane options and warrants will be adjusted to reflect the exchange
ratio discussed above.
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<PAGE> 66
E.piphany Stock Split and Similar Matters.
The number of shares of E.piphany common stock issuable in the merger, and
the resulting exchange ratio, are subject to adjustment in the event that
E.piphany effects a stock split, stock dividend, cash dividend, distribution,
reorganization or recapitalization prior to the merger.
PROCEDURE FOR EXCHANGING OCTANE COMMON STOCK FOR E.PIPHANY COMMON STOCK
The merger agreement requires E.piphany, as soon as practicable after the
merger, to deposit with Equiserve, E.piphany's exchange agent, or such other
institution as it may select, for the benefit of the holders of shares of Octane
capital stock, certificates representing the shares of E.piphany common stock to
be issued in the merger.
Exchange Procedures
E.piphany has included with this proxy statement/prospectus a letter of
transmittal for each Octane shareholder to utilize to exchange Octane stock
certificates for E.piphany stock certificates after the merger is consummated.
After the merger is completed, E.piphany will send each Octane shareholder
written notice advising the shareholder to send in his or her Octane stock
certificates to be exchanged for E.piphany stock certificates. Once an Octane
shareholder has delivered his or her Octane stock certificate to E.piphany's
exchange agent, together with an executed letter of transmittal and such other
documents as may reasonably be required by the exchange agent, the Octane
shareholder will receive his or her E.piphany stock certificates, less the
portion placed in the escrow fund. See "-- Escrow Fund and Indemnification."
Octane shareholders should not forward Octane stock certificates to the exchange
agent until they have received written notice from E.piphany to so do. Octane
shareholders should not return Octane stock certificates with their proxy or
consent.
Octane shareholders should also note:
No dividends or other distributions on E.piphany common stock declared or
made after the merger will be paid to any holder of any unsurrendered Octane
stock certificate with respect to the shares of E.piphany common stock
represented by the unsurrendered certificate until the certificate is
surrendered to the Exchange Agent.
If any certificate for shares of E.piphany common stock is to be issued in
a name other than that in which the Octane stock certificate surrendered in
exchange therefor is registered, the Octane stock certificate so surrendered
must be properly endorsed and otherwise in proper form for transfer and the
person requesting the exchange will have to pay E.piphany or any agent
designated by E.piphany any transfer or other taxes required by reason of
issuance of a certificate for shares of E.piphany common stock in any name other
than that of the registered holder of the Octane stock certificate surrendered,
or establish to the satisfaction of E.piphany or any agent designated by
E.piphany that the tax has been paid or is not payable.
In the event that any Octane stock certificates representing shares of
Octane capital stock have been lost, stolen or destroyed, the exchange agent
will issue shares of E.piphany common stock in exchange for the lost, stolen, or
destroyed Octane stock certificates upon the making of an affidavit of that fact
by the owner of the Octane stock certificates and, at the request of E.piphany,
upon delivery of a bond in an amount as E.piphany may reasonably direct as
indemnity against any claim that may be made against E.piphany or the exchange
agent with respect to the Octane stock certificates alleged to have been lost,
stolen or destroyed.
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FORM S-8 FILING
E.piphany has agreed to file with the Securities and Exchange Commission,
within 15 days after the closing of the merger, a registration statement on Form
S-8 to register shares of E.piphany common stock issuable as a result of the
exercise of Octane options assumed in the merger.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains customary representations and warranties made
by Octane. These representations and warranties relate to various aspects of
Octane's business, including:
- organization and good standing as a corporation,
- ownership of subsidiaries,
- capital structure,
- authorization, execution, delivery and enforceability of the merger
agreement and related agreements,
- absence of conflict with, default under or violation of agreements and
laws,
- absence of need for waivers or consents from any governmental entity or
third party,
- accuracy of financial statements,
- absence of undisclosed liabilities,
- absence of certain changes in the business,
- tax matters,
- absence of restrictions on business activities,
- title to property,
- intellectual property matters,
- absence of certain types of agreements, contracts and commitments,
- absence of certain types of transactions with related parties,
- governmental authorizations related to the business,
- litigation matters,
- accounts receivable and inventory of the business,
- full disclosure of the business' minute books,
- compliance with environmental matters,
- broker's and finder's fees incurred in connection with the merger,
- employee benefit plans,
- disclosure of all insurance policies in effect,
- compliance with laws,
- absence of certain warranties and indemnities related to products or
services of the business,
- the vote of Octane shareholders required to approve the merger,
- delivery of documents related to the business,
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- accuracy and completeness of portions of this proxy statement/prospectus,
and
- completeness of representations made.
The representations and warranties of Octane terminate one year from the
closing date. Octane shareholders have an indemnification obligation to
E.piphany for breaches of Octane's representations and warranties. For a more
detailed description of the indemnification obligations, see "--Escrow Fund and
Indemnification."
The merger agreement also contains customary representations and warranties
made by E.piphany and Orchid Acquisition Corporation. These representations and
warranties relate to certain aspects of E.piphany's and Orchid Acquisition
Corporation's business, including:
- organization and good standing as a corporation,
- authorization, execution, delivery and enforceability of the merger
agreement and related agreements,
- absence of conflict with, default under or violation of agreements and
laws,
- absence of need for waivers or consents from any governmental entity or
third party,
- capital structure,
- accuracy and completeness of filings and reports with the Securities and
Exchange Commission and accuracy of financial statements,
- finder's fees incurred in connection with the merger,
- accuracy and completeness of portions of this proxy statement/prospectus,
- no material changes,
- absence of material adverse change to E.piphany, and
- completeness of representations made.
The representations and warranties of E.piphany and Orchid Acquisition
Corporation terminate one year from the closing date.
The representations and warranties contained in the merger agreement are
complicated and not easily summarized. You are urged to carefully read the
articles of the merger agreement entitled "Representations and Warranties of the
Company" and "Representations and Warranties of Parent and Sub."
CONDUCT OF BUSINESS OF OCTANE PENDING THE MERGER
Octane has agreed in the merger agreement to carry on its business in its
usual customary manner during the period from the date of the merger agreement
and continuing until the earlier of the termination of the merger agreement or
the date of the merger. Octane has committed to use its reasonable best efforts
consistent with past practice and policies:
- to preserve intact the present business organization of Octane,
- to keep available the services of their present officers and key
employees, and
- to preserve its relationships with customers, suppliers, distributors,
licensors, licensees and others having business dealings with Octane.
Octane has also agreed to refrain from taking a variety of actions that
could affect Octane's business prior to the closing without E.piphany's prior
consent. A complete list of these actions is set
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forth in Section 4.1 of the merger agreement, which is included as Annex I to
this proxy statement/ prospectus.
NO SOLICITATION BY OCTANE OF OTHER OFFERS
Octane has agreed that it will not solicit or initiate any other offer or
proposal to acquire or invest in Octane until the earlier of the termination of
the merger agreement or the date of the merger. Octane has further agreed that
it will not provide information about itself to any other party or enter into
any agreements with any party in connection with a proposal to acquire or invest
in Octane. If Octane receives an unsolicited acquisition proposal, Octane has
agreed to immediately notify E.piphany and disclose the identity of the offeror
and the terms of the proposal.
CONDITIONS TO THE MERGER
There are numerous conditions that have to be satisfied or waived before
the merger can be completed. These conditions are divided into three categories
and are summarized below.
The obligations of each party to complete the merger are subject to the
following conditions:
- the merger and merger agreement must have been approved by the requisite
vote of the Octane shareholders,
- the issuance of shares of E.piphany common stock to Octane shareholders
must have been approved by the requisite vote of the E.piphany
stockholders,
- all necessary approvals from government authorities shall have been
obtained,
- no court order or other legal restraint or prohibition preventing the
consummation of the merger will be in effect or pending, and
- E.piphany and Octane must each receive from their respective tax counsel
an opinion to the effect that the merger will constitute a tax-free
reorganization within the meaning of Section 368(a) of the Internal
Revenue Code. However, if counsel to either E.piphany or Octane does not
render this opinion, this condition will be satisfied if counsel to the
other party renders the opinion to such party.
The obligations of E.piphany and Orchid Acquisition Corporation to complete
the merger are subject to the following conditions:
- Octane's representations and warranties must be true and correct in all
material respects as of the date the merger is to be completed as if made
at and as of such time, except to the extent Octane's representations and
warranties address matters only as of a particular date in which case
they must be true and correct only as of that date,
- Octane must perform or comply in all material respects with all of its
agreements and covenants required by the merger agreement to be performed
or complied with by Octane at or before completion of the merger,
- no material adverse effect with respect to Octane shall have occurred,
- Octane shareholders shall have approved by the requisite vote any
payments and benefits to its employees which are characterized as
"parachute payments," within the meaning of Section 280G(b)(2) of the
Internal Revenue Code as a result of the merger, the merger agreement or
the transactions contemplated by the merger agreement,
- there shall not have occurred any final judgment against E.piphany,
Octane or Orchid Acquisition Corporation arising out of, or in any way
connected with, the merger or the other transactions described in the
merger agreement,
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- no more than 5% of Octane shareholders shall have exercised or given
notice of their intent to exercise dissenters' rights in accordance with
California law,
- certain consents, waivers, assignments and approvals required to
consummate the merger shall have been obtained,
- E.piphany shall have received a legal opinion from legal counsel to
Octane,
- Aditya (Tim) Guleri, William Walsh, Kira Makagon, James Doehrman, Robert
Loughan, Robert Gryphon, Todd Rowe, Andrew Sherman, Gary Schaumburg and
Manu Kumar shall have entered into employment and noncompetition
agreements with E.piphany, and each of the agreements shall be in full
force and effect as of the date of the merger,
- each of Octane's executive officers, directors and their affiliates shall
have entered into an affiliate agreement with E.piphany,
- all outstanding shares of preferred stock of Octane shall have been
converted into shares of common stock of Octane,
- all employment agreements between Octane and any other person shall have
terminated to the extent contemplated by the merger agreement,
- E.piphany shall have received from Octane a detailed schedule of the
estimated third party expenses paid or payable by Octane,
- at least eighty percent of Octane's sales, services, technical and
engineering employees, and each of Mr. Guleri, Ms. Makagon, Mr. Loughan,
Mr. Gryphon and Mr. Walsh shall remain Octane employees immediately prior
to the closing of the merger,
- E.piphany shall have received from the Secretary of Octane a certificate
as to organization, existence and good standing of Octane and the
authorization of the merger agreement and the transactions contemplated
by the merger agreement, and
- E.piphany shall have received from Octane a certificate as to the
satisfaction of certain conditions described above.
The obligations of Octane to complete the merger are subject to the
following conditions:
- E.piphany's and Orchid Acquisition Corporation's representations and
warranties must be true and correct in all material respects as of the
date the merger is to be completed as if made at and as of such time,
except to the extent the representations and warranties address matters
only as of a particular date in which case they must be true and correct
only as of that date,
- E.piphany and Orchid Acquisition Corporation must perform or comply in
all material respects with all of their agreements and covenants required
by the merger agreement to be performed or complied with by E.piphany and
Orchid Acquisition Corporation at or before completion of the merger,
- Octane shall have received a legal opinion from legal counsel to
E.piphany,
- Octane shall have received from the Secretary of E.piphany a certificate
as to organization, existence and good standing of E.piphany and the
authorization of the merger agreement and the transactions contemplated
by the merger agreement,
- No material adverse effect with respect to E.piphany shall have occurred,
and
- Octane shall have received from E.piphany a certificate as to the
satisfaction of certain conditions described above.
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TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated and the merger abandoned at any time
prior to the merger in certain circumstances which are described below:
By Octane and E.piphany, if they mutually agree,
By E.piphany or Octane if:
- the merger has not occurred by October 15, 2000, unless the party seeking
to terminate the merger agreement had acted or failed to act in such a
manner as to be the principal cause of or resulted in the failure of the
merger to occur on or before such date and the action or failure to act
constitutes a breach of the merger agreement,
- there is a final nonappealable order of a federal or state court in
effect preventing the merger, or
- there is any statute, rule, regulation or order enacted, promulgated or
issued or deemed applicable to the merger by any governmental entity that
would make consummation of the merger illegal.
By E.piphany if:
- any governmental entity has prohibited E.piphany's or Orchid Acquisition
Corporation's ownership or operation of any portion of the business of
Octane, or required E.piphany or Octane to dispose of or hold separate
all or a portion of the business or assets of Octane or E.piphany as a
result of the merger,
- E.piphany is not in material breach of its obligations under the merger
agreement and there has been a material breach of any representation,
warranty, covenant or agreement contained in the merger agreement on the
part of Octane and the breach has not been cured within ten days after
written notice to Octane, but no cure period is required for a breach
which by its nature cannot be cured,
- Octane fails to obtain approval of the merger by Octane's shareholders at
its special meeting of shareholders, or
- an event having a material adverse effect on Octane shall have occurred
after the date of the merger agreement.
By Octane if:
- Octane is not in material breach of its obligations under the merger
agreement and there has been a material breach in any representation,
warranty, covenant or agreement contained in the merger agreement on the
part of E.piphany or Orchid Acquisition Corporation and such breach has
not been cured within ten days after written notice to E.piphany, but no
cure period is required for a breach which by its nature cannot be cured,
- E.piphany fails to obtain approval of the merger by E.piphany
stockholders at its special meeting of stockholders, or
- an event having a material adverse effect on E.piphany shall have
occurred after the date of the merger agreement.
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ESCROW FUND AND INDEMNIFICATION
An aggregate of 10% of the total number of shares of E.piphany common stock
that constitute the merger consideration under the merger agreement will
automatically be contributed to the escrow fund. The escrow fund will be the
exclusive remedy available to compensate E.piphany and its officers, directors
and affiliates -- referred to in the paragraphs to follow as the indemnified
parties -- for:
- any losses incurred by E.piphany or for which E.piphany would otherwise
be liable as a result of any inaccuracy or breach of a representation or
warranty of Octane contained in the merger agreement or any related
agreement, and
- any failure by Octane to perform or comply with any covenant in the
merger agreement or any related agreement.
For purposes of compensating E.piphany for its losses, the escrow shares
will be valued at $192.85 per share. The escrow fund shall not be available to
compensate the indemnified parties for any losses until the aggregate losses for
which indemnification is sought exceeds $1,750,000, in which case the full
amount of the loss, including the $1,750,000, will be subject to
indemnification. However, if aggregate losses attributable to breaches of
representations and warranties relating to intellectual property exceed $500,000
before such time as the total aggregate losses exceed $1,750,000, then Octane
will have liability to the indemnified parties to the extent of the losses
attributable to breaches of representations and warranties relating to
intellectual property, including the $500,000. In addition, if Octane has
liability to the indemnified parties for losses attributable to breaches of
representations and warranties relating to intellectual property over and
including the $500,000, then the $1,750,000 limitation will be reduced to
$1,250,000 for losses other than losses relating to intellectual property.
Octane shareholders will have voting rights with respect to the escrow
shares while in escrow, and will receive dividends, if any, attributable to the
escrow shares.
Subject to any unresolved claims, the escrow fund and the indemnity will
terminate on the one year anniversary of the closing date of the merger, and the
remaining escrow shares will be distributed to the former shareholders of
Octane. The escrow shares and the indemnity will be the exclusive remedy of the
indemnified parties to recover for any losses they suffer by reason of the
breach of any representation, warranty or covenant of Octane. However, the
indemnified party's remedy will not be so limited in the case of fraud or
willful misconduct by Octane.
SECURITYHOLDER AGENT
BY APPROVING THE MERGER AGREEMENT, OCTANE SHAREHOLDERS WILL HAVE CONSENTED
TO THE APPOINTMENT OF DAVID STROHM, A MEMBER OF THE BOARD OF DIRECTORS OF
OCTANE, TO ACT AS THE SECURITYHOLDER AGENT ON BEHALF OF OCTANE SHAREHOLDERS, TO
AUTHORIZE DELIVERY OF ESCROW SHARES TO THE INDEMNIFIED PARTIES IN SATISFACTION
OF CLAIMS BROUGHT BY THE INDEMNIFIED PARTIES, TO OBJECT TO SUCH DELIVERIES, TO
AGREE TO, TO NEGOTIATE AND TO ENTER INTO SETTLEMENTS AND COMPROMISES WITH
RESPECT TO SUCH CLAIMS, AND TO TAKE CERTAIN OTHER ACTION ON BEHALF OF OCTANE
SHAREHOLDERS, ALL AS MORE FULLY DESCRIBED IN ARTICLE VII OF THE MERGER
AGREEMENT. OCTANE SHAREHOLDERS ARE ENCOURAGED TO READ ARTICLE VII OF THE MERGER
AGREEMENT FOR A MORE DETAILED EXPLANATION OF THE ESCROW FUND AND RIGHTS WITH
RESPECT THERETO.
FEES AND EXPENSES
Regardless of whether the merger is consummated, all fees and expenses
incurred in connection with the merger incurred by a party in connection with
the merger agreement and the transactions contemplated thereby will be the
obligation of the respective party incurring the fees and expenses.
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OTHER COVENANTS
The merger agreement also contains various other covenants and agreements
that are customary in transactions of this nature, including:
- E.piphany and Octane have agreed to prepare and cause to be filed with
the Securities and Exchange Commission a registration statement on Form
S-4 including this proxy statement/prospectus for (a) the solicitation of
approval of the shareholders of Octane of the merger agreement, the
merger and the conversion of the shares of Octane preferred stock, and
(b) the solicitation and approval of the stockholders of E.piphany of the
issuance of shares of E.piphany common stock to Octane shareholders in
connection with the merger, and (c) to register the sale of the shares of
E.piphany common stock issuable in the merger.
- E.piphany and Octane have agreed to respond promptly to any comments of
the staff of the Securities and Exchange Commission and to use their
respective reasonable best efforts to have the registration statement on
Form S-4 declared effective under the Securities Act as promptly as
practicable after it is filed.
- Octane has agreed to submit the merger and merger agreement to its
shareholders for approval promptly after the registration statement on
Form S-4 is declared effective. Pursuant to this provision, the Octane
shareholders special meeting has been scheduled for May 31, 2000.
- E.piphany has agreed to submit for approval by its stockholders the
proposal to issue shares of its common stock to Octane shareholders in
connection with the merger promptly after the registration statement on
Form S-4 is declared effective. Accordingly, the E.piphany special
meeting of stockholders has also been scheduled for May 31, 2000.
- E.piphany and Octane have agreed to promptly furnish to the other party
all information concerning itself, its stockholders and its affiliates
that may be required or reasonably requested in connection with any
action contemplated by the foregoing provisions.
- If any event related to E.piphany or Octane occurs or if E.piphany or
Octane becomes aware of any information that should be disclosed in an
amendment or supplement to the registration statement or the proxy
statement/prospectus, then E.piphany or Octane, as applicable, will
inform the other of the same and will cooperate with each other in filing
any amendment or supplement with the Securities and Exchange Commission
and, if appropriate, in mailing the amendment or supplement to the
shareholders of Octane and stockholders of E.piphany.
- E.piphany has agreed that each employee of Octane who remains an employee
of E.piphany after the merger will be eligible to participate in
E.piphany's employee benefit plans, consistent with E.piphany's human
resource policy, and will be given credit for service with Octane prior
to the merger.
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OTHER AGREEMENTS
EMPLOYMENT AND NONCOMPETITION AGREEMENTS
Concurrent with the execution of the merger agreement and effective as of
the merger, Aditya (Tim) Guleri, William Walsh, Kira Makagon, James Doehrman,
Robert Loughan, Robert Gryphon, Todd Rowe, Andrew Sherman, Gary Schaumburg and
Manu Kumar entered into employment and noncompetition agreements with E.piphany.
The employment and noncompetition agreements provide, among other things, that,
beginning on the closing date of the merger and ending on the second anniversary
of the merger, the employees will not, without the consent of E.piphany, become
employed in any capacity by competitors of E.piphany. The employment and
noncompetition agreements also provide that the employees will not, until the
later of the second anniversary of the merger and the one year anniversary of
the termination of their employment with E.piphany, directly or indirectly hire,
solicit or induce any employee of E.piphany or its subsidiaries to terminate his
or her employment with E.piphany or its subsidiaries or divert the business of
any customer of E.piphany or its subsidiaries.
AFFILIATE AGREEMENTS
All directors, executive officers and affiliates of Octane and their
respective affiliates have entered into agreements with E.piphany. The
agreements provide, among other things, that Octane affiliates will not sell,
transfer or otherwise dispose of the shares of E.piphany common stock issued to
such affiliate in the merger other than in compliance with Rule 145 promulgated
under the Securities Act of 1933 unless the affiliate delivers to E.piphany a
written opinion from counsel, reasonably acceptable to E.piphany, that the sale,
transfer or disposition is otherwise exempt from registration under the
Securities Act. Additionally, the affiliate agreements provide that E.piphany
will place legends on the stock certificates and place stop transfer orders with
its transfer agent to ensure compliance with Rule 145.
VOTING AGREEMENTS
Octane Voting Agreements. As a condition to E.piphany entering into the
merger agreement, the executive officers, directors, venture capital firms
affiliated with the directors, and other affiliates of Octane entered into
voting agreements with E.piphany. By entering into the voting agreements, these
Octane shareholders have agreed to vote their shares of Octane stock in favor of
the merger agreement, the merger and the preferred stock conversion and to
irrevocably appoint E.piphany as their lawful attorney and proxy. These proxies
give E.piphany the limited right to vote the shares of Octane capital stock
beneficially owned by these Octane shareholders, including shares of Octane
capital stock acquired after the date of the voting agreement, in favor of the
approval and adoption of the merger agreement and the merger and, in the case of
holders of Octane preferred stock, to vote in favor of the automatic conversion
of Octane preferred stock into Octane common stock immediately prior to the
merger and in favor of each other matter that could reasonably be expected to
facilitate the merger. These Octane shareholders may vote their shares of Octane
capital stock on all other matters.
As of April 14, 2000, these Octane shareholders collectively beneficially
owned:
- 74.7% of the outstanding shares of common stock,
- 74.3% of the outstanding shares of preferred stock, and
- 74.5% of the outstanding shares of common stock and preferred stock
voting as a class.
None of the Octane shareholders who are parties to the voting agreement
were paid additional consideration in connection with entering into a voting
agreement.
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Pursuant to the voting agreements, and except as otherwise waived by
E.piphany, each Octane shareholder who is party to a voting agreement agreed not
to sell the Octane stock and options owned, controlled or acquired, either
directly or indirectly, by that person until the earlier of the termination of
the merger agreement or the completion of the merger, unless the transfer is in
accordance with any affiliate agreement between the Octane shareholder and
E.piphany and each person to which any shares or any interest in any shares is
transferred agrees to be bound by the terms and provisions of their voting
agreement.
THE OCTANE VOTING AGREEMENTS WILL TERMINATE UPON THE EARLIER TO OCCUR OF THE
TERMINATION OF THE MERGER AGREEMENT AND THE COMPLETION OF THE MERGER. THE FORM
OF VOTING AGREEMENT IS ATTACHED TO THIS PROXY STATEMENT/PROSPECTUS AS ANNEX II
AND YOU ARE URGED TO READ IT IN ITS ENTIRETY.
E.piphany Voting Agreements. The directors, executive officers and certain
of the affiliates of the directors of E.piphany entered into voting agreements
with Octane. By entering into the voting agreements, these E.piphany
stockholders have agreed to vote their shares of Octane stock in favor of the
issuance of shares of E.piphany common stock to Octane shareholders in
connection with the merger, and in favor of each other matter that could
reasonably be expected to facilitate the merger. These E.piphany stockholders
may vote their shares of Octane capital stock on all other matters.
As of April 14, 2000, these E.piphany stockholders collectively
beneficially owned 31.1% of the outstanding shares of common stock.
THE E.PIPHANY VOTING AGREEMENTS WILL TERMINATE UPON THE EARLIER TO OCCUR OF THE
TERMINATION OF THE MERGER AGREEMENT AND THE COMPLETION OF THE MERGER. THE FORM
OF VOTING AGREEMENT IS ATTACHED TO THIS PROXY STATEMENT/PROSPECTUS AS ANNEX III,
AND YOU ARE URGED TO READ IT IN ITS ENTIRETY.
CONVERSION OF OCTANE PREFERRED STOCK
In connection with the proposed merger, Octane's board of directors is
requesting the approval of holders of its preferred stock of a proposal to
automatically convert all Octane preferred stock into Octane common stock
effective immediately prior to the merger. The Octane board adopted this
proposal at its meeting on March 14, 2000 subject to approval by the holders of
Octane preferred stock.
THE PROPOSAL
Octane's amended and restated articles of incorporation provide that Octane
preferred stock is convertible into Octane common stock at any time at the
election of the holder, and that all Octane preferred stock will automatically
convert into Octane common stock upon the affirmative vote of at least 66 2/3%
of the Octane preferred stock, voting as a single class. Each share of Octane
preferred stock is presently convertible into one share of Octane common stock.
Upon conversion into common stock, holders of preferred stock will no
longer be entitled to preferential dividend, liquidation, antidilution or voting
rights presently enjoyed by the various series of Octane preferred stock. There
are no declared but unpaid dividends with respect to any shares of Octane
preferred stock.
OCTANE'S REASONS FOR THE PREFERRED STOCK CONVERSION
Under the terms of Octane's preferred stock, the proposed merger would be
deemed a "liquidation" of Octane, thereby triggering the liquidation preferences
and distribution of consideration as set forth in Octane's amended and restated
articles of incorporation. Based on the value of the consideration to be paid by
E.piphany in the merger at the time the merger agreement was signed
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and the number of shares of Octane capital stock outstanding or subject to
outstanding options or warrants, holders of Octane common stock and preferred
stock would receive the same aggregate consideration per share on a common stock
equivalent basis, even in such a "liquidation."
The per share consideration to be paid for Octane capital stock in the
merger was determined based on the average trading price of E.piphany's common
stock for a thirty-day period ending the day before the merger agreement was
signed. By contrast, the liquidation preference provisions of Octane's amended
and restated articles of incorporation determine the distribution of merger
consideration based on the average price of the acquiror's common stock for a
thirty-day period expiring three days before the acquisition closes.
As a result of this disparity, a reduction in the price of E.piphany's
common stock in the period between signing and closing could result in the
holders of Octane common stock receiving substantially less per share than
holders of Octane preferred stock in the merger. The Octane board, which is
comprised predominantly of members designated by holders of Octane preferred
stock, determined that such an outcome would not be an equitable distribution of
the proceeds of the merger. The conversion of all preferred stock into common
stock immediately prior to the merger prevents disparate treatment of holders of
Octane preferred and common stock.
REQUIRED VOTE AND BOARD RECOMMENDATION
Octane's board of directors unanimously recommends that all holders of
Octane preferred stock vote FOR this proposal. Approval of this proposal
requires the affirmative vote of holders of preferred stock representing at
least 66 2/3% of the votes attributable to Octane preferred stock. Abstentions
will thus have the effect of a vote against the proposal.
All of Octane's executive officers, directors, venture capital firms
affiliated with some of the directors, and other affiliates have agreed to vote
all of their shares of Octane preferred stock in favor of the preferred stock
conversion.
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COMPARISON OF CAPITAL STOCK
DESCRIPTION OF E.PIPHANY CAPITAL STOCK
E.piphany is authorized to issue 100,000,000 shares of common stock,
$0.0001 par value, and 5,000,000 shares of undesignated preferred stock, $0.0001
par value. The following description of E.piphany's capital stock is subject to
and qualified in its entirety by E.piphany's amended certificate of
incorporation and bylaws, and by the provisions of applicable Delaware law.
E.PIPHANY COMMON STOCK
As of April 14, 2000, there were 32,444,364 shares of common stock
outstanding which were held of record by approximately 334 stockholders. This
does not include the number of persons whose stock is in nominee or "street
name" accounts through brokers. As of the date hereof there are no shares of
preferred stock outstanding.
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 for that
purpose. For a more detailed explanation, see "Payment of Dividends and
Repurchase of Shares." In the event of the liquidation, dissolution or winding
up of E.piphany, the holders of 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 holders of common stock
have no preemptive or conversion rights or other subscription rights. There are
no redemption or sinking fund provisions applicable to the common stock.
E.PIPHANY PREFERRED STOCK
E.piphany's board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, which may be
greater than the rights of the common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the common stock until E.piphany's board of directors determines
the specific rights of the holders of such preferred stock. However, the effects
might include, among other things:
- restricting dividends on the common stock,
- diluting the voting power of the common stock,
- impairing the liquidation rights of the common stock, or
- delaying or preventing a change in control of E.piphany without further
action by the stockholders.
No shares of preferred stock are outstanding and we have no present plans to
issue any shares of preferred stock.
E.PIPHANY WARRANTS
As of April 14, 2000, there were warrants outstanding to purchase up to
70,745 shares of common stock of E.piphany.
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E.PIPHANY REGISTRATION RIGHTS
As of April 14, 2000, the holders of 17,289,188 shares of common stock were
entitled to the following rights with respect to registration of such shares
with the Securities and Exchange Commission.
These rights are provided under the terms of an agreement between E.piphany
and the holders of registrable securities. If holders of at least 50% of the
outstanding registrable securities request that at least 30% of the outstanding
registrable securities be registered, E.piphany may be required, on up to two
occasions, to register their shares for public resale. E.piphany is obligated to
register these shares only if the outstanding registrable securities have an
anticipated public offering price of at least $6,000,000. Also, holders of
registrable securities may require on two separate occasions within any twelve
month period that E.piphany registers their shares for public resale on Form S-3
or similar short-form registration, if available, if the value of the securities
to be registered is at least $2,000,000. Depending on market conditions,
however, E.piphany may defer such registration for up to 120 days. Furthermore,
in the event E.piphany elects to register any E.piphany shares of common stock
for purposes of effecting any public offering, the holders of the registrable
securities described above are entitled to include their shares of common stock
in the registration, but E.piphany may reduce the number of shares proposed to
be registered in view of market conditions. All expenses in connection with any
registration, other than underwriting discounts and commissions, will be borne
by E.piphany. All registration rights will terminate on September 21, 2004, or,
with respect to each holder of registrable securities, at such time as the
holder is entitled to sell all of its shares in any three month period under
Rule 144 promulgated under the Securities Act of 1933.
LIMITATION OF LIABILITY OF DIRECTORS OF E.PIPHANY
The Delaware General Corporation Law permits a corporation to include a
provision in its certificate of incorporation eliminating or limiting the
personal liability of a director or officer to the corporation or its
stockholders for damages for a breach of the director's fiduciary duty, subject
to certain limitations. E.piphany's certificate of incorporation includes such a
provision to the maximum extent permitted by law.
While these provisions provide directors with protection from awards for
monetary damages for breaches of their duty of care, they do not eliminate that
duty. Accordingly, these provisions will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's
breach of his or her duty of care.
INDEMNIFICATION OF DIRECTORS AND OFFICERS OF E.PIPHANY
The Delaware General Corporation Law permits a corporation to indemnify
officers and directors for actions taken in good faith and in a manner they
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and with respect to any criminal action, which they had no
reasonable cause to believe was unlawful.
E.piphany's certificate of incorporation and bylaws provide that any person
who was or is a party or is threatened to be a party to or is involved in any
action, suit, or proceeding, whether civil, criminal, administrative or
investigative, because that person is or was a director or officer, or is or was
serving at the request of E.piphany as a director, officer, employee or agent of
another corporation or of a partnership, joint venture, trust or other
enterprise, will be indemnified against expenses, including attorney's fees, and
held harmless by E.piphany to the fullest extent permitted by the Delaware
General Corporation Law. The indemnification rights conferred by E.piphany are
not exclusive of any other right to which persons seeking indemnification may be
entitled under any statute, E.piphany's certificate of incorporation or bylaws,
any agreement, vote of stockholders or
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disinterested directors or otherwise. In addition, E.piphany is authorized to
purchase and maintain insurance on behalf of its directors and officers.
Additionally, E.piphany may pay expenses incurred by its directors or
officers in defending a civil or criminal action, suit or proceeding because
that person is a director or officer, in advance of the final disposition of
that action, suit or proceeding. However, such payment will be made only if
E.piphany receives an undertaking by or on behalf of that director or officer to
repay all amounts advanced if it is ultimately determined that he or she is not
entitled to be indemnified by E.piphany.
ANTI-TAKEOVER EFFECTS OF E.PIPHANY'S CERTIFICATE AND BYLAWS AND DELAWARE LAW
Some provisions of Delaware law and E.piphany's certificate of
incorporation and bylaws could make the following more difficult:
- acquisition of E.piphany by means of a tender offer,
- acquisition of E.piphany by means of a proxy contest or otherwise, or
- removal of E.piphany's incumbent officers and directors.
These provisions, summarized below, are expected to discourage coercive takeover
practices and inadequate takeover bids. These provisions are also designed to
encourage persons seeking to acquire control of E.piphany to first negotiate
with E.piphany's board of directors. E.piphany believes that the benefits of
increased protection of its potential ability to negotiate with the proponent of
an unfriendly or unsolicited proposal to acquire or restructure E.piphany
outweighs the disadvantages of discouraging such proposals because negotiation
of such proposals could result in an improvement of their terms.
Election and Removal of Directors. E.piphany's board of directors is
divided into three classes. The directors in each class will serve for a
three-year term, one class being elected each year by the stockholders. For more
information on the classified board, see the sections entitled "Classification
of Board of Directors" and "Management -- Classified Board." This system of
electing and removing directors may tend to discourage a third party from making
a tender offer or otherwise attempting to obtain control of E.piphany because it
generally makes it more difficult for stockholders to replace a majority of the
directors.
Stockholder Meetings. Under E.piphany's bylaws, only the board of
directors, the chairman of the board and the president may call special meetings
of stockholders.
Requirements for Advance Notification of Stockholder Nominations and
Proposals. E.piphany's bylaws establish advance notice procedures with respect
to stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or a committee of the board of directors.
Delaware Anti-Takeover Law. E.piphany is subject to Section 203 of the
Delaware General Corporation Law, an anti-takeover law. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date the person became an interested stockholder, unless the
"business combination" or the transaction in which the person became an
interested stockholder is approved in a prescribed manner. Generally, a
"business combination" includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested stockholder.
Generally, an "interested stockholder" is a person who, together with affiliates
and associates, owns or within three years prior to the determination of
interested stockholder status, did own, 15% or more of a corporation's voting
stock. The existence of this provision may have an anti-takeover effect with
respect to transactions not approved in advance by the board of directors,
including discouraging
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attempts that might result in a premium over the market price for the shares of
common stock held by stockholders.
Elimination of Stockholder Action By Written Consent. E.piphany's
certificate of incorporation eliminates the right of stockholders to act by
written consent without a meeting.
Elimination of Cumulative Voting. E.piphany's certificate of incorporation
and bylaws do not provide for cumulative voting in the election of directors.
Cumulative voting provides for a minority stockholder to vote a portion or all
of its shares for one or more candidates for seats on the board of directors.
Without cumulative voting, a minority stockholder will not be able to gain as
many seats on E.piphany's board of directors based on the number of shares of
E.piphany stock that such stockholder holds than if cumulative voting were
permitted. The elimination of cumulative voting makes it more difficult for a
minority stockholder to gain a seat on E.piphany's board of directors to
influence the board of directors' decision regarding a takeover.
Undesignated Preferred Stock. The authorization of undesignated preferred
stock makes it possible for the board of directors to issue preferred stock with
voting or other rights or preferences that could impede the success of any
attempt to change control of E.piphany. These and other provisions may have the
effect of deferring hostile takeovers or delaying changes in control or
management of E.piphany.
Amendment of Charter Provisions. The amendment of any of the above
provisions would require approval by holders of at least 66 2/3% of the
outstanding common stock of E.piphany.
E.PIPHANY TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the E.piphany common stock is
Equiserve, Limited Partnership.
NASDAQ NATIONAL MARKET LISTING
Our shares are traded on The Nasdaq Stock Market's National Market under
the symbol "EPNY."
DESCRIPTION OF OCTANE CAPITAL STOCK
Prior to the closing of the merger, Octane is authorized to issue
43,350,000 shares of capital stock, of which 30,000,000 shares are common stock
with no par value, and 13,350,000 shares are preferred stock with no par value.
The following description of Octane's capital stock is subject to and qualified
in its entirety by Octane's amended articles of incorporation and bylaws, and by
the provisions of applicable California law.
OCTANE COMMON STOCK
As of April 14, 2000, there were 9,729,189 shares of Octane common stock
outstanding which were held of record by 214 shareholders.
The holders of Octane common stock are entitled to one vote per share on
all matters to be voted upon by the shareholders. Shareholders may cumulate
votes in connection with the election of directors. Subject to the preferential
rights of the Octane preferred stock, the holders of shares of Octane common
stock are entitled to receive dividends payable either in cash, property or
shares of capital stock, when and if declared by Octane's board of directors out
of funds legally available therefor.
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Octane common stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
available to Octane common shareholders. All outstanding shares of Octane common
stock are fully paid and non-assessable.
OCTANE PREFERRED STOCK
As of April 14, 2000, 12,951,320 shares of Octane preferred stock were
outstanding of which 4,650,000 shares are designated as Series A preferred
stock, 4,778,780 shares are designated as Series B preferred stock and 3,522,540
shares are designated as Series C preferred stock. Octane preferred stock is
convertible into shares of Octane common stock on a one-for-one basis, subject
to adjustments, and, certain events will trigger automatic conversion of
Octane's preferred stock into common stock. Octane's preferred stock is held by
60 shareholders of record.
Dividend Rights. Holders of Octane preferred stock are entitled to receive
dividends before holders of common stock in the following amounts per annum:
$0.1067 per share of Series A preferred stock, $0.2568 per share of Series B
preferred stock and $0.65444 per share of Series C preferred stock. Such
dividends are not cumulative and are paid only when and if declared by the
Octane board of directors.
Liquidation Preference. In the event of any liquidation, dissolution or
winding up of Octane, such as the merger, holders of Octane preferred stock are
entitled to be paid first out of the assets of Octane available for distribution
before any amounts or assets are distributed among the holders of common stock.
Holders of preferred stock are entitled to receive $1.33 per share of Series A
preferred stock, $3.21 per share of Series B preferred stock and $8.18 per share
of Series C preferred stock, plus any accrued and unpaid dividends thereon. Any
remaining assets of Octane available for distribution to shareholders are to be
distributed among the holders of preferred stock and common stock pro rata based
on the number of shares of common stock held by each, assuming conversion of all
preferred stock into common stock, until:
- holders of Series A preferred stock receive an aggregate of $4.00 per
share of Series A preferred stock if such distribution takes place prior
to January 27, 2001, or $6.6666 per share if such distribution takes
place on or after January 27, 2001,
- holders of Series B preferred stock receive an aggregate of $9.63 per
share of Series B preferred stock if such distribution takes place prior
to January 27, 2001, or $16.05 per share if such distribution takes place
on or after January 27, 2001, and
- holders of Series C preferred stock receive an aggregate of $24.54 per
share of Series C preferred stock if such distribution takes place prior
to January 27, 2001, or $40.90 per share if such distribution takes place
on or after January 27, 2001.
If assets remain in Octane after the above liquidation preferences are
fully satisfied, the holders of common stock shall receive all of the remaining
assets on a pro rata basis.
Other Rights. Octane preferred stock is subject to broad-based,
weighted-average anti-dilution provisions in the event of additional issuances
of securities by Octane. Also, Octane is required to obtain the approval of the
holders of at least a majority of outstanding shares of preferred stock for
certain corporate actions including actions impacting preferred stock and
corporate dispositions, sales and mergers.
OCTANE WARRANTS
As of April 14, 2000 there were warrants outstanding to purchase up to
18,750 shares of Octane common stock and up to 22,500 shares of Octane Series A
preferred stock.
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OCTANE TRANSFER AGENT AND REGISTRAR
Venture Law Group, A Professional Corporation, currently acts as the
transfer agent and registrar of Octane capital stock.
COMPARISON OF CAPITAL STOCK OF E.PIPHANY AND OCTANE
This section of the proxy statement/prospectus describes material
differences between the rights of holders of Octane capital stock and E.piphany
common stock. While we believe that the description covers the material
differences between the two, this summary may not contain all of the information
that is important to you. You should carefully read this entire document and the
other documents we refer to for a more complete understanding of the differences
between being a shareholder of Octane and being a stockholder of E.piphany.
E.piphany is incorporated in the State of Delaware and Octane is
incorporated in the State of California. Following the merger, the surviving
corporation of the merger of Octane and Orchid Acquisition Corporation will be
governed by the California Corporations Code and E.piphany will continue to be
governed by the Delaware General Corporation Law. Shareholders of Octane,
however, will hold E.piphany common stock rather than Octane common stock.
Therefore, the rights of such shareholders will be governed by Delaware law and
the provisions of the E.piphany amended and restated certificate of
incorporation and the E.piphany bylaws, rather than the Octane amended and
restated articles of incorporation and the Octane bylaws.
The following is a summary of the comparison of some provisions of
California law and Delaware law and the charters and bylaws of the respective
corporations. This summary does not purport to be complete and is qualified in
its entirety by reference to the corporate statutes of Delaware and California
and the corporate charters and bylaws of E.piphany and Octane.
PREFERRED STOCK
E.piphany's certificate of incorporation provides that E.piphany's board of
directors is authorized to issue shares of undesignated preferred stock in one
or more series, and to fix the designations, powers, preferences and rights of
the shares of each series and any qualifications, limitations or restrictions
thereof.
Octane's articles of incorporation provides that Octane's board of
directors is authorized to issue shares of designated preferred stock in three
series. The holders of preferred stock receive preferences as to dividends and
liquidation. The holders of preferred stock are entitled to a number of votes
equal to the number of shares of common stock into which the shares of preferred
stock could be converted at the record date for determination of the
shareholders entitled to vote on such matters.
AMENDMENT OF BYLAWS
Under Delaware and California law, stockholders entitled to vote have the
power to adopt, amend or repeal bylaws. In addition, under Delaware and
California law a corporation may, in its certificate or articles of
incorporation, as the case may be, confer such power upon the board of
directors. The stockholders under both California and Delaware law always have
the power to adopt, amend or repeal bylaws, even though the board may also be
delegated such power. Each of E.piphany's and Octane's boards of directors is
expressly authorized to adopt, amend and repeal their respective bylaws by an
affirmative vote of a majority of the total number of authorized directors at
that time, regardless of any vacancies, except for certain changes to the number
of directors as described below in "Size of the Board of Directors."
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AMENDMENT OF E.PIPHANY'S CERTIFICATE AND OCTANE'S ARTICLES
Under Delaware law, a certificate of incorporation of a Delaware
corporation may be amended by approval of the board of directors of the
corporation and the affirmative vote of the holders of a majority of the
outstanding shares entitled to vote on the amendment, unless a higher vote is
required by the corporation's certificate of incorporation. Under E.piphany's
certificate of incorporation, certain provisions may be amended only with the
affirmative vote of the holders of at least two-thirds of the combined voting
power of all of the then-outstanding shares of E.piphany capital stock entitled
to vote, unless the amendment is approved by a majority of the directors of
E.piphany.
Under California law, except for certain amendments such as stock splits,
the articles of incorporation may be amended by the approval of the board of
directors and a majority of the outstanding shares entitled to vote. Octane's
articles of incorporation contain provisions requiring a vote greater than that
required by California law to amend certain sections of Octane's articles of
incorporation. For example, Octane's articles of incorporation require a
two-thirds majority class vote of the preferred shareholders to convert all
shares of Octane preferred stock into shares of Octane common stock in
connection with the merger.
STOCKHOLDERS' ABILITY TO ACT BY WRITTEN CONSENT WITHOUT A MEETING
The Octane bylaws allow for the Octane shareholders to act by written
consent without a meeting, whereas E.piphany's certificate of incorporation
eliminates the ability of E.piphany stockholders to act by written consent
without a meeting. The elimination of the ability of stockholders to act by
written consent could lengthen the amount of time required to take stockholder
actions by requiring all actions to occur at a duly noticed and formally called
stockholders' meeting. This lengthening of time has the potential to deter
hostile takeover attempts. If the ability of stockholders to act by written
consent is eliminated, a holder or group of holders controlling a majority in
interest of a corporation's capital stock, for example, would not be able to
amend such corporation's bylaws or remove its directors pursuant to a
stockholders' written consent. E.piphany's board of directors, chairman of the
board or president may call special meetings of E.piphany stockholders at any
time. E.piphany stockholders do not have the ability to call special meetings.
Octane's board of directors, chairman of the board, president, or the holders of
at least 10% of the outstanding shares of capital stock of Octane entitled to
vote may call special meetings of Octane shareholders.
SIZE OF THE BOARD OF DIRECTORS
Delaware law provides that the board of directors of a Delaware corporation
shall consist of one or more members. The number of directors may be fixed by,
or in the manner provided in, the corporation's bylaws unless the certificate of
incorporation fixes the number of directors. E.piphany's certificate of
incorporation states that the number of directors of E.piphany will be fixed.
The number of directors may be changed by an amendment to the E.piphany bylaws
approved by its board of directors, by its stockholders or by a duly adopted
amendment to its certificate of incorporation. E.piphany's bylaws provide that
its board of directors will consist of seven directors. There are currently six
directors serving and one vacancy on the board.
Under California law, although changes in the number of directors must in
general be approved by the shareholders, the board of directors may fix the
exact number of directors within a stated range set forth in the articles of
incorporation or bylaws, if the stated range has been approved by the
shareholders.
Octane's board of directors currently consists of five seats, with four
directors currently serving on Octane's board of directors and one seat
currently vacant. The number of directors on Octane's board of directors may be
changed by Octane shareholders by a duly adopted amendment to the
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articles of incorporation or by an amendment to the bylaws adopted by the vote
or written consent of holders of a majority of the outstanding shares entitled
to vote. However, an amendment reducing the fixed number or the minimum number
of directors to a number less than five (5) cannot be adopted if the votes cast
against its adoption at a meeting, or the shares not consenting in the case of
an action by written consent, are equal to more than 16 2/3% of the outstanding
shares entitled to vote thereon. Under Octane's articles of incorporation, the
holders of Series A, Series B and Series C preferred stock, voting together as a
class, have the right to elect two members of the board of directors of Octane.
Holders of common stock, voting together as a class, have the right to elect two
members of the board of directors. The other director is to be elected by the
holders of preferred stock and common stock, voting together on an as-converted
to common stock basis.
CLASSIFICATION OF BOARD OF DIRECTORS
A classified board is one with respect to which a certain number of
directors, but not necessarily all, are elected on a rotating basis each year.
The Delaware General Corporation Law permits, but does not require, a classified
board of directors, pursuant to which the directors can be divided into as many
as three classes with staggered terms of office, with only one class of
directors standing for election each year. E.piphany's certificate of
incorporation and bylaws provide for a classified board of directors.
E.piphany's board of directors is divided into three classes designated as Class
I, Class II, and Class III, respectively. Directors are assigned to each class
in accordance with a resolution or resolutions adopted by the board of
directors. At the 2000 annual meeting of stockholders, the term of office of the
Class I directors will expire and Class I directors will be elected for a full
term of three years. At the 2001 annual meeting of stockholders, the term of
office of the Class II directors will expire and Class II directors will be
elected for a full term of three years. At the 2002 annual meeting of
stockholders, the term of office of the Class III directors will expire and
Class III directors will be elected for a full term of three years. At each
succeeding annual meeting of stockholders, directors will be elected for a full
term of three years to succeed the directors of the class whose terms expire at
such annual meeting.
California law generally requires that directors be elected annually but
does permit a "classified" board of directors if the corporation is "listed." A
listed corporation is defined under California law as one (a) which is listed on
the New York or American Stock Exchange or (b) with a class of securities
designated as a national market system security on NASDAQ. If eligible,
California law permits corporations to provide for a board of directors divided
into as many as three classes by adopting an amendment to the articles of
incorporation or bylaws, which amendment must be approved by the shareholders.
Octane is not listed and its articles of incorporation and bylaws do not provide
for a classified board.
CUMULATIVE VOTING
In an election of directors under cumulative voting, each share of stock
normally having one vote is entitled to a number of votes equal to the number of
directors to be elected. A stockholder may then cast all such votes for a single
candidate or may allocate them among as many candidates as the stockholder may
choose. Without cumulative voting, the holders of a majority of the shares
present at an annual meeting would have the power to elect all the directors to
be elected at that meeting, and no person could be elected without the support
of holders of a majority of the shares.
Under Delaware law, cumulative voting in the election of directors is not
available unless specifically provided for in the certificate of incorporation.
E.piphany's certificate of incorporation does not provide for cumulative voting.
California law provides that any shareholder is entitled to cumulate his or
her votes in the election of directors upon proper notice of his or her
intention to do so, except that a "listed"
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corporation may eliminate cumulative voting with shareholder approval. If any
one shareholder gives such notice, all shareholders may cumulate their votes.
The Octane bylaws permit any person entitled to vote at an election for
directors to cumulate the votes to which such person is entitled. However, no
shareholder is entitled to cumulate his or her votes unless the candidates for
which the shareholder is voting have been placed in nomination prior to the
voting and a shareholder has given notice at the meeting, prior to the vote, of
an intention to cumulate votes.
REMOVAL OF DIRECTORS
Under Delaware law, a director of a corporation that does not have a
classified board of directors or cumulative voting may be removed without cause
by a majority stockholder vote. A director of a corporation with a classified
board of directors can be removed only for cause unless the certificate of
incorporation otherwise provides. E.piphany's directors, or the entire E.piphany
board, may be removed with cause by the affirmative vote of the holders of at
least a majority of the outstanding shares of E.piphany common stock entitled to
vote in the election of directors. "Cause" is not defined in E.piphany's
certificate of incorporation or bylaws.
Under California law, any director, or the entire board of directors, may
be removed, with or without cause, with the approval of a majority of the
outstanding shares entitled to vote. However, no directors may be removed
(unless the entire board is removed) if the number of votes cast against the
removal would be sufficient to elect the director under cumulative voting.
Octane's articles of incorporation permit removal of a director, with or without
cause, by the vote or consent of the holders of the outstanding class or series
with voting power to elect the director in accordance with the California
Corporations Code. "Cause" is not defined in Octane's articles of incorporation
or bylaws.
FILLING VACANCIES IN THE BOARD OF DIRECTORS
Vacancies and newly created directorships in E.piphany's board of directors
resulting from any increase in the authorized number of directors elected by all
of the stockholders having the right to vote as a single class may be filled by
a majority of the directors then in office, although less than a quorum, or by a
sole remaining director. However, a vacancy created by the removal of a director
by the vote of the stockholders or by court order may be filled only by the
affirmative vote of a majority of the shares represented and voting at a duly
held meeting at which a quorum is present -- which shares, voting affirmatively,
also constitute a majority of the required quorum. If, at the time of filling
any vacancy or any newly created directorship of E.piphany, the directors then
in office constitute less than a majority of the whole board -- as constituted
immediately prior to any such increase -- then the Delaware Court of Chancery
may, upon application of any stockholder or stockholders holding at least 10% of
the total number of the shares then outstanding having the right to vote for
such directors, summarily order an election to be held to fill any such
vacancies or newly created directorships, or to replace the directors chosen by
the directors then in office, which election will be governed by the provisions
of the Delaware General Corporation Law as far as applicable.
Any vacancies on Octane's board of directors resulting from any increase in
the number of authorized directors or by the departure of a director (other than
vacancies created by the removal of a director by the vote or written consent of
the shareholders or by court order), may be filled by a majority of the
remaining members of the Octane board of directors, even though less than a
quorum, or by a sole remaining director. If a vacancy on the board of directors
is to be filled by the Octane board of directors, only a director or directors
elected by the same class of shareholders as those who would be entitled to vote
to fill the vacancy, if any, will vote to fill the vacancy. A vacancy created by
a removal of a director by the vote or written consent of the shareholders or by
court order may be filled only by the affirmative vote of a majority of the
shares represented and voting at a duly
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held meeting at which a quorum is present -- which shares, voting affirmatively,
also constitute a majority of the required quorum -- or by the unanimous written
consent of all shares entitled to vote thereon.
PAYMENT OF DIVIDENDS AND REPURCHASES OF SHARES
Delaware law permits a corporation, unless otherwise restricted by its
certificate of incorporation, to declare and pay dividends out of surplus or, if
there is no surplus, out of net profits for the fiscal year in which the
dividend is declared, and/or for the preceding fiscal year, as long as the
amount of capital of the corporation is not less than the aggregate amount of
the capital represented by the issued and outstanding stock of all classes
having a preference upon the distribution of assets. In addition, Delaware law
generally provides that a corporation may redeem or repurchase its shares only
if the redemption or repurchase would not impair the capital of the corporation.
The ability of a Delaware corporation to pay dividends on, or to make
repurchases or redemptions of, its shares is dependent on the financial status
of the corporation standing alone and not on a consolidated basis. In
determining the amount of surplus of a Delaware corporation, the assets of the
corporation, including stock of subsidiaries owned by the corporation, must be
valued at their fair market value as determined by the board of directors,
regardless of their historical book value.
Under California law, a corporation may not make any distribution
(including dividends, whether in cash or other property, and repurchases of its
shares) unless either the corporation's retained earnings immediately prior to
the proposed distribution equal or exceed the amount of the proposed
distribution or, immediately after giving effect to such distribution, the
corporation's assets (exclusive of goodwill, capitalized research and
development expenses and deferred charges) would be at least equal to 125% of
its liabilities (not including deferred taxes, deferred income and other
deferred credits), and the corporation's current assets, as defined, would be at
least equal to its current liabilities (or 125% of its current liabilities if
the average pre-tax and pre-interest earnings for the preceding two fiscal years
were less than the average interest expenses for such years). These tests are
applied to California corporations on a consolidated basis. Under California
law, there are certain exceptions to the foregoing rules for repurchases of
shares in connection with certain rescission actions or pursuant to certain
employee stock plans.
DISSENTERS' AND APPRAISAL RIGHTS
Under both California and Delaware law, a stockholder of a corporation
participating in certain major corporate transactions may, under varying
circumstances, be entitled to appraisal rights under Delaware law, or,
dissenters' rights under California law, pursuant to which the stockholder may
receive cash in the amount of the fair market value of the shares held by the
stockholder (as determined by a court or by agreement of the corporation and the
stockholder) in lieu of the consideration the stockholder would otherwise
receive in the transaction.
Under Delaware law, appraisal rights are not available to:
- stockholders with respect to a merger or consolidation by a corporation
whose shares are either listed on a national securities exchange or
designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc.
or are held of record by more than 2,000 holders if such stockholders
receive only shares of the surviving corporation or shares of any other
corporation having shares that are either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or are held of record by more than 2,000 holders; or
- stockholders of a corporation surviving a merger if no vote of the
stockholders of the surviving corporation is required to approve the
merger because, among other things, the number of
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shares to be issued in the merger does not exceed 20% of the shares of
the surviving corporation outstanding immediately prior to the merger and
if certain other conditions are met.
Delaware law also does not provide stockholders of a corporation with
appraisal rights when the corporation acquires another business through the
issuance of its stock:
- in exchange for the assets of the business to be acquired,
- in exchange for the outstanding stock of the corporation to be acquired,
or
- in a merger of the corporation to be acquired with a subsidiary of the
acquiring corporation.
California law treats these kinds of acquisitions in the same manner as a
direct merger of the acquiring corporation with the corporation to be acquired.
The limitations on the availability of dissenters' rights under California
law are different from those under Delaware law. Shareholders of a California
corporation whose shares are listed on a national securities exchange or on a
list of over-the-counter margin stocks issued by the Board of Governors of the
Federal Reserve System generally do not have dissenters' rights unless the
holders of at least 5% of the class of outstanding shares claim the right.
Dissenters' rights are not available, however, if the shareholders of a
corporation or the corporation itself, or both, immediately prior to a
reorganization own, immediately after the reorganization, more than five-sixths
of the voting power of the surviving or acquiring corporation or its parent.
Dissenters' rights are available to shareholders of Octane with respect to
the merger. For a more complete description of these rights, see the section
entitled "Dissenters' Rights" and reference Sections 1300 through 1312 of the
California Corporations Code attached as Annex IV to this proxy
statement/prospectus.
INSPECTION OF BOOKS AND RECORDS
Both California and Delaware law allow any stockholder to inspect the
stockholder list for a purpose reasonably related to such person's interest as a
stockholder. California law provides, in addition, an absolute right to inspect
and copy the corporation's shareholder list by a person or persons holding 5% or
more of a corporations voting shares, or any shareholder or shareholders holding
1% or more of such shares who has filed a Schedule 14A with the Commission
relating to the election of directors. Delaware law does not provide for any
such absolute right of inspection.
LIMITATION OF LIABILITY OF DIRECTORS
California and Delaware laws have similar provisions and limitations
respecting indemnification by a corporation of its officers, directors and
employees. Both California and Delaware law permit a corporation to adopt a
provision in its charter documents eliminating the liability of a director to
the corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided such liability does not arise from certain
proscribed conduct, including intentional misconduct and breach of the duty of
loyalty.
INDEMNIFICATION
The Delaware General Corporation Law generally permits indemnification of
expenses incurred in the defense or settlement of a derivative or third-party
action, provided there is a determination by a disinterested quorum of the
directors, by independent legal counsel or by the stockholders, that the person
seeking indemnification acted in good faith and in a manner reasonably believed
to be in or (in contrast to California law) not opposed to the best interests of
the corporation and, with respect to a criminal proceeding, which such person
had no reasonable cause to believe his or her conduct
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was unlawful. Without court approval, however, no indemnification may be made in
respect of any derivative action in which such person is adjudged liable to the
corporation. Delaware law requires indemnification of expenses when the
individual being indemnified has successfully defended the action on the merits
or otherwise.
The E.piphany bylaws provide that E.piphany will indemnify its directors
and executive officers and may indemnify other offices to the maximum extent
permitted by law. Under E.piphany's bylaws, indemnified parties are entitled to
indemnification to the extent permitted by law for actions made in good faith
and in a manner such person reasonably believes to be in, or not opposed to, the
best interests of E.piphany. The E.piphany bylaws also require E.piphany to
advance litigation expenses in the case of stockholder derivative actions or
other actions, against an undertaking by the indemnified party to repay such
advances if it is ultimately determined that the indemnified party is not
entitled to indemnification. E.piphany also has indemnification agreements with
its officers and directors.
The California Corporations Code permits indemnification of expenses
incurred in derivative or third-party actions, except that with respect to
derivative actions (a) no indemnification may be made when a person is adjudged
liable to the corporation in the performance of that person's duty to the
corporation and its shareholders, unless a court determines such person is
entitled to indemnity for expenses, and then such indemnification may be made
only to the extent that the court shall determine, and (b) no indemnification
may be made without court approval in respect of amounts paid in settling or
otherwise disposing of an action or expenses incurred in defending an action
which is settled or otherwise disposed of without court approval.
Indemnification is permitted by California law only for acts taken by the
person seeking indemnification in good faith and in a manner the person
reasonably believed to be in the best interests of the corporation and its
shareholders and with respect to a criminal proceeding, which such person had no
reasonable cause to believe the conduct of the person was unlawful, as
determined by a majority vote of a quorum of disinterested directors,
independent legal counsel (if a quorum of disinterested directors is not
obtainable), a majority vote of a quorum of the shareholders (excluding shares
owned by the indemnified party), or the court handling the action. California
law requires indemnification when the individual has successfully defended the
action on the merits. California corporations may include in their articles of
incorporation a provision which extends the scope of indemnification through
agreements, bylaws or other corporate actions beyond that specifically
authorized by law. The Octane bylaws include a provision that provides Octane
with the authority to indemnify its agents to the fullest extent permitted by
California law.
STOCKHOLDER APPROVAL OF CERTAIN BUSINESS COMBINATIONS
The Delaware General Corporation Law makes it more difficult to effect
certain transactions between a corporation and a person or group who or which
owns 15% or more of the corporation's outstanding voting stock (including any
rights to acquire stock pursuant to an option, warrant, agreement, arrangement
or understanding, or upon the exercise of conversion or exchange rights, and
stock with respect to which the person has voting rights only), or is an
affiliate or associate of the corporation and was the owner of 15% or more of
such voting stock at any time within the previous three years (excluding persons
who became 15% stockholders by action of the corporation alone). For a period of
three years following the date that a stockholder became a holder of 15% or more
of the corporation's outstanding voting stock, the following types of
transactions between the corporation and the 15% stockholder are prohibited
(unless certain conditions, described below, are met):
- mergers or consolidations,
- sales, leases, exchanges or other transfers of 10% or more of the
aggregate assets of the corporation,
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- issuances or transfers by the corporation of any stock of the corporation
which would have the effect of increasing the 15% stockholder's
proportionate share of the stock of any class or series of the
corporation,
- receipt by the 15% stockholder of the benefit (except proportionately as
a stockholder) of loans, advances, guarantees, pledges or other financial
benefits provided by the corporation, and
- any other transaction which has the effect of increasing the
proportionate share of the stock of any class or series of the
corporation which is owned by the 15% stockholder.
The three-year ban does not apply if either the proposed transactions or
the transaction by which the 15% stockholder became a 15% stockholder is
approved by the board of directors of the corporation prior to the date the
stockholder became a 15% stockholder. Additionally, a 15% stockholder may avoid
the statutory restriction if, upon the consummation of the transaction whereby
the stockholder became a 15% stockholder, the stockholder owns at least 85% of
the outstanding voting stock of the corporation without regard to those shares
owned by the corporation's officers and directors or certain employee stock
plans. Business combinations are also permitted within the three year period if
approved by the board of directors and, at an annual or special meeting, by the
holders of 66 2/3% of the voting stock not owned by the 15% stockholder.
A corporation may, at its option, exclude itself from the coverage of this
Delaware law provision by providing in its certificate of incorporation or
bylaws at any time to exempt itself from coverage, provided that a bylaw or
charter amendment cannot become effective for 12 months after the amendment is
adopted.
In addition, any transaction is exempt from the statutory ban if it is
proposed at a time when the corporation has proposed, and a majority of certain
continuing directors of the corporation have approved, a transaction with a
party who is not a 15% stockholder of the corporation (or who became such with
board approval) if the proposed transaction involves:
- certain mergers or consolidations involving the corporation,
- a sale or other transfer of over 50% of the aggregate assets of the
corporation, or
- a tender or exchange offer for 50% or more of the outstanding voting
stock of the corporation.
STOCKHOLDER VOTING ON MERGERS AND SIMILAR TRANSACTIONS
The laws of both California and Delaware generally require that a majority
of the shareholders of both acquiring and target corporations approve statutory
mergers. Delaware law does not require a stockholder vote of the surviving
corporation in a merger (unless the corporation provides otherwise in its
certificate of incorporation) if:
- the merger agreement does not amend the existing certificate of
incorporation,
- each share of stock of the surviving corporation outstanding before the
merger is an identical outstanding or treasury share after the merger,
and
- the number of shares to be issued by the surviving corporation in the
merger does not exceed 20% of the shares outstanding immediately prior to
the merger.
California law contains a similar exception to its voting requirements for
reorganization where shareholders, or the corporation itself, or both,
immediately prior to the reorganization will own immediately after the
reorganization equity securities constituting more than five-sixths of the
voting power (assuming the conversion of convertible equity securities) of the
surviving or acquiring corporation or its parent entity.
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The laws of both California and Delaware also generally require that a sale
of all or substantially all of the assets of a corporation be approved by a
majority of the voting shares of the corporation transferring such assets.
With certain exceptions, California law also requires that mergers,
reorganizations, and similar transactions be approved by a majority vote of each
class of shares outstanding. In contrast, Delaware law generally does not
require class voting, except for amendments to the certificate of incorporation
that change the number of authorized shares or the par value of shares of a
specific class or that adversely affect such class of shares.
LOANS TO DIRECTORS, OFFICERS AND EMPLOYEES
Under Delaware law, a corporation may make loans to, guarantee the
obligations of, or otherwise assist its officers or other employees and those of
its subsidiaries when such action, in the judgment of the directors, may
reasonably be expected to benefit the corporation.
Under California law, any such loan or guaranty to or for the benefit of a
director or officer of the corporation or any of its subsidiaries requires
approval of the shareholders unless such loan or guaranty is provided under a
plan approved by shareholders owning a majority of the outstanding shares of the
corporation. In addition, under California law, shareholders of any corporation
with 100 or more shareholders of record may approve a bylaw authorizing the
board of directors alone to approve a loan or guaranty to or on behalf of an
officer (whether or not a director) if the board determines that such a loan or
guaranty may reasonably be expected to benefit the corporation.
INTERESTED DIRECTOR TRANSACTIONS
Under both California and Delaware law, certain contracts or transactions
in which one or more of a corporation's directors has an interest are not void
or voidable because of such interest provided that certain conditions, such as
obtaining the required approval and fulfilling the requirements of good faith
and full disclosure, are met. With certain exceptions, the conditions are
similar under California and Delaware law. Under California and Delaware law,
(a) either the stockholders or the board of directors must approve any such
contract or transaction after full disclosure of the material facts, and, in the
case of board of director approval, the contract or transaction must also be
"just and reasonable" (in California) or "fair" (in Delaware) to the
corporation, or (b) the contract or transaction must have been just and
reasonable or fair as to the corporation at the time it was approved. In the
latter case. California law explicitly places the burden of proof on the
interested director. Under California law, if shareholder approval is sought,
the interested director is not entitled to vote his or her shares at a
shareholder meeting with respect to any action regarding such contract or
transaction. If board of director approval is sought, the contract or
transaction must be approved by a majority vote of a quorum of the directors,
without counting the vote of any interested directors (except that interested
directors may be counted for purposes of establishing a quorum). Therefore,
certain transactions that the board of directors of a California corporation
might not be able to approve because of the number of interested directors could
be approved by a majority of the disinterested directors of a Delaware
corporation although less than a majority of a quorum.
STOCKHOLDER DERIVATIVE SUIT
The Delaware General Corporation Law provides that a person may only bring
a derivative action on behalf of the corporation if the person was a stockholder
of the corporation at the time of the transaction in question or his or her
stock thereafter devolved upon him or her by operation of law.
The California Corporations Code provides that a shareholder bringing a
derivative action on behalf of a corporation need not have been a shareholder at
the time of the transaction in question, provided that certain criteria are met.
California law also provides that the corporation or the
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defendant in a derivative suit may, under certain circumstances, make a motion
to the court for an order requiring the plaintiff shareholder to furnish a
security bond. Delaware does not have a similar bonding requirement.
DISSOLUTION
Under Delaware law, a dissolution must be approved by stockholders holding
100% of the total voting power or the dissolution must be initiated by the board
of directors and approved by a simple majority of the stockholders of the
corporation. In the event of such a board-initiated dissolution, Delaware law
allows a Delaware corporation to include in its certificate of incorporation a
supermajority voting requirement in connection with dissolutions.
Under California law, shareholders holding 50% or more of the voting power
may authorize a corporation's dissolution, with or without the approval of the
corporation's board of directors and this right may not be modified by the
articles of incorporation.
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E.PIPHANY BUSINESS
The discussion in this proxy statement/prospectus contains forward-looking
statements which involve risks and uncertainties. E.piphany's actual results
could differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, without
limitation, those discussed in this section and the sections entitled "Risk
Factors," as well as those discussed elsewhere in this proxy
statement/prospectus.
E.PIPHANY OVERVIEW
E.piphany develops and markets software that helps companies establish,
maintain and continually improve customer relationships across both Internet and
traditional sales, marketing and distribution channels. The E.piphany E.4 System
is an integrated family of software solutions that companies can deploy to
collect and analyze data from their existing software systems, and from third
party data providers, to profile their customers' characteristics and
preferences. Business users within these companies can then act on this
information by using the E.piphany E.4 System to design and execute marketing
campaigns as well as personalize products, services and related interactions.
E.piphany has recently extended its product offerings to enable companies to
make marketing offers in real time during interactions initiated by customers.
Companies can implement the E.piphany E.4 System to collect and analyze data
from their existing software systems and from third party data providers to
profile their customers' characteristics and preferences. By using E.piphany's
software to address the unique characteristics and preferences of each customer,
E.piphany believes companies are able to improve the longevity and profitability
of their customer relationships.
RECENT EVENTS
On January 4, 2000, E.piphany acquired RightPoint Software, Inc. in a
merger transaction. RightPoint develops and markets real-time marketing
software. RightPoint's software solutions enable companies to optimize and
present marketing offers, promotions, and communications while a customer is
interacting with a web site, call center agent or other point of customer
interaction. RightPoint's real-time marketing software applications provide a
single integrated view of the customer across multiple channels, allowing
consistent marketing messages and promotions to customers regardless of which
channel a customer is using. In connection with the acquisition, E.piphany
issued approximately 3.1 million shares of its common stock. In addition,
options and warrants of RightPoint were converted into options and warrants to
purchase approximately 530,000 shares of E.piphany's common stock. This
transaction has been accounted for under the purchase method of accounting.
On January 20, 2000, E.piphany completed a follow-on public offering of
3,700,000 shares of common stock. E.piphany sold 1,993,864 shares of its common
stock and the selling stockholders sold 1,706,136 shares of E.piphany's common
stock. In addition, on February 15, 2000 the underwriters exercised their option
to purchase 418,500 shares, of which 104,342 were from E.piphany and 314,158
were from selling stockholders, to cover over-allotments of shares. E.piphany
expects to use the net proceeds from the offering of $356 million for working
capital and general corporate purposes. E.piphany may also use a portion of the
net proceeds to acquire complementary products, technologies or businesses.
On March 27, 2000, E.piphany entered into a definitive agreement to acquire
privately held iLeverage Corporation, a start-up company that is developing
marketing solutions for digital marketplaces, for 181,649 shares of E.piphany
common stock. The acquisition will be accounted for as a purchase and is subject
to customary closing conditions, including the approval of iLeverage
stockholders.
On April 14, 2000, E.piphany entered into a definitive agreement to acquire
privately held eClass Direct, an application service provider of
permission-based e-mail marketing services, for approxi-
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mately 750,000 shares of E.piphany common stock. The acquisition will be
accounted for as a purchase and is subject to customary closing conditions,
including the approval of eClass Direct stockholders.
INDUSTRY BACKGROUND
The Internet is fundamentally changing the way businesses interact with
their customers and suppliers. Consumers can use the Internet to more quickly
evaluate products and prices from a wide range of vendors without regard to
geographical constraints. At the same time, companies across a variety of
industries are using the Internet to redefine the way that goods and services
are marketed, sold and distributed.
To remain competitive in this dynamic business environment, many companies
are seeking to increase the longevity and profitability of their customer
relationships. E.piphany believes companies that improve their understanding of
their customers can gain the loyalty of their most profitable customers by
personalizing products, services and related interactions based on each
customer's characteristics and preferences. Furthermore, when companies
understand individual customer preferences, they can market complementary
products, known as "cross-selling," or market higher-end products, known as
"up-selling." To execute on these marketing strategies, companies need to
establish a single view of each customer across all of the company's various
departments, distribution channels and points of customer interaction. Companies
must then leverage this knowledge to market to customers through proactive
marketing campaigns, as well as by making marketing decisions in real time when
a customer initiates contact with the company. Finally, to better serve
customers, companies can use their knowledge of their customers to better
anticipate customer demand and optimize their processes for fulfilling customer
orders. For example, a company that identifies that many customers prefer a
particular product can increase inventories of that product to meet anticipated
demand.
Over the past two decades, companies have invested in software applications
that reduce costs by automating business processes. AMR Research, an industry
and market analysis firm, estimates that, from 1995 through 1998, companies
spent more than $56 billion on industrial enterprise software applications that
are focused on automating sales, support, manufacturing, distribution and
finance processes. More recently, companies have begun investing in Internet
infrastructure software, including systems that enable commercial transactions
over the Web, as well as systems that monitor and track customers' behavior on
Web sites. Many companies also continue to operate older, custom-built systems
that automate critical business processes, such as order processing and
accounting. All of these applications have allowed companies to collect and
store enormous volumes of customer data, including customer demographic
information, historical purchasing information or delivery specifications. This
data is often augmented by marketing data from third-party data providers.
Despite the vast amounts of data generated, these applications remain
focused on automating business processes, rather than helping companies better
understand their customers or manage marketing campaigns. Moreover, because
these data reside in disparate computer systems in different departments or are
delivered from third parties, combining and analyzing this information to
provide a single view of the customer is a significant challenge. For example, a
company may have over time acquired sales, customer service, and distribution
software applications, each operating on a different computer system. In
addition, many companies' Internet commerce systems operate independently of
systems that automate their traditional sales channels and fulfillment
processes. Because these applications and systems serve different purposes, they
collect vastly different types of customer data. To analyze and act on disparate
corporate data, many companies have attempted to integrate multiple software
tools designed to either extract data from various software systems, store it in
a central repository, analyze the data or manage marketing campaigns. Many of
these internally assembled
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software systems require substantial amounts of time to integrate and customize,
making them expensive to implement and maintain. Moreover, these tools often
have complex user interfaces that are not accessible to all business users in a
company. Finally, these tools are typically not able to collect and analyze data
in real time to rapidly make marketing offers when a customer initiates contact
with the company.
To allow all business users within a company to better understand and act
on customer information collected from multiple sources, companies need new
software solutions. These software solutions should be:
- Focused on establishing, maintaining and improving customer
relationships. Software should allow companies to identify and
differentiate their current and potential customers and act on that
knowledge to provide products, services, and related interactions
personalized to each customer's preferences.
- Deployable to all business users and points of interaction with
customers. Software should be designed to offer the ease of use and
availability of the Web to enable all business users -- not just
information technology professionals and specialized analysts -- to
access, understand and act on customer information. Additionally,
software should easily integrate with companies' existing software to
collect all relevant customer information and enable personalized
interactions at each point of customer interaction.
- Packaged to offer faster and less expensive implementation. Software
should minimize the time and expense of implementation and maintenance by
including in a single integrated system all of the technologies required
to extract, store, analyze and act on customer data. In addition, the
software should be designed to solve specific business problems without
substantial customization.
- Designed to generate marketing recommendations in real time. Software
should enable companies to market to customers in real time during
interactions initiated by the customer, such as Web site visits or
contact with a customer support call center. This capability requires
software systems to collect and analyze customer information and then
immediately make a personalized marketing recommendation in real time.
THE E.PIPHANY SOLUTION
Companies can use E.piphany's software to establish, maintain and
continually improve customer relationships across both Internet and traditional
sales, marketing and distribution channels. The E.piphany E.4 System allows
companies to profile customers' characteristics and preferences by collecting
and analyzing data from their existing software systems and third party data
providers. Business users within these companies can then act on this
information by using E.piphany's E.4 System to design and execute marketing
campaigns as well as personalize products, services and related interactions.
E.piphany believes that its software is differentiated by its combination of the
following characteristics:
Software designed to establish, maintain and improve customer
relationships. E.piphany's software helps companies establish, maintain and
improve customer relationships by:
- Identifying customers. E.piphany's software can be used by companies to
better identify their customers by aggregating and analyzing data from
existing software systems as well as from third-party data providers,
- Differentiating customers. E.piphany's software allows companies to
differentiate their customers by analyzing customer groups according to
demographics, profitability, length of sales cycle, cross-sell success
rates and other company-defined criteria,
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- Interacting with customers more personally. E.piphany's software helps
companies to extend customer information to all employees that interact
with customers as well as integrate this information with Internet
infrastructure software that generates Web pages and e-mail. Moreover,
E.piphany's software can be used to design and execute marketing
campaigns that tailor marketing messages to each customer based on his or
her specific characteristics and preferences, and
- Personalizing products, services and related interactions. E.piphany's
software helps companies collect and analyze the data required to
personalize products, services and related interactions based on customer
characteristics and preferences. In addition, companies can use
E.piphany's software to better anticipate customer demand and to manage
their processes for fulfilling orders in a more efficient manner.
Web-based design to promote ease of use and wide-scale deployment to
business users. E.piphany's software offers an easy to use interface that is
similar to those used on most Web sites. The interface is accessed by business
users across a corporate network or the Internet using a Web browser, such as
Microsoft Internet Explorer. The software is installed by the customer in a
central location, either on the customer's own computer servers or on those of a
third-party hosting service. This Web-based design does not require E.piphany's
software to be installed on each user's computer, which reduces the costs of
deploying and maintaining software.
Packaged software for faster and less expensive implementation. E.piphany's
software solutions are integrated to combine all of the technologies required to
collect and analyze customer data and manage marketing campaigns. As a result,
companies do not need to combine multiple vendors' software tools -- each of
which offers only limited capabilities -- into a single software solution and
then customize this software solution to meet their needs. E.piphany's software
solutions can generally be implemented in 16 weeks or less.
Designed to generate marketing recommendations in real time. E.piphany's
software has been designed to generate marketing recommendations in real time
during interactions initiated by a customer. For example, the E.piphany E.4
System can collect data while a customer navigates a company's Web site or
speaks to a call center operator. E.piphany's software immediately analyzes that
data along with existing customer data to determine a customized marketing offer
to present to the customer. The offer is then delivered through integration at
the point of customer contact, such as dynamically presenting Web site content
or presenting a script to a call center operator within their existing call
center software application.
E.PIPHANY PRODUCTS
The E.piphany E.4 System includes multiple software solutions designed to
solve specific business problems in areas such as sales, marketing, finance and
Internet commerce. Each of these software solutions incorporate core
technologies that E.piphany has designed to extract data from existing software
systems, store it in a central repository, analyze the data to discover customer
characteristics and preferences, and manage marketing campaigns. E.piphany's
software solutions can be deployed simultaneously or in incremental steps as its
customers address new business problems.
The E.piphany E.4 System software solutions are grouped into three product
families:
- Reporting & Analysis,
- Distributed Database Marketing, and
- E-Commerce.
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REPORTING & ANALYSIS
E.piphany's Reporting & Analysis software solutions allow any business user
with a Web browser to easily analyze customer, supplier and operational data
from across the enterprise and the Internet. To support this capability,
E.piphany has designed the E.piphany E.4 System to extract and manage data from
a wide variety of electronic data sources regardless of their format. The
analytical capabilities of E.piphany's software solutions range from aggregating
data from disparate software systems to the application of complex statistical
formulas to that data, known as data mining. Once E.piphany's software solutions
have analyzed the data, they present the resulting information in an easy-to-use
format, such as graphs and tables. The following are E.piphany's current
Reporting & Analysis software solutions:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
SOFTWARE SOLUTION DESCRIPTION
- -------------------------------------------------------------------------------------------------------
<S> <C>
Bookings, Billings & Analyzes bookings, billings, backlog and other sales data to identify
Backlog/ Sales Reporting & trends and the status of sales for sales managers and finance personnel.
Analysis
- -------------------------------------------------------------------------------------------------------
Customer Relationship Analyzes customer data from sales and support applications so that sales
Management Reporting & support and service managers can better understand the quantity and
Analysis status of sales leads, customer inquiries and service calls as well as
forecast future sales using data mining techniques such as trend
analysis.
- -------------------------------------------------------------------------------------------------------
Channel Sell-Through Analyzes sales data from indirect business channels such as resellers and
Management distributors. Sales managers can use this information to track channel
inventory trends, distributors' profit margins or other metrics to better
manage sales through indirect channels.
- -------------------------------------------------------------------------------------------------------
Call Center Reporting & Analyzes data from call centers. Managers of call centers can use this
Analysis information to improve call center efficiency by tracking metrics such as
the average cost and time for problem resolution, the frequency of
customer contact, the profitability of individual representatives and the
most common types of customer calls.
- -------------------------------------------------------------------------------------------------------
Customer Profitability Analyzes data to segment customers according to their current and
potential profitability and also calculates the profitability of
divisions, geographies and the entire company. Managers throughout the
company can use this information to better understand which customers and
areas of the business they should target for profitability improvements.
- -------------------------------------------------------------------------------------------------------
Branch Information Analyzes data from branch office systems so that branch managers can
track regional sales, profile their customers and market to those
customers.
- -------------------------------------------------------------------------------------------------------
</TABLE>
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DISTRIBUTED DATABASE MARKETING
E.piphany's Distributed Database Marketing software solutions allow
employees in a company's marketing department to collaborate on planning and
designing marketing campaigns that target each customer based on his or her
specific characteristics and preferences. Once a campaign is designed,
E.piphany's software solutions can execute the campaign through direct mail,
personalized e-mail, customized Web pages and other points of customer
interaction. When campaigns are executed, E.piphany's Distributed Database
Marketing software solutions analyze response data to refine and tune campaigns.
The following are E.piphany's current Distributed Database Marketing software
solutions:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
SOFTWARE SOLUTION DESCRIPTION
- -------------------------------------------------------------------------------------------------------
<S> <C>
Cross-Sell/Up-Sell Analyzes customer characteristics using data mining techniques to
identify opportunities to sell complementary or higher-end products to
existing customers, and then enables business users to plan, execute,
measure and refine marketing campaigns.
- -------------------------------------------------------------------------------------------------------
Campaign Performance Monitors the response rates, costs and profitability of corporate and
Measurement regional marketing campaigns, and also predicts the likely returns on
marketing campaign investments.
- -------------------------------------------------------------------------------------------------------
Loyalty Program Management Analyzes customer buying and attrition data to enable companies to better
identify and understand their most loyal customers as well as measure and
improve the effectiveness of their loyalty programs.
- -------------------------------------------------------------------------------------------------------
Customer Acquisition Identifies promising potential customers by using data mining techniques
to analyze data from third party data providers, advertising programs and
promotional events and then enables business users to plan, execute,
measure and refine marketing campaigns to attract those customers.
- -------------------------------------------------------------------------------------------------------
Attrition Management Enables companies to determine why some customers terminate their
relationships with the company. Companies can then use this information
to maximize the retention of profitable customers and manage the
attrition of unprofitable customers.
- -------------------------------------------------------------------------------------------------------
</TABLE>
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E-COMMERCE
E.piphany's E-Commerce software solutions help companies analyze customer
behavior on Internet commerce Web sites and personalize those sites by
integrating customer preference data into the software that generates Web pages.
As a result, each time a customer accesses the company's Web site, the customer
will see and interact with a Web site personalized for his or her preferences.
These software solutions also enable companies to design and execute Internet
commerce marketing campaigns through e-mail and other points of e-commerce
customer interaction, as well as personalize products, services and related
transactions based on customer preference information. Finally, these systems
can be used to measure the effectiveness of companies' Internet commerce
initiatives as well as their effect on traditional business channels. The
following are E.piphany's current E-Commerce software solutions:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
SOFTWARE SOLUTION DESCRIPTION
- -------------------------------------------------------------------------------------------------------
<S> <C>
E-Commerce Reporting & Analyzes Internet commerce purchasing patterns and Web site
Analysis effectiveness. Marketing and finance personnel can use this solution to
analyze customer behavior on Web sites, including Web site navigation and
purchase patterns. Companies can also use this solution to measure the
effect of Internet commerce on traditional sales, marketing and
distribution channels and overall corporate profitability.
- -------------------------------------------------------------------------------------------------------
E-Commerce Campaigns Allows marketing personnel to manage marketing campaigns through e-mail
and Web sites in addition to conventional direct mail and phone
solicitations.
- -------------------------------------------------------------------------------------------------------
Emailer Allows marketing personnel to personalize and send e-mails based on
customer characteristics and preferences, track e-mail delivery and
responses, embed Internet addresses in e-mails to provide personalized
Web pages and customized offers and finally, measure and help manage the
effectiveness of Internet marketing campaigns.
- -------------------------------------------------------------------------------------------------------
Product Customization Analyzes customer preference data so that product development personnel
can personalize products for individual customers as well as develop new
products based on current customer preferences.
- -------------------------------------------------------------------------------------------------------
Real-Time Personalization Allows companies to cross-sell, up-sell and deliver marketing offers for
Solution individual customers in real time across both Internet and traditional
points of customer interaction.
- -------------------------------------------------------------------------------------------------------
</TABLE>
PROFESSIONAL SERVICES
E.piphany's internal professional services organization plays an integral
role in implementing E.piphany's software for its customers as well as
supporting and training its customers. E.piphany believes that providing a high
level of customer service and technical support is critical to the satisfaction
of E.piphany's customers. E.piphany's professional services staff consisted of
93 employees as of March 31, 2000. E.piphany's professional services offerings
include:
Consulting and implementation services. E.piphany offers consulting and
implementation services focused on configuring and implementing software
solutions to meet each of E.piphany's customer's unique needs. These services
are delivered primarily by E.piphany's internal professional
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services organization, but also by outside consulting organizations. When
E.piphany works with third party consulting organizations E.piphany typically
subcontracts to these consulting organizations or enters into contracts with
them to collaborate on specific projects. E.piphany believes that its consulting
services enhance the quality of E.piphany's software solutions, accelerates the
implementation of its solutions and shares best business practices with client
project teams.
Maintenance services. E.piphany provides its customers with extensive
maintenance services including telephone support, Web-based support and updates
to E.piphany's products and documentation. E.piphany enters into maintenance
contracts separate from its product license agreements. Fees are typically 15 to
20% of the license fees for the associated software products.
Training services. E.piphany offers extensive training programs to its
customers and other companies with which E.piphany has relationships to
accelerate the implementation and adoption of its solutions by the users within
a company. Fees for E.piphany's training services are typically charged
separately from E.piphany's software license fees and consulting fees.
In addition to implementing E.piphany's software and supporting E.piphany's
customers, E.piphany's professional services organization works closely with
E.piphany's internal research and development organization to design new
E.piphany E.4 System software solutions. Experience gained by E.piphany's
professional services organization through repeated implementation of
E.piphany's products is routinely conveyed to E.piphany's research and
development staff. E.piphany's research and development staff then uses this
experience to design new features into new releases of its software.
E.PIPHANY E.4 SYSTEM TECHNOLOGY
The E.piphany E.4 System includes core technologies that enable E.piphany's
software solutions to extract, manage and analyze data from existing systems as
well as manage marketing campaigns. These software technologies allow
E.piphany's internal research and development organization to rapidly build and
deploy new software solutions as market opportunities arise, without
re-developing and configuring the underlying technologies. The major elements of
the E.piphany E.4 System's core technologies include:
EpiCenter. EpiCenter is the E.piphany E.4 System software technology
E.piphany developed for storing and managing data. E.piphany's software
solutions utilize EpiCenter to retrieve the data that they require to perform
their analysis and distributed database marketing. Key functional elements of
EpiCenter include:
- Adaptive Schema Generator. The Adaptive Schema Generator is the software
technology that E.piphany developed and market as a part of the E.piphany
E.4 System. It automatically reconfigures EpiCenter, based on high-level
specifications, each time a customer's software solutions are modified.
This technology enables rapid customization of E.piphany's products to
meet the specific and dynamic business needs of E.piphany's customers and
allows system administrators to avoid having to manage complex data
storage design tasks.
- Metadata integration. All of the components of the E.piphany E.4 System
are integrated through E.piphany's metadata, which is a high-level,
software-based description of a customer's E.piphany E.4 System and the
data which resides in that system. Generic metadata is included in the
E.piphany E.4 System when shipped, and is continually updated by the
E.piphany E.4 System as consultants or users make changes to any portion
of the system. As a result, when new data elements or functions are added
to any software component of a customer's E.piphany E.4 System, all other
software components are able to recognize the change and adapt
accordingly.
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- Accelerators. E.piphany has integrated into the E.piphany E.4 System
mathematical formulas called accelerators that improve the performance of
E.piphany's software by pre-computing some information, creating special
indices and providing "hints" to the system on how to optimize the
processing of user queries.
Data extraction and transformation. The E.piphany E.4 System offers a
powerful approach to extracting data from various sources and transforming that
data before loading it into EpiCenter. Central to this capability are
E.piphany's Packaged Semantic Transformations, which are rules that change
customer data into a format well-suited for data analysis by business users.
Software application server. E.piphany's software application server is the
software technology that E.piphany developed to manage the mathematical formulas
that are used to analyze data in response to user queries. In addition, the
software application server generates the user interface that end-users interact
with through their Web browsers.
Real-Time Personalization Solution. E.piphany's Real-Time Personalization
Solution executes the marketing campaigns developed by end users for real-time
marketing recommendations. When a customer makes contact with the company
through, for example, a Web site or a call center, E.piphany's Real-Time
Campaign Server accesses existing customer information, pre-defined campaigns
and information gathered during the current interaction to provide the most
appropriate recommendation to the customer.
RELATIONSHIPS AND ALLIANCES
An important element of E.piphany's strategy is to establish relationships
and alliances to assist E.piphany in marketing, selling and implementing
E.piphany's software solutions. These relationships and alliances fall into the
following four categories:
Consulting and implementation relationships. E.piphany works with Cambridge
Technology Partners, Ernst & Young and KPMG through subcontractor relationships
whereby these firms implement E.piphany's software on customers' computer
systems. In return for the services provided under these subcontractor
agreements, E.piphany pays fees to these entities and provides personnel and
technical resources to support their implementation of E.piphany's software. In
order to improve their opportunity to generate service fees from E.piphany's
customers, each of these entities has committed resources to training their
consultants on E.piphany's products, co-marketing E.piphany's products with
their services and incorporating E.piphany's products into their customer
relationship management marketing strategies. E.piphany has a contractual
relationship with Marketing 1:1 -- a marketing consulting firm -- under which
they provide consulting services to E.piphany and co-market and promote
E.piphany's software. In return, E.piphany pays consulting fees and other
compensation to the firm as well as fees for customer referrals. Cambridge
Technology Partners, KPMG and Marketing 1:1 are also investors in E.piphany.
E.piphany believes that these relationships will facilitate the adoption and
deployment of E.piphany's software and expand the capabilities of E.piphany's
software to target specific industries.
Platform relationships. To help ensure that E.piphany's products are based
on industry standards and take advantage of current and emerging technologies,
E.piphany has formed relationships with vendors of software and hardware
technology platforms. E.piphany currently maintains platform relationships with
Hewlett-Packard, Microsoft, Oracle and Sun Microsystems. These companies
voluntarily provide E.piphany with early releases of new technology platforms,
education related to those platforms and limited access to their technical
resources to facilitate adoption of their technology. As a result, E.piphany is
able to more easily integrate E.piphany's products with these vendors'
platforms, and E.piphany can also anticipate required changes to E.piphany's
products based on new versions of these vendors' platforms. E.piphany believes
that these
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relationships allow E.piphany to focus on E.piphany's core competencies,
simplify the task of designing and developing E.piphany's software and reduce
the time it takes E.piphany to make E.piphany's software compatible with their
software or hardware.
Technology relationships. E.piphany has formed relationships with vendors
of complementary software products. These relationships consist of non-exclusive
contractual agreements to co-market each other's products and share technical
resources in order to better integrate each other's products. These agreements
also provide, in some instances, for the payment of referral fees to each other
for customer referrals. E.piphany currently has such agreements with Art
Technology Group, BroadVision, FirePond and Vignette, all of which are providers
of Internet infrastructure software.
Reseller and applications service provider relationships. E.piphany has
entered into contractual reseller agreements with vendors under which E.piphany
sells software solutions to them for resale to their customers. E.piphany
believes that these relationships will extend its sales presence in new and
existing markets. E.piphany has entered into reseller agreements with Acxiom and
Harte-Hanks -- two providers of customer data and strategic marketing
services -- and a reseller agreement with Pivotal Software -- a vendor of sales
force automation and customer support software. E.piphany has also recently
entered into a relationship with Corio -- an Internet-based application service
provider. Under these agreements, E.piphany sells its software solutions to
these companies at a discount from E.piphany's list prices, provide some
marketing and training support and must provide advance notice of price
increases. Each of these companies has committed resources to training their
employees, developing co-marketing programs and incorporating E.piphany's
products into their customer relationship management marketing strategies.
E.piphany provides sales materials, training and support services to these
resellers on the implementation of E.piphany's software solutions. E.piphany
also has contractual relationships with Exactis.com, Bullseye Interactive and
Interrelate under which these companies host E.piphany's software solutions as
Internet-based application service providers. E.piphany has not yet generated
any significant revenues from any of these reseller and applications service
provider agreements.
CUSTOMERS
E.piphany's customers represent large global institutions from industries
such as high technology, financial services, communications, and internet
commerce. For the quarter ended March 31, 2000 no individual customer accounted
for more than 10% of E.piphany's total revenues. For the year ended December 31,
1999, Sallie Mae accounted for 11% of E.piphany's total revenues. For the year
ended December 31, 1998, Autodesk, Charles Schwab, Hewlett-Packard, KPMG and
Macromedia, accounted for 30%, 17%, 16%, 11% and 11%, respectively, of
E.piphany's total revenues.
RESEARCH AND DEVELOPMENT
E.piphany's research and development organization is responsible for
developing new software products, product architecture, core technologies,
product testing, quality assurance and ensuring the compatibility of E.piphany's
products with hardware and software platforms. In addition, this organization
supports some pre-sale and customer support activities. E.piphany's research and
development organization is divided into teams consisting of development
engineers, product managers, quality assurance engineers and technical writers.
In addition, E.piphany's professional services staff helps E.piphany's research
and development organization identify potential new product features.
E.piphany's research and development staff consisted of 86 employees as of
March 31, 2000. E.piphany's total expenses for research and development were
$7.1 million for the year ended December 31, 1999 and $3.8 million for the year
ended December 31, 1998. E.piphany expects that
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research and development expenses will increase in absolute dollars and may
increase as a percentage of revenue in future periods.
SALES, MARKETING AND DISTRIBUTION
To date, E.piphany has marketed its products primarily through its direct
sales force. However, E.piphany intends to expand its sales channels through
additional relationships with systems integrators and value-added resellers. In
selling E.piphany's products, E.piphany typically approaches both business users
and information technology professionals with an integrated team from
E.piphany's sales and professional services organizations. Initial sales
activities typically include a demonstration of E.piphany's product capabilities
followed by one or more detailed technical reviews. E.piphany also seeks to
establish relationships and alliances with major industry vendors that will add
value to E.piphany's products and expand E.piphany's distribution opportunities.
E.piphany's sales and marketing organization consisted of 117 employees as of
March 31, 2000.
E.piphany uses a variety of marketing programs to build market awareness of
E.piphany's company, E.piphany's brand name and E.piphany's products, as well as
to attract potential customers. These programs include E.piphany's own market
research, product and strategy updates with industry analysts, public relations
activities, direct mail programs, telemarketing and telesales, seminars, trade
shows, reseller programs, speaking engagements and Web site marketing.
E.piphany's marketing organization also produces marketing materials in support
of sales to prospective customers that include brochures, data sheets, white
papers, presentations and demonstrations.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
E.piphany's future success depends in part on legal protection of
E.piphany's technology. To protect its technology, E.piphany relies on a
combination of the following among others:
- patent laws,
- copyright laws,
- trademark laws,
- trade secret laws, and
- employee and third-party nondisclosure agreements and confidentiality
procedures.
E.piphany holds one patent and has applied for seven other patents on
E.piphany's technology in the United States and made one international
application. E.piphany has also applied for additional trademarks. E.piphany's
pending patent and trademark applications may not be allowed. Even if they are
allowed, these patents may not provide E.piphany a competitive advantage.
Competitors may successfully challenge the validity and scope of E.piphany's
patents and trademarks.
E.piphany's end-user licenses are designed to prohibit unauthorized use,
copying and disclosure of E.piphany's software and technology. However, these
provisions may be unenforceable under the laws of some jurisdictions and foreign
countries. Unauthorized third parties may be able to copy some portions of
E.piphany's products or reverse engineer or obtain and use information and
technology that E.piphany regards as proprietary. Third parties could also
independently develop competing technology or design around E.piphany's
technology. If E.piphany is unable to successfully detect infringement and
enforce its rights to its technology, E.piphany may lose competitive position in
the market. E.piphany cannot assure you that its means of protecting its
proprietary rights in the United States or abroad will be adequate or that
competing companies will not independently develop similar technology. In
addition, some of E.piphany's licensed users may allow additional unauthorized
users to use E.piphany's software, and if E.piphany does not detect such use it
could lose potential license fees.
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From time to time, E.piphany may encounter disputes over rights and
obligations concerning intellectual property. E.piphany believes that its
products do not infringe the intellectual property rights of third parties.
However, E.piphany cannot assure you that E.piphany will prevail in all
intellectual property disputes. E.piphany has not conducted a search for
existing patents and other intellectual property registrations, and E.piphany
cannot assure you that its products do not infringe upon issued patents. In
addition, because patent applications in the United States are not publicly
disclosed until the patent is issued, applications may have been filed which
would relate to E.piphany's products.
E.piphany indemnifies some of its customers against claims that its
products infringe upon the intellectual property rights of others. E.piphany
could incur substantial costs in defending its company and its customers against
infringement claims. In the event of a claim of infringement, E.piphany or its
customers may be required to obtain one or more licenses from third parties.
E.piphany cannot assure you that such licenses could be obtained from third
parties at a reasonable cost, or at all. Defense of any lawsuit or failure to
obtain any such required license would have a material adverse effect on
E.piphany's business.
COMPETITION
The market for E.piphany's products is intensely competitive, subject to
rapid change and significantly affected by new product introductions and other
market activities of industry participants. E.piphany's integrated software
competes against various vendors' software tools designed to accomplish specific
elements of a complete process, including extracting data, storing and managing
data, analyzing data, or managing marketing campaigns. E.piphany's competitors
include companies that sell:
- data management and data analysis software tools, such as Brio
Technology, Broadbase, Business Objects, Informatica, Microstrategy and
Sagent Technology,
- enterprise application software, such as Oracle, PeopleSoft, SAP and
Siebel Systems,
- marketing campaign management software tools, such as Exchange
Applications, Prime Response, and Recognition Systems,
- software that recommends products to customers in real-time based on
simple analytics rules such as Net Perceptions, and
- electronic customer relations management software, such as Kana
Communications (Silknet Software), eGain, Primus Knowledge Solutions,
Nortel (Clarify), PeopleSoft (Vantive), and Siebel Systems (Scopus).
Many of E.piphany's competitors have longer operating histories,
significantly greater financial, technical, marketing, or other resources, or
greater name recognition than E.piphany does. E.piphany's competitors may be
able to respond more quickly to new or emerging technologies and changes in
customer requirements. Competition could seriously harm E.piphany's ability to
sell additional software, maintenance renewals, and services on terms favorable
to E.piphany. Competitive pressures could reduce E.piphany's market share or
require E.piphany to reduce the price of its products and services, any of which
could materially and adversely affect E.piphany's business, financial condition
and operating results.
E.piphany competes on the basis of certain factors, including:
- product performance,
- product features,
- user scalability,
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- open architecture,
- ease of use,
- product reliability,
- analytic capabilities,
- time to market,
- customer support, and
- product pricing.
E.piphany believes that it presently competes favorably with respect to
each of these factors. However, the markets for E.piphany's products are still
rapidly evolving, and E.piphany may not be able to compete successfully against
current and potential competitors.
EMPLOYEES
As of March 31, 2000, E.piphany has 333 full-time employees. Of these
employees, 86 are engaged in research and development, 117 are engaged in sales
and marketing, 93 are engaged in professional services and 37 are engaged in
finance and administration.
None of E.piphany's employees is represented by a labor union or a
collective bargaining agreement. E.piphany has not experienced any work
stoppages and considers its relations with its employees to be good.
FACILITIES
E.piphany currently leases approximately 32,500 square feet of office space
for E.piphany's headquarters in one building in San Mateo, California. E.piphany
also leases approximately 35,500 square feet of additional office space in two
additional buildings in San Mateo, California. E.piphany also leases sales
offices near Atlanta, Boston, Chicago, Detroit, Dallas, London, Los Angeles,
Minneapolis, Phoenix, St. Louis and Stamford, Connecticut. E.piphany believes
that its facilities are adequate for its current needs. E.piphany may need to
locate additional space to meet its needs in the future.
LEGAL PROCEEDINGS
From time to time, E.piphany may become involved in litigation relating to
claims arising from its ordinary course of business. E.piphany believes that
there are no claims or actions pending or threatened against E.piphany, the
ultimate disposition of which would have a material adverse effect on E.piphany.
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E.PIPHANY SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following selected financial data and other operating information of
E.piphany as of and for the years ended December 31, 1997, 1998 and 1999 are
derived from E.piphany's financial statements, which have been audited by Arthur
Andersen LLP, independent public accountants, and are included elsewhere in this
proxy statement/prospectus. The consolidated financial data as of and for the
three months ended March 31, 1999 and 2000 are derived from E.piphany's
unaudited consolidated financial statements included elsewhere in this proxy
statement/prospectus. E.piphany has prepared this unaudited information on the
same basis as the audited financial statements and has included all adjustments,
consisting only of normal recurring adjustments that it considers necessary for
a fair presentation of its financial position and operating results for such
periods. When you read this selected consolidated financial data, it is
important that you also read the financial statements and related notes included
in this proxy statement/prospectus, as well as the section of this prospectus
entitled "E.piphany Management's Discussion and Analysis of Financial Condition
and Results of Operations." Historical results are not necessarily indicative of
future results. See Note 2 of Notes to Financial Statements of E.piphany for an
explanation of the determination of the number of shares used in computing per
share amounts.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- -------------------
1997(1) 1998 1999 1999 2000
------- -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Product license.......................................... $ -- $ 2,216 $ 10,161 $ 1,136 $ 8,268
Services................................................. -- 1,161 9,021 758 6,147
------- -------- -------- ------- --------
Total revenues......................................... -- 3,377 19,182 1,894 14,415
------- -------- -------- ------- --------
Cost of revenues:
Product license.......................................... -- 4 158 5 109
Services................................................. 1,396 9,191 827 6,020
------- -------- -------- ------- --------
Total cost of revenues................................. -- 1,400 9,349 832 6,129
------- -------- -------- ------- --------
Gross profit............................................... -- 1,977 9,833 1,062 8,286
------- -------- -------- ------- --------
Operating expenses:
Research and development................................. 1,646 3,769 7,074 1,294 3,758
Sales and marketing...................................... 1,200 6,519 18,727 2,763 11,212
General and administrative............................... 373 1,503 4,576 456 2,257
In-process research and development charge............... -- -- -- -- 22,000
Amortization of goodwill and purchased intangibles....... -- -- -- -- 39,943
Stock-based compensation................................. 1 799 2,929 603 477
------- -------- -------- ------- --------
Total operating expenses............................... 3,220 12,590 33,306 5,116 79,647
------- -------- -------- ------- --------
Loss from operations....................................... (3,220) (10,613) (23,473) (4,054) (71,361)
------- -------- -------- ------- --------
Other income (expense):
Interest income.......................................... 71 333 1,722 138 4,647
Interest expense......................................... -- (48) (639) (43) (254)
Other.................................................... -- (2) -- -- --
------- -------- -------- ------- --------
Total other income..................................... 71 283 1,083 95 4,393
------- -------- -------- ------- --------
Net Loss................................................... $(3,149) $(10,330) $(22,390) $(3,959) $(66,968)
======= ======== ======== ======= ========
Basic and diluted net loss per share....................... $ (2.90) $ (4.49) $ (2.19) $ (0.84) $ (2.35)
======= ======== ======== ======= ========
Shares used in computing basic and diluted net loss per
share.................................................... 1,087 2,299 10,247 4,733 28,452
======= ======== ======== ======= ========
Pro forma basic and diluted net loss per share
(unaudited).............................................. $ (1.07) $ (1.23) $ (0.26) $ (2.35)
======== ======== ======= ========
Shares used in computing pro forma basic and diluted net
loss per share (unaudited)............................... 9,694 18,201 15,355 28,452
======== ======== ======= ========
</TABLE>
- ---------------
(1) The statement of operations for the year ended December 31, 1997 is
presented for the period from inception in November 1996 to December 31,
1997. Operating expenses totaled $12,000 for the period from inception in
November 1996 to December 31, 1996.
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<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1997 1998 1999 2000
---- ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments......... $369 $13,595 $81,010 $424,720
Working capital........................................... 131 12,601 78,351 413,144
Total assets.............................................. 801 16,364 93,586 883,866
Long-term obligations, net of current portion............. -- 333 7,824 790
Total stockholders' equity................................ 468 13,440 74,642 858,745
</TABLE>
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E.PIPHANY MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of E.piphany's financial condition and results of
operations should be read in conjunction with E.piphany's financial statements
and related notes. This discussion contains forward-looking statements that
involve risks and uncertainties. Forward-looking statements include statements
regarding the extent and timing of future revenues and expenses and customer
demand, statements regarding the deployment of E.piphany's products, and
statements regarding E.piphany's reliance on third parties. All forward-looking
statements included in this document are based on information available to
E.piphany as of the date hereof, and E.piphany assumes no obligation to update
any such forward-looking statement. E.piphany's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including but not limited to, those discussed in the
section entitled "Risk Factors" in this proxy statement/prospectus.
OVERVIEW
The E.piphany E.4 System is an integrated set of software solutions that
provide capabilities for analysis of customer data and managing distributed
database marketing. Companies can implement the E.piphany E.4 System to collect
and analyze data from their existing software systems, and from third party data
providers, to profile their customers' characteristics and preferences. Business
users within these companies can then act on this information by using the
E.piphany E.4 System to design and execute marketing campaigns as well as
personalize products, services and related interactions.
E.piphany was founded in November 1996. From E.piphany's founding through
the end of 1997, E.piphany primarily engaged in research activities, developing
products and building business infrastructure. E.piphany began shipping its
first software product and first generated revenues from software license fees,
implementation and consulting fees, and maintenance fees in early 1998. During
1998, E.piphany introduced several other software products, and in June 1999,
E.piphany began shipping its E.piphany E.4 System software solutions. Although
E.piphany's revenues consistently increased from quarter to quarter during 1998
and 1999, E.piphany incurred significant costs to develop its technology and
products, to continue the recruitment of research and development personnel, to
build a direct sales force and a professional services organization, and to
expand its general and administrative infrastructure. E.piphany's total
headcount has increased from 69 employees at December 31, 1998 to 333 employees
at March 31, 2000.
ACQUISITIONS
THE OCTANE ACQUISITION
On March 14, 2000, E.piphany entered into a definitive agreement to acquire
Octane Software, Inc. E.piphany expects to complete the acquisition during the
quarter ending June 30, 2000. Octane is a next-generation provider of
multi-channel customer interaction applications and infrastructure software for
sales, service and support. Under the terms of the agreement, E.piphany will
issue up to approximately 12.8 million shares of its common stock in return for
all outstanding shares of Octane capital stock and options, warrants and other
rights to purchase Octane capital stock. The acquisition is subject to customary
closing conditions, including regulatory approval and the approval of
E.piphany's stockholders and Octane's shareholders.
Octane began offering its Internet relationship management applications in
the second quarter of 1999, and began generating revenue from its Internet
relationship management applications in its fiscal quarter ended December 31,
1999. Octane has also experienced significant increases in headcount during 1999
and the first quarter of 2000. As of March 31, 2000, Octane had 263 employees.
Octane has incurred substantial costs to develop its products, and to recruit
and train personnel for its engineering, sales and marketing services
organizations.
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E.piphany expects that the combination of the companies will result in
significant increases in all expense categories. As of March 31, 2000, Octane
had 60 employees engaged in the delivery of services, 85 employees engaged in
research and development, 84 employees engaged in sales and marketing and 34
employees engaged in general and administrative activities. E.piphany expects
that operating expenses will increase in absolute dollars and may increase as a
percentage of revenue as a result of the acquisition.
E.piphany expects that it will continue to add employees across all
departments to invest in the development of technology, to continue to build a
direct sales force and professional services organization and to expand
E.piphany's general and administrative infrastructure following the acquisition.
This expansion places significant demands on E.piphany's management and
operational resources. To manage rapid growth and increased demand, E.piphany
must continue to invest in and implement additional operational systems,
procedures and controls.
E.piphany will account for the acquisition under the purchase method of
accounting and expects to incur a write-off related to in-process research and
development of approximately $25 million in the quarter ending June 30, 2000
upon closing of the transaction, as the in-process technology acquired has not
reached technological feasibility and, in the opinion of management, has no
alternative future use. In addition to the in-process research and development
charge E.piphany will incur, E.piphany expects to allocate a portion of the
purchase price to intangible assets of approximately $2.7 billion which will be
amortized ratably over their estimated useful life of three years.
THE ILEVERAGE ACQUISITION
On March 27, 2000, E.piphany entered into a definitive agreement to acquire
privately held iLeverage Corporation, a start-up company that is developing
marketing solutions for digital marketplaces, for 181,649 shares of E.piphany
common stock. The acquisition will be accounted for as a purchase and is subject
to customary closing conditions, including the approval of iLeverage
stockholders.
THE ECLASS DIRECT ACQUISITION
On April 14, 2000, E.piphany entered into a definitive agreement to acquire
privately held eClass Direct, an application service provider of
permission-based e-mail marketing services, for approximately 750,000 shares of
E.piphany common stock. The acquisition will be accounted for as a purchase and
is subject to customary closing conditions, including the approval of eClass
Direct stockholders.
THE RIGHTPOINT ACQUISITION
E.piphany acquired RightPoint Software, Inc. on January 4, 2000 in a merger
transaction. RightPoint develops and markets real time marketing software
solutions that enable companies to optimize and present marketing offers,
promotions, and communications while a customer is interacting with a web site,
call center agent or other point of customer interaction. In connection with
this transaction, E.piphany acquired all of the outstanding shares of capital
stock of RightPoint in exchange for approximately 3.1 million shares of
E.piphany's common stock. In addition, options and warrants of RightPoint were
converted into options and warrants to purchase approximately 530,000 shares of
E.piphany's common stock.
RightPoint began offering its current real-time marketing applications in
April 1998. RightPoint began generating revenue from its real-time marketing
applications in its fiscal year ended June 30, 1998. RightPoint's revenues grew
from $806,000 in its fiscal 1998 to $3.5 million in its fiscal 1999. RightPoint
also experienced significant increases in headcount during this period.
RightPoint grew
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from 34 employees on June 30, 1998 to 79 employees as of December 31, 1999.
RightPoint incurred substantial costs to develop its products, and to recruit
and train personnel for its engineering, sales and marketing services
organizations.
E.piphany accounted for the acquisition under the purchase method of
accounting and incurred a write-off related to in-process research and
development of $22 million which was reflected in the results of operations for
the quarter ended March 31, 2000, as the in-process technology acquired had not
reached technological feasibility and, in the opinion of management, has no
alternative future use. In addition to the in-process research and development
charge E.piphany incurred, E.piphany recorded intangible assets of approximately
$479 million which are being amortized ratably over an estimated useful life of
three years.
SOURCE OF REVENUES AND REVENUE RECOGNITION POLICY
E.piphany generates revenues principally from licensing its software
products directly to customers and providing related professional services
including implementation, consulting, support and training. Through March 31,
2000, substantially all of E.piphany's revenues have been derived from sales
within the United States through E.piphany's direct sales force. E.piphany's
license agreements generally provide that customers pay a software license fee
for one or more software solutions for a specified number of users. The amount
of the license fee varies based on which software solution is purchased, the
number of software solutions purchased and the number of users licensed.
Customers can subsequently pay additional license fees to allow additional users
to use previously purchased software solutions or to purchase additional
software solutions. Each software solution included in the E.piphany E.4 System
contains the same core technology, allowing for easy integration of additional
software solutions as they are purchased from E.piphany. Customers that purchase
software solutions receive the software on compact disc or via Internet
delivery.
Customers generally require consulting and implementation services which
include evaluating their business needs, identifying the data sources necessary
to meet these needs and installing the software solution in a manner which
fulfills their needs. Customers have generally purchased these services directly
from E.piphany through E.piphany's internal professional services organization
on either a fixed fee or a time and expense basis. E.piphany has historically
supplemented the capacity of its internal professional services organization by
subcontracting some of these services to consulting organizations, especially to
those organizations with which E.piphany has relationships such as KPMG,
Cambridge Technology Partners and Ernst & Young. However, E.piphany intends to
increasingly encourage customers to purchase services directly from these
consulting organizations. E.piphany believes that this would increase the number
of consultants which can provide consulting and implementation services related
to E.piphany's software products and that it would increase E.piphany's overall
gross margins by increasing E.piphany's percentage of license revenue, which has
substantially higher gross margins than services revenue, as a percentage of
total revenue. E.piphany also believes that it will encourage these consulting
organizations to generate sales leads within their customer base.
Customers also generally purchase maintenance contracts which provide
software upgrades and technical support over a stated term, generally twelve
months. Revenue on software upgrades and technical support is recognized ratably
over the term of the maintenance contract.
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E.piphany recognizes product license revenues in accordance with the
provisions of American Institute of Certified Public Accounts (AICPA) Statement
of Position (SOP) 97-2, "Software Revenue Recognition." Pursuant to the
requirements of SOP 97-2, E.piphany recognizes product license revenues when all
of the following conditions are met:
- E.piphany has signed a noncancellable agreement with the customer,
- E.piphany has delivered the software product to the customer,
- the amount of fees to be paid by the customer is fixed or determinable,
and
- E.piphany believes that collection of these fees is probable.
To date, when E.piphany manages the implementation process for its
customers, the implementation services have been considered essential to the
functionality of the software products. Accordingly, both the product license
revenues and services revenues are recognized in accordance with the provisions
of SOP 81-1, "Accounting for Performance of Construction Type and Certain
Production Type Contracts." Prior to 1999, E.piphany recognized substantially
all of its revenues using the completed contract method as estimates of costs
and efforts necessary to complete the implementation were generally not reliable
given E.piphany's lack of history with implementing its products. In 2000 and
future periods, E.piphany expects to recognize most of its revenues using the
percentage of completion method, and therefore both product license and services
revenues are recognized as work progresses. While E.piphany's software solutions
can generally be implemented in less than 16 weeks, implementation can take
longer depending on the solution which has been licensed, the number of software
solutions licensed, the complexity of the customer's information technology
environment and the resources directed by customers to the implementation
projects. To date, E.piphany has managed the implementation of E.piphany's
solutions for the substantial majority of its customers. When E.piphany
subcontracts services to consulting organizations, E.piphany is responsible for
managing the implementation. To the extent that customers contract directly with
consulting organizations to provide implementation services, E.piphany does not
manage the implementation, and license revenues are recognized when the relevant
conditions of SOP 97-2 are met. Some of E.piphany's contracts provide for the
delivery of unspecified future products over a period of time. Accordingly,
payments received from E.piphany's customers upon the signing of these
agreements are deferred and the revenues are recognized ratably over the
contract period. Revenue allocated to training and other services is recognized
as the services are performed.
COST OF REVENUES AND OPERATING EXPENSES
E.piphany's cost of license revenues primarily consists of license fees due
to third parties for integrated technology. E.piphany's cost of services
revenues include salaries and related expenses for E.piphany's implementation,
consulting support and training organizations, costs of subcontracting to
consulting organizations to provide consulting services to customers and an
allocation of facilities, communications and depreciation expenses. E.piphany's
operating expenses are classified into three general categories: sales and
marketing, research and development, and general and administrative. E.piphany
classifies all charges to these operating expense categories based on the nature
of the expenditures. E.piphany allocates the costs for overhead and facilities
to each of the functional areas that use the overhead and facilities services
based on their headcount. These allocated charges include facility rent for
corporate offices, communication charges and depreciation expenses for office
furniture and equipment.
Software development costs incurred prior to the establishment of
technological feasibility are included in research and development costs as
incurred. Since license revenues from E.piphany's software solutions are not
recognized until after technological feasibility has been established, software
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development costs are not generally expensed in the same period in which license
revenues for the developed products are recognized.
RESULTS OF OPERATIONS
The following table sets forth consolidated statement of operations data
for the three years ended December 31, 1999 and the three months ended March 31,
1999 and 2000 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- -------------------
1997 1998 1999 1999 2000
------- -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product license................. $ -- $ 2,216 $ 10,161 $ 1,136 $ 8,268
Services........................ -- 1,161 9,021 758 6,147
------- -------- -------- ------- --------
Total revenues............... -- 3,377 19,182 1,894 14,415
------- -------- -------- ------- --------
Cost of revenues:
Product license................. -- 4 158 5 109
Services........................ 1,396 9,191 827 6,020
------- -------- -------- ------- --------
Total cost of revenues....... -- 1,400 9,349 832 6,129
------- -------- -------- ------- --------
Gross profit...................... -- 1,977 9,833 1,062 8,286
------- -------- -------- ------- --------
Operating expenses:
Research and development........ 1,646 3,769 7,074 1,294 3,758
Sales and marketing............. 1,200 6,519 18,727 2,763 11,212
General and administrative...... 373 1,503 4,576 456 2,257
In-process research and
development charge........... -- -- -- -- 22,000
Amortization of goodwill and
purchased intangibles........ -- -- -- -- 39,943
Stock-based compensation........ 1 799 2,929 603 477
------- -------- -------- ------- --------
Total operating expenses..... 3,220 12,590 33,306 5,116 79,647
------- -------- -------- ------- --------
Loss from operations.............. (3,220) (10,613) (23,473) (4,054) (71,361)
Other income (expense):
Interest income................. 71 333 1,722 138 4,647
Interest expense................ -- (48) (639) (43) (254)
Other........................... -- (2) -- -- --
------- -------- -------- ------- --------
Total other income........... 71 283 1,083 95 4,393
------- -------- -------- ------- --------
Net loss.......................... $(3,149) $(10,330) $(22,390) $(3,959) $(66,968)
======= ======== ======== ======= ========
Basic and diluted net loss per
share........................... $ (2.90) $ (4.49) $ (2.19) $ (0.84) $ (2.35)
======= ======== ======== ======= ========
Shares used in computing basic and
diluted net loss per share...... 1,087 2,299 10,247 4,733 28,452
======= ======== ======== ======= ========
Pro forma basic and diluted net
loss per share (unaudited)...... $ (1.07) $ (1.23) $ (0.26) $ (2.35)
======== ======== ======= ========
Shares used in computing pro forma
basic and diluted net loss per
share (unaudited)............... 9,694 18,201 15,355 28,452
======== ======== ======= ========
</TABLE>
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RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
E.piphany's results of operations for the three months ended March 31, 2000
include the results of RightPoint, which was acquired on January 4, 2000.
REVENUES
Total revenues increased to $14.4 million for the three months ended March
31, 2000, from $1.9 million for the three months ended March 31, 1999. For the
three months ended March 31, 2000, there were no customers that made up more
than 10% of revenue. For the three months ended March 31, 1999, KPMG, FileNET,
Pivotal, and Hilton accounted for 22%, 13%, 10%, and 10% of total revenues,
respectively.
Product license revenues increased to $8.3 million, or 57% of total
revenue, for the three months ended March 31, 2000 from $1.1 million, or 60% of
total revenue, for the three months ended March 31, 1999. The increase in dollar
amount of product license revenues was due to both an increase in the number of
licenses sold and the average size of the licenses, and resulted primarily from
the growth of E.piphany's direct sales force and the introduction and shipment
of new products.
Services revenues increased to $6.1 million, or 43% of total revenues, for
the three months ended March 31, 2000 from $0.8 million, or 40% of revenues, for
the three months ended March 31, 1999. The increase in dollar amount of service
revenues was primarily attributable to increased implementation and consulting
services performed in connection with increased license sales and to maintenance
contracts sold to E.piphany's new customers.
Services revenues as a percentage of total revenues has varied
significantly from quarter to quarter due to E.piphany's relatively early stage
of development. The relative amount of services revenues as compared to license
revenues has varied based on the volume of license fees for software solutions
compared to the volume of license fees for additional users, which generally do
not require services. In addition, the amount of services E.piphany provides for
a software solution can vary greatly depending on the solution which has been
licensed, the complexity of the customers' information technology environment,
the resources directed by customers to their implementation projects, the number
of users licensed and the extent to which consulting organizations provide
services directly to customers. Services revenues have substantially lower
margins relative to product license revenues. To the extent that services
revenues become a greater percentage of our total revenues and services margins
do not increase, E.piphany's overall gross margins will decline.
This is especially true when E.piphany is required to subcontract with
consulting organizations to supplement its internal professional services
organization. It generally costs E.piphany more to subcontract with consulting
organizations to provide these services than to provide these services itself.
To offset the effect that providing services itself or through subcontractors
has on E.piphany's gross margins, E.piphany intends to further encourage
customers to contract directly with consulting organizations for implementation
and consulting services. Encouraging direct contracts between E.piphany's
customers and consulting organizations may also increase the overall amount of
services available to customers and generate sales leads. E.piphany does not
receive any services revenues when customers contract directly with consulting
organizations for implementation and consulting services.
COST OF REVENUES
Total cost of revenues increased to $6.1 million for the three months ended
March 31, 2000 from $0.8 million for the three months ended March 31, 1999. Cost
of product license revenues consists primarily of license fees paid to third
parties under technology license arrangements and have not been
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significant to date. Cost of services revenues consists primarily of the costs
of consulting and customer service and support. Cost of services revenues
increased to $6.0 million, or 98% of services revenues, for the three months
ended March 31, 2000 from $0.8 million, or 109% of services revenues, for the
three months ended March 31, 1999. The increase in cost of services revenues in
absolute dollars resulted primarily from the hiring of additional employees and
the subcontracting of consulting services to consulting organizations to support
increased customer demand for consulting services. Cost of services revenues has
almost exceeded service revenues, and during the three months ended March 31,
1999 exceeded services revenues, due to the rapid growth of E.piphany's services
organization from 5 employees at September 30, 1998 to 93 employees at March 31,
2000 and E.piphany's investment in experienced management in anticipation of
future revenue growth.
OPERATING EXPENSES
Research and Development
Research and development expenses consist primarily of personnel and
related costs associated with E.piphany's product development efforts. Research
and development expenses increased to $3.8 million for the three months ended
March 31, 2000 from $1.3 million for the three months ended March 31, 1999. The
increase in absolute dollars was primarily due to an increase in the number of
employees engaged in research and development from 22 employees as of March 31,
1999 to 86 employees as of March 31, 2000. Research and development expenses as
a percentage of total revenues decreased from 68% for the three months ended
March 31, 1999 to 26% for the three months ended March 31, 2000. Research and
development expenses as a percentage of total revenues decreased primarily due
to growth in E.piphany's revenues. E.piphany believes that investments in
product development are essential to its future success and expects that the
absolute dollar amount of research and development expenses will increase in
future periods.
Sales and Marketing
Sales and marketing expenses consist primarily of employee salaries,
benefits and commissions, and the costs of trade shows, seminars, promotional
materials and other sales and marketing programs. Sales and marketing expenses
increased to $11.2 million for the three months ended March 31, 2000 from $2.8
million for the three months ended March 31, 1999. Sales and marketing expenses
as a percentage of total revenues decreased from 146% for the three months ended
March 31, 1999 to 78% for the three months ended March 31, 2000. The increase in
sales and marketing expenses in absolute dollars was primarily attributable to
an increase in the number of direct sales, pre-sales support and marketing
employees from 27 as of March 31, 1999 to 117 as of March 31, 2000. E.piphany
expects that the absolute dollar amount of sales and marketing expenses will
continue to increase due to the planned growth of its sales force, including the
establishment of sales offices in additional domestic and international
locations including Europe and Asia, and due to expected additional increases in
advertising and marketing programs and other promotional activities.
General and Administrative
General and administrative expenses consist primarily of employee salaries
and related expenses for executive, finance and administrative personnel.
General and administrative expenses increased to $2.3 million for the three
months ended March 31, 1999 from $0.5 million for the three months ended March
31, 2000. The increase in general and administrative expenses in absolute
dollars was primarily attributable to an increase in the number of executive,
finance and administrative employees from 7 as of March 31, 1999 to 37 as of
March 31, 2000. E.piphany expects general and administrative expenses to
increase in absolute dollars in future periods.
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Amortization of Goodwill and Purchased Intangibles
Goodwill represents the purchase price of RightPoint in excess of
identified tangible and intangible assets. In January 2000, E.piphany recorded
$479.3 million of goodwill, which is being amortized on a straight-line basis
over three years. E.piphany recorded amortization expense of $39.9 million for
the three months ended March 31, 2000.
In-Process Research and Development Charge
In connection with the RightPoint acquisition, E.piphany expensed $22.0
million of acquired in-process research and development which, in the opinion of
management, had not reached technological feasibility and had no alternative
future use.
E.piphany allocated values to in-process research and development based on
an assessment of the R&D projects. The value assigned to these assets was
limited to significant research projects for which technological feasibility had
not been established, including development, engineering and testing activities
associated with the introduction of RightPoint's next-generation technologies.
The value assigned to purchased in-process technology was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from the
projects and discounting the net cash flows to their present value. The revenue
projection used to value the in-process research and development was based on
estimates of relevant market sizes and growth factors, expected trends in
technology, and the nature and expected timing of new product introductions by
RightPoint and its competitors.
The nature of the efforts to develop the acquired in-process technology
into commercially viable products and services principally related to the
completion of certain planning, designing, coding, prototyping, and testing
activities that were necessary to establish that the developmental RightPoint
technologies met their design specifications including functional, technical,
and economic performance requirements. Anticipated completion dates ranged from
3 to 11 months, at which times RightPoint expected to begin selling the
developed products. Development costs to complete the R&D were estimated at
approximately $6.0 million.
RightPoint's primary in-process R&D projects involved the development of
additional features and functionality to make the RealTime product suite a
complete e-marketing solution rather than a component technology. The estimated
revenues for the in-process projects were expected to peak within four years of
introduction and then decline as other new products and technologies are
expected to enter the market.
Operating expenses were estimated based on historical results and
management's estimates regarding anticipated profit margin improvements. Due to
purchasing power increases and general economics of scale, estimated operating
expenses as a percentage of revenues were expected to decrease after the
acquisition.
The rates utilized to discount the net cash flows to their present value
were based on estimated cost of capital calculations. Due to the nature of the
forecast and the risks associated with the projected growth, profitability and
developmental projects, a discount rate of 25 percent was appropriate for the
in-process R&D, and a discount rate of 20 percent was appropriate for the
existing products and technology. These discount rates were commensurate with
RightPoint's stage of development and the uncertainties in the economic
estimates described above.
The estimates used by E.piphany in valuing in-process research and
development were based upon assumptions E.piphany believes to be reasonable but
which are inherently uncertain and unpredictable. E.piphany's assumptions may be
incomplete or inaccurate, and no assurance can be given that unanticipated
events and circumstances will not occur. Accordingly, actual results may vary
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from the projected results. Any such variance may result in a material adverse
effect on the financial condition and results of operations of E.piphany.
Stock-Based Compensation
Stock-based compensation consists of amortization of deferred compensation
in connection with stock option grants and sales of stock to employees at
exercise or sales prices below the deemed fair market value of Epiphany's common
stock and compensation related to equity instruments issued to non-employees for
services rendered. E.piphany has recorded aggregate deferred compensation of
$5.9 million related to stock-based compensation to employees. This amount is
being amortized over the respective vesting periods of these equity instruments
in a manner consistent with Financial Accounting Standards Board Interpretation
No. 28. Total stock-based compensation was $477,000 for the three months ended
March 31, 2000. E.piphany expects amortization of approximately $1,023,000 in
the last three quarters of 2000 and $781,000, $309,000, and $25,000 for the
years ended December 31, 2001, 2002, and the first half of 2003, respectively.
See Note 6 to E.piphany's Notes to Financial Statements for further discussion
regarding the accounting treatment for stock-based compensation.
INTEREST INCOME, NET
The increase in interest income, net of interest expense, for the three
months ended March 31, 2000 when compared to the same period in the prior year
was due to increased cash balances as a result of the completion of E.piphany's
initial public offering in September 1999 and its secondary offering in January
2000.
YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUES
Total revenues increased to $19.2 million for the year ended December 31,
1999, from $3.4 million for the year ended December 31, 1998. This rapid growth
in revenues reflects E.piphany's relatively early stage of development, and
E.piphany does not expect revenues to increase at the same rate in the future.
For the year ended December 31, 1999, Sallie Mae accounted for 11% of
E.piphany's total revenues, and for the year ended December 31, 1998, Autodesk,
Charles Schwab, Hewlett-Packard, KPMG, and Macromedia accounted for 30%, 17%,
16%, 11%, and 11% of total revenues, respectively.
Product license revenues increased to $10.2 million, or 53% of total
revenue, for the year ended December 31, 1999 from $2.2 million, or 66% of total
revenue, for the year ended December 31, 1998. The increase in dollar amount of
product license revenues was due to both an increase in the number of licenses
sold and the average size of the licenses, and resulted primarily from the
growth of E.piphany's direct sales force and the introduction and shipment of
new products.
Services revenues increased to $9.0 million, or 47% of total revenues, for
the year ended December 31, 1999 from $1.2 million, or 34% of revenues, for the
year ended December 31, 1998. The increase in dollar amount of service revenues
was primarily attributable to increased implementation and consulting services
performed in connection with increased license sales and to maintenance
contracts sold to E.piphany's new customers.
COST OF REVENUES
Total cost of revenues increased to $9.3 million for the year ended
December 31, 1999 from $1.4 million for the year ended December 31, 1998. Cost
of services revenues increased to $9.2 million, or 102% of services revenues,
for the year ended December 31, 1999 from $1.4 million,
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or 120% of services revenues, for the year ended December 31, 1998. The increase
in cost of services revenues in absolute dollars resulted primarily from the
hiring of additional employees and the subcontracting of consulting services to
consulting organizations to support increased customer demand for consulting
services. Cost of services revenues has exceeded services revenues due to the
rapid growth of E.piphany's services organization from 11 employees at December
31, 1998 to 53 employees at December 31, 1999 and E.piphany's investment in
experienced management in anticipation of future revenue growth.
OPERATING EXPENSES
Research and Development
Research and development expenses increased to $7.1 million for the year
ended December 31, 1999 from $3.8 million for the year ended December 31, 1998.
The increase in absolute dollars was primarily due to an increase in the number
of employees engaged in research and development from 23 employees as of
December 31, 1998 to 55 employees as of December 31, 1999. Research and
development expenses as a percentage of total revenues decreased from 112% for
the year ended December 31, 1998 to 37% for the year ended December 31, 1999.
Research and development expenses as a percentage of total revenues decreased
primarily due to growth in E.piphany's revenues. E.piphany believes that
investments in product development are essential to E.piphany's future success
and expects that the absolute dollar amount of research and development expenses
will increase in future periods.
Sales and Marketing
Sales and marketing expenses increased to $18.7 million for the year ended
December 31, 1999 from $6.5 million for the year ended December 31, 1998. Sales
and marketing expenses as a percentage of total revenues decreased from 193% for
the year ended December 31, 1998 to 98% for the year ended December 31, 1999.
The increase in sales and marketing expenses in absolute dollars was primarily
attributable to an increase in the number of direct sales, pre-sales support and
marketing employees from 30 as of December 31, 1998 to 70 as of December 31,
1999. E.piphany expects that the absolute dollar amount of sales and marketing
expenses will continue to increase due to the planned growth of E.piphany's
sales force, including the establishment of sales offices in additional domestic
and international locations including Europe and Asia, and due to expected
additional increases in advertising and marketing programs and other promotional
activities.
General and Administrative
General and administrative expenses increased to $4.6 million for the year
ended December 31, 1999 from $1.5 million for the year ended December 31, 1998.
The increase in general and administrative expenses in absolute dollars was
primarily attributable to an increase in the number of executive, finance and
administrative employees from 5 as of December 31, 1998 to 22 as of December 31,
1999. E.piphany expects general and administrative expenses to increase in
absolute dollars in future periods.
Stock-Based Compensation
Total stock-based compensation was $2.9 million for the year ended December
31, 1999. E.piphany expects amortization of approximately $1,500,000, $781,000,
$309,000, and $25,000 in the years ended December 31, 2000, 2001, 2002, and the
first half of 2003, respectively. See Note 6 to E.piphany's Notes to Financial
Statements for further discussion regarding the accounting treatment for
stock-based compensation.
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INTEREST INCOME, NET
Interest income, net of interest expense, for the year ended December 31,
1999 increased by $0.8 million compared to the same period in the prior year.
The increase was primarily attributable to interest income resulting from higher
average cash balances during the more recent period.
YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUES
E.piphany's total revenues were $3.4 million in 1998 and were comprised of
the first commercial sales of software products and related services fees from
implementation, training and support. Product license revenues were $2.2 million
in 1998. Services revenues were $1.2 million in 1998. For 1998, product license
revenues and services revenues accounted for 66% and 34% of revenues,
respectively. E.piphany did not recognize any revenues in 1997.
In 1998, Autodesk, Charles Schwab, Hewlett-Packard, KPMG and Macromedia,
accounted for 30%, 17%, 16%, 11% and 11% of total revenues, respectively.
COST OF REVENUES
Cost of revenues was $1.4 million in 1998. Cost of services revenues as a
percentage of services revenues was 120%. Cost of services revenues in 1998
resulted primarily from the hiring of employees and, to a lesser extent, the
subcontracting of consulting organizations to support customer demand for
consulting and maintenance services. E.piphany did not have any revenues in 1997
and thus had no cost of revenues in 1997.
OPERATING EXPENSES
Research and Development
Research and development expenses increased to $3.8 million, or 112% of
total revenues, in 1998 from $1.6 million in 1997. The increase in research and
development expenses was related primarily to an increase in the number of
employees engaged in research and development to support the development of new
products.
Sales and Marketing
Sales and marketing expenses increased to $6.5 million, or 193% of total
revenues, in 1998 from $1.2 million in 1997. The increase in sales and marketing
expenses resulted primarily from building a direct sales force and investing in
sales and marketing infrastructure which included significant personnel-related
expenses, recruiting fees, travel expenses, and related facility and equipment
costs, as well as increased marketing activities, including trade shows, public
relations, direct mail campaigns and other promotional expenses.
General and Administrative
General and administrative expenses increased to $1.5 million, or 45% of
total revenues, in 1998 from $0.4 million in 1997. The increase in dollar amount
of general and administrative expenses resulted primarily from the addition of
executive, finance and administrative personnel to support the growth of
E.piphany's business.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities totaled $4.2 million and $3.2 million
for the three months ended March 31, 2000 and 1999, respectively. Cash used in
operating activities for each period
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resulted from net losses in those periods. For the period ended March 31, 2000,
cash used in operating activities also resulted from an increase in accounts
receivable and a decrease in accounts payable. These uses of cash were partially
offset by an increase in accrued liabilities. Net cash used in operating
activities totaled $17.8 million and $8.7 million for the years ended December
31, 1999 and 1998, respectively. Cash used in operating activities for each
period resulted primarily from net losses in those periods, and to a lesser
extent, increases in accounts receivable. These uses of cash were partially
offset by increases in accrued liabilities and deferred revenue.
Net cash used in investing activities totaled $24.2 million and $0.5
million for the three months ended March 31, 2000 and 1999, respectively. The
increase resulted from purchases of short-term investments and to a lesser
extent, purchases of property and equipment. Net cash used in investing
activities totaled $25.9 million and $1.1 million for the years ended December
31, 1999 and 1998, respectively. The increase resulted primarily from the
purchase of short-term investments and to a lesser extent, purchases of
furniture and equipment, consisting largely of computer servers and
workstations.
Net cash provided by financing activities totaled $348.7 million and $3.0
million for the three months ended March 31, 2000 and 1999, respectively. The
increase was due primarily to the receipt of proceeds from E.piphany's recently
completed secondary offering. Net cash provided by financing activities totaled
$88.2 million and $23.0 million for the years ended December 31, 1999 and 1998,
respectively. The increase was due primarily to the receipt of proceeds from
E.piphany's recently completed initial public offering.
At March 31, 2000, E.piphany had $401.3 million in cash and cash
equivalents and $23.5 million in short-term investments. E.piphany has a $3.0
million term loan under a senior credit facility that is repayable ratably over
a 36-month period beginning March 1, 2000. The term loan bears variable interest
at the bank's prime rate plus 0.5%, currently 9.0%. As of December 31, 1999,
E.piphany had borrowed $3.0 million against this term loan. This loan is secured
by essentially all of E.piphany's assets and was paid in full during January
2000.
On January 20, 2000, E.piphany completed a follow-on public offering.
E.piphany issued 1,993,864 shares of common stock in exchange for net proceeds
of approximately $338.6 million, after deduction of the underwriters' discount
and expenses. In connection with the follow-on offering on February 15, 2000,
the underwriters' exercised an option to purchase from E.piphany an additional
104,342 shares of common stock, resulting in additional net proceeds of
approximately $17.7 million, after the underwriters' discount and expenses. The
aggregate number of shares of E.piphany common stock issued in the follow-on
offering was 2,098,206, resulting in aggregate net proceeds of approximately
$365.4 million, after the underwriters' discount and expenses.
In addition, E.piphany has a subordinated debt facility with Comdisco, Inc.
under which E.piphany is entitled to borrow up to $10.0 million, of which $5.0
million was outstanding as of December 31, 1999, over 42 months beginning June
1999 at a fixed interest rate of 10.0%. All borrowings under the subordinated
facility are secured by essentially all of E.piphany's assets after the rights
of senior creditors, and E.piphany cannot maintain more than $5.0 million of
senior debt without approval of the lender. This loan was paid in full during
January 2000. E.piphany also has a $2.0 million equipment lease line with
Comdisco. Under the equipment lease line, E.piphany is entitled to lease
equipment with payment terms extending over 42 months. The ability to lease new
equipment expires on May 31, 2000 and borrowings bear interest at 8.5% for the
first six months of the lease, and 8.0% thereafter. E.piphany is currently
considering whether to seek to extend this equipment lease line.
As of March 31, 2000, E.piphany's principal sources of liquidity included
$401.3 million of cash and cash equivalents and $23.5 million in short-term
investments. E.piphany anticipates a substantial
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increase in its capital expenditures consistent with anticipated growth in
operations, infrastructure and personnel. E.piphany believes that its current
cash and cash equivalents and short-term investments will be sufficient to meet
its anticipated liquidity needs for working capital and capital expenditures for
the foreseeable future. If E.piphany requires additional capital resources to
grow its business internally or to acquire complementary technologies and
businesses at any time in the future, E.piphany may seek to sell additional
equity or debt securities or secure an additional bank line of credit. The sale
of additional equity or convertible debt securities could result in additional
dilution to E.piphany's stockholders. E.piphany cannot assure you that any
financing arrangements will be available in amounts or on terms acceptable to it
in the future.
MARKET RISK
The following discusses E.piphany's exposure to market risk related to
changes in interest rates, equity prices and foreign currency exchange rates.
This discussion contains forward-looking statements that are subject to risks
and uncertainties. Actual results could vary materially as a result of a number
of factors including those set forth in the risk factors section of this
prospectus.
Foreign Currency Exchange Rate Risk
To date, all of E.piphany's recognized revenues have been denominated in
U.S. dollars and primarily from customers in the United States, and E.piphany's
exposure to foreign currency exchange rate changes has been immaterial.
E.piphany expects, however, that future product license and services revenues
may also be derived from international markets and may be denominated in the
currency of the applicable market. As a result, E.piphany's operating results
may become subject to significant fluctuations based upon changes in the
exchange rates of certain currencies in relation to the U.S. dollar.
Furthermore, to the extent that E.piphany engages in international sales
denominated in U.S. dollars, an increase in the value of the U.S. dollar
relative to foreign currencies could make E.piphany's products less competitive
in international markets. Although E.piphany will continue to monitor its
exposure to currency fluctuations, and, when appropriate, may use financial
hedging techniques in the future to minimize the effect of these fluctuations,
E.piphany cannot assure you that exchange rate fluctuations will not adversely
affect its financial results in the future.
Interest Rate Risk
As of March 31, 2000, E.piphany had cash and cash equivalents of $401.3
million which consist of cash and highly liquid short-term investments. Declines
of interest rates over time will reduce E.piphany's interest income from its
short-term investments. Based upon E.piphany's balance of cash and cash
equivalents, a decrease in interest rates of 0.5% would cause a corresponding
decrease in E.piphany's annual interest income by approximately $2.0 million. As
of March 31, 2000, E.piphany did not have any short-term or long term debt
outstanding.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which requires companies to
record derivative financial instruments on their balance sheets as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. The key criterion
for hedge accounting is that the hedging relationship must be highly effective
in achieving offsetting changes in fair value or cash flows. In June 1999, the
FASB issued SFAS No. 137, "Accounting For Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133," which
amends SFAS No. 133 to be effective for all fiscal quarters or all fiscal years
beginning after June 15, 2000, or
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January 1, 2001 for E.piphany. E.piphany believes that this statement will not
have a material impact on the financial condition or results of E.piphany's
operations.
In December 1998, the AICPA issued Statement of Position (SOP) 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions." SOP 98-9 amends SOP 97-2 and SOP 98-4 by extending the deferral
of the application of some provisions of SOP 97-2 amended by SOP 98-4 through
fiscal years beginning on or before March 15, 1999. All other provisions of SOP
98-9 are effective for transactions entered into in fiscal years beginning after
March 15, 1999. E.piphany does not anticipate that this statement will have a
material adverse impact on E.piphany's statement of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying generally accepted accounting
principles to revenue issues in financial statements. E.piphany will adopt SAB
101 as required in the second quarter of 2000. E.piphany does not expect the
adoption of SAB 101 to have a material impact on its consolidated results of
operations and financial position.
E.PIPHANY MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information with respect to E.piphany's
current executive officers and directors as of March 31, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Roger S. Siboni...................... 45 President, Chief Executive Officer and Chairman of
the Board of Directors
Gayle Crowell........................ 49 Chief Privacy Officer
Kevin J. Yeaman...................... 33 Chief Financial Officer
Phillip M. Fernandez................. 39 Executive Vice President, Product Development
Anthony M. Leach..................... 48 Executive Vice President, Operations and Services
Karen A. Richardson.................. 37 Executive Vice President, Worldwide Sales
Paul M. Hazen........................ 58 Director
Robert L. Joss....................... 58 Director
Sam H. Lee........................... 39 Director
Douglas J. Mackenzie................. 40 Director
</TABLE>
Roger S. Siboni has served as President, Chief Executive Officer and a
member of the board of directors of E.piphany since August 1998. He has served
as Chairman of the Board of Directors since December 1999. Prior to joining
E.piphany, Mr. Siboni served as Deputy Chairman and Chief Operating Officer of
KPMG Peat Marwick LLP, a member firm of KPMG International, an accounting and
consulting organization, from October 1996 to July 1998 and served as National
Managing Partner of KPMG's information and communications practice from June
1993 to October 1996. He serves on the board of directors of Cadence Design
Systems, Inc., FileNET, Inc., Active Software and Pivotal Corporation. Mr.
Siboni also serves as Chairman of the advisory board of the Haas Graduate School
of Business at the University of California at Berkeley. Mr. Siboni holds a B.S.
in Business Administration from the University of California at Berkeley and is
a Certified Public Accountant in New York and California.
Gayle Crowell joined E.piphany as President, E.piphany.net and Executive
Vice President, Marketing following its acquisition of RightPoint on January 4,
2000, and became its Chief Privacy Officer in February 2000. Mrs. Crowell has
served as a member of the Board of Directors since
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March 2000. From January 1998 to December 1999, Ms. Crowell served as President,
Chief Executive Officer and Director of RightPoint. Ms. Crowell was named
Chairman of the Board of RightPoint in May 1998. From 1995 to 1998, Ms. Crowell
served as senior vice president and general manager of worldwide field
operations for Mosaix, Inc., a provider of enterprise customer management
call-center solutions. From 1992 to 1995, Ms. Crowell served in senior executive
sales and marketing roles with Recognition International, a document imaging and
workflow software company. From 1990 to 1992, Ms. Crowell served in senior
executive sales and marketing roles with Oracle Corporation, a database software
company. From 1989 to 1990, Ms. Crowell was employed by DSC, a
telecommunications hardware and software company and from 1985 through 1989, Ms.
Crowell was employed by Cubix Corporation, a manufacturer of networking systems.
She holds a B.S. degree from the University of Nevada, Reno.
Kevin J. Yeaman has served as Chief Financial Officer of E.piphany since
August 1999, as Vice President, Finance and Administration of E.piphany from
June 1999 to August 1999 and as Controller of E.piphany from August 1998 to June
1999. From February 1998 to August 1998, Mr. Yeaman served as Worldwide Vice
President of Field Operations for Informix Software, Inc., a provider of
relational database software. From September 1988 to February 1998, Mr. Yeaman
served in Silicon Valley and London in various positions at KPMG Peat Marwick
LLP, an accounting firm, serving most recently as a senior manager. Mr. Yeaman
holds a B.S. in Commerce from Santa Clara University and is a Certified Public
Accountant in California.
Phillip M. Fernandez has served as Executive Vice President, Product
Development of E.piphany since April 1999. Prior to joining E.piphany, Mr.
Fernandez served in several executive positions at Red Brick Systems Inc., a
provider of database software. Mr. Fernandez served as Executive Vice President
and Chief Operating Officer of Red Brick Systems Inc. from June 1998 to December
1998, as Senior Vice President of Products and Services from November 1996 to
May 1998 and as Vice President of Product Development from December 1991 to
October 1996. From January 1999 to March 1999, after Red Brick Systems, Inc. was
acquired by Informix, Mr. Fernandez served as a consultant to Informix. Mr.
Fernandez holds a B.A. in History from Stanford University.
Anthony M. Leach has served as Executive Vice President, Operations and
Services of E.piphany since January 1999. Prior to joining E.piphany, Mr. Leach
was employed by Oracle Corporation, a database system and applications supplier,
as Senior Vice President of Consulting Services for Europe, the Middle East and
Africa from November 1994 to June 1997, and as Senior Vice President of World
Wide Consulting from June 1997 to January 1999. From August 1975 to November
1994, Mr. Leach served with KPMG, an accounting and services firm, in Europe,
and became a partner in the firm in 1984. Mr. Leach is a Fellow of the Institute
of Management Accounts, and a Fellow of the Institute of Chartered Accountants
in England and Wales.
Karen A. Richardson has served as Executive Vice President, Worldwide Sales
of E.piphany since June 1998. From November 1995 to May 1998, Ms. Richardson
served as Vice President of Sales at Netscape Communications Corporation, an
internet software company. From December 1994 to November 1995, Ms. Richardson
served as Vice President of Sales at Collabra Software, Inc., a developer of
groupware software. From November 1993 to September 1995, Ms. Richardson served
as Vice President of Marketing at Be Incorporated, a provider of software
operating systems for digital media applications. Ms. Richardson holds a B.S. in
Industrial Engineering from Stanford University.
Paul M. Hazen has served as a director of E.piphany since June 1999. Mr.
Hazen serves as chairman of the board of directors of Wells Fargo & Co., a
position he has held since January 1995. Mr. Hazen also served as Chief
Executive Officer of Wells Fargo & Co., a national bank, from January 1995 to
November 1998 and as President and Chief Operating Officer from July 1984 to
January 1995. Mr. Hazen serves on the board of directors of Safeway, Inc.,
Phelps Dodge
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Corporation, and Vodafone Group, plc. Mr. Hazen holds a B.S. in Finance from the
University of Arizona and an M.B.A. from the University of California at
Berkeley.
Robert L. Joss has served as a director of E.piphany since June 1999. Mr.
Joss has been dean of the Graduate School of Business at Stanford University
since September 1, 1999. From January 1993 to June 1999, Mr. Joss served on the
Board of Directors of Westpac Banking Corporation, a banking and financial
services company. From February 1993 to February 1999, Mr. Joss also served as
Chief Executive Officer of Westpac Banking Corporation. Mr. Joss holds a B.A. in
Economics from the University of Washington and an M.B.A. and Ph.D. in Finance
from Stanford University.
Sam H. Lee has served as a director of E.piphany since March 1997. Mr. Lee
is a co-founder and general partner of Information Technology Ventures, a
venture capital firm, a position he has held since June 1994. From June 1990 to
May 1994, Mr. Lee served as vice president of Philadelphia Ventures, a venture
capital firm. Mr. Lee serves on the board of directors of several private
companies. Mr. Lee holds a Bachelor of Science degree in Electrical Engineering
from Mississippi State University, a Masters of Engineering degree from Texas
A&M University and an M.B.A. from the Wharton School of the University of
Pennsylvania.
Douglas J. Mackenzie has served as a director of E.piphany since January
1998. Mr. Mackenzie has been a general partner of the venture capital firm of
Kleiner Perkins Caufield & Byers since 1994. Mr. Mackenzie serves on the board
of directors of Marimba, Inc., Pivotal Corporation and HomeGrocer.com, Inc. He
also serves on the board of directors of several private companies. Mr.
Mackenzie holds an A.B. in Economics from Stanford University, an M.S. in
Industrial Engineering from Stanford University and an M.B.A. from Harvard
University.
In connection with their investments in E.piphany, Kleiner Perkins Caufield
& Byers and Information Technology Ventures were given the right to elect one
person each to be a member of our board of directors. Douglas J. Mackenzie was
appointed to our board of directors by Kleiner Perkins Caufield & Byers. Sam H.
Lee was appointed to our board of directors by Information Technology Ventures.
Roger S. Siboni was appointed to our board of directors as a condition of his
being hired to be our chief executive officer. The rights of these persons and
entities to appoint members to our board of directors ceased after our initial
public offering.
CLASSIFIED BOARD
E.piphany's certificate of incorporation provides for a classified board of
directors consisting of three classes of directors, each serving staggered
three-year terms. As a result, a portion of E.piphany's board of directors will
be elected each year. To implement the classified structure, prior to the
consummation of E.piphany's initial public offering, two of the nominees to the
board were elected to one-year terms, two were elected to two-year terms and two
were elected to three-year terms. Thereafter, directors will be elected for
three-year terms. Sam H. Lee and Roger S. Siboni were designated Class I
directors whose term expires at the 2000 annual meeting of stockholders. Douglas
J. Mackenzie and Gayle Crowell were designated Class II directors whose term
expires at the 2001 annual meeting of stockholders. Paul M. Hazen and Robert L.
Joss were designated Class III directors whose term expires at the 2002 annual
meeting of stockholders. For more information on the classified board, see the
section entitled "Description of Capital Stock -- Anti-takeover Effects of our
Certificate and Bylaws and Delaware Law."
Executive officers are appointed by the board of directors on an annual
basis and serve until their successors have been duly elected and qualified.
There are no family relationships among any of E.piphany's directors, officers
or key employees.
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BOARD COMMITTEES
E.piphany established an Audit Committee in June 1999. The Audit Committee
of the Board of Directors currently consists of Messrs. Lee and Hazen. The Audit
Committee has met once in 2000, but did not meet in 1999. The Audit Committee
reviews the internal accounting procedures of E.piphany and consults with and
reviews the services provided by E.piphany's independent accountants.
E.piphany established the Compensation Committee in June 1999. The
Compensation Committee of the Board of Directors currently consists of Messrs.
Mackenzie and Joss. The Compensation Committee held two meetings during fiscal
1999 and has held two meetings thus far in fiscal 2000. The Compensation
Committee reviews and recommends to the Board of Directors the compensation and
benefits of employees of E.piphany.
The board of directors selects the directors who will serve as members of
these committees and may reduce or enlarge the size of the committees or change
the scope of their responsibilities. The board has no current plans to take any
of these actions. The rules of The Nasdaq Stock Market's National Market, on
which E.piphany's common stock is listed, require E.piphany to maintain an audit
committee consisting of at least two directors who are not employees of
E.piphany.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to establishing the compensation committee, the board of directors as
a whole performed the functions delegated to the compensation committee. No
member of the board of directors or the 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 E.piphany's board of
directors or compensation committee.
DIRECTOR COMPENSATION
Directors do not currently receive any cash compensation from E.piphany for
their service as members of the board of directors. Under E.piphany's 1999 stock
plan, outside directors are granted an option to purchase 25,000 shares of
E.piphany's common stock upon appointment to E.piphany's board of directors. In
addition, an option to purchase up to 12,500 shares of common stock is granted
to each outside director at the start of each of the second and third years of
his service at the then fair market value of E.piphany's common stock at that
time. During 1999, the board of directors granted options to purchase 25,000
shares to each of Robert L. Joss and Paul M. Hazen at an exercise price of $6.00
per share under E.piphany's 1997 stock plan. Following E.piphany's initial
public offering, E.piphany ceased making grants under its 1997 stock plan. See
the section entitled "-- Incentive Stock Plans."
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EXECUTIVE COMPENSATION
The table below summarizes the compensation earned for services rendered to
E.piphany in all capacities for the fiscal year ended December 31, 1999, by each
person that served as chief executive officer during the last fiscal year and
E.piphany's four next most highly compensated executive officers who earned more
than $100,000 during the fiscal year ended December 31, 1999. These executives
are referred to as the named executive officers in this proxy
statement/prospectus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
---------------------------- SECURITIES
FISCAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
--------------------------- ------ -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Roger S. Siboni......................... 1999 $250,000 -- -- $ 2,922
President, Chief Executive Officer and 1998 104,166 -- -- 178,867
Chairman of the Board of Directors
Kevin J. Yeaman......................... 1999 133,333 $ 35,417 50,000 --
Chief Financial Officer 1998 52,083 -- 62,500 --
Phillip M. Fernandez.................... 1999 138,750 98,438 225,000 --
Executive Vice President, Product 1998(1) -- -- -- --
Development
Anthony M. Leach........................ 1999 172,500 112,250 337,500 --
Executive Vice President, Operations 1998(1) -- -- -- --
and Services
Karen A. Richardson..................... 1999 150,000 224,389 30,292 --
Executive Vice President, Worldwide 1998 84,712 61,909 242,500 --
Sales
</TABLE>
- -------------------------
(1) Messrs. Fernandez and Leach joined E.piphany in 1999.
The other compensation paid to Mr. Siboni in 1998 represents amounts loaned
to Mr. Siboni in connection with his relocation to E.piphany in 1998, plus
accrued interest through December 31, 1998. The other compensation paid to Mr.
Siboni in 1999 represents accrued interest on Mr. Siboni's relocation loan from
January 1, 1999 to March 31, 1999. As provided in Mr. Siboni's employment
agreement, these amounts were forgiven by E.piphany on March 31, 1999.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to stock options
granted to each of the named executive officers in the fiscal year ended
December 31, 1999, including the potential realizable value over the ten-year
term of the options, based on assumed rates of stock appreciation of 0%, 5% and
10%, compounded annually. These assumed rates of appreciation comply with the
rules of the Securities and Exchange Commission and do not represent E.piphany's
estimate of future stock price. Actual gains, if any, on stock option exercises
will be dependent on the future performance of E.piphany's common stock.
In the fiscal year ended December 31, 1999, E.piphany granted options to
purchase up to an aggregate of 3,436,078 shares to employees, directors and
consultants. All options were granted under E.piphany's 1997 stock option plan
and E.piphany's 1999 stock plan at exercise prices at or above the fair market
value of E.piphany's common stock on the date of grant, as determined in good
faith by
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the board of directors. All options have a term of ten years. Optionees may pay
the exercise price by cash, check, cancellation of any outstanding indebtedness
of the option holder to us or delivery of already-owned shares of E.piphany's
common stock. All options listed below are immediately exercisable upon grant;
however, any unvested shares are subject to repurchase by E.piphany at their
cost if the optionee's service with Octane terminates. All option shares listed
in the table below vest over four years, with 25% of the option shares vesting
one year after the option grant date, and the remaining option shares vesting
ratably each month thereafter.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------
% OF TOTAL
OPTIONS
NUMBER OF GRANTED TO DEEMED POTENTIAL REALIZABLE VALUE AT ASSUMED
SECURITIES EMPLOYEES VALUE PER ANNUAL RATES OF STOCK PRICE
UNDERLYING IN LAST EXERCISE SHARE ON APPRECIATION FOR OPTION TERM
OPTIONS FISCAL PRICE PER DATE OF EXPIRATION -------------------------------------
NAME GRANTED YEAR SHARE GRANT DATE 0% 5% 10%
---- ---------- ---------- --------- --------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Roger S. Siboni............ -- -- -- -- -- -- -- --
Kevin J. Yeaman............ 12,500 0.36% $ 4.00 $ 6.40 5/4/09 $ 30,000 $ 80,312 $ 157,499
12,500 0.36 11.00 11.00 7/28/09 -- 86,473 219,140
25,000 0.73 11.00 11.00 9/17/09 -- 172,946 438,279
Phillip M. Fernandez....... 225,000 6.55 2.70 5.08 3/17/09 535,500 1,254,327 2,357,148
Anthony M. Leach........... 337,500 9.82 2.00 3.91 1/18/09 644,625 1,474,530 2,747,767
Karen A. Richardson........ 15,146 0.44 6.40 6.40 6/30/09 -- 60,962 154,488
15,146 0.44 62.63 62.63 10/13/09 -- 596,566 1,511,815
</TABLE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table describes for the named executive officers their option
exercises for the fiscal year ended December 31, 1999, and exercisable and
unexercisable options held by them as of December 31, 1999.
The "Value of Unexercised In-the-Money Options at December 31, 1999" is
based on a value of $223.125 per share, the closing price of E.piphany's common
stock on the Nasdaq Stock Market's National Market as of December 31, 1999, less
the per share exercise price, multiplied by the number of shares issued upon
exercise of the option. Options were granted under E.piphany's 1997 stock option
plan or 1999 stock option plan. All options listed below are immediately
exercisable; however, as a condition of exercise, the optionee must enter into a
restricted stock purchase agreement granting us the right to repurchase any
unvested portion of the shares issuable by such exercise at their cost in the
event of the optionee's termination of employment. The shares vest over four
years, with 25% of the shares vesting one year after the grant date and the
remaining shares vesting ratably each month thereafter.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1999 DECEMBER 31, 1999
ACQUIRED ON ---------------------------- ----------------------------
NAME EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Roger S. Siboni.................. -- -- -- -- -- --
Kevin J. Yeaman.................. 25,000 $ 82,750 87,500 -- $19,038,438 --
Phillip M. Fernandez............. -- -- 225,000 -- 49,595,625 --
Anthony M. Leach................. 337,540 3,037,500 -- -- -- --
Karen A. Richardson.............. 121,500 704,700 30,292 -- 5,713,374 --
</TABLE>
INCENTIVE STOCK PLANS
1997 Stock Option Plan
E.piphany's 1997 stock plan provides for the granting to employees of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and for the
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granting to employees and consultants of nonstatutory stock options and stock
purchase rights. As of March 31, 2000, options to purchase an aggregate of
2,824,214 shares of common stock were outstanding under E.piphany's 1997 stock
plan. E.piphany's board of directors determined that no further options will be
granted under the 1997 stock plan after the initial public offering. The 1997
stock plan provides that if E.piphany merges with or into another corporation,
or sell substantially all of E.piphany's assets, each outstanding option must be
assumed or substituted for by the successor corporation. If the successor
corporation refuses to assume or substitute for the E.piphany options, the
E.piphany options will terminate as of the closing of the merger or sale of
assets.
1999 Stock Plan
E.piphany's 1999 stock plan was adopted by E.piphany's board of directors
in June 1999 and approved by the stockholders in July 1999. As of March 31,
2000, 845,200 options were outstanding under E.piphany's 1999 stock plan.
E.piphany's 1999 stock plan provides for the grant of incentive stock options to
employees, including officers and employee directors, and for the grant of
nonstatutory stock options and stock purchase rights to employees, directors and
consultants.
A total of 4,696,577 shares of E.piphany's common stock are reserved for
issuance under the 1999 stock plan.
Annual increases will be added to the 1999 stock plan equal to the lesser
of: (a) 2,500,000 shares, (b) 4% of all outstanding shares of E.piphany's common
stock or (c) a lesser amount determined by E.piphany's board of directors.
Unless terminated sooner, E.piphany's 1999 stock plan will terminate on
September 21, 2009.
The administrator of E.piphany's 1999 stock plan, which is currently
E.piphany's board of directors, has the power to determine among other things:
- the terms of the options or stock purchase rights granted, including the
exercise price of each option or stock purchase right,
- the number of shares subject to each option or stock purchase right,
- the exercisability of each option or stock purchase right, and
- the form of consideration payable upon the exercise of each option or
stock purchase right.
In addition, the administrator has the authority to amend, suspend or
terminate E.piphany's 1999 stock plan, so long as the action does not affect any
shares of common stock previously issued and sold or any option previously
granted under E.piphany's 1999 stock plan. During any fiscal year, each optionee
may be granted options to purchase a maximum of 750,000 shares. In addition, in
connection with an optionee's initial employment with E.piphany, such optionee
may be granted an option covering an additional 750,000 shares.
Options and stock purchase rights granted under E.piphany's 1999 stock plan
are generally not transferable by the optionee, and each option and stock
purchase right is exercisable during the lifetime of the optionee only by the
optionee. Options granted under E.piphany's 1999 stock plan must generally be
exercised within three months after the end of the optionee's status as an
employee, director or consultant of E.piphany, or within twelve months after
such optionee's termination by death or disability, but not later than the
expiration of the option's term.
In the case of stock purchase rights, unless the administrator determines
otherwise, the restricted stock purchase agreement grants us a repurchase
option, exercisable for any unvested stock purchase rights, upon the voluntary
or involuntary termination of the purchaser's employment or consulting
relationship with E.piphany for any reason, including death or disability. The
purchase price for
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shares repurchased pursuant to the restricted stock purchase agreement shall be
the original price paid by the purchaser and may be paid by cancellation of any
indebtedness of the purchaser to E.piphany. The repurchase option lapses at a
rate determined by the administrator.
The exercise price of all incentive stock options granted under the 1999
stock plan must be at least equal to the fair market value of the common stock
on the date of grant. The exercise price of nonstatutory stock options and stock
purchase rights granted under the 1999 stock plan is determined by the
administrator, but with respect to nonstatutory stock options intended to
qualify as "performance-based compensation" within the meaning of Section 162(m)
of the Internal Revenue Code, the exercise price must be at least equal to the
fair market value of E.piphany's common stock on the date of grant. With respect
to any participant who owns stock having more than 10% of the voting power of
all classes of E.piphany's outstanding capital stock, the exercise price of any
incentive stock option granted must be at least equal to 110% of the fair market
value on the grant date and the term of such incentive stock option must not
exceed five years. The term of all other options granted under the 1999 stock
plan may not exceed ten years.
The 1999 stock plan provides that if E.piphany merges with or into another
corporation, or sells substantially all of its assets, each option and stock
purchase right must be assumed or an equivalent option or stock purchase right
substituted for by the successor corporation. If the outstanding options and
stock purchase rights are not assumed or substituted for by the successor
corporation, the optionees shall become fully vested in and have the right to
exercise such options or stock purchase rights. If an option or stock purchase
right becomes fully vested and exercisable in the event of a merger or sale of
assets, the administrator must notify the optionee that the option or stock
purchase right is fully exercisable for a period of 15 days from the date of the
notice, and the option or stock purchase right will terminate upon the
expiration of the 15 day period.
RightPoint 1996 Stock Option Plan
In connection with the acquisition of RightPoint Software, Inc., E.piphany
assumed each outstanding and unexercised option granted under the RightPoint
Software, Inc. (formerly Datamind Corporation) 1996 Stock Option Plan. The
RightPoint 1996 Stock Option Plan provided for the grant of incentive stock
options and non-statutory stock options to employees, consultants and directors
of RightPoint Software, Inc. As of March 31, 2000, there were options to
purchase 412,026 shares of our common stock outstanding under the RightPoint
1996 Stock Option Plan. E.piphany will not grant additional options under the
RightPoint 1996 Stock Option Plan.
1999 Employee Stock Purchase Plan
E.piphany's 1999 employee stock purchase plan was adopted by E.piphany's
board of directors in June 1999, and approved by the stockholders in July 1999.
As of March 31, 2000, a total of 3,081,964 shares of E.piphany's common stock
have been reserved for issuance under the 1999 purchase plan, plus annual
increases equal to the lesser of: (a) 2,000,000 shares, (b) 4% of the
outstanding shares on such date or (c) a lesser amount determined by E.piphany's
board of directors. As of March 31, no shares have been issued under the 1999
purchase plan.
The 1999 purchase plan, which is intended to qualify under Section 423 of
the Internal Revenue Code, contains consecutive, overlapping, twenty-four month
offering periods. Each offering period includes four six-month purchase periods.
The offering periods generally start on the first trading day on or after May 1
and November 1 of each year, except for the first such offering period which
commenced on September 21, 1999 and ends on the last trading day on or before
October 31, 2001.
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Employees are eligible to participate if they are customarily employed by
E.piphany or any participating subsidiary for at least 20 hours per week and for
more than five months in any calendar year. However, employees may not be
granted an option to purchase stock under the 1999 purchase plan if they either:
- immediately after grant, own stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock, or
- hold rights to purchase stock under E.piphany's employee stock purchase
plans which accrue at a rate which exceeds $25,000 worth of stock for
each calendar year.
The 1999 purchase plan permits participants to purchase E.piphany's common
stock through payroll deductions of up to 15% of the participant's
"compensation." Compensation is defined as the participant's base straight time
gross earnings, overtime, shift premium and bonuses, but excludes other
compensation. The maximum number of shares a participant may purchase during a
single purchase period is 20,000 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each purchase period. The price of stock
purchased under the 1999 purchase plan is generally 85% of the lower of the fair
market value of the common stock either:
- at the beginning of the offering period, or
- at the end of the purchase period.
In the event the fair market value at the end of a purchase period is less
than the fair market value at the beginning of the offering period, the
participants will be withdrawn from the current offering period following
exercise and automatically re-enrolled in a new offering period. The new
offering period will use the lower fair market value as of the first date of the
new offering period to determine the purchase price for future purchase periods.
Participants may end their participation at any time during an offering period,
and they will be paid their payroll deductions to date. Participation ends
automatically upon termination of employment with E.piphany.
Rights granted under the 1999 purchase plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the 1999 purchase plan. The 1999 purchase plan provides
that, in the event of a merger with or into another corporation or a sale of
substantially all of E.piphany's assets, each outstanding option may be assumed
or substituted for by the successor corporation. If the successor corporation
refuses to assume or substitute for the outstanding options, the offering period
then in progress will be shortened and a new exercise date will be set. The new
exercise date will be set prior to the proposed date of the merger or sale of
assets.
E.piphany's board of directors has the authority to amend or terminate the
1999 purchase plan, except that they may not adversely affect any outstanding
rights to purchase stock under the 1999 purchase plan. However, the board of
directors may terminate an offering period on any exercise date if the board
determines that the termination of the 1999 purchase plan is in E.piphany's best
interest and the best interest of E.piphany's stockholders. Notwithstanding
anything to the contrary, the board of directors may in its sole discretion
amend the 1999 purchase plan to the extent necessary and desirable to avoid
unfavorable financial accounting consequences by altering the purchase price for
any offering period, shortening any offering period or allocating remaining
shares among the participants. The 1999 purchase plan will terminate
automatically on September 21, 2009 unless terminated earlier by E.piphany's
board of directors.
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401(k) Plan
In January 1999, E.piphany adopted a 401(k) plan to provide eligible
employees with a tax preferential savings and investment program. Employees
become eligible to participate in the 401(k) plan on the first day they perform
an hour of service for E.piphany. Eligible participants may elect to reduce
their current compensation up to the lesser of 15% of eligible compensation or
the statutorily prescribed annual limit, currently $10,000, and have such
reduction contributed to the 401(k) plan. The 401(k) plan permits, but does not
require, E.piphany to make additional matching contributions to the 401(k) plan
on behalf of eligible participants. E.piphany has not made any matching
contributions to the 401(k) plan to date. All contributions made by and on
behalf of participants are subject to a maximum contribution limitation
currently equal to the lesser of 25% of their compensation or $30,000 per year.
At the direction of each participant, the trustee of the 401(k) plan invests the
assets of the 401(k) plan in selected investment options. Contributions by
participants or by E.piphany to the 401(k) plan, and income earned on plan
contributions, are generally not taxable to the participants until withdrawn,
and contributions by E.piphany, if any, are generally deductible by E.piphany
when made.
CHANGE IN CONTROL, SEVERANCE AND EMPLOYMENT ARRANGEMENTS
In connection with E.piphany's hiring of Roger S. Siboni as its President
and Chief Executive Officer in July 1998, E.piphany sold 1,600,000 shares of its
common stock to him at a purchase price of $0.40 per share in exchange for a
promissory note and cash. E.piphany has a right to repurchase these shares of
stock at a price of $0.40 per share. E.piphany's right to repurchase Mr.
Siboni's shares lapses as to 1/48 of his total number of shares at the end of
each month after May 1, 1998. As of April 1, 2000, E.piphany's repurchase right
had lapsed with respect to 766,667 of Mr. Siboni's shares, leaving 833,333 of
his shares subject to the repurchase right. However, E.piphany's right to
repurchase Mr. Siboni's shares terminates as to all of his shares upon a change
in control of E.piphany in which Mr. Siboni is not given equivalent compensation
and title in the post change of control entity. See the sections entitled
"Certain Relationships and Related Transactions -- Common Stock Purchases and
Sales" and "-- Employee Loans."
In a merger or a sale of substantially all of E.piphany's assets, if the
options under E.piphany's 1997 stock plan are not assumed or substituted for,
each outstanding option will terminate as of the closing of the merger or sale
of assets. In a merger or a sale of substantially all of E.piphany's assets, if
the options outstanding under E.piphany's 1999 stock plan are not assumed or
substituted, each outstanding option will vest fully and become immediately
exercisable.
In connection with E.piphany's acquisition of RightPoint, E.piphany entered
into an employment agreement with Gayle Crowell, E.piphany's Chief Privacy
Officer, and former President, Chief Executive Officer and Director of
RightPoint. Pursuant to her employment agreement, Ms. Crowell is guaranteed a
base salary at an annualized rate of $280,000 plus a bonus of not less than
$40,000 on an annualized basis. The agreement also guarantees Ms. Crowell
severance payments for up to 12 months in the event of a termination without
cause.
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LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS
E.piphany's certificate of incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except liability for any of
the following:
- 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 limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
E.piphany's certificate of incorporation and bylaws provide that E.piphany
shall indemnify its directors and executive officers and may indemnify
E.piphany's other officers and employees and other agents to the fullest extent
permitted by law. E.piphany believes that indemnification under its bylaws
covers at least negligence and gross negligence on the part of indemnified
parties. E.piphany's bylaws also permit it to secure insurance on behalf of any
officer, director, employee or other agent for any liability arising out of his
or her actions in such capacity, regardless of whether E.piphany's bylaws would
permit indemnification.
E.piphany has entered into agreements to indemnify its directors and
executive officers, in addition to the indemnification provided for in its
bylaws. These agreements, among other things, provide for indemnification of
E.piphany's directors and executive officers for expenses, judgments, fines and
settlement amounts incurred by any such person in any action or proceeding
arising out of such person's services as a director or executive officer or at
E.piphany's request. E.piphany believes that these provisions and agreements are
necessary to attract and retain qualified persons as directors and executive
officers.
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SECURITY OWNERSHIP OF MANAGEMENT
AND PRINCIPAL STOCKHOLDERS OF E.PIPHANY
The following table sets forth certain information regarding beneficial
ownership of E.piphany's common stock as of March 31, 2000 by (a) each director
of E.piphany, (b) E.piphany's Chief Executive Officer and each of the four other
most highly compensated executive officers of E.piphany's during fiscal 1999,
(c) all directors and executive officers of E.piphany as a group, and (d) all
those known by E.piphany to be beneficial owners of more than five percent of
outstanding shares of E.piphany's common stock. This table is based on
information provided to E.piphany or filed with the Securities and Exchange
Commission by E.piphany's directors, executive officers and principal
stockholders. Unless otherwise indicated in the footnotes below, and subject to
community property laws where applicable, each of the named persons has sole
voting and investment power with respect to the shares shown as beneficially
owned.
Unless otherwise indicated, the address of each stockholder listed in the
following table is c/o E.piphany, Inc., 1900 South Norfolk Street, San Mateo,
California 94403. Applicable percentage ownership in the following table is
based on 32,444,364 shares of common stock outstanding as of April 14, 2000.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
SHARES BENEFICIALLY SHARES
NAME AND ADDRESS OWNED BENEFICIALLY OWNED
---------------- ------------------- ------------------
<S> <C> <C>
Kleiner Perkins and Caufield & Byers(1)............... 3,959,291 12.2%
2750 Sand Hill Road
Menlo Park, California 94025
Information Technology Ventures(2).................... 3,547,296 10.9
3000 Sand Hill Road
Building 1, Suite 280
Menlo Park, California 94025
Eliot L. Wegbreit(3).................................. 1,958,238 6.0
Steven G. Blank(4).................................... 1,727,553 5.3
Roger S. Siboni(5).................................... 1,440,000 4.4
Gayle Crowell(6)...................................... 294,828 *
Kevin J. Yeaman(7).................................... 101,250 *
Phillip M. Fernandez(8)............................... 225,000 *
Anthony M. Leach...................................... 303,750 *
Karen A. Richardson(9)................................ 229,358 *
Douglas J. Mackenzie(10).............................. 3,959,291 12.2
Sam H. Lee(11)........................................ 3,547,296 10.9
Paul M. Hazen(12)..................................... 60,000 *
Robert L. Joss(13).................................... 60,000 *
All directors and officers as a group (10
persons)(14)........................................ 10,220,773 31.1
</TABLE>
- -------------------------
* Less than 1% of the outstanding shares of common stock.
(1) Includes 3,648,882 shares held by Kleiner Perkins Caufield & Byers VIII,
L.P., 211,426 shares held by KPCB VIII Founders Fund, L.P., and 98,983
shares held by KPCB Information Services Zaibatsu Fund II, L.P. The general
partner of Kleiner Perkins Caufield & Byers VIII, L.P. and KPCB VIII
Founders Fund, L.P. is KPCB VIII Associates, L.P. The general partner of
KPCB Information Sciences Zaibatsu Fund II, L.P. is KPCB VII Associates,
L.P. Douglas J. Mackenzie, a member of the board of directors of E.piphany,
is a general partner of both KPCB VIII Associates, L.P. and KPCB VII
Associates, L.P.
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(2) Includes 3,455,158 shares held by Information Technology Ventures, L.P. and
92,138 shares held by ITV Affiliates Fund, L.P. The general partner of each
of these two limited partnerships is ITV Management, L.L.C. Sam H. Lee, a
member of the board of directors of E.piphany, is a principal member of ITV
Management L.L.C.
(3) 1,882,418 shares are held by Eliot L. Wegbreit as trustee of the Wegbreit
Trust, 625 shares are held by David Abraham Weigbert Trust, Eliot L.
Wegbreit and Beth A. Wegbreit trustees, and 625 shares are held by Jennifer
Allison Wegbreit. Dr. Wegbreit served as chairman of the board of directors
of E.piphany from December 1996 to December 1999. Dr. Wegbreit co-founded
E.piphany in November 1996 and also served as Chief Executive Officer and
Chief Financial Officer of E.piphany from December 1996 to May 1998 and as
Executive Vice President, Research and Development from May 1998 to April
1999.
(4) Includes 31,063 shares held by Steven G. Blank as Trustee of the
Elliot-Blank Revocable Trust, 33,594 shares held by David Elliot as Trustee
of the Katherine Elliot Blank Trust and 33,594 shares held by David Elliot
as Trustee of the Sarah Elliot Blank Trust. Mr. Blank disclaims beneficial
ownership of the shares held by the Katherine Elliot Blank and Sarah Elliot
Blank Trusts. Mr. Blank served as Executive Vice President of Marketing of
E.piphany from May 1998 to August 1999. Mr. Blank also co-founded E.piphany
in November 1996 and served as President of E.piphany from its founding
until May 1998.
(5) Includes 833,333 shares subject to repurchase by E.piphany as of April 1,
2000. E.piphany's right of repurchase lapses as to 33,333 shares per month
for Mr. Siboni.
(6) Includes 57,632 shares issuable upon exercise of currently exercisable
stock options and 172 shares issuable upon exercise of a currently
exercisable warrant.
(7) Includes 87,500 shares issuable upon exercise of currently exercisable
stock options.
(8) Includes 225,000 shares issuable upon exercise of currently exercisable
stock options.
(9) Includes 30,292 shares issuable upon exercise of currently exercisable
stock options.
(10) All 3,959,291 shares are held by entities associated with Kleiner Perkins
Caufield & Byers, a venture capital firm (see footnote (1) above). Mr.
Mackenzie disclaims beneficial ownership of the shares held by the entities
associated with Kleiner Perkins Caufield & Byers except for his monetary
interest arising from his general partnership interest in the entities.
(11) All 3,947,296 shares are held by entities associated with ITV Management,
L.L.C., a venture capital firm. Mr. Lee disclaims beneficial ownership of
the shares held by the entities associated with ITV Management, L.L.C.
except for his monetary interest arising from his principal membership
interest in ITV Management, L.L.C.
(12) Includes 50,000 shares issuable upon exercise of currently exercisable
stock options.
(13) Includes 50,000 shares issuable upon exercise of currently exercisable
stock options.
(14) Includes 374,200 shares issuable upon exercise of currently exercisable
stock options.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a description of transactions during the last three fiscal
years to which E.piphany has been a party, in which the amount involved in the
transaction exceeds $60,000 and in which any director, executive officer or
holder of more than 5% of E.piphany's capital stock had or will have a direct or
indirect material interest other than compensation arrangements that are
otherwise required to be described.
PREFERRED STOCK SALES
Series C Preferred Stock. In September and October 1998, E.piphany sold
shares of Series C preferred stock, at a purchase price of $3.38 per share, to
raise capital to finance its operations. The following 5% stockholders purchased
shares in that financing:
<TABLE>
<CAPTION>
NUMBER AGGREGATE
PURCHASER OF SHARES CONSIDERATION
--------- --------- -------------
<S> <C> <C>
Kleiner Perkins Caufield & Byers......................... 1,479,291 $5,000,000
Information Technology Ventures.......................... 1,183,433 4,000,000
</TABLE>
Partnerships controlled by Kleiner Perkins Caufield & Byers currently own
12.2% of E.piphany's stock and were allotted one seat on E.piphany's board of
directors, currently filled by Douglas J. Mackenzie, in connection with their
investment in E.piphany's Series B Preferred Stock financing. Partnerships
controlled by Information Technology Ventures currently own 10.9% of E.piphany's
stock and were allotted one seat on E.piphany's board of directors, currently
filled by Sam H. Lee, in connection with their investments in E.piphany's
preferred stock financings.
Warrant to purchase shares of Series C Preferred Stock. In June 1999,
E.piphany issued and sold a warrant to purchase up to 31,250 shares of Series C
preferred stock at an exercise price of $3.38 per share, and an option to
purchase shares of Series C preferred stock at a purchase price of $6.40 per
share to Comdisco, Inc., a 5% stockholder of E.piphany. The option to purchase
share of Series C preferred stock was exercised for 351,563 shares in August
1999. The warrant remains outstanding.
Series B Preferred Stock. In January 1998, E.piphany sold shares of Series
B Preferred Stock, at a purchase price of $2.50 per share, to raise capital to
finance its operations. The following 5% stockholders purchased shares in that
financing:
<TABLE>
<CAPTION>
NUMBER AGGREGATE
PURCHASER OF SHARES CONSIDERATION
--------- --------- -------------
<S> <C> <C>
Kleiner Perkins Caufield & Byers......................... 2,230,000 $5,575,000
Information Technology Ventures.......................... 596,932 1,492,329
</TABLE>
Series A Preferred Stock. In March and September 1997, E.piphany sold
shares of Series A Preferred Stock, at a purchase price of $1.13 per share, to
raise capital to finance its operations. The following directors, officers, and
5% stockholders purchased shares in that financing:
<TABLE>
<CAPTION>
NUMBER AGGREGATE
PURCHASER OF SHARES CONSIDERATION
--------- --------- -------------
<S> <C> <C>
Information Technology Ventures.......................... 2,166,931 $2,448,632
Eliot L. Wegbreit as Trustee of Wegbreit Trust........... 74,570 84,264
Steven G. Blank as Trustee of Elliot-Blank
Revocable Trust..................................... 31,063 35,101
</TABLE>
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Eliot L. Wegbreit currently owns 6.0% of E.piphany's stock, and, at the
time of the purchase, was also an officer and director of E.piphany. Steven G.
Blank currently owns 5.3% of E.piphany's stock and was an officer of E.piphany
at the time of the purchase.
The foregoing purchases and sales were exempt from registration under the
Securities Act pursuant to Section 4(2) thereof on the basis that the
transaction did not involve a public offering.
COMMON STOCK PURCHASES AND SALES
At the time of E.piphany's founding, E.piphany entered into stock purchase
agreements with Steven G. Blank and Eliot L. Wegbreit, founders of E.piphany. On
January 24, 1997, Mr. Blank and Dr. Wegbreit each purchased 2,100,000 shares of
E.piphany's common stock under their agreements at a purchase price of $0.0005
per share for $1,050 each. Mr. Blank was an officer of E.piphany and Dr.
Wegbreit was an officer of E.piphany and chairman of E.piphany's board of
directors. E.piphany had the right to repurchase Mr. Blank's and Dr. Wegbreit's
shares at their original purchase price of $0.0005 per share if E.piphany
terminated their respective employment for cause or upon their death or
disability. E.piphany's repurchase right lapsed as to 1/48 of the total number
of shares at the end of each month after November 1, 1996.
In March 1999, Dr. Wegbreit resigned as Executive Vice President,
Engineering of E.piphany. In accordance with the terms of his stock purchase
agreement, Dr. Wegbreit's remaining shares of common stock are no longer subject
to E.piphany's repurchase right.
On August 6, 1999, Steven G. Blank, who was at the time E.piphany's
Executive Vice President of Marketing, resigned from E.piphany to pursue other
interests. In connection with Mr. Blank's resignation, 125,000 shares of his
common stock were repurchased by E.piphany for a total purchase price of $62.50.
In accordance with the terms of his stock purchase agreement, Mr. Blank's
remaining shares of common stock are no longer subject to E.piphany's repurchase
right. Mr. Blank has agreed to continue as a consultant to E.piphany for up to
five days per month, until February 6, 2000. E.piphany will not be required to
pay any consulting fees to Mr. Blank, however, after the earlier of February 6,
2000 or the termination of the lock-up period which restricts Mr. Blank's sale
of his shares of E.piphany's common stock for up to 180 days following
E.piphany's initial public offering.
In connection with E.piphany's hiring of Roger S. Siboni, E.piphany's
President and Chief Executive Officer, on July 7, 1998 E.piphany sold an
aggregate of 1,600,000 shares of common stock to Mr. Siboni at a purchase price
of $0.40 per share. Mr. Siboni paid for his shares with a promissory note in the
amount of $639,680 and $320 in cash. The principal amount of the note accrues
simple interest at a rate of 5.88% per year. See the section entitled
"Management -- Change in Control, Severance and Employment Arrangements."
On January 16, 1998, in connection with E.piphany's Series B financing,
E.piphany sold an aggregate of 250,000 shares of its common stock to entities
affiliated with Kleiner Perkins Caufield & Byers, a 5% stockholder of E.piphany,
at a purchase price of $0.25 per share.
EMPLOYEE LOANS
In addition to the loan to purchase stock given to Mr. Siboni, in
connection with his offer of employment as E.piphany's President and Chief
Executive Officer, Mr. Siboni received a loan of $175,000 for relocation
expenses. The entire amount of the loan was forgiven under the terms of the loan
on March 31, 1999. E.piphany has also offered to loan to Mr. Siboni up to
$250,000 per year for two years, drawable monthly. Mr. Siboni is currently
drawing down this loan at a rate of $20,833 per month. As of March 31, 2000, the
total outstanding principal amount of this loan is $63,000. In January 2000, the
board of directors awarded Mr. Siboni a bonus of $175,000 and applied this bonus
to the outstanding balance of the loan. This loan bears interest at a rate per
annum of 5.6%
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<PAGE> 135
compounded monthly and is repayable upon Mr. Siboni's first sales of E.piphany's
stock. Mr. Siboni is also eligible for an annual bonus of up to $125,000, which
is first applied to any outstanding loan balance that Mr. Siboni has with
E.piphany including the loan described above.
INDEMNIFICATION AGREEMENTS
E.piphany has entered into agreements to indemnify its directors and
executive officers, in addition to indemnification provided for in its bylaws.
These agreements, among other things, provide for indemnification of E.piphany's
directors and executive officers for expenses, judgments, fines and settlement
amounts incurred by any such person in any action or proceeding arising out of
such person's services as a director or executive officer or at E.piphany's
request. E.piphany believes that these provisions and agreements are necessary
to attract and retain qualified persons as directors and executive officers.
E.piphany believes that the shares sold in transactions described above
were sold at fair market value and the terms of the other arrangements described
above were no less favorable than E.piphany could have obtained from
unaffiliated third parties.
In addition to the transactions described above, E.piphany has compensation
arrangements with directors and officers which are described under the section
entitled "Management."
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OCTANE BUSINESS
The discussion in this proxy statement/prospectus contains forward-looking
statements which involve risks and uncertainties. Octane's actual results could
differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, without
limitation, those discussed in this section and the section entitled "Risk
Factors," as well as those discussed elsewhere in this proxy
statement/prospectus.
OVERVIEW
Octane Software, Inc. is a developer and marketer of a new category of
customer care software called Internet relationship management software.
Octane's Internet relationship management applications are 100 percent
Internet-based and enable businesses engaged in Internet commerce to acquire,
build and sustain long-term, loyal customer relationships. Octane's products
facilitate customer interactions across multiple channels of communication,
including Internet, email, text chat, phone and fax technologies. Covering both
automated and human-assisted communication channels, Octane's products can
collect, consolidate, analyze and distribute customer information captured
across multiple communication media to provide a complete view of the customer.
PRODUCTS
Octane's product suite, Octane 2000, is designed for the unique customer
care requirements of companies engaged in Internet commerce. Octane 2000
consists of an Internet-based relationship management application called iCare
and an Internet application infrastructure called iBusiness. Octane99, the
predecessor product suite to Octane 2000, is no longer offered by Octane but is
still being supported by Octane for customers who have not yet transitioned to
Octane 2000.
iCare and iBusiness
iCare provides companies engaged in Internet commerce with a single system
to effectively manage the complete customer life cycle, including marketing,
sales, and service over multiple channels of communication. iBusiness is the
Internet application infrastructure upon which iCare is based. iBusiness
features a high-performance business process engine, support for multiple
communications channels and integration to third-party systems. iBusiness also
embodies real-time business intelligence and analysis functionality. All
application functionality is designated in Octane's visual development
environment, which is called iBusiness Studio. The heart of the iBusiness
application infrastructure is the iBusiness Transaction Server, a distributed
business process engine. Individual components of the system work independently
and allow the Internet relationship management product to scale to meet the
needs of an organization as it expands and as transaction volumes grow.
Octane Online
Octane's iCare application is available in a fully functional offering
hosted by Octane called Octane Online. Octane Online provides all the benefits
of the iCare solution without the up-front expense, resources, or time required
for traditional software-based implementations. Unlike client-server
applications that must overcome two-tier architectures, iCare is better suited
for remote hosting than traditional client-server software applications because
it is Internet-based. Octane Online users access their remote server through a
regular web browser, the same way users of the standard version of iCare access
the application.
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CUSTOMERS
Octane targets both business-to-consumer and business-to-business segments
of the Internet commerce marketplace. Octane's customers include traditional
brick-and-mortar companies seeking to establish an Internet presence, as well as
Internet-only "dot.com" companies. As of March 31, 2000, over 60 customers have
entered into agreements to purchase software licenses since Octane first began
shipping its products in the third quarter of 1999. Critical Path, EDS
Cashiering and Ybook accounted for 17%, 24% and 24%, respectively, of Octane's
revenue for the year ended December 31, 1999, and, IVUS and Total Solutions
accounted for 22% and 10% of Octane's revenue, respectively, for the three
months ended March 31, 2000.
PROFESSIONAL SERVICES AND CUSTOMER SUPPORT
Octane offers a range of professional services to its clients that includes
support, consulting and education resources. Octane offers a broad range of
consulting services including needs analysis, product implementation,
configuration, integration and customization in order to meet customer-specific
Internet commerce requirements. Consulting services are delivered by Octane
consulting specialists as well as through implementation partners. Octane also
offers extensive training programs for its customers and partners to accelerate
implementation and end-user adoption of Octane solutions. Octane also offers a
full range of customer support services.
SALES AND MARKETING
Octane sells its products through a direct sales force and indirectly
through resellers, distributors, application service providers and outsourcers.
As of March 31, 2000, Octane's sales and marketing force consisted of 84
professionals, including sales representatives, major account representatives,
sales engineers, channel/partner salespeople and marketing professionals. Octane
has salespeople located in sales offices in cities in the United States and in
the United Kingdom, Germany and Australia. Octane has also entered into reseller
agreements with several companies including TeleTech, Eltrax, RISC Management,
e-Assist.com, Brigade Solutions, e-Convergent and MISNet. Some of these Octane
partners also host Octane applications as an application service provider and
provide a full range of services such as the outsourcing of contact center
management and staff. Octane currently has relationships with 10 domestic and
international resellers, distributors, application service providers and
outsourcers.
RESEARCH AND DEVELOPMENT
Octane's research and development organization is responsible for product
and technology development and enhancements, quality assurance and product
architecture. Octane's research and development organization is divided into
several design teams, including the core development group that designs the
iBusiness Transaction Server, the application development group that designs the
iCare application, the database development group that designs Octane's
underlying data schema and data marts, and the tools development group that
designs iBusiness Studio and management tools. The research and development
organization also includes a Quality Assurance team, as well as the Product
Marketing organization. As of March 31, 2000, the research and development
organization consisted of 85 employees.
COMPETITION
The market for Octane's Internet relationship management products is new,
rapidly evolving and is expected to become increasingly competitive as current
competitors expand their product offerings
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and new companies enter the market. The main competitive factors in the Internet
relationship management market include:
- adherence to emerging web-based technology standards,
- integration with a variety of communications media,
- adaptability, flexibility and scalability,
- integration with other Internet commerce applications and legacy systems,
- completeness of application functionality,
- ease of application use, deployment and maintenance,
- speed of implementation,
- customer service, support and training, and
- price and total cost of ownership.
Octane has three primary sources of competition:
- in-house and third-party custom development efforts,
- client-server based customer relationship management applications, such
as Siebel Systems, Nortel (Clarify) and PeopleSoft (Vantive), and
stand-alone point-solutions for email response such as Kana and e-Gain,
and
- providers of other Internet commerce solutions, such as Kana (Silknet)
and e-Gain.
Potential future competitors of Octane include telecommunication and
networking vendors, as well as enterprise software vendors and system
integrators. There can be no assurance that Octane can maintain its competitive
position against current and potential future competitors, especially
competitors with longer operating histories, greater name recognition and
substantially greater financial, technical, marketing, management, service,
support and other resources.
FACILITIES
Octane currently leases approximately 31,400 square feet of office space
for Octane's headquarters in two buildings in San Mateo, California. These
leases expire in 2002, 2004 and 2005. Octane also leases office space in
Atlanta, Boston, Chicago, London, Melbourne, Australia, New York and Pittsburgh.
Octane believes that its facilities are adequate for its current needs. Octane
is currently in the process of negotiating a new lease for its headquarters in
San Mateo, California.
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OCTANE SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following selected financial data and other operating information of
Octane as of and for the years ended December 31, 1997, 1998 and 1999, are
derived from Octane's consolidated financial statements, which have been audited
by Deloitte & Touche LLP, independent auditors, and are included elsewhere in
this proxy statement/prospectus. The financial data as of and for the three
months ended March 31, 1999 and 2000 are derived from Octane's unaudited
consolidated financial statements included elsewhere in this proxy
statement/prospectus. Octane has prepared this unaudited information on the same
basis as the audited consolidated financial statements and has included all
adjustments, consisting only of normal recurring adjustments that it considers
necessary for a fair presentation of its financial position and operating
results for such periods. When you read this selected financial data, it is
important that you also read the historical consolidated financial statements
and related notes included in this proxy statement/prospectus, as well as the
section of this prospectus entitled "Octane Management's Discussion and Analysis
of Financial Condition and Results of Operations." Historical results are not
necessarily indicative of future results.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------
1997(1) 1998 1999 1999 2000
------- ------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues
License.............................. $ -- $ -- $ 647 $ -- $ 1,880
Services............................. 248 2,938 2,835 879 1,622
---- ------- -------- ------- --------
Total revenues.................... 248 2,938 3,482 879 3,502
---- ------- -------- ------- --------
Cost of revenues....................... 139 1,651 1,663 570 1,531
Gross profit........................... 109 1,287 1,819 309 1,971
---- ------- -------- ------- --------
Operating expenses:
Research and development............. 50 1,137 4,528 735 2,431
Sales and marketing.................. -- 515 6,794 774 5,353
General and administrative........... 34 1,075 3,794 511 3,974
Stock-based compensation............. -- -- 1,219 95 4,433
---- ------- -------- ------- --------
Total operating expenses............... 84 2,727 16,335 2,115 16,191
---- ------- -------- ------- --------
Income (loss) from operations.......... 25 (1,440) (14,516) (1,806) (14,220)
Interest and other income, net......... -- 26 134 32 246
---- ------- -------- ------- --------
Net income (loss)...................... $ 25 $(1,414) $(14,382) $(1,774) $(13,974)
Accretion and deemed dividend on
preferred stock...................... -- -- 2,509 2 1,677
---- ------- -------- ------- --------
Net income (loss) available to common
shareholders......................... $ 25 $(1,414) $(16,891) $(1,776) $(15,651)
==== ======= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1998 1999 2000
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 3,963 $ 8,224 $ 30,607
Working capital............................................. 4,274 5,557 26,960
Total assets................................................ 5,146 11,274 138,352
Long-term debt, net of current portion...................... -- 339 287
Total shareholders' equity (deficiency)..................... (1,389) (14,431) 129,010
</TABLE>
- -------------------------
(1) Period from September 9 (Inception) to December 31, 1997
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OCTANE MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of Octane's financial condition and
results of operations should be read in conjunction with Octane's consolidated
financial statements and notes thereto appearing elsewhere in this proxy
statement/prospectus. This discussion and analysis contains forward-looking
statements that involve risks and uncertainties. Actual results may differ
materially from those indicated in such forward-looking statements.
OVERVIEW
Octane is a developer and marketer of a new category of customer care
software called Internet relationship management software. Octane's Internet
relationship management applications are 100 percent Internet-based and enable
businesses engaged in Internet commerce to acquire, build and sustain long-term,
loyal customer relationships. Octane's products facilitate customer interactions
across multiple channels of communication, including Internet, email, text chat,
phone and fax technologies. Covering both automated and human-assisted
communication channels, Octane's products can collect, consolidate, analyze and
distribute customer information captured across multiple communication media to
provide a complete view of the customer.
REVENUES
Octane derives its revenue from:
- licensing software, and
- providing professional consulting, maintenance and support services.
Product license revenue is recognized when:
- persuasive evidence of an agreement exists,
- the product has been delivered, and no uncertainty exists about customer
acceptance,
- the license fee is fixed or determinable, and
- collection of the fee is probable.
If the customer uses Octane to install the product, product license revenue
is deferred until installation has occurred. To date, Octane has been
responsible for substantially all of its product installations.
Services revenue consists of fees from:
- professional services, including integration of software, application
development, training and software installation,
- maintenance of Octane software, and
- customer support.
Octane recognizes professional services fees billed on a time-and-materials
basis as the services are performed. For fixed price arrangements, Octane
recognizes professional services fees upon the completion of specific
contractual milestone events, or based on an estimated percentage of completion
as work progresses. Octane's clients typically purchase maintenance agreements
annually. Octane recognizes revenue from maintenance agreements (the term of
which is typically one year) ratably over the remaining term of the maintenance
obligation.
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COST OF REVENUES
Cost of license revenues consists of costs to manufacture, package, and
distribute Octane's products. Cost of license revenues have been insignificant
to date because Octane typically distributes its software by permitting
customers to download its software from Octane's web site. Cost of service
revenues consists primarily of employee-related costs and third-party consultant
fees incurred to provide services for consulting projects, customer support, and
training.
OPERATING EXPENSES
Operating expenses are classified into four general categories:
- research and development expenses, which consists primarily of
employee-related costs and fees for outside consultants and related costs
associated with the development of new products, the enhancement of
existing products, quality assurance, testing, and documentation,
- sales and marketing expenses, which consists primarily of employee
salaries, commissions, and costs associated with marketing programs,
- general and administrative expenses, which consists primarily of employee
salaries and other personnel related costs for executive, financial,
legal, and accounting as well as other professional service fees, and
- Stock based compensation expense, which consists of amortization of
deferred compensation in connection with stock option grants and sales of
stock to employees at exercise or sales prices below the deemed fair
market value of Octane's common stock and compensation related to equity
instruments issued to non-employees for services rendered.
All charges to these operating expense categories are based on the nature
of the expenditures. The costs for facilities and fixed asset depreciation are
allocated to these categories based on headcount.
ACQUISITION
On March 13, 2000, Octane acquired all of the outstanding capital stock of
Sneakerlabs, Inc., a developer of chat and web collaboration software and
services. In connection with the acquisition, Octane issued 1,049,992 shares of
its common stock and issued options to purchase approximately 69,000 shares of
Octane common stock. The acquisition was accounted for as a purchase in the
three month period ended March 31, 2000.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
REVENUES
Total revenue increased to $3.5 million for the three months ended March
31, 2000 from $879,000 for the three months ended March 31, 1999. The increase
in revenue was primarily a result of the introduction of Octane's first software
product in the second quarter of 1999 and the related transition from a
primarily service-based business to a software product-based business.
License revenues were $1.9 million for the three months ended March 31,
2000 compared to none for the three months ended March 31, 1999. The increase in
license revenues coincided with the introduction of the Octane 2000 product
suite.
Total services revenues increased to $1.6 million for the three months
ended March 31, 2000 from $879,000 for the three months ended March 31, 1999.
Services revenues from activity relating to Octane's products increased to $1.5
million for the three months ended March 31, 2000 from none
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for the three months ended March 31, 1999. This increase in services revenue
principally reflected an increase in overall services activity relating to
Octane's own software products, offset by a reduction in services activity
relating to third party software.
COST OF REVENUES
Total cost of revenues increased to $1.5 million for the three months ended
March 31, 2000, from $570,000 for the three months ended March 31, 1999. Cost of
license revenues consists primarily of license fees paid to third parties under
technology license arrangements and have not been significant to date. Cost of
services revenues consists primarily of the costs of consulting and customer
service and support.
Cost of services revenues increased to $1.5 million or 94% of services
revenue for the three months ended March 31, 2000, compared to $570,000 or 65%
of services revenues for the three months ended March 31, 1999. The cost of
services revenues increased on a percentage basis due to the time required to
train the existing consulting organization to support Octane's own products as
well as the hiring and training of employees to provide for anticipated growth
in consulting, customer support, and training services. The number of employees
engaged in services increased to 60 as of March 31, 2000 from 13 as of March 31,
1999.
OPERATING EXPENSES
Research and development expenses consist primarily of personnel and
related costs associated with our product development efforts. Research and
development expenses increased to $2.4 million for the three months ended March
31, 2000, from $735,000 for the three months ended March 31, 1999. This increase
primarily resulted from salaries associated with newly hired development
personnel. The number of employees engaged in research and development increased
to 85 as of March 31, 2000 from 24 as of March 31, 1999.
Sales and marketing expenses consist primarily of employee salaries,
benefits and commissions, and the costs of trade shows, seminars, promotional
materials and other sales and marketing programs. Sales and marketing expense
increased to $5.4 million for the three months ended March 31, 2000, from
$773,000 for the three months ended March 31, 1999. The increase primarily
resulted from salaries associated with newly hired sales and marketing
personnel, commissions from licenses of Octane99 and Octane2000, and an increase
in marketing programs. The number of employees engaged in sales and marketing
duties increased to 84 as of March 31, 2000 from 16 as of March 31, 1999.
General and administrative expenses consist primarily of employee salaries
and related expenses for executive, finance and administrative personnel.
General and administrative expenses increased to $4.0 million for the three
months ended March 31, 2000, from $511,000 for the three months ended March 31,
1999. A charge of $1.6 million was taken for goodwill amortization related to
the Sneakerlabs acquisition, which was completed on March 13, 2000. The
remaining increase primarily resulted from salaries associated with newly hired
personnel and related costs required to manage growth and facilities expansion.
The number of employees engaged in general and administrative duties increased
to 34 as of March 31, 2000 from 8 as of March 31, 1999.
Stock-based compensation increased to $4.4 million for the first quarter of
2000 from $95,000 for the first quarter of 1999. This increase principally
resulted from an increase in stock option grant activity coupled with a more
rapid rate of increase in the deemed fair market value of Octane's common stock.
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RESULTS OF OPERATIONS
FISCAL YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
REVENUE
Total revenue increased to $3.5 million in 1999 from $2.9 million for 1998.
Prior to the fourth quarter of 1999, Octane's revenues were derived from the
implementation of third party software products. Octane introduced its first
software product in the second quarter of 1999 and first began recognizing
product revenues in the fourth quarter of 1999. The increase in revenue was
primarily a result of the introduction of Octane's software product and the
related transition from a primarily services-based business. Octane's 1997
revenues of $248,000 consisted of entirely services revenue and reflected the
fact that Octane was only in operation for a limited portion of the year and
only provided professional services at that time.
License revenues were $647,000 in 1999. Octane had no license revenues in
either 1998 or 1997. The increase in license revenues coincided with the
introduction of the Octane99 product suite, which was replaced by the Octane
2000 product suite.
Services revenue decreased to $2.8 million for 1999 from $2.9 million for
1998. This decrease in services revenue reflected reduction in services activity
relating to third party software offset by an increase in consulting activity
relating to Octane's own software products.
COST OF REVENUES
Total cost of revenues remained at $1.7 million in 1999, when compared to
the fiscal year ended December 31, 1998.
Cost of license revenues have been insignificant for all periods.
Cost of services revenue remained at $1.7 million, or 59% of services
revenue in 1999, compared to $1.7 million, or 56% of services revenue, in 1998
and $139,000, or 56% of services revenue, in 1997. The cost of services revenue
increased on a percentage basis during 1999 due to reduced productivity caused
by the need to train the existing consulting organization to support Octane's
own products as well as the hiring and training of employees to provide for
anticipated growth in consulting, customer support, and customer training. The
number of employees engaged in services increased to 37 as of December 31, 1999
from 17 as of December 31, 1998 and 2 as of December 31, 1997.
OPERATING EXPENSES
Research and development expenses increased to $4.5 million in 1999, from
$1.1 million in 1998 and $50,000 in 1997. This increase primarily resulted from
salaries associated with newly hired development personnel. The number of
employees engaged in research and development increased to 53 as of December 31,
1999 from 19 as of December 31, 1998 and 1 as of December 31, 1997.
Sales and marketing expenses increased to $6.8 million in 1999, from
$515,000 in 1998. The increase primarily resulted from salaries associated with
newly hired sales and marketing personnel, sales commissions from licenses of
Octane99, and an increase in marketing programs. The number of employees engaged
in sales and marketing duties increased to 41 as of December 31, 1999 from 8 as
of December 31, 1998. Octane had no sales and marketing personnel or other
expenses during the fiscal year ended December 31, 1997 as it had not yet
introduced any products.
General and administrative expenses increased to $3.8 million in 1999, from
$1.1 million in 1998 and $34,000 in 1997. These increases primarily resulted
from salaries associated with newly hired personnel and related costs required
to manage growth and facilities expansion. The number of
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employees engaged in general and administrative duties increased to 11 as of
December 31, 1999 from 7 as of December 31, 1998 and 1 as of December 31, 1997.
Stock-based compensation increased to $1.2 million for 1999 from none in
1998 and 1997, principally as a result of an increase in stock option grant
activity coupled with the rapid rise in deemed fair market value of Octane's
common stock.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities totalled $7.1 million and $1.4
million for the three months ended March 31, 2000 and 1999, respectively. Cash
used in operating activities for each period resulted primarily from net losses
in those periods. Net cash used in operating activities totaled $10.0 million
and $1.7 million for the years ended December 31, 1999 and 1998, respectively.
Cash used in operating activities for each period resulted primarily from net
losses in those periods, and to a lesser extent, increases in accounts
receivable. These uses of cash were partially offset by increases in accrued
liabilities and unearned revenues.
Net cash provided (used in) in investing activities totaled ($1 million)
and $1.9 million for the three months ended March 31, 2000 and 1999,
respectively. The increase resulted primarily from the purchases of furniture
and equipment, consisting largely of computer servers and workstations. Net cash
provided (used in) in investing activities totaled $354,000 and ($2.6 million)
for the years ended December 31, 1999 and 1998, respectively. The decrease
resulted primarily from the sale of short-term investments offset, to a lesser
extent, by purchases of furniture and equipment, consisting largely of computer
servers and workstations.
Net cash provided by financing activities totaled $30 million and $17,000
for the three months ended March 31, 2000 and 1999, respectively. The increase
was primarily due to the proceeds from Octane's Series C Financing. Net cash
provided by financing activities totaled $16.0 million and $6.2 million for the
years ended December 31, 1999 and 1998, respectively. The increase was due
primarily to the receipt of proceeds from Octane's 1999 equity financings.
In April 1999, Octane entered into a loan agreement with a lending
corporation that allows the company to borrow up to a total of $1.5 million for
the purchase and financing of property and equipment. Borrowings under the loan
agreement bear interest at a fixed rate of 8.50% and are collateralized by the
purchased property and equipment. As of December 31, 1999, Octane had $537,272
outstanding under the loan agreement, which is payable as follows: $197,863 in
2000; $215,353 in 2001; and $124,056 in 2002. The loan agreement expires in June
2000 with all payment due as noted in the preceding sentence and contains
certain covenants and restrictions as to various matters, including dividend
payments. Octane does not have any other credit facilities.
As of March 31, 2000, Octane's principal sources of liquidity were $30.6
million of cash and cash equivalents. In January and February 2000, Octane
conducted a private placement of its Series C preferred stock, raising $29
million in cash. Octane believes that its current cash and cash equivalents and
short-term investments will be sufficient to meet its anticipated liquidity
needs for working capital and capital expenditures for at least 12 months in the
absence of additional financing or consummation of the merger.
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EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998 and June 1999, FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities and SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities: Deferral of the Effective Date of
SFAS No. 133. These statements define derivatives, require that all derivatives
be carried at fair value, and provide for hedge accounting when certain
conditions are met. SFAS No. 133, as amended, is effective for Octane in fiscal
2001. Although Octane has not fully assessed the implications of SFAS No. 133,
it does not believe that adoption of this statement will have a material impact
on its financial position, results of operations or cash flows.
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OCTANE MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information with respect to Octane's current
executive officers and directors as of March 31, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Aditya (Tim) Guleri... 35 Chairman of the Board and Chief Executive Officer
William Walsh......... 36 President and Chief Operating Officer
Kira Makagon.......... 36 Director, Senior Vice President, Products and Chief
Technology Officer
James Doehrman........ 42 Senior Vice President Finance and Administration, Chief
Financial Officer and Assistant Secretary
Robert Loughan........ 34 Senior Vice President, Worldwide Sales
Jeff Pulver........... 34 Vice President, Marketing
Robert Davoli......... 51 Director
David Strohm.......... 52 Director
</TABLE>
Aditya (Tim) Guleri has served as Chairman and Chief Executive Officer of
Octane since September 1997. Prior to joining Octane, he held key executive
management positions at Scopus Technology as a Vice President of Product
Marketing/Business Development from 1996 to 1997 and Vice President of
Application Engineering from 1992 to 1996. From 1989 to 1992, Mr. Guleri served
as Director of IT at LSI Logic Inc. His education includes a Master's Degree in
Robotics/IE from Virginia Polytechnic Institute and State University and a B.S.
in Electrical Engineering from Punjab University in India.
William Walsh has served as President and Chief Operating Officer of Octane
since January 2000. Prior to joining Octane, Mr. Walsh served as president of
PeopleSoft International from January 1999 to December 1999. At PeopleSoft, he
also served as vice president & general manager for Latin America from 1996 to
1999, vice president & general manager for Germany from 1995 to 1996, and vice
president of customer services from 1992 to 1995. Prior to PeopleSoft, Mr. Walsh
served as a senior manager at Andersen Consulting from 1985 to 1992. He holds a
B.A. in industrial/organizational psychology from DePaul University and an MBA
in marketing/finance from Loyola University of Chicago.
Kira Makagon has served as a director, Senior Vice President, Products and
Chief Technology Officer of Octane since July 1998. Prior to joining Octane, she
served as Vice President of Product Development at Scopus Technology from 1993
to 1998. Ms. Makagon was Product Development Manager at Guzik Technical from
1987 to 1992. From 1984 to 1985, she held various senior engineering management
positions at Ingres Corporation. She was a founding team member at Trifox, Inc.
from 1985 to 1987. Ms. Makagon has an MBA and a B.S. in Computer Science from
the University of California at Berkeley.
James Doehrman has served as Senior Vice President, Finance and
Administration, Chief Financial Officer and Assistant Secretary of Octane since
January 2000. Prior to joining Octane, Mr. Doerhman served as Vice President and
Chief Financial Officer at IDG Books Worldwide from 1997 to 1999. Prior to IDG,
he held numerous worldwide executive positions with Simon & Schuster, in Mexico,
England and New York from 1992 to 1997. Mr. Doehrman also held key senior
positions at Federated Department Stores from 1988 to 1992, The Limited from
1986 to 1988 and Arthur Andersen & Co. from 1979 to 1986. He holds a Bachelor of
Business Administration degree from Southern Methodist University.
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Rob Loughan has served as Senior Vice President, Worldwide Sales of Octane
since September 1997. Prior to joining Octane, he held key U.S. and
international sales management and strategic sales positions in several software
companies, including Sybase where he served as a Sales Representative from 1989
to 1992, Micromuse where he served as Director of Sales from 1996 to 1997 and
Scopus Technology, Inc. where he served as Manager of Strategic Accounts from
1992 to 1996. Mr. Loughan holds B.A. degrees in Political Science and Psychology
from the State University of New York at Albany.
Jeff Pulver has served as Vice President, Marketing of Octane since March
2000. Prior to joining Octane, Mr. Pulver held various positions at PeopleSoft,
Inc. from 1993 to 2000, most recently serving as Vice President of Corporate
Marketing Communications. Prior to PeopleSoft, held sales and marketing
positions at IBM from 1988 to 1993. Mr. Pulver holds a B.S. in Industrial
Technology from California Polytechnic State University, San Luis Obispo.
Robert Davoli has served as a director of Octane since August 1998. Mr.
Davoli has served as General Partner of Sigma Partners, a venture capital firm,
since January 1995. He served as President and Chief Executive Officer of Epoch
Systems, a client-server software company, from February 1993 to September 1994.
From May 1986 through June 1992, Mr. Davoli was the President and Chief
Executive Officer of SQL Solutions, a relational database management systems
consulting and tools company that he founded and sold to Sybase, Inc. in January
1990. He is a director of ISS Group, Inc., a network security software company,
which is publicly held, and he serves as a director of several privately held
companies. Mr. Davoli received a B.A. in History from Ricker College.
David Strohm has served as a director of Octane since August 1998. Mr.
Strohm joined Greylock Management Corporation, a venture capital management
company, in 1980 and is a general partner of several venture capital funds
affiliated with Greylock. Mr. Strohm currently serves as a director of Banyan
Systems, Inc., a manufacturer of networking software products, DoubleClick,
Inc., a leading provider of comprehensive Internet advertising solutions and ISS
Group, Inc., a provider of Internet security software, Legato Systems, Inc., a
developer of enterprise storage software, each of which are publicly traded
companies, as well as several privately held technology companies. Mr. Strohm
holds a B.A. from Dartmouth College and an M.B.A. from Harvard University.
DIRECTOR COMPENSATION
Directors do not currently receive any cash compensation from Octane for
their service as members of the board of directors. Under Octane's 1997 stock
plan, Octane's two outside directors were each granted an option to purchase
40,000 shares of Octane's common stock on September 28, 1999 and an option to
purchase 10,000 shares of common stock on January 12, 2000.
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<PAGE> 148
EXECUTIVE COMPENSATION
The table below summarizes the compensation earned for services rendered to
Octane in all capacities for the fiscal year ended December 31, 1999, by each
person that served as chief executive officer during the last fiscal year and
Octane's next most highly compensated executive officers who earned more than
$100,000 during the fiscal year ended December 31, 1999. These executives are
referred to as the named executive officers in this proxy statement/prospectus.
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
----------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
--------------------------- -------- ------ ------------
<S> <C> <C> <C>
Aditya (Tim) Guleri....................................... $160,000 $5,000 --
President and Chief Executive Officer
Kira Makagon.............................................. 150,000 5,000 $ 2,652
Senior Vice President, Products and
Chief Technology Officer
Robert Loughan............................................ 150,000 5,000 18,795(1)
Senior Vice President, Worldwide Sales
</TABLE>
- -------------------------
(1) Includes $18,046 of sales-based commissions
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to stock options
granted to Mr. Guleri, Ms. Makagon and Mr. Loughan in the fiscal year ended
December 31, 1999, including potential realizable value over the 10 year term of
the options, based on assumed rates of stock appreciation of 5% and 10%,
compounded annually. These assumed rates of appreciation comply with the rules
of the Securities and Exchange Commission and do not represent an estimate of
future stock price. Actual gains, if any, on stock option exercises will be
dependent on the future performance of E.piphany common stock.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE
---------------------------------------------------------------- AT ASSUMED ANNUAL
% OF TOTAL RATES OF
NUMBER OF OPTIONS DEEMED STOCK PRICE
SECURITIES GRANTED TO EXERCISE VALUE APPRECIATION FOR
UNDERLYING EMPLOYEES PRICE PER SHARE OPTION TERM
OPTIONS IN LAST PER ON DATE EXPIRATION ---------------------
NAME GRANTED FISCAL YEAR SHARE OF GRANT DATE 0% 5% 10%
---- ------------ ------------ --------- --------- ---------- --- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aditya (Tim) Guleri....... 5,000 0.268% $0.25 $0.25 4/13/2009 -- $ 786 $1,992
5,000 0.268 0.45 0.45 8/17/2009 -- 1,415 3,586
5,000 0.268 0.90 0.90 11/2/2009 -- 2,830 7,172
Kira Makagon.............. 5,000 0.268 0.25 0.25 4/13/2009 -- 786 1,992
5,000 0.268 0.45 0.45 8/17/2009 -- 1,415 3,586
5,000 0.268 0.90 0.90 11/2/2009 -- 2,830 7,172
Robert Loughan............ 5,000 0.268 0.25 0.25 4/13/2009 -- 786 1,992
5,000 0.268 0.45 0.45 8/17/2009 -- 1,415 3,586
5,000 0.268 0.90 0.90 11/2/2009 -- 2,830 7,172
</TABLE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table describes for the named executive officers their option
exercises for the fiscal year ended December 31, 1999, and exercisable and
unexercisable options held by them as of December 31, 1999.
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<PAGE> 149
The "Value of Unexercised In-the-Money Options at December 31, 1999" is
based on a value of $1.50 per share, the fair market value of Octane's common
stock as of December 31, 1999 as determined by the Octane board of directors,
less the per share exercise price, multiplied by the number of shares issued
upon exercise of the option.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT DECEMBER 31, 1999 AT DECEMBER 31, 1999
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Aditya (Tim) Guleri... -- -- 15,000 -- $14,500 --
Kira Makagon.......... -- -- 15,000 -- 14,500 --
Robert Loughan........ -- -- 15,000 -- 14,500 --
</TABLE>
EMPLOYMENT AGREEMENTS
See "Other Agreements -- Employment and Noncompetition Agreements" for a
description of the employment agreements for certain of our executive officers
entered into in connection with the merger.
143
<PAGE> 150
SECURITY OWNERSHIP OF MANAGEMENT
AND PRINCIPAL SHAREHOLDERS OF OCTANE
The following table sets forth certain information regarding beneficial
ownership of Octane common stock as of April 14, 2000 for (a) each director of
Octane (b) Octane's Chief Executive Officer and each of the other most highly
compensated Octane executive officers during fiscal 1999, (c) all directors and
executive officers of Octane as a group, and (d) all those known by Octane to be
beneficial owners of more than five percent of outstanding shares of Octane
common stock. Unless otherwise indicated in the footnotes below, and subject to
community property laws where applicable, each of the named persons has sole
voting and investment power with respect to the shares shown as beneficially
owned.
Unless otherwise indicated, the address of each shareholder listed in the
following table is c/o Octane Software, Inc., 2929 Campus Drive #101, San Mateo,
California 94403. All share ownership numbers and percentages are shown on an
as-converted to common stock basis. Applicable percentage ownership in the
following table is based on 24,685,281 shares of common stock outstanding as of
April 14, 2000 and includes all shares subject to options and warrants
exercisable within 60 days of April 14, 2000.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES
NUMBER OF SHARES BENEFICIALLY
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OWNED
------------------------ ------------------- -------------
<S> <C> <C>
Sigma Partners(1)............................. 3,121,824 12.7%
20 Customhouse St., Suite 830
Boston, MA 02110
Greylock IX Limited Partnership............... 3,121,824 12.7
755 Page Mill Road
Palo Alto, CA 94304
Norwest Venture Partners VII, L.P. ........... 1,838,181 7.5
245 Lytton Avenue
Suite 250
Palo Alto, CA 94301
Aditya (Tim) Guleri(2)........................ 1,836,740 7.4
TTEC Nevada, Inc.............................. 1,651,275 6.7
1700 Lincoln Street
Denver, CO 80302
Lucent Venture Partners, Inc.................. 1,530,022 6.2
Room 6G-212
600 Mountain Avenue
Murray Hill, NJ 07974
Kira Makagon(2)............................... 1,170,605 4.7
Robert Loughan(2)............................. 953,415 3.9
David Strohm(3)............................... 50,000 *
Robert Davoli(4).............................. 50,000 *
Directors and officers as a group (13
persons)(5)................................. 7,629,028 30.9
</TABLE>
- -------------------------
* Less than one percent.
(1) Includes securities owned by Sigma Partners IV, L.P., Sigma Associates IV,
L.P. and Sigma Investors IV, L.P.
(2) Includes shares held by family trusts.
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<PAGE> 151
(3) Excludes shares held by Greylock IX Limited Partnership. Mr. Strohm is a
general partner of Greylock IX Limited Partnership but disclaims beneficial
ownership of all such shares except to the extent of his pecuniary interest
therein.
(4) Excludes shares held by Sigma Partners IV, L.P., Sigma Associates IV, L.P.
and Sigma Investors IV, L.P. Mr. Davoli is a general partner of such
entities, but disclaims beneficial ownership of all such shares except to
the extent of his pecuniary interest therein.
(5) Includes options to purchase 343,000 shares of common stock exercisable
within 60 days of April 14, 2000.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PREFERRED STOCK SALES
Series C Preferred Stock. In January 2000 and February 2000, Octane sold
shares of Series C Preferred Stock, at a purchase price of $8.18 per share, to
raise capital to finance its operations. The following 5% shareholders purchased
shares in that financing:
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE
PURCHASER SHARES CONSIDERATION
--------- --------- -------------
<S> <C> <C>
Lucent Venture Partners, Inc........................... 233,517 $1,910,169
Norwest Venture Partners VII, L.P...................... 280,547 2,294,874
Sigma Partners......................................... 476,463 3,897,467
Greylock IX Limited Partnership........................ 476,463 3,897,467
TTEC Nevada, Inc....................................... 872,459 7,136,714
</TABLE>
Series B Preferred Stock. In August 1999 and December 1999, Octane sold
shares of Series B Preferred Stock, at a purchase price of $3.21 per share, to
raise capital to finance its operations. The following 5% shareholders purchased
shares in that financing:
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE
PURCHASER SHARES CONSIDERATION
--------- --------- -------------
<S> <C> <C>
Lucent Venture Partners, Inc........................... 417,445 $1,339,998
Sigma Partners......................................... 834,891 2,680,000
TTEC Nevada, Inc....................................... 778,816 2,499,999
Greylock IX Limited Partnership........................ 834,891 2,680,000
Norwest Venture Partners VII, L.P...................... 1,557,632 4,999,998
</TABLE>
EMPLOYEE LOANS
William Walsh, president and chief operating officer of Octane, has issued
to Octane a promissory note dated January 20, 2000 in the amount of $825,000 due
and payable on January 20, 2005 to purchase common stock in connection with the
vesting of his options pursuant to his stock option agreement. James Doehrman,
senior vice president finance and administration, chief financial officer and
assistant secretary of Octane, has issued to Octane two promissory notes dated
January 20, 2000 and March 1, 2000 in the amounts of $225,000 and $37,500,
respectively, due and payable on January 20, 2005 and March 1, 2005,
respectively, to purchase common stock in connection with the vesting of his
options pursuant to his stock option agreement.
Octane believes that the shares sold in transactions described above were
sold at fair market value and the terms of the other arrangements described
above were no less favorable than Octane could have obtained from unaffiliated
third parties. In addition to the transactions described above,
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<PAGE> 152
Octane has compensation arrangements with directors and officers which are
described under the section entitled "Octane Management."
STOCK AND OPTIONS SUBJECT TO ACCELERATED VESTING
Certain directors, officers and consultants of Octane hold common stock or
options to purchase common stock that are subject to accelerated vesting upon a
change of control of Octane, such as the merger that is currently being
contemplated with E.piphany, pursuant to terms set forth in their respective
common stock purchase agreements or stock option agreements, as applicable. Such
individuals and entities are as follows: Aditya (Tim) Guleri, William Walsh,
Kira Makagon, James Doehrman, Robert Gryphon, Robert Loughan, Robert Davoli,
David Strohm, Elias Blawie, Sanjay Khare, VLG Investments 1998 and VLG
Investments 2000.
<TABLE>
<CAPTION>
NUMBER OF OCTANE SHARES
SUBJECT TO ACCELERATED VESTING
AS A RESULT OF THE MERGER
OFFICER/DIRECTOR/CONSULTANT AS OF MAY 31, 2000
--------------------------- ------------------------------
<S> <C>
Aditya (Tim) Guleri............................ 500,315
William Walsh.................................. 275,000
Kira Makagon................................... 319,071
James Doehrman................................. 50,000
Robert Loughan................................. 267,359
Robert Gryphon................................. 500,315
Robert Davoli.................................. 50,000
David Strohm................................... 50,000
Elias Blawie................................... 750
Sanjay Khare................................... 4,500
VLG Investments 1998........................... 5,250
VLG Investments 2000........................... 7,000
</TABLE>
Octane is presently in the process of soliciting shareholder approval by
written consent for the acceleration of vesting in connection with the merger as
described herein.
In addition, the following officers, directors and consultants of Octane
hold stock options or common stock that are subject to certain accelerated
vesting provisions upon the termination of such officer, director or consultant
following consummation of the merger pursuant to terms set forth in their
respective common stock purchase or stock option agreements, as applicable:
Aditya (Tim)
146
<PAGE> 153
Guleri, William Walsh, Kira Makagon, Rob Loughan, Robert Gryphon, Jeff Pulver,
Manu Kumar, Elias Blawie, Sanjay Khare and VLG Investments 1998.
<TABLE>
<CAPTION>
NUMBER OF OCTANE SHARES
SUBJECT TO ACCELERATED VESTING
UPON TERMINATION
OFFICER/CONSULTANT AFTER THE MERGER
------------------ ------------------------------
<S> <C>
Aditya (Tim) Guleri............................ 166,772
William Walsh.................................. 275,000
Kira Makagon................................... 106,357
Rob Loughan.................................... 89,120
Robert Gryphon................................. 166,772
Jeff Pulver.................................... 22,500
Manu Kumar..................................... 264,181
Elias Blawie................................... 375
Sanjay Khare................................... 750
VLG Investments 1998........................... 2,625
</TABLE>
E.piphany currently anticipates that most employees of Octane, including
certain officers and directors, will be employed by E.piphany after the merger.
LEGAL MATTERS
The validity of the E.piphany common stock issuable to Octane shareholders
pursuant to the merger will be passed on by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California. As of the date of this proxy
statement/prospectus, investment partnerships composed of members of and persons
associated with Wilson Sonsini Goodrich & Rosati, Professional Corporation, as
well as some individual attorneys of the firm, beneficially own an aggregate of
78,779 shares of E.piphany common stock.
Venture Law Group, A Professional Corporation, is acting as counsel for
Octane in connection with certain legal matters relating to the merger, the
merger agreement and the transactions contemplated thereby. As of the date of
this proxy statement/prospectus, investment partnerships composed of members of
and persons associated with Venture Law Group, A Professional Corporation, as
well as some individual attorneys of the firm, beneficially own an aggregate of
54,000 shares of Octane common stock. As of the date of this proxy
statement/prospectus, investment partnerships composed of members of and persons
associated with Venture Law Group, A Professional Corporation, as well as some
individual attorneys of the firm, beneficially own an aggregate of 17,699 shares
of E.piphany common stock.
EXPERTS
The audited financial statements of E.piphany, Inc. for the years ended
December 31, 1997, 1998 and 1999 included in this proxy statement/prospectus and
elsewhere in this registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included in this proxy statement/prospectus in reliance upon
the authority of said firm as experts in giving said reports.
Octane's consolidated financial statements as of December 1998 and 1999 and
for the period from September 9, 1997 (inception) through December 31, 1997 and
each of the years in the two-year period ended December 31, 1999 included in
this document have been audited by Deloitte & Touche LLP, independent auditors,
as stated in their report appearing herein, and have been so
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<PAGE> 154
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
The consolidated financial statements of RightPoint as of June 30, 1999 and
1998 for the years then ended included in this proxy statement/prospectus have
been included herein and in the registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in auditing and
accounting.
CHANGE IN E.PIPHANY'S INDEPENDENT PUBLIC ACCOUNTANTS
In July 1998, KPMG LLP resigned as E.piphany's independent public
accountants, as KPMG LLP became an integrator of E.piphany's products and
purchased E.piphany's preferred stock. The former independent accountants'
report on E.piphany's financial statements for the year ended December 31, 1997
did not contain an adverse opinion, a disclaimer of opinion or any
qualifications or modifications related to uncertainty, limitation of audit
scope or application of accounting principles. The former independent public
accountants' report does not cover any of E.piphany's financial statements in
this registration statement. KPMG LLP did not issue an audit opinion on
E.piphany's financial statements for any other period. There were no
disagreements with the former public accountants on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure with respect to E.piphany's financial statements up through the time
of dismissal that, if not resolved to the former accountants' satisfaction,
would have caused them to make reference to the subject matter of the
disagreement in connection with their report. In September 1998, E.piphany
retained Arthur Andersen LLP as its independent public accountants. The decision
to retain Arthur Andersen LLP was approved by resolution of E.piphany's board of
directors. Prior to retaining Arthur Andersen LLP, E.piphany had not consulted
with Arthur Andersen LLP regarding accounting principles.
CHANGE IN OCTANE'S INDEPENDENT PUBLIC ACCOUNTANTS
In February 2000, Octane terminated its relationship with
PricewaterhouseCoopers LLP for reasons unrelated to the preparation of Octane's
financial statements. There was no disagreement between Octane and
PricewaterhouseCoopers LLP regarding accounting principles. This registration
statement does not include any report on Octane's financial statements for any
period from Octane's former independent public accountants. In February 2000,
Octane retained Deloitte & Touche LLP as its independent public accountants. The
decision to retain Deloitte & Touche LLP was approved by resolution of Octane's
board of directors. Prior to retaining Deloitte & Touche LLP, Octane had not
consulted with Deloitte & Touche LLP regarding accounting principles. For
purposes of issuing its audit opinion included in this registration statement,
Deloitte & Touche LLP re-audited Octane's financial statements as of and for the
year ended December 31, 1998, and for the period from September 9, 1997 to
December 31, 1997 which had originally been audited by Octane's former
independent public accountants.
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<PAGE> 155
E.PIPHANY, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
On January 4, 2000, E.piphany, Inc. acquired RightPoint Software, Inc.
("RightPoint"). The acquisition of RightPoint was accounted for under the
purchase method of accounting.
In March 2000, E.piphany signed a definitive agreement to acquire Octane
Software, Inc. ("Octane"). When completed, the acquisition of Octane will also
be accounted for under the purchase method of accounting.
The pro forma combined condensed statement of operations of E.piphany for
the twelve months ended December 31, 1999 assume that the acquisitions of
RightPoint and Octane took place on January 1, 1999. The pro forma combined
condensed statements of operations of E.piphany for the three months ended March
31, 2000 assume that the acquisition of Octane took place on January 1, 2000.
The statements combine E.piphany's, RightPoint's and Octane's consolidated
statements of operations for the twelve months ended December 31, 1999 and
E.piphany's and Octane's consolidated statements of operations for the three
months ended March 31, 2000, as if the acquisitions took place at the beginning
of each period.
The pro forma combined condensed balance sheet as of March 31, 2000
combines E.piphany's and Octane's consolidated balance sheets as of March 31,
2000 as if the acquisition had been consummated on that date.
The unaudited pro forma combined condensed information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have actually occurred if the
acquisitions had been consummated as of the date indicated, nor is it
necessarily indicative of future operating results or financial position. The
pro forma adjustments are based on the information available at the date of this
proxy statement/prospectus and are subject to change based upon completion of
the transactions and final purchase price allocations, including completion of
third party appraisals.
E.piphany's and Octane's condensed financial information included in these
pro forma financial statements is derived from their December 31, 1999 audited
consolidated financial statements and their March 31, 2000 unaudited condensed
consolidated financial statements included elsewhere in this proxy
statement/prospectus. The results of operations of RightPoint included in the
unaudited pro forma combined condensed statements of operations of the year
ended December 31, 1999 were derived from its unaudited consolidated financial
statements for the same period that have been included in this proxy
statement/prospectus.
The unaudited condensed consolidated financial information of E.piphany,
RightPoint and Octane has been prepared in accordance with generally accepted
accounting principles applicable to interim financial information and, in the
opinion of E.piphany, RightPoint and Octane management, includes all adjustments
necessary for a fair presentation of the financial information for such interim
periods.
The historical consolidated financial statements of E.piphany, RightPoint
and Octane are included elsewhere in this proxy statement/prospectus and the
unaudited pro forma combined condensed information presented herein should be
read in conjunction with those consolidated financial statements and related
notes.
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<PAGE> 156
E.PIPHANY
PRO FORMA UNAUDITED COMBINED CONDENSED BALANCE SHEET
AS OF MARCH 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA E.PIPHANY
E.PIPHANY OCTANE ADJUSTMENTS AND OCTANE
--------- -------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents..................... $ 401,268 $ 30,607 $ -- $ 431,875
Short-term investments............. 23,452 -- -- 23,452
Accounts receivable, net........... 9,317 4,519 (2,581)(A) 11,255
Prepaid expenses and other
assets.......................... 3,438 788 -- 4,226
--------- -------- ---------- ----------
Total current assets............ 437,475 35,914 (2,581) 470,808
Property and equipment, net........ 6,696 2,849 -- 9,545
Goodwill and purchased
intangibles..................... 439,375 99,267 2,574,943(B) 3,113,615
Other assets....................... 320 322 642
--------- -------- ---------- ----------
$ 883,866 $138,352 $2,572,392 $3,594,610
========= ======== ========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable... $ 458 $ 202 $ -- $ 660
Trade accounts payable............. 948 554 -- 1,502
Accrued liabilities................ 19,308 4,112 30,000(C) 53,420
Deferred revenue................... 3,617 4,086 (2,581)(A) 5,122
--------- -------- ---------- ----------
Total current liabilities....... 24,331 8,954 27,419 60,704
--------- -------- ---------- ----------
Deferred rent...................... -- 101 -- 101
Long term obligations, net of
current portion................. 790 287 -- 1,077
STOCKHOLDERS' EQUITY:
Convertible preferred stock.......... -- 50,292 (50,292)(C) --
Common stock......................... 5 185,079 (185,079)(C) 5
Accumulated and other comprehensive
income............................. 4 -- -- 4
Deferred compensation................ (2,125) (71,300) 71,300(C) (2,125)
Additional paid-in capital........... 965,197 -- 2,700,112(C) 3,665,309
Warrants............................. 143 -- -- 143
Notes receivable..................... (1,640) (1,129) -- (2,769)
Accumulated deficit.................. (102,839) (33,932) 8,932(C) (127,839)
--------- -------- ---------- ----------
Total stockholders' equity...... 858,745 129,010 2,595,265 3,532,728
--------- -------- ---------- ----------
$ 883,866 $138,352 $2,572,392 $3,594,610
========= ======== ========== ==========
</TABLE>
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<PAGE> 157
E.PIPHANY, INC.
PRO FORMA UNAUDITED COMBINED CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
E.PIPHANY,
PRO FORMA E.PIPHANY AND PRO FORMA RIGHTPOINT,
E.PIPHANY RIGHTPOINT ADJUSTMENTS RIGHTPOINT OCTANE ADJUSTMENTS AND OCTANE
--------- ---------- ----------- ------------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product license................ $ 10,161 $ 3,207 $ -- $ 13,368 $ 647 $ -- $ 14,015
Services....................... 9,021 1,501 -- 10,522 2,835 -- 13,357
-------- -------- --------- --------- -------- --------- -----------
Total revenues.......... 19,182 4,708 -- 23,890 3,482 -- 27,372
-------- -------- --------- --------- -------- --------- -----------
Cost of revenues:
Product license................ 158 13 -- 171 -- -- 171
Services....................... 9,191 1,689 -- 10,880 1,663 -- 12,543
-------- -------- --------- --------- -------- --------- -----------
Total cost of
revenues.............. 9,349 1,702 -- 11,051 1,663 -- 12,714
-------- -------- --------- --------- -------- --------- -----------
Gross profit................. 9,833 3,006 -- 12,839 1,819 -- 14,658
-------- -------- --------- --------- -------- --------- -----------
Operating expenses:
Research and development....... 7,074 3,622 -- 10,696 4,528 -- 15,224
Sales and marketing............ 18,727 5,985 -- 24,712 6,794 -- 31,506
General and administrative..... 4,576 6,141 -- 10,717 3,794 -- 14,511
Amortization of goodwill and
purchased intangibles........ -- -- 159,773(D) 159,773 -- 891,413(D) 1,051,186
Stock-based compensation....... 2,929 1,382 (1,382)(E) 2,929 1,219 (1,219)(E) 2,929
-------- -------- --------- --------- -------- --------- -----------
Total operating
expenses.............. 33,306 17,130 158,391 208,827 16,335 890,194 1,115,356
-------- -------- --------- --------- -------- --------- -----------
Operating loss............... (23,473) (14,124) (158,391) (195,988) (14,516) (890,194) (1,100,698)
Other income, net................ 1,083 257 -- 1,340 134 -- 1,474
-------- -------- --------- --------- -------- --------- -----------
Net loss................ (22,390) (13,867) (158,391) (194,648) (14,382) (890,194) (1,099,224)
Accretion and deemed dividend on
preferred stock................ -- -- -- -- (2,509) 2,509(F) --
-------- -------- --------- --------- -------- --------- -----------
Net loss attributable to
common stockholders... $(22,390) $(13,867) $(158,391) $(194,648) $(16,891) $(887,685) $(1,099,224)
======== ======== ========= ========= ======== ========= ===========
Basic and diluted net
loss per share........ $ (2.19) $ (12.85) $ (18.76) $ (4.49) $ (89.17)
======== ======== ========= ======== ===========
Shares used in computing
basic and diluted net
loss per share........ 10,247 1,079 10,375 3,760 12,327
======== ======== ========= ======== ===========
Pro forma basic and
diluted net loss per
share(1).............. $ (1.23) $ (0.70) $ (9.46) $ (1.71) $ (42.04)
======== ======== ========= ======== ===========
Shares used in computing
pro forma basic and
diluted net loss per
share(1).............. 18,201 19,922 20,568 9,849 26,146
======== ======== ========= ======== ===========
</TABLE>
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<PAGE> 158
E.PIPHANY, INC.
PRO FORMA UNAUDITED COMBINED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA E.PIPHANY AND
E.PIPHANY OCTANE ADJUSTMENTS OCTANE
--------- -------- ----------- -------------
<S> <C> <C> <C> <C>
Revenues:
Product license........................................... $ 8,268 $ 1,880 $ -- $ 10,148
Services.................................................. 6,147 1,622 -- 7,769
-------- -------- --------- ---------
Total revenues..................................... 14,415 3,502 -- 17,917
-------- -------- --------- ---------
Cost of revenues:
Product license........................................... 109 -- -- 109
Services.................................................. 6,020 1,531 -- 7,551
-------- -------- --------- ---------
Total cost of revenues............................. 6,129 1,531 -- 7,660
-------- -------- --------- ---------
Gross profit............................................ 8,286 1,971 -- 10,257
-------- -------- --------- ---------
Operating expenses:
Research and development.................................. 3,758 2,431 -- 6,189
Sales and marketing....................................... 11,212 5,353 -- 16,565
General and administrative................................ 2,257 2,387 -- 4,644
In-process research and development charge................ 22,000 -- (22,000)(G) --
Amortization of goodwill and purchased intangibles........ 39,943 1,587 221,266(H) 262,796
Stock-based compensation.................................. 477 4,433 (4,433)(I) 477
-------- -------- --------- ---------
Total operating expenses........................... 79,647 16,191 194,833 290,671
-------- -------- --------- ---------
Operating loss.......................................... (71,361) (14,220) (194,833) (280,414)
Other income, net........................................... 4,393 246 -- 4,639
-------- -------- --------- ---------
Net loss........................................... (66,968) (13,974) (194,833) (275,775)
Accretion and deemed dividend on preferred stock............ -- (1,677) 1,677(J) --
-------- -------- --------- ---------
Net loss attributable to common stockholders....... $ 66,968 $ 15,651 $(193,156) $(275,775)
======== ======== ========= =========
Basic and diluted per share........................ $ (2.35) $ (2.76) $ (8.79)
======== ======== =========
Shares used in computing basic and diluted net loss
per share........................................ 28,452 5,676 31,392
======== ======== =========
Pro forma basic and diluted net loss per share..... $ (2.35) $ (0.89) $ (7.35)
======== ======== =========
Shares used in computing pro forma basic and
diluted net loss per share....................... 28,452 17,510 37,520
======== ======== =========
</TABLE>
152
<PAGE> 159
NOTES TO THE
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The total purchase price of the RightPoint acquisition has been allocated
to acquired assets based on estimates of their fair values. The purchase price
of approximately $496.8 million has been assigned to the intangible assets
acquired and liabilities assumed as follows (in thousands):
<TABLE>
<S> <C>
Current and other assets.................................... $ 3,076
Property, plant and equipment............................... 817
Notes receivable from stockholders.......................... 1,185
Acquired in-process research and development................ 22,000
Assembled work force and customer list...................... 4,100
Developed technology........................................ 35,000
Goodwill.................................................... 440,218
--------
506,396
Less: liabilities assumed................................... (9,633)
--------
$496,763
========
</TABLE>
E.piphany allocated approximately $22.0 million of the purchase price to
RightPoint's in-process research and development, which was expensed upon
consummation of the merger as it has not reached technological feasibility and,
in the opinion of management, has no alternative future use. This amount has not
been reflected in the accompanying pro forma statements of operations as it is a
nonrecurring charge.
The total purchase price of the Octane acquisition has been allocated to
acquired assets based on estimates of their fair values. The purchase price of
approximately $2.7 billion has been assigned to the assets acquired as follows
(in thousands):
<TABLE>
<S> <C>
Current assets.............................................. $ 35,914
Property, plant and equipment............................... 2,849
Notes receivable from stockholders.......................... 1,129
Other assets................................................ 322
Acquired in-process research and development................ 25,000
Assembled work force and customer list...................... 59,000
Developed technology........................................ 55,000
Goodwill.................................................... 2,560,240
----------
2,739,454
Less: liabilities assumed................................... (9,342)
----------
$2,730,112
==========
</TABLE>
E.piphany expects to allocate approximately $25.0 million of the purchase
price to Octane's in-process research and development, which will be expensed
upon consummation of the merger as it has not reached technological feasibility
and, in the opinion of management, has no alternative future use. The estimated
amount is subject to adjustment based upon completion of third party appraisals.
This amount has not been reflected in the accompanying pro forma statements of
operations as it is a nonrecurring charge, but has been reflected as an
adjustment to accumulated deficit in the accompanying pro forma balance sheet.
The adjustments to the unaudited pro forma combined condensed balance sheet
as of March 31, 2000 are as follows:
(A) To offset the Octane deferred revenue and related uncollected
receivable as of March 31, 2000.
153
<PAGE> 160
(B) To reflect Goodwill and other intangibles of approximately $2.7
billion resulting from the acquisition of Octane.
(C) To reflect the purchase price paid for Octane as follows: issuance of
approximately 11,755,138 shares of our common stock and the assumption
of options and warrants to purchase approximately 1,038,372 shares of
our common stock, valued at approximately $2.7 billion and
acquisition-related expenses of approximately $30.0 million. The
valuation of the E.piphany common stock is based on its weighted
average closing price three days prior to and three days following the
announcement of the acquisition. The valuation of options and warrants
to purchase E.piphany common stock is based upon the Black-Scholes
valuation model.
The adjustments to the pro forma combined condensed statements of
operations for the year ended December 31, 1999 assume the acquisitions occurred
on January 1, 1999 and are as follows:
(D) To reflect the amortization of approximately $1.1 billion of estimated
goodwill and other intangibles resulting from the RightPoint and
Octane acquisitions. The intangible assets will be amortized over
three years.
(E) To remove the effect of the amortization of stock-based compensation
taken by Octane.
(F) To remove the effect of the accretion and deemed dividend on preferred
stock assuming conversion occurred on January 1, 1999.
The adjustments to the pro forma combined statements of operations for the
three months ended March 31, 2000 assume the Octane acquisition occurred on
January 1, 2000 and are as follows:
(G) To remove the effect of the in-process research and development charge
taken by E.piphany as a result of the RightPoint acquisition.
(H) To reflect the amortization of approximately $222.9 million of
estimated goodwill and other intangibles resulting from the Octane
acquisition. The intangible assets will be amortized over three years.
(I) To remove the effect of the amortization of stock-based compensation
taken by Octane.
(J) To remove the effect of the accretion and deemed dividend on preferred
stock assuming conversion occurred on January 1, 2000.
154
<PAGE> 161
E.PIPHANY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
E.PIPHANY FINANCIAL STATEMENTS
Report of Independent Public Accountants.................... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statement of Stockholders' Equity and Comprehensive Loss.... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
E.PIPHANY UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Unaudited Condensed Consolidated Balance Sheet as of March
31, 2000.................................................. F-22
Unaudited Condensed Consolidated Statements of Operations
for the three months ended March 31, 2000 and 1999........ F-23
Unaudited Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2000 and 1999........ F-24
Notes to Unaudited Condensed Consolidated Financial
Statements................................................ F-25
RIGHTPOINT SOFTWARE, INC.
Report of Independent Auditors.............................. F-29
Consolidated Balance Sheets................................. F-30
Consolidated Statements of Operations and Comprehensive
Loss...................................................... F-31
Consolidated Statements of Stockholders' Equity............. F-32
Consolidated Statements of Cash Flows....................... F-33
Notes to Consolidated Financial Statements.................. F-34
OCTANE SOFTWARE, INC.
Independent Auditors' Report................................ F-45
Consolidated Balance Sheets................................. F-46
Consolidated Statements of Operations....................... F-47
Consolidated Statements of Shareholders' Equity
(Deficiency).............................................. F-48
Consolidated Statements of Cash Flows....................... F-49
Notes to Consolidated Financial Statements.................. F-50
</TABLE>
F-1
<PAGE> 162
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To E.piphany, Inc.:
We have audited the accompanying balance sheets of E.piphany, Inc. (a
Delaware corporation) as of December 31, 1998 and 1999, and the related
statements of operations, stockholders' equity and comprehensive loss, and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of E.piphany's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of E.piphany, Inc. as of
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.
/s/ ARTHUR ANDERSEN LLP
San Jose, California
January 7, 2000
F-2
<PAGE> 163
E.PIPHANY, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 13,595 $ 58,084
Short-term investments.................................... -- 22,926
Accounts receivable, net of allowance for doubtful
accounts of $30 and $300, respectively................. 1,243 5,502
Prepaid expenses and other current assets................. 354 2,959
-------- --------
Total current assets.............................. 15,192 89,471
Property and equipment, net................................. 1,172 3,932
Other assets................................................ -- 183
-------- --------
$ 16,364 $ 93,586
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations.............. $ -- $ 237
Current portion of notes payable.......................... 167 894
Accounts payable.......................................... 1,015 650
Accrued liabilities....................................... 1,028 5,696
Deferred revenue.......................................... 381 3,643
-------- --------
Total current liabilities......................... 2,591 11,120
Capital lease obligations, net of current portion......... -- 399
Notes payable, net of current portion..................... 333 7,425
-------- --------
Total liabilities................................. 2,924 18,944
-------- --------
Commitments (Note 4)
Stockholders' equity:
Series A - D convertible preferred stock, $0.0001 par
value;
Authorized -- 12,703 shares in 1998 and 0 shares in
1999
Outstanding -- 10,623 shares in 1998 and 0 in 1999..... 3 --
Convertible preferred stock, $0.0001 par value;
Authorized -- 5,000 in 1999
Outstanding -- none.................................... -- --
Common stock, $0.0001 par value;
Authorized -- 100,000 in 1999
Outstanding -- 8,913 shares in 1998 and 27,049 shares
in 1999............................................... 2 5
Additional paid-in capital................................ 30,030 113,636
Warrants.................................................. -- 143
Note receivable........................................... (640) (640)
Accumulated and other comprehensive income (loss)......... -- (31)
Deferred compensation..................................... (2,476) (2,602)
Accumulated deficit....................................... (13,479) (35,869)
-------- --------
Total stockholders' equity........................ 13,440 74,642
-------- --------
$ 16,364 $ 93,586
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 164
E.PIPHANY, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Revenues:
Product license....................................... $ -- $ 2,216 $ 10,161
Services.............................................. -- 1,161 9,021
------- -------- --------
-- 3,377 19,182
------- -------- --------
Cost of revenues:
Product license....................................... -- 4 158
Services.............................................. -- 1,396 9,191
------- -------- --------
-- 1,400 9,349
------- -------- --------
Gross profit....................................... -- 1,977 9,833
------- -------- --------
Operating expenses:
Research and development.............................. 1,646 3,769 7,074
Sales and marketing................................... 1,200 6,519 18,727
General and administrative............................ 373 1,503 4,576
Stock-based compensation.............................. 1 799 2,929
------- -------- --------
Total operating expenses...................... 3,220 12,590 33,306
------- -------- --------
Loss from operations............................... (3,220) (10,613) (23,473)
------- -------- --------
Other income (expense):
Interest income....................................... 71 333 1,722
Interest expense...................................... -- (48) (639)
Other................................................. -- (2) --
------- -------- --------
Total other income............................ 71 283 1,083
------- -------- --------
Net loss........................................... $(3,149) $(10,330) $(22,390)
======= ======== ========
Basic and diluted net loss per share.................... $ (2.90) $ (4.49) $ (2.19)
======= ======== ========
Shares used in computing basic and diluted net loss per
share................................................. 1,087 2,299 10,247
======= ======== ========
Pro forma basic and diluted net loss per share
(unaudited)........................................... $ (1.07) $ (1.23)
======== ========
Shares used in computing pro forma basic and diluted net
loss per share (unaudited)............................ 9,694 18,201
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 165
E.PIPHANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE COMMON ACCUMULATED
PREFERRED STOCK STOCK ADDITIONAL AND OTHER
---------------- --------------- PAID-IN NOTE COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL WARRANTS RECEIVABLE INCOME (LOSS)
------- ------ ------ ------ ---------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock........ -- -- 5,600 $ 1 $ 2 $ -- $ -- $ --
Exercise of common stock
options....................... -- -- 8 -- 1 -- -- --
Issuance of common stock in
exchange for services......... -- -- 11 -- 1 -- -- --
Issuance of Series A preferred
stock, net.................... 3,228 1 -- -- 3,611 -- -- --
Comprehensive loss:
Net loss...................... -- -- -- -- -- -- -- --
------- --- ------ --- -------- ----- ----- ----
Total comprehensive
loss....................
Balance, December 31, 1997........ 3,228 1 5,619 1 3,615 -- -- --
Issuance of Series B preferred
stock, net.................... 3,229 1 -- -- 8,019 -- -- --
Sale of common stock to Series B
investors..................... -- -- 250 -- 62 -- -- --
Issuance of common stock to
officer....................... -- -- 1,600 -- 640 -- (640) --
Issuance of common stock in
exchange for services......... -- -- 60 -- 36 -- -- --
Issuance of Series C preferred
stock, net.................... 4,160 1 -- -- 13,992 -- -- --
Exercise of common stock
options....................... -- -- 1,540 1 488 -- -- --
Repurchase of stock............. -- -- (156) -- (70) -- -- --
Issuance of Series C preferred
stock in exchange for
services...................... 6 -- -- -- 20 -- -- --
Stock-based compensation........ -- -- -- -- 11 -- -- --
Deferred stock compensation..... -- -- -- -- 3,217 -- -- --
Amortization of deferred stock
compensation.................. -- -- -- -- -- -- -- --
Comprehensive loss:
Net loss...................... -- -- -- -- -- -- -- --
------- --- ------ --- -------- ----- ----- ----
Total comprehensive
loss....................
Balance, December 31, 1998........ 10,623 3 8,913 2 30,030 -- (640) --
Exercise of common stock
options....................... -- -- 1,522 -- 2,579 -- -- --
Issuance of stock options in
exchange for services......... -- -- -- -- 388 -- -- --
Issuance of Series D preferred
stock, net.................... 937 -- -- -- 5,970 -- -- --
Issuance of warrants............ -- -- -- -- -- 532 -- --
Repurchase of stock............. -- -- (172) -- (10) -- -- --
Issuance of stock related to
leases and debt financing..... -- -- 6 -- 100 -- -- --
Issuance of common stock in
initial public offering,
net........................... -- -- 4,773 -- 69,598 -- -- --
Conversion of preferred stock... (11,560) (3) 11,560 3 -- -- -- --
Exercise of warrants............ -- -- 447 -- 2,315 (389) -- --
Acceleration of common stock
option vesting................ -- -- -- -- 47 -- -- --
Deferred stock compensation..... -- -- -- -- 2,619 -- -- --
Amortization of deferred stock
compensation.................. -- -- -- -- -- -- -- --
Comprehensive loss:
Unrealized loss on
investments................. -- -- -- -- -- -- -- (31)
Net loss...................... -- -- -- -- -- -- -- --
------- --- ------ --- -------- ----- ----- ----
Total comprehensive
loss....................
Balance, December 31, 1999........ -- $-- 27,049 $ 5 $113,636 $ 143 $(640) $(31)
======= === ====== === ======== ===== ===== ====
<CAPTION>
TOTAL
DEFERRED ACCUMULATED STOCKHOLDERS' COMPREHENSIVE
COMPENSATION DEFICIT EQUITY LOSS
------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Issuance of common stock........ $ -- $ -- $ 3
Exercise of common stock
options....................... -- -- 1
Issuance of common stock in
exchange for services......... -- -- 1
Issuance of Series A preferred
stock, net.................... -- -- 3,612
Comprehensive loss:
Net loss...................... -- (3,149) (3,149) $ (3,149)
------- -------- -------- --------
Total comprehensive
loss.................... $ (3,149)
========
Balance, December 31, 1997........ -- (3,149) 468
Issuance of Series B preferred
stock, net.................... -- -- 8,020
Sale of common stock to Series B
investors..................... -- -- 62
Issuance of common stock to
officer....................... -- -- --
Issuance of common stock in
exchange for services......... -- -- 36
Issuance of Series C preferred
stock, net.................... -- -- 13,993
Exercise of common stock
options....................... -- -- 489
Repurchase of stock............. -- -- (70)
Issuance of Series C preferred
stock in exchange for
services...................... -- -- 20
Stock-based compensation........ -- -- 11
Deferred stock compensation..... (3,217) -- --
Amortization of deferred stock
compensation.................. 741 -- 741
Comprehensive loss:
Net loss...................... -- (10,330) (10,330) $(10,330)
------- -------- -------- --------
Total comprehensive
loss.................... $(10,330)
========
Balance, December 31, 1998........ (2,476) (13,479) 13,440
Exercise of common stock
options....................... -- -- 2,579
Issuance of stock options in
exchange for services......... -- -- 388
Issuance of Series D preferred
stock, net.................... -- -- 5,970
Issuance of warrants............ -- -- 532
Repurchase of stock............. -- -- (10)
Issuance of stock related to
leases and debt financing..... -- -- 100
Issuance of common stock in
initial public offering,
net........................... -- -- 69,598
Conversion of preferred stock... -- -- --
Exercise of warrants............ -- -- 1,926
Acceleration of common stock
option vesting................ -- -- 47
Deferred stock compensation..... (2,619) -- --
Amortization of deferred stock
compensation.................. 2,493 -- 2,493
Comprehensive loss:
Unrealized loss on
investments................. -- -- (31) $ (31)
Net loss...................... -- (22,390) (22,390) (22,390)
------- -------- -------- --------
Total comprehensive
loss.................... $(22,421)
========
Balance, December 31, 1999........ $(2,602) $(35,869) $ 74,642
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 166
E.PIPHANY, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................ $(3,149) $(10,330) $(22,390)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation....................................... 47 269 908
Allowance for doubtful accounts.................... -- 30 270
Loss on sale of property and equipment............. 9 -- --
Noncash compensation expense....................... 1 799 2,929
Noncash interest expense........................... -- -- 86
Changes in operating assets and liabilities:
Accounts receivable.............................. (16) (1,257) (4,529)
Prepaid expenses and other assets................ (79) (275) (2,628)
Accounts payable................................. 117 898 (365)
Accrued liabilities.............................. 140 888 4,668
Deferred revenue................................. 76 305 3,262
------- -------- --------
Net cash used in operating activities......... (2,854) (8,673) (17,789)
------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment.................... (408) (1,104) (2,952)
Proceeds from the sale of property and equipment...... 15 -- --
Purchases of short-term investments................... -- -- (22,957)
------- -------- --------
Net cash used in investing activities......... (393) (1,104) (25,909)
------- -------- --------
Cash flows from financing activities:
Borrowings............................................ -- 500 8,000
Repayments on line of credit.......................... -- -- (181)
Principal payments on capital lease obligations....... -- -- (81)
Proceeds from initial public offering of common stock,
net................................................ -- -- 69,598
Proceeds from exercise of warrant..................... -- -- 2,250
Net proceeds from issuance of convertible preferred
stock.............................................. 3,612 22,033 5,970
Issuance of common stock.............................. 4 470 2,631
------- -------- --------
Net cash provided by financing activities..... 3,616 23,003 88,187
------- -------- --------
Net increase in cash and cash equivalents............... 369 13,226 44,489
Cash and cash equivalents at beginning of period........ -- 369 13,595
------- -------- --------
Cash and cash equivalents at end of period.............. $ 369 $ 13,595 $ 58,084
======= ======== ========
Supplemental cash flow information:
Cash paid for interest................................ $ -- $ 48 $ 487
======= ======== ========
Non-cash transactions:
Loan to officer to purchase stock..................... $ -- $ 640 $ --
======= ======== ========
Equipment acquired under capital lease................ $ -- $ -- $ 716
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 167
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
E.piphany, Inc. ("E.piphany" or the "Company"), formerly Epiphany Marketing
Software, Inc., was incorporated in Delaware in November 1996, and develops and
markets software that companies can use to establish, maintain and continually
improve customer relationships across both Internet and traditional sales,
marketing and distribution channels. In 1997, E.piphany was in the development
stage and was primarily engaged in obtaining equity financing and performing
research and development activities. Although E.piphany began actively selling
its products in 1998 and no longer considers itself to be in the development
stage, it has not operated profitably to date and there are no assurances that
it will operate profitably in the future.
E.piphany has incurred net operating losses since inception and, as of
December 31, 1999, had an accumulated deficit of $35.9 million. E.piphany is
subject to various risks associated with companies in a comparable stage of
development, including having a limited operating history; competition from
substitute products and larger competitors; dependence on a limited number of
customers; dependence on key individuals; and the ability to obtain adequate
financing to support its growth.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
Statements of Cash Flows
For purposes of the statements of cash flows, E.piphany considers all
highly liquid investments purchased with original maturities of three months or
less to be cash equivalents. Cash equivalents consist of amounts on deposit at a
commercial bank and investments in commercial paper and other securities.
Concentration of Credit Risk and Significant Customers
E.piphany provides credit to its customers in the normal course of
business, performs ongoing credit evaluations of its customers and maintains
allowances for potential credit losses which, to date, have not been material.
F-7
<PAGE> 168
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Sales to significant customers as a percentage of total revenues were as
follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Customer A................................. -- 30% --
Customer B................................. -- 17% --
Customer C................................. -- 16% --
Customer D................................. -- 11% --
Customer E................................. -- 11% --
Customer F................................. -- -- 11%
</TABLE>
In September 1998, the President and Chief Executive Officer of E.piphany
was elected to the board of directors of Customer D. E.piphany recognized
$357,000 and $273,000 in revenue from this customer in 1998 and 1999,
respectively, and had $146,000 and $118,000 in accounts receivable due from
Customer D at December 31, 1998 and 1999, respectively. The majority of the
agreements relating to this revenue were entered into before the chief executive
officer was employed by E.piphany or elected to Customer D's board of directors.
The President and Chief Executive Officer of E.piphany is a member of the
board of directors of an additional customer. E.piphany recognized a total of
$296,000 in revenue from this customer in 1999, and had a total of $280,000 in
accounts receivable at December 31, 1999 from this customer. An outside director
of E.piphany is also a member of the board of directors of this customer.
An outside director of E.piphany is a member of the board of directors of
two additional customers. E.piphany recognized $233,000 and $704,000 in revenue
from these customers in 1998 and 1999, and had a total of $57,000 and $112,000
in accounts receivable as of December 31, 1998 and 1999, respectively. The first
agreement with one of these customers was entered into before the outside
director was elected to E.piphany's board of directors.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based on estimated useful lives, generally three to
five years. Depreciation expense is included in operating expenses.
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
------ -------
<S> <C> <C>
Computer software and equipment...................... $1,329 $ 4,959
Furniture and fixtures............................... 159 197
------ -------
1,488 5,156
Less: Accumulated depreciation....................... (316) (1,224)
------ -------
$1,172 $ 3,932
====== =======
</TABLE>
Included in property and equipment are assets acquired under capital leases
with original cost of approximately $715,000 as of December 31, 1999.
Accumulated amortization on the leased assets is approximately $106,000 as of
December 31, 1999.
F-8
<PAGE> 169
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease payments on capital leases are as follows at December
31, 1999 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
2000........................................................ $ 272
2001........................................................ 233
2002........................................................ 149
2003........................................................ 24
-----
Total minimum lease payments................................ 678
Less: Imputed interest (10.0%).............................. (42)
-----
Present value of payments under capital leases.............. 636
Less: Current portion....................................... (237)
-----
Long-term capital lease obligations......................... $ 399
=====
</TABLE>
Software Development Costs
Software development costs incurred prior to the establishment of
technological feasibility are included in research and development expenses.
E.piphany defines establishment of technological feasibility as the completion
of a working model. Software development costs incurred subsequent to the
establishment of technological feasibility through the period of general market
availability of the products are capitalized, if material, after consideration
of various factors, including net realizable value. To date, software
development costs that are eligible for capitalization have not been material
and have been expensed.
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1999
------ ------
<S> <C> <C>
Accrued professional services......................... $ 158 $ 603
Accrued sales tax..................................... 93 20
Accrued payroll....................................... 249 --
Accrued vacation...................................... 153 739
Accrued commissions and bonus......................... 212 1,877
Accrued marketing expenses............................ -- 660
Accrued ESPP.......................................... -- 888
Accrued other......................................... 163 909
------ ------
$1,028 $5,696
====== ======
</TABLE>
Stock-Based Compensation
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," in October 1995. This accounting standard permits the use of
either a fair value based method of accounting or the method defined in
Accounting Principles Board Opinion 25 ("APB 25"), "Accounting for Stock Issued
to Employees" to account for stock-based compensation arrangements. Companies
that elect
F-9
<PAGE> 170
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
to employ the method proscribed by APB 25 are required to disclose the pro forma
net income (loss) that would have resulted from the use of the fair value based
method. E.piphany has elected to continue to account for its stock-based
compensation arrangements under the provisions of APB 25, and accordingly, has
included in Note 6 the pro forma disclosures required under SFAS No. 123.
Revenue Recognition
E.piphany generates several types of revenue including the following:
License Fees. E.piphany's standard end user license agreement for
E.piphany's products provides for an initial fee to use the product in
perpetuity up to a maximum number of users. E.piphany also enters into other
license agreement types, which allow for the use of E.piphany's products,
usually restricted by the number of employees, the number of users, or the
license term. Fees from licenses are recognized as revenue upon contract
execution, provided all shipment obligations have been met, fees are fixed or
determinable, collection is probable, and vendor specific objective evidence
exists to allocate the total fee between all elements of the arrangement. Fees
from license agreements which include the right to receive unspecified future
products are recognized over the term of the arrangement or, if not specified,
the estimated economic life of the product.
When licenses are sold together with consulting and implementation
services, license fees are recognized upon shipment, provided that (1) the above
criteria have been met, (2) payment of the license fees is not dependent upon
the performance of the consulting services, and (3) the services do not include
significant alterations to the features and functionality of the software. To
date, services have been essential to the functionality of the software products
for substantially all license agreements entered into which included
implementation services. For these arrangements and other arrangements which
don't meet the above criteria, both the product license revenues and services
revenues are recognized in accordance with the provisions of Statement of
Position ("SOP") 81-1, "Accounting for Performance of Construction Type and
Certain Production Type Contracts." When reliable estimates are available for
the costs and efforts necessary to complete the implementation services, the
Company accounts for the arrangements under the percentage completion contract
method pursuant to SOP 81-1. When such estimates are not available, the
completed contract method is utilized. License revenue recognized pursuant to
SOP 81-1 comprised 76% and 66% of total product revenue for the years ended
December 31, 1998 and 1999, respectively.
E.piphany provides for sales returns based on historical rates of return
which, to date, have not been material.
Maintenance Agreements. Maintenance agreements generally call for E.piphany
to provide technical support and software updates to customers. Revenue on
technical support and software update rights is recognized ratably over the term
of the maintenance agreement and is included in services revenue in the
accompanying statements of operations.
Consulting, Implementation and Training Services. E.piphany provides
consulting, implementation and training services to its customers. Revenue from
such services, when not sold in conjunction with product licenses, is generally
recognized as the services are performed.
As of December 31, 1999, $545,000 of accounts receivable was unbilled due
to services performed in advance of billings.
F-10
<PAGE> 171
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Advertising Costs
The Company expenses all advertising costs as incurred. The Company does
not incur any direct-response advertising costs.
Comprehensive Income (Loss)
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which E.piphany adopted beginning on January 1, 1998. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. The objective
of SFAS No. 130 is to report a measure of all changes in equity of an enterprise
that results from transactions and other economic events of the period other
than transactions with shareholders ("comprehensive income"). Comprehensive
income is the total of net income and all other non-owner changes in equity. For
each of the three years ended December 31, 1999, E.piphany's comprehensive
income did not differ materially from reported net loss.
Computation of Basic and Diluted Net Loss Per Share and Pro Forma Basic and
Diluted Net Loss Per Share
Basic and diluted net loss per common share are presented in conformity
with SFAS No. 128, "Earnings Per Share," for all periods presented. In
accordance with SFAS No. 128, basic net loss per common share has been computed
using the weighted average number of shares of common stock outstanding during
the period, less shares subject to repurchase. Basic and diluted pro forma net
loss per common share, as presented in the statements of operations, has been
computed as described above and also gives effect to the conversion of the
convertible preferred stock (using the if-converted method) from the original
date of issuance (in thousands, except per share amounts).
F-11
<PAGE> 172
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Net loss................................ $(3,149) $(10,330) $(22,390)
======= ======== ========
Basic and diluted:
Weighted average shares of common
stock outstanding.................. 5,486 7,235 14,216
Less: Weighted average shares subject to
repurchase............................ (4,399) (4,936) (3,969)
------- -------- --------
Weighted average shares used in
computing basic and diluted net loss
per common share...................... 1,087 2,299 10,247
======= ======== ========
Basic and diluted net loss per common
share.............................. $ (2.90) $ (4.49) $ (2.19)
======= ======== ========
Net loss.............................. $(10,330) $(22,390)
======== ========
Shares used above....................... 2,299 10,247
Pro forma adjustment to reflect weighted
effect of assumed conversion of
convertible preferred stock
(unaudited)........................... 7,395 7,954
-------- --------
Shares used in computing pro forma basic
and diluted net loss per common share
(unaudited)........................... 9,694 18,201
-------- --------
Pro forma basic and diluted net loss per
common share (unaudited).............. $ (1.07) $ (1.23)
======== ========
</TABLE>
E.piphany has excluded all convertible preferred stock, warrants for
convertible preferred stock, outstanding stock options, and shares subject to
repurchase from the calculation of diluted net loss per common share because all
such securities are antidilutive for all periods presented. The total number of
shares excluded from the calculations of diluted net loss per share were
approximately 8,124,000, 14,952,000, and 16,256,000 for the years ended December
31, 1997, 1998 and 1999, respectively. See Note 6 for further information on
these securities.
Segment Reporting
During 1998, E.piphany adopted SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 requires a new basis of
determining reportable business segments (i.e., the management approach). This
approach requires that business segment information used by management to assess
performance and manage company resources be the source for segment information
disclosure. On this basis, E.piphany is organized and operates as one business
segment, the design, development, and marketing of software solutions.
During the years ended December 31, 1997, 1998 and 1999, E.piphany did not
generate significant revenues in foreign countries and did not have any material
assets in foreign countries.
F-12
<PAGE> 173
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires companies to record
derivative financial instruments on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. In June 1999, the FASB
issued SFAS No. 137, "Accounting For Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133," which
amends SFAS No. 133 to be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000 (or January 1, 2001 for E.piphany). Management
believes that this Statement will not have a material impact on the financial
condition or results of the operations of E.piphany.
In December 1998, the AICPA issued Statement of Position ("SOP") 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions." SOP 98-9 amends SOP 97-2 and SOP 98-4 by extending the deferral
of the application of certain provisions of SOP 97-2 amended by SOP 98-4 through
fiscal years beginning on or before March 15, 1999. All other provisions of SOP
98-9 are effective for transactions entered into in fiscal years beginning after
March 15, 1999. E.piphany does not anticipate that this statement will have a
material impact on its statement of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "SAB 101," "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. We will adopt
SAB 101 as required in the first quarter of 2000. We do not expect the adoption
of SAB 101 to have a material impact on our consolidated results of operations
and financial position.
3. LONG-TERM DEBT
E.piphany had the following long-term debt arrangements as of December 31
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1998 1999
----- ------
<S> <C> <C>
Subordinated convertible debt facility for $10.0 million.
Expires in February 2000. Borrowings bear interest at 10%
and are payable in equal monthly installments of interest
only through June 2001 and equal installments of principal
and interest from June 2001 to December 2002.............. $ -- $5,000
Non-revolving equipment line of credit with a bank for $3.0
million. Expires in March 2000 with all payments due March
2003. Borrowings bear interest at the bank's prime rate
plus 0.5% (9.0% at December 31, 1999)..................... -- 3,000
Non-revolving equipment line of credit with a bank for $1.25
million. Borrowings bear interest at the bank's prime rate
plus 0.5% (9.0% at December 31, 1999) and are payable in
monthly installments through September 2001............... 500 319
----- ------
Total borrowings outstanding.............................. 500 8,319
Less: current portion..................................... (167) (894)
----- ------
Total long-term debt.............................. $ 333 $7,425
===== ======
</TABLE>
F-13
<PAGE> 174
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
All of the debt arrangements above are collateralized by substantially all
of E.piphany's assets. E.piphany must comply with certain covenants under some
of these arrangements including minimum deposits and liquidity ratios.
The subordinated convertible debt facility lender had the option to convert
a portion of the outstanding borrowings under the facility to 351,563 shares of
E.piphany's Series C preferred stock at a price of $6.40 per share. The fair
value of the warrant at the date of issuance was determined to be $391,000 and
was estimated using the Black-Scholes model with the following assumptions:
risk-free interest rate of 5.6%; expected life of 0.25 years; and expected
volatility of 85%. This amount will be recognized as additional interest expense
over the term of this arrangement with the lender. As of December 31, 1999, this
warrant has been exercised.
Borrowings outstanding as of December 31, 1999 are payable as follows (in
thousands):
<TABLE>
<S> <C>
2000............................ $ 894
2001............................ 2,759
2002............................ 4,416
2003............................ 250
------
$8,319
======
</TABLE>
4. COMMITMENTS
E.piphany leases certain equipment and its facilities under operating lease
agreements. The leases expire at various dates through 2004. Future minimum
lease payments under these leases as of December 31, 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C>
2000............................ $2,303
2001............................ 2,331
2002............................ 1,833
2003............................ 1,458
2004............................ 275
------
$8,200
======
</TABLE>
Total rent expense for the years ended December 31, 1997, 1998 and 1999,
was approximately $127,000, $610,000 and $1,220,000, respectively.
5. PREFERRED STOCK
Since inception, E.piphany has issued 11,560,000 shares of preferred stock.
These shares were converted to shares of common stock upon the closing of the
Company's initial public offering (IPO). All outstanding warrants to purchase
preferred stock are now exercisable for common stock. Upon the closing of the
IPO, E.piphany authorized 5,000,000 shares of undesignated preferred stock for
future issuance.
6. COMMON STOCK
During January and February 1997, E.piphany issued 5,600,000 shares of
common stock, under restricted stock purchase agreements, for $0.0005 per share
in exchange for cash. Pursuant to the restricted stock purchase agreements,
E.piphany has the right to repurchase the common stock at the
F-14
<PAGE> 175
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
original purchase price. The repurchase right expires over a 48-month period. In
July 1998, E.piphany's chief executive officer purchased 1,600,000 shares of
common stock under a restricted stock purchase agreement in exchange for a
promissory note (see Note 8). Pursuant to the stock purchase agreement,
E.piphany has the right to repurchase the common stock at the original purchase
price. The repurchase right expires over a 48-month period. As of December 31,
1999, 1,189,583 shares of common stock were subject to repurchase under these
founders agreements. All exercised but unvested stock options are also subject
to repurchase by E.piphany at the original purchase price. As of December 31,
1999 2,115,282 shares of common stock were subject to repurchase under these
stock options agreements.
Effective upon the closing of the IPO, the number of authorized shares of
common stock was increased to 100,000,000 shares.
As of December 31, 1999, E.piphany had reserved the following shares of
authorized but unissued common stock:
<TABLE>
<S> <C>
Stock options outstanding under the 1997 stock option
plan...................................................... 2,945,942
Stock options outstanding under the 1999 stock option
plan...................................................... 203,797
Stock options to be granted under the 1999 stock plan....... 3,410,816
Stock reserved for issuance under the 1999 employee stock
purchase plan............................................. 2,000,000
Warrants.................................................... 31,250
---------
Total shares reserved............................. 8,591,805
=========
</TABLE>
Warrants
In May 1997, E.piphany issued a warrant to purchase 22,124 shares of Series
A preferred stock at $1.13 per share in connection with obtaining a line of
credit. The fair value of the warrant at the date of issuance was estimated
using the Black-Scholes model with the following assumptions: risk-free interest
rate of 6.4%; expected life of 4 years; and expected volatility of 85%. The
value was determined to be immaterial. As of December 31, 1999, this warrant has
been exercised.
In January 1998, E.piphany issued a warrant to purchase shares of Series B
preferred stock at $2.50 per share in connection with obtaining a line of credit
with a bank. The number of shares is calculated based on $97,500 plus a
percentage of borrowings under the revolving line of credit divided by the share
price. The fair value of the warrant at the date of issuance was estimated using
the Black-Scholes model with the following assumptions: risk-free interest rate
of 5.6%; expected life of 3 years; and expected volatility of 85%. The value was
determined to be immaterial. As of December 31, 1999, this warrant has been
exercised for 75,000 shares.
In June 1999, E.piphany issued a warrant to purchase 31,250 shares of
Series C preferred stock at $3.38 per share in connection with obtaining an
equipment lease line. The warrant is exercisable immediately and expires in June
2009. The fair value of the warrant at the date of issuance was determined to be
$141,000 and was estimated using the Black-Scholes model with the following
assumptions: risk-free interest rate of 5.2%; expected life of 3 years; and
expected volatility of 85%. This amount will be recognized as additional
interest expense over the term of this arrangement with the lender.
Upon the closing of the Company's IPO, all warrants to purchase preferred
stock converted to warrants to purchase common stock.
F-15
<PAGE> 176
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Stock-Based Compensation
In connection with the grant of certain stock options to employees during
the years ended December 31, 1998 and 1999, the Company recorded deferred
compensation of approximately $5.9 million, representing the difference between
the deemed value of the common stock for accounting purposes and the option
exercise price or stock sale price at the date of the option grant or stock
sale. Such amount is presented as a reduction of stockholders' equity and
amortized over the vesting period of the applicable options in a manner
consistent with FASB Interpretation No. 28. Approximately $0.7 million and $2.5
million was expensed during the years ended December 31, 1998 and 1999,
respectively. Compensation expense is decreased in the period of forfeiture for
any accrued but unvested compensation arising from the early termination of an
option holder's services.
During the years ended December 31, 1997, 1998 and 1999, E.piphany recorded
stock-based compensation of $1,000, $58,000, and $435,000, respectively, related
to equity instruments issued to non-employees. Stock-based compensation related
to stock options to purchase common stock which are issued to non-employees is
determined based upon the fair value at the date of issuance in accordance with
the provisions of SFAS No. 123.
1999 Employee Stock Purchase Plan
On June 30, 1999, the board of directors approved the adoption of
E.piphany's 1999 Employee Stock Purchase Plan (the "Purchase Plan"). A total of
2,000,000 shares of common stock have been reserved for issuance under the
Purchase Plan. The Purchase Plan permits eligible employees to purchase shares
of common stock through payroll deductions at 85% of the fair market value of
the common stock, as defined in the Purchase Plan. As of December 31, 1999, no
shares had been purchased.
Initial Public Offering
On September 21, 1999, E.piphany completed an IPO of 4,772,500 shares of
its common stock at a price of $16.00 per share and received net proceeds of
approximately $69.9 million.
Stock Split
On June 30, 1999, E.piphany's board of directors approved a 1-for-2 reverse
stock split of E.piphany's outstanding common and preferred shares which was
effective upon E.piphany's IPO. All share and per share information included in
these financial statements have been retroactively adjusted to reflect this
reverse stock split.
Stock Options
In 1997, E.piphany adopted the 1997 Stock Plan (the "1997 Plan") under
which incentive stock options and nonstatutory stock options may be granted to
employees and consultants of E.piphany. The exercise price for incentive stock
options is at least 100% of the fair market value on the date of grant for
employees owning less than 10% of the voting power of all classes of stock and
at least 110% of the fair market value on the date of grant for employees owning
more than 10% of the voting power of all classes of stock. For nonstatutory
stock options, the exercise price is at least 110% of the fair market value on
the date of grant for employees owning more than 10% of voting power of all
classes of stock and at least 85% for employees owning less than 10% of the
voting power of all classes of stock. Options generally expire in 10 years.
Options are immediately exercisable, but shares
F-16
<PAGE> 177
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
so purchased vest over periods determined by the board of directors, generally
four years. Upon termination of employment, unvested shares may be repurchased
by E.piphany for the original purchase price.
On June 30, 1999, the board of directors approved the adoption of
E.piphany's 1999 Stock Plan (the "1999 Plan"). A total of 3,500,000 shares of
common stock have been reserved for issuance related to stock options under the
1999 Plan. As of December 31, 1999, 203,797 shares have been granted.
E.piphany's board of directors determined that no further options would be
granted under the 1997 Plan after the IPO. In addition to the 3,500,000 shares
authorized for the 1999 Plan, the 1997 Plan options authorized but not granted
as of the IPO date were made available for grant under the 1999 Plan.
Accordingly as of December 31, 1999, an aggregate of 3,410,816 shares were
available for future option grants under the 1999 Plan.
E.piphany accounts for its stock option plans pursuant to APB 25 whereby
the difference between the exercise price and the fair value at the date of
grant is recognized as compensation expense. Had compensation expense for stock
option plans been determined consistent with SFAS No. 123, net losses would have
increased to the following pro forma amounts (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Net loss as reported.................... $(3,149) $(10,330) $(22,390)
Net loss pro forma...................... $(3,163) $(10,457) $(24,956)
Net loss per share as reported.......... $ (2.90) $ (4.50) $ (2.19)
Net loss per share pro forma............ $ (2.91) $ (4.55) $ (2.44)
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions for grants in 1997, 1998, and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate................ 5.8 - 6.9% 4.3 - 5.7% 4.5 - 6.2%
Expected life of the option............ 4.5 years 4.5 years 4.5 years
Dividend yield......................... 0% 0% 0%
Volatility............................. 0% 85% 85%
</TABLE>
F-17
<PAGE> 178
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the stock option plan activity under the
stock option plans (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period....................... -- $0.00 1,210 $0.12 1,661 $ 0.57
Granted........................ 1,218 $0.12 2,560 $0.56 3,438 $13.21
Exercised...................... (8) $0.12 (1,540) $0.31 (1,522) $ 1.69
Canceled....................... -- $0.00 (569) $0.25 (427) $ 3.52
------ ------- -------
Outstanding at end of period... 1,210 $0.12 1,661 $0.57 3,150 $13.42
====== ======= =======
Vested and exercisable at end
of period.................... 60 $0.15 156 $0.13 231 $ 3.87
====== ======= =======
Weighted average fair value per
share........................ $ 0.08 $ 0.28 $ 13.42
====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
OPTIONS VESTED
OPTIONS OUTSTANDING AND EXERCISABLE
------------------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
DECEMBER 31, 1999 REMAINING EXERCISE EXERCISE
RANGE OF EXERCISE PRICES NUMBER YEARS PRICE NUMBER PRICE
- ------------------------ ------ --------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
$ 0.12 - $ 0.30..... 122 7.91 $ 0.18 12 $ 0.16
$ 0.40 - $ 0.60..... 281 8.46 $ 0.51 39 $ 0.55
$ 1.00 - $ 2.00..... 258 8.82 $ 1.12 53 $ 1.09
$ 2.70 - $ 4.00..... 523 9.22 $ 3.10 12 $ 4.00
$ 6.00 - $ 6.40..... 655 9.45 $ 6.11 100 $ 6.00
$ 11.00 - $ 11.00..... 1,107 9.64 $ 11.00 15 $11.00
$ 62.00 - $ 88.56..... 121 9.80 $ 73.44 0 $ 0.00
$120.00 - $178.00..... 43 9.92 $165.69 0 $ 0.00
$183.88 - $211.38..... 40 9.96 $200.39 0 $ 0.00
----- ---- ------- --- ------
$ 0.12 - $211.38..... 3,150 9.31 $ 13.42 231 $ 3.87
===== ==== ======= === ======
</TABLE>
During the years ended December 31, 1997 and 1998, E.piphany issued 11,250
and 60,000 shares, respectively, under the 1997 Plan for services rendered. The
fair value of these shares is reflected in operating expenses in the respective
years.
7. INCOME TAXES
E.piphany accounts for income taxes pursuant to SFAS No. 109, "Accounting
for Income Taxes." A valuation allowance has been recorded for the total
deferred tax assets of E.piphany as a
F-18
<PAGE> 179
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
result of uncertainties regarding the realization of the assets based on the
limited operating history of E.piphany, the lack of profitability to date, and
the uncertainty of future profitability. The components of net deferred tax
assets are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
------- --------
<S> <C> <C>
Net operating loss carryforwards................... $ 4,889 $ 10,511
Accruals and reserves.............................. -- 1,455
Plant and equipment................................ -- 150
Startup and organization costs..................... -- 166
Research and development credits................... 333 503
------- --------
Total deferred tax assets.......................... 5,222 12,785
Valuation allowance................................ (5,222) (12,785)
------- --------
Net deferred tax assets............................ $ -- $ --
======= ========
</TABLE>
As of December 31, 1999, E.piphany had net operating loss carryforwards of
approximately $27.5 million and $19.7 million for federal and state tax
purposes, respectively. The federal net operating loss and other credit
carryforwards expire on various dates beginning on 2012 through 2019. The state
net operating loss carryforwards will expire in 2004.
Under current tax law, net operating loss and credit carryforwards
available to offset future income in any given year may be limited upon the
occurrence of certain events, including significant changes in ownership
interests.
The provision for income taxes differs from the expected tax benefit amount
computed by applying the statutory federal income rate of 34% to income (loss)
before taxes as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1997 1998 1999
----- ------ ------
<S> <C> <C> <C>
Federal statutory rate........................ (34.0)% (34.0)% (34.0)%
State taxes, net of federal benefit........... -- -- --
Amortization of stock compensation............ -- (2.92)% (4.45)%
Net operating loss not benefitted............. (34.0)% (31.08)% (29.55)%
----- ------ ------
0% 0% 0%
===== ====== ======
</TABLE>
8. RELATED PARTY TRANSACTIONS
In 1998, E.piphany loaned its chief executive officer $175,000 for
relocation expenses. In accordance with the loan agreement, the entire amount of
the loan was forgiven on March 31, 1999. The loan was charged to compensation
expense and is included in general and administrative expense in the
accompanying statement of operations for the year ended December 31, 1998. The
chief executive officer was also offered a loan of $250,000 per year for two
years, drawable monthly. This loan bears interest at 5.6% per annum compounded
monthly and is repayable by the officer's first stock sales. As of December 31,
1999, $368,000 was outstanding on this loan. As the repayment of this amount was
contingent on future stock sales, this amount has been expensed as paid.
Advances
F-19
<PAGE> 180
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
under the loan were charged to compensation expense in the period in which the
amounts were loaned to the officer, and thus, $104,000 and $250,000 are included
in general and administrative expense in the accompanying statements of
operations for the years ended December 31, 1998 and 1999, respectively. This
chief executive officer was also given a loan to purchase 1,600,000 shares of
common stock at $0.40 per share. This loan is due on July 1, 2008 and accrues
interest at 5.88% per annum.
9. 401(k) PLAN
In January 1999, the Company adopted a 401(k) plan (the "401(k)").
Participation in the 401(k) is available to all employees. Employees are
eligible to participate in the 401(k) at any time beginning with their first day
of employment. Each participant may elect to contribute an amount up to 15% of
his or her annual base salary plus commission and bonus, but not to exceed the
statutory limit as prescribed by the Internal Revenue Code. The Company may make
discretionary contributions to the 401(k). To date, no contributions have been
made by the Company.
10. ACQUISITIONS (UNAUDITED)
The RightPoint Acquisition
On January 4, 2000, E.piphany acquired RightPoint Software, Inc. in a
merger transaction. Under the terms of the Merger Agreement, stockholders of
RightPoint exchanged approximately 0.1185 shares of E.piphany common stock for
each share of RightPoint common stock they owned at the time the merger was
consummated. In addition, options and warrants to acquire RightPoint common
stock were converted as a result of the merger into equivalent options and
warrants for E.piphany common stock, based upon the exchange ratio. E.piphany
expects that the costs directly related to the Merger will be approximately $4.8
million. The total purchase price was approximately $496.8 million, of which
approximately $22.0 million was allocated to in-process research and development
and expensed upon closing of the acquisition as it had not reached technological
feasibility and, in management's opinion, had no alternative future use. The
remaining purchase price consists principally of acquired intangibles and
goodwill which will be amortized over a period of 3 years.
The Octane Acquisition
On March 15, 2000, E.piphany entered into a definitive agreement to acquire
Octane Software, Inc. Octane Software is a next-generation provider of
multi-channel customer interaction applications and infrastructure software for
sales, service and support. Octane Software enables companies to provide
real-time, interactive customer care to engage, acquire and retain customers in
the new Internet economy. Under the terms of the agreement, we will issue
approximately 12.8 million shares of its common stock to the stockholders of
Octane Software. The acquisition is subject to customary closing conditions,
including regulatory approval and the approval of E.piphany's and Octane
Software's stockholders.
E.piphany will account for the acquisition under the purchase method of
accounting and E.piphany expects to allocate a portion of the purchase price to
intangible assets which will be amortized ratably over their estimated useful
lives. In addition, E.piphany expects to incur a write-off related to in-process
research and development upon closing of the transaction.
F-20
<PAGE> 181
E.PIPHANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The iLeverage Acquisition
On March 27, 2000, E.piphany entered into a definitive agreement to acquire
privately held iLeverage Corporation, a start-up company that is developing
marketing solutions for digital marketplaces, for 181,649 shares of E.piphany
common stock. The acquisition will be accounted for as a purchase and is subject
to customary closing conditions, including the approval of iLeverage
stockholders.
The eClass Direct Acquisition
On April 14, 2000, E.piphany entered into a definitive agreement to acquire
privately held eClass Direct, an application service provider of
permission-based e-mail marketing services, for approximately 750,000 shares of
E.piphany common stock. The acquisition will be accounted for as a purchase and
is subject to customary closing conditions, including the approval of eClass
Direct stockholders.
11. SECONDARY OFFERING (UNAUDITED)
In January 2000, E.piphany completed a public offering (the "Offering") of
3,700,000 shares of common stock. E.piphany sold 1,993,864 shares of common
stock and the selling stockholders sold 1,706,136 shares of common stock. In
addition, the underwriters exercised their option to purchase 418,500 shares, of
which 104,342 were from E.piphany and 314,158 were from selling stockholders, to
cover over-allotments of shares. The net proceeds from the Offering totalled
$356 million.
F-21
<PAGE> 182
E.PIPHANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31,
2000
-----------
(UNAUDITED)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 401,268
Short-term investments.................................... 23,452
Accounts receivable, net.................................. 9,317
Prepaid expenses and other assets......................... 3,438
---------
Total current assets................................... 437,475
Property and equipment, net............................... 6,696
Goodwill and purchased intangibles........................ 439,375
Other assets.............................................. 320
---------
Total assets........................................... $ 883,866
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations.............. $ 458
Trade accounts payable.................................... 948
Accrued merger costs...................................... 7,795
Accrued compensation...................................... 5,102
Accrued other............................................. 6,411
Deferred revenue.......................................... 3,617
---------
Total current liabilities.............................. 24,331
Capital lease obligations, net of current portion......... 790
---------
Total liabilities...................................... 25,121
---------
Stockholders' equity:
Convertible preferred stock............................... --
Common stock.............................................. 5
Additional paid-in capital................................ 965,197
Warrants to purchase preferred stock...................... 143
Note receivable........................................... (1,640)
Accumulated and other comprehensive income................ 4
Deferred compensation..................................... (2,125)
Accumulated deficit....................................... (102,839)
---------
Total stockholders' equity............................. 858,745
---------
Total liabilities and stockholders' equity............. $ 883,866
=========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-22
<PAGE> 183
E.PIPHANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1999 2000
------- --------
<S> <C> <C>
Revenues:
Product license........................................... $ 1,136 $ 8,268
Services.................................................. 758 6,147
------- --------
Total revenues......................................... 1,894 14,415
------- --------
Cost of revenues:
Product license........................................... 5 109
Services.................................................. 827 6,020
------- --------
Total cost of revenues................................. 832 6,129
------- --------
Gross profit........................................... 1,062 8,286
------- --------
Operating expenses:
Research and development.................................. 1,294 3,758
Sales and marketing....................................... 2,763 11,212
General and administrative................................ 456 2,257
In-process research and development charge................ -- 22,000
Amortization of goodwill and purchased intangibles........ -- 39,943
Stock-based compensation.................................. 603 477
------- --------
Total operating expenses............................... 5,116 79,647
------- --------
Loss from operations................................... (4,054) (71,361)
Other income (expense), net................................. 95 4,393
------- --------
Net loss............................................... $(3,959) $(66,968)
======= ========
Basic and diluted net loss per share........................ $ (0.84) $ (2.35)
======= ========
Shares used in computing basic and diluted net loss per
share..................................................... 4,733 28,452
======= ========
Pro forma basic and diluted net loss per share.............. $ (0.26) $ (2.35)
======= ========
Shares used in computing pro forma basic and diluted net
loss per share............................................ 15,355 28,452
======= ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-23
<PAGE> 184
E.PIPHANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1999 2000
------- --------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(3,959) $(66,968)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization.......................... 128 467
Allowance for doubtful accounts........................ -- 250
Noncash compensation expense........................... 602 477
In-process research and development charge............. -- 22,000
Amortization of goodwill and purchased intangibles..... -- 39,943
Changes in operating assets and liabilities, net of
effect of RightPoint acquisition:
Accounts receivable.................................. (49) (2,652)
Prepaid expenses and other assets.................... 67 (416)
Trade accounts payable............................... (68) (5,002)
Accrued liabilities.................................. (10) 8,373
Deferred revenue..................................... 134 (680)
------- --------
Net cash used in operating activities............. (3,155) (4,208)
------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (476) (2,414)
Cash acquired in RightPoint acquisition................... -- 1,613
Purchases and sales of investments, net................... -- (23,417)
------- --------
Net cash used in investing activities............. (476) (24,218)
------- --------
Cash flows from financing activities:
Borrowings................................................ 3,000 --
Repayments on line of credit.............................. (31) (8,319)
Principal payments on capital lease obligations........... (5) (68)
Proceeds from secondary offering, net..................... -- 356,361
Repurchase of common stock................................ -- (5)
Repayments on notes receivable............................ -- 185
Repayments of short-swing profits......................... -- 193
Proceeds from sale of common stock........................ 69 337
------- --------
Net cash provided by financing activities......... 3,033 348,684
------- --------
Net increase in cash and cash equivalents................... (598) 320,258
Cash and cash equivalents at beginning of period............ 13,595 81,010
------- --------
Cash and cash equivalents at end of period.................. $12,997 $401,268
======= ========
Non-cash transactions:
Equipment acquired under capital lease.................... $ 99 $ --
======= ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-24
<PAGE> 185
E.PIPHANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, the Company believes that the
disclosures are adequate to make the information presented not misleading. These
condensed consolidated financial statements should be read in conjunction with
the Company's audited financial statements and notes for the year ended December
31, 1999, included elsewhere in this proxy statement/prospectus.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments) which
are, in the opinion of management, necessary to state fairly the results for the
three month period ended March 31, 2000. The results for the three month period
ended March 31, 2000 are not necessarily indicative of the results expected for
the full fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
During the three months ended March 31, 2000, E.piphany established
subsidiaries primarily to extend its direct sales force into international
locations. The consolidated financial statements include the accounts of
E.piphany, Inc. and its wholly owned subsidiaries E.piphany (UK) Limited,
RightPoint Software, Inc., RightPoint Software S.A.R.L. and RightPoint LTD. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's subsidiaries is the local
currency. Accordingly, all assets and liabilities are translated into U.S.
dollars at the current exchange rate as of the applicable balance sheet date.
Revenues and expenses are translated at the average exchange rate prevailing
during the period. Gains and losses resulting from the translation of the
financial statements are reported as a separate component of stockholders'
equity. Foreign currency transaction gains and losses are included in other
income (expense) and as of March 31, 2000 these transactions have not been
material.
3. COMPREHENSIVE INCOME (LOSS)
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which E.piphany adopted beginning on January 1, 1998. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. The objective
of SFAS No. 130 is to report a measure of all changes in equity of an enterprise
that results from transactions and other economic events of the period other
than transactions with shareholders ("comprehensive income"). Comprehensive
income is the total of net income and all other non-owner changes in equity. For
the three months ended March 31, 1999, and the three months ended March 31,
2000, E.piphany's comprehensive income (loss) did not differ materially from
reported net loss.
F-25
<PAGE> 186
E.PIPHANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. COMPUTATION OF BASIC AND DILUTED NET LOSS PER SHARE AND PRO FORMA BASIC AND
DILUTED NET LOSS PER SHARE
Basic and diluted net loss per common share are presented in conformity
with SFAS No. 128, "Earnings Per Share," for all periods presented. In
accordance with SFAS No. 128, basic net loss per common share has been computed
using the weighted average number of shares of common stock outstanding during
the period, less shares subject to repurchase. Basic and diluted pro forma net
loss per common share, as presented in the statements of operations, has been
computed as described above and also gives effect to the conversion of the
convertible preferred stock (using the if-converted method) from the original
date of issuance.
The following table presents the calculation of basic and pro forma basic
net loss per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1999 2000
------- --------
<S> <C> <C>
Net loss.................................................... $(3,959) $(66,968)
Basic and diluted:
Weighted average shares of common stock outstanding....... 8,987 31,729
Less: Weighted average shares subject to repurchase......... (4,254) (3,277)
------- --------
Weighted average shares used in computing basic and diluted
net loss per common share................................. 4,733 28,452
======= ========
Basic and diluted net loss per common share............... $ (0.84) $ (2.35)
======= ========
Net loss.................................................. $(3,959) $(66,968)
======= ========
Shares used above......................................... 4,733 28,452
Pro forma adjustment to reflect weighted effect of assumed
conversion of convertible preferred stock.............. 10,622 --
------- --------
Shares used in computing pro forma basic and diluted net
loss per common share.................................. 15,355 28,452
======= ========
Pro forma basic and diluted net loss per common share..... $ (0.26) $ (2.35)
======= ========
</TABLE>
E.piphany has excluded all convertible preferred stock, warrants for
convertible preferred stock, outstanding stock options, and shares subject to
repurchase from the calculation of diluted net loss per common share because all
such securities are antidilutive for all periods presented. The total number of
shares excluded from the calculations of basic and diluted net loss per share
were approximately 17,471,000 and 7,389,000 for the three months ended March 31,
1999 and March 31, 2000, respectively.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires companies to record
derivative financial instruments on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. The key criterion for hedge
accounting is that the hedging
F-26
<PAGE> 187
E.PIPHANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. In June 1999, the FASB issued SFAS No. 137, "Accounting For
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133," which amends SFAS No. 133 to be effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000 (or January 1,
2001 for E.piphany). This Statement will not have a material impact on the
financial condition or results of the operations of E.piphany.
In December 1998, the AICPA issued Statement of Position ("SOP") 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions." SOP 98-9 amends SOP 97-2 and SOP 98-4 by extending the deferral
of the application of certain provisions of SOP 97-2 which were amended by SOP
98-4 through fiscal years beginning on or before March 15, 1999. All other
provisions of SOP 98-9 are effective for transactions entered into in fiscal
years beginning after March 15, 1999. E.piphany does not anticipate that this
statement will have a material impact on its statement of operations.
6. THE RIGHTPOINT ACQUISITION
On January 4, 2000, E.piphany acquired RightPoint Software, Inc. in a
merger transaction. Under the terms of the Merger Agreement, stockholders of
RightPoint exchanged approximately 0.1185 shares of E.piphany common stock for
each share of RightPoint common stock they owned at the time the merger was
consummated. In addition, options and warrants to acquire RightPoint common
stock were converted as a result of the merger into equivalent options and
warrants for E.piphany common stock, based upon the exchange ratio. The total
purchase price was approximately $496.8 million, of which $22.0 million was
allocated to in-process research and development and expensed upon closing of
the acquisition as it has not reached technological feasibility and, in
management's opinion, had no alternative future use. Purchased intangibles,
representing purchase price in excess of identified tangible and intangible
assets, of approximately $479.3 million were recorded and are being amortized on
a straight-line basis over a useful life of three years. Accumulated
amortization was approximately $39.9 million at March 31, 2000.
The value assigned to acquired in-process research and development was
determined by identifying research projects in areas for which technological
feasibility has not been established. The value was determined by estimating the
costs to develop the acquired in-process technology into commercially viable
products, estimating the resulting net cash flows from such projects, and
discounting the net cash flows back to their present values. The discount rate
includes a factor that takes into account the uncertainty surrounding the
successful development of the acquired in-process technology. If these projects
are not successfully developed, future revenue and profitability of the Company
may be adversely affected. Additionally, the value of the other purchased
intangible assets may be impaired.
In connection with the acquisition, net assets acquired were as follows (in
thousands):
<TABLE>
<S> <C>
Cash, receivables and other current assets.................. $ 3,076
Property, plant and equipment and other noncurrent assets... 817
Note receivable from stockholder............................ 1,185
Purchased intangibles, including in-process technology...... 501,318
Current liabilities assumed................................. (9,633)
--------
Net assets acquired............................... 496,763
========
</TABLE>
F-27
<PAGE> 188
E.PIPHANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following table presents the unaudited pro forma results assuming that
E.piphany had merged with RightPoint at the beginning of fiscal year 1999. Net
income has been adjusted to exclude the write-off of acquired in-process
research and development of approximately $22.0 million and includes
amortization of purchase intangibles of approximately $39.9 million for both of
the three months ended March 31, 1999 and 2000. This information may not
necessarily be indicative of the future combined results of operations of the
Company.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 2000
--------- ---------
<S> <C> <C>
Revenues.................................................... $ 3,207 $ 14,415
Net loss.................................................... $ (66,521) $ (66,968)
Basic net loss per share.................................... $ (13.69) $ (2.35)
</TABLE>
F-28
<PAGE> 189
INDEPENDENT AUDITORS' REPORT
The Board of Directors
RightPoint Software, Inc.:
We have audited the accompanying consolidated balance sheets of RightPoint
Software, Inc. and subsidiary (the Company) as of June 30, 1998 and 1999, and
the related consolidated statements of operations and comprehensive loss,
stockholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of RightPoint
Software, Inc. and subsidiary as of June 30, 1998 and 1999, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
[KPMG LLP SIGNATURE]
Mountain View, California
September 10, 1999
F-29
<PAGE> 190
RIGHTPOINT SOFTWARE, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
------------------- DECEMBER 31,
1998 1999 1999
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,002 $ 4,307 $ 1,463
Short-term investments.................................... -- 3,769 --
Accounts receivable, net of allowance of $0, $15 and $150
at June 30, 1998, 1999 and December 31, 1999,
respectively........................................... 145 728 1,413
Prepaid expenses and other current assets................. 163 153 199
-------- -------- --------
Total current assets.............................. 1,310 8,957 3,075
Property and equipment, net................................. 395 265 817
Other assets................................................ 39 1 1
-------- -------- --------
$ 1,744 $ 9,223 $ 3,893
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................................. $ 140 $ -- $ --
Accounts payable.......................................... 395 464 450
Accrued liabilities....................................... 201 406 5,116
Deferred revenue.......................................... 66 249 654
Repayable grant........................................... 330 236 123
Current portion of capital lease obligation............... 229 244 284
-------- -------- --------
Total current liabilities......................... 1,361 1,599 6,627
Capital lease obligation, less current portion.............. 318 94 396
Commitments
Stockholders' equity:
Convertible preferred stock, $0.01 par value; shares
authorized, issued, and outstanding:
Series A, 2,047 shares with liquidation preference of
$1,822 as of June 30, 1998 and 1999 and December 31,
1999................................................ 20 20 20
Series B, 1,482 shares with liquidation preference of
$3,365 as of June 30, 1998 and 1999 and December 31,
1999................................................ 15 15 15
Series C, 1,673 shares with liquidation preference of
$7,412 as of June 30, 1998 and 1999 and December 31,
1999................................................ 17 17 17
Series D, 2,174 shares with liquidation preference of
$5,000 as of June 30, 1998 and 1999 and December 31,
1999................................................ 22 22 22
Series E, 8,100 shares with liquidation preference of
$-0- as of June 30, 1998 and $11,178 as of June 30
and December 31, 1999, respectively................. -- 81 81
Common stock, $0.01 par value; 25,000, 25,000 and 30,000
shares authorized; 957, 1,108 and 6,120 shares issued
and outstanding at June 30, 1998 and 1999 and December
31, 1999, respectively................................. 10 11 61
Additional paid-in capital................................ 17,537 28,708 37,242
Notes receivable from stockholders........................ (36) -- (1,185)
Deferred compensation..................................... -- -- (5,842)
Accumulated other comprehensive income.................... 103 89 88
Accumulated deficit....................................... (17,623) (21,433) (33,649)
-------- -------- --------
Total stockholders' equity (deficiency)........... 65 7,530 (3,130)
-------- -------- --------
$ 1,744 $ 9,223 $ 3,893
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE> 191
RIGHTPOINT SOFTWARE, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT IN PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
-------------------- -------------------
1998 1999 1998 1999
-------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
License................................................... $ 428 $ 2,819 $ 860 $ 1,248
Service................................................... 378 728 175 948
------- ------- ------- --------
Total revenues.......................................... 806 3,547 1,035 2,196
Cost of revenues:
License................................................... 46 10 -- 3
Service................................................... 90 208 39 1,520
------- ------- ------- --------
Total cost of revenues.................................. 136 218 39 1,523
------- ------- ------- --------
Gross margin............................................ 670 3,329 996 673
Operating expenses:
Research and development.................................. 2,474 2,616 1,185 2,191
Selling and marketing..................................... 3,007 3,301 1,324 4,008
General and administrative................................ 1,221 1,323 570 5,388
Stock-based compensation.................................. -- -- -- 1,382
------- ------- ------- --------
Total operating expenses................................ 6,702 7,240 3,079 12,969
------- ------- ------- --------
Loss from operations.................................... (6,032) (3,911) (2,083) (12,296)
Interest income............................................. 187 188 31 78
Interest expense............................................ (123) (197) (107) (62)
Other income and expenses, net.............................. (60) 110 -- 64
------- ------- ------- --------
Net loss................................................ (6,028) (3,810) (2,159) (12,216)
Other comprehensive income (loss):
Currency translation adjustment........................... 49 (14) (40) (1)
------- ------- ------- --------
Net comprehensive loss.................................. $(5,979) $(3,823) $(2,199) $(12,217)
======= ======= ======= ========
Basic and diluted net loss per share........................ $(10.48) $ (3.83) $ (2.30) $ (5.81)
======= ======= ======= ========
Weighted average shares used in computing basic and diluted
net loss per share........................................ 575 995 940 2,102
======= ======= ======= ========
Pro forma basic and diluted net loss per share.............. $ (0.24) $ (0.18) $ (0.57)
======= ======= ========
Weighted average shares used in computing pro forma basic
and diluted net loss per share............................ 15,788 12,271 21,533
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-31
<PAGE> 192
RIGHTPOINT SOFTWARE, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998 AND 1999, AND THE SIX MONTHS ENDED DECEMBER 31, 1999
(IN THOUSANDS)
(INFORMATION AS OF DECEMBER 31, 1999 AND FOR THE SIX MONTHS THEN ENDED IS
UNAUDITED)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
--------------- --------------- PAID-IN FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS
------ ------ ------ ------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances as of June 30, 1997....... 5,202 $ 52 1,102 $11 $12,601 $ (131)
Issuance of Series D preferred
stock, net of issuance costs of
$43.............................. 2,174 22 -- -- 4,935 --
Issuance of common stock on
exercise of options.............. -- -- 85 1 19 --
Repurchase of common stock......... -- -- (441) (4) (65) 95
Issuance of common stock........... -- -- 211 2 47 --
Currency translation adjustment.... -- -- -- -- -- --
Net loss........................... -- -- -- -- -- --
------ ---- ----- --- ------- -------
Balances as of June 30, 1998....... 7,376 $ 74 957 $10 $17,537 $ (36)
Issuance of Series E preferred
stock for cash and on conversion
of debt, net of issuance costs of
$31.............................. 8,100 81 -- -- 11,119 --
Issuance of common stock on
exercise of options.............. -- -- 166 1 40 --
Repurchase of common stock......... -- -- (21) -- (3) --
Issuance of common stock and
warrants in exchange for
services......................... -- -- 6 -- 15 --
Repayment of notes receivable from
stockholders..................... -- -- -- -- -- 36
Currency translation adjustment.... -- -- -- -- -- --
Net loss........................... -- -- -- -- -- --
------ ---- ----- --- ------- -------
Balances as of June 30, 1999....... 15,476 $155 1,108 $11 $28,708 $ --
Issuance of common stock on
exercise of options
(unaudited)...................... -- -- 4,997 50 85 --
Issuance of common stock to
officers (unaudited)............. -- -- -- -- 1,185 (1,185)
Issuance of common stock and
warrants in exchange for services
(unaudited)...................... -- -- 15 -- 40 --
Deferred stock compensation
(unaudited)...................... -- -- -- -- 7,224 --
Amortization of deferred stock
compensation (unaudited)......... -- -- -- -- -- --
Currency translation adjustment
(unaudited)...................... -- -- -- -- -- --
Net loss (unaudited)............... -- -- -- -- -- --
------ ---- ----- --- ------- -------
Balances as of December 31, 1999
(unaudited)...................... 15,476 $155 6,120 $61 $37,242 $(1,185)
====== ==== ===== === ======= =======
<CAPTION>
ACCUMULATED TOTAL
OTHER STOCKHOLDERS'
DEFERRED COMPREHENSIVE ACCUMULATED EQUITY
COMPENSATION INCOME DEFICIT (DEFICIENCY)
------------ ------------- ----------- -------------
<S> <C> <C> <C> <C>
Balances as of June 30, 1997....... -- $ 55 $(11,595) $ 993
Issuance of Series D preferred
stock, net of issuance costs of
$43.............................. -- -- -- 4,957
Issuance of common stock on
exercise of options.............. -- -- -- 20
Repurchase of common stock......... -- -- -- 26
Issuance of common stock........... -- -- -- 49
Currency translation adjustment.... -- 48 -- 48
Net loss........................... -- -- (6,028) (6,028)
------- ------- -------- -------
Balances as of June 30, 1998....... -- $ 103 $(17,623) $ 65
Issuance of Series E preferred
stock for cash and on conversion
of debt, net of issuance costs of
$31.............................. -- -- -- 11,200
Issuance of common stock on
exercise of options.............. -- -- -- 41
Repurchase of common stock......... -- -- -- (3)
Issuance of common stock and
warrants in exchange for
services......................... -- -- -- 15
Repayment of notes receivable from
stockholders..................... -- -- -- 36
Currency translation adjustment.... -- (14) -- (14)
Net loss........................... -- -- (3,810) (3,810)
------- ------- -------- -------
Balances as of June 30, 1999....... -- $ 89 $(21,433) $ 7,530
Issuance of common stock on
exercise of options
(unaudited)...................... -- -- -- 135
Issuance of common stock to
officers (unaudited)............. -- -- -- --
Issuance of common stock and
warrants in exchange for services
(unaudited)...................... -- -- -- 40
Deferred stock compensation
(unaudited)...................... (7,224) -- -- --
Amortization of deferred stock
compensation (unaudited)......... 1,382 -- -- 1,382
Currency translation adjustment
(unaudited)...................... -- (1) -- (1)
Net loss (unaudited)............... -- -- (12,216) (12,216)
------- ------- -------- -------
Balances as of December 31, 1999
(unaudited)...................... $(5,842) $ 88 $(33,649) $(3,130)
======= ======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-32
<PAGE> 193
RIGHTPOINT SOFTWARE, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
----------------- ------------------
1998 1999 1998 1999
------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(6,028) $(3,810) $(2,159) $(12,216)
Adjustment to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... 257 232 91 89
Issuance of common stock and warrants for services.... 41 15 -- 40
Stock-based compensation.............................. -- -- -- 1,382
Provision for returns and doubtful accounts........... -- 15 -- 135
Loss on disposal of property and equipment............ 43 6 -- --
Proceeds from sale of short-term investments.......... 1,021 -- -- 3,769
Purchases of short-term investments................... -- (3,769) -- --
Changes in operating assets and liabilities:
Accounts receivable................................ 141 (599) (329) (3,430)
Prepaid expenses and other assets.................. 31 48 85 (46)
Accounts payable................................... 205 69 (95) 4,652
Accrued liabilities................................ (573) 205 59 44
Deferred revenue................................... (15) 183 36 3,016
------- ------- ------- --------
Net cash used in operating activities............ (4,877) (7,405) (2,312) (2,565)
------- ------- ------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... -- (109) -- --
Proceeds from sale of property and equipment.............. -- 1 -- --
Other long-term assets.................................... 31 -- 32 --
------- ------- ------- --------
Net cash provided by (used in) investing
activities.................................... 31 (108) 32 --
------- ------- ------- --------
Cash flows from financing activities:
Repayment of capital lease obligation..................... (203) (209) (93) (300)
Repayment of repayable grant.............................. (260) (94) 26 (113)
Proceeds from bridge loan................................. 138 1,890 1,890 --
Repayment of bridge loan.................................. (17) (2) -- --
Repayment of notes receivable from stockholders........... 29 36 36 --
Net proceeds from issuance of common stock................ 24 42 -- 135
Repurchases of common stock............................... -- (3) (45) --
Net proceeds from issuance of preferred stock............. 4,956 9,172 27 --
------- ------- ------- --------
Net cash provided (used in) by financing
activities.................................... 4,667 10,832 1,841 (278)
------- ------- ------- --------
Effect of foreign currency exchange rates on cash and cash
equivalents............................................... 31 (14) (40) (1)
------- ------- ------- --------
Net increase (decrease) in cash and cash equivalents........ (148) 3,305 (479) (2,844)
Cash and cash equivalents at beginning of period............ 1,150 1,002 1,002 4,307
------- ------- ------- --------
Cash and cash equivalents at end of period.................. $ 1,002 $ 4,307 $ 523 $ 1,463
======= ======= ======= ========
Supplemental disclosures of cash flow information:
Cash paid during the period:
Income taxes............................................ $ 3 $ 2 $ 1 $ --
======= ======= ======= ========
Interest................................................ $ 102 $ 66 $ 107 $ 12
======= ======= ======= ========
Noncash financing and investing activities:
Issuance of preferred stock on conversion of debt....... $ -- $ 138 $ -- $ --
======= ======= ======= ========
Property and equipment recorded under capital lease..... $ 76 $ -- $ -- $ 641
======= ======= ======= ========
Repurchase of common stock for promissory notes......... $ 66 $ -- $ -- $ --
======= ======= ======= ========
Issuance of common stock for shareholder note
receivable............................................. -- -- -- 1,185
======= ======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-33
<PAGE> 194
RIGHTPOINT SOFTWARE, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 31, 1999 AND FOR THE SIX MONTHS THEN ENDED IS
UNAUDITED)
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF THE COMPANY
RightPoint Software, Inc. was originally incorporated under the laws of
France in 1991. The Company was reincorporated under the laws of California in
October 1995 and reincorporated under the laws of Delaware in July 1997. The
Company designs, develops, markets, and supports real-time marketing software
for business environments. The Company operates as one business segment.
(b) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the financial
statements of the Company and its wholly owned subsidiary, RightPoint Software
France SARL (formerly neurOagent, S.A.). All significant intercompany accounts
and transactions have been eliminated.
(c) CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. Cash
equivalents as of December 31 1999, June 30, 1999 and 1998 consisted primarily
of money market funds, recorded at cost, which approximates fair value.
The Company classifies its investments as trading and records them at fair
market value.
(d) SOFTWARE DEVELOPMENT COSTS
Statement of Financial Accounting Standard ("SFAS") No. 86, "Accounting for
the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed",
requires the capitalization of software development costs once technological
feasibility has been established. Software development costs are included in
research and development and expensed as incurred. To date, no software
development costs have been capitalized after technological feasibility was
reached, as such costs have not been significant.
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, ranging
from three to five years. Equipment recorded under capital lease and leasehold
improvements are amortized using the straight-line method over the shorter of
the lease-term or estimated useful life of the asset.
(f) REVENUE RECOGNITION
Revenues consist of fees for licenses of the Company's software products,
maintenance, support, consulting, and training.
License revenues are recognized when persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed and determinable and
collectibility is probable.
F-34
<PAGE> 195
RIGHTPOINT SOFTWARE, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 31, 1999 AND FOR THE SIX MONTHS THEN ENDED IS
UNAUDITED)
Maintenance and support revenues are recognized ratably over the term of
the contract, which is generally 12 months. Revenues from consulting and
training are recognized when the services are performed.
(g) FOREIGN CURRENCY
The functional currency of the Company's French subsidiary is the local
currency. All foreign assets and liabilities are translated into U.S. dollars at
the current exchange rates as of the applicable balance sheet date. Revenues and
expenses are translated at the average exchange rate prevailing during the
period. Gains and losses resulting from the translation of the subsidiary's
financial statements are reported as cumulative translation adjustment as a
component of accumulated other comprehensive income in stockholders' equity. Net
gains and losses resulting from foreign exchange transactions are included in
the consolidated statements of operations and were not significant during any of
the periods presented.
(h) USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(i) CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents,
short-term investments and accounts receivable. The Company maintains its cash
and cash equivalents in commercial checking and money market accounts with
high-quality financial institutions.
As of and for the year ended June 30, 1998, two customers comprised 21% and
20%, respectively, of revenue and 0% and 16%, respectively, of accounts
receivable. As of and for the year ended June 30, 1999, three customers
comprised approximately 41%, 13% and 12%, respectively of revenue and 5%, 52%
and 0%, respectively, of accounts receivable. As of and for the six months ended
December 31, 1999, three customers comprised 24%, 12% and 12%, respectively, of
revenue and 18%, 6% and 1%, respectively of accounts receivable.
(j) INCOME TAXES
Income taxes are computed using the asset and liability method. Under this
method, deferred income tax assets and liabilities are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the current enacted tax rates and laws.
F-35
<PAGE> 196
RIGHTPOINT SOFTWARE, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 31, 1999 AND FOR THE SIX MONTHS THEN ENDED IS
UNAUDITED)
(k) STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation using the
intrinsic-value method prescribed in the Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, and related interpretations.
The Company provides additional pro forma disclosures as required under
SFAS No. 123, Accounting for Stock-Based Compensation.
(l) COMPREHENSIVE INCOME AND LOSS
Comprehensive loss consists of net loss and foreign currency translation
adjustments, and is presented in the accompanying consolidated statements of
operations and comprehensive loss. Accumulated other comprehensive loss consists
entirely of cumulative foreign currency translation adjustments. No tax effects
have been recorded.
(m) COMPUTATION OF NET LOSS PER SHARE
Basic net loss per common share has been computed using the weighted
average number of shares of common stock outstanding during the period, less
shares subject to repurchase. Basic and diluted pro forma net loss per common
share, as presented in the statements of operations, has been computed as
described above and also gives effect to the conversion of the convertible
preferred stock (using the if-converted method) from the original date of
issuance.
Calculations of historical and pro forma net loss per share are as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
------------------ -------------------
1998 1999 1998 1999
------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
HISTORICAL
Net loss...................................... $(6,028) $(3,810) $(2,159) $(12,216)
Basic and diluted:
Weighted average shares of common stock
outstanding.............................. 1,047 1,023 982 2,428
Less: Weighted average shares subject to
repurchase............................... 472 28 42 326
------- ------- ------- --------
Weighted average shares used in computing
basic and diluted net loss per common
share....................................... 575 995 940 2,102
======= ======= ======= ========
Basic and diluted net loss per common
share.................................... $(10.48) $ (3.83) $ (2.30) $ (5.81)
======= ======= ======= ========
</TABLE>
F-36
<PAGE> 197
RIGHTPOINT SOFTWARE, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 31, 1999 AND FOR THE SIX MONTHS THEN ENDED IS
UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
------------------ -------------------
1998 1999 1998 1999
------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
PRO FORMA
Net loss.................................... $(6,028) $(3,810) $(2,159) $(12,216)
======= ======= ======= ========
Shares used above........................... 575 995 940 2,102
Pro forma adjustment to reflect weighted
effect of assumed conversion of
convertible preferred stock.............. 14,793 11,331 19,431
------- ------- --------
Shares used in computing pro forma basic and
diluted net loss per common share........ 15,788 12,271 21,533
======= ======= ========
Pro forma basic and diluted net loss per
common share............................. $ (0.24) $ (0.18) $ (0.57)
======= ======= ========
</TABLE>
The Company has excluded all convertible preferred stock, warrants for
convertible preferred stock, outstanding stock options, and shares subject to
repurchase from the calculation of diluted net loss per common share because all
such securities are antidilutive for all periods presented. The total number of
shares excluded from the calculations of diluted net loss per share were
approximately 15,098,000, 25,671,000, 18,157,000, and 28,553,000 for the years
ended June 30, 1998 and 1999 and the six months ended December 31, 1998 and
1999, respectively.
Pro forma diluted net loss per share gives effect to the conversion of
convertible preferred stock. However, outstanding warrants, stock option, and
shares subject to repurchase have been excluded from the calculations of pro
forma diluted net loss per share because all such securities are antidilutive
for all periods presented. The total number of shares excluded from the
calculations of pro forma diluted net loss per share were approximately
6,239,000, 3,526,000 and 7,447,000 for the year ended June 30, 1999 and the six
months ended December 31, 1998 and 1999, respectively.
(n) NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. For a derivative not designated as a hedging
instrument, changes in the fair value of the derivative are recognized in
earnings in the period of change. SFAS No. 133, as amended by SFAS No. 137,
"Deferral of the Effective Date of FASB Statement No. 133" is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. Management does
not believe the adoption of SFAS No. 133 will have a material effect on the
Company's consolidated financial position.
F-37
<PAGE> 198
RIGHTPOINT SOFTWARE, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 31, 1999 AND FOR THE SIX MONTHS THEN ENDED IS
UNAUDITED)
(2) PROPERTY AND EQUIPMENT
Property and equipment as of June 30, 1998 and 1999 and December 31, 1999,
consisted of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31,
1998 1999 1999
-------- -------- ------------
<S> <C> <C> <C>
Computer equipment and software........................ $478 $507 $ 604
Furniture, fixtures, and office equipment.............. 289 312 528
Leasehold improvements................................. 32 32 92
---- ---- ------
799 851 1,224
Less accumulated depreciation and amortization......... 404 586 581
---- ---- ------
$395 $265 $ 643
==== ==== ======
</TABLE>
The cost of assets recorded under capital leases included in property and
equipment is approximately $723,000 as of June 30, 1998 and 1999 and December
31, 1999. The accumulated amortization associated with these assets was
$363,000, $547,000, and $618,000 for the years ended June 30, 1998 and 1999 and
the six months ended December 31, 1999, respectively. Amortization of assets
recorded under capital leases is included in depreciation and amortization
expense.
(3) LEASE COMMITMENTS
The Company leases its main U.S. facilities under an operating lease
agreement expiring in August 2004 and leases its facilities in France under an
operating lease expiring in December 2004. In addition, the Company leases
certain equipment under operating and capital lease agreements.
Future minimum lease payments under capital and noncancelable operating
leases as of June 30, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING CAPITAL OPERATING
JUNE 30, LEASES LEASES
------------ ------- ---------
<S> <C> <C>
2000........................................................ $ 289 $106
2001........................................................ 82 7
2002........................................................ 20 1
Thereafter.................................................. -- --
----- ----
Total minimum lease payments................................ 391 $114
====
Less amount representing imputed interest................... (53)
-----
Present value of minimum lease payment...................... 338
Less current portion........................................ (244)
-----
Long-term portion of capital lease obligation............... $ 94
=====
</TABLE>
Rent expense from operating leases was approximately $417,000, $540,000 and
$458,000 for the years ended June 30, 1998 and 1999 and the six months ended
December 31, 1999, respectively.
F-38
<PAGE> 199
RIGHTPOINT SOFTWARE, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 31, 1999 AND FOR THE SIX MONTHS THEN ENDED IS
UNAUDITED)
In July, 1999 the Company signed a five year lease agreement for its main
U.S. facilities. Annual rent is approximately $891,000 in the first year with
annual incremental increases to $1,042,000 in the fifth year. The lease expires
in August 2004.
(4) FINANCING ARRANGEMENTS
REPAYABLE GRANT AGREEMENTS
As of June 30, 1998 and 1999 and December 31, 1999, the Company had
$330,000, $236,000 and $123,000 respectively, outstanding in the form of an
interest-free repayable grant from a French organization. Under the grant
agreement, payment is due in fiscal 2000.
NOTE PAYABLE
As of June 30, 1998, the Company had a balance outstanding of approximately
$140,000 under a bridge loan agreement that was signed in conjunction with a
convertible debt offering. All outstanding debt was subsequently converted into
Series E Preferred Stock in January 1999.
LEASE AGREEMENT
As of December 31, 1999, the Company had a lease line of credit available
up to a minimum commitment amount of $400,000 and $100,000 for the financing of
equipment and leasehold improvements, respectively. Upon request and formal
approval by the Lessor, these lines would be extended for an additional $400,000
and $100,000, respectively. As of December 31, 1999 there was no outstanding
balance under this line of credit.
(5) STOCKHOLDERS' EQUITY
(a) CONVERTIBLE PREFERRED STOCK
The rights, preferences, and privileges of the preferred stock are as
follows:
- The holders of Series A, B, C, D, and E preferred stock are entitled to
receive noncumulative annual dividends at the rate of $0.07, $0.18,
$0.35, $0.18, and $0.11 per share, respectively, with certain adjustments
for stock splits, stock dividends, recapitalization, and similar events,
when and if declared by the Board of Directors, in preference and
priority to any payment of dividends to holders of common stock.
The liquidation preference for the Series A, B, C, D, and E preferred
stock is $0.89, $2.27, $4.43, $2.30, and $1.38 per share, respectively,
plus all declared but unpaid dividends. If the assets are insufficient to
make payments in full to all holders of preferred stock, assets will be
distributed ratably among the holders of preferred stock in proportion to
the full amounts to which they would have otherwise been entitled. Any
remaining assets shall be distributed ratably among the holders of common
and preferred stock on an "as if converted" basis until such time that
aggregate distributions to holders of Series A, B, C, D, and E preferred
stock equals $1.78, $4.54, $8.86, $6.90, and $4.14 per share,
respectively. After that time, any remaining assets will be distributed
on a pro rata basis to the holders of common stock and
F-39
<PAGE> 200
RIGHTPOINT SOFTWARE, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 31, 1999 AND FOR THE SIX MONTHS THEN ENDED IS
UNAUDITED)
preferred stock, based on the number of shares of common stock held by
each, assuming conversion of all preferred stock.
- At June 30, 1999, each share of Series A, B, C, D and E preferred stock
is convertible into 1.51, 1.55, 2.00, 1.20, and 1.00 shares of common
stock subject to future adjustments for antidilution. Each share of
preferred stock will automatically convert into one share of common
stock, subject to certain adjustments for antidilution, upon the closing
of an underwritten public offering with a per share price reflecting a
valuation of the Company of at least $50,000,000, and with gross proceeds
of at least $20,000,000 or the role of two-thirds of the holders of the
preferred stocks, voting together.
- The holders of preferred stock have voting rights on an "as if converted"
basis.
- The holders of preferred stock have certain registration rights and a
right of first offer in future rounds of financing under certain
conditions.
The Company has reserved 19,431,358 shares of common stock for the
conversion of the preferred stock.
(b) STOCK-BASED COMPENSATION
In connection with the grant of stock options and the sale of common stock
to certain employees during the six months ended December 31, 1999, the Company
recorded deferred compensation of approximately $7,224,000, representing the
difference between the fair value of the common stock and the option exercise
price or stock sale price at the date of the option grant or stock sale. Such
amount is presented as a reduction of stockholders' equity and amortized over
the vesting period of the applicable options in a manner consistent with
Financial Accounting Standards Board Interpretation No. 28. Approximately
$1,382,000 was expensed during the six months ended December 31, 1999.
(c) STOCK OPTION PLANS
The Company adopted stock option plans in October 1995 and July 1996 that
provide for the issuance of incentive and nonstatutory options to purchase
shares of common stock. As of June 30, 1999, the Company has reserved 1,978,176
and 5,458,612 shares of common stock for issuance under the 1995 and 1996 plans,
respectively. Nonstatutory options may be granted to employees and consultants
and incentive options to employees. Options have a term no greater than 10 years
and generally vest 25% at the end of the first year and at a rate of 1/48 per
month thereafter. Options granted under the 1995 and 1996 plans may be exercised
prior to being fully vested. However exercised and unvested shares are subject
to repurchase by the Company at the exercise price. The Company's repurchase
right decreases as shares vest under the original option terms. As of June 30,
1998, 1999, and December 31, 1999 the number of shares outstanding and subject
to repurchase were 466,650, 31,169 and 30,827, respectively.
Vesting of certain options accelerates in full upon a change in control of
the Company.
F-40
<PAGE> 201
RIGHTPOINT SOFTWARE, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 31, 1999 AND FOR THE SIX MONTHS THEN ENDED IS
UNAUDITED)
Nonstatutory options are exercisable at a price not less than 85% of fair
market value of the stock at the date of grant, as determined by the Company's
Board of Directors, unless they are granted to an individual who owns more than
10% of the voting rights of all classes of stock, in which case the exercise
price shall be no less than 110% of the fair market value. Incentive stock
options are exercisable at a price not less than 100% of fair market value of
the stock at the date of grant, as determined by the Company's Board of
Directors, except when they are granted to an employee who owns greater than 10%
of the voting power of all classes of stock, in which case they are exercisable
at a price not less than 110% of fair market value.
The Company has elected to continue using the intrinsic-value-based method
to account for all of its stock-based employee compensation plans. Pursuant to
SFAS No. 123, the Company is required to disclose the pro forma effects on the
net losses of the Company as if the Company had elected to use the fair value
approach to account for all of its stock-based employee compensation plans. Had
compensation cost for the Company's plans been determined consistent with the
fair value approach enumerated in SFAS No. 123, the Company's 1998 and 1999 net
losses would have increased to the following pro forma amounts (in thousands,
except per share data):
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 30,
------------------
1998 1999
------- -------
<S> <C> <C>
Net loss as reported........................................ $(6,028) $(3,810)
Net loss pro forma.......................................... (6,043) (3,871)
Net loss per share as reported.............................. $(10.48) $ (3.83)
Net loss per share pro forma................................ (10.51) (3.89)
</TABLE>
For the years ended June 30, 1998 and 1999 and the six months ended
December 31, 1999, the fair value of each option was estimated using the minimum
value-based method on the date of grant with the following weighted-average
assumptions: no dividend yield; a risk-free interest rate of 7%; and an expected
life of five years.
F-41
<PAGE> 202
RIGHTPOINT SOFTWARE, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 31, 1999 AND FOR THE SIX MONTHS THEN ENDED IS
UNAUDITED)
The following summarizes activity under the plans as of June 30, 1998 and
1999 and December 31, 1999, respectively (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1999 DECEMBER 31, 1999
---------------------- ---------------------- ----------------------
(UNAUDITED)
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF OPTIONS PRICE OF OPTIONS PRICE OF OPTIONS PRICE
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period..... 750 $0.27 2,779 $0.23 5,775 $0.23
Granted................................ 2,513 0.23 3,456 0.23 3,324 0.51
Exercised.............................. (85) 0.23 (166) 0.25 (4,997) 0.32
Canceled............................... (399) 0.26 (294) 0.24 (184) 0.44
------ ------ ------
Outstanding at end of period........... 2,779 0.23 5,775 0.23 3,918
====== ====== ======
Vested at period end................... 287 1,497 311 1.22
====== ====== ======
Weighted-average fair value of options
granted during the period............ 0.16 0.16 0.28
</TABLE>
The following table summarizes information about stock options outstanding
as of June 30, 1999 (in thousands, except per share data):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------ -------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICE OPTIONS LIFE (YEARS) PRICE OPTIONS PRICE
- ------------ ------- ------------ --------- ------- ---------
<S> <C> <C> <C> <C> <C>
0.15 - 0.29 5,775 9.07 0.23 5,775 0.23
====== ======
</TABLE>
(d) WARRANTS
The Company values all warrants issued using an option pricing model with
the following assumptions: no dividend yield; risk-free interest rates ranging
between 5.5% and 7.0%; contractual lives ranging from five to ten years, and 65%
expected volatility. The fair value assigned to warrants is recorded as
compensation expense by the Company. The Company has reserved the corresponding
number of shares for the exercise of these warrants. The following warrants were
issued and outstanding during the periods presented and as of December 31, 1999:
In July, 1999, the Company issued warrants to purchase 25,000 shares of
common stock at a price of $2.80 per share. These warrants are exercisable
at any time prior to the expiration date of September 2004. In addition, in
conjunction with the signing of the lease agreement for a lease line of
credit, the Company issued warrants to the Lessor for the purchase of
16,304 shares of Series E Preferred Stock at a price of $1.38 per share.
These warrants are exercisable at any time prior to the expiration date of
September 2009, or 5 years from the effective date of the Company's initial
public offering, whichever is earlier. An additional 16,304 shares are
issuable to
F-42
<PAGE> 203
RIGHTPOINT SOFTWARE, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 31, 1999 AND FOR THE SIX MONTHS THEN ENDED IS
UNAUDITED)
the Lessor at a price of $1.38 per share if the Company requests an
increase to the line above the initial commitment amount discussed above
under Financing Arrangements.
As of June 30, 1999 and 1998, the Company has three transferable warrants
to purchase 16,439, 16,948, and 18,324 shares of common stock at a price of
$1.46, $2.22, and $1.91 per share, respectively, outstanding. These
warrants are exercisable at any time prior to the expiration dates of
February 2003, October 2003, and December 2005, respectively. As of June
30, 1999, the Company has a warrant outstanding to purchase 48,268 shares
of common stock at a price of $1.91 per share. This warrant is exercisable
at any time prior to the expiration date of August 2008.
As of June 30, 1999, the Company has warrants outstanding to purchase a
total of 294,296 shares of common stock at a price of $0.23 per share.
These warrants are exercisable at any time prior to their expiration date
of January 2009.
(6) INCOME TAXES
The types of temporary differences that give rise to significant portions
of the Company's deferred tax assets and liabilities are set out below (in
thousands).
<TABLE>
<CAPTION>
AS OF JUNE 30,
------------------
1998 1999
------- -------
<S> <C> <C>
Deferred tax assets:
Accruals and reserves..................................... $ 76 $ 168
Plant and equipment....................................... 24 13
State income taxes........................................ 1 1
Research credit carryforward.............................. 306 480
Net operating loss carryforwards.......................... 5,910 6,935
------- -------
Gross deferred tax assets................................... 6,317 7,597
Valuation allowance......................................... (6,317) (7,597)
------- -------
Total deferred tax assets................................... -- --
Deferred tax liabilities.................................... $ -- $ --
======= =======
</TABLE>
The Company has provided a valuation allowance due to the uncertainty of
generating future profits that would allow for the realization of such deferred
tax assets.
As of June 30, 1999, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $17,500,000 and
$11,100,000, respectively, available to reduce future income subject to income
taxes. The federal carryforward will expire from 2010 to 2019. The California
net operating loss carryforwards expire in 2003.
The Company also has credit carryforwards for federal and California income
tax return purposes of approximately $269,000 and $211,000, respectively,
available to reduce future income subject to income taxes. The federal credit
carryforward will expire from 2010 to 2019, while the California credit may be
carried forward indefinitely.
F-43
<PAGE> 204
RIGHTPOINT SOFTWARE, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF DECEMBER 31, 1999 AND FOR THE SIX MONTHS THEN ENDED IS
UNAUDITED)
As of the year ended June 30, 1998 and 1999, the Company had net deferred
tax assets of approximately $6,317,000 and $7,597,000 respectively. The net
deferred tax assets have been fully offset by valuation allowances. The net
valuation allowance increased by $2,614,000 and $1,281,000 during the years
ended June 30, 1998 and 1999, respectively.
(7) RELATED PARTY TRANSACTIONS
In June 1994, the Company's French subsidiary entered into an exclusive
license agreement with its founder, who is also a director, to use and market
certain technology in certain territories in exchange for an annual royalty fee
payable in quarterly installments. The Company also has an option to purchase
the technology for $700,000 in the event that the licensor fails to perform any
significant obligations or during the six months prior to the contract
expiration in 2004. This agreement was amended and restated in October 1995
under substantially the same terms and conditions. The amounts paid under this
license arrangement for the years ended June 30, 1999 and 1998, was $51,000 per
year.
A second license for the technology was entered into on October 23, 1995,
between the Company and the same individual owner of this technology. Annual
royalties of $800 are payable under the agreement. The agreement licensed the
Company to distribute the technology in certain territories. The license expires
on July 18, 2004, with the licensee having the option to purchase all interests
in the technology for $10,000 provided that the Company's option to purchase the
first technology license is exercised.
In January 1999, the Company entered into an agreement with Edify
Corporation, who is also a Series E preferred shareholder, to distribute certain
RightPoint software products at a discounted price to Edify for a minimum
nonrefundable distribution fee payable to the Company in quarterly installments
over 12 months. As of June 30, 1999 and December 31, 1999, the Company has
recognized $417,000 and $667,000, respectively, of this minimum nonrefundable
distribution fee as revenue.
F-44
<PAGE> 205
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Octane Software, Inc.:
We have audited the accompanying consolidated balance sheets of Octane
Software, Inc. and subsidiaries (the "Company") as of December 31, 1998 and 1999
and the related consolidated statements of operations, shareholders' equity
(deficiency) and cash flows for the period from September 9, 1997 (inception) to
December 31, 1997 and for the years ended December 31, 1998 and 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1998 and 1999 and the results of its operations and its cash flows for the
period from September 9, 1997 (inception) to December 31, 1997 and for the years
ended December 31, 1998 and 1999 in conformity with generally accepted
accounting principles in the United States of America.
Deloitte & Touche LLP
/s/ Deloitte & Touche LLP
San Jose, California
March 22, 2000
F-45
<PAGE> 206
OCTANE SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------- ------------
1998 1999 2000
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents...................................... $ 1,927,615 $ 8,223,786 $ 30,607,292
Short-term investments.................................... 2,035,327 -- --
Accounts receivable, net of reserve for doubtful accounts
of $35,000, $176,700 and $468,190....................... 633,860 735,020 4,519,325
Prepaid expenses and other current assets................. 34,535 379,582 787,422
----------- ------------ ------------
Total current assets................................ 4,631,337 9,338,388 35,914,039
Property and equipment, net................................. 422,455 1,623,743 2,848,535
Restricted cash............................................. 92,011 -- --
Goodwill and other intangibles, net......................... -- -- 99,267,259
Deposits and other assets................................... -- 311,934 322,163
----------- ------------ ------------
Total assets................................................ $ 5,145,803 $ 11,274,065 $138,351,996
=========== ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable.......................................... $ 276,465 $ 877,744 $ 553,794
Accrued liabilities....................................... 80,774 1,809,812 4,112,484
Unearned revenue.......................................... -- 895,703 4,085,511
Current portion of long-term debt......................... -- 197,863 202,108
----------- ------------ ------------
Total current liabilities........................... 357,239 3,781,122 8,953,897
Deferred rent............................................... -- 73,664 100,811
Long-term debt, net of current portion...................... -- 339,409 286,919
Commitments and contingencies (Note 9)
Redeemable convertible preferred stock:
No par value; shares authorized: 1998 -- 4,650,000;
1999 -- 9,600,000 (aggregate redemption and liquidation
value: 1998 -- $6,200,000; 1999 -- 21,539,884):
Series A; shares issued and outstanding: 4,650,000,
4,650,000 and none, respectively..................... 6,177,705 6,197,796 --
Series B; shares issued and outstanding: none,
4,778,780 and none, respectively..................... -- 15,313,121 --
----------- ------------ ------------
Total redeemable convertible preferred stock........ 6,177,705 21,510,917 --
Shareholders' equity (deficiency):
Convertible preferred stock:
No par value; shares authorized: 13,350,000 (aggregate
liquidation value: $50,354,106):
Series A: shares issued and outstanding: 4,650,000.... -- -- 6,197,796
Series B: shares issued and outstanding: 4,778,780.... -- -- 15,313,121
Series C: shares issued and outstanding: 3,522,540.... -- -- 28,780,973
----------- ------------ ------------
Total convertible preferred stock................... -- -- 50,291,890
Common stock; no par value; shares authorized: 1998 and
1999 -- 22,500,000; 2000 -- 25,000,000; shares issued
and outstanding: 5,835,000, 6,122,212 and 9,744,189,
respectively............................................ 49,700 8,569,080 185,078,975
Notes receivable from shareholders........................ (49,400) (57,476) (1,128,837)
Deferred stock compensation............................... -- (4,661,940) (71,299,564)
Accumulated deficit....................................... (1,389,441) (18,280,711) (33,932,095)
----------- ------------ ------------
Total shareholders' equity (deficiency)............. (1,389,141) (14,431,047) 129,010,369
----------- ------------ ------------
Total liabilities and shareholders' equity
(deficiency)........................................ $ 5,145,803 $ 11,274,065 $138,351,996
=========== ============ ============
</TABLE>
See notes to consolidated financial statements.
F-46
<PAGE> 207
OCTANE SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 9, THREE MONTHS
1997 YEARS ENDED ENDED
(INCEPTION) TO DECEMBER 31, MARCH 31,
DECEMBER 31, -------------------------- --------------------------
1997 1998 1999 1999 2000
-------------- ----------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product licenses............. $ -- $ -- $ 647,272 $ -- $ 1,879,910
Services..................... 248,109 2,938,442 2,834,891 879,310 1,622,371
-------- ----------- ------------ ----------- ------------
Total revenues 248,109 2,938,442 3,482,163 879,310 3,502,281
Cost of revenues (exclusive of
stock-based
compensation(*))............. 138,983 1,651,849 1,663,150 570,808 1,531,637
-------- ----------- ------------ ----------- ------------
Gross profit................... 109,126 1,286,593 1,819,013 308,502 1,970,644
-------- ----------- ------------ ----------- ------------
Costs and expenses:
Research and development..... 50,168 1,136,627 4,527,847 735,119 2,431,262
Sales and marketing.......... 39 514,552 6,793,993 773,435 5,353,205
General and administrative... 34,362 1,075,215 3,794,256 510,635 3,973,316
Stock-based
compensation(*)........... -- -- 1,218,769 95,158 4,433,188
-------- ----------- ------------ ----------- ------------
Total costs and
expenses................ 84,569 2,726,394 16,334,865 2,114,347 16,190,971
-------- ----------- ------------ ----------- ------------
Income (loss) from
operations................... 24,557 (1,439,801) (14,515,852) (1,805,845) (14,220,327)
Other income (expense):
Interest income.............. -- 48,557 202,448 32,311 274,490
Interest expense............. -- (22,754) (68,539) -- (27,880)
-------- ----------- ------------ ----------- ------------
Total other income, net... -- 25,803 133,909 32,311 246,610
-------- ----------- ------------ ----------- ------------
Net income (loss).............. $ 24,557 $(1,413,998) $(14,381,943) $(1,773,534) $(13,973,717)
Accretion and deemed dividend
on preferred stock........... -- -- 2,509,327 2,332 1,677,667
-------- ----------- ------------ ----------- ------------
Net income (loss) available to
common shareholders.......... $ 24,557 $(1,413,998) $(16,891,270) $(1,775,866) $(15,651,384)
======== =========== ============ =========== ============
(*) Stock-based compensation:
Cost of revenues.......... $ -- $ -- $ 173,937 $ 14,274 $ 664,978
Research and
development............. -- -- 354,413 37,112 1,205,827
Sales and marketing....... -- -- 264,675 24,741 1,469,602
General and
administrative.......... -- -- 425,744 19,031 1,092,781
-------- ----------- ------------ ----------- ------------
$ -- $ -- $ 1,218,769 $ 95,158 $ 4,433,188
======== =========== ============ =========== ============
</TABLE>
See notes to consolidated financial statements.
F-47
<PAGE> 208
OCTANE SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
COMMON STOCK PREFERRED STOCK RECEIVABLE DEFERRED
------------------------ ------------------------ FROM SHARE- STOCK
SHARES AMOUNT SHARES AMOUNT HOLDERS COMPENSATION
--------- ------------ ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances, September 9, 1997 (inception)....... -- $ -- -- $ -- $ -- $ --
Net income....................................
--------- ------------ ---------- ----------- ----------- ------------
Balances, December 31, 1997................... -- -- -- -- -- --
Issuance of founders' common stock for notes
receivable and cash.......................... 5,835,000 49,700 (49,400)
Net loss......................................
--------- ------------ ---------- ----------- ----------- ------------
Balances, December 31, 1998................... 5,835,000 49,700 -- -- (49,400) --
Issuance of common stock for notes receivable
and cash..................................... 60,000 13,125 (3,750)
Accrued interest on notes receivable.......... (4,326)
Repurchase of founders' stock................. (60,000) (400)
Exercise of stock options for cash............ 287,212 91,848
Deferred stock compensation................... 5,880,709 (5,880,709)
Amortization of deferred stock
compensation................................. 1,218,769
Warrants for financing arrangement............ 34,098
Accretion for redemption value on Series A and
B preferred stock............................
Deemed dividend on Series B preferred stock... 2,500,000
Net loss......................................
--------- ------------ ---------- ----------- ----------- ------------
Balances, December 31, 1999................... 6,122,212 8,569,080 -- -- (57,476) (4,661,940)
Reclassification of Series A and B preferred
stock from redeemable preferred stock*....... 9,428,780 21,510,917
Sale of Series C preferred stock*............. 3,522,540 28,780,973
Deemed dividend on Series C preferred
stock*....................................... 1,677,667
Issuance of common stock and stock options for
acquisition of business*..................... 1,049,992 100,984,339
Accrued interest on notes receivable*......... (12,610)
Exercise of stock options for cash and notes
receivable*.................................. 2,581,985 2,781,577 (1,058,751)
Deferred stock compensation*.................. 71,070,812 (71,070,812)
Amortization of deferred stock
compensation*................................ 4,433,188
Repurchase of common stock*................... (10,000) (4,500)
Net loss*.....................................
--------- ------------ ---------- ----------- ----------- ------------
Balances, March 31, 2000*..................... 9,744,189 $185,078,975 12,951,320 $50,291,890 $(1,128,837) $(71,299,564)
========= ============ ========== =========== =========== ============
<CAPTION>
ACCUMULATED SHAREHOLDERS'
EARNINGS EQUITY
(DEFICIT) (DEFICIENCY)
------------ -------------
<S> <C> <C>
Balances, September 9, 1997 (inception)....... $ -- $ --
Net income.................................... 24,557 24,557
------------ ------------
Balances, December 31, 1997................... 24,557 24,557
Issuance of founders' common stock for notes
receivable and cash.......................... 300
Net loss...................................... (1,413,998) (1,413,998)
------------ ------------
Balances, December 31, 1998................... (1,389,441) (1,389,141)
Issuance of common stock for notes receivable
and cash..................................... 9,375
Accrued interest on notes receivable.......... (4,326)
Repurchase of founders' stock................. (400)
Exercise of stock options for cash............ 91,848
Deferred stock compensation................... --
Amortization of deferred stock
compensation................................. 1,218,769
Warrants for financing arrangement............ 34,098
Accretion for redemption value on Series A and
B preferred stock............................ (9,327) (9,327)
Deemed dividend on Series B preferred stock... (2,500,000) --
Net loss...................................... (14,381,943) (14,381,943)
------------ ------------
Balances, December 31, 1999................... (18,280,711) (14,431,047)
Reclassification of Series A and B preferred
stock from redeemable preferred stock*....... 21,510,917
Sale of Series C preferred stock*............. 28,780,973
Deemed dividend on Series C preferred
stock*....................................... (1,677,667) --
Issuance of common stock and stock options for
acquisition of business*..................... 100,984,339
Accrued interest on notes receivable*......... (12,610)
Exercise of stock options for cash and notes
receivable*.................................. 1,722,826
Deferred stock compensation*.................. --
Amortization of deferred stock
compensation*................................ 4,433,188
Repurchase of common stock*................... (4,500)
Net loss*..................................... (13,973,717) (13,973,717)
------------ ------------
Balances, March 31, 2000*..................... $(33,932,095) $129,010,369
============ ============
</TABLE>
- -------------------------
* Unaudited
See notes to consolidated financial statements.
F-48
<PAGE> 209
OCTANE SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 9,
1997 YEARS ENDED THREE MONTHS ENDED
(INCEPTION) TO DECEMBER 31, MARCH 31,
DECEMBER 31, -------------------------- ---------------------------
1997 1998 1999 1999 2000
-------------- ----------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................. $ 24,557 $(1,413,998) $(14,381,943) $ (1,773,534) $(13,973,717)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Provision for doubtful accounts.............. -- 35,000 141,700 -- 287,554
Depreciation and amortization................ 318 45,588 280,029 47,234 1,770,312
Stock-based compensation expense............. -- -- 1,218,769 95,158 4,433,188
Noncash interest expense (income), net....... -- -- 23,896 1,837 (12,610)
Loss on disposal of equipment................ -- -- 8,556 -- --
Changes in assets and liabilities:
Accounts receivable........................ (64,055) (604,805) (242,860) 82,505 (4,042,120)
Prepaid expenses and other current
assets................................... (23,536) (10,999) (345,047) 9,913 (407,840)
Accounts payable........................... 78,750 197,715 601,279 (133,758) (606,672)
Accrued liabilities........................ 1,825 78,949 1,729,038 219,414 2,269,262
Unearned revenue........................... -- -- 895,703 -- 3,189,808
Deferred rent.............................. -- -- 73,664 15,000 27,147
-------- ----------- ------------ ------------ ------------
Net cash provided by (used in) operating
activities............................. 17,859 (1,672,550) (9,997,216) (1,436,231) (7,065,688)
-------- ----------- ------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of short-term investments... -- -- 2,035,327 2,035,327 --
Purchase of short-term investments............. -- (2,035,327) -- -- --
Purchase of property and equipment............. (11,534) (456,827) (1,499,527) (136,386) (1,407,575)
Proceeds from sale of property and equipment... -- -- 9,654 -- --
Decrease (increase) in restricted cash......... -- (92,011) 92,011 36,400 --
Increase in deposits and other assets.......... -- -- (283,629) -- (10,229)
Cash from acquired business.................... -- -- -- -- 415,944
-------- ----------- ------------ ------------ ------------
Net cash provided by (used in) investing
activities............................. (11,534) (2,584,165) 353,836 1,935,341 (1,001,860)
-------- ----------- ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt................... -- -- 630,751 -- --
Repayment of long-term debt.................... -- -- (93,479) -- (48,245)
Proceeds from issuance of redeemable preferred
stock, net of issuance costs................. -- 6,177,705 15,301,456 13,076 --
Proceeds from issuance of preferred stock, net
of issuance costs............................ -- -- -- -- 28,780,973
Proceeds from issuance of common stock......... -- 300 9,375 -- --
Proceeds from exercise of stock options........ -- -- 91,848 4,068 1,722,826
Repurchase of common stock..................... -- -- (400) -- (4,500)
-------- ----------- ------------ ------------ ------------
Net cash provided by financing
activities............................. -- 6,178,005 15,939,551 17,144 30,451,054
-------- ----------- ------------ ------------ ------------
Net increase in cash and equivalents............. 6,325 1,921,290 6,296,171 516,254 22,383,506
Cash and equivalents, beginning of period........ -- 6,325 1,927,615 1,927,615 8,223,786
-------- ----------- ------------ ------------ ------------
Cash and equivalents, end of period.............. $ 6,325 $ 1,927,615 $ 8,223,786 $ 2,443,869 $ 30,607,292
======== =========== ============ ============ ============
Supplemental cash flow information:
Cash paid for interest......................... $ -- $ 22,754 $ 621 $ 62 $ 11,314
======== =========== ============ ============ ============
Noncash investing and financing activities:
Issuance of common stock in exchange for note
receivable................................... $ -- $ 49,400 $ 3,750 $ -- $ 1,058,751
======== =========== ============ ============ ============
Issuance of warrants -- common stock in
connection with financing arrangement........ $ -- $ -- $ 34,098 $ -- $ --
======== =========== ============ ============ ============
Issuance of warrants -- Series A preferred
stock in connection with financing
arrangement.................................. $ -- $ -- $ 22,474 $ 22,474 $ --
======== =========== ============ ============ ============
Issuance of common stock and stock options for
acquisition of business...................... $ -- $ -- $ -- $ -- $100,984,339
======== =========== ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-49
<PAGE> 210
OCTANE SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM SEPTEMBER 9, 1997 (INCEPTION) TO DECEMBER 31, 1997,
THE YEARS ENDED DECEMBER 31, 1998 AND 1999 AND THREE MONTHS ENDED
MARCH 31, 1999 (UNAUDITED) AND 2000 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization -- Octane Software, Inc. (the "Company"), was formed on
September 9, 1997 (inception). The Company provides customer care solutions for
electronic commerce and other critical Internet operations. Since its inception,
the Company has primarily been involved in raising capital, recruiting
personnel, and developing and marketing its software products.
Principles of Consolidation -- The consolidated financial statements
include the Company and its wholly-owned subsidiaries: Octane International and
Octane Australia Pty Ltd. All significant intercompany transactions and amounts
are eliminated in consolidation.
Use of Estimates -- The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk -- Financial instruments that potentially
subject the Company to concentration of credit risk consist of trade
receivables. However, the Company's credit risk is mitigated by its credit
evaluation process and the reasonably short collection terms. The Company does
not require collateral or other security to support accounts receivable and
maintains reserves for potential credit losses.
Cash and Equivalents -- The Company considers all highly liquid
investments, with a remaining maturity from the date of purchase of ninety days
or less, to be cash equivalents. Cash equivalents consisted of $1,264,494 and
$4,094,414 held in a money market account with a bank at December 31, 1998 and
1999, respectively, and $4,000,652 in commercial paper at December 31, 1999.
Restricted Cash -- Restricted cash consisted of certificates of deposit
which were restricted from use pursuant to certain lease agreements.
Short-Term Investments -- The Company's short-term investments are
classified as available-for-sale. The investments are carried at cost, which
approximated fair value at December 31, 1998. Short-term investments at December
31, 1998 consisted of $2,035,327 in certificates of deposit with a bank.
Property and Equipment -- Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of three to five years. Leasehold improvements are amortized over
the shorter of the lease term or the useful lives of the improvements.
Software Development Costs -- Costs for the development of new software
products and substantial enhancements to existing software products are expensed
as incurred until technological feasibility has been established, at which time
any additional development costs would be capitalized in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, Computer
F-50
<PAGE> 211
OCTANE SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM SEPTEMBER 9, 1997 (INCEPTION) TO DECEMBER 31, 1997,
THE YEARS ENDED DECEMBER 31, 1998 AND 1999 AND THREE MONTHS ENDED
MARCH 31, 1999 (UNAUDITED) AND 2000 (UNAUDITED)
Software To Be Sold, Leased, or Otherwise Marketed. Because the Company believes
its current process for developing software is essentially completed
concurrently with the establishment of technological feasibility, no costs have
been capitalized to date.
Costs of Software Developed for Internal Use -- Effective January 1, 1999,
the Company adopted the American Institute of Certified Public Accountants
Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, which requires the
capitalization of direct costs after management commits to funding a project it
believes will be completed and used to perform the functions intended. The
adoption of SOP 98-1 did not have a significant impact on the Company's
financial position, results of operations or cash flows as of and for the year
ended December 31, 1999, as the Company generally does not develop software for
internal use.
Revenue Recognition -- The Company's revenue recognition policy is
consistent with SOP No. 97-2, Software Revenue Recognition, as amended. License
revenues are comprised of fees for the Company's software products. Revenue from
license fees is recognized when an agreement has been signed, delivery of the
product has occurred, no uncertainty exists about customer acceptance, the fee
is fixed or determinable, collectibility is probable and vendor-specific
objective evidence of fair value exists to allocate a portion of the total fee
to any undelivered elements of the arrangement. For electronic delivery, the
software is considered to have been delivered when the Company has provided the
customer with the access codes that allow for immediate possession of the
software. If the fee due from the customer is not fixed or determinable, revenue
is recognized as payments become due from the customer. If the customer uses the
Company to install the product, license revenue is deferred until installation
has occurred.
Services revenues are comprised of revenue from support arrangements and
consulting fees. Support arrangements do not provide for specified upgrade
rights and provide technical support and the right to unspecified upgrades on an
if-and-when-available basis. Revenue from support arrangements (which are
typically one year) is recognized ratably over the remaining term of the support
agreement. If support or consulting services are included in an arrangement that
includes a license agreement, amounts related to support or consulting are
allocated based on vendor-specific objective evidence. Vendor-specific objective
evidence for support and professional services is based on the price when such
elements are sold separately, or, when not sold separately, the price as
established by management having the relevant authority. Consulting and training
revenue is recognized when provided to the customer.
Income Taxes -- Deferred tax liabilities are recognized for future taxable
amounts, and deferred tax assets are recognized for future deductions, net of a
valuation allowance to reduce net deferred tax assets to amounts that are more
likely than not to be realized.
Stock-Based Compensation -- The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees.
F-51
<PAGE> 212
OCTANE SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM SEPTEMBER 9, 1997 (INCEPTION) TO DECEMBER 31, 1997,
THE YEARS ENDED DECEMBER 31, 1998 AND 1999 AND THREE MONTHS ENDED
MARCH 31, 1999 (UNAUDITED) AND 2000 (UNAUDITED)
Impairment of Long-Lived Assets and Long-Lived Assets To Be Disposed
Of -- The Company evaluates its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets or intangibles may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future undiscounted net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
Certain Significant Risks and Uncertainties -- The Company operates in the
software industry, and accordingly, can be affected by a variety of factors. For
example, management of the Company believes that changes in any of the following
areas could have a significant negative effect on the Company in terms of its
future financial position, results of operations or cash flows: the ability to
increase revenues; the hiring, training and retention of key employees;
development of sales distribution capabilities; market acceptance of the
Company's products under development; fundamental changes in the technology
underlying the Company's software products; arbitration, litigation or other
claims against the Company; adverse changes in international market conditions;
successful and timely completion of product development efforts; product
introductions by competitors and the ability to obtain additional financing.
Comprehensive Income (Loss) -- Comprehensive income, as defined, includes
all changes in shareholders' equity (deficiency) during a period from non-owner
sources. To date, the Company has not had any significant transactions that are
required to be reported in other comprehensive income (loss).
Recently Issued Accounting Standards -- In June 1998, the FASB issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, which
defines derivatives, requires that all derivatives be carried at fair value, and
provides for hedge accounting when certain conditions are met. SFAS No. 133 is
effective for the Company in fiscal 2001. Although the Company has not fully
assessed the implications of SFAS No. 133, the Company does not believe adoption
of this statement will have a material impact on its financial position or
results of operations.
Unaudited Interim Financial Information -- The interim financial
information as of March 31, 2000 and for the three months ended March 31, 1999
and 2000 is unaudited and has been prepared on the same basis as the audited
financial statements. In the opinion of management, such unaudited financial
information includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the interim information.
Operating results for the three months ended March 31, 2000 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000.
F-52
<PAGE> 213
OCTANE SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM SEPTEMBER 9, 1997 (INCEPTION) TO DECEMBER 31, 1997,
THE YEARS ENDED DECEMBER 31, 1998 AND 1999 AND THREE MONTHS ENDED
MARCH 31, 1999 (UNAUDITED) AND 2000 (UNAUDITED)
2. PROPERTY AND EQUIPMENT, NET
Property and equipment at December 31 are comprised of the following:
<TABLE>
<CAPTION>
1998 1999
-------- ----------
<S> <C> <C>
Property and equipment at cost:
Computers and equipment.................................. $372,525 $1,518,382
Furniture and fixtures................................... 95,836 372,369
Leasehold improvements................................... -- 58,927
-------- ----------
Total................................................. 468,361 1,949,678
Less accumulated depreciation and amortization............. (45,906) (325,935)
-------- ----------
Property and equipment, net................................ $422,455 $1,623,743
======== ==========
</TABLE>
3. ACCRUED LIABILITIES
Accrued liabilities at December 31 consist of the following:
<TABLE>
<CAPTION>
1998 1999
------- ----------
<S> <C> <C>
Commissions payable......................................... $10,323 $ 742,847
Salaries and bonuses payable................................ 4,410 474,020
Paid time-off accrual....................................... 60,125 347,098
Other accruals.............................................. 5,916 245,847
------- ----------
Total accrued liabilities................................. $80,774 $1,809,812
======= ==========
</TABLE>
4. FINANCING ARRANGEMENTS
In February 1999, the Company entered into a revolving line of credit
arrangement with a commercial bank that enables the Company to borrow up to a
total of $1,000,000. Borrowings under the revolving line of credit bear interest
at the bank's prime rate (8.25% at December 31, 1999) and are collateralized by
substantially all of the Company's assets. As of December 31, 1999, the Company
had no amounts outstanding under the revolving line of credit. The credit
arrangement expires in February 2000 and contains certain covenants and
restrictions as to various matters, including dividend payments.
In April 1999, the Company entered into a loan agreement with a lending
corporation that allows the company to borrow up to a total of $1.5 million for
the purchase and financing of property and equipment through June 2000.
Borrowings under the loan agreement bear interest at a fixed rate of 8.50% and
are collateralized by the purchased property and equipment. As of December 31,
1999, the Company had $537,272 outstanding under the loan agreement, which is
payable as follows: $197,863 in 2000; $215,353 in 2001; and $124,056 in 2002.
The loan agreement contains certain covenants and restrictions as to various
matters, including dividend payments.
F-53
<PAGE> 214
OCTANE SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM SEPTEMBER 9, 1997 (INCEPTION) TO DECEMBER 31, 1997,
THE YEARS ENDED DECEMBER 31, 1998 AND 1999 AND THREE MONTHS ENDED
MARCH 31, 1999 (UNAUDITED) AND 2000 (UNAUDITED)
5. INCOME TAXES
The Company's deferred income tax assets at December 31 are comprised of
the following:
<TABLE>
<CAPTION>
1998 1999
--------- -----------
<S> <C> <C>
Net deferred tax assets:
Net operating loss carryforwards....................... $ 575,000 $ 5,564,000
Credit carryforwards................................... 124,000 674,000
Stock compensation expense on nonqualified stock
options............................................. -- 164,000
Accruals deductible in different periods............... 33,000 352,000
--------- -----------
Total............................................... 732,000 6,754,000
Valuation allowance.................................... (732,000) (6,754,000)
--------- -----------
Total............................................... $ -- $ --
========= ===========
</TABLE>
The Company has no income tax provision due to its history of operating
losses. Due to the uncertainty surrounding the realization of the benefits of
its favorable tax attributes in future tax returns, the Company has fully
reserved its net deferred tax assets as of December 31, 1998 and 1999.
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $13.9 million for federal and state income tax purposes. These
carryforwards begin to expire in 2018 for federal purposes and 2006 for state
purposes. Additionally, Section 382 of the Internal Revenue Code and the
applicable California law impose annual limitations on the use of net operating
loss carryforwards if there is a change in ownership, as defined, within any
three-year period. The utilization of certain net operating loss carryforwards
may be limited due to the Company's capital stock transactions.
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK
During 1998, the Company issued 4,650,000 shares of Series A redeemable
convertible preferred stock for cash of $6,177,705 (net of issuance costs of
$22,295). During 1999, the Company issued 4,778,780 shares of Series B
redeemable convertible preferred stock for cash of $15,301,456 (net of issuance
costs of $28,492).
At December 31, 1999, the rights, preferences, and privileges of the
holders of preferred stock are as follows (see Note 11 regarding subsequent
changes to certain provisions of the Series A and B preferred stock):
- Dividends are noncumulative and payable only upon declaration by the
Company's Board of Directors at a rate of $0.1067 and $0.2568 per share
per annum for Series A and B preferred stock, respectively. No dividends
on preferred stock or common stock have been declared by the Board from
inception through December 31, 1999.
F-54
<PAGE> 215
OCTANE SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM SEPTEMBER 9, 1997 (INCEPTION) TO DECEMBER 31, 1997,
THE YEARS ENDED DECEMBER 31, 1998 AND 1999 AND THREE MONTHS ENDED
MARCH 31, 1999 (UNAUDITED) AND 2000 (UNAUDITED)
- The holders of Series A and B preferred stock have voting rights
equivalent to the number of shares of common stock into which it is
convertible.
- Each share of Series A and B preferred stock is convertible at any time
into one share of common stock at the option of the holder, subject to
adjustment to protect against dilution. The Company can be required to
convert the preferred stock into common stock with the consent of not
less than two-thirds of the outstanding Series A and B preferred
stockholders, voting together as a single class. Each share of preferred
stock automatically converts into common stock upon the closing of the
sale of the Company's common stock in a public offering in which the
aggregate cash proceeds, net of underwriting discounts and commissions,
exceed $20,000,000 and the offering price equals or exceeds $10.00 per
share.
- In the event of liquidation, dissolution or winding up of the Company,
the holders of Series A and B preferred stock are entitled to receive
$1.3333 and $3.21 per share, respectively, as well as any declared but
unpaid dividends on each share, prior to any distribution to the holders
of common stock. Any remaining distributable assets of the Company would
be distributed among the holders of Series A and B preferred stock and
common stock on a pro rata basis, up to a total distribution of $4.00 and
$9.63 per share of Series A and B preferred stock, respectively, if such
distribution takes place prior to the first anniversary of the purchase
date of Series B preferred stock, and up to a total distribution of
$6.6666 and $16.05 per share of Series A and B preferred stock,
respectively, if such distribution takes place on or after the first
anniversary of the purchase date of the Series B preferred stock; after
which any remaining assets are distributed solely to the holders of
common stock.
- At any time following 6 years after the purchase date of Series B
preferred stock, but on a date within 30 days of a written request from
the holders of a majority of the then outstanding Series A and B
preferred stock, voting together as a single class, that all of the
outstanding shares of preferred stock be redeemed, the Company shall
redeem for cash a sum equal to the redemption value of $1.3333 and $3.21
per share of Series A and B preferred stock, respectively, plus all
declared but unpaid dividends.
In April 1999, the Company issued a warrant to purchase 22,500 shares of
Series A preferred stock at $1.33 per share to a commercial bank in connection
with obtaining a line of credit. The warrant is exercisable after February 9,
2000 and expires June 30, 2005. The fair value of the warrant at the date of
issuance was estimated using the Black-Scholes model with the following
assumptions: risk free interest rate of 6%, contractual life of 6.5 years and
expected volatility of 75%. The value was deemed to be $22,429.
Deemed Dividend
In December 1999, the Company sold 778,816 shares of Series B preferred
stock to an investor at $3.21 per share. In accordance with Emerging Issues Task
Force ("EITF") Issue No. 98-5, Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, the
Company has recognized a deemed dividend of $2,500,000, representing the
F-55
<PAGE> 216
OCTANE SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM SEPTEMBER 9, 1997 (INCEPTION) TO DECEMBER 31, 1997,
THE YEARS ENDED DECEMBER 31, 1998 AND 1999 AND THREE MONTHS ENDED
MARCH 31, 1999 (UNAUDITED) AND 2000 (UNAUDITED)
intrinsic value of the beneficial conversion feature limited to the cash
proceeds received from the sale of 778,816 shares of Series B preferred stock.
7. SHAREHOLDERS' EQUITY (DEFICIENCY)
Stock Splits
In September 1998, the Board of Directors authorized a three for two stock
split of the Company's common stock and preferred stock. All share and per share
amounts in these consolidated financial statements have been adjusted to give
effect to this split.
Warrants
In February 1999, the Company issued a warrant to purchase 18,750 shares of
common stock at $0.25 per share to a lending corporation in connection with
obtaining an equipment financing arrangement. The warrant is exercisable after
February 9, 2000 and expires June 30, 2005. The fair value of the warrant at
date of issuance was estimated using the Black-Scholes model with the following
assumptions: risk free interest rate of 6%, contractual life of 6.5 years and
expected volatility of 75%. The value was determined to be $34,098. Under the
terms of the equipment financing arrangement, the Company would be required to
issue an additional warrant to purchase 18,750 shares of common stock if
outstanding borrowings under the arrangement exceed $750,000. As of December 31,
1999, this warrant had not been earned or issued.
Common Stock
A portion of the Company's shares of common stock were issued under
restricted stock purchase agreements. Under these agreements, in the event of
termination, the Company has the right to repurchase the common stock at the
original purchase price. The repurchase right expires over a 48 month period. At
December 31, 1998 and 1999 there were 2,581,792 and 1,735,923 shares subject to
repurchase, respectively.
Pursuant to the restricted stock grant noted above, the Company accelerated
the vesting of certain shares subject to repurchase. Accordingly, the Company
recognized compensation expense of $113,000 during fiscal 1999.
Certain shares were issued in exchange for notes receivable, which are full
recourse and additionally collateralized by the underlying shares of common
stock. These notes receivable have been included in shareholders' equity
(deficiency).
On March 14, 2000, the Company amended certain common stock purchase and
option agreements with key employees to adjust for the effect of the merger
between the Company and E.piphany on accelerated vesting provisions set forth in
such agreements.
F-56
<PAGE> 217
OCTANE SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM SEPTEMBER 9, 1997 (INCEPTION) TO DECEMBER 31, 1997,
THE YEARS ENDED DECEMBER 31, 1998 AND 1999 AND THREE MONTHS ENDED
MARCH 31, 1999 (UNAUDITED) AND 2000 (UNAUDITED)
Stock Option Plans
The Company's 1997 Stock Option Plan (the "Plan") provides for the granting
of stock options to employees and consultants of the Company. Options granted
under the Plan may be either incentive stock options or nonqualified stock
options. Incentive stock options ("ISOs") may be granted only to Company
employees (including officers and directors who are also employees).
Nonqualified stock options ("NSOs") may be granted to Company employees and
consultants. The Company has reserved 2,742,500 shares of common stock for
issuance under the Plan.
Options under the Plan may be granted for periods of up to ten years. The
exercise price of an ISO and NSO shall not be less than 100% and 85% of the
estimated fair value of the shares on the date of grant, respectively, and the
exercise price of an ISO and NSO granted to a 10% shareholder shall not be less
than 110% of the estimated fair value of the shares on the date of grant.
Options are exercisable immediately in the event of termination, subject to
repurchase. This repurchase right generally lapses over the original vesting
schedule. To date, options granted generally vest over four years.
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
---------- --------
<S> <C> <C>
Balance, December 31, 1997............................... -- $ --
Granted.................................................. 818,250 0.07
Canceled................................................. (130,875) 0.01
---------- ------
Balance, December 31, 1998 (4,062 shares vested at a
weighted average exercise price of $0.01 per share).... 687,375 0.07
Granted.................................................. 1,638,226 0.63
Exercised................................................ (287,212) 0.32
Canceled................................................. (171,035) 0.22
---------- ------
Balance, December 31, 1999 (201,429 shares vested at a
weighted average exercise price of $0.33 per share).... 1,867,354 0.52
Granted.................................................. 2,697,903 9.03
Exercised................................................ (2,581,985) 1.09
Canceled................................................. (19,750) 0.95
---------- ------
Balance, March 31, 2000 (96,539 shares vested at a
weighted average exercise price of $2.44 per share).... 1,963,522 $11.45
========== ======
</TABLE>
F-57
<PAGE> 218
OCTANE SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM SEPTEMBER 9, 1997 (INCEPTION) TO DECEMBER 31, 1997,
THE YEARS ENDED DECEMBER 31, 1998 AND 1999 AND THREE MONTHS ENDED
MARCH 31, 1999 (UNAUDITED) AND 2000 (UNAUDITED)
The following table summarizes information as of December 31, 1999
concerning outstanding and vested options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- ------------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.01 246,378 8.45 $0.01 44,811 $0.01
$0.17 - $0.25 481,982 8.92 0.21 79,764 0.20
$0.30 - $0.45 513,694 9.55 0.40 43,004 0.42
$0.80 - $0.90 440,600 9.81 0.87 32,350 0.75
$1.50 184,700 9.95 1.50 1,500 1.50
--------- ----- ------- -----
1,867,354 $0.52 201,429 $0.33
========= ===== ======= =====
</TABLE>
At December 31, 1999, 587,934 shares remained available for future grant.
Stock-Based Compensation -- In connection with options granted to purchase
common stock, the Company recorded deferred stock compensation of $5,880,709 in
1999. Such amounts represent, for employee stock options, the difference between
the exercise price and the fair value of the Company's common stock at the date
of grant, and for non-employee options, the deemed fair value of the option at
the date of vesting. The deferred charges for employee and non-employee options
are being amortized to expense through 2003. Stock-based compensation expense of
$1,218,769 was recognized during 1999. Deferred stock compensation and related
stock-based compensation expense of $71,070,812 and $4,433,188, respectively,
was recorded in the three-months ended March 31, 2000.
Options granted to nonemployees -- The Company has granted options to
non-employees for consulting and legal services performed. The initial vesting
period for these options ranged from immediate vesting to vesting over 4 years
and an option exercise period of up to 10 years. Stock options issued to
non-employees are accounted for in accordance with provisions of SFAS No. 123,
Accounting for Stock-Based Compensation and EITF No. 96-18. Accounting for
Equity Instruments That Are Issued To Other Than Employees for Acquiring, or in
Conjunction With Selling, Goods or Services. The fair value of stock options
issued to non-employees was calculated using a risk free interest rate of 6%,
expected volatility of 75% and actual length of the option.
During fiscal year 1998, options for 52,500 shares were granted at an
exercise price of approximately $0.01 and options for 4,500 shares were granted
at an exercise price of approximately $0.17. At December 31, 1998, unvested
non-employee options totaled 57,000 shares.
During 1999, non-employee options for 27,250 shares were granted at an
exercise price of $0.25, options for 7,000 shares were granted at an exercise
price of $0.35, options for 15,750 shares were granted at an exercise price of
$0.45 and 1,500 shares were granted at an exercise price of $1.50. In connection
with these non-employee options, the Company recorded deferred stock
compensation of
F-58
<PAGE> 219
OCTANE SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM SEPTEMBER 9, 1997 (INCEPTION) TO DECEMBER 31, 1997,
THE YEARS ENDED DECEMBER 31, 1998 AND 1999 AND THREE MONTHS ENDED
MARCH 31, 1999 (UNAUDITED) AND 2000 (UNAUDITED)
$699,306 and amortized $403,219 as an expense during 1999. At December 31, 1999,
unvested non-employee options totaled 50,551 shares and unamortized deferred
stock based compensation related to unvested options totaled $296,087.
Additional Stock Plan Information
As discussed in Note 1, the Company accounts for its stock-based awards to
employees using the intrinsic value method in accordance with APB Opinion No.
25, Accounting for Stock Issued to Employees, and its related interpretations.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net income (loss) had the Company adopted the fair value
method since the Company's inception. Under SFAS No. 123, the fair value of
stock-based awards to employees is calculated through the use of option pricing
models, even though such models were developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including expected time to exercise, which
greatly affect the calculated values.
The Company's calculations for employee grants were made using the minimum
value model for grants with the following weighted average assumptions: expected
life; one year following vesting; risk free interest rate of 5.25% in 1998 and
6% in 1999; and no dividends during the expected term. In addition, volatility
of 70% was used for nonemployee grants valued under the fair value method. The
Company's calculations are based on a multiple award valuation approach and
forfeitures are recognized as they occur. If the computed values of the
Company's stock-based awards to employees had been amortized to expense over the
vesting period of the awards as specified under SFAS No. 123, net loss would
have been $1,421,998 and $14,789,619 for the years ended December 31, 1998 and
1999, respectively.
The number and estimated weighted-average value per option for employee and
nonemployee awards, granted at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1999
-------- ----------
<S> <C> <C>
Employee options:
Number of shares......................................... 761,250 1,587,226
Estimated weighted average minimum value................. $ 0.04 $ 3.48
Nonemployee options:
Number of shares......................................... 57,000 51,000
Estimated weighted average fair value.................... $ 0.01 $ 2.06
</TABLE>
8. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Savings Plan (the "Plan"), which covers all full
time employees who are at least 21 years old and have completed three months of
service. Participants may contribute a portion of their earnings to the Plan, up
to a maximum allowed under the law. A
F-59
<PAGE> 220
OCTANE SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM SEPTEMBER 9, 1997 (INCEPTION) TO DECEMBER 31, 1997,
THE YEARS ENDED DECEMBER 31, 1998 AND 1999 AND THREE MONTHS ENDED
MARCH 31, 1999 (UNAUDITED) AND 2000 (UNAUDITED)
discretionary profit sharing contribution may be made by the Company. The
Company has not made any contributions since inception.
9. COMMITMENTS
The Company leases its office facilities and some equipment under
noncancelable operating leases which expire through 2005.
At December 31, 1999, the future minimum lease payments are as follows:
<TABLE>
<S> <C>
2000...................................................... $1,796,520
2001...................................................... 1,763,357
2002...................................................... 1,647,811
2003...................................................... 1,310,865
2004...................................................... 1,154,453
Thereafter.................................................. 449,788
----------
Total future minimum payments............................... $8,122,794
==========
</TABLE>
Rent expense for the period from September 9, 1997 (inception) to December
31, 1997 and the years ended December 31, 1998 and 1999, was $1,020, $129,024
and $762,764, respectively.
10. MAJOR CUSTOMERS
Sales to significant customers as a percentage of total revenues were as
follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Customer A................................................. 55% --
Customer B................................................. 20% --
Customer C................................................. -- 19%
Customer D................................................. -- 14%
Customer E................................................. -- 12%
</TABLE>
Receivables due from significant customers as a percentage of total
accounts receivable were as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Customer A................................................. 39% 19%
Customer B................................................. 20% --
Customer C................................................. -- 19%
Customer D................................................. -- 17%
Customer E................................................. -- 15%
</TABLE>
F-60
<PAGE> 221
OCTANE SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM SEPTEMBER 9, 1997 (INCEPTION) TO DECEMBER 31, 1997,
THE YEARS ENDED DECEMBER 31, 1998 AND 1999 AND THREE MONTHS ENDED
MARCH 31, 1999 (UNAUDITED) AND 2000 (UNAUDITED)
11. SUBSEQUENT EVENTS
Proposed Acquisition by E.piphany, Inc.
On March 15, 2000, the Company announced that it would be acquired by
E.piphany, Inc. ("E.piphany"), for approximately 12.8 million shares of
E.piphany common stock, pending the approval of both the Company's and
E.piphany's stockholders, certain regulatory approvals and completion of other
standard closing procedures.
Issuance of Series C Preferred Stock
In January 2000, the Board and shareholders approved the amendment and
restatement of the Company's articles of incorporation to increase the total
number of authorized shares of common stock from 22,500,000 to 25,000,000 and to
increase the total number of authorized shares of preferred stock from 9,600,000
to 13,350,000 in the form of 3,750,000 shares of Series C preferred stock. As a
result, the Company reserved 3,750,000 shares of common stock for issuance upon
conversion of the Series C preferred stock. In addition, the rights, preferences
and privileges of the holders of Series A, B and C preferred stock were modified
as follows:
- The mandatory redemption clause for holders of Series A and B preferred
stock was annulled, and, accordingly, the amounts recorded for such stock
were reclassified in the accompanying consolidated balance sheets as of
March 31, 2000 from redeemable preferred stock to shareholders' equity
(deficiency).
- Dividends for Series C are noncumulative and payable only upon
declaration by the Company's Board of Directors at a rate of $0.65444 per
share per annum.
- The holders of Series C preferred stock have voting rights equivalent to
the number of shares of common stock into which it is convertible.
- Each share of Series A, B and C preferred stock is convertible at any
time into one share of common stock at the option of the holder, subject
to adjustment to protect against dilution. The Company can be required to
convert the preferred stock into common stock at the consent of not less
than two-thirds of the outstanding Series A, B and C preferred
stockholders, voting together as a single class. Each share of preferred
stock automatically converts upon the closing of the sale of the
Company's common stock in a public offering in which the aggregate cash
proceeds, net of underwriting discounts and commissions, total at least
$20,000,000 and the offering price is not less than $12.00 per share.
- In the event of liquidation, dissolution or winding up of the Company,
the holders of Series A, B and C preferred stock are entitled to receive
$1.3333, $3.21 and $8.18 per share, respectively, as well as any declared
but unpaid dividends on each share, prior to any distribution to the
holders of common stock. Any remaining distributable assets of the
Company would be distributed among the holders of Series A, B and C
preferred stock and common stock on a pro rata basis, up to a total
distribution of $4.00, $9.63 and $24.54 per share of Series A, B and C
preferred stock, respectively, if such distribution takes place prior
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OCTANE SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM SEPTEMBER 9, 1997 (INCEPTION) TO DECEMBER 31, 1997,
THE YEARS ENDED DECEMBER 31, 1998 AND 1999 AND THREE MONTHS ENDED
MARCH 31, 1999 (UNAUDITED) AND 2000 (UNAUDITED)
to the first anniversary of the purchase date of Series C preferred
stock, and up to a total distribution of $6.6666, $16.05 and $40.90 per
share of Series A, B and C preferred stock, respectively, if such
distribution takes place on or after the first anniversary of the
purchase date of the Series C preferred stock; after which any remaining
assets are distributed solely to the holders of common stock.
In January and February 2000, the Company sold 3,522,540 shares of Series C
preferred stock at $8.18 per share for gross proceeds of approximately $28.8
million. Pursuant to EITF Issue No. 98-5, the Company recognized a deemed
dividend of $1,677,667 on 205,094 shares of Series C preferred stock sold in
February 2000.
1997 Stock Option Plan Amendment
In January and February 2000, the Board of Directors approved amendments to
the 1997 Stock Option Plan to increase the number of shares of common stock
reserved for issuance under the plan to an aggregate of 5,092,500.
2000 Nonstatutory Stock Option Plan
In March 2000, the Company established a Nonstatutory Stock Option Plan,
which provides for the granting of stock options to employees and consultants as
nonstatutory stock options. The Company has reserved 1,000,000 shares of common
stock for issuance under the Plan. The term of each option shall be 10 years
from the date of grant, with the exercise price determined by the Administrator.
Options granted generally become exercisable at 20% per year over 5 years,
subject to repurchase with the repurchase right lapsing 20% per year over 5
years from the date the option is granted.
Acquisition of Sneaker Labs, Inc.
On March 13, 2000, Octane acquired all of the outstanding capital stock of
Sneakerlabs, Inc. (Sneakerlabs), a developer of chat and web collaboration
software and services, for 1,049,992 shares of Octane common stock plus the
issuance of options to purchase approximately 69,000 shares of Octane common
stock at $3.00 per share. The terms of the agreement were accepted by both
parties concurrent with the closing of the acquisition on March 13, 2000. The
acquisition has been accounted for as a purchase and, accordingly, the Octane
shares and options issued to purchase Sneakerlabs have been valued at their
estimated fair value. Such Octane shares and options were valued at
approximately $101 million, based on a value of approximately $91 per share of
Octane stock. This per share value of Octane stock was derived principally by
reference to the closing share price of E.piphany stock on the date the proposed
merger with E.piphany, Inc. was publicly announced (March 15, 2000), adjusted by
the share exchange ratio to be used in the proposed merger between E.piphany and
Octane (See "Proposed Acquisition by E.piphany, Inc." above).
The acquisition cost of approximately $101 million has been allocated to
acquired assets and assumed liabilities based on estimates of their fair values.
As the value of the tangible net assets
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<PAGE> 223
OCTANE SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM SEPTEMBER 9, 1997 (INCEPTION) TO DECEMBER 31, 1997,
THE YEARS ENDED DECEMBER 31, 1998 AND 1999 AND THREE MONTHS ENDED
MARCH 31, 1999 (UNAUDITED) AND 2000 (UNAUDITED)
acquired from Sneakerlabs was less than $0.5 million, substantially all the
acquisition cost has been allocated to goodwill and other intangibles. The
allocation among the intangible assets has not been finalized; the expected
useful life of all intangibles, including goodwill, is three years.
As of the acquisition date, Sneakerlabs had recently released its first two
products, iMeet and iServe, for commercial use. As of that date, Sneakerlabs had
no projects in process with respect to significant enhancements to those
products or with respect to new products. Accordingly, no amount of the purchase
price was assigned to in-process research and development.
The results of operations of SneakerLabs are included in the accompanying
consolidated financial statements from the date of acquisition, and were not
significant during the period from March 14, 2000 through March 31, 2000.
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ANNEX I
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
E.PIPHANY, INC.
ORCHID ACQUISITION CORPORATION
AND
OCTANE SOFTWARE, INC.
DATED AS OF MARCH 14, 2000
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TABLE OF CONTENTS
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ARTICLE I THE MERGER................................................ 1
1.1 The Merger.................................................. 1
1.2 Effective Time.............................................. 1
1.3 Effect of the Merger........................................ 2
1.4 Articles of Incorporation; Bylaws........................... 2
1.5 Directors and Officers...................................... 2
Effect of Merger on the Capital Stock of the Constituent
1.6 Corporations................................................ 2
1.7 Dissenting Shares........................................... 5
1.8 Surrender of Certificates................................... 5
1.9 No Further Ownership Rights in Company Capital Stock........ 7
1.10 Lost, Stolen or Destroyed Certificates...................... 7
1.11 Taking of Necessary Action; Further Action.................. 7
1.12 Tax and Accounting Consequences............................. 7
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY............ 7
2.1 Organization of the Company................................. 7
2.2 Subsidiaries................................................ 8
2.3 Company Capital Structure................................... 8
2.4 Authority................................................... 9
2.5 No Conflict................................................. 9
2.6 Consents.................................................... 10
2.7 Company Financial Statements................................ 10
2.8 No Undisclosed Liabilities.................................. 10
2.9 No Changes.................................................. 10
2.10 Tax Matters................................................. 12
2.11 Restrictions on Business Activities......................... 14
Title of Properties; Absence of Liens and Encumbrances;
2.12 Condition of Equipment...................................... 14
2.13 Intellectual Property....................................... 14
2.14 Agreements, Contracts and Commitments....................... 17
2.15 Interested Party Transactions............................... 18
2.16 Governmental Authorization.................................. 18
2.17 Litigation.................................................. 19
2.18 Accounts Receivable; Inventory.............................. 19
2.19 Minute Books................................................ 19
2.20 Environmental Matters....................................... 19
2.21 Brokers' and Finders' Fees; Third Party Expenses............ 20
2.22 Employee Matters and Benefit Plans.......................... 20
2.23 Insurance................................................... 24
2.24 Compliance with Laws........................................ 24
2.25 Warranties; Indemnities..................................... 24
2.26 Voting Agreements........................................... 24
2.27 Complete Copies of Materials................................ 24
2.28 Registration Statement; Proxy Statement..................... 24
2.29 Representations Complete.................................... 25
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB........ 25
3.1 Organization of Parent and Sub.............................. 25
3.2 Authority................................................... 25
3.3 No Conflict................................................. 26
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TABLE OF CONTENTS (CONTINUED)
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3.4 Consents.................................................... 26
3.5 Capital Structure........................................... 26
3.6 SEC Filings; Financial Statements........................... 27
3.7 Brokers' and Finders' Fees.................................. 27
3.8 Registration Statement; Proxy Statement..................... 27
3.9 No Changes.................................................. 27
3.10 Representations Complete.................................... 27
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME...................... 28
4.1 Conduct of Business of the Company.......................... 28
4.2 No Solicitation............................................. 30
4.3 Termination of Severance and 401(k) Plans................... 31
ARTICLE V ADDITIONAL AGREEMENTS..................................... 31
5.1 Registration Statement; Shareholder Approval................ 31
5.2 Access to Information....................................... 32
5.3 Confidentiality; Public Disclosure.......................... 33
5.4 Consents; Approvals......................................... 33
5.5 Reasonable Efforts.......................................... 33
5.6 Notification of Certain Matters............................. 33
5.7 Additional Documents and Further Assurances................. 34
5.8 FIRPTA Compliance........................................... 34
5.9 Expenses.................................................... 34
5.10 Termination of Agreements................................... 34
5.11 Employee Benefits........................................... 34
5.12 Officers and Directors of the Company's Subsidiaries........ 35
5.13 Employment Agreements....................................... 35
5.14 Voting Agreement............................................ 35
5.15 Affiliate Agreements........................................ 35
5.16 Parent Voting Agreement..................................... 35
5.17 Company Stock Option Grants................................. 35
5.18 No Actions Inconsistent With Tax-Free Reorganization........ 35
5.19 Form S-8.................................................... 35
5.20 Assumption of Indemnity Obligations......................... 36
ARTICLE VI CONDITIONS TO THE MERGER................................. 36
Conditions to Obligations of Each Party to Effect the
6.1 Merger...................................................... 36
6.2 Conditions to Obligations of Company........................ 37
6.3 Conditions to the Obligations of Parent and Sub............. 38
ARTICLE VII SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNIFICATION................................................... 39
7.1 Survival of Representations and Warranties.................. 39
7.2 Indemnification............................................. 39
7.3 Exclusive Contractual Remedy................................ 40
7.4 Escrow Arrangements......................................... 40
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER...................... 46
8.1 Termination................................................. 46
8.2 Effect of Termination....................................... 46
8.3 Amendment................................................... 47
8.4 Extension; Waiver........................................... 47
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TABLE OF CONTENTS (CONTINUED)
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ARTICLE IX GENERAL PROVISIONS....................................... 47
9.1 Notices..................................................... 47
9.2 Interpretation.............................................. 48
9.3 Counterparts; Facsimile..................................... 48
9.4 Entire Agreement; Assignment................................ 48
9.5 Severability................................................ 48
9.6 Other Remedies; Specific Performance........................ 49
9.7 Governing Law............................................... 49
9.8 Rules of Construction....................................... 49
9.9 Attorneys Fees.............................................. 49
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INDEX OF EXHIBITS
<TABLE>
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EXHIBITS DESCRIPTION
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Exhibit A Merger Agreement
Exhibit B Key Employees
Exhibit C Disclosure Schedules
Exhibit D Form of Employment Agreement
Exhibit E Form of Voting Agreement
Exhibit F Form of Affiliate Agreement
Exhibit G-1 Certain Officers Directors of Parent
Exhibit G-2 Form of Parent Voting Agreement
</TABLE>
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INDEX OF REQUIRED SECTIONS OF
DISCLOSURE SCHEDULE
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SECTION DESCRIPTION
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2.1 List of Officers and Directors of the Company
2.12(a) List of all real property currently leased by the Company
2.12(b) List of all material items of equipment owned or leased by
the Company
2.13(b) List of all Registered Intellectual Property
2.13(d) List of shrink wrap license agreements of Company
2.13(g) List of agreements relating to Intellectual Property
2.13(h) List of agreements relating to infringement of Intellectual
Property
2.14(a) List of agreements, contracts and commitments
2.14(c) List of consents, waivers, assignments and approvals
2.16 List of Governmental authorizations
2.2 List of Subsidiaries
2.21(a) List of any brokerage or finders' fees incurred
2.21(b) Estimate of Third Party Expenses
2.22(b) List of Employee Plans, International Employee Plans and
Employment Agreements
2.22(i) Description of Effect of Transaction on Company Employee
Plan and Employment Agreements
2.23 List of all insurance policies
2.3(a) List of Shareholders of the Company
2.3(b) List of restricted stock, options and warrants
2.7 List of financial statements of the Company
3.5 List of options and warrants
4.1 List of exceptions
4.1(i) List of additional stock options granted at the fair market
value
5.10 List of surviving employment agreements
5.12 List of persons who will enter into Employment Agreements
with Parent
5.13 List of Shareholders who will enter into Voting Agreements
with Parent
5.14 List of persons who are or may be "affiliates" of the
Company within the meaning of Rule 145
5.15 List of Affiliates
5.17 List of employees eligible for additional grants of stock
options
</TABLE>
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AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of March 14, 2000 among E.PIPHANY, INC., a California
corporation ("Parent"), ORCHID ACQUISITION CORPORATION, a California corporation
and a wholly-owned subsidiary of Parent ("Sub") and OCTANE SOFTWARE, INC., a
California corporation (together with its subsidiaries, as applicable, the
"Company").
RECITALS
WHEREAS, the Boards of Directors of each of the Company, Parent and Sub
believe it is in the best interests of each company and their respective
shareholders that Parent acquire the Company through the statutory merger of Sub
with and into the Company (the "Merger") and, in furtherance thereof, have
approved the Merger.
WHEREAS, certain of the Shareholders of Company and Parent are entering
into Voting Agreements agreeing to vote the shares of Company capital stock and
Parent capital stock, respectively, held by them in favor of the Merger.
WHEREAS, pursuant to the Merger, among other things, all of the issued and
outstanding capital stock of the Company shall be converted into the right to
receive Parent Common Stock (as defined herein). Parent will assume all
outstanding stock options and warrants of the Company.
WHEREAS, the Company, on the one hand, and Parent and Sub, on the other
hand, desire to make certain representations, warranties, covenants and other
agreements in connection with the Merger.
WHEREAS, the parties intend, by executing this Agreement, to adopt a plan
of reorganization within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the parties agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of the California General Corporation Law ("California
Law"), Sub shall be merged with and into the Company, the separate corporate
existence of Sub shall cease and the Company shall continue as the surviving
corporation and as a wholly-owned subsidiary of Parent. The surviving
corporation after the Merger is hereinafter sometimes referred to as the
"Surviving Corporation."
1.2 Effective Time. The closing of the Merger (the "Closing") will take
place as promptly as practicable, but in any event no later than one (1)
business day following the approval of the Merger by the Shareholders at the
Company Shareholders' meeting and by the stockholders of the Parent at the
Parent stockholders meeting and the satisfaction or waiver of the conditions set
forth in Article VI, at the offices of Wilson Sonsini Goodrich & Rosati,
Professional Corporation, 650 Page Mill Road, Palo Alto, California 94304,
unless another place or time is agreed to in writing by Parent and the Company.
The date upon which the Closing occurs is herein referred to as the "Closing
Date." On the Closing Date, the parties hereto shall cause the Merger to be
consummated by filing
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an agreement of merger (or like instrument) in the form attached hereto as
Exhibit A, with an officers certificate of each constituent corporation
attached, with the Secretary of State of the State of California (the "Merger
Agreement"), in accordance with the applicable provisions of California Law (the
time of acceptance by the Secretary of State of the State of California of such
filing being referred to herein as the "Effective Time").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in the applicable provisions of California Law. Without
limiting the generality of the foregoing, and subject thereto, at the Effective
Time, all the property, rights, privileges, powers and franchises of the Company
and Sub shall vest in the Surviving Corporation, and all debts, liabilities and
duties of the Company and Sub shall become the debts, liabilities and duties of
the Surviving Corporation.
1.4 Articles of Incorporation; Bylaws
(a) Unless otherwise determined by Parent prior to the Effective Time,
at the Effective Time, the Articles of Incorporation of Sub shall be the
Articles of Incorporation of the Surviving Corporation until thereafter
amended as provided by law and such Certificate of Incorporation.
(b) The Bylaws of Sub, as in effect immediately prior to the Effective
Time, shall be the Bylaws of the Surviving Corporation until thereafter
amended.
1.5 Directors and Officers. The directors of the Surviving Corporation
immediately after the Effective Time shall be the directors of Sub immediately
prior to the Effective Time, each to hold the office of director of the
Surviving Corporation in accordance with the provisions of California Law and
the Articles of Incorporation and Bylaws of the Surviving Corporation until his
or her successor is duly qualified and elected. The officers of the Surviving
Corporation immediately after the Effective Time shall be the officers of Sub
immediately prior to the Effective Time, each to hold office in accordance with
the provisions of the Bylaws of the Surviving Corporation.
1.6 Effect of Merger on the Capital Stock of the Constituent Corporations:
(a) Certain Definitions. For all purposes of this Agreement, the
following terms shall have the following meanings:
"Company Capital Stock" shall mean shares of Company Common Stock,
Company Series A Preferred Stock, Company Series B Preferred Stock and
Company Series C Preferred Stock, and shares of any other capital stock
of the Company.
"Company Common Stock" shall mean outstanding shares of common
stock of the Company.
"Company Options" shall mean all outstanding options or other
rights to purchase shares of Company Common Stock issued pursuant to the
Stock Option Plans and all warrants and other rights to purchase Company
Capital Stock.
"Company Preferred Stock" shall mean the collective reference to
the Company Series A Preferred Stock, the Company Series B Preferred
Stock and the Company Series C Preferred Stock.
"Company Series A Preferred Stock" shall mean shares of Series A
Preferred Stock of the Company.
"Company Series B Preferred Stock" shall mean shares of Series B
Preferred Stock of the Company.
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"Company Series C Preferred Stock" shall mean shares of Series C
Preferred Stock of the Company.
"Estimated Third Party Expenses" shall mean Third Party Expenses
(as defined in Section 5.9) of the Company on the Closing Date,
excluding investment banking advisory fees payable to Morgan Stanley
Dean Witter as a result of services provided to the Company in
connection with the Merger and as listed on Section 2.21(a) of the
Disclosure Schedule, as estimated by the Company in good faith and based
on reasonable assumptions.
"GAAP" shall mean U.S. generally accepted accounting principles
consistent with the reporting practices and principles used by Parent
from time to time for preparing its public filings under the Securities
and Exchange Act of 1934, as amended (the "Exchange Act").
"HSR Act" shall mean the Hart Scott Rodino Antitrust Improvement
Act of 1976, as amended.
"Key Employees" shall mean those employees of the Company listed on
Exhibit B hereto.
"Knowledge" of any entity shall mean the knowledge of any officer
or director of such entity.
"Parent Common Stock" shall mean shares of the common stock, par
value $0.0001 per share, of Parent.
"Parent Common Stock Consideration" shall mean 12,793,510 shares of
Parent Common Stock less (b) an amount of shares of Parent Common Stock
equal to (1) the amount by which the Estimated Third Party Expenses
exceed $1,500,000 divided by (2) the Trading Price (each of (a) and (b)
as appropriately adjusted for stock splits, stock dividends, combination
and the like of such Parent Common Stock subsequent to the date hereof
and prior to the Effective Time).
"Shareholder" shall mean each holder of any Company Capital Stock
immediately prior to the Effective Time.
"Stock Exchange Ratio" shall mean a number equal to the quotient
obtained by dividing (a) Parent Common Stock Consideration by (b) the
number of Total Outstanding Shares.
"Stock Option Plans" shall mean the Company's 1997 Stock Option
Plans, 2000 Nonstatutory Stock Option Plans and 2000 Pennsylvania Plan.
"Total Consideration" shall mean the total Parent Common Stock
Consideration paid hereunder.
"Total Outstanding Shares" shall mean the aggregate number of
shares of Company Common Stock outstanding immediately prior to the
Effective Time plus the aggregate number of shares of Company Common
Stock issuable, with or without the passage of time or satisfaction of
other conditions, upon exercise or conversion of all convertible
securities, options, warrants and other rights to acquire or receive
shares of Company Capital Stock outstanding immediately prior to the
Effective Time.
"Trading Price" shall mean $192.85.
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<PAGE> 233
(b) Effect on Capital Stock. At the Effective Time, by virtue of the
Merger and without any action on the part of the Sub, the Company or the
Shareholders, each share of Company Common Stock issued and outstanding
immediately prior to the Effective Time (other than any Dissenting Shares
(as defined in Section 1.7) will be canceled and extinguished and be
converted automatically into the right to receive, upon surrender of the
certificate representing such share of Company Common Stock and upon the
terms and subject to the conditions set forth below and throughout this
Agreement, including, without limitation Sections 1.6(e) and (f) hereof and
the escrow provisions set forth in Article VII and/or described in Section
1.8(b) hereof, a fraction of a share of Parent Common Stock equal to the
Stock Exchange Ratio.
(c) Assumption of Company Stock Options, Warrants and Other Rights to
Purchase Company Capital Stock.
(i) At the Effective Time, under this Agreement, each Company
Option will be assumed by Parent, and will continue to have, and be
subject to, the same terms and conditions governing such Company Option
immediately prior to the Effective Time (including, without limitation,
any vesting schedule or repurchase rights), except that (i) each Company
Option will be exercisable (or will become exercisable in accordance
with its terms) for that number of whole shares of Parent Common Stock
equal to the product of the number of shares of Company Common Stock
that were issuable upon exercise of such Company Option immediately
prior to the Effective Time multiplied by the Stock Exchange Ratio,
rounded down to the nearest whole number of shares of Parent Common
Stock, and (ii) the per share exercise price for the shares of Parent
Common Stock issuable upon exercise of such assumed Company Option will
be equal to the quotient determined by dividing the exercise price per
share of Company Common Stock at which such Company Option was
exercisable immediately prior to the Effective Time by the Stock
Exchange Ratio, rounded up to the nearest whole cent. It is the
intention of the parties that the assumed Company Options qualify to the
maximum extent possible following the Effective Time as incentive stock
options as defined in Section 422 of the Code to the extent such options
qualified as incentive stock options prior to the Effective Time. Within
thirty (30) days following the Effective Time, Parent will issue to each
holder of an outstanding Company Option a notice describing the
foregoing assumption of such Company Options by Parent.
(ii) Prior to the Effective Time, the Company shall take all action
necessary to effect the transactions anticipated by this Section 1.6(c)
under all Company Option agreements and any other plan or arrangement of
the Company.
(d) Capital Stock of Sub. Each share of common stock of Sub issued and
outstanding immediately prior to the Effective Time shall be converted into
and exchanged for one validly issued, fully paid and nonassessable share of
common stock of the Surviving Corporation. Each stock certificate of Sub
evidencing ownership of any such shares shall continue to evidence
ownership of such shares of capital stock of the Surviving Corporation.
(e) Withholding Taxes. All Parent Common Stock issuable pursuant to
Section 1.6 shall be subject to, and reduced by, the amount of any state,
federal and foreign withholding taxes incurred by or applicable to a
Shareholder (and that has not been previously paid by or on behalf of such
Shareholder or the Company) in connection with the Merger, the acquisition
of Company Capital Stock upon the exercise of Company Options, the
acceleration of the vesting of any Company Option or any Company Capital
Stock or the payment of a bonus in the form of Company Capital Stock.
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(f) Fractional Shares. No fractional share of Parent Common Stock
shall be issued in the Merger. In lieu thereof, any fractional share, after
aggregating all shares held by a Shareholder, shall be rounded down to the
nearest whole share of Parent Common Stock and to the extent required by
Section 407 of the California Law, such Shareholder will be entitled to
receive an amount of cash equal to the fractional shares to which such
Shareholder would be entitled, multiplied by the Trading Price.
(g) Adjustments to Stock Exchange Ratio. The Stock Exchange Ratio
shall be adjusted to reflect fully the effect of any stock split, reverse
split, dividend (including any dividend or distribution of cash, assets or
securities convertible into Parent Capital Stock or Company Capital Stock),
distribution, reorganization or recapitalization with respect to Parent
Common Stock or Company Capital Stock occurring after the date hereof and
prior to the Effective Time.
1.7 Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the contrary,
any shares of Company Capital Stock held by a holder who has exercised and
perfected appraisal rights for such shares in accordance with California
Law and who, as of the Effective Time, has not effectively withdrawn or
lost such dissenter's rights ("Dissenting Shares"), shall not be converted
into or represent a right to receive the consideration for Company Capital
Stock pursuant to Section 1.6, but the holder thereof shall only be
entitled to such rights as are granted by California Law.
(b) Notwithstanding the provisions of subsection (a), if any holder of
Dissenting Shares shall effectively withdraw or lose (through failure to
perfect or otherwise) his or her dissenter's rights, then, as of the later
of Effective Time and the occurrence of such event, such holder's shares
shall automatically be converted into and represent only the right to
receive the consideration for Company Capital Stock as provided in Section
1.6, without interest thereon, upon surrender of the certificate
representing such shares.
(c) The Company shall give Parent (i) prompt notice of any written
demand for purchase received by the Company pursuant to the applicable
provisions of California Law and (ii) the opportunity to participate in all
negotiations and proceedings with respect to such demands. The Company
shall not, except with the prior written consent of Parent, voluntarily
make any payment with respect to any such demands or offer to settle or
settle any such demands. To the extent that Parent or the Company makes any
payment or payments in respect of any Dissenting Shares, Parent shall be
entitled to recover under the terms of Article VII hereof the aggregate
amount by which such payment or payments exceed the aggregate consideration
that otherwise would have been payable in respect of such shares.
1.8 Surrender of Certificates.
(a) Exchange Agent. The Corporate Secretary of Parent or an
institution selected by Parent and reasonably satisfactory to the Company
shall serve as exchange agent (the "Exchange Agent") in the Merger.
(b) Parent to Provide Shares. Promptly after the Effective Time,
Parent shall make available to the Exchange Agent for exchange in
accordance with this Article I, Certificates representing the shares of
Parent Common Stock representing the Parent Common Stock Consideration (in
the aggregate amount to be issued in the Merger); provided, however, that
on behalf of the Shareholders, pursuant to Section 7.3 hereof, Parent shall
deposit into an escrow account the number of shares of Parent Common Stock
issued in respect of Company Common Stock held by such Shareholders
pursuant to Section 1.6(b) to the Escrow Agent on behalf of
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the Shareholders equal to the product obtained by multiplying (x) ten
percent (10%) by (y) the Parent Common Stock Consideration (the "Escrow
Amount"). The portion of the Escrow Amount contributed on behalf of each
Shareholder shall be in proportion to the aggregate number of shares of
Parent Common Stock which such Shareholder would otherwise be entitled to
receive in the Merger by virtue of ownership of outstanding shares of
Company Common Stock.
(c) Exchange Procedures. Concurrently with the distribution of the
Proxy Statement/ Prospectus (as hereinafter defined), Parent shall cause
the Exchange Agent to mail to each holder of record (as of such date) of a
certificate or certificates (the "Certificates") which immediately prior to
the Effective Time represented outstanding shares of Company Capital Stock
whose shares were converted into the right to receive shares of Parent
Common Stock pursuant to Section 1.6, (i) a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title
to the Certificates shall pass, only upon delivery of the Certificates to
the Exchange Agent and shall be in such form and have such other provisions
as Parent may reasonably specify) and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for certificates
representing shares of Parent Common Stock. Upon surrender of Certificates
for cancellation to the Exchange Agent or to such other agent or agents as
may be appointed by Parent, together with such letter of transmittal, duly
completed and validly executed in accordance with the instructions thereto,
the holders of such Certificates shall be entitled to receive in exchange
therefor certificates representing the number of whole shares of Parent
Common Stock, and the Certificates so surrendered shall forthwith be
canceled. Until so surrendered, outstanding Certificates will be deemed
from and after the Effective Time, for all corporate purposes, subject to
Section 1.8(d) as to the payment of dividends, to evidence the ownership of
the number of full shares of Parent Common Stock into which such shares of
Company Capital Stock shall have been so converted and the right to receive
any dividends or distributions payable pursuant to Section 1.8(d).
(d) Distributions With Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the date of this Agreement with
respect to Parent Common Stock with a record date after the Effective Time
will be paid to the holders of any unsurrendered Certificates with respect
to the shares of Parent Common Stock represented thereby until the holders
of record of such Certificates shall surrender such Certificates. Subject
to applicable law, following surrender of any such Certificates, the
Exchange Agent shall deliver to the record holders thereof, without
interest, certificates representing whole shares of Parent Common Stock
issued in exchange therefor and the amount of any such dividends or other
distributions with a record date after the Effective Time payable with
respect to such whole shares of Parent Common Stock. No interest shall
accrue or be owed to a Shareholder with respect to any amounts which the
Shareholder has the right to receive.
(e) Transfers of Ownership. If certificates for shares of Parent
Common Stock are to be issued in a name other than that in which the
Certificates surrendered in exchange therefor are registered, it will be a
condition of the issuance thereof that the Certificates so surrendered will
be properly endorsed and otherwise in proper form for transfer and that the
persons requesting such exchange will have paid to Parent or any agent
designated by it any transfer or other taxes required by reason of the
issuance of certificates for shares of Parent Common Stock in any name
other than that of the registered holder of the Certificates surrendered,
or established to the satisfaction of Parent or any agent designated by it
that such tax has been paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary in this
Section 1.8, none of the Exchange Agent, the Surviving Corporation or any
party hereto shall be liable to a holder of
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shares of Company Capital Stock for any amount properly paid to a public
official pursuant to any applicable abandoned property, escheat or similar
law.
1.9 No Further Ownership Rights in Company Capital Stock. All
consideration paid in respect of the surrender for exchange of shares of Company
Capital Stock in accordance with the terms hereof, shall be deemed to be full
satisfaction of all rights pertaining to such shares of Company Capital Stock,
and there shall be no further registration of transfers on the records of the
Surviving Corporation of shares of Company Capital Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this Article I.
1.10 Lost, Stolen or Destroyed Certificates. In the event any Certificates
evidencing shares of Company Capital Stock shall have been lost, stolen or
destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or
destroyed certificates, upon the making of an affidavit of that fact by the
holder thereof, such shares of Parent Common Stock as may be required pursuant
to Section 1.8; provided, however, that Parent may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificates to deliver a bond in such sum as it may
reasonably direct against any claim that may be made against Parent or the
Exchange Agent with respect to the certificates alleged to have been lost,
stolen or destroyed.
1.11 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of the Company, Parent and Sub, the officers and directors of the
Company, Parent and Sub are fully authorized in the name of their respective
corporations or otherwise to take, and will take, all such lawful and necessary
action.
1.12 Tax and Accounting Consequences. It is intended by the parties hereto
that the Merger shall constitute a reorganization within the meaning of Section
368 of the Internal Revenue Code of 1986, as amended (the "Code") and the
parties hereby adopt this Agreement as a plan of reorganization. Each party has
consulted with its own tax advisors and accountants with respect to the tax and
accounting consequences, respectively, of the Merger.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Sub, subject to such
exceptions as are specifically disclosed in the disclosure schedule (referencing
the appropriate Section and paragraph numbers) supplied by the Company to Parent
and attached hereto as Exhibit C (the "Disclosure Schedule"), that on the date
hereof and as of the Effective Time as though made at the Effective Time as
follows:
2.1 Organization of the Company. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California. The Company has the corporate power to own its properties and to
carry on its business as now being conducted. The Company is duly qualified to
do business and in good standing as a foreign corporation in each jurisdiction
in which the failure to be so qualified could have a Company Material Adverse
Effect. Each of the Subsidiaries (as defined in Section 2.2 below) of the
Company is duly organized, validly existing and in good standing under the laws
of the jurisdiction of its formation and has the corporate or other applicable
power to own its properties and to carry on its business as now being conducted.
Each of the Subsidiaries is duly qualified to do business and in good standing
in each jurisdiction
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outside of the jurisdiction of its formation in which the failure to be so
qualified would have a Company Material Adverse effect. For all purposes of this
Agreement, the term "Company Material Adverse Effect" means any change, event or
effect that is materially adverse to the business, assets (including intangible
assets), condition (financial or otherwise), results of operations or prospects
of the Company and its subsidiaries, taken as a whole; provided, however, that a
change, event or effect resulting directly from the announcement of this
Agreement and the Merger shall not be deemed to have a Company Material Adverse
Effect. The Company has delivered a true and correct copy of its Articles of
Incorporation and Bylaws, each as amended to date, to Parent. Section 2.1 of the
Disclosure Schedule lists the directors and officers of the Company. The
operations now being conducted by the Company have not been conducted under any
other name.
2.2 Subsidiaries. Except as set forth in Section 2.2 of the Disclosure
Schedule, the Company does not have, and has never had, any subsidiaries and
does not otherwise own, and has not otherwise owned, any shares in the capital
of or any interest in, or control of, directly or indirectly, any corporation,
partnership, association, joint venture or other business entity. The entities
set forth in Section 2.2 of the Disclosure Schedule are hereinafter occasionally
referred to individually as a "Subsidiary" and, collectively, as the
"Subsidiaries." Section 2.2 of the Disclosure Schedule also sets forth or
references the form and percentage interest of the Company in the Subsidiaries
and, to the extent that a Subsidiary set forth thereon is not wholly owned by
the Company, lists the other person, persons, entity or entities who have an
interest in such Subsidiary and references the percentage of such interest.
2.3 Company Capital Structure.
(a) The authorized Company Capital Stock consists of 30,000,000 shares
of authorized Company Common Stock, with no par value, of which 9,707,353
shares are issued and outstanding as of the date hereof, and 13,350,000
shares of Preferred Stock, with no par value, of which 4,750,000 shares are
designated Series A Preferred Stock, of which 4,650,000 are issued and
outstanding as of the date hereof 4,850,000 shares are designated Series B
Preferred Stock, of which 4,778,780 are issued and outstanding of the date
hereof and 3,750,000 shares are designated Series C Preferred Stock, of
which 3,552,540 are issued and outstanding as of the date hereof. Each
share of Company Series A Preferred Stock is convertible into 1 share of
Company Common Stock. Each share of Company Series B Preferred Stock is
convertible into 1 share of Company Common Stock. Each share of Company
Series C Preferred Stock is convertible into 1 share of Company Common
Stock. All outstanding shares of Preferred Stock will convert into Common
Stock prior to the Closing. The Company Capital Stock is held by the
persons, with the addresses and in the amounts set forth in Section 2.3(a)
of the Disclosure Schedule. All outstanding shares of Company Capital Stock
are duly authorized, validly issued, fully paid and non-assessable and not
subject to preemptive rights created by statute, the Articles of
Incorporation or Bylaws of the Company or any agreement to which the
Company is a party or by which it is bound and have been issued in
compliance with federal and state securities laws. There are no declared or
accrued unpaid dividends with respect to any shares of the Company's
Capital Stock. The Company has no other capital stock authorized, issued or
outstanding.
(b) Except for the Stock Option Plans, the Company has never adopted
or maintained any Stock Option Plans or other plan providing for equity
compensation of any person. The Company has reserved 7,092,500 shares of
Company Common Stock for issuance to employees and consultants pursuant to
the Stock Option Plans, and 2,003,074 shares are subject to outstanding
unexercised options as of the date hereof. Except as set forth on Section
2.3(b) of the Disclosure Schedule, there is no outstanding Company Capital
Stock which is subject to vesting. Section 2.3(b) of the Disclosure
Schedule sets forth for each outstanding Company Option, the
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name and the address of the holder, the number of shares of Company Common
Stock subject to such Company Warrant, the exercise price of such Company
Option, the vesting schedule of such Company Option including the extent to
which such Company Option has vested to the date hereof and whether the
vesting of such Company Option will be accelerated by reason of the
transactions contemplated by this Agreement, and whether such Company
Option is intended to qualify as an incentive stock option within the
meaning of Section 422 of the Code. Section 2.3(b) of the Disclosure
Schedule also sets forth the name of the holder of any Company Capital
Stock subject to vesting, the number of shares of Company Capital Stock
subject to vesting and the vesting schedule for such Company Capital Stock,
including the extent vested to date. Section 2.3(b) of the Disclosure
Schedule sets forth for each outstanding warrant to purchase Company
Capital Stock (a "Company Warrant"), the name of the holder, the number of
shares of Company Common Stock subject to such Company Warrant and the
exercise price of such Company Warrant. Except as set forth on Section
2.3(b) of the Disclosure Schedule, there are no options, warrants, calls,
rights, commitments or agreements of any character, written or oral, to
which the Company is a party or by which it is bound obligating the Company
to issue, deliver, sell, repurchase or redeem, or cause to be issued,
delivered, sold, repurchased or redeemed, any shares of the capital stock
of the Company or obligating the Company to grant, extend, accelerate the
vesting of, change the price of, otherwise amend or enter into any such
option, warrant, call, right, commitment or agreement. There are no
outstanding or authorized stock appreciation, phantom stock, profit
participation, or other similar rights with respect to the Company. There
are no voting trusts, proxies, or other agreements or understandings with
respect to the voting stock of the Company.
2.4 Authority. The Company has all requisite power and authority to enter
into this Agreement and any Related Agreements (as hereinafter defined) to which
it is a party and to consummate the transactions contemplated hereby and
thereby. The execution and delivery of this Agreement and any Related Agreements
to which the Company is a party and the consummation of the transactions
contemplated hereby and thereby have been duly authorized by all necessary
corporate action on the part of the Company, and no further action is required
on the part of the Company to authorize the Agreement, any Related Agreements to
which it is a party and the transactions contemplated hereby and thereby,
subject only to the approval of this Agreement by the Shareholders of record as
of the Record Date. This Agreement and the Merger have been unanimously approved
by the Board of Directors of the Company. This Agreement and any Related
Agreements to which the Company is a party have been duly executed and delivered
by the Company and, assuming the due authorization, execution and delivery by
the other parties hereto and thereto, constitute the valid and binding
obligation of the Company enforceable in accordance with their respective terms,
subject to the laws of general application relating to bankruptcy, insolvency
and the relief of debtors and to rules of law governing specific performance,
injunctive relief or other equitable remedies. The "Related Agreements" shall
mean all such ancillary agreements and certificates required in this Agreement
to be executed and delivered in connection with the transactions contemplated
hereby.
2.5 No Conflict. The execution and delivery by the Company of this
Agreement and any Related Agreements to which the Company is a party do not,
and, the consummation of the transactions contemplated hereby and thereby will
not, conflict with, or result in any violation of, or default under (with or
without notice or lapse of time, or both), or give rise to a right of
termination, cancellation, modification or acceleration of any obligation or
loss of any benefit under (any such event, a "Conflict") (i) any provision of
the Articles of Incorporation and Bylaws of the Company, (ii) any mortgage,
indenture, lease, contract or other agreement or instrument, permit, concession,
franchise or license to which the Company or any of its respective properties or
assets (including
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intangible assets) is subject, or (iii) any judgment, order, decree, statute,
law, ordinance, rule or regulation applicable to the Company or its respective
properties or assets.
2.6 Consents. No consent, waiver, approval, order or authorization of, or
registration, declaration or filing with, any court, administrative agency or
commission or other federal, state, county, local or other foreign governmental
authority, instrumentality, agency or commission ("Governmental Entity") is
required by or with respect to the Company in connection with the execution and
delivery of this Agreement and any Related Agreements to which the Company is a
party or the consummation of the transactions contemplated hereby and thereby,
except for (i) such consents, waivers, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
securities laws and (ii) the filing of the Merger Agreement with the Secretary
of State of the State of California.
2.7 Company Financial Statements. Section 2.7 of the Disclosure Schedule
sets forth the Company's audited consolidated balance sheet as of December 31,
1998 and the related audited consolidated statements of income and cash flow for
the twelve-month periods ended December 31, 1998 (the "Audited Financials") and
the Company's unaudited balance sheets as of December 31, 1999 and January 31,
2000, and the related unaudited statements of income and cash flow for the
twelve months and one month, respectively, then ended (the "Unaudited
Financials"). The Unaudited Financials and the Audited Financials are correct in
all material respects and have been prepared in accordance with GAAP applied on
a basis consistent throughout the periods indicated and consistent with each
other. The Unaudited Financials and Audited Financials present fairly the
consolidated financial condition and consolidated operating results of the
Company and any consolidated subsidiaries as of the dates and during the periods
indicated therein, subject in the case of the Unaudited Financials, to normal
year-end adjustments, which will not be material in amount or significance and
provided that the Unaudited Financials do not include footnotes typically
associated with financial statements. The Company's unaudited Balance Sheet as
of January 31, 2000 shall be hereinafter referred to as the "Current Balance
Sheet."
2.8 No Undisclosed Liabilities. The Company has no liability,
indebtedness, obligation, expense, claim, deficiency, guaranty or endorsement of
any type, whether accrued, absolute, contingent, matured, unmatured or other,
which individually or in the aggregate (i) has not been reflected in the Current
Balance Sheet, or (ii) has not arisen in the ordinary course of business
consistent with past practices since December 31, 1999, none of which is
material to the business, results of operations or condition (financial or
otherwise) of the Company.
2.9 No Changes. Since January 31, 2000 through the date of this Agreement,
there has not been, occurred or arisen any:
(a) amendments or changes to the Articles of Incorporation or Bylaws
of the Company;
(b) capital expenditure or commitment by the Company, exceeding
$50,000 individually or $100,000 in the aggregate;
(c) destruction of, damage to or loss of any material assets, business
or customer of the Company (whether or not covered by insurance);
(d) labor trouble or claim of wrongful discharge or other unlawful
labor practice or action;
(e) change in accounting methods or practices (including any change in
depreciation or amortization policies or rates) by the Company;
(f) revaluation by the Company of any of its assets;
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(g) declaration, setting aside or payment of a dividend or other
distribution with respect to the capital stock of the Company or any direct
or indirect redemption, purchase or other acquisition by the Company of its
capital stock other than repurchase of shares of Company Capital Stock from
employees in connection with the termination of such employees' employment
with the Company;
(h) increase in the salary or other compensation payable or to become
payable by the Company to any of its officers, directors, employees or
advisors, or the declaration, payment or commitment or obligation of any
kind for the payment, by the Company of a bonus or other additional salary
or compensation to any such person, other than "spot" bonuses paid to
employees and salary increases that do not exceed $20,000 individually or
$100,000 in the aggregate, annually;
(i) agreement, contract, covenant, instrument, lease, license or
commitment to which the Company is a party or by which it or any of its
assets (including intangible assets) are bound or any termination,
extension, amendment or modification the terms of any agreement, contract,
covenant, instrument, lease, license or commitment to which the Company is
a party or by which it or any of its assets are bound in each case
involving obligations or payments by or to the Company in excess of
$100,000 individually or $250,000 in the aggregate, other than commercial
licenses of the Company's software in the ordinary course of business;
(j) sale, lease, license or other disposition of any of the assets or
properties of the Company valued in excess of $50,000 individually or
$100,000 in the aggregate or any creation of any security interest in such
assets or properties, other than commercial licenses of the Company's
software in the ordinary course of business;
(k) loan by the Company to any person or entity, incurring by the
Company of any indebtedness, guaranteeing by the Company of any
indebtedness, issuance or sale of any debt securities of the Company or
guaranteeing of any debt securities of others, except for advances to
employees for travel and business expenses in the ordinary course of
business, consistent with past practice;
(l) waiver or release of any right or claim of the Company including
any write-off or other compromise of any account receivable of the Company
involving amounts in excess of $10,000 individually or $50,000 in the
aggregate;
(m) the commencement or notice or threat or reasonable basis therefor
of any lawsuit or, to the Company's Knowledge, proceeding or investigation
against the Company or its affairs;
(n) knowledge of any claim or potential claim of ownership by any
person other than the Company of the Company Intellectual Property (as
defined in Section 2.13) or of infringement by the Company of any other
person's Intellectual Property (as defined in Section 2.13);
(o) issuance or sale, or contract to issue or sell, by the Company of
any shares of its capital stock or securities exchangeable, convertible or
exercisable therefor, or any securities, warrants, options or rights to
purchase any of the foregoing, other than issuances under the Stock Option
Plans reflected on Schedule 2.3;
(p)(i) sale or license of any Company Intellectual Property or
entering into of any agreement with respect to the Company Intellectual
Property with any person or entity or with respect to the Intellectual
Property of any person or entity other than commercial licenses of the
Company's software in the ordinary course of business or (ii) purchase or
license of any Intellectual Property or entering into of any agreement with
respect to the Intellectual Property of any person or entity other than the
Company, except for end-user licenses of commercially
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available software applications for internal use by the Company in the
ordinary course of business or (iii) change in pricing or royalties set or
charged by the Company to its customers or licensees or in pricing or
royalties set or charged by persons who have licensed Intellectual Property
to the Company;
(q) event or condition of any character that has had or is reasonably
likely to have a Company Material Adverse Effect;
(r) transaction by the Company except in the ordinary course of
business as conducted on that date and consistent with past practices; or
(s) negotiation or agreement by the Company or any officer or employee
thereof to do any of the things described in the preceding clauses (a)
through (r) (other than negotiations or agreements with Parent and its
representatives regarding the transactions contemplated by this Agreement).
2.10 Tax Matters.
(a) Definition of Taxes. For the purposes of this Agreement, "Tax" or,
collectively, "Taxes," means (i) any and all federal, state, local and
foreign taxes, assessments and other governmental charges, duties,
impositions and liabilities, including taxes based upon or measured by
gross receipts, income, profits, sales, use and occupation, and value
added, ad valorem, transfer, franchise, withholding, payroll, recapture,
employment, excise and property taxes, together with all interest,
penalties and additions imposed with respect to such amounts; (ii) any
liability for the payment of any amounts of the type described in clause
(i) as a result of being a member of an affiliated, consolidated, combined
or unitary group for any period; and (iii) any liability for the payment of
any amounts of the type described in clause (i) or (ii) as a result of any
express or implied obligation to indemnify any other person or as a result
of any obligations under any agreements or arrangements with any other
person with respect to such amounts and including any liability for taxes
of a predecessor entity.
(b) Tax Returns and Audits.
(i) As of the Effective Time, the Company will have prepared and
timely filed all required federal, state, local and foreign returns,
estimates, information statements and reports ("Returns") relating to
any and all Taxes concerning or attributable to the Company or its
operations and such Returns are true and correct and have been completed
in accordance with applicable law.
(ii) As of the Effective Time, the Company (A) will have paid all
Taxes required to be paid by the Company on or before the Effective Time
or will have reflected a reserve for such Taxes on the Current Balance
Sheet and will have withheld with respect to its employees all federal
and state income taxes, FICA, FUTA and other Taxes required to be
withheld, and (B) will have accrued on the Current Balance Sheet all
Taxes attributable to the periods covered by the Current Balance Sheet
and will not have incurred any liability for Taxes for the period prior
to the Effective Time other than in the ordinary course of business.
(iii) The Company has not been delinquent in the payment of any Tax
nor is there any Tax deficiency outstanding, assessed or proposed
against the Company, nor has the Company executed any waiver of any
statute of limitations on or extending the period for the assessment or
collection of any Tax.
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(iv) No audit or other examination of any Return of the Company is
presently in progress, nor has the Company been notified of any request
for such an audit or other examination.
(v) As of the date of the Current Balance Sheet, the Company has no
liabilities for due but unpaid federal, state, local and foreign Taxes
which have not been accrued or reserved against on the Current Balance
Sheet, whether asserted or unasserted, contingent or otherwise.
(vi) The Company has made available to Parent or its legal counsel,
copies of all foreign, federal and state income and all state sales and
use the Returns for the Company filed for all periods since its
inception.
(vii) There are (and immediately following the Effective Time there
will be) no liens, pledges, charges, claims, restrictions on transfer,
mortgages, security interests or other encumbrances of any sort
(collectively, "Liens") on the assets of the Company relating to or
attributable to Taxes other than Liens for Taxes not yet due and
payable.
(viii) None of the Company's assets are treated as "tax-exempt use
property", within the meaning of Section 168(h) of the Code.
(ix) As of the Effective Time, there will not be any contract,
agreement, plan or arrangement, including but not limited to the
provisions of this Agreement, covering any employee or former employee
of the Company that, individually or collectively, could give rise to
the payment of any amount that would not be deductible as an expense
under applicable law.
(x) The Company has not filed any consent agreement under Section
341(f) of the Code or agreed to have Section 341(f)(4) of the Code apply
to any disposition of a subsection (f) asset (as defined in Section
341(f)(4) of the Code) owned by the Company.
(xi) The Company is not a party to any tax sharing, indemnification
or allocation agreement nor does the Company owe any amount under any
such agreement, other than this Agreement.
(xii) The Company's tax basis in its assets for purposes of
determining its future amortization, depreciation and other federal
income tax deductions is accurately reflected on the Company's tax books
and records.
(xiii) The Company is not and has never been at any time, a "United
States Real Property Holding Corporation" within the meaning of Section
897(c)(2) of the Code.
(xiv) No adjustment relating to any Return filed by the Company has
been proposed formally or, to the Knowledge of the Company, informally
by any tax authority to the Company or any representative thereof.
(xv) The Company has not participated (either as a "distributing"
or "controlled" corporation) in any transaction described in Section 355
of the Code.
(c) Executive Compensation Tax. There is no contract, agreement, plan
or arrangement to which the Company is a party as of the date of this
Agreement, including but not limited to the provisions of this Agreement,
covering any employee or former employee of Company, individually or
collectively, that could give rise to the payment of any amount that would
not be deductible pursuant to Sections 280G, 404 or 162(m) of the Code or
constitute a "parachute payment" under Section 280G of the Code.
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2.11 Restrictions on Business Activities. There is no agreement
(noncompete or otherwise), commitment, judgment, injunction, order or decree to
which the Company is a party or otherwise binding upon the Company which has or
may have the effect of prohibiting or impairing any business practice of the
Company, any acquisition of property (tangible or intangible) by the Company or
the conduct of business by the Company. Without limiting the foregoing, the
Company has not entered into any agreement under which it is restricted from
selling, licensing or otherwise distributing any of its technology or products
to or providing services to, customers or potential customers or any class of
customers, in any geographic area, during any period of time or in any segment
of the market.
2.12 Title of Properties; Absence of Liens and Encumbrances; Condition of
Equipment.
(a) The Company does not own any real property, nor has the Company
ever owned any real property. Section 2.12(a) of the Disclosure Schedule
sets forth a list of all real property currently leased by the Company, the
name of the lessor, the date of the lease and each amendment thereto and,
with respect to any current lease, the aggregate annual rental and/or other
fees payable under any such lease. All such current leases are in full
force and effect, are valid and effective in accordance with their
respective terms, and there is not, under any of such leases, any existing
default or event of default (or event which with notice or lapse of time,
or both, would constitute a default).
(b) The Company has good and valid title to, or, in the case of leased
properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used or held for use in
its business, free and clear of any Liens, except as reflected in the
Current Balance Sheet and except for Liens for Taxes not yet due and
payable and such imperfections of title and encumbrances, if any, which are
not material in character, amount or extent, and which do not detract from
the value, or interfere with the present use, of the property subject
thereto or affected thereby.
(c) Section 2.12(c) of the Disclosure Schedule lists all material
items of equipment (the "Equipment") owned or leased by the Company as of
the date hereof, and such Equipment is, (i) adequate for the conduct of the
business of the Company as currently conducted and (ii) in good operating
condition, regularly and properly maintained, subject to normal wear and
tear.
(d) The Company has sole and exclusive ownership, free and clear of
any Liens, of all customer files and other customer information relating to
customers of the Company's current and former customers (the "Customer
Information"). No person other than the Company possesses any claims or
rights with respect to use of the Customer Information.
2.13 Intellectual Property.
(a) For the purposes of this Agreement, the following terms have the
following definitions:
"Intellectual Property" shall mean any or all of the following (i)
works of authorship including, without limitation, computer programs,
source code and executable code, whether embodied in software, firmware
or otherwise, documentation, designs, files, records, data and mask
works, (ii) inventions (whether or not patentable), improvements, and
technology, (iii) proprietary and confidential information, trade
secrets and know how, (iv) databases, data compilations and collections
and technical data, (v) logos, trade names, trade dress, trademarks and
service marks, (vi) domain names, web addresses and sites, (vii) tools,
methods and processes, and (viii) all versions of the foregoing in any
form and embodied in any media.
"Intellectual Property Rights" shall mean worldwide common law and
statutory rights associated with (i) patents and patent applications,
(ii) copyrights, copyrights registrations
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and copyrights applications and "moral" rights, (iii) the protection of
trade and industrial secrets and confidential information, (iv) other
proprietary rights relating to intangible intellectual property, (v)
trademarks, trade names and service marks, (vi) analogous rights to
those set forth above, and (vii) divisions, continuations, renewals,
reissuances and extensions of the foregoing (as applicable) now existing
or hereafter filed, issued or acquired.
"Company Intellectual Property" shall mean any Intellectual
Property and Intellectual Property Rights that are owned by or
exclusively licensed to the Company.
"Registered Intellectual Property Rights" shall mean Intellectual
Property Rights that have been registered, filed, certified or otherwise
perfected by recordation with any state, government or other public
legal authority.
(b) Section 2.13(b) of the Disclosure Schedule lists as of the date
hereof all Registered Intellectual Property owned by, or filed in the name
of, the Company (the "Company Registered Intellectual Property") and lists
any proceedings or actions before any court, tribunal (including the United
States Patent and Trademark Office (the "PTO") or equivalent authority
anywhere in the world) related to any of the Company Registered
Intellectual Property Rights.
(c) Subject to licenses of the Company's software in the ordinary
course of business, each item of Company Intellectual Property, including
all Company Registered Intellectual Property listed in Section 2.13(b) of
the Disclosure Schedule and all Intellectual Property licensed to the
Company, is free and clear of any Liens or other encumbrances. The Company
is the exclusive owner or licensee of all Company Intellectual Property.
(d) To the extent that any Intellectual Property has been developed or
created independently or jointly by any person other than the Company for
which the Company has, directly or indirectly, paid, the Company has a
written agreement with such person with respect thereto, and the Company
thereby has obtained ownership of, and is the exclusive owner of, all such
Intellectual Property and associated Intellectual Property Rights by
operation of law or by valid assignment.
(e) Subject to licenses of the Company's software in the ordinary
course of business, the Company has not transferred ownership of or granted
any license of or right to use or authorized the retention of any rights to
use any Intellectual Property or Intellectual Property Rights that is or
was Company Intellectual Property, to any other person.
(f) The Company Intellectual Property, together with other
Intellectual Property to which the Company has a valid and subsisting
license, constitutes all the Intellectual Property and Intellectual
Property Rights used in and/or necessary to the conduct of the business of
the Company as it has been conducted in the past or as it currently is
conducted, or currently planned to be conducted, including, without
limitation, the design, development, manufacture, use, import and sale of
products, technology and services (including products, technology or
services currently under development).
(g) Other than "shrink-wrap" and similar widely available commercial
end-user licenses, and licenses of the Company's software in the ordinary
course of business the contracts, licenses and agreements listed in Section
2.13(g) of the Disclosure Schedule include all contracts, licenses and
agreements to which the Company is a party with respect to any Intellectual
Property and Intellectual Property Rights. No person who has licensed
Intellectual Property or Intellectual Property Rights to the Company has
ownership rights or license rights to
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improvements made by the Company in such Intellectual Property which has
been licensed to the Company.
(h) Section 2.13(h) of the Disclosure Schedule lists as of the date
hereof all contracts, licenses and agreements between the Company and any
other person wherein or whereby the Company has agreed to, or assumed, any
obligation or duty to warrant, indemnify, reimburse, hold harmless,
guaranty or otherwise assume or incur any obligation or liability or
provide a right of rescission with respect to the infringement or
misappropriation by the Company or such other person of the Intellectual
Property Rights of any person other than the Company.
(i) The operation of the business of the Company as it has been
conducted in the past or as it currently is conducted or is currently
planned to be conducted by the Company, including but not limited to the
design, development, use, import, manufacture and sale of the products,
technology or services (including products, technology or services
currently under development) of the Company does not infringe or
misappropriate the Intellectual Property Rights of any person, violate the
rights of any person (including rights to privacy or publicity), or
constitute unfair competition or trade practices under the laws of any
jurisdiction, and the Company has not received notice from any person
claiming that such operation or any act, product, technology or service
(including products, technology or services currently under development) of
the Company infringes or misappropriates the Intellectual Property Rights
of any person or constitutes unfair competition or trade practices under
the laws of any jurisdiction (nor does the Company have Knowledge of any
basis therefor).
(j) Each item of Company Registered Intellectual Property is valid and
subsisting, and all necessary registration, maintenance and renewal fees in
connection with such Company Registered Intellectual Property have been
paid and all necessary documents and certificates in connection with such
Company Registered Intellectual Property have been filed with the relevant
patent, copyright, trademark or other authorities in the United States or
foreign jurisdictions, as the case may be, for the purposes of maintaining
such Company Registered Intellectual Property. There are no actions that
must be taken by the Company within sixty (60) days of the date hereof,
including the payment of any registration, maintenance or renewal fees or
the filing of any documents, applications or certificates for the purposes
of maintaining, perfecting or preserving or renewing any Company Registered
Intellectual Property. In each case in which the Company has acquired any
Intellectual Property Rights from any person, the Company has obtained a
valid and enforceable assignment sufficient to transfer such rights in such
Intellectual Property as are necessary for development and license of the
Company's products.
(k) There are no contracts, licenses or agreements between the Company
and any other person with respect to Company Intellectual Property under
which there is any dispute known to the Company regarding the scope of such
agreement, or performance under such agreement including with respect to
any payments to be made or received by the Company thereunder.
(l) To the Knowledge of the Company, no person is infringing or
misappropriating any Company Intellectual Property.
(m) The Company has taken commercially reasonable steps that are
required to protect the Company's rights in confidential information and
trade secrets of the Company or provided by any other person to the
Company. Without limiting the foregoing, the Company has, and enforces, a
policy requiring each employee, consultant and contractor to execute
proprietary information, confidentiality and assignment agreements
substantially in the Company's standard forms, and all current and former
employees, consultants and contractors of the Company have executed such an
agreement.
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(n) No Company Intellectual Property, Intellectual Property Rights or
service of the Company is subject to any proceeding or outstanding decree,
order, judgment, agreement or stipulation that restricts in any manner the
use, transfer or licensing thereof by the Company or may affect the
validity, use or enforceability of such Company Intellectual Property.
(o) No (i) product, technology, service or publication of the Company,
(ii) material published or distributed by the Company or (iii) conduct or
statement of Company constitutes obscene material, a defamatory statement
or material, false advertising or otherwise violates any law or regulation.
(p) All of the Company's products (including products currently under
development) will record, store, process, calculate and present calendar
dates falling on and after (and if applicable, spans of time including)
January 1, 2000, and will calculate any information dependent on or
relating to such dates in the same manner, and with the same functionality,
data integrity and performance, as the products record, store, process,
calculate and present calendar dates on or before December 31, 1999, or
calculate any information dependent on or relating to such dates
(collectively, "Year 2000 Compliant"). All of the Company's products (i)
will lose no functionality with respect to the introduction of records
containing dates falling on or after January 1, 2000 and (ii) will be
interoperable with other products used and distributed by Parent that may
deliver records to the Company's products or receive records from the
Company's products, or interact with the Company's products, including but
not limited to back-up and archived data. All of the Company's internal
computer and technology products and systems are Year 2000 Compliant.
2.14 Agreements, Contracts and Commitments.
(a) Except as set forth in Sections 2.13(g), 2.13(h) or 2.14(a) of the
Disclosure Schedule, as of the date hereof, the Company is not a party to
nor is it bound by:
(i) any employment or consulting agreement, contract or commitment,
other than confidentiality agreements, with an employee or individual
consultant or salesperson or consulting or sales agreement, contract or
commitment with a firm or other organization,
(ii) any agreement or plan, including, without limitation, any
Stock Option Plans, stock appreciation rights plan or stock purchase
plan, any of the benefits of which will be increased, or the vesting of
benefits of which will be accelerated, by the occurrence of any of the
transactions contemplated by this Agreement or the value of any of the
benefits of which will be calculated on the basis of any of the
transactions contemplated by this Agreement,
(iii) any fidelity or surety bond or completion bond,
(iv) any lease of personal property having a value individually in
excess of $50,000 or $100,000 in the aggregate,
(v) any agreement, contract or commitment containing any covenant
limiting the freedom of the Company to engage in any line of business or
to compete with any person,
(vi) any agreement, contract or commitment relating to capital
expenditures and involving future payments in excess of $250,000
individually or $1,000,000 in the aggregate,
(vii) any agreement, contract or commitment relating to the
disposition or acquisition of assets or any interest in any business
enterprise outside the ordinary course of the Company's business,
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(viii) any mortgages, indentures, loans or credit agreements,
security agreements or other agreements or instruments relating to the
borrowing of money or extension of credit,
(ix) any purchase order or contract for the purchase of materials
involving in excess of $250,000 individually,
(x) any construction contracts involving future obligation of the
Company in excess of $250,000 individually,
(xi) any dealer, distribution, joint marketing or development
agreement,
(xii) any sales representative, original equipment manufacturer,
value added, remarketer, reseller or independent software vendor or
other agreement for use or distribution of the Company's products,
technology or services, or
(xiii) any other agreement, contract or commitment that involves
$250,000 individually or is not cancelable without penalty within thirty
(30) days.
(b) The Company is in compliance with and has not breached, violated
or defaulted under, or received notice that it has breached, violated or
defaulted under, any of the terms or conditions of any agreement, contract,
covenant, instrument, lease, license or commitment to which it is a party
or by which it is bound (collectively a "Contract"), nor does the Company
have Knowledge of any event that would constitute such a breach, violation
or default with the lapse of time, giving of notice or both. Each Contract
is in full force and effect and is not subject to any default thereunder by
any party obligated to the Company pursuant thereto. The Company has
obtained, or will obtain prior to the Closing Date, all necessary consents,
waivers and approvals of parties to any Contract as are required thereunder
in connection with the Merger or for such Contracts to remain in effect
without modification after the Closing. Following the Effective Time, the
Company will be permitted to exercise all of its rights under the Contracts
without the payment of any additional amounts or consideration other than
ongoing fees, royalties or payments which the Company would otherwise be
required to pay had the transactions contemplated by this Agreement not
occurred. and all consents, waivers, assignments and approvals under any of
the Contracts as may be required in connection with the Merger are set
forth in Section 2.14(c) of the Disclosure Schedule.
2.15 Interested Party Transactions. No officer, director or, to the
Company's knowledge, Shareholder (nor any ancestor, sibling, descendant or
spouse of any of such persons, or any trust, partnership or corporation in which
any of such persons has or has had any direct or indirect interest), has or has
had, directly or indirectly, (i) an interest in any entity which furnished or
sold, or furnishes or sells, services, products or technology that the Company
furnishes or sells, or proposes to furnish or sell, or (ii) any interest in any
entity that purchases from or sells or furnishes to the Company any goods or
services or (iii) a beneficial interest in any Contract; provided, that
ownership of no more than one percent (1%) of the outstanding voting stock of a
publicly traded corporation shall not be deemed an "interest in any entity" for
purposes of this Section 2.15.
2.16 Governmental Authorization. Section 2.16 of the Disclosure Schedule
accurately lists each consent, license, permit, grant or other authorization
issued to the Company by a Governmental Entity (i) pursuant to which the Company
currently operates or holds any interest in any of their properties or (ii)
which is required for the operation of its business or the holding of any such
interest (herein collectively called "Company Authorizations"). The Company
Authorizations are in full force and effect and constitute all Company
Authorizations required to permit the Company to operate or conduct its business
or hold any interest in its properties or assets.
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2.17 Litigation. There is no action, suit, claim or proceeding of any
nature pending, or, to the Company's Knowledge, threatened, against the Company,
its properties (tangible or intangible) or any of their officers or directors,
nor, to the Knowledge of the Company, is there any reasonable basis therefor. To
the Company's Knowledge, there is no investigation pending or threatened against
the Company, its properties or any of their officers or directors (nor, to the
best Knowledge of the Company, is there any reasonable basis therefor) by or
before any Governmental Entity. No Governmental Entity has at any time
challenged or questioned the legal right of the Company to conduct its
operations as presently or previously conducted.
2.18 Accounts Receivable; Inventory.
(a) The Company has made available to Parent a list of all accounts
receivable of the Company as of January 31, 2000 along with a range of days
elapsed since invoice.
(b) All accounts receivable arose in the ordinary course of business,
are carried at values determined in accordance with GAAP consistently
applied. The reserves associated with such accounts receivable were
established in accordance with GAAP. No person has any Lien on any of such
Accounts Receivable and no request or agreement for deduction or discount
has been made with respect to any of such Accounts Receivable.
(c) The Company does not maintain any inventory on its financial
statements. Such policy is in accordance with GAAP.
2.19 Minute Books. The minutes of the Company made available to counsel
for Parent are the only minutes of the Company and contain a reasonably accurate
summary of all meetings of the Board of Directors (or committees thereof) of the
Company and its respective shareholders or actions by written consent since the
time of incorporation of the Company.
2.20 Environmental Matters.
(a) Hazardous Material. The Company has not: (i) operated any
underground storage tanks at any property that the Company has at any time
owned, operated, occupied or leased; or (ii) illegally released any
material amount of any substance that has been designated by any
Governmental Entity or by applicable federal, state or local law to be
radioactive, toxic, hazardous or otherwise a danger to health or the
environment, including, without limitation, PCBs, asbestos, petroleum, and
urea-formaldehyde and all substances listed as hazardous substances
pursuant to the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended, or defined as a hazardous waste pursuant
to the United States Resource Conservation and Recovery Act of 1976, as
amended, and the regulations promulgated pursuant to said laws (a
"Hazardous Material"), but excluding office and janitorial supplies
properly and safely maintained. To the Company's knowledge, no Hazardous
Materials are present as a result of the deliberate actions of the Company
or as a result of any actions of any other person or otherwise, in, on or
under any property, including the land and the improvements, ground water
and surface water thereof, that the Company has at any time owned,
operated, occupied or leased.
(b) Hazardous Materials Activities. The Company has not transported,
stored, used, manufactured, disposed of, released or exposed its employees
or others to Hazardous Materials in violation of any law in effect on or
before the Effective Time, nor has either of them disposed of, transported,
sold, or manufactured any product containing a Hazardous Material (any or
all of the foregoing being collectively referred to as "Hazardous Materials
Activities") in violation of any rule, regulation, treaty or statute
promulgated by any Governmental Entity in effect prior to
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or as of the date hereof to prohibit, regulate or control Hazardous
Materials or any Hazardous Material Activity.
(c) Permits. The Company currently holds all environmental approvals,
permits, licenses, clearances and consents (the "Environmental Permits")
necessary for the conduct of the Company's Hazardous Material Activities,
respectively, and other businesses of the Company as such activities and
businesses are currently being conducted.
(d) Environmental Liabilities. No action, proceeding, revocation
proceeding, amendment procedure, writ, injunction or claim is pending, or
to the Company's Knowledge, threatened concerning any Environmental Permit,
Hazardous Material or any Hazardous Materials Activity of the Company. The
Company does not have Knowledge of any fact or circumstance which could
reasonably be expected to involve the Company in any environmental
litigation or impose upon the Company any environmental liability.
2.21 Brokers' and Finders' Fees; Third Party Expenses. Except as set forth
in Section 2.21(a) of the Disclosure Schedule, the Company has not incurred, nor
will it incur, directly or indirectly, any liability for brokerage or finders'
fees or agents' commissions or any similar charges in connection with the
Agreement or any transaction contemplated hereby. Section 2.21(a) of the
Disclosure Schedule sets forth the principal terms and conditions of any
agreement, written or oral, with respect to such fees. Section 2.21(b) of the
Disclosure Schedule sets forth the Company's current reasonable estimate of all
Third Party Expenses (as defined in Section 5.9) expected to be incurred by the
Company in connection with the negotiation and effectuation of the terms and
conditions of this Agreement and the transactions contemplated hereby.
2.22 Employee Matters and Benefit Plans.
(a) Definitions. For purposes of this Agreement, the following terms
shall have the meanings set forth below:
(i) "Code" shall mean the Internal Revenue Code of 1986, as
amended;
(ii) "Company Employee Plan" shall mean any plan, program, policy,
practice, contract, agreement or other arrangement providing for
compensation, severance, termination pay, deferred compensation,
performance awards, stock or stock-related awards, fringe benefits or
other employee benefits or remuneration of any kind, whether written or
unwritten or otherwise, funded or unfunded, including without
limitation, each "employee benefit plan," within the meaning of Section
3(3) of ERISA which is or has been maintained, contributed to, or
required to be contributed to, by the Company or any ERISA Affiliate for
the benefit of any Employee, or with respect to which the Company or any
ERISA Affiliate has or may have any liability or obligation;
(iii) "COBRA" shall mean the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended;
(iv) "DOL" shall mean the Department of Labor;
(v) "Employee" shall mean any current or former employee,
consultant or director of the Company or any Affiliate;
(vi) "Employee Agreement" shall mean each management, employment,
severance, consulting, relocation, repatriation, expatriation, visas,
work permit or other agreement, contract or understanding between the
Company or any ERISA Affiliate and any Employee pursuant to which such
Employee has (A) any continued right of employment, (B) any
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right of severance, separation pay, salary continuation, or other
compensation or money owed, or (C) any change of right as a result of a
merger, acquisition or change of control of the Company;
(vii) "ERISA" shall mean the Employee Retirement Income Security
Act of 1974, as amended;
(viii) "ERISA Affiliate" shall mean any other person or entity
under common control with the Company within the meaning of Section
414(b), (c), (m) or (o) of the Code and the regulations issued
thereunder;
(ix) "FMLA" shall mean the Family Medical Leave Act of 1993, as
amended;
(x) "International Employee Plan" shall mean each Company Employee
Plan that has been adopted or maintained by the Company or any ERISA
Affiliate, whether informally or formally, or with respect to which the
Company or any ERISA Affiliate will or may have any liability, for the
benefit of Employees who perform services outside the United States;
(xi) "IRS" shall mean the Internal Revenue Service;
(xii) "Multiemployer Plan" shall mean any "Pension Plan" (as
defined below) which is a "multiemployer plan," as defined in Section
3(37) of ERISA;
(xiii) "PBGC" shall mean the Pension Benefit Guaranty Corporation;
and
(xiv) "Pension Plan" shall mean each Company Employee Plan which is
an "employee pension benefit plan," within the meaning of Section 3(2)
of ERISA.
(b) Schedule. Section 2.22(b) of the Disclosure Schedule contains an
accurate and complete list of each Company Employee Plan, International
Employee Plan, each Employment Agreement. The Company does not have any
plan or commitment to establish any new Company Employee Plan,
International Employee Plan, or Employee Agreement, to modify any Company
Employee Plan or Employee Agreement (except to the extent required by law
or to conform any such Company Employee Plan or Employee Agreement to the
requirements of any applicable law, in each case as previously disclosed to
Parent in writing, or as required by this Agreement), or to adopt or enter
into any Company Employee Plan, International Employee Plan, or Employee
Agreement.
(c) Documents. The Company has made available to Parent: (i) correct
and complete copies of all documents embodying each Company Employee Plan,
International Employee Plan, and each Employee Agreement including (without
limitation) all amendments thereto and all related trust documents; (ii)
the most recent annual actuarial valuations, if any, prepared for each
Company Employee Plan; (iii) the three (3) most recent annual reports (Form
Series 5500 and all schedules and financial statements attached thereto),
if any, required under ERISA or the Code in connection with each Company
Employee Plan; (iv) if the Company Employee Plan is funded, the most recent
annual and periodic accounting of Company Employee Plan assets; (v) the
most recent summary plan description together with the summary(ies) of
material modifications thereto, if any, required under ERISA with respect
to each Company Employee Plan; (vi) all IRS determination, opinion,
notification and advisory letters, and all applications and correspondence
to or from the IRS or the DOL with respect to any such application or
letter; (vii) all material written agreements and contracts relating to
each Company Employee Plan, including, but not limited to, administrative
service agreements, group annuity contracts and group insurance contracts;
(viii) all communications material to any Employee or Employees relating to
any Company Employee Plan and any proposed Company
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Employee Plans, in each case, relating to any amendments, terminations,
establishments, increases or decreases in benefits, acceleration of
payments or vesting schedules or other events which would result in any
material liability to the Company; (ix) all correspondence to or from any
governmental agency relating to any Company Employee Plan; (x) all COBRA
forms and related notices (or such forms and notices as required under
comparable law); (xi) all policies pertaining to fiduciary liability
insurance covering the fiduciaries for each Company Employee Plan; (xii)
the three (3) most recent plan years discrimination tests for each Company
Employee Plan; and (xiii) all registration statements, annual reports (Form
11-K and all attachments thereto) and prospectuses prepared in connection
with each Company Employee Plan.
(d) Employee Plan Compliance. (i) The Company has performed in all
material respects all obligations required to be performed by it under, is
not in default or violation of, and has no knowledge of any default or
violation by any other party to 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 compliance with all applicable
laws, statutes, orders, rules and regulations, including but not limited to
ERISA or the Code; (ii) each Company Employee Plan intended to qualify
under Section 401(a) of the Code and each trust intended to qualify under
Section 501(a) of the Code has either received a favorable determination,
opinion, notification or advisory letter from the IRS with respect to each
such Plan as to its qualified status under the Code, including all
amendments to the Code effected by the Tax Reform Act of 1986 and
subsequent legislation, or has remaining a period of time under applicable
Treasury regulations or IRS pronouncements in which to apply for such a
letter and make any amendments necessary to obtain a favorable
determination as to the qualified status of each such Company Employee
Plan; (iii) no "prohibited transaction," within the meaning of Section 4975
of the Code or Sections 406 and 407 of ERISA, and not otherwise exempt
under Section 4975 or Section 408 of ERISA (or any administrative class
exemption issued thereunder), has occurred with respect to any Company
Employee Plan; (iv) there are no actions, suits or claims pending, or, to
the knowledge of the Company, threatened or reasonably anticipated (other
than routine claims for benefits) against any Company Employee Plan or
against the assets of any Company Employee Plan; (v) each Company Employee
Plan (other than any Stock Option Plans) can be amended, terminated or
otherwise discontinued after the Effective Time, without material liability
to the Parent, Company or any of its Affiliates (other than ordinary
administration expenses); (vi) there are no audits, inquiries or
proceedings pending or, to the knowledge of the Company or any Affiliates,
threatened by the IRS or DOL with respect to any Company Employee Plan; and
(vii) neither the Company nor any Affiliate is subject to any penalty or
tax with respect to any Company Employee Plan under Section 502(i) of ERISA
or Sections 4975 through 4980 of the Code.
(e) Pension Plan. Neither the Company nor any ERISA Affiliate has ever
maintained, established, sponsored, participated in, or contributed to, any
Pension Plan which is subject to Title IV of ERISA or Section 412 of the
Code.
(f) Multiemployer and Multiple Employer Plans. At no time has the
Company or any ERISA Affiliate contributed to or been obligated to
contribute to any Multiemployer Plan. Neither the Company, nor any ERISA
Affiliate has at any time ever maintained, established, sponsored,
participated in, or contributed to any multiple employer plan, or to any
plan described in Section 413(c) of the Code.
(g) No Post-Employment Obligations. No Company Employee Plan provides,
or reflects or represents any liability to provide retiree health benefits
to any person for any reason, except as may be required by COBRA or other
applicable statute, and the Company has never
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represented, promised or contracted (whether in oral or written form) to
any Employee (either individually or to Employees as a group) or any other
person that such Employee(s) or other person would be provided with retiree
health benefits, except to the extent required by statute.
(h) Health Care Compliance. Neither the Company nor any ERISA
Affiliate has, prior to the Effective Time and in any material respect,
violated any of the health care continuation requirements of COBRA, the
requirements of FMLA, the requirements of the Health Insurance Portability
and Accountability Act of 1996, the requirements of the Women's Health and
Cancer Rights Act, the requirements of the Newborns' and Mothers' Health
Protection Act of 1996, or any amendment to each such Act, or any similar
provisions of state law applicable to its Employees.
(i) Effect of Transaction. Except as set forth on Sections 2.3(b) or
2.22(i) of the Disclosure Schedule, the execution of this Agreement and the
consummation of the transactions contemplated hereby will not (either alone
or upon the occurrence of any additional or subsequent events) constitute
an event under any Company Employee Plan, Employee Agreement, trust or loan
that will or may result in any payment (whether of severance pay or
otherwise), acceleration, forgiveness of indebtedness, vesting,
distribution, increase in benefits or obligation to fund benefits with
respect to any Employee.
(j) Employment Matters. The Company: (i) is in compliance in all
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; (ii) has withheld and reported all amounts required by law or by
agreement to be withheld and reported with respect to wages, salaries and
other payments to Employees; (iii) is not liable for any arrears of wages
or any taxes or any penalty for failure to comply with any of the
foregoing; and (iv) is not liable for any payment to any trust or other
fund governed by or maintained by or on behalf of any governmental
authority, with respect to unemployment compensation benefits, social
security or other benefits or obligations for Employees (other than routine
payments to be made in the normal course of business and consistent with
past practice). There are no pending, threatened or reasonably anticipated
claims or actions against the Company under any worker's compensation
policy or long-term disability policy.
(k) Labor. No work stoppage or labor strike against the Company is
pending, threatened or reasonably anticipated. The Company does not know of
any activities or proceedings of any labor union to organize any Employees.
There are no actions, suits, claims, labor disputes or grievances pending,
or, to the knowledge of the Company, threatened or reasonably anticipated
relating to any labor, safety or discrimination matters involving any
Employee, including, without limitation, charges of unfair labor practices
or discrimination complaints, which, if adversely determined, would,
individually or in the aggregate, result in any material liability to the
Company. Neither the Company nor any of its subsidiaries has 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, any collective bargaining agreement or union contract with
respect to Employees and no collective bargaining agreement is being
negotiated by the Company.
(l) International Employee Plan. Each International Employee Plan has
been established, maintained and administered in compliance with its terms
and conditions and with the requirements prescribed by any and all
statutory or regulatory laws that are applicable to such International
Employee Plan. Furthermore, no International Employee Plan has unfunded
liabilities, that as of the Effective Time, will not be offset by insurance
or fully accrued. Except
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as required by law, no condition exists that would prevent the Company or
Parent from terminating or amending any International Employee Plan at any
time for any reason without liability to the Company or its Affiliates
(other than ordinary administration expenses or routine claims for
benefits).
2.23 Insurance. Section 2.23 of the Disclosure Schedule lists all
insurance policies and fidelity bonds covering the assets, business, equipment,
properties, operations, employees, officers and directors of the Company. There
is no claim by the Company pending under any of such policies or bonds as to
which coverage has been questioned, denied or disputed by the underwriters of
such policies or bonds. All premiums due and payable under all such policies and
bonds have been paid, and the Company is otherwise in compliance with the terms
of such policies and bonds (or other policies and bonds providing substantially
similar insurance coverage). The Company does not have Knowledge of any
threatened termination of, or premium increase with respect to, any of such
policies.
2.24 Compliance with Laws. The Company has complied with, is not in
violation of, and has not received any notices of violation with respect to, any
material foreign, federal, state or local statute, law or regulation.
2.25 Warranties; Indemnities. Except for the warranties and indemnities
contained in (i) those contracts and agreements set forth in Section 2.13(g) of
the Disclosure Schedule and (ii) the Company's standard license agreements
substantially in the form set forth in Section 2.13(d) of the Disclosure
Schedule, the Company has not given any warranties or indemnities relating to
products or technology sold or licensed or services rendered by the Company.
2.26 Voting Agreements. The Principal Shareholders (as defined below) who
are executing Voting Agreements pursuant to Section 5.14, own in the aggregate a
sufficient percentage of the outstanding voting securities of the Company to
approve the Merger under California Law, and the Company's Articles of
Incorporation.
2.27 Complete Copies of Materials. The Company has delivered or made
available true and complete copies of each document (or summaries of same) that
has been requested by Parent or its counsel.
2.28 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by Company for inclusion or incorporation by
reference in (i) the registration statement on Form S-4 to be filed with the SEC
by Parent in connection with the issuance of the Parent Common Stock in or as a
result of the Merger (the "S-4") will, at the time the S-4 becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading; and (ii) the proxy statement/prospectus to be
filed with the SEC by Company and Parent pursuant to Section 5.1(a) hereof (the
"Proxy Statement/Prospectus") will, at the dates mailed to the stockholders of
Parent and Company, at the times of the stockholders meeting of Company (the
"Company Stockholders' Meeting") and the Stockholders meeting of Parent (the
"Parent Stockholders' Meeting") in connection with the transactions contemplated
hereby and as of the Effective Time, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they are made, not misleading. The Proxy Statement/Prospectus will
comply as to form in all material respects with the provisions of the Exchange
Act and the rules and regulations promulgated by the SEC thereunder.
Notwithstanding the foregoing, the Company makes no representation or warranty
with respect to any
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information supplied by Parent or Sub for use in and which is contained in any
of the foregoing documents.
2.29 Representations Complete. None of the representations or warranties
made by the Company (as modified by the Disclosure Schedule), nor any statement
made in any Schedule or certificate furnished by the Company pursuant to this
Agreement or furnished in or in connection with documents mailed or delivered to
the Shareholders for use in soliciting their consent to this Agreement and the
Merger contains or will contain at the Effective Time, any untrue statement of a
material fact, or omits or will omit at the Effective Time to state any material
fact necessary in order to make the statements contained herein or therein, in
the light of the circumstances under which made, not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub represent and warrant to the Company that on the date
hereof, and as of the Effective Time as though made on the date hereof, as
follows:
3.1 Organization of Parent and Sub. Parent and each of its subsidiaries 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. Each of
Parent, Sub and the other subsidiaries of Parent has the corporate power to own
its properties and to carry on its business as now being conducted. Each of
Parent, Sub and the other subsidiaries of Parent is duly qualified to do
business and in good standing as a foreign corporation in each jurisdiction in
which the failure to be so qualified could have a Parent Material Adverse
Effect. For all purposes of this Agreement, the term "Parent Material Adverse
Effect" means any change, event or effect that is materially adverse to the
business, assets (including intangible assets), condition (financial or
otherwise), results of operations or prospects of the Parent and its
subsidiaries, taken as a whole; provided, however, that neither (i) a decline in
the market price of the Parent's Common Stock that is not as a result of other
changes to the business, assets (including intangible assets), conditions
(financial or otherwise), results of operations or prospects of Parent and its
subsidiaries, taken as a whole, nor (ii) a change, event or effect resulting
directly from the announcement of this Agreement and the Merger, shall be deemed
to have a Parent Material Adverse Effect. Parent has made available a true and
correct copy of the Certificate of Incorporation and Bylaws of Parent and Sub,
each as amended to date, to the Company.
3.2 Authority. Each of Parent and Sub has all requisite power and
authority to enter into this Agreement and any Related Agreements to which it is
a party and to consummate the transactions contemplated hereby and thereby. The
execution and delivery of this Agreement and any Related Agreements to which
Parent is a party and the consummation of the transactions contemplated hereby
and thereby have been duly authorized by all necessary corporate action on the
part of Parent and Sub, and no further action is required on the part of Parent
and Sub to authorize the Agreement, any Related Agreements to which it is a
party and the transactions contemplated hereby and thereby subject only to the
approval of this Agreement by the stockholders of Parent. This Agreement and the
Merger have been approved by the Board of Directors of Parent and Sub and the
Stockholders Sub. This Agreement and any Related Agreements to which Parent is a
party have been duly executed and delivered by Parent and, assuming the due
authorization, execution and delivery by the other parties hereto and thereto,
constitute the valid and binding obligation of Parent enforceable in accordance
with their respective terms, subject to the laws of general application relating
to bankruptcy, insolvency and the relief of debtors and to rules of law
governing specific performance, injunctive relief or other equitable remedies.
This Agreement and any Related Agreements to which
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Sub is a party have been duly executed and delivered by Sub and, assuming the
due authorization, execution and delivery by the other parties hereto and
thereto, constitute the valid and binding obligation of Sub enforceable in
accordance with their respective terms, subject to the laws of general
application relating to bankruptcy, insolvency and the relief of debtors and to
rules of law governing specific performance, injunctive relief or other
equitable remedies.
3.3 No Conflict. The execution and delivery by Parent of this Agreement
and any Related Agreements to which Parent is a party and the execution and
delivery by Sub of this Agreement and any Related Agreements to which Sub is a
party do not, and the consummation of the transactions contemplated hereby and
thereby will not, or result in, any Conflict with or under (i) any provision of
the Certificate of Incorporation and Bylaws of Parent, Sub or any other
Subsidiary of Parent, (ii) any mortgage, indenture, lease, contract or other
agreement or instrument, permit, concession, franchise or license to which
Parent, Sub or any other Subsidiary of Parent or any of their respective
properties or assets (including intangible assets) is subject, or (iii) any
judgment, order, decree, statute, law, ordinance, rule or regulation applicable
to Parent, Sub or any other Subsidiary of Parent or its respective properties or
assets or any judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Sub or its respective properties or assets.
3.4 Consents. No consent, waiver, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is required by
or with respect to Parent or Sub in connection with the execution and delivery
of this Agreement and Related Agreements to which Parent or Sub is a party or
the consummation of the transactions contemplated hereby and thereby, except for
(i) such consents, waivers, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable securities laws and
(ii) the filing of the Merger Agreement with the Secretary of State of the State
of California.
3.5 Capital Structure.
(a) The authorized stock of Parent consists of 100,000,000 shares of
Common Stock, $0.0001 par value, of which 32,309,194 shares were issued and
outstanding as of February 29, 2000, and 5,000,000 shares of undesignated
Preferred Stock, $0.0001 par value, none of which were outstanding on such
date. The authorized capital stock of Sub consists of 100 shares of Common
Stock, $0.01 par value, 100 shares of which, as of the date hereof, are
issued and outstanding and are held by Parent. All such shares of Parent
and Sub have been duly authorized, and all such issued and outstanding
shares have been validly issued, are fully paid and nonassessable and are
free of any liens or encumbrances other than any liens or encumbrances
created by or imposed upon the holders thereof. Parent has also reserved an
aggregate of 11,267,501 shares of Common Stock for issuance pursuant to its
employee and director stock and option and stock purchase plans 4,061,994
of which are subject to outstanding options or commitments for issuance and
7,205,507 of which are reserved for future issuance, and an aggregate of
65,569 shares of Common Stock for issuance pursuant to outstanding
warrants. There are no other options, warrants, calls, rights, commitments
or agreements of any character to which Parent is a party or by which it is
bound obligating Parent to issue, deliver, sell, repurchase or redeem, or
cause to be issued, delivered, sold, repurchased or redeemed, any shares of
the capital stock of Parent or obligating Parent to grant, extend or enter
into any such option, warrant, call, right, commitment or agreement.
(b) The shares of Parent Common Stock to be issued pursuant to the
Merger will be duly authorized, validly issued, fully paid, non-assessable,
free of any liens or encumbrances, issued in compliance with all applicable
state and federal securities laws and not subject to any preemptive rights
or rights of first refusal created by statute or the Certificate of
Incorporation or Bylaws of
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Parent, Sub, or any other Subsidiary of Parent or any agreement to which
Parent, Sub or any other Subsidiary of Parent is a party or is bound.
3.6 SEC Filings; Financial Statements.
(a) Parent has filed all forms, reports and documents required to be
filed with the SEC (collectively, the "Parent SEC Reports"). The Parent SEC
Reports (i) at the time they were filed, complied as to form in all
material respects with the requirements of the Securities Act or 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 require to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. Except to the
extent set forth in the preceding sentence, Parent and Sub make no
representation or warranty whatsoever concerning the Parent SEC Reports as
of any time other than the time they were filed. None of the Parent's
subsidiaries is required to file any forms, reports or other documents with
the SEC.
(b) Each of the consolidated financial statements (including, in each
case, any related notes thereto) (the "Parent Financial Statements")
contained in the Parent SEC Reports has been prepared in accordance with
GAAP applied on a consistent basis throughout the period involved (except
as may be indicated in the notes thereto) and each fairly presents in all
material respects the consolidated financial position of Parent and its
subsidiaries as at the respective dates thereof 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 will not be material in
significance.
3.7 Brokers' and Finders' Fees. Except for certain fees the Parent has
agreed to pay to Credit Suisse First Boston Corporation, the Parent has not
incurred, nor will it incur, directly or indirectly, any liability for brokerage
or finders' fees or agents' commissions or any similar charges in connection
with this Agreement or any transaction contemplated hereby.
3.8 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by Parent or Sub for inclusion or incorporation by
reference in (i) the S-4 will, at the time the S-4 becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are made,
not misleading; and (ii) the Proxy Statement/Prospectus will, at the dates
mailed to the stockholders of Parent and Company, at the time of the Company
Stockholders' Meeting and the Parent Stockholders' Meeting and as of the
Effective Time, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are made,
not misleading. The S-4 will comply as to form in all material respects with the
provisions of the Securities Act and the Exchange Act, as applicable and the
rules and regulations promulgated by the SEC thereunder. Notwithstanding the
foregoing, Parent makes no representation or warranty with respect to any
information supplied by the Company for use in and which is contained in any of
the foregoing documents.
3.9 No Changes. Since December 31, 1999, there has not been, occurred or
arisen any event or condition of any character that has had or is reasonably
likely to have a Parent Material Adverse Effect.
3.10 Representations Complete. None of the representations or warranties
made by Parent, nor any statement made in any Schedule or certificate furnished
by Parent pursuant to this Agreement or furnished in or in connection with
documents mailed or delivered to Parent Stockholders for use in
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soliciting their consent to this Agreement contains or will contain at the
Effective Time, any untrue statement of a material fact, or omits or will omit
at the Effective Time to state any material fact necessary in order to make the
statements contained herein or therein, in the light of the circumstances under
which made, not misleading.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business of the Company. During the period from the date of
this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, the Company agrees (except to the extent that
Parent shall otherwise consent in writing), to carry on the Company's business
in the usual, regular and ordinary course in substantially the same manner as
heretofore conducted, to pay the debts and Taxes of the Company when due, to pay
or perform other obligations when due, and, to the extent consistent with such
business, use their reasonable best efforts consistent with past practice and
policies to preserve intact the Company's present business organizations, keep
available the services of the Company's present officers and key employees and
preserve the Company's relationships with customers, suppliers, distributors,
licensors, licensees, and others having business dealings with it, all with the
goal of preserving unimpaired the Company's goodwill and ongoing businesses at
the Effective Time. The Company shall promptly notify Parent of any event or
occurrence or emergency not in the ordinary course of business of the Company
and any material event involving the Company.
Except as expressly contemplated by this Agreement as set forth in Section
4.1 of the Disclosure Schedule, the Company shall not, without the prior written
consent of Parent (which consent may be pursuant to electronic mail, and need
not be signed):
(a) make any expenditures or enter into any commitment or transaction
exceeding $250,000 individually or that is not in the ordinary course of
business and consistent with past practice, or any commitment or
transaction of the type described in Section 2.9 hereof;
(b) (i) other than commercial licenses of the Company's software in
the ordinary course of business consistent with past practice, sell any
Company Intellectual Property or enter into any agreement with respect to
the Company Intellectual Property with any person or entity or with respect
to the Intellectual Property of any person or entity, (ii) buy any
Intellectual Property or enter into any agreement with respect to the
Intellectual Property of any person or entity, (iii) enter into any
agreement with respect to development of any Intellectual Property with a
third party;
(c) other than commercial licenses of the Company's software in the
ordinary course of business consistent with past practice, sell or enter
into any license agreement with respect to the Company Intellectual
Property with any person or entity or buy or enter into any license
agreement with respect to the Intellectual Property of any person or
entity;
(d) other than commercial licenses of the Company's software in the
ordinary course of business consistent with past practice, transfer to any
person or entity any rights to the Company Intellectual Property;
(e) enter into or amend any Contract pursuant to which any other party
is granted distribution, development or similar rights of any type or scope
with respect to any products or technology of the Company;
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(f) enter into or amend any Contract pursuant to which as other party
is granted marketing or similar rights of any type or scope with respect to
any products or technology of the Company;
(g) amend or otherwise modify (or agree to do so), except in the
ordinary course of business, or violate the terms of, any of the Contracts
set forth or described in the Disclosure Schedule;
(h) commence or settle any litigation;
(i) 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 capital stock of the Company, or
repurchase, redeem or otherwise acquire, directly or indirectly, any shares
of the capital stock of the Company (or options, warrants or other rights
exercisable therefor) except for repurchases of shares of Company Capital
Stock from employees of the Company in connection with the termination of
their employment with the Company;
(j) except for the issuance of shares of Company Capital Stock upon
the exercise or conversion of options, warrants or other rights, or
convertible securities outstanding on the date hereof, and except for the
grant of additional stock options at the fair market value to the persons
and in the amounts listed and with the vesting as set forth on Section
4.1(j) to the Disclosure Schedule, issue, grant, deliver or sell or
authorize or propose the issuance, grant, delivery or sale of, or purchase
or propose the purchase of, any shares of its capital stock or securities
convertible into, or subscriptions, rights, warrants or options to acquire,
or other agreements or commitments of any character obligating it to issue
or purchase any such shares or other convertible securities, or accelerate
the vesting of any stock options.
(k) cause or permit any amendments to its Articles of Incorporation or
Bylaws;
(l) acquire or agree to acquire by merging or consolidating with, or
by purchasing any assets or equity securities of, or by any other manner,
any business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire
any assets which are material, individually or in the aggregate, to the
Company's business;
(m) sell, lease, license or otherwise dispose of any of its material
properties or assets, except properties or assets which are not
Intellectual Property and commercial licenses of the Company's software in
the ordinary course of business and consistent with past practices;
(n) incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities or guarantee any debt
securities of others other than pursuant to capital leases outstanding as
of the date hereof;
(o) grant any loans to others or purchase debt securities of others or
amend the terms of any outstanding loan agreement;
(p) grant any severance or termination pay (i) to any director or
officer or (ii) to any other employee except payments made pursuant to
standard written agreements outstanding on the date hereof and disclosed in
the Disclosure Schedule, other than pursuant to the Company's standard
practice of granting two weeks' pay to terminating employees in
consideration for a release of claims;
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(q) adopt any employee benefit plan, or enter into any employment
contract, pay or agree to pay any special bonus or special remuneration to
any director or employee, or increase the salaries or wage rates of its
employees other than in connection with the regularly scheduled performance
reviews of individual employees;
(r) revalue any of its assets, including without limitation writing
down the value of inventory or writing off notes or accounts receivable
other than in the ordinary course of business;
(s) pay, discharge or satisfy, in an amount in excess of $100,000 in
any one case or $250,000 in the aggregate, any claim, liability or
obligation (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than payroll, pre-existing lease obligations or the
payment, discharge or satisfaction in the ordinary course of business of
liabilities reflected or reserved against in the Current Balance Sheet;
(t) make or change any material election in respect of Taxes, adopt or
change any accounting method in respect of Taxes, enter into any closing
agreement, settle any claim or assessment in respect of Taxes, or consent
to any extension or waiver of the limitation period applicable to any claim
or assessment in respect of Taxes;
(u) enter into any strategic alliance or joint marketing arrangement
or agreement;
(v) other than as specifically requested in writing by Parent or as
specified in Section 2.22(i) of the Disclosure Schedule, accelerate the
vesting schedule of any of the outstanding Company Options or Company
Capital Stock;
(w) hire or terminate employees or encourage employees to resign,
excluding those individuals to whom offers have been made and are
outstanding as of the date of this Agreement as set forth in Schedule
4.1(w); or
(x) take, or agree in writing or otherwise to take, any of the actions
described in Sections 4.1(a) through (w) above, or any other action that
would prevent the Company from performing or cause the Company not to
perform its covenants hereunder, or any other action not in the ordinary
course of the Company's business and consent with past practice.
4.2 No Solicitation. Until the earlier of the Effective Time or the date
of termination of this Agreement pursuant to the provisions of Section 8.1
hereof, the Company shall not (nor will it permit any of its officers,
directors, employees, stockholders, agents, representatives or affiliates to),
directly or indirectly, take any of the following actions with any party other
than Parent or its designees:
(a) solicit, encourage, initiate, continue or participate in any
negotiations or discussions with respect to any offer or proposal to
acquire or license all or any material part of the business of Company (the
"Business"), whether by merger, purchase of assets, tender offer, license
or otherwise, or effect any such transaction,
(b) disclose any information not customarily disclosed to any person
concerning the Business or afford to any person or entity access to its
properties, books or records,
(c) assist or cooperate with any person to make any proposal to
purchase or license all or a material portion of the Business (including,
without limitation any technology or proprietary information related to the
Business), or
(d) enter into any agreement or arrangement with any person providing
for the acquisition or licensing of all or any material portion of the
Business (whether by way of merger, purchase
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of assets (including, without limitation any technology or proprietary
information of Company), tender offer, license or otherwise).
In the event Company shall receive any offer or proposal, directly or
indirectly, of the type referred to in clause (a) or (c) above, or any request
for disclosure or access pursuant to clause (b) above, it shall immediately
inform Parent as to any such offer or proposal, provide Parent with a complete
copy of any written offer or proposal and any related correspondence, and will
cooperate with Parent by furnishing any other information Parent may reasonably
request (including without limitation the identity of the party making the offer
or proposal and all terms and conditions of the offer or proposal). Without
limiting the foregoing, it is understood that any violation of the restrictions
set forth above by any officer, director, employee, stockholder, agent,
representative or affiliate of Company shall be deemed to be a breach of this
Section 4.2 by Company. Company agrees that irreparable damage would occur in
the event that the provisions of this Section 4.2 are not performed in
accordance with their specific terms or were otherwise breached. Company
accordingly agrees that Parent shall be entitled, without the requirement of
posting a bond or other security, to an injunction or injunctions to prevent
breaches of the provisions of this Section 4.2 and to enforce specifically the
terms and provisions hereof in any court of the United States or any state
having jurisdiction, this being in addition to any other remedy to which Parent
may be entitled at law or in equity.
4.3 Termination of Severance and 401(k) Plans. Company and its affiliates,
as applicable, each agrees to terminate any and all group severance, separation
or salary continuation plans, programs, or arrangements that are covered under
ERISA, as of the day immediately preceding the Closing Date other than the
agreement set forth on Schedule 5.10. In addition, Company shall, unless Parent
informs Company otherwise at least three (3) days prior to the Closing Date,
terminate its 401(k) plan effective as of the day immediately preceding the
Closing Date. Parent shall receive from Company evidence that Company's and each
affiliate's, as applicable, severance and/or 401(k) plan(s) have been terminated
pursuant to resolution of each such entity's Board of Directors (the form and
substance of which resolutions shall be subject to review and reasonable
approval of Parent), effective as of the day immediately preceding the Closing
Date.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Registration Statement; Shareholder Approval.
(a) Within thirty (30) days after the execution of this Agreement, the
Company and the Parent shall prepare, with the cooperation of each other,
the Proxy Statement/Prospectus, and Parent will prepare and file with the
SEC the S-4 in which the Proxy Statement/Prospectus will be included as a
prospectus. Each of Parent and the Company shall provide promptly to the
other such information concerning its business and financial statements and
affairs as, in the reasonable judgment of the providing party or its
counsel, may be required or appropriate for inclusion in the Proxy
Statement/Prospectus and the S-4, or in any amendments or supplements
thereto, and to cause its counsel and current and former auditors to
cooperate with the other's counsel and auditors in the preparation of the
Proxy Statement/Prospectus and the S-4 (including, but not limited to,
delivery of appropriate consents in a timely manner). Each of the Company
and Parent shall use its respective reasonable best efforts to respond to
any comments of the SEC and have the S-4 declared effective under the
Securities Act as promptly as practicable after such filing. The Company
and the Parent shall cause the Proxy Statement/ Prospectus to be mailed to
the Shareholders and the stockholders of the Parent, respectively, at the
earliest practicable time and in no event later than five (5) days after
the S-4 is declared
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effective by the SEC, subject to Parent approval, which approval shall not
be unreasonably withheld. As promptly as practicable after the date of this
Agreement, the Company and Parent will prepare and file any other filings
required under the Exchange Act, the Securities Act or any other Federal,
foreign or Blue Sky laws relating to the Merger and the transactions
contemplated by this Agreement (the "Other Filings"). Each of the Company
and Parent will notify the other promptly upon the receipt of any comments
from the SEC or its staff and of any request by the SEC or its staff or any
other government officials for amendments or supplements to the S-4, the
Proxy Statement/Prospectus or any Other Filing or for additional
information and will supply the other with copies of all correspondence
between such party or any of its representatives, on the one hand, and the
SEC, or its staff or any other government officials, on the other hand,
with respect to the S-4, the Proxy Statement/Prospectus, the Merger or any
Other Filing. The Proxy Statement/Prospectus, the S-4 and the Other Filings
will comply in all material respects with all applicable requirements of
law and the rules and regulations promulgated thereunder. Whenever any
event occurs which is required to be set forth in an amendment or
supplement to the Proxy Statement/Prospectus, the S-4 or any Other Filing,
the Company or Parent, as the case may be, will promptly inform the other
of such occurrence and cooperate in filing with the SEC or its staff or any
other government officials, and/or mailing to the Shareholders, such
amendment or supplement.
(b) The Company will take all action necessary in accordance with
California Law and its Articles of Incorporation and Bylaws to convene a
special meeting of its Shareholders to be held on the twenty-first day
after the mailing of the Proxy Statement/Prospectus to the Shareholders for
the purpose of voting upon this Agreement and the Merger. The Company will
use commercially reasonable efforts to solicit from its shareholders
proxies in favor of the adoption and approval of this Agreement and the
approval of the Merger and will take all other action necessary or
advisable to secure the vote or consent of its shareholders required to
obtain such approvals. The materials submitted to the Company's
Shareholders shall have been subject to review and approval by Parent and
include information regarding the Company, the terms of the Merger and this
Agreement and the unanimous recommendation of the Board of Directors of the
Company in favor of the Merger and this Agreement.
(c) Parent shall take all action necessary in accordance with its
Certificate of Incorporation and Bylaws, Delaware Law and the Securities
Exchange Act of 1934, as amended, and the rules and regulations promulgated
hereunder to convene a special meeting of its stockholders to be held on
the twenty-first day after the mailing of the Ross Statement/Prospectus to
its stockholders for the purpose of approving the issuance of the Parent
Common Stock consideration in the Merger. Parent will use commercially
reasonable efforts to solicit from its stockholders proxies in favor of the
issuance of the Parent Common Stock Consideration in the Merger and will
take all other action necessary or advisable to secure the vote of its
stockholders required to issue such shares. The materials submitted to the
Parent's Shareholders shall be subject to review by the Company and include
information regarding Parent, the terms of the Merger and this Agreement
and the unanimous recommendation of the Board of Directors of Parent in
favor of the Merger and this Agreement. Each of Parent, Sub and Company
hereby agree not to take any action specifically for the purpose of
preventing or delaying (i) the filing of the S-4, (ii) the effectiveness of
the S-4, (iii) the date of the Company Stockholders' Meeting or the Parent
Stockholders' meeting, or (iv) the consummation of the Merger.
5.2 Access to Information. The Company shall afford Parent and its
accountants, counsel and other representatives, reasonable access during normal
business hours during the period prior to the Effective Time to (a) all of the
Company's properties, books, contracts, commitments and records, (b) all other
information concerning the business, properties and personnel (subject to
restrictions
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imposed by applicable law) of the Company as Parent may reasonably request and
(c) all employees of the Company as identified by Parent. The Company agrees to
provide to Parent and its accountants, counsel and other representatives copies
of internal financial statements and projections (including by returns and
supporting documentation) promptly upon request. Parent shall provide the
Company with copies of such publicly available information about Parent as the
Company may request. No information or knowledge obtained in any investigation
pursuant to this Section 5.2 shall affect or be deemed to modify any
representation or warranty contained herein or the conditions to the obligations
of the parties to consummate the Merger.
5.3 Confidentiality; Public Disclosure.
(a) Each of the parties hereto hereby agrees that the information
obtained pursuant to Section 5.2 or pursuant to the negotiation and
execution of this Agreement or the effectuation of the transaction
contemplated hereby shall be governed by the terms of the Mutual
Nondisclosure Agreement dated as of February 12, 2000 by and between the
Company and Parent (the "NDA").
(b) Each of the parties hereto agrees to continue to be bound by the
publicity and disclosure provisions at the NDA.
5.4 Consents; Approvals.
(a) The Company shall use its best efforts to obtain the consents,
waivers, assignments and approvals under any of the Contracts or otherwise
as may be required in connection with the Merger (all of such consents,
waivers and approvals are set forth in the Disclosure Schedule) so as to
preserve all rights of, and benefits to, the Company thereunder.
(b) As soon as may be reasonably practicable, Parent and Company each
shall file with the United States Federal Trade Commission (the "FTC") and
the Antitrust Division of the United States Department of Justice ("DOJ")
Notification and Report Forms relating to the transactions contemplated
herein as required by HSR, as well as comparable pre-merger notification
forms required by the merger notification or control laws and regulations
of any applicable jurisdiction, as agreed to by the parties. Parent, Sub
and Company each shall promptly (a) supply the other with any information
which may be required by the FTC, the DOJ or the competition or merger
control authorities of any jurisdiction and which the parties may
reasonably deem appropriate. Parent and Sub will each pay 50% of the
applicable HSR filing fee.
5.5 Reasonable Efforts. Subject to the terms and conditions provided in
this Agreement, each of the parties hereto shall use commercially reasonable
efforts to take promptly, or cause to be taken, all actions, and to do promptly,
or cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated hereby, to obtain all necessary waivers, consents and approvals and
to effect all necessary registrations and filings and to remove any injunctions
or other impediments or delays, legal or otherwise, in order to consummate and
make effective the transactions contemplated by this Agreement for the purpose
of securing to the parties hereto the benefits contemplated by this Agreement.
5.6 Notification of Certain Matters. The Company and Parent shall give
prompt notice to each other of (i) the occurrence or non-occurrence of any
event, the occurrence or non-occurrence of which is likely to cause any
representation or warranty of such party contained in this Agreement to be
untrue or inaccurate and (ii) any failure of such party to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder; provided, however, that the delivery of any notice pursuant to
this Section 5.6 shall not limit or otherwise affect any remedies
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available to the party receiving such notice. Further, disclosure by the Company
or Parent pursuant to this Section 5.6 shall not be deemed to amend or
supplement the Disclosure Schedule or prevent or cure any misrepresentations,
breach of warranty or breach of covenant.
5.7 Additional Documents and Further Assurances. Each party hereto, at the
request of another party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be necessary or
desirable for effecting completely the consummation of this Agreement and the
transactions contemplated hereby.
5.8 FIRPTA Compliance. On the Closing Date, the Company shall deliver to
Parent a properly executed statement in a form reasonably acceptable to Parent
for purposes of satisfying Parent's obligations under Treasury Regulation
Section 1.1445-2(c)(3).
5.9 Expenses. Whether or not the Merger is consummated, all fees and
expenses incurred in connection with the Merger including, without limitation,
all legal, accounting, financial advisory, consulting and all other fees and
expenses of third parties ("Third Party Expenses") incurred by a party in
connection with the negotiation and effectuation of the terms and conditions of
this Agreement and the transactions contemplated hereby, shall be the obligation
of the respective party incurring such fees and expenses.
5.10 Termination of Agreements. Except as set forth in Section 5.10 of the
Disclosure Schedule, Company shall terminate, or cause to be terminated, prior
to Closing, all employment agreements between the Company and any person, other
than non-disclosure, confidentiality and invention assignment agreements and
those agreements entered into in connection with this Agreement.
5.11 Employee Benefits. Each Employee who remains an employee of the
Surviving Corporation after the Effective Time shall be eligible, upon (i) the
Employee's execution of Parent's standard form of Proprietary Information,
Invention Assignment and Arbitration Agreement and (ii) proof of appropriate
employment authorization from the U.S. Immigration and Naturalization Service or
the U.S. Department of State reflecting a right to work in the United States, to
receive salary and benefits (such as medical benefits, bonuses and 401(k) plan
participation) consistent with Parent's standard human resource policies. All
such employees shall be "at-will" employees of the Surviving Corporation.
Subject to the foregoing, each Company Employee at the time of the Closing shall
be eligible to participate in the employee benefit plans and compensation
programs maintained by Parent applicable to other similarly-situated employees
of Parent, including (without limitation) retirement plans, savings or profit
sharing plans, incentive or other bonus plans, life, disability, health,
accident and other insurance programs, paid vacations, and similar plans or
programs, subject, in each case, to the generally applicable terms and
conditions of the applicable plan or program in question. Parent shall make its
commercially reasonable best efforts to ensure that under the terms of each such
plan or program, each Employee's service with the Company and its predecessors
prior to the Closing, to the extent consistent with the Company's records, as
delivered to Parent, shall be treated as service, to the extent permitted by law
and provided that it should not result in duplication of benefits with Parent
for all purposes. Parent shall make its commercially reasonable best efforts to
ensure that, to the extent consistent with the Company's records, as delivered
to Parent, each such Employee shall be credited with all deductibles,
co-payments or out-of-pocket expenses incurred under any Company plan or program
for purposes of any deductible or out-of-pocket requirements under any similar
Company plan or program. During the Employee's period of employment, such
Employee shall be entitled to receive all fringe benefits and perquisites in
accordance with the plans, practices, programs and policies of Parent as from
time to time in effect.
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5.12 Officers and Directors of the Company's Subsidiaries. The Company
will obtain and deliver to Parent on the Closing Date resignations from all of
the officers and directors of its subsidiaries, if any.
5.13 Employment Agreements. The Company shall deliver or cause to be
delivered to Parent, concurrently with the execution of this Agreement, from
each of the individuals listed on Section 5.13 of the Disclosure Schedule an
executed Employment Agreement with the Parent substantially in the form attached
hereto as Exhibit D, upon proof of appropriate employment authorization from the
U.S. Immigration and Naturalization Service or the U.S. Department of State
reflecting a right to work in the United States, and subject to and in
compliance with Parent's standard human resources policies and procedures.
5.14 Voting Agreement. The Company shall deliver or cause to be delivered
to Parent, concurrently with the execution of this Agreement, from each of the
shareholders listed in Section 5.14 of the Disclosure Schedule (the "Principal
Shareholders"), an executed Voting Agreement with the Parent substantially in
the form attached hereto as Exhibit E.
5.15 Affiliate Agreements. Section 5.15 of the Disclosure Schedule sets
forth those persons who, in the Company's reasonable judgment, are or may be
"affiliates" of the Company within the meaning of Rule 145 (each such person a
"Rule 145 Affiliate") promulgated under the Securities Act ("Rule 145"). The
Company shall provide Parent such information and documents as Parent shall
reasonably request for purposes of reviewing such list. The Company shall
deliver or cause to be delivered to Parent, concurrently with the execution of
this Agreement from each of the Rule 145 Affiliates of the Company, an executed
agreement ("Rule 145 Affiliate Agreement") in the form attached hereto as
Exhibit F. Parent and Sub shall be entitled to place appropriate legends on the
certificates evidencing any Parent Common Stock to be received by such Rule 145
Affiliates pursuant to the terms of this Agreement, and to issue appropriate
stop transfer instructions to the transfer agent for Parent Common Stock,
consistent with the terms of such Rule 145 Affiliate Agreements.
5.16 Parent Voting Agreement. The Parent shall deliver or cause to be
delivered to Company, concurrently with the execution of this Agreement, from
each of the individual officers and directors of the Parent listed on Exhibit
G-1, as executed Parent Voting Agreement with the Company substantially in the
form attended hereto as Exhibit G-2.
5.17 Company Stock Option Grants. Parent and Company agree that Company
may grant stock options from its Stock Option Plans in the amounts and with
terms and conditions consistent with past practice. All such grants shall have
exercise prices equal to the fair market value of Company's common stock on the
date of grant or as otherwise agreed to by parent in writing.
5.18 No Actions Inconsistent With Tax-Free Reorganization. The Company,
Parent and Sub shall (and, following the Effective Time, Parent shall cause the
Company to) take no action with respect to the capital stock, assets or
liabilities of the Company that could reasonably be expected to cause the Merger
to fail to qualify as a "reorganization" within the meaning of Section 368(a) of
the Code and shall report the Merger as a reorganization on all Tax Returns.
Neither Parent, Sub nor Company has taken any action which could reasonably be
expected to preclude the Merger from qualifying as a reorganization under
Section 368(a) of the Code.
5.19 Form S-8. Parent shall file a registration statement on Form S-8 to
register shares of Parent Common Stock issuable upon exercise of assumed Company
Options (other than Company Options in the form of warrants or other investments
issued pursuant to arrangements that are not eligible for registration on Form
S-8) within 15 days after the Closing Date. During the period that any such
assumed Company Options are exercisable by their terms, Parent will maintain in
effect such registration statement and Parent shall comply with any applicable
federal and state securities
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laws requirements applicable with respect to any shares of Parent Common Stock
issuable pursuant to the exercise of any assumed Company Options.
5.20 Assumption of Indemnity Obligations.
(a) Articles of Incorporation and Bylaws. Parent and the Surviving
Corporation agree that the obligations set forth in the Amended and
Restated Articles of Incorporation and Bylaws of Company to indemnify its
directors and officers, as in effect immediately prior to the Effective
Time, shall survive the Merger, and any rights of the directors and
officers to such indemnification thereunder shall not be adversely affected
by and amendment, repeal or other modification thereto after the Effective
Time. From and after the Effective Time, such obligations shall be the
joint and several obligations of Parent and the Surviving Corporation.
(b) Indemnification Agreements. Subject to Section 5.20(c) hereof, the
Surviving Corporation and Parent shall honor and fulfill in all respects
the obligations of Company pursuant to the Indemnification Agreements
between Company and such officers and directors.
(c) Exclusion. Notwithstanding the foregoing, nothing in this Section
5.20 is intended to release any director or officer of Company, who is also
a Shareholder of Company, from their respective indemnity obligations under
Section 7 hereof.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of the Parent, Sub and Company to effect the Merger shall
be subject to the satisfaction at or prior to the Effective Time of the
following conditions:
(a) Shareholder Approval. The Shareholders shall have duly approved by
the requisite vote under California Law and the Company's Articles of
Incorporation, the Merger, this Agreement and the transactions contemplated
hereby. The Stockholders of Parent shall have duly approved by requisite
vote under Delaware General Corporation Law and Parent's Certificate of
Incorporation, the Merger, this Agreement and the transactions contemplated
hereby.
(b) Permits. All approvals from government authorities, including any
requisite Blue Sky approvals, which are appropriate or necessary for the
consummation of the Merger and the other transactions contemplated by this
Agreement, shall have been obtained.
(c) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any
court of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger shall be in effect, nor shall any
proceeding brought by an administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking any
of the foregoing be pending; nor shall there be any action taken, or any
statute, rule, regulation or order enacted, entered, enforced or deemed
applicable to the Merger, which makes the consummation of the Merger
illegal or otherwise prohibits consummation of the Merger.
(d) No Order; HSR Act. No Governmental Entity shall have enacted,
issued, promulgated, enforced or entered any statute, rule, regulation,
executive order, decree, injunction or other order (whether temporary,
preliminary or permanent) which is in effect and which has the effect of
making the Merger illegal or otherwise prohibiting consummation of the
Merger. All waiting
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periods under the HSR Act relating to the transactions contemplated hereby
(if any) will have expired or terminated early.
(e) Tax Opinions. The Company and Parent shall each have received
written opinions from their respective counsel, Venture Law Group, A
Professional Corporation, and Wilson Sonsini Goodrich & Rosati,
Professional Corporation, to the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code; provided,
however, that if the counsel to either the Company or Parent does not
render such opinion, this condition shall nonetheless be deemed to be
satisfied with respect to such party if counsel to the other party renders
such opinion to such party. The parties to this Agreement agree to make
reasonable representations as requested by such counsel for the purpose of
rendering such opinions.
6.2 Conditions to Obligations of Company. The obligations of the Company
to consummate and effect this Agreement and the transactions contemplated hereby
shall be subject to the satisfaction at or prior to the Effective Time of each
of the following conditions, any of which may be waived, in writing, exclusively
by the Company:
(a) Representations, Warranties and Covenants. The representations and
warranties of Parent and Sub in this Agreement shall be true and correct in
all respects on and as of the Effective Time as though such representations
and warranties were made on and as of such time and each of Parent and Sub
shall have performed and complied in all respects with all covenants and
obligations of this Agreement required to be performed and complied with by
it as of the Effective Time, except to the extent that any such inaccuracy
or noncompliance would not result in a Parent Material Adverse Effect.
(b) Legal Opinion. The Company shall have received a legal opinion
from Wilson Sonsini Goodrich & Rosati with respect to the issuance of the
shares of Parent Common Stock in the Merger, in such form as Company and
its counsel shall reasonably request.
(c) Certificate of the Parent. Company shall have been provided with a
certificate executed on behalf of Parent by a Vice President to the effect
that, as of the Effective Time:
(i) all representations and warranties made by Parent and Sub in
this Agreement are true and correct in all respects on and as of the
Effective Time as though such representations and warranties were made
on and as of such time, except to the extent that any such inaccuracy or
noncompliance would not result in a Parent Material Adverse Effect;
(ii) all covenants and obligations of this Agreement to be
performed by Parent and Sub on or before such date have been so
performed in all respects, except to the extent that any such inaccuracy
or noncompliance would not result in a Parent Material Adverse Effect;
and
(iii) the provisions set forth in Section 6.2(e).
(d) Secretary's Certificate. Company shall have been provided with a
certificate of the Parent's Secretary relating to the organization,
existence and good standing of Parent and Sub and the authorization of this
Agreement and the transactions contemplated hereby and other customary
matters, all in form and substance satisfactory to Company and its counsel.
(e) No Parent Material Adverse Effect. There shall not have occurred
any event or condition of any character that has had or is reasonably
likely to have a Parent Material Adverse Effect.
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6.3 Conditions to the Obligations of Parent and Sub. The obligations of
Parent and Sub to consummate and effect this Agreement and the transactions
contemplated hereby shall be subject to the satisfaction at or prior to the
Effective Time of each of the following conditions, any of which may be waived,
in writing, exclusively by Parent:
(a) Representations, Warranties and Covenants. The representations and
warranties of the Company in this Agreement shall be true and correct in
all respects on and as of the Effective Time as though such representations
and warranties were made on and as of the Effective Time and the Company
shall have performed and complied in all respects with all covenants and
obligations of this Agreement required to be performed and complied with by
them as of the Effective Time except to the extent that any such
non-compliance or inaccuracy would not result in a Company Material Adverse
Effect.
(b) No Company Material Adverse Effect. There shall not have occurred
any event or condition of any character that has had or is reasonably
likely to have a Company Material Adverse Effect.
(c) Shareholder Approval. The Shareholders shall have duly approved,
by the requisite vote, any payments and benefits to Employees as a result
of the Merger, this Agreement or the transactions contemplated hereby which
are characterized as "parachute payments," within the meaning of Section
280G(b)(2) of the Internal Revenue Code.
(d) Claims. There shall be no bona fide action, suit, claim or
proceeding of any nature pending against the Parent, Sub or the Company,
their respective properties or any of their officers or directors, arising
out of, or in any way connected with, the Merger or the other transactions
contemplated by the terms of this Agreement that would reasonably be
expected to have a Company Material Adverse Effect.
(e) Dissenters. Shareholders holding no more than five percent (5%) of
the Company Capital Stock shall have exercised or given notice of their
intent to exercise dissenter's rights in accordance with California Law.
(f) Third Party Consents. Any and all material consents, waivers,
assignments and approvals in Section 2.6 hereto shall have been obtained.
(g) Legal Opinion. Parent shall have received a legal opinion from
Venture Law Group, legal counsel to the Company, in such form as Parent and
its counsel shall reasonably request.
(h) Employment Agreements. Each of the individuals listed in Section
5.13 of the Disclosure Schedule hereto shall have entered into an
Employment Agreement with Parent and each of such Employment Agreements
shall be in full force and effect at the Effective Time and no such
individual shall be in breach of the agreement, threatening to breach such
agreement or taking any action materially inconsistent with such
individual's obligations under the agreement.
(i) Affiliate Agreements. Each Rule 145 Affiliate of the Company shall
have entered into a Rule 145 Affiliate Agreement and each of such
agreements shall be in full force and effect at the Effective Time and no
party to any such agreement shall be in breach of the agreement, are
threatening to breach such agreement or taking any action materially
inconsistent with the party's obligations under the agreement.
(j) Conversion of Preferred Stock. All outstanding shares of Company
Preferred Stock shall have converted into shares of Company Common Stock.
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(k) Termination of Employment Agreements. All employment agreements
between the Company and any other person shall have been terminated to the
extent contemplated in Section 5.10.
(l) Estimated Third Party Expenses. Parent shall have received from
the Company at least three business days prior to the Closing Date a
detailed schedule of the Estimated Third Party Expenses paid or payable by
the Company certified as to correctness by the Company in a form reasonably
satisfactory to Parent.
(m) Employee Retention. At least eighty percent (80%) of the Company's
sales, services, technical and engineering employees, and all Key
Employees, as of the date hereof remain employees of the Company as of the
Closing Date.
(n) Secretary's Certificate. Parent shall have been provided with a
certificate of the Parent's Secretary relating to the organization,
existence and good standing of Company and the authorization of this
Agreement and the transactions contemplated hereby and other customary
matters, all in form and substance satisfactory to Parent and its counsel.
(o) Certificate of the Company. Parent shall have been provided with a
certificate executed on behalf of Company by its Chief Executive Officer to
the effect that, as of the Effective Time:
(i) all representations and warranties made by the Company in this
Agreement are true and correct on and as of the Effective Time as though
such representations and warranties were made on and as of such time
except to the extent that any such inaccuracy or noncompliance would not
have a Company Material Adverse Effect;
(ii) all covenants and obligations of this Agreement to be
performed by the Company on or before such date have been so performed
except to the extent that any such inaccuracy or noncompliance would not
have a Company Material Adverse Effect; and
(iii) the provisions set forth in Sections 6.3(b) and (c) have been
satisfied.
(p) Other Documents. Parent shall have been provided with such other
documents from the Company as it shall reasonably request.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
7.1 Survival of Representations and Warranties. The Company's
representations and warranties in this Agreement shall survive the Merger and
shall continue until the date that is twelve (12) months after the Closing Date
(the "Escrow Termination Date"). All of the Parent's and Sub's representations
and warranties in this Agreement shall survive the Merger and shall continue
until the date that is twelve (12) months after the Closing Date.
7.2 Indemnification. The Company agrees to indemnify and hold Parent and
its officers, directors and affiliates harmless against all claims, losses,
liabilities, damages, deficiencies, costs and expenses, including reasonable
attorneys' fees and expenses of investigation and defense (hereinafter
individually a "Loss" and collectively "Losses") incurred by Parent, its
officers, directors, or affiliates (including the Surviving Corporation)
directly or indirectly as a result of (a) any inaccuracy or breach of a
representation or warranty of the Company contained in this Agreement or any
Related Agreements (b) any failure by the Company to perform or comply with any
covenant contained in this Agreement or any Related Agreements or (c) the Third
Party Expenses of the Company exceeding the greater of the Estimated Third Party
Expenses or $500,000. The Shareholders shall not
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have any right of indemnification or contribution from the Company with respect
to any Loss claimed by an indemnified party after the Effective Time.
Notwithstanding the foregoing, the Company shall not have any liability under
subsections (a) or (b) of this Section 7.2, unless and until the aggregate
Losses for which indemnification is sought (aggregating all of the claims
against the Company under subsections (a) or (b)) exceed $1,750,000 (the
"Basket"), in which case the full amount of such Losses (including the
$1,750,000) shall be subject to indemnification; provided, however, that in the
event that aggregate Losses attributable to breaches of Section 2.13 ("Section
2.13 Losses") exceed $500,000 prior to such time as total aggregate Losses
exceed the Basket, then the Company shall have liability to Parent to the extent
of such Section 2.13 Losses (including the $500,000), and provided, further,
that in the event the Company has liability to Parent for Section 2.13 Losses
pursuant to the foregoing proviso, then the Basket shall be reduced to
$1,250,000 for Losses other than Section 2.13 Losses.
7.3 Exclusive Contractual Remedy. Except in the case of fraud or willful
misconduct, the rights of the Parent to make claims upon the Escrow Fund in
accordance with this Section 7 shall be the sole and exclusive remedy of Parent,
the Surviving Corporation and any other Indemnified Persons after the Closing
with respect to any representation, warranty, covenant or agreement made by
Company under this Agreement and no Shareholder of Company shall have any
personal liability to Parent, the Surviving Corporation or any other Indemnified
Persons after the Closing in connection with the Merger.
7.4 Escrow Arrangements.
(a) Escrow Fund. As security for the indemnity provided for in Section
7.2 hereof and by virtue of this Agreement and the Merger Agreement, the
Company and the Shareholders will be deemed to have received and deposited
with the Escrow Agent (as defined below) the Escrow Amount (plus any
additional shares as may be issued upon any stock split, stock dividend or
recapitalization effected by Parent after the Effective Time with respect
to the Escrow Amount) without any act of the Company or any Shareholders.
As soon as practicable after the Effective Time, the Escrow Amount, without
any act of any Shareholders, will be deposited with U.S. Bank Trust N.A.
(or other institution acceptable to Parent and the Securityholder Agent (as
defined in Section 7.4(g) below)) as Escrow Agent (the "Escrow Agent"),
such deposit to constitute an escrow fund (the "Escrow Fund") to be
governed by the terms set forth herein. The Escrow Agent may execute this
Agreement following the date hereof and prior to the Effective Time, and
such latter execution shall not affect the binding nature of this Agreement
as of the date hereof among the signatories hereto.
(b) Escrow Period; Distribution upon Termination of Escrow
Periods. Subject to the following requirements, the Escrow Fund shall be in
existence immediately following the Effective Time and shall terminate at
5:00 p.m., Pacific time, on the Escrow Termination Date (the "Escrow
Period"); provided that, the Escrow Period shall not terminate with respect
to such remaining portion of the Escrow Fund (or some portion thereof) that
in the reasonable judgement of Parent, subject to the objection of the
Securityholder Agent (as defined below) and the subsequent arbitration of
the matter in the manner provided in Section 7.4(f) hereof, is necessary to
satisfy (i) any then pending unsatisfied claims specified in any Officer's
Certificate delivered to the Escrow Agent prior to the termination of the
Escrow Period and (ii) any unsatisfied claims specified in any Officer's
Certificate delivered to the Escrow Agent prior to three days after the
termination of the Escrow Period with respect to facts and circumstances
existing prior to the termination of such Escrow Period (including, in the
case of both (i) and (ii) above, an Officer's Certificate delivered to the
Escrow Agent that states that the Parent reasonably believes that it may
have a claim against the Escrow Fund and describing the grounds for such
claim). As soon as all such claims have been resolved, the Escrow Agent
shall deliver
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to the Shareholders the remaining portion of the Escrow Fund not required
to satisfy such claims. Deliveries of Escrow Amounts to the Shareholders
pursuant to this Section 7.4(b) shall be made in proportion to their
respective original contributions to the Escrow Fund.
(c) Protection of Escrow Fund.
(i) The Escrow Agent shall hold and safeguard the Escrow Fund
during the Escrow Period, shall treat such fund as a trust fund in
accordance with the terms of this Agreement and not as the property of
Parent and shall hold and dispose of the Escrow Fund only in accordance
with the terms hereof.
(ii) Any shares of Parent Common Stock or other equity securities
issued or distributed by Parent (including shares issued upon a stock
split) ("New Shares") in respect of Parent Common Stock in the Escrow
Fund which have not been released from the Escrow Fund shall be added to
the Escrow Fund and become a part thereof. New Shares issued in respect
of shares of Parent Common Stock which have been released from the
Escrow Fund shall not be added to the Escrow Fund but shall be
distributed to the record holders thereof. Cash dividends on Parent
Common Stock, if any, shall not be added to the Escrow Fund but shall be
distributed to the record holders thereof.
(iii) Each Shareholder shall have voting rights and the right to
distributions of dividends with respect to the shares of Parent Common
Stock contributed to the Escrow Fund by such Shareholders (and on any
voting securities added to the Escrow Fund in respect of such shares of
Parent Common Stock).
(d) Claims Upon Escrow Fund.
(i) Upon receipt by the Escrow Agent at any time on or before three
days after the last day of the Escrow Period of a certificate signed by
any officer of Parent (an "Officer's Certificate"): (A) stating that
Parent has paid Losses, (B) specifying in reasonable detail the
individual items of Losses included in the amount so stated, the date
each such item was paid, and the nature of the misrepresentations,
breach of warranty or covenant to which such items are related and (C)
specifying the number of Escrow Shares necessary to satisfy such claim,
the Escrow Agent shall, subject to the provisions of Section 7.4(e),
deliver to Parent out of the Escrow Fund as promptly as practicable,
shares of Parent Common Stock held in the Escrow Fund in an amount equal
to such Losses.
(ii) For the purposes of determining the number of shares of Parent
Common Stock to be delivered to Parent out of the Escrow Fund as
indemnity pursuant to Section 7.4(b) and 7.4(d)(i) hereof, the shares of
Parent Common Stock shall be valued at the Trading Price.
(e) Objections to Claims. At the time of delivery of any Officer's
Certificate to the Escrow Agent, a duplicate copy of such certificate shall
be delivered to the Securityholder Agent and for a period of thirty (30)
days after such delivery, the Escrow Agent shall make no delivery to Parent
of any Escrow Amounts pursuant to Section 7.4(d) hereof unless the Escrow
Agent shall have received written authorization from the Securityholder
Agent to make such delivery. After the expiration of such thirty (30) day
period, the Escrow Agent shall make delivery of shares of Parent Common
Stock from the Escrow Fund in accordance with Section 7.4(d) hereof,
provided that no such payment or delivery may be made if the Securityholder
Agent shall object in a written statement to the claim made in the
Officer's Certificate, and such statement shall have been delivered to the
Escrow Agent prior to the expiration of such thirty (30) day period.
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(f) Resolution of Conflicts; Arbitration.
(i) In case the Securityholder Agent shall so object in writing to
any claim or claims made in any Officer's Certificate, the
Securityholder Agent and Parent shall attempt in good faith to agree
upon the rights of the respective parties with respect to each of such
claims. If the Securityholder Agent and Parent should so agree, a
memorandum setting forth such agreement shall be prepared and signed by
both parties and shall be furnished to the Escrow Agent. The Escrow
Agent shall be entitled to rely on any such memorandum and distribute
shares of Parent Common Stock from the Escrow Fund in accordance with
the terms thereof.
(ii) If no such agreement can be reached after good faith
negotiation, either Parent or the Securityholder Agent may demand
arbitration of the matter unless the amount of the damage or loss is at
issue in pending litigation with a third party, in which event
arbitration shall not be commenced until such amount is ascertained or
both parties agree to arbitration; and in either such event the matter
shall be settled by arbitration conducted by one arbitrator mutually
agreeable to Parent and the Securityholder Agent. In the event that
within forty-five (45) days after submission of any dispute to
arbitration, Parent and the Securityholder Agent cannot mutually agree
on one arbitrator, Parent and the Securityholder Agent shall each select
one arbitrator, and the two arbitrators so selected shall select a third
arbitrator. The arbitrator or arbitrators, as the case may be, shall set
a limited time period and establish procedures designed to reduce the
cost and time for discovery while allowing the parties an opportunity,
adequate in the sole judgement of the arbitrator or majority of the
three arbitrators, as the case may be, to discover relevant information
from the opposing parties about the subject matter of the dispute. The
arbitrator or a majority of the three arbitrators, as the case may be,
shall rule upon motions to compel or limit discovery and shall have the
authority to impose sanctions, including attorneys' fees and costs, to
the extent as a court of competent law or equity, should the arbitrator
or a majority of the three arbitrators, as the case may be, determine
that discovery was sought without substantial justification or that
discovery was refused or objected to without substantial justification.
The decision of a the arbitrator or a majority of the three arbitrators,
as the case may be, as to the validity and amount of any claim in such
Officer's Certificate shall be binding and conclusive upon the parties
to this Agreement, and notwithstanding anything in Section 7.4(e)
hereof, the Escrow Agent shall be entitled to act in accordance with
such decision and make or withhold payments out of the Escrow Fund in
accordance therewith. Such decision shall be written and shall be
supported by written findings of fact and conclusions which shall set
forth the award, judgment, decree or order awarded by the arbitrator(s).
(iii) Judgment upon any award rendered by the arbitrator(s) may be
entered in any court having jurisdiction. Any such arbitration shall be
held in San Mateo County, California under the rules then in effect of
the American Arbitration Association. The arbitrator(s) shall determine
how all expenses relating to the arbitration shall be paid, including
without limitation, the respective expenses of each party, the fees of
each arbitrator and the administrative fee of the American Arbitration
Association.
(g) Securityholder Agent of the Shareholders; Power of Attorney.
(i) In the event that the Merger is approved, effective upon such
vote, and without further act of any Shareholders, David N. Strohm shall
be appointed as agent and attorney-in-fact (the "Securityholder Agent")
for each Shareholder of the Company, for and on behalf of Shareholders,
to give and receive notices and communications, to authorize
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delivery to Parent of shares of Parent Common Stock from the Escrow Fund
in satisfaction of claims by Parent, to object to such deliveries, to
agree to, negotiate, enter into settlements and compromises of, and
demand arbitration and comply with orders of courts and awards of
arbitrators with respect to such claims, and to take all actions
necessary or appropriate in the judgment of Securityholder Agent for the
accomplishment of the foregoing. Such agency may be changed by the
Shareholders from time to time upon not less than thirty (30) days prior
written notice to Parent; provided that the Securityholder Agent may not
be removed unless holders of a majority interest of the Escrow Fund
agree to such removal and to the identity of the substituted agent. No
bond shall be required of the Securityholder Agent, and the
Securityholder Agent shall not receive compensation for his or her
services, but shall be entitled to reimbursement of reasonable and
documented out-of-pocket expenses (including reasonable legal fees)
incurred in carrying out the Securityholder Agent's duties as such out
of the Escrow Fund to the extent available. Notices or communications to
or from the Securityholder Agent shall constitute notice to or from each
of the Shareholders. The Securityholder Agent may execute this Agreement
following the date hereof and prior to the Effective Time, and such
latter execution shall not affect the binding nature of this Agreement
as of the date hereof among the signatories hereto.
(ii) The Securityholder Agent shall not be liable for any act done
or omitted hereunder as Securityholder Agent while acting in good faith
and in the exercise of reasonable judgment. The Shareholders on whose
behalf the Escrow Amount was contributed to the Escrow Fund shall
severally indemnify the Securityholder Agent and hold the Securityholder
Agent harmless against any loss, liability or expense incurred without
negligence or bad faith on the part of the Securityholder Agent and
arising out of or in connection with the acceptance or administration of
the Securityholder Agent's duties hereunder, including the reasonable
fees and expenses of any legal counsel retained by the Securityholder
Agent.
(h) Actions of the Securityholder Agent. A decision, act, consent or
instruction of the Securityholder Agent shall constitute a decision of all
the Shareholders for whom a portion of the Escrow Amount otherwise issuable
to them are deposited in the Escrow Fund and shall be final, binding and
conclusive upon each of such Shareholders, and the Escrow Agent and Parent
may rely upon any such decision, act, consent or instruction of the
Securityholder Agent as being the decision, act, consent or instruction of
each and every such Shareholder. The Escrow Agent and Parent are hereby
relieved from any liability to any person for any acts done by them in
accordance with such decision, act, consent or instruction of the
Securityholder Agent.
(i) Third-Party Claims. In the event Parent becomes aware of a
third-party claim which Parent believes may result in a demand against the
Escrow Fund, Parent shall notify the Securityholder Agent of such claim,
and the Securityholder Agent and the Shareholders of the Company shall be
entitled, at their expense, to participate in any defense of such claim.
Parent shall have the right in its sole discretion to settle any such
claim; provided, however, that except with the consent of the
Securityholder Agent, no settlement of any such claim with third-party
claimants shall be determinative of the amount of any claim against the
Escrow Fund. In the event that the Securityholder Agent has consented to
any such settlement, the Securityholder Agent shall have no power or
authority to object under any provision of this Article VII to the amount
of any claim by Parent against the Escrow Fund with respect to such
settlement.
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(j) Escrow Agent's Duties.
(i) The Escrow Agent shall be obligated only for the performance of
such duties as are specifically set forth herein, and as set forth in
any additional written escrow instructions which the Escrow Agent may
receive after the date of this Agreement which are signed by an officer
of Parent and the Securityholder Agent, and may rely and shall be
protected in relying or refraining from acting on any instrument
reasonably believed to be genuine and to have been signed or presented
by the proper party or parties. The Escrow Agent shall not be liable for
any act done or omitted hereunder as Escrow Agent while acting in good
faith and in the exercise of reasonable judgment, and any act done or
omitted pursuant to the advice of counsel shall be conclusive evidence
of such good faith.
(ii) The Escrow Agent is hereby expressly authorized to disregard
any and all warnings given by any of the parties hereto or by any other
person, excepting only orders or process of courts of law, and is hereby
expressly authorized to comply with and obey orders, judgments or
decrees of any court. In case the Escrow Agent obeys or complies with
any such order, judgment or decree of any court, the Escrow Agent shall
not be liable to any of the parties hereto or to any other person by
reason of such compliance, notwithstanding any such order, judgment or
decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.
(iii) The Escrow Agent shall not be liable in any respect on
account of the identity, authority or rights of the parties executing or
delivering or purporting to execute or deliver this Agreement or any
documents or papers deposited or called for hereunder.
(iv) The Escrow Agent shall not be liable for the expiration of any
rights under any statute of limitations with respect to this Agreement
or any documents deposited with the Escrow Agent.
(v) In performing any duties under the Agreement, the Escrow Agent
shall not be liable to any party for damages, losses, or expenses,
except for negligence or willful misconduct on the part of the Escrow
Agent. The Escrow Agent shall not incur any such liability for (A) any
act or failure to act made or omitted in good faith, or (B) any action
taken or omitted in reliance upon any instrument, including any written
statement of affidavit provided for in this Agreement that the Escrow
Agent shall in good faith believe to be genuine, nor will the Escrow
Agent be liable or responsible for forgeries, fraud, impersonations, or
determining the scope of any representative authority. In addition, the
Escrow Agent may consult with the legal counsel in connection with
Escrow Agent's duties under this Agreement and shall be fully protected
in any act taken, suffered, or permitted by him/her in good faith in
accordance with the advice of counsel. The Escrow Agent is not
responsible for determining and verifying the authority of any person
acting or purporting to act on behalf of any party to this Agreement.
(vi) If any controversy arises between the parties to this
Agreement, or with any other party, concerning the subject matter of
this Agreement, its terms or conditions, the Escrow Agent will not be
required to determine the controversy or to take any action regarding
it. The Escrow Agent may hold all documents and shares of Parent Common
Stock and may wait for settlement of any such controversy by final
appropriate legal proceedings or other means as, in the Escrow Agent's
discretion, the Escrow Agent may be required, despite what may be set
forth elsewhere in this Agreement. In such event, the Escrow Agent will
not be liable for damages.
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Furthermore, the Escrow Agent may at its option, file an action of
interpleader requiring the parties to answer and litigate any claims and
rights among themselves. The Escrow Agent is authorized to deposit with
the clerk of the court all documents and shares of Parent Common Stock
held in escrow, except all cost, expenses, charges and reasonable
attorney fees incurred by the Escrow Agent due to the interpleader
action and which the parties jointly and severally agree to pay. Upon
initiating such action, the Escrow Agent shall be fully released and
discharged of and from all obligations and liability imposed by the
terms of this Agreement.
(vii) The parties and their respective successors and assigns agree
jointly and severally to indemnify and hold Escrow Agent harmless
against any and all losses, claims, damages, liabilities, and expenses,
including reasonable costs of investigation, counsel fees, including
allocated costs of in-house counsel and disbursements that may be
imposed on Escrow Agent or incurred by Escrow Agent in connection with
the performance of his/her duties under this Agreement, including but
not limited to any litigation arising from this Agreement or involving
its subject matter other than arising out of its negligence or willful
misconduct provided, however, that the Shareholder's maximum liability
hereunder shall not exceed the amounts then available from the Escrow
Fund.
(viii) The Escrow Agent may resign at any time upon giving at least
thirty (30) days written notice to Parent and the Securityholder Agent;
provided, however, that no such resignation shall become effective until
the appointment of a successor escrow agent which shall be accomplished
as follows: the parties shall use their best efforts to mutually agree
on a successor escrow agent within thirty (30) days after receiving such
notice. If the parties fail to agree upon a successor escrow agent
within such time, the Escrow Agent shall have the right to appoint a
successor escrow agent authorized to do business in the state of
California. The successor escrow agent shall execute and deliver an
instrument accepting such appointment and it shall, without further
acts, be vested with all the estates, properties, rights, powers, and
duties of the predecessor escrow agent as if originally named as escrow
agent. Upon appointment of a successor escrow agent, the Escrow Agent
shall be discharged from any further duties and liability under this
Agreement.
(k) Fees. All fees of the Escrow Agent for performance of its duties
hereunder shall be paid by Parent in accordance with the standard fee
schedule of the Escrow Agent. It is understood that the fees and usual
charges agreed upon for services of the Escrow Agent shall be considered
compensation for ordinary services as contemplated by this Agreement. In
the event that the conditions of this Agreement are not promptly fulfilled,
or if the Escrow Agent renders any service not provided for in this
Agreement, or if the parties request a substantial modification of its
terms, or if any controversy arises, or if the Escrow Agent is made a party
to, or intervenes in, any litigation pertaining to the Escrow Fund or its
subject matter, the Escrow Agent shall be reasonably compensated for such
extraordinary services and reimbursed for all costs, attorney's fees,
including allocated costs of in-house counsel, and expenses occasioned by
such default, delay, controversy or litigation. The Parent promises to pay
these sums upon demand.
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ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 Termination. Except as provided in Section 8.2, this Agreement may be
terminated and the Merger abandoned at any time prior to the Effective Time:
(a) by mutual consent of the Company and Parent;
(b) by Parent or the Company if: (i) the Effective Time has not
occurred by October 15, 2000, provided, however, that the right to
terminate this Agreement under this Section 8.1(b)(i) shall not be
available to any party whose action or failure to act has been a principal
cause of or resulted in the failure of the Merger to occur on or before
such date and such action or failure to act constitutes a breach of this
Agreement; (ii) there shall be a final nonappealable order of a federal or
state court in effect preventing consummation of the Merger; or (iii) there
shall be any statute, rule, regulation or order enacted, promulgated or
issued or deemed applicable to the Merger by any Governmental Entity that
would make consummation of the Merger illegal;
(c) by Parent if there shall be any action taken, or any statute,
rule, regulation or order enacted, promulgated or issued or deemed
applicable to the Merger by any Governmental Entity, which would: (i)
prohibit or materially restrict the Parent's or the Surviving Corporation's
ownership or operation of any portion of the business of the Company or
(ii) compel Parent or the Company to dispose of or hold separate all or a
portion of the business or assets of the Company or Parent as a result of
the Merger;
(d) by Parent if it is not in material breach of its obligations under
this Agreement and there has been a material breach of any representation,
warranty, covenant or agreement contained in this Agreement or any Related
Agreements on the part of the Company and such breach has not been cured
within ten (10) calendar days after written notice to the Company;
provided, however, that, no cure period shall be required for a breach
which by its nature cannot be cured.
(e) by Parent if an event having a Company Material Adverse Effect
shall have occurred after the date of this Agreement.
(f) by the Company if it is not in material breach of its obligations
under this Agreement and there has been a material breach of any
representation, warranty, covenant or agreement contained in this Agreement
or any Related Agreements on the part of Parent and such breach has not
been cured within ten (10) calendar days after written notice to Parent;
provided, however, that, no cure period shall be required for a breach
which by its nature cannot be cured.
(g) by Company if an event having a Parent Material Adverse Effect
shall have occurred after the date of this Agreement.
(h) by Parent if Company fails to obtain approval of the Merger by the
Company Shareholders at the Company Stockholders' Meeting; or
(i) by Company if Parent fails to obtain approval of the Merger by the
Parent shareholders at the Parent Stockholders' Meeting (including an
adjournment thereof held within twenty (20) days of the initial stockholder
meeting).
8.2 Effect of Termination. In the event of termination of this Agreement
as provided in Section 8.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of Parent, Sub or the Company,
or their respective officers, directors or Shareholders; provided, that each
party shall remain liable for any willful breaches of this Agreement prior to
its
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termination; provided further that, the provisions of Sections 5.3 and 5.9(a),
Article IX and this Section 8.2 shall remain in full force and effect and
survive any termination of this Agreement.
8.3 Amendment. This Agreement may be amended by the parties hereto at any
time by execution of an instrument in writing signed on behalf of Parent, Sub
and the Company.
8.4 Extension; Waiver. At any time prior to the Effective Time, Parent and
Sub, on the one hand, and the Company, on the other hand, may, to the extent
legally allowed, (a) extend the time for the performance of any of the
obligations of the other party hereto, (b) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto, and (c) waive compliance with any of the
agreements or conditions for the benefit of such party contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
ARTICLE IX
GENERAL PROVISIONS
9.1 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
messenger or courier service, or mailed by registered or certified mail (return
receipt requested) or sent via facsimile (with acknowledgment of complete
transmission) to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice), provided, however,
that notices sent by mail will not be deemed given until received:
(a) if to Parent or Sub, to:
E.piphany, Inc.
1900 South Norfolk Street, Suite 310
San Mateo, California 94403
Attention: General Counsel
Telephone No.: (650) 356-3800
Facsimile No.: (650) 356-3801
with a copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
Attention: Aaron J. Alter, Esq.
N. Anthony Jeffries, Esq.
Telephone No.: (650) 493-9300
Facsimile No.: (650) 493-6811
(b) if to the Company, to
Octane Software, Inc.
2929 Campus Drive #101
San Mateo, California 94403
Attention: Aditya Guleri
Telephone No.: (650) 295-6200
Facsimile No.: (650) 295-6370
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with a copy to:
Venture Law Group, A Professional Corporation
2800 Sand Hill Road
Menlo Park, CA 94025
Attention: Sanjay Khare, Esq.
Telephone No.: (650) 854-4488
Facsimile No.: (650) 854-1121
(c) If to the Escrow Agent, to:
U.S. Bank Trust N.A.
One California Street, 4th Floor
San Francisco, California 94111
Attention: Ann Gadsby
Telephone No.: (415) 273-4532
Facsimile No.: (415) 273-4593
(d) If to the Securityholder Agent, to:
Grey Lock
755 Page Mill Road
Building A, Suite 100
Palo Alto, California 94304
Attention: David N. Strohm
Telephone No.: (650) 493-5525
Facsimile No.: (650) 493-5575
9.2 Interpretation. The words "include," "includes" and "including" when
used herein shall be deemed in each case to be followed by the words "without
limitation." The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
9.3 Counterparts; Facsimile. This Agreement may be executed by facsimile
and in one or more counterparts, all of which shall be considered one and the
same agreement and shall become effective when one or more counterparts have
been signed by each of the parties and delivered to the other party, it being
understood that all parties need not sign the same counterpart.
9.4 Entire Agreement; Assignment. This Agreement, the Related Agreements,
the Exhibits and Schedules hereto, the Mutual Nondisclosure Agreement, dated
February 12, 2000 between the Company and Parent and the documents and
instruments and other agreements among the parties hereto referenced herein: (a)
constitute the entire agreement among the parties with respect to the subject
matter hereof and supersede all prior agreements and understandings both written
and oral, among the parties with respect to the subject matter hereof; (b)
except as set forth in Section 5.20 are not intended to confer upon any other
person any rights or remedies hereunder; and (c) shall not be assigned (other
than by operation of law), except that Parent and Sub may assign their
respective rights and delegate their respective obligations hereunder to their
respective affiliates.
9.5 Severability. In the event that any provision of this Agreement or the
application thereof, becomes or is declared by a court of competent jurisdiction
to be illegal, void or unenforceable, the remainder of this Agreement will
continue in full force and effect and the application of such provision to other
persons or circumstances will be interpreted so as reasonably to effect the
intent of the parties hereto. The parties further agree to replace such void or
unenforceable provision of this
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Agreement with a valid and enforceable provision that will achieve, to the
extent possible, the economic, business and other purposes of such void or
unenforceable provision.
9.6 Other Remedies; Specific Performance. Any and all remedies herein
expressly conferred upon a party will be deemed cumulative with and not
exclusive of any other remedy conferred hereby, or by law or equity upon such
party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy. The parties hereto 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 seek an injunction
or injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
having jurisdiction, this being in addition to any other remedy to which they
are entitled at law or in equity.
9.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
Each of the parties hereto irrevocably consents to the exclusive jurisdiction
and venue of any court within San Mateo County, State of California, in
connection with any matter based upon or arising out of this Agreement or the
matters contemplated herein, agrees that process may be served upon them in any
manner authorized by the laws of the State of Delaware for such persons and
waives and covenants not to assert or plead any objection which they might
otherwise have to such jurisdiction, venue and such process. Each of Parent,
Company and Sub hereby irrevocably waives all right to trial by jury in any
action, proceeding or counterclaim (whether based on contract, tort or
otherwise) arising out of or relating to this agreement or the actions of
Parent, Company or Sub in the negotiation, administration, performance and
enforcement hereof.
9.8 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefor, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
9.9 Attorneys Fees. If any action or other proceeding relating to the
enforcement of any provision of this Agreement is brought by any party hereto,
the prevailing party shall be entitled to recover reasonable attorneys' fees,
costs and disbursements (in addition to any other relief to which the prevailing
party may be entitled).
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IN WITNESS WHEREOF, Parent, Sub, the Company, the Escrow Agent and the
Securityholder Agent have caused this Agreement to be signed, all as of the date
first written above.
<TABLE>
<S> <C>
E.PIPHANY, INC. OCTANE SOFTWARE, INC.
By:
--------------------------------------------------- By:
---------------------------------------------------
Name: ----------------------------------------------- Name: -----------------------------------------------
Title:
------------------------------------------------- Title:
-------------------------------------------------
ORCHID ACQUISITION CORPORATION ESCROW AGENT:
U.S. BANK TRUST N.A.
(for purposes of Article VII only)
By:
--------------------------------------------------- By:
---------------------------------------------------
Name: ----------------------------------------------- Name: -----------------------------------------------
Title:
------------------------------------------------- Title:
-------------------------------------------------
SECURITYHOLDER AGENT:
David N. Strohm
(for purposes of Article VII only)
By:
---------------------------------------------------
Name: -----------------------------------------------
</TABLE>
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ANNEX II
VOTING AGREEMENT
THIS VOTING AGREEMENT (this "Agreement") is made and entered into as of
March , 2000, among E.piphany, Inc., a Delaware corporation ("Parent"), and
the undersigned shareholder and/or optionholder (the "Shareholder") of Octane
Software, Inc., a California corporation (the "Company").
WHEREAS, the Company, Sub (as defined below), Parent and certain other
parties have entered into an Agreement and Plan of Reorganization (the
"Reorganization Agreement"), which provides for the merger of a wholly-owned
subsidiary of Parent ("Sub") into the Company (the "Merger"). Pursuant to the
Merger, all issued and outstanding capital stock of the Company shall be
converted into the right to receive common stock of Parent, as set forth in the
Reorganization Agreement;
WHEREAS, Shareholder is the beneficial owner (as defined in Rule 13d-3
under the Securities Exchange Act of 1934, as amended (the "Exchange Act") of
such number of shares of the outstanding capital stock of the Company and shares
subject to outstanding options and warrants as is indicated on the signature
page of this Agreement; and
WHEREAS, in consideration of the execution of the Reorganization Agreement
by Parent, Shareholder (in its, his or her capacity as such) agrees to vote the
Shares (as defined below), and other such shares of capital stock of the Company
over which Shareholder has voting power, so as to facilitate consummation of the
Merger.
NOW, THEREFORE, intending to be legally bound, the parties hereto agree as
follows:
1. Certain Definitions. Capitalized terms not defined herein shall have the
meanings ascribed to them in the Reorganization Agreement. For purposes of this
Agreement:
(a) "Expiration Date" shall mean the earlier to occur of (i) such date
and time as the Reorganization Agreement shall have been terminated
pursuant to Article VIII thereof, or (ii) such date and time as the Merger
shall become effective in accordance with the terms and provisions of the
Reorganization Agreement.
(b) "Person" shall mean any (i) individual, (ii) corporation, limited
liability company, partnership or other entity, or (iii) governmental
authority.
(c) "Shares" shall mean: (i) all securities of the Company (including
all shares of Company Capital Stock and all options, warrants and other
rights to acquire shares of Company Capital Stock) owned by Shareholder as
of the date of this Agreement; and (ii) all additional securities of the
Company (including all additional shares of Company Capital Stock and all
additional options, warrants and other rights to acquire shares of Company
Capital Stock) of which Shareholder acquires ownership during the period
from the date of this Agreement through the Expiration Date.
(d) Transfer. A Person shall be deemed to have effected a "Transfer"
of a security if such person directly or indirectly: (i) sells, pledges,
encumbers, grants an option with respect to, transfers or disposes of such
security or any interest in such security; or (ii) enters into an agreement
or commitment providing for the sale of, pledge of, encumbrance of, grant
of an option with respect to, transfer of or disposition of such security
or any interest therein.
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2. Transfer of Shares.
(a) Transferee of Shares to be Bound by this Agreement. Shareholder
agrees that, during the period from the date of this Agreement through the
Expiration Date, Shareholder shall not cause or permit any Transfer of any
of the Shares to be effected unless such Transfer is in accordance with any
affiliate agreement between Shareholder and Parent contemplated by the
Reorganization Agreement and each Person to which any of such Shares, or
any interest in any of such Shares, is or may be transferred shall have:
(a) executed a counterpart of this Agreement and a proxy in the form
attached hereto as Exhibit A (with such modifications as Parent may
reasonably request); and (b) agreed in writing to hold such Shares (or
interest in such Shares) subject to all of the terms and provisions of this
Agreement.
(b) Transfer of Voting Rights. Shareholder agrees that, during the
period from the date of this Agreement through the Expiration Date,
Shareholder shall not deposit (or permit the deposit of) any Shares in a
voting trust or grant any proxy or enter into any voting agreement or
similar agreement in contravention of the obligations of Shareholder under
this Agreement with respect to any of the Shares.
3. Agreement to Vote Shares. At every meeting of the Shareholders of the
Company called, and at every adjournment thereof, and on every action or
approval by written consent of the Shareholders of the Company, Shareholder (in
its, his or her capacity as such) shall cause the Shares to be voted in favor of
approval of the Reorganization Agreement and the Merger, in favor of the
automatic conversion of Company Preferred Stock into Company Common Stock
immediately prior to Effective Time, in favor of each of the other transactions
contemplated by the Reorganization Agreement, in favor of any matter that could
reasonably be expected to facilitate the Merger and against any matter that is
inconsistent with the prompt consummation of the Merger and other transactions
contemplated by the Reorganization Agreement.
4. Irrevocable Proxy. Concurrently with the execution of this Agreement,
Shareholder agrees to deliver to Parent a proxy in the form attached hereto as
Exhibit A (the "Proxy"), which shall be irrevocable to the fullest extent
permissible by law, with respect to the Shares.
5. Irrevocable Election to Conversion. Shareholder hereby agrees and elects
to the automatic conversion immediately prior to Effective Time of the Shares
into Company Common Stock, as appropriate, pursuant to the terms of the
Company's Certificate of Incorporation, which agreement and election shall be
irrevocable to the fullest extent permissible by law.
6. Representations and Warranties of the Shareholder. Shareholder (a) is
the sole beneficial owner of the shares of Company Capital Stock and the options
and warrants to purchase shares of Company Capital Stock indicated on the final
page of this Agreement, free and clear of any liens, claims, options, rights of
first refusal (except as may be held by the Company), co-sale rights, charges or
other encumbrances; (b) does not beneficially own any securities of the Company
other than the shares of Company Capital Stock and options and warrants to
purchase shares of Company Capital Stock indicated on the final page of this
Agreement; and (c) has full power and authority to make, enter into and carry
out the terms of this Agreement and the Proxy.
7. Additional Documents. Shareholder (in its, his or her capacity as such)
hereby covenants and agrees to execute and deliver any additional documents
necessary or desirable, in the reasonable opinion of Parent, to carry out the
intent of this Agreement.
8. Consent and Waiver. Shareholder (not in its, his or her capacity as a
director or officer of the Company) hereby gives any consents or waivers that
are reasonably required for the
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consummation of the Merger under the terms of any agreements to which
Shareholder is a party or pursuant to any rights Shareholder may have.
9. Legending of Shares. If so requested by Parent, Shareholder agrees that
the Shares shall bear a legend stating that they are subject to this Agreement
and to an irrevocable proxy. Subject to the terms of Section 2 hereof,
Shareholder agrees that Shareholder shall not Transfer the Shares without first
having the aforementioned legend affixed to the certificates representing the
Shares.
10. Termination. This Agreement shall terminate and shall have no further
force or effect on such date and time as the Reorganization Agreement shall have
been terminated pursuant to Article VIII thereof.
11. Miscellaneous.
(a) Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
void or unenforceable, then the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.
(b) Binding Effect and Assignment. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns, but,
except as otherwise specifically provided herein, neither this Agreement
nor any of the rights, interests or obligations of the parties hereto may
be assigned by either of the parties without prior written consent of the
other.
(c) Amendments and Modification. This Agreement may not be modified,
amended, altered or supplemented except upon the execution and delivery of
a written agreement executed by the parties hereto.
(d) Waiver. No waiver, alteration or modification of any of the
provisions of this Agreement shall be binding unless in writing and signed
by duly authorized representatives of the parties hereto. No failure or
delay by any party in executing any right, power or privilege hereunder
shall operate as a waiver hereof, nor shall any single or partial exercise
hereof preclude any other or future exercise hereof or the exercise of any
other right, power or privilege hereof.
(e) Specific Performance; Injunctive Relief. The parties hereto
acknowledge that Parent shall be irreparably harmed and that there shall be
no adequate remedy at law for a violation of any of the covenants or
agreements of Shareholder set forth herein. Therefore, it is agreed that,
in addition to any other remedies that may be available to Parent upon any
such violation, Parent shall have the right to enforce such covenants and
agreements by specific performance, injunctive relief or by any other means
available to Parent at law or in equity.
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(f) Notices. All notices and other communications pursuant to this
Agreement shall be in writing and deemed to be sufficient if contained in a
written instrument and shall be deemed given if delivered personally,
telecopied, sent by nationally-recognized overnight courier or mailed by
registered or certified mail (return receipt requested), postage prepaid,
to the parties at the following address (or at such other address for a
party as shall be specified by like notice):
If to Parent: E.piphany, Inc.
1900 South Norfolk Street, Suite 310
San Mateo, CA 94403
Attention: General Counsel
Telephone: (650) 356-3800
Facsimile: (650) 356-3801
With a copy to: Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
Attention: Aaron Alter, Esq.
Tony Jeffries, Esq.
Telephone: (650) 493-9300
Facsimile: (650) 493-6811
If to Shareholder: To the address for notice set forth on the signature
page hereof.
(g) Governing Law. This Agreement shall be governed by the laws of the
State of Delaware, without reference to rules of conflicts of law.
(h) Entire Agreement. This Agreement and the Proxy contain the entire
understanding of the parties in respect of the subject matter hereof, and
supersede all prior negotiations and understandings between the parties
with respect to such subject matter.
(i) Effect of Headings. The Section headings are for convenience only
and shall not affect the construction or interpretation of this Agreement.
(j) Facsimile; Counterparts. This Agreement may be executed by
facsimile and in several counterparts, each of which shall be an original,
but all of which together shall constitute one and the same agreement.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the day and year first above written.
E.piphany, Inc.
By:
--------------------------------------------------------
Name:
-------------------------------------------------------
Title:
-------------------------------------------------------
[SIGNATURE PAGE TO VOTING AGREEMENT]
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SHAREHOLDER:
<TABLE>
<S> <C>
By:
Name:
Title:
Address:
Phone:
Facsimile:
</TABLE>
Shares beneficially owned:
________________________ shares of Company Common Stock
________________________ shares of Company Common Stock issuable upon exercise
of outstanding options or warrants
________________________ shares of Company Series A Preferred Stock
________________________ shares of Company Series A Preferred Stock issuable
upon exercise of outstanding warrants
________________________ shares of Company Series B Preferred Stock
________________________ shares of Company Series B Preferred Stock issuable
upon exercise of outstanding warrants
________________________ shares of Company Series C Preferred Stock
________________________ shares of Company Series C Preferred Stock issuable
upon exercise of outstanding warrants
[SIGNATURE PAGE TO VOTING AGREEMENT]
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EXHIBIT A
IRREVOCABLE PROXY
The undersigned Shareholder of Octane Software, Inc., a California
corporation (the "Company"), hereby irrevocably (to the fullest extent permitted
by law) appoints Roger Siboni, Kevin Yeaman and Debbie Townsend, and each of
them, as the sole and exclusive attorneys and proxies of the undersigned, with
full power of substitution and resubstitution, to vote and exercise all voting
and related rights (to the full extent that the undersigned is entitled to do
so) with respect to all of the shares of capital stock of the Company that now
are or hereafter may be beneficially owned by the undersigned, and any and all
other shares or securities of the Company issued or issuable in respect thereof
on or after the date hereof (collectively, the "Shares") in accordance with the
terms of this Proxy. The Shares beneficially owned by the undersigned
Shareholder of the Company as of the date of this Proxy are listed on the final
page of this Proxy. Upon the undersigned's execution of this Proxy, any and all
prior proxies given by the undersigned with respect to any Shares are hereby
revoked and the undersigned agrees not to grant any subsequent proxies with
respect to the Shares until after the Expiration Date (as defined below).
This Proxy is irrevocable (to the fullest extent permitted by law), is
coupled with an interest and is granted pursuant to that certain Voting
Agreement of even date herewith by and among E.piphany, Inc., a Delaware
corporation ("Parent") and the undersigned Shareholder (the "Voting Agreement"),
and is granted in consideration of Parent entering into that certain Agreement
and Plan of Reorganization (the "Reorganization Agreement"), among Parent,
Orchid Acquisition Corporation, a California corporation and a wholly-owned
subsidiary of Parent ("Sub"), and the Company. The Reorganization Agreement
provides for the merger of Sub with and into the Company in accordance with its
terms (the "Merger"). As used herein, the term "Expiration Date" shall mean the
earlier to occur of (i) such date and time as the Reorganization Agreement shall
have been validly terminated pursuant to Article VIII thereof or (ii) such date
and time as the Merger shall become effective in accordance with the terms and
provisions of the Reorganization Agreement. Capitalized terms not defined herein
shall have the meanings ascribed to them in the Reorganization Agreement.
The attorneys and proxies named above, and each of them, are hereby
authorized and empowered by the undersigned, at any time prior to the Expiration
Date, to act as the undersigned's attorney and proxy to vote the Shares, and to
exercise all voting, consent and similar rights of the undersigned with respect
to the Shares (including, without limitation, the power to execute and deliver
written consents) at every annual, special or adjourned meeting of Shareholders
of the Company and in every written consent in lieu of such meeting in favor of
approval of the Reorganization Agreement and the Merger, in favor of the
automatic conversion of Company Preferred Stock into Company Common Stock
immediately prior to Effective Time, in favor of each of the other transactions
contemplated by the Reorganization Agreement, in favor of any matter that could
reasonably be expected to facilitate the Merger and against any matter that is
inconsistent with the prompt consummation of the Merger or other transactions
contemplated by the Reorganization Agreement.
The attorneys and proxies named above may not exercise this Proxy on any
other matter except as provided above. The undersigned Shareholder may vote the
Shares on all other matters.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned.
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This Proxy is irrevocable (to the fullest extent permitted by law). This
Proxy shall terminate, and be of no further force and effect, automatically upon
the Expiration Date.
Dated:
- --------------------------------------------- , 1999
SHAREHOLDER
By:
Name:
Title:
Shares beneficially owned:
________________________ shares of the Company Common Stock
________________________ shares of the Company Common Stock issuable upon
exercise of outstanding options or warrants
________________________ shares of the Company Series A Preferred Stock
________________________ shares of the Company Series A Preferred Stock
issuable upon exercise of outstanding warrants
________________________ shares of the Company Series B Preferred Stock
________________________ shares of the Company Series B Preferred Stock
issuable upon exercise of outstanding warrants
________________________ shares of the Company Series C Preferred Stock
________________________ shares of the Company Series C Preferred Stock
issuable upon exercise of outstanding warrants
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<PAGE> 288
ANNEX III
VOTING AGREEMENT
THIS VOTING AGREEMENT (this "Agreement") is made and entered into as of
March , 2000, between Octane Software, Inc., a California corporation
("Company"), and the undersigned stockholder (the "Stockholder") of E.piphany
Inc., a Delaware corporation (the "Parent").
WHEREAS, the Company, Sub (as defined below), Parent and certain other
parties have entered into an Agreement and Plan of Reorganization (the
"Reorganization Agreement"), which provides for the merger of a wholly-owned
subsidiary of Parent ("Sub") into the Company (the "Merger"). Pursuant to the
Merger, all issued and outstanding capital stock of the Company shall be
converted into the right to receive common stock of Parent, as set forth in the
Reorganization Agreement;
WHEREAS, Stockholder is the beneficial owner (as defined in Rule 13d-3
under the Securities Exchange Act of 1934, as amended (the "Exchange Act") of
such number of shares of the outstanding common stock of the Company as is
indicated on the signature page of this Agreement; and
WHEREAS, in consideration of the execution of the Reorganization Agreement
by Parent, Stockholder (in its, his or her capacity as such) agrees to vote the
Shares (as defined below), so as to facilitate consummation of the Merger.
NOW, THEREFORE, intending to be legally bound, the parties hereto agree as
follows:
1. Certain Definitions. Capitalized terms not defined herein shall have the
meanings ascribed to them in the Reorganization Agreement. For purposes of this
Agreement:
(a) "Expiration Date" shall mean the earlier to occur of (i) such date
and time as the Reorganization Agreement shall have been terminated
pursuant to Article VIII thereof, or (ii) such date and time as the Merger
shall become effective in accordance with the terms and provisions of the
Reorganization Agreement.
(b) "Person" shall mean any (i) individual, (ii) corporation, limited
liability company, partnership or other entity, or (iii) governmental
authority.
(c) "Shares" shall mean all securities of the Parent beneficially
owned (if any) by Stockholder as of the record date for the vote of the
Stockholders with respect to the Merger.
(d) Transfer. A Person shall be deemed to have effected a "Transfer"
of a security if such person directly or indirectly: (i) sells, pledges,
encumbers, grants an option with respect to, transfers or disposes of such
security or any interest in such security; or (ii) enters into an agreement
or commitment providing for the sale of, pledge of, encumbrance of, grant
of an option with respect to, transfer of or disposition of such security
or any interest therein.
(e) "Stockholders" shall mean the holders of common stock of the
Parent.
2. Transfers Permitted. Nothing in this Agreement shall be deemed to
prohibit, restrict or in any way limit Stockholder's right to Transfer any
securities of the Parent beneficially owned by Stockholder.
3. Agreement to Vote Shares. At every meeting of the Stockholders called,
and at every adjournment thereof, and on every action or approval by written
consent of the Stockholders of the
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<PAGE> 289
Parent, Stockholder (in its, his or her capacity as such) shall cause the Shares
to be voted in favor of approval of the Reorganization Agreement and the Merger,
in favor of each of the other transactions contemplated by the Reorganization
Agreement, and in favor of any matter that could reasonably be expected to
facilitate the Merger and against any matter that is intended specifically for
the purpose of preventing or delaying the Merger and other transactions
contemplated by the Reorganization Agreement.
4. Representations and Warranties of the Stockholder. Stockholder (a) is
the beneficial owner of the shares of Parent common stock indicated on the final
page of this Agreement as of the date of this Agreement (with the understanding
that the number of shares held on the record date may be different than such
number); and (b) has full power and authority to make, enter into and carry out
the terms of this Agreement.
5. Termination. This Agreement shall terminate and shall have no further
force or effect on the Expiration Date.
6. Miscellaneous.
(a) Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
void or unenforceable, then the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.
(b) Binding Effect and Assignment. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns, but,
except as otherwise specifically provided herein, neither this Agreement
nor any of the rights, interests or obligations of the parties hereto may
be assigned by either of the parties without prior written consent of the
other.
(c) Amendments and Modification. This Agreement may not be modified,
amended, altered or supplemented except upon the execution and delivery of
a written agreement executed by the parties hereto.
(d) Waiver. No waiver, alteration or modification of any of the
provisions of this Agreement shall be binding unless in writing and signed
by duly authorized representatives of the parties hereto. No failure or
delay by any party in executing any right, power or privilege hereunder
shall operate as a waiver hereof, nor shall any single or partial exercise
hereof preclude any other or future exercise hereof or the exercise of any
other right, power or privilege hereof.
(e) Specific Performance; Injunctive Relief. The parties hereto
acknowledge that Company shall be irreparably harmed and that there shall
be no adequate remedy at law for a violation of any of the covenants or
agreements of Stockholder set forth herein. Therefore, it is agreed that,
in addition to any other remedies that may be available to Company upon any
such violation, Company shall have the right to enforce such covenants and
agreements by specific performance, injunctive relief or by any other means
available to Company at law or in equity.
(f) Notices. All notices and other communications pursuant to this
Agreement shall be in writing and deemed to be sufficient if contained in a
written instrument and shall be deemed given if delivered personally,
telecopied, sent by nationally-recognized overnight courier or mailed by
registered or certified mail (return receipt requested), postage prepaid,
to the parties at the following address (or at such other address for a
party as shall be specified by like notice):
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If to Company: At the address as set forth in the Reorganization
Agreement
With a copy to: Venture Law Group at the address as set forth in
the Reorganization Agreement
If to Stockholder: Care of the address of the Parent as set forth
in the Reorganization Agreement.
(g) Governing Law. This Agreement shall be governed by the laws of the
State of Delaware, without reference to rules of conflicts of law.
(h) Entire Agreement. This Agreement contain the entire understanding
of the parties in respect of the subject matter hereof, and supersede all
prior negotiations and understandings between the parties with respect to
such subject matter.
(i) Effect of Headings. The Section headings are for convenience only
and shall not affect the construction or interpretation of this Agreement.
(j) Facsimile; Counterparts. This Agreement may be executed by
facsimile and in several counterparts, each of which shall be an original,
but all of which together shall constitute one and the same agreement.
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<PAGE> 291
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the day and year first above written.
Company:
By: ________________________________________
Name: _____________________________________
Title: ______________________________________
Stockholder:
By: ________________________________________
Name: _____________________________________
Title: ______________________________________
Shares beneficially owned:
________________________ shares of Company Common Stock
________________________ shares of Company Common Stock issuable upon the
exercise of outstanding options and warrants
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<PAGE> 292
ANNEX IV
CALIFORNIA CORPORATIONS CODE
CHAPTER 13. DISSENTERS' RIGHTS
1300 RIGHT TO REQUIRE PURCHASE -- "DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DENIED.
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split, or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by the
Commissioner of Corporations under subdivision (o) of Section 25100 or (B)
listed on the list of OTC margin stocks issued by the Board of Governors of the
Federal Reserve System, and the notice of meeting of shareholders to act upon
the reorganization summarizes this section and Sections 1301, 1302, 1303 and
1304; provided, however, that this provision does not apply to any shares with
respect to which there exists any restriction on transfer imposed by the
corporation or by any law or regulation; and provided, further, that this
provision does not apply to any class of shares described in subparagraph (A) or
(B) if demands for payment are filed with respect to 5 percent or more of the
outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted in
favor of the reorganization or, (B) if described in subparagraph (A) or (B) of
paragraph (1) (without regard to the provisos in that paragraph), were voted
against the reorganization, or which were held of record on the effective date
of a short-form merger; provided, however, that subparagraph (A) rather than
subparagraph (B) of this paragraph applies in any case where the approval
required by Section 1201 is sought by written consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
1301 DEMAND FOR PURCHASE.
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such
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shareholder a notice of the approval of the reorganization by its outstanding
shares (Section 152) within 10 days after the date of such approval, accompanied
by a copy of Sections 1300, 1302, 1303, 1304 and this section, a statement of
the price determined by the corporation to represent the fair market value of
the dissenting shares, and a brief description of the procedure to be followed
if the shareholder desires to exercise the shareholder's right under such
sections. The statement of price constitutes an offer by the corporation to
purchase at the price stated any dissenting shares as defined in subdivision (b)
of Section 1300, unless they lose their status as dissenting shares under
Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
1302 ENDORSEMENT OF SHARES.
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
1303 AGREED PRICE -- TIME OF PAYMENT.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in
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the case of certificated securities, subject to surrender of the certificates
therefor, unless provided otherwise by agreement.
1304 DISSENTER'S ACTION TO ENFORCE PAYMENT.
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
1305 APPRAISERS' REPORT -- PAYMENT -- COSTS.
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
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1306 DISSENTING SHAREHOLDERS' STATUS AS CREDITOR.
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
1307 DIVIDENDS PAID AS CREDIT AGAINST PAYMENT.
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
1308 CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS.
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
1309 TERMINATION OF DISSENTING SHAREHOLDER STATUS.
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
1310 SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION.
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
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1311 EXEMPT SHARES.
This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger.
1312 ATTACKING VALIDITY OF REORGANIZATION OR MERGER.
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
5
<PAGE> 297
ANNEX V
[LETTERHEAD OF CREDIT SUISSE FIRST BOSTON CORPORATION]
March 14, 2000
Board of Directors
E.piphany, Inc.
1900 South Norfolk Street, Suite 310
San Mateo, California 94403
Members of the Board:
You have asked us to advise you with respect to the fairness, from a financial
point of view, to E.piphany, Inc. ("E.piphany") of the Consideration (as defined
below) set forth in the Agreement and Plan of Reorganization, dated as of March
14, 2000 (the "Agreement"), by and among E.piphany, Orchid Acquisition
Corporation, a wholly owned subsidiary of E.piphany ("Merger Sub"), and Octane
Software, Inc. ("Octane"). The Agreement provides for, among other things, the
merger of Merger Sub with and into Octane (the "Merger") pursuant to which
E.piphany will acquire all of the outstanding shares of capital stock of Octane
and assume all obligations relating to outstanding options, warrants and other
rights to purchase capital stock of Octane, in exchange for aggregate
consideration consisting of that number of shares of the common stock, par value
$0.0001 per share, of E.piphany (the "E.piphany Common Stock") and options,
warrants and other rights to purchase E.piphany Common Stock equal to (i)
12,793,510 less (ii) an amount equal to (a) the amount by which the estimated
fees and expenses incurred by Octane in connection with the Merger exceed
$1,500,000 divided by (b) $192.85 (the "Consideration").
In arriving at our opinion, we have reviewed the Agreement and certain related
documents, certain publicly available business and financial information
relating to E.piphany and certain available business and financial information
relating to Octane. We have also reviewed certain other information relating to
E.piphany and Octane, including financial forecasts, provided to or discussed
with us by E.piphany and Octane, and have met with the managements of E.piphany
and Octane to discuss the businesses and prospects of E.piphany and Octane,
including the ability to integrate the businesses of E.piphany and Octane. We
have also considered certain financial and stock market data of E.piphany and
certain financial data of Octane, and we have compared those data with similar
data for publicly held companies in businesses similar to E.piphany and Octane,
and we have considered, to the extent publicly available, the financial terms of
certain other business combinations and other transactions which have recently
been effected. We also considered such other information, financial studies,
analyses and investigations and financial, economic and market criteria which we
deemed relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
such information being complete and accurate in all material respects. With
respect to the financial forecasts, we have been advised, and have assumed, that
the management of E.piphany has reviewed publicly available financial forecasts
for E.piphany and that such publicly available forecasts represent reasonable
estimates and judgments as to the future financial performance of E.piphany, and
that the financial forecasts for Octane have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
managements of E.piphany and Octane as to the future financial performance of
Octane. In addition, we have relied upon, without independent verification, the
assessments of the managements
<PAGE> 298
Board of Directors
E.piphany, Inc.
March 14, 2000
Page 2
of E.piphany and Octane as to (i) their ability to retain key employees of
Octane, (ii) the strategic benefits anticipated by the managements of E.piphany
and Octane to result from the Merger, (iii) Octane's existing technology and
products and the validity of, and risks associated with, Octane's future
technology and products and (iv) the ability to integrate the businesses of
E.piphany and Octane. We also have assumed, with your consent, that the Merger
will be treated as a tax-free reorganization for federal income tax purposes. We
have not been requested to make, and have not made, an independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise) of E.piphany or
Octane, nor have we been furnished with any such evaluations or appraisals. Our
opinion is necessarily based upon information available to us, and financial,
economic, market and other conditions as they exist and can be evaluated, on the
date hereof. We are not expressing any opinion as to what the value of the
E.piphany Common Stock actually will be when issued pursuant to the Merger or
the prices at which the E.piphany Common Stock will trade subsequent to the
Merger.
We have acted as financial advisor to E.piphany in connection with the Merger
and will receive a fee for our services, a significant portion of which is
contingent upon the consummation of the Merger. We will also receive a fee upon
delivery of this opinion. We and our affiliates have in the past provided and
are currently providing financial services to E.piphany unrelated to the
proposed Merger, for which services we have received and in the future may
receive compensation. In the ordinary course of business, we and our affiliates
may actively trade the securities of E.piphany for our and such affiliates'
accounts and for the accounts of customers and, accordingly, may at any time
hold long or short positions in such securities.
It is understood that this letter is for the information of the Board of
Directors of E.piphany in connection with its evaluation of the Merger, does not
constitute a recommendation to any stockholder as to how such stockholder should
vote with respect to any matter relating to the Merger, and is not to be quoted
or referred to, in whole or in part, in any registration statement, prospectus
or proxy statement, or in any other document used in connection with the
offering or sale of securities, nor shall this letter be used for any other
purposes, without our prior written consent.
Based upon and subject to the foregoing, it is our opinion that, as of the date
hereof, the Consideration is fair, from a financial point of view, to E.piphany.
Very truly yours,
CREDIT SUISSE FIRST BOSTON CORPORATION
2
<PAGE> 299
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits a corporation
to include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
Article VII of E.piphany's Restated Certificate of Incorporation provides
for the indemnification of directors to the fullest extent permissible under
Delaware law.
Article VI of E.piphany's Bylaws provides for the indemnification of
officers, directors and third parties acting on behalf of E.piphany if such
person acted in good faith and in a manner reasonably believed to be in and not
opposed to the best interest of E.piphany, and, with respect to any criminal
action or proceeding, the indemnified party had no reason to believe his or her
conduct was unlawful.
E.piphany has entered into indemnification agreements with its directors
and executive officers, in addition to indemnification provided for in
E.piphany's Bylaws, and intends to enter into indemnification agreements with
any new directors and executive officers in the future.
E.piphany has entered into underwriting agreements with the underwriters
for its recent public offerings which provide for indemnification by E.piphany
of the underwriters for some liabilities, including liabilities arising under
the Securities Act of 1933, as amended.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
2.1 Agreement and Plan of Reorganization dated as of March 14,
2000, among E.piphany, Inc., Orchid Acquisition Corporation
and Octane Software, Inc. (included as Annex I to the proxy
statement/prospectus which is a part of this registration
statement on Form S-4).
2.2 Form of voting agreement dated as of March 14, 2000 among
E.piphany and the officers, directors and affiliated
shareholders of Octane (included as Annex II to the proxy
statement/prospectus which is a part of this registration
statement on Form S-4).
2.3 Form of voting agreement dated as of March 14, 2000 among
Octane and the officers, directors and certain affiliated
stockholders of E.piphany (included as Annex III to the
proxy statement/prospectus which is a part of this
registration statement on Form S-4).
3.1* Restated Certificate of Incorporation of the Registrant.
3.2* Restated Bylaws of the Registrant.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1* Form of Indemnification Agreement between the Registrant and
each of its directors and officers.
10.2* 1999 Stock Plan and form of agreements thereunder.
10.3* 1999 Employee Stock Purchase Plan and form of agreements
thereunder.
10.4* 1997 Stock Plan and form of agreements thereunder.
10.5* Fourth Amended and Restated Investors' Rights Agreement
dated June 16, 1999.
10.6* Loan and Security Agreement entered into as of January 9,
1998 with Silicon Valley Bank.
</TABLE>
II-1
<PAGE> 300
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.7* Loan Modification Agreement between the Registrant and
Silicon Valley Bank dated December 1, 1998.
10.8* Master Lease Agreement dated June 2, 1999 by and between
Comdisco, Inc. and the Registrant.
10.9* Subordinated Loan and Security Agreement dated as of June 2,
1999 by and between the Registrant and Comdisco, Inc.
10.10* Sublease Portion of Third Floor of 1900 Norfolk Street, San
Mateo, California dated April 23, 1999 by and between
Inktomi Corporation and the Registrant.
10.11* Form of Amended and Restated Common Stock Purchase Agreement
dated March 18, 1997 between the Registrant and four
stockholders.
10.12* Restricted Stock Purchase Agreement, Promissory Note, Stock
Pledge Agreement and Joint Escrow Instructions dated July 1,
1998 between Roger S. Siboni and the Registrant.
10.13* Promissory Note dated August 15, 1998 between Roger S.
Siboni and the Registrant.
10.14** RightPoint Software, Inc. (formerly Datamind Corporation)
1996 Stock Option Plan.
16.1* Letter from KPMG LLP.
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.
23.2 Consent of KPMG, Independent Public Accountants.
23.3 Consent of Deloitte & Touche, LLP, Independent Auditors.
23.4 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1).
24.1 Power of Attorney (included on the signature page of this
registration statement).
27.1 Financial Data Schedule.
99.1 Form of Proxy for special meeting of shareholders of Octane.
99.2 Form of Proxy for special meeting of stockholders of
E.piphany.
99.3 Consent of Credit Suisse First Boston Corporation.
</TABLE>
- -------------------------
* Incorporated by reference to E.piphany, Inc.'s Registration Statement on Form
S-1 (Registration No. 333-82799) declared effective by the Securities and
Exchange Commission on September 21, 1999.
** Incorporated by reference to E.piphany, Inc.'s Registration Statement on Form
S-1 (Registration No. 333-94033) declared effective by the Securities and
Exchange Commission on January 20, 2000.
(b) FINANCIAL STATEMENT SCHEDULES
None.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed
II-2
<PAGE> 301
that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of
prospectus filed with the SEC pursuant to Rule 424(b) (sec. 230.424(b)
of this chapter) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of
the Exchange Act (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement 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.
(5) The undersigned registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder
through use of a prospectus which is a part of this registration statement,
by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
(6) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (6) immediately preceding, or (ii) that purports to
meet the requirements of section 10(a)(3) of the Securities Act and is used
in connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the registration statement and will not
be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act, each such
post-effective amendment 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.
(7) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the
prospective pursuant to Items 4, 10(b), 11, or 13 of this Form, within one
business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date
of the registration statement through the date of responding to the
request.
(8) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and
the company being acquired involved therein, that was not the subject of
and included in the registration statement when it became effective.
II-3
<PAGE> 302
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement on Form S-4 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Mateo,
State of California, on the 24th day of April, 2000.
E.PIPHANY, INC.
By: /s/ ROGER S. SIBONI
------------------------------------
Roger S. Siboni, President and
Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints, jointly and severally, Roger S.
Siboni and Kevin J. Yeaman, and each of them acting individually, as his
attorney-in-fact, each with full power of substitution, for him in any and all
capacities, to sign any and all amendments to this registration statement on
Form S-4 (including any post-effective amendments), and to file the same, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, each acting alone, or his
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 on Form S-4 has been signed by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ROGER S. SIBONI President, Chief Executive April 24, 2000
- ----------------------------------------------------- Officer and Chairman
Roger S. Siboni of the Board
(Principal Executive Officer)
/s/ KEVIN J. YEAMAN Chief Financial Officer April 24, 2000
- ----------------------------------------------------- (Principal Financial and
Kevin J. Yeaman Accounting Officer)
/s/ ROBERT L. JOSS Director April 24, 2000
- -----------------------------------------------------
Robert L. Joss
/s/ PAUL M. HAZEN Director April 24, 2000
- -----------------------------------------------------
Paul M. Hazen
/s/ SAM H. LEE Director April 24, 2000
- -----------------------------------------------------
Sam H. Lee
/s/ DOUGLAS J. MACKENZIE Director April 24, 2000
- -----------------------------------------------------
Douglas J. Mackenzie
/s/ GAYLE CROWELL Director April 24, 2000
- -----------------------------------------------------
Gayle Crowell
</TABLE>
II-4
<PAGE> 303
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
2.1 Agreement and Plan of Reorganization dated as of March 14,
2000, among E.piphany, Inc., Orchid Acquisition Corporation
and Octane Software, Inc. (included as Annex I to the proxy
statement/prospectus which is a part of this registration
statement on Form S-4).
2.2 Form of voting agreement dated as of March 14, 2000 among
E.piphany and the officers, directors and affiliated
shareholders of Octane (included as Annex II to the proxy
statement/prospectus which is a part of this registration
statement on Form S-4).
2.3 Form of voting agreement dated as of March 14, 2000 among
Octane and the officers, directors and certain affiliated
stockholders of E.piphany (included as Annex III to the
proxy statement/prospectus which is a part of this
registration statement on Form S-4).
3.1* Restated Certificate of Incorporation of the Registrant.
3.2* Restated Bylaws of the Registrant.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1* Form of Indemnification Agreement between the Registrant and
each of its directors and officers.
10.2* 1999 Stock Plan and form of agreements thereunder.
10.3* 1999 Employee Stock Purchase Plan and form of agreements
thereunder.
10.4* 1997 Stock Plan and form of agreements thereunder.
10.5* Fourth Amended and Restated Investors' Rights Agreement
dated June 16, 1999.
10.6* Loan and Security Agreement entered into as of January 9,
1998 with Silicon Valley Bank.
10.7* Loan Modification Agreement between the Registrant and
Silicon Valley Bank dated December 1, 1998.
10.8* Master Lease Agreement dated June 2, 1999 by and between
Comdisco, Inc. and the Registrant.
10.9* Subordinated Loan and Security Agreement dated as of June 2,
1999 by and between the Registrant and Comdisco, Inc.
10.10* Sublease Portion of Third Floor of 1900 Norfolk Street, San
Mateo, California dated April 23, 1999 by and between
Inktomi Corporation and the Registrant.
10.11* Form of Amended and Restated Common Stock Purchase Agreement
dated March 18, 1997 between the Registrant and four
stockholders.
10.12* Restricted Stock Purchase Agreement, Promissory Note, Stock
Pledge Agreement and Joint Escrow Instructions dated July 1,
1998 between Roger S. Siboni and the Registrant.
10.13* Promissory Note dated August 15, 1998 between Roger S.
Siboni and the Registrant.
10.14** RightPoint Software, Inc. (formerly Datamind Corporation)
1996 Stock Option Plan.
16.1* Letter from KPMG LLP.
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.
23.2 Consent of KPMG, Independent Public Accountants.
23.3 Consent of Deloitte & Touche, LLP, Independent Auditors.
23.4 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1).
24.1 Power of Attorney (included on the signature page of this
registration statement).
27.1 Financial Data Schedule.
99.1 Form of Proxy for special meeting of shareholders of Octane.
99.2 Form of Proxy for special meeting of stockholders of
E.piphany.
</TABLE>
<PAGE> 304
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
99.3 Consent of Credit Suisse First Boston Corporation.
</TABLE>
- -------------------------
* Incorporated by reference to E.piphany, Inc.'s Registration Statement on Form
S-1 (Registration No. 333-82799) declared effective by the Securities and
Exchange Commission on September 21, 1999.
** Incorporated by reference to E.piphany, Inc.'s Registration Statement on Form
S-1 (Registration No. 333-94033) declared effective by the Securities and
Exchange Commission on January 20, 2000.
<PAGE> 1
EXHIBIT 5.1
[LETTERHEAD OF WILSON SONSINI GOODRICH & ROSATI]
April 25, 2000
E.piphany, Inc.
1900 South Norfolk Street, Suite 310
San Mateo, CA 94403
RE: REGISTRATION STATEMENT ON S-4
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-4, which will be
filed by you with the Securities and Exchange Commission (the "Commission") on
April 25, 2000 (the "Registration Statement") in connection with the
registration under the Securities Act of 1933, as amended (the "Act"), of the
shares of your Common Stock to be issued to the shareholders of Octane Software,
Inc., a California corporation, as described in the Registration Statement (the
"Shares"). As your counsel in connection with this transaction, we have examined
the proceedings taken and are familiar with the proceedings proposed to be taken
by you in connection with the sale and issuance of the Shares.
It is our opinion that upon conclusion of the proceedings being taken or
contemplated to be taken by you and by us, as your counsel, prior to the
issuance of the Shares, the Shares, when issued and sold in the manner described
in the Registration Statement, will be validly issued, fully paid and
non-assessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the proxy statement/prospectus constituting a
part thereof, and any amendment thereto. In giving such consent, we are not
acknowledging that we are in the category of persons whose consent is required
under Section 7 of the Act or the Rules and Regulations of the Securities and
Exchange Commission.
Sincerely,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ WILSON SONSINI GOODRICH & ROSATI
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and to all references to our Firm included in or made a part of this
registration statement.
San Jose, California /s/ ARTHUR ANDERSEN LLP
April 24, 2000
<PAGE> 1
EXHIBIT 23.2
The Board of Directors
E.piphany, Inc.
We consent to the use of our report dated September 10, 1999 on the consolidated
financial statements of RightPoint Software, Inc. and subsidiary as of June 30,
1998 and 1999, and the related consolidated statements of operations and
comprehensive loss, stockholders' equity and cash flows for the years then
ended included herein and to the reference to our firm under the headings
"Experts" and "Change in Independent Public Accountants" in the proxy
statement/prospectus.
/s/ KPMG LLP
Mountain View, California
April 25, 2000
<PAGE> 1
EXHIBIT 23.3
CONSENT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS
We consent to the use in this Registration Statement of E.piphany, Inc.
on Form S-4 of our report dated March 22, 2000 relating to the consolidated
financial statements of Octane Software, Inc. and subsidiaries as of December
31, 1998 and 1999 and for the period from September 9, 1997 (inception) to
December 31, 1997 and for the years ended December 31, 1998 and 1999 appearing
in the Proxy Statement/Prospectus, which is a part of such Registration
Statement, and to the references to us under the headings "Octane Selected
Historical Financial Data" and "Experts" in such Proxy Statement/Prospectus.
DELOITTE & TOUCHE LLP
/s/ DELOITTE & TOUCHE LLP
San Jose, California
April 24, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 401,268
<SECURITIES> 23,452
<RECEIVABLES> 9,867
<ALLOWANCES> 550
<INVENTORY> 0
<CURRENT-ASSETS> 437,475
<PP&E> 7,163
<DEPRECIATION> 467
<TOTAL-ASSETS> 883,866
<CURRENT-LIABILITIES> 25,121
<BONDS> 0
0
0
<COMMON> 5
<OTHER-SE> 858,740
<TOTAL-LIABILITY-AND-EQUITY> 883,866
<SALES> 14,415
<TOTAL-REVENUES> 14,415
<CGS> 6,129
<TOTAL-COSTS> 6,129
<OTHER-EXPENSES> 79,647
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (66,968)
<INCOME-TAX> 0
<INCOME-CONTINUING> (66,968)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (66,968)
<EPS-BASIC> (2.35)
<EPS-DILUTED> (2.35)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD
OF DIRECTORS OF OCTANE SOFTWARE, INC.
SPECIAL MEETING OF SHAREHOLDERS
The undersigned shareholder of Octane Software, Inc., a California
corporation, hereby acknowledges receipt of the Notice of Special Meeting of
Shareholders and Proxy Statement, each dated April __, 2000, and hereby appoints
Aditya (Tim) Guleri and James Doehrman, and each of them, with full power to
each of substitution, as proxies and attorneys-in-fact, on behalf and in the
name of the undersigned, to represent the undersigned at the Special Meeting of
Shareholders of Octane, to be held on May 31, 2000, at 8:00 a.m., local time, at
2929 Campus Drive #101, San Mateo, California 94403, and at any adjournment or
postponement thereof, and to vote all shares of common stock that the
undersigned would be entitled to vote if then and there personally present, on
the matters set forth on the reverse side of this Proxy.
This Proxy will be voted as directed or, if no contrary direction is
indicated, will be voted FOR the proposals to approve the Agreement and Plan of
Reorganization, dated as of March 14, 2000, by and among E.piphany, Inc., Orchid
Acquisition Corporation and Octane and the merger contemplated thereby and FOR
the conversion of all Octane preferred stock into common stock effective
immediately prior to the merger.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)
- ------------------------------FOLD AND DETACH HERE------------------------------
<PAGE> 2
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER(S). THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
A VOTE FOR THE PROPOSALS.
(i) To approve the Agreement and Plan of Reorganization, dated March
14, 2000, by and among E.piphany Inc., Orchid Acquisition
Corporation and Octane and the merger contemplated thereby.
FOR: [ ] AGAINST: [ ] ABSTAIN: [ ]
(ii) To approve the conversion of all Octane preferred stock into
Octane common stock effective immediately prior to the merger
(for holders of Octane preferred stock only).
FOR: [ ] AGAINST: [ ] ABSTAIN: [ ]
And, in their discretion, the proxies are authorized to vote on such
other business as may properly come before the meeting or any adjournment
thereof.
____________________ [ ] MARK HERE FOR ADDRESS CHANGE
____________________ AND NOTE AT LEFT
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD USING THE ENCLOSED
ENVELOPE. Please sign exactly as name appears hereon. Where shares are held by
joint tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by an authorized officer. If a
partnership, please sign in partnership name by an authorized person.
- ------------------------------------ -----------------------------
Signature Date
- ------------------------------FOLD AND DETACH HERE------------------------------
-2-
<PAGE> 1
EXHIBIT 99.2
PROXY
E.PIPHANY, INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of E.PIPHANY, Inc. ("E.piphany"), a Delaware
corporation, hereby acknowledges receipt of the Notice of Special Meeting of
Stockholders and Proxy Statement/Prospectus, each dated April __, 2000, for the
Special Meeting to be held on May 31, 2000 and at any and all adjournments
thereof, and hereby appoints Roger S. Siboni and Kevin J. Yeaman, and each of
them, as proxies and attorneys-in-fact, with full power to each of substitution,
on behalf and in the name of the undersigned, to represent the undersigned at
the Special Meeting of Stockholders of E.piphany, to be held on May 31, 2000 at
9:00 a.m., local time at the Hotel Sofitel, located at 223 Twin Dolphin Drive,
Redwood City, California 94065, and to vote all shares of common stock which the
undersigned would be entitled to vote, if then and there personally present.
THIS PROXY WILL BE VOTED AS DIRECTED, OR IF NO CONTRARY DIRECTION IS INDICATED,
WILL BE VOTED FOR ITEM 1 ON THE REVERSE SIDE OF THIS PROXY, AND AS SAID PROXIES
DEEM ADVISABLE ON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE SPECIAL
MEETING.
(Continued and to be signed on reverse side)
SEE SEE
REVERSE REVERSE
SIDE SIDE
FOLD AND DETACH HERE
- --------------------------------------------------------------------------------
<PAGE> 2
PLEASE [X]
MARK VOTES
AS IN THIS
EXAMPLE
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER(S). THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
A VOTE FOR THE PROPOSAL.
(1) To approve the issuance of shares of E.piphany FOR AGAINST ABSTAIN
common stock to shareholders of Octane [ ] [ ] [ ]
Software, Inc. in connection with the merger of
a wholly-owned subsidiary of E.piphany with
Octane.
[ ] MARK HERE FOR ADDRESS
CHANGE AND NOTE AT LEFT
[ ] MARK HERE IF YOU PLAN
TO ATTEND THE MEETING
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY
CARD USING THE ENCLOSED ENVELOPE. This Proxy
should be marked, dated and signed by the
stockholder(s) exactly as his, her or its name
appears hereon, and returned promptly in the
enclosed envelope. Persons signing in a
fiduciary capacity should so indicate. If a
corporation, please sign in full corporate name
by an authorized officer. If a partnership,
please sign in partnership name by an authorized
person. If shares are held by joint tenants or
as community property, both should sign.
Signature(s)_______________Date:______Signature(s)_________________Date:________
FOLD AND DETACH HERE
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<PAGE> 1
EXHIBIT 99.3
[LETTERHEAD OF CREDIT SUISSE FIRST BOSTON CORPORATION]
Board of Directors
E.piphany, Inc.
1900 South Norfolk Street, Suite 310
San Mateo, California 94403
Members of the Board:
We hereby consent to the inclusion of our opinion letter to the Board of
Directors of E.piphany, Inc. ("E.piphany") as Annex V to the Proxy Statement/
Prospectus of E.piphany and Octane Software, Inc. ("Octane") relating to the
proposed merger transaction involving E.piphany and Octane, and references
thereto in such Proxy Statement/Prospectus under the captions "SUMMARY OF THE
PROXY STATEMENT/PROSPECTUS -- Approval of the Merger and Other Matters --
Opinion of E.piphany's Financial Advisor" and "THE MERGER AND RELATED
TRANSACTIONS -- Opinion of E.piphany's Financial Advisor." In giving such
consent, we do not admit that we come within the category of persons whose
consent is required under, and we do not admit that we are "experts" for
purposes of, the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.
By: /s/ CREDIT SUISSE FIRST BOSTON CORPORATION
------------------------------------------
CREDIT SUISSE FIRST BOSTON CORPORATION
Palo Alto, California
April 21, 2000
