<PAGE>
As filed with the Securities and Exchange Commission on July 9, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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KANA COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
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Delaware 7372 77-0435679
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
87 Encina Avenue
Palo Alto, California 94301
(650) 325-9850
(Address, including zip code, and telephone number, including area code, of
the registrant's principal executive offices)
---------------
Michael J. McCloskey
Chief Executive Officer
Kana Communications, Inc.
87 Encina Avenue
Palo Alto, California 94301
(650) 325-9850
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
Warren T. Lazarow, Esq. Laird H. Simons III, Esq.
David A. Makarechian, Esq. Katherine Tallman Schuda, Esq.
Kimberley E. Henningsen, Esq. Sayre E. Stevick, Esq.
Taylor L. Stevens, Esq. FENWICK & WEST LLP
BROBECK, PHLEGER & HARRISON LLP Two Palo Alto Square
Two Embarcadero Place Palo Alto, California 94301
2200 Geng Road (650) 494-0600
Palo Alto, California 94303
(650) 424-0160
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
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If the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Title of Each Class of Amount of
Securities to be Amount to Registration
Registered be Registered(1) Fee
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<S> <C> <C>
Common Stock, $.001 per share.............................. $40,250,000 $11,190
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o).
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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, as amended, or until the
Registration Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said Section 8(a), may determine.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information contained in this preliminary prospectus is not complete and +
+may be changed. These securities may not be sold until the registration +
+statement filed with the Securities and Exchange Commission is effective. +
+This preliminary prospectus is not an offer to sell nor does it seek an offer +
+to buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion. Dated July 9, 1999.
Shares
[LOGO OF KANA COMMUNICATIONS]
Kana Communications, Inc.
Common Stock
-----------
This is an initial public offering of shares of Kana Communications, Inc. All
of the shares of common stock are being sold by Kana.
Prior to this offering, there has been no public market for the common stock.
It is currently estimated that the initial public offering price per share will
be between $ and $ . Kana has applied for quotation of the common stock on
the Nasdaq National Market under the symbol "KANA".
See "Risk Factors" beginning on page 7 to read about factors you should
consider before buying shares of the common stock.
-----------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- ------
<S> <C> <C>
Initial public offering price.................................. $ $
Underwriting discount.......................................... $ $
Proceeds, before expenses, to Kana............................. $ $
</TABLE>
The underwriters may, under specific circumstances, purchase up to an
additional shares from Kana at the initial public offering price less the
underwriting discount.
-----------
The underwriters expect to deliver the shares against payment in New York,
New York on , 1999.
Goldman, Sachs & Co.
Hambrecht & Quist
Wit Capital Corporation
-----------
Prospectus dated , 1999.
<PAGE>
Description No. 1
Inside Front Cover
A logo bearing the words "powered by Kana" in lower case letters, immediately
above and to the left of the Kana logo, which consists of the letter "K"
surrounded by a partially open oval and the words "Kana Communications."
Below the logo is a band of white space, and below the white space are logos of
the following customers:
eBay Inc., eToys Inc., Priceline.com Incorporated, Chase Manhattan Bank, Ford
Motor Company and Northwest Airlines.
<PAGE>
Inside Gatefold
Centered across the top of the gatefold, in stylized letters, the words "Kana
develops, markets and supports an integrated suite of e-Business infrastructure
solutions addressing online customer interactions." Immediately to the left of
this phrase appears the Kana logo, which consists of a stylized "K" surrounded
by a partially open oval and the words "Kana Communications."
Below the phrase, centered in the page, a trapezoidal shape design which covers
most of the gatefold that has within it two large shaded trapezoidal shapes,
with one such shape on the far left of the trapezoid and another shape on the
far right of the trapezoid. The smaller shape on the right is entitled the "Kana
Architecture." The smaller shape on the left is labeled "Customers and Web
Sites." Shading covers and extends over the smaller trapezoids. Extending from
the design that is labeled Kana Architecture is a series of broken an unbroken
lines to boxes labeled with the main heading "Kana Applications." Each box has a
subheading that represents a different application of Kana's suite of
applications, including Kana Control, Kana Mail, Kana Direct, Kana Reports, Kana
Link, Kana Classify and Kana Web Connect. Extending from the boxes entitled
"Kana Applications" toward the smaller shape labeled Customers and Web Sites is
a series of broken and unbroken lines which are interrupted by the phrases
"upselling to customers," "defining new products and services," and "optimizing
performance."
Below this graphic is a band of white space. Below the white space is a shaded
area covering the lower eighth of the gatefold, with the phrase "Kana business
benefits" on the far left of the shaded region. Within the shared region appears
the words "enhanced customer relationships," "reduced operating and IT costs,"
and "increased revenue opportunities."
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our consolidated financial statements and notes to those
statements appearing elsewhere in this prospectus.
Our Business
We develop, market and support an integrated suite of e-Business
infrastructure solutions addressing online customer interactions. The Kana
software platform, together with our applications, provides an advanced and
scaleable solution that allows strategic online businesses, or e-Businesses, to
manage high volumes of e-mail and Web-based customer communications. In
addition, our software is designed to integrate with enterprise applications
and systems to help e-Businesses capitalize upon the extensive customer
information contained within online customer communications.
We also offer Kana Online, our hosted Web-based application service, for e-
Businesses that want to rapidly and efficiently deploy an online customer
interactions solution while minimizing their up-front investment in hardware,
software and services. Kana Online allows us to manage important customer data
and monitor real-time, hands-on customer feedback on our software.
We believe that our solution differs from those of our competitors as a
result of several core capabilities, including an advanced, scaleable, Web-
based architecture that supports industry standards, workflow optimization and
tools for enhanced productivity. In addition, our solution offers comprehensive
data analysis and reporting, and advanced messaging analysis technologies,
which permit e-Businesses to choose the level of automation appropriate for
their needs. We believe that our solution helps e-Businesses enhance customer
relationships, lower operating and IT costs and create new revenue
opportunities.
Our customers include e-Businesses in the communications, Internet,
retailing and technology industries, and companies employing e-Business
strategies in traditional industries such as financial services, energy,
automobile and airlines. As of June 30, 1999, more than 100 customers have
licensed our software, including:
. eBay Inc. . Chase Manhattan Bank
. eToys Inc. . Ford Motor Company
. Priceline.com . Northwest Airlines
Incorporated
Our Market Opportunity
With the advent of the Internet and the proliferation of e-mail, the manner
in which businesses communicate with their customers has undergone a
fundamental change: customers are now demanding that businesses be accessible
and communicate online. Given the emerging shift to online customer
interaction, traditional solutions are not addressing the changes required by
e-Businesses. Negative consequences, such as lost customers, result from a
failure to respond effectively to online communications. In addition, e-
Businesses may lose the opportunity to take advantage of new revenue-generating
opportunities by failing to capitalize upon the wealth of information conveyed
through online customer interactions.
3
<PAGE>
We believe that in order for companies to compete effectively in today's
rapidly changing e-Business environment, they must differentiate themselves by
providing the highest quality customer experience with a software solution
that:
. enables personalized online customer interaction that is timely, relevant
and specific to the needs of the customer;
. reduces operating and IT costs while integrating with existing e-Business
and legacy systems and databases across multiple departments; and
. broadens the opportunities for revenue generation through the extraction,
analysis and management of the valuable information contained within
online customer interactions.
Our Strategy
Our objective is to become the leading provider of mission-critical e-
Business infrastructure solutions addressing online customer interactions. The
key elements of our strategy include:
Extend Market Leadership Position. Our objective is to extend our position
as a leader in the e-Business infrastructure market for managing online
customer interactions by leveraging our suite of software applications and
establishing ourselves as the solution of choice. We believe that by broadening
our platform and suite of applications, we can expand our market opportunities
and solidify our position as a leading provider of comprehensive e-Business
infrastructure solutions.
Expand Our Suite of Products to Enter New Markets. We intend to expand our
suite of products to include additional e-commerce and content management
applications in order to enter new markets. We are working with our customers
to identify the strategic and functional needs of e-Businesses that operate in
the rapidly changing Internet environment. Our focus is to develop applications
that address those needs and integrate them seamlessly with our existing
platform to help e-Businesses establish broader and deeper customer
relationships.
Increase Global Distribution Capabilities and Partnerships. We intend to
broaden and increase our worldwide distribution capabilities by combining the
efforts of our direct sales force and our partnerships with leading e-Business
service and infrastructure providers. By expanding existing partnerships and
aggressively developing new alliances, we can leverage our partners' sales,
marketing and deployment capabilities.
Establish Technology Leadership with Open, Scaleable, Web-based
Architecture. Our objective is to establish the Kana architecture as the
leading technology platform and market standard for e-Business infrastructure
solutions addressing online customer interactions. Because our advanced
architecture is based on industry standards such as Java and Extensible Mark-up
Language (XML), e-Businesses and third parties are able to develop and deploy
new applications on top of the Kana platform. We intend to continue to develop
and enhance our advanced architecture to efficiently handle the growing volume
of online customer interactions while providing increased functionality across
e-Businesses.
Leverage Hosted Web-Based Application Service. Kana Online, our hosted Web-
based application service, allows us to manage important customer data and
monitor real-time, hands-on customer feedback on our software. We intend to
continue developing this service because it allows us to target additional
markets that are complementary to our software-based solution, provides us with
recurring revenue streams and may, in the future, allow us to enter into new
business opportunities.
4
<PAGE>
Emphasize Customer Advocacy and Satisfaction. We believe that delivering
complete customer satisfaction is vital to growing our business. We intend to
remain focused on providing the highest level of satisfaction to our customers
and to continue to design our solutions to address their online customer
interactions needs. In addition, we intend to continue to build our
professional services group, which maintains customer relationships beyond the
implementation phase and is responsible for providing a superior customer
experience.
Corporate Information
Kana Communications, Inc. was incorporated in California in July 1996 as
Kana Net Works, Inc., changed its name to Kana.com, Inc. in January 1997 and
then changed its name to Kana Communications, Inc. in October 1997. Kana
Communications, Inc. plans to reincorporate in Delaware prior to the
consummation of this offering. References in this prospectus to "Kana", "we",
"our", and "us" collectively refer to Kana Communications, Inc., a Delaware
corporation, its subsidiary and its California predecessor, and not to the
underwriters. Kana's principal executive offices are located at 87 Encina
Avenue, Palo Alto, California 94301 and its telephone number is (650) 325-9850.
Kana(R) is a registered trademark, and KANA COMMUNICATIONS and Design(TM)
and the Kana logo are trademarks of Kana Communications, Inc. Each trademark,
trade name or service mark of any other company appearing in this prospectus
belongs to its holder.
The Offering
<TABLE>
<S> <C>
Common stock offered.... shares
Common stock to be
outstanding after the
offering............... shares
Use of proceeds......... For general corporate purposes, including working
capital, product development, possible acquisitions and
capital expenditures. See "Use of Proceeds".
Proposed Nasdaq National
Market symbol.......... KANA
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of June 30, 1999, and includes
1,257,708 shares of common stock issuable upon conversion of preferred stock
issued subsequent to June 30, 1999 and excludes:
. 264,800 shares of common stock issuable upon exercise of stock options
outstanding as of June 30, 1999 at a weighted average exercise price of
$0.28 per share;
. shares of common stock reserved for issuance under our 1999 Stock
Incentive Plan which incorporates our 1997 Stock Option/Stock Issuance
Plan; and
. shares of common stock reserved for issuance under our 1999 Employee
Stock Purchase Plan.
See "Capitalization", "Management--Benefit Plans", "Description of Capital
Stock" and Note 4 of Notes to Consolidated Financial Statements.
5
<PAGE>
Summary Consolidated Financial Data
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, March 31,
---------------- --------------------
1997 1998 1998 1999
------- ------- --------- ---------
<S> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Total revenues........................ $ -- $ 2,049 $ 177 $ 1,423
Gross profit.......................... -- 1,476 147 987
Operating loss........................ (1,435) (6,525) (1,042) (1,957)
Net loss.............................. $(1,383) $(6,337) $ (1,012) $ (1,845)
======= ======= ========= =========
Basic and diluted net loss per share.. $ (0.62) $ (2.48) $ (0.55) $ (0.47)
======= ======= ========= =========
Shares used in computing basic and
diluted net loss per share........... 2,246 2,555 1,824 3,939
======= ======= ========= =========
Pro forma basic and diluted net loss
per share............................ $ (0.35) $ (0.47)
======= =========
Shares used in computing pro forma
basic and diluted net loss per
share................................ 17,979 22,708
======= =========
</TABLE>
Shares used in computing pro forma basic and diluted net loss per share
include the shares used in computing basic and diluted net loss per share
adjusted for the conversion of preferred stock to common stock, as if the
conversion occurred at the date of original issuance.
<TABLE>
<CAPTION>
March 31, 1999
-----------------------------
Actual Pro Forma As Adjusted
------- --------- -----------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term
investments.................................... $ 8,631 $18,831 $
Working capital................................. 7,566 17,766
Total assets.................................... 11,138 21,338
Notes payable, less current portion............. 360 360
Total stockholders' equity...................... 8,534 18,734
</TABLE>
The consolidated balance sheet data as of March 31, 1999 is set forth on an
actual basis; on a pro forma basis to give effect to the sale in July 1999 of
1,257,708 shares of our Series D preferred stock and the conversion of all of
our outstanding preferred stock into common stock upon completion of this
offering; and on an as adjusted basis to reflect the sale of shares of
common stock offered at an assumed initial public offering price of $ per
share and after deducting the estimated underwriting discount and the estimated
offering expenses. See "Use of Proceeds" and "Capitalization".
----------------
Except as set forth in the consolidated financial statements or as
otherwise specified in this prospectus, all information in this prospectus:
. assumes no exercise of the underwriters' over-allotment option;
. assumes the completion of a for one reverse stock split;
. reflects the conversion of all of our outstanding preferred stock into
common stock upon completion of this offering; and
. reflects our reincorporation into Delaware before completion of this
offering.
See "Description of Capital Stock" and "Underwriting".
6
<PAGE>
RISK FACTORS
You should carefully consider the risks and uncertainties described below
and the other information in this prospectus before deciding whether to invest
in shares of our common stock. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations.
The occurrence of any of the following risks could materially and adversely
affect our business, financial condition and operating results. In this case,
the trading price of our common stock could decline and you may lose part or
all of your investment.
Risks Related to Our Business
Because we have a limited operating history, it is difficult to evaluate our
business and prospects
We are still in the early stages of our development, and our limited
operating history makes it difficult to evaluate our business and prospects. We
were incorporated in July 1996 and we first recorded revenue in February 1998.
As an early stage company in the new and rapidly evolving market for e-Business
customer interactions solutions, we face numerous risks and uncertainties. Some
of these risks include our ability to:
. anticipate and adapt to the changing e-Business market;
. attract more customers;
. implement our sales, marketing and after-sales service initiatives, both
domestically and internationally;
. build and maintain relationships with system integrators and other
strategic partners;
. attract, retain and motivate qualified personnel;
. execute our product development activities;
. respond to actions taken by our competitors; and
. continue to build an infrastructure to manage our growth effectively.
We may not successfully address any of these risks.
Our quarterly revenues and operating results may fluctuate in future periods
and we may fail to meet expectations, which may cause the price of our common
stock to decline
Our quarterly revenues and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter. If our quarterly revenues
or operating results fall below the expectations of investors or public market
analysts, the price of our common stock could decline substantially. Factors
that might cause quarterly fluctuations in our operating results include:
. the evolving and varying demand for e-Business customer interactions
solutions, particularly the Kana solution;
. the timing of sales of our products and services and the timing of new
releases of our products;
. the discretionary nature of our customers' purchasing and budget cycles;
. delays in introducing our products and services, or new releases of our
products;
. changes in our pricing policies or those of our competitors;
. the timing of execution of large contracts that materially affect our
operating results;
. our ability to develop and attain market acceptance of the Kana
solution, additional products and enhancements to our products;
. the entrance of new competitors;
7
<PAGE>
. new product announcements or introductions by competitors;
. the mix of sales channels through which our products and services are
sold;
. the mix of domestic and international sales;
. the timing of releases of new versions of third-party software and
hardware products that work with our products;
. costs related to acquisitions of technologies or businesses;
. our ability to attract, integrate, train, retain and motivate a
substantial number of sales and marketing, research and development,
administrative and product management personnel;
. costs related to the customization of our products;
. our ability to expand our operations, and the amount and timing of
expenditures related to this expansion;
. any costs or expenses related to our anticipated move to new corporate
offices;
. global economic conditions as well as those specific to large
enterprises with high e-mail volume; and
. governmental regulation surrounding the Internet and e-mail in
particular.
We also often offer volume-based pricing, which may affect our operating
margins. Most of our expenses, such as employee compensation and rent, are
significant and relatively fixed in the short term. Moreover, our expense
levels are based, in part, on our expectations regarding future revenues
levels. As a result, if total revenues for a particular quarter are below our
expectations, we could not proportionately reduce operating expenses for that
quarter. Therefore, this revenue shortfall would have a disproportionate effect
on our expected operating results for that quarter. In addition, because our
service revenue is largely correlated with our license revenue, a decline in
license revenue could also cause a decline in our service revenue in the same
quarter or in subsequent quarters.
Due to the foregoing factors, we believe that quarter-to-quarter
comparisons of our operating results are not a good indication of our future
performance. See "--We may not be able to forecast our revenues accurately
because our products have a long and variable sales cycle" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
We have a history of losses and may not be profitable in the future
Since we began operations in 1997, we have incurred substantial operating
losses in every quarter. As a result of accumulated operating losses, at March
31, 1999, we had an accumulated deficit of approximately $9.6 million. Since
inception, we have funded our business primarily through selling our stock, not
from cash generated by our business. Our growth in recent periods has been from
a limited base of customers, and we may not be able to sustain these growth
rates. We expect to continue to increase our operating expenses and our
expenditures on our professional services organization. As a result, we expect
to continue to experience losses and negative cash flows, even if sales of the
Kana solution continue to grow, and may not generate sufficient revenues to
achieve profitability in the future. If we do achieve profitability, we may not
be able to sustain or increase any profitability on a quarterly or annual basis
in the future. See "--Our quarterly revenues and operating results may
fluctuate in future periods and we may fail to meet expectations, which may
cause the price of our common stock to decline", "Selected Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
We face substantial competition and may not be able to compete effectively
The market for our solution is intensely competitive, evolving and subject
to rapid technological change. We expect the intensity of competition to
increase in the future. Increased competition may result in price reductions,
reduced gross margins and loss of market share, any one of which could
seriously harm our business.
8
<PAGE>
We currently face competition for our products from systems designed by in-
house and third-party development efforts. We expect that these solutions will
continue to be a principal source of competition for the foreseeable future.
Our competitors include a number of companies offering one or more solutions
for the e-Business infrastructure market, some of which compete directly with
our products. For example, our competitors include companies providing stand-
alone point solutions, including Brightware, Inc., eGain Communications Corp.
and Mustang Software, Inc. In addition, we may compete with companies providing
customer management and communications solutions, such as Clarify Inc., Genesys
Telecommunications Laboratories, Inc., Lucent Technologies, Inc., Oracle
Corporation, Pivotal Corporation, Siebel Systems, Inc., Silknet Software, Inc.
and Vantive Corporation.
Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition and a larger installed base of customers than do we.
In addition, many of our competitors have well-established relationships with
our current and potential customers and have extensive knowledge of our
industry. In the past, we have lost potential customers to competitors for
various reasons, including the ability or willingness of our competitors to
offer lower prices and other incentives that we did not match. In addition,
current and potential competitors, particularly enterprise or call center
software providers that market integrated suites of products, have established
or may establish co-operative relationships among themselves or with third
parties to increase the ability of their products to address customer needs.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. We also expect that
competition will increase as a result of industry consolidations.
We may not be able to compete successfully against current and future
competitors, and competitive pressures may seriously harm our business. See
"Business--Competition".
Our failure to consummate our expected sales in any given quarter could
dramatically harm our operating results because of the large size of our
typical orders
Our sales cycle is subject to a number of significant risks, including
customers' budgetary constraints and internal acceptance reviews, over which we
have little or no control. Consequently, if sales expected from a specific
customer in a particular quarter are not realized in that quarter, we are
unlikely to be able to generate revenue from alternate sources in time to
compensate for the shortfall. As a result, and due to the relatively large size
of a typical order, a lost or delayed sale could result in revenues that are
lower than expected. Moreover, to the extent that significant sales occur
earlier than anticipated, revenues for subsequent quarters may be lower than
expected. See "--Our quarterly revenues and operating results may fluctuate in
future periods and we may fail to meet expectations, which may cause the price
of our common stock to decline".
We may not be able to forecast our revenues accurately because our products
have a long and variable sales cycle
To date, the sales cycle for the Kana solution has taken three to 12 months
and has required pre-purchase evaluation by a significant number of individuals
in our customers' organizations. Many of our customers evaluate our software
slowly and deliberately, depending on the specific technical capabilities of
the customer, the size of the deployment, the complexity of the customer's
network environment, and the quantity of hardware and the degree of hardware
configuration necessary to deploy the Kana solution. The long sales cycle for
our products may cause license revenue and operating results to vary
significantly from period to period.
Along with our partners, we invest significant amounts of time and
resources educating and providing information to our prospective customers
regarding the use and benefits of our products. We may not recoup this
investment if the prospective customer does not ultimately license our
solution. See "--Our quarterly revenues and operating results may fluctuate in
future periods and we may fail to meet expectations, which may cause the price
of our common stock to decline".
9
<PAGE>
Difficulties in implementing our solution could harm our revenues and margins
Forecasting our revenues depends upon the timing of implementation of the
Kana solution. This implementation typically involves working with
sophisticated software, computing and communications systems. If we experience
difficulties with implementation or do not meet project milestones in a timely
manner, we could be obligated to devote more customer support, engineering and
other resources to a particular project. Some customers may also require us to
develop customized features or capabilities. If new or existing customers have
difficulty deploying our products or require significant amounts of our
professional services support or customized features, our revenue recognition
could be further delayed and our costs could increase, causing increased
variability in our operating results. See "--Our quarterly revenues and
operating results may fluctuate in future periods and we may fail to meet
expectations, which may cause the price of our common stock to decline".
Our business depends on the acceptance of the Kana solution, and it is
uncertain whether the market will accept this product
Substantially all of our revenue is currently derived from licenses of our
software and related services. We are not certain that our target customers
will widely adopt and deploy the Kana solution. Our future financial
performance will depend on the successful development, introduction and
customer acceptance of new and enhanced versions of the Kana solution. In the
future, we may not be successful in marketing the Kana solution or any new or
enhanced products.
We may be unable to hire and retain the skilled personnel necessary to develop
our engineering, professional services and support capabilities
We intend to hire a significant number of additional sales, marketing,
engineering, professional services and product management personnel in 1999 and
beyond. Competition for these individuals is intense, and we may not be able to
attract, assimilate or retain highly qualified personnel in the future. Our
business cannot continue to grow if we cannot attract qualified personnel. Our
failure to attract and retain the highly trained personnel that are integral to
our product development and professional services organizations may limit the
rate at which we can develop and install new products or product enhancements,
which would harm our business. As of June 30, 1999, we had only a 20-person
professional services organization. We will need to increase our staff to
support new customers and the expanding needs of our existing customers,
without compromising the quality of our customer service. Hiring qualified
professional services personnel, as well as sales, marketing, administrative
and research and development personnel, is very competitive in our industry,
particularly in the San Francisco Bay Area, where Kana is headquartered, due to
the limited number of people available with the necessary technical skills. We
expect to face greater difficulty attracting these personnel with equity
incentives as a public company than we did as a privately held company. See
"Business--Employees".
We may face difficulties in hiring and retaining qualified sales personnel to
sell the Kana solution
Our financial success depends to a large degree on the ability of our
direct sales force to increase sales to a level required to reach and maintain
profitability. Therefore, our ability to increase revenues in the future
depends considerably upon our success in recruiting, training and retaining
additional direct sales personnel and the success of the direct sales force.
There is a shortage of direct sales personnel with the skills and expertise
necessary to sell our products. Also, it may take a new salesperson a number of
months before he or she becomes a productive member of our sales force. Our
business will be harmed if we fail to hire or retain qualified sales personnel,
or if newly hired salespeople fail to develop the necessary sales skills or
develop these skills more slowly than we anticipate. See "Business--Employees".
Loss of key personnel could harm our business
Our future success depends to a significant degree on the skills,
experience and efforts of our senior management and other key personnel. The
loss of the services of any of these individuals
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<PAGE>
could harm our business and operations. In addition, we have not obtained key
person life insurance on any of our key employees. If any of our key employees
left or was seriously injured and unable to work and we were unable to find a
qualified replacement, our business could be harmed.
Our business will suffer if we fail to manage our growth successfully
Our ability to offer the Kana solution successfully in a rapidly evolving
market requires an effective planning and management process. We have limited
experience in managing rapid growth. In addition, we have recently hired a new
Chief Executive Officer, and many of our other officers are relatively
inexperienced. We are experiencing a period of growth that is placing a
significant strain on our managerial, financial and personnel resources. Our
business will suffer if this growth continues and we fail to manage this
growth. On June 30, 1999, we had a total of 98 full-time employees compared to
38 on June 30, 1998. We expect to continue to hire new employees at a rapid
pace. The rate of our recent growth has made management of that growth more
difficult.
In addition, the proceeds of this offering will be used in part to expand
product offerings and expand international operations, as well as sales and
marketing capabilities. Any additional growth will further strain our
management, financial, personnel, internal training and other resources. To
manage any future growth effectively, we must improve our financial and
accounting systems and controls, reporting systems and procedures, integrate
new personnel and manage expanded operations. Any failure to do so could
negatively affect the quality of our products and our ability to respond to our
customers, retain key personnel and our business in general. We plan to move
our corporate offices to a new location in October 1999. This move may disrupt
our business and operations. See "Business--Facilities".
Delays in the development of new products or enhancements to existing products
would hurt our sales and damage our reputation
To be competitive, we must develop and introduce on a timely basis new
products and product enhancements for companies with significant e-Business
customer interactions needs. Any failure to do so could harm our business. In
the past, we have failed to ship some new products or product enhancements by
our planned shipment date. If we experience similar delays in the future, we
may face:
. customer dissatisfaction;
. cancellation of orders and license agreements;
. negative publicity;
. loss of revenues;
. slower market acceptance; and
. legal action by customers against us.
In the future, our efforts to remedy this situation may not be successful
and we may lose customers as a result. Delays in bringing to market new
products or their enhancements, or the existence of defects in new products or
their enhancements, could be exploited by our competitors. If we were to lose
market share as a result of lapses in our product management, our business
would suffer.
Technical problems with our Kana Online service could harm our business
The success of our Kana Online service depends on the efficient and
uninterrupted operation of our own and outsourced computer and communications
hardware and software systems. These systems and operations are vulnerable to
damage or interruption from human error, natural disasters, telecommunications
failures, break-ins, sabotage, computer viruses, intentional acts of vandalism
and similar adverse events. We have no formal disaster recovery plan, and our
insurance policies may
11
<PAGE>
not adequately compensate us for any losses that we may incur. Any system
failure that causes an interruption in our service or a decrease in
responsiveness could harm our relationships with our customers and result in
reduced revenues. See "Business--Products and Services--Kana Online".
We have entered into an Internet-hosting agreement with Exodus
Communications, Inc. to maintain all of our Kana Online servers at Exodus' data
center in Santa Clara, California. Our operations depend on Exodus' ability to
protect its and our systems in its data center against damage from human error,
natural disasters, telecommunications failures, break-ins, sabotage, computer
viruses, intentional acts of vandalism and similar adverse events. Exodus does
not guarantee that our Internet access will be uninterrupted, error-free or
secure. Any disruption in the Internet services provided by Exodus could harm
our business.
We need to quickly and successfully build skills relating to our Kana Online
service
The skills necessary to market and sell Kana Online are different than
those relating to our software solution. Principally, while we license our
software for a fixed fee based on the number of concurrent users and the
optional applications purchased, we license Kana Online based on a fixed fee
for installation, configuration and training, and a variable monthly component
based on actual customer usage. Our sales force sells both our software
solution and Kana Online. Because different skills are necessary to sell Kana
Online versus our software solution, our sales and marketing organizations may
not be able to maintain or increase the level of sales of either Kana Online or
our software solution.
Our pending patents may never be issued and, even if issued, may provide us
with little protection
Our success and ability to compete depend to a significant degree upon the
protection of our software and other proprietary technology rights. We regard
the protection of patentable inventions as important to our future
opportunities. We currently have four U.S. patent applications pending relating
to our e-Business customer interactions solution. However, none of our
technology is patented outside of the United States nor do we currently have
any international patent applications pending. It is possible that:
. our pending patent applications may not result in the issuance of
patents;
. our patents may not be broad enough to protect our proprietary rights;
. any issued patent could be successfully challenged by one or more third
parties, which could result in our loss of the right to prevent others
from exploiting the inventions claimed in those patents;
. current and future competitors may independently develop similar
technology, duplicate our products or design around any of our patents;
and
. effective patent protection may not be available in every country in
which we do business.
See "Business--Intellectual Property".
We also rely upon trademarks, copyrights and trade secrets to protect our
proprietary rights, which are only of limited value
We also rely on a combination of laws, such as copyright, trademark and
trade secret laws, and contractual restrictions, such as confidentiality
agreements and licenses, to establish and protect our proprietary rights. We
currently have a registered trademark, "Kana", and pending trademark
applications for our logo and "KANA COMMUNICATIONS and Design". However, none
of our
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<PAGE>
trademarks is registered outside of the United States, nor do we have any
trademark applications pending outside of the United States. Moreover, despite
any precautions that we have taken:
. laws and contractual restrictions may not be sufficient to prevent
misappropriation of our technology or deter others from developing
similar technologies;
. current federal laws that prohibit software copying provide only limited
protection from software "pirates", and effective trademark, copyright
and trade secret protection may be unavailable or limited in certain
foreign countries;
. other companies may claim common law trademark rights based upon state
or foreign law that precede the federal registration of our marks; and
. policing unauthorized use of our products and trademarks is difficult,
expensive and time-consuming and we may be unable to determine the
extent of this unauthorized use.
Also, the laws of other countries in which we market our products may offer
little or no effective protection of our proprietary technology. Reverse
engineering, unauthorized copying or other misappropriation of our proprietary
technology could enable third parties to benefit from our technology without
paying us for it, which would significantly harm our business. See "Business--
Intellectual Property".
We may become involved in litigation over proprietary rights, which could be
costly and time consuming
Substantial litigation regarding intellectual property rights exists in our
industry. We expect that software in our industry may be increasingly subject
to third-party infringement claims as the number of competitors grows and the
functionality of products in different industry segments overlaps. Third
parties may currently have, or may eventually be issued, patents that our
products or technology infringe. Any of these third parties might make a claim
of infringement against us. Many of our software license agreements require us
to indemnify our customers from any claim or finding of intellectual property
infringement. Any litigation, brought by us or others, could result in the
expenditure of significant financial resources and the diversion of
management's time and efforts. In addition, litigation in which we are accused
of infringement may cause product shipment delays, require us to develop non-
infringing technology or require us to enter into royalty or license
agreements, which may not be available on acceptable terms, or at all. If a
successful claim of infringement were made against us and we could not develop
non-infringing technology or license the infringed or similar technology on a
timely and cost-effective basis, our business could be significantly harmed.
See "Business--Intellectual Property".
We may face liability and lost sales if our software contains errors
We face possible claims and higher costs as a result of the complexity of
our products and the potential for undetected errors. Due to the mission-
critical nature of the Kana solution, undetected errors are of particular
concern. We have only a few "beta" customers that test new features and
functionality of our software before we make these features and functionalities
generally available to our customers. If our software contains undetected
errors or we fail to meet our customers' expectations in a timely manner we
could experience:
. loss of or delay in revenues and loss of market share;
. loss of customers;
. failure to achieve market acceptance;
. diversion of development resources;
. injury to our reputation;
13
<PAGE>
. increased service and warranty costs;
. legal actions by customers against us; and
. increased insurance costs.
Our licenses with customers generally contain provisions designed to limit
our exposure to potential product liability claims, such as disclaimers of
warranties and limitations on liability for special, consequential and
incidental damages. In addition, our license agreements generally cap the
amounts recoverable for damages to the amounts paid by the licensee to us for
the product or service giving rise to the damages. However, these contractual
limitations on liability may not be enforceable and we may be subject to claims
based on errors in our software or mistakes in performing our services
including claims relating to damages to our customers' internal systems. A
product liability claim, whether or not successful, could harm our business by
increasing our costs, damaging our reputation and distracting our management.
Our ability to increase revenues depends on our ability to expand and manage
our international operations
For the three months ended March 31, 1999, we derived approximately six
percent of our total revenues from sales outside North America. We also have
established an office in the United Kingdom. As a result, we face risks from
doing business on an international basis, including:
. reduced protection for intellectual property rights in some countries;
. licenses, tariffs and other trade barriers;
. difficulties in staffing and managing foreign operations;
. longer sales and payment cycles;
. greater difficulties in collecting accounts receivable;
. political and economic instability;
. seasonal reductions in business activity;
. potentially adverse tax consequences;
. compliance with a wide variety of complex foreign laws and treaties; and
. variation and unexpected changes in local laws and regulations.
We plan to expand our existing international operations and establish
additional facilities in other parts of the world. The expansion of our
existing international operations and entry into additional international
markets will require significant management attention and financial resources.
In addition, in order to expand our international sales operations, we will
need to, among other things:
. expand our international sales channel management and support
organizations;
. customize products for local markets; and
. develop relationships with international service providers and
additional distributors and system integrators.
Our investments in establishing facilities in other countries may not
produce desired levels of revenues. Even if we are able to expand our
international operations successfully, we may not be able to maintain or
increase international market demand for our products. In addition, we have
only licensed the Kana solution internationally since January 1999 and we have
limited experience in developing localized versions of our software and
marketing and distributing them internationally. Localizing our products may
take longer than we anticipate due to difficulties in translation and delays we
may experience in recruiting and training international staff.
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Our international revenues are denominated in local currency. Therefore, a
strengthening of other currencies versus the U.S. dollar could make our
products less competitive in foreign markets. We do not currently engage in
currency hedging activities. To the extent that we are unable to manage a
successful expansion of our business into international markets, our business
could be severely harmed.
Acquisitions of companies or technologies may result in disruptions to our
business and management due to difficulties in assimilating personnel and
operations
Although we have not done so in the past, we may acquire or invest in other
companies, products or technologies. If we make any acquisitions, we will be
required to assimilate the operations, products and personnel of the acquired
businesses and train, retain and motivate key personnel from the acquired
businesses. We may be unable to maintain uniform standards, controls,
procedures and policies if we fail in these efforts. Similarly, acquisitions
may cause disruptions in our operations and divert management's attention from
day-to-day operations, which could impair our relationships with our current
employees, customers and strategic partners. In addition, our profitability may
suffer because of acquisition-related costs or amortization costs for acquired
goodwill and other intangible assets.
Our prospects for obtaining additional financing, if required, are uncertain
and failure to obtain needed financing could affect our ability to pursue
future growth
We may need to raise additional funds to develop or enhance our products or
services, to fund expansion, to respond to competitive pressures or to acquire
complementary products, businesses or technologies. Additional financing may
not be available on terms that are acceptable to us. If we raise additional
funds through the issuance of equity or convertible debt securities, the
percentage ownership of our stockholders would be reduced and these securities
might have rights, preferences and privileges senior to those of our current
stockholders. If adequate funds are not available on acceptable terms, our
ability to fund our expansion, take advantage of unanticipated opportunities,
develop or enhance products or services, or otherwise respond to competitive
pressures would be significantly limited.
Our executive officers and directors will exercise significant control over
stockholder voting matters
After this offering, our executive officers and directors, their affiliates
and other substantial stockholders will together control approximately % of
the outstanding common stock. As a result, these stockholders, if they act
together, will be able to control all matters requiring our stockholders'
approval, including the election of directors and approval of significant
corporate transactions. This concentration of ownership may delay, prevent or
deter a change in control of Kana, could deprive our stockholders of an
opportunity to receive a premium for their common stock as part of a sale of
Kana or its assets and might affect the market price of our common stock.
We have adopted anti-takeover defenses that could delay or prevent an
acquisition of our company
After this offering, the board of directors will have the authority to
issue up to 5,000,000 shares of preferred stock. Moreover, without any further
vote or action on the part of the stockholders, the board of directors will
have the authority to determine the price, rights, preferences, privileges and
restrictions of the preferred stock. This preferred stock, if issued, might
have preference over and harm the rights of the holders of common stock.
Although the issuance of this preferred stock will provide us with flexibility
in connection with possible acquisitions and other corporate purposes, this
issuance may make it more difficult for a third party to acquire a majority of
our outstanding voting stock. We currently have no plans to issue preferred
stock.
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<PAGE>
Our certificate of incorporation, bylaws and equity compensation plans
include provisions that may deter an unsolicited offer to purchase Kana. These
provisions, coupled with the provisions of the Delaware General Corporation
Law, may delay or impede a merger, tender offer or proxy contest involving
Kana. Furthermore, our board of directors will be divided into three classes,
only one of which will be elected each year. Directors will only be removable
by the affirmative vote of at least 66 2/3% of all classes of voting stock.
These factors may further delay or prevent a change of control of Kana. See
"Description of Capital Stock--Anti-takeover Effects of Provisions of the
Certificate of Incorporation, Bylaws and Delaware Law".
Risks Related to Our Industry
Our future product demand will depend on our ability to manage multiple
technologies and technological change
Future versions of hardware and software platforms embodying new
technologies and the emergence of new industry standards could render our
products obsolete. The market for e-Business customer interactions solutions is
characterized by:
. rapid technological change;
. frequent new product introductions;
. changes in customer requirements; and
. evolving industry standards.
The Kana solution is designed to work on a variety of hardware and software
platforms used by our customers. However, our software may not operate
correctly on evolving versions of hardware and software platforms, programming
languages, database environments and other systems that our customers use. For
example, the server component of the current version of the Kana solution runs
on the Windows NT operating system from Microsoft, and we must develop a
solution that is compatible with UNIX and other operating systems to meet the
demands of our customers. If we cannot successfully develop these products in
response to customer demands, our business could suffer. Also, we must
constantly modify and improve our products to keep pace with changes made to
these platforms and to database systems and other back-office applications and
Internet-related applications. This may result in uncertainty relating to the
timing and nature of new product announcements, introductions or modifications,
which may cause confusion in the market and harm our business. If we fail to
modify or improve our products in response to evolving industry standards, our
products could rapidly become obsolete, which would harm our business.
We may not be able to respond to changing customer preferences in our market
We must continually improve the performance, features and reliability of
our products, particularly in response to competitive offerings. Our success
depends, in part, on our ability to enhance our existing customer interactions
solutions and to develop new services, functionality and technology that
address the increasingly sophisticated and varied needs of our prospective
customers. If we do not properly identify the feature preferences of
prospective customers, or if we fail to deliver features that meet the
requirements of these customers, our ability to market our products
successfully and to increase our revenues could be impaired. The development of
proprietary technology and necessary service enhancements entail significant
technical and business risks and require substantial expenditures and lead
time.
Our business substantially depends upon the continued acceptance and growth of
the Internet and e-mail as a medium of communication
We sell the Kana solution primarily to organizations that receive large
volumes of e-mail and Web-based communications. Consequently, our future
revenues and profits, if any, substantially
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<PAGE>
depend upon the continued acceptance and use of the Internet and e-mail, which
is evolving as a medium of communication. Rapid growth in the use of e-mail is
a recent phenomenon and may not continue. Many of our customers have business
models that are based on the continued growth of the Internet. As a result, a
broad base of enterprises that use e-mail as a primary means of communication
may not develop or be maintained. In addition, the market may not accept
recently introduced services and products that process e-mail, including our
solution. Moreover, companies that have already invested significant resources
in other methods of communications with customers, such as call centers, may be
reluctant to adopt a new strategy that may limit or compete with their existing
investments. If businesses do not continue to accept the Internet and e-mail as
a medium of communication, our business would suffer.
Future regulation of the Internet may slow its growth, resulting in decreased
demand for our products and services and increased costs of doing business
Due to the increasing popularity and use of the Internet, it is possible
that state and federal regulators could adopt laws and regulations that may
impose additional burdens on those companies that conduct business online.
The growth and development of the market for online services may prompt
calls for more stringent consumer protection laws or laws that may inhibit the
use of Internet-based communications or the information contained in these
communications. The adoption of any additional laws or regulations may decrease
the expansion of the Internet. A decline in the growth of the Internet,
particularly as it relates to online communication, could decrease demand for
our products and services and increase our costs of doing business, or
otherwise harm our business. Moreover, the applicability to the Internet of
existing laws in various jurisdictions governing issues such as property
ownership, sales tax, libel and personal privacy is uncertain and may take
years to resolve. Our costs could increase and our growth could be harmed by
any new legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the Internet and other online
services.
Year 2000 issues present technological risks, could cause disruption to our
business and could harm sales of the Kana solution
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with these Year 2000 requirements or risk system
failure or miscalculations causing disruptions of normal business activities.
Any failure of our material systems, our customers' material systems or the
Internet to be Year 2000 compliant would have material adverse consequences for
us. We are currently assessing the Year 2000 readiness of the software,
computer technology and other services that we use that may not be Year 2000
compliant. We have not completed all operational tests on our internal systems.
Accordingly, we are unable to predict to what extent our business may be
affected if our software, the systems that operate in conjunction with our
software or our internal systems experience a material Year 2000 failure. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance".
Risks Related to This Offering
We will have broad discretion in using the proceeds from this offering
We intend to use the proceeds from this offering for general corporate
purposes, including working capital, and we may use a portion of the proceeds
to acquire other businesses, products or
17
<PAGE>
technologies. We will nonetheless have broad discretion in how we use these
proceeds. You will not have the opportunity to evaluate the economic, financial
or other information on which we base our decisions regarding how to use the
proceeds from this offering, and we may spend these proceeds in ways with which
you may disagree. Pending any of these uses, we plan to invest the proceeds of
this offering in short-term, investment-grade, interest-bearing securities. We
cannot predict whether these investments will yield a favorable return. See
"Use of Proceeds".
The price of our common stock after this offering may be lower than the price
you pay and may be volatile
Prior to this offering, our common stock has not been sold in a public
market. After this offering, an active trading market in our stock might not
develop. If an active trading market develops, it may not continue. Moreover,
if an active market develops, the trading price of our common stock may
fluctuate widely as a result of a number of factors, many of which are outside
our control. In addition, the stock market has experienced extreme price and
volume fluctuations that have affected the market prices of many technology and
computer software companies, particularly Internet-related companies, and which
have often been unrelated or disproportionate to the operating performance of
these companies. These broad market fluctuations could adversely affect the
market price of our common stock.
If you purchase shares of our common stock in this offering, you will pay a
price that was not established in a competitive market. Rather, you will pay a
price that we negotiated with the representatives of the underwriters based
upon a number of factors. The price of our common stock that will prevail in
the market after this offering may be higher or lower than the price you pay.
See "Underwriting".
Future sales by existing security holders could depress the market price of our
common stock
If our existing stockholders sell their shares of our common stock in the
public market following the offering, the market price of our common stock
could decline. Moreover, the perception in the public market that our existing
stockholders might sell shares of common stock could depress the market price
of the common stock. These sales, or the perception of these sales, could 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.
Immediately after this offering, we will have outstanding shares of our
common stock, assuming no exercise of the underwriters' over-allotment option.
Of these shares, the shares sold in this offering will be freely tradable
and 24,402,670 shares will be available for resale in the public market under
Rule 144 (subject in some cases to volume limitations) or Rule 144(k) under the
Securities Act following a lock-up period that expires 180 days after the date
of this prospectus. In addition, upon expiration of the 180-day lock up period,
6,333,898 shares will be available for resale in the public market under Rule
701, subject in some cases to a right of repurchase by the Company, and
1,257,708 shares will not be saleable under Rule 144 until July 2000.
Holders of approximately 24,401,670 shares of our common stock have the
right to require us to register their shares of common stock with the
Securities and Exchange Commission. In addition, after this offering, we intend
to register approximately shares of our common stock that we may issue
under our stock option plans. Once we register these shares, they can be freely
sold in the public market upon issuance, in some instances subject to the lock-
up agreements described above. If these holders cause a large number of
securities to be sold in the public market, the sales could materially and
adversely affect the market price of our common stock. In addition, any of
these sales could impede our ability to raise needed capital. See "Shares
Available for Future Sale" and "Underwriting".
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<PAGE>
Investors will experience immediate and substantial dilution in the book value
of their investment
If you purchase shares of our common stock in this offering, you will
experience immediate and substantial dilution, in that the price you pay will
be substantially greater than the net tangible book value per share, or the per
share value of our assets after subtracting our liabilities, of the shares you
acquire. Specifically, purchasers of shares of our common stock in this
offering will contribute % of the total amount paid to fund our company but
will own only % of our outstanding shares. Additionally, if the holders of
outstanding options exercise their options, you will experience further
dilution. See "Dilution".
Cautionary Note on Forward-Looking Statements
This prospectus contains forward-looking statements that have been made
under the provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are not historical facts but rather are based
on current expectations, estimates and projections about our industry, our
beliefs, and assumptions. Words such as "anticipates", "expects", "intends",
"plans", "believes", "seeks", "estimates" and variations of these words and
similar expressions are intended to identify forward-looking statements. These
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and other factors, some of which are beyond our control,
are difficult to predict and could cause actual results to differ materially
from those expressed or forecasted in the forward-looking statements. These
risks and uncertainties include those described in "Risk Factors" and elsewhere
in this prospectus. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect our management's view only as of the
date of this prospectus. We undertake no obligation to update these statements
or publicly release the result of any revision to the forward-looking
statements that we may make to reflect events or circumstances after the date
of this prospectus or to reflect the occurrence of unanticipated events.
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USE OF PROCEEDS
The net proceeds to Kana from the sale and issuance of the shares of
common stock offered are estimated to be $ million (approximately $
million if the underwriters' over-allotment option is exercised in full), at
the assumed initial public offering price of $ per share after deducting the
underwriting discount and estimated offering expenses. We are conducting this
offering primarily to increase our equity capital, to create a public market
for our common stock and to facilitate our future access to public equity
markets. We intend to use the net proceeds for general corporate purposes,
including working capital, product development and capital expenditures. In
addition, we may use a portion of the net proceeds to acquire or invest in
complementary businesses or products or to obtain the right to use
complementary technologies. However, we currently have no plan for use of the
expected offering proceeds, nor have we sought the advice of or received
reports from any of our professional advisors regarding the use of the offering
proceeds. In addition, we have no agreements or commitments with respect to any
acquisition or investment, and we are not involved in any negotiations with
respect to any similar transaction. Pending these uses, we will invest the net
proceeds of this offering in short-term, interest-bearing, investment-grade
securities. See "Risk Factors--We will have broad discretion in using the
proceeds from this offering".
DIVIDEND POLICY
We have never declared or paid dividends on our capital stock and do not
anticipate declaring or paying cash dividends in the foreseeable future.
Payments of future dividends, if any, will be at the discretion of our board of
directors after taking into account various factors, including our financial
condition, operating results, current and anticipated cash needs and plans for
expansion.
PREEMPTIVE RIGHTS
As of the date of this prospectus, holders of at least 6,378,856 shares of
our preferred stock have preemptive rights that entitle them to purchase
approximately five percent of the shares to be issued in this offering. The
number of shares that may be purchased under these rights, however, may be
limited at the discretion of the underwriters. Shares purchased by these
stockholders under their preemptive rights will reduce the number of shares
available to new investors in this offering. See "Underwriting".
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CAPITALIZATION
The following table sets forth the capitalization of Kana as of March 31,
1999:
. on an actual basis;
. on a pro forma basis giving effect to the sale of 1,257,708 shares of
our Series D preferred stock for total proceeds of $10.2 million and the
conversion of all shares of the convertible preferred stock into
20,026,670 shares of common stock upon the completion of this offering;
and
. as adjusted to reflect the estimated net proceeds from the sale of
shares of common stock offered by Kana at an estimated initial public
offering price of $ per share after deducting the estimated
underwriting discount and the estimated offering expenses.
This table should be read in conjunction with the consolidated financial
statements and notes to consolidated financial statements appearing elsewhere
in this prospectus.
<TABLE>
<CAPTION>
March 31, 1999
-----------------------------
Actual Pro Forma As Adjusted
------ --------- -----------
(In thousands, except share
and per share data)
<S> <C> <C> <C>
Notes payable, less current portion.............. $ 360 $ 360 $
------ ------- ----
Stockholders' equity:
Convertible preferred stock: $0.001 par value
per share; 50,000,000, 50,000,000 and 5,000,000
shares authorized actual, pro forma and as
adjusted, respectively; 18,768,962, 0 and 0
shares issued and outstanding actual, pro forma
and as adjusted, respectively.................. 19 --
Common stock: $0.001 par value per share;
60,000,000 shares authorized actual, pro forma
and as adjusted; 8,357,607, 28,384,277 and
shares issued and outstanding actual, pro forma
and as adjusted, respectively.................. 8 28
Additional paid-in capital...................... 22,797 32,996
Deferred stock-based compensation............... (4,463) (4,463)
Notes receivable from stockholders.............. (243) (243)
Accumulated other comprehensive losses.......... (19) (19)
Accumulated deficit............................. (9,565) (9,565)
------ ------- ----
Total stockholders' equity...................... 8,534 18,734
------ ------- ----
Total capitalization............................. $8,894 $19,094 $
====== ======= ====
</TABLE>
The number of shares outstanding as of March 31, 1999 excludes:
. 316,300 shares of common stock issuable upon exercise of stock options
outstanding at a weighted average exercise price of $0.08 per share;
. shares of common stock reserved for issuance under our 1999 Stock
Incentive Plan which incorporates our 1997 Stock Option/Stock Issuance
Plan; and
. shares of common stock reserved for issuance under our 1999 Employee
Stock Purchase Plan.
Also excludes 2,232,000 shares of common stock that have been issued or are
issuable upon exercise of stock options granted between March 31, 1999 and June
30, 1999 at a weighted average exercise price of $0.46 per share.
See "Management--Benefit Plans", "Description of Capital Stock" and Note 4
of Notes to Consolidated Financial Statements.
21
<PAGE>
DILUTION
The pro forma net tangible book value of Kana at March 31, 1999, was
approximately $18.7 million, or $0.66 per share. Pro forma net tangible book
value per share represents total tangible assets less total liabilities,
divided by the number of shares of common stock outstanding after giving effect
to the conversion of all outstanding convertible preferred stock. After giving
effect to the sale in July 1999 of 1,257,708 shares of our Series D preferred
stock and the sale of shares of common stock offered by Kana at an assumed
initial public offering price of $ per share, and after deducting the
estimated underwriting discount and commissions and estimated offering
expenses, Kana's pro forma net tangible book value at March 31, 1999, would
have been $ , or $ per share. This represents an immediate increase in net
tangible book value of $ per share to existing stockholders and an immediate
dilution of $ per share to new investors purchasing shares of common stock
in this offering. Dilution is defined as the diminution in the proportion of
income, or earnings per share, to which each share is entitled due to the
issuance of additional shares. With the sale and issuance of shares in this
offering, existing stockholders will suffer an immediate reduction in the net
tangible book value of their shares because the additional shares decrease the
percentage of ownership of the existing stockholders. The following table
illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $
Pro forma net tangible book value per share as of March 31, 1999... $0.66
Increase per share attributable to new investors...................
-----
Pro forma net tangible book value per share after the offering.......
----
Dilution per share to new investors.................................. $
====
</TABLE>
The following table summarizes, as of March 31, 1999, on a pro forma basis,
the total number of shares and consideration paid to Kana and the average price
per share paid by existing stockholders and by new investors purchasing shares
of common stock in this offering at an assumed initial public offering price of
$ per share, before deducting the estimated underwriting discount and
estimated offering expenses:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ --------------------- Price
Number Percent Amount Percent Per Share
---------- ------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 28,384,277 % $ % $
New public investors.......
---------- ----- --------- ----------
Totals................... 100.0% $ 100.0%
========== ===== ========= ==========
</TABLE>
The foregoing computations are based on the number of shares of common
stock outstanding as of March 31, 1999 and exclude:
. 316,300 shares of common stock issuable upon exercise of stock options
outstanding at a weighted average exercise price of $0.08 per share;
. shares of common stock reserved for issuance under our 1999 Stock
Incentive Plan which incorporates our 1997 Stock Option/Stock Issuance
Plan; and
. shares of common stock reserved for issuance under our 1999 Employee
Stock Purchase Plan.
Also excludes 2,232,000 shares of common stock that have been issued or are
issuable upon exercise of stock options granted between March 31, 1999 and June
30, 1999 at a weighted average exercise price of $0.46 per share.
To the extent that any of these options are exercised, there could be
further dilution to new investors. See "Capitalization", "Management--Benefit
Plans", "Description of Capital Stock" and Note 4 of Notes to Consolidated
Financial Statements.
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the selected consolidated financial data set forth below in
conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
of Kana Communications, Inc. and the notes to consolidated financial statements
included elsewhere in this prospectus.
Kana was incorporated in July 1996 but had no significant operations until
1997. The consolidated statement of operations data for each of the years in
the two-year period ended December 31, 1998, and the consolidated balance sheet
data at December 31, 1997 and 1998, are derived from our consolidated financial
statements. These consolidated financial statements have been audited by KPMG
LLP, independent auditors, and are included elsewhere in this prospectus. The
consolidated statement of operations data for each of the three-month periods
ended March 31, 1998 and 1999, and the consolidated balance sheet data at March
31, 1999, are derived from our unaudited interim consolidated financial
statements included elsewhere in this prospectus. The unaudited interim
consolidated financial statements have been prepared on substantially the same
basis as the audited consolidated financial statements and, in our opinion,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results of operations and financial
position for these periods. The diluted net loss per share computation excludes
potential shares of common stock (preferred stock, options to purchase common
stock and common stock subject to repurchase rights held by Kana), since their
effect would be antidilutive. See Note 1 of Notes of Consolidated Financial
Statements for a detailed explanation of the determination of the shares used
to compute actual and pro forma basic and diluted net loss per share. Pro forma
basic and diluted net loss per share gives effect to the conversion of
preferred stock as if it had occurred at the beginning of the periods
presented. The historical results are not necessarily indicative of results to
be expected for any future period. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
<TABLE>
<CAPTION>
Years Ended Three Months Ended
December 31, March 31,
---------------- --------------------
1997 1998 1998 1999
------- ------- --------- ---------
(In thousands, except
per share data)
<S> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Revenues:
License.............................. $ -- $ 1,793 $ 161 $ 1,165
Service.............................. -- 256 16 258
------- ------- --------- ---------
Total revenues..................... -- 2,049 177 1,423
Cost of revenues:
License.............................. -- 54 4 34
Service.............................. -- 519 26 402
------- ------- --------- ---------
Total cost of revenues............. -- 573 30 436
------- ------- --------- ---------
Gross profit.......................... -- 1,476 147 987
Operating expenses:
Sales and marketing.................. 366 3,796 498 1,539
Research and development............. 699 2,254 403 823
General and administrative........... 257 721 104 227
Amortization of stock-based
compensation........................ 113 1,230 184 355
------- ------- --------- ---------
Total operating expenses.............. 1,435 8,001 1,189 2,944
------- ------- --------- ---------
Operating loss........................ (1,435) (6,525) (1,042) (1,957)
Other income, net..................... 52 188 30 112
------- ------- --------- ---------
Net loss.............................. $(1,383) $(6,337) $ (1,012) $ (1,845)
======= ======= ========= =========
Basic and diluted net loss per share.. $ (0.62) $ (2.48) $ (0.55) $ (0.47)
======= ======= ========= =========
Shares used in computing basic and
diluted net loss per share........... 2,246 2,555 1,824 3,939
======= ======= ========= =========
Pro forma basic and diluted net loss
per share............................ $ (0.35) $ (0.47)
======= =========
Shares used in computing pro forma
basic and diluted net loss per
share................................ 17,979 22,708
======= =========
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------- March 31,
1997 1998 1999
------ ------ ---------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments...... $3,513 $9,952 $8,631
Working capital........................................ 3,281 9,294 7,566
Total assets........................................... 3,824 11,969 11,138
Notes payable, less current portion.................... 51 360 360
Total stockholders' equity............................. 3,504 10,038 8,534
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Kana develops, markets and supports an integrated suite of e-Business
infrastructure solutions addressing online customer interactions. The Kana
software platform, together with our applications, provides an advanced and
scaleable solution that allows strategic online businesses, or e-Businesses, to
manage high volumes of e-mail and Web-based customer communications. In
addition, our software is designed to integrate with enterprise applications
and systems to help e-Businesses capitalize upon the extensive customer
information contained within online customer communications.
We also offer Kana Online, our hosted Web-based application service, for e-
Businesses that want to rapidly and efficiently deploy an online customer
interactions solution while minimizing their up-front investment in hardware,
software and services. Kana Online allows us to manage important customer data
and monitor real-time, hands-on customer feedback on our software.
We were incorporated in July 1996 but had no significant operations until
1997. Through January 1998, we were a development stage enterprise and had no
revenues. Our operating activities during this period related primarily to
conducting research, developing our initial products, raising capital and
building our sales and marketing organization. In February 1998, we released
the first commercially available version of the Kana platform. To date, we have
derived substantially all of our revenues from licensing our software and
related services. To date, we have sold our products worldwide primarily
through our direct sales force.
We derive our revenues from the sale of software product licenses and from
professional services including implementation, customization, hosting and
maintenance. License revenue is recognized when persuasive evidence of an
agreement exists, the product has been delivered, the arrangement does not
involve significant customization of the software, the license fee is fixed and
determinable and collection of the fee is probable. Service revenue includes
revenues from maintenance contracts, implementation, customization and hosting
services. Revenue from maintenance contracts is recognized ratably over the
term of the contract. Revenue from implementation, customization and hosting
services is recognized as the services are provided. Revenue under arrangements
where multiple products or services are sold together is allocated to each
element based on its relative fair value.
Our cost of license revenue includes royalties due to a third party for
technology integrated into some of our products, the cost of product
documentation, media used to deliver our products and shipping costs. Cost of
service revenue consists primarily of personnel-related expenses, travel costs,
equipment costs and overhead associated with delivering professional services
to our customers.
Our operating expenses are classified into three general categories: sales
and marketing, research and development, and general and administrative. We
classify all charges to these operating expense categories based on the nature
of the expenditures. Although each category includes expenses that are unique
to the category, some expenditures, such as compensation, employee benefits,
recruiting costs, equipment costs, travel and entertainment costs, facilities
costs and third-party professional services fees, occur in each of these
categories.
24
<PAGE>
We allocate the total costs for information services and facilities to each
functional area that uses the information services and facilities based on its
relative headcount. These allocated costs include rent and other facility-
related costs for the corporate office, communication charges and depreciation
expense for furniture and equipment.
In connection with the granting of stock options to our employees, we
recorded deferred stock-based compensation totaling approximately $6.2 million
through March 31,1999. This amount represents the total difference between the
exercise prices of stock options and the deemed fair value of the underlying
common stock for accounting purposes on the date these stock options were
granted. This amount is included as a component of stockholders' equity and is
being amortized on an accelerated basis by charges to operations over the
vesting period of the options, consistent with the method described in
Financial Accounting Standards Board, or FASB, Interpretation No. 28. We
recorded $1.2 million of stock-based compensation amortization expense during
the year ended December 31, 1998, and approximately $355,000 of stock-based
compensation amortization expense during the three months ended March 31, 1999.
As of March 31, 1999, we had a total of $4.5 million of deferred stock-based
compensation that had not been amortized. We expect to record additional
deferred stock-based compensation of at least $12.0 million for stock option
grants made during the three months ended June 30, 1999. The amortization of
the remaining deferred stock-based compensation will result in additional
charges to operations through July 2003. The amortization of stock-based
compensation is classified as a separate component of operating expenses
in our consolidated statement of operations.
Although revenues have increased consistently from quarter to quarter,
since the beginning of 1997 we have incurred substantial costs to develop our
products and to recruit, train and compensate personnel for our engineering,
sales, marketing, client services and administration departments. As a result,
we have incurred substantial losses since inception and, as of March 31, 1999,
had an accumulated deficit of $9.6 million. We believe our future success is
contingent upon providing superior customer service, increasing our customer
base and developing our products. We intend to invest heavily in sales,
marketing, research and development, client services and infrastructure to
support these activities. We therefore expect to continue to incur substantial
operating losses for the foreseeable future.
We had 98 full-time employees as of June 30, 1999 and intend to hire a
significant number of employees in the future. This expansion places
significant demands on our management and operational resources. To manage this
rapid growth, we must invest in and implement scaleable operational systems,
procedures and controls. We expect future expansion to continue to challenge
our ability to hire, train, manage and retain employees.
We believe that period-to-period comparisons of our historical operating
results are not necessarily meaningful and should not be relied upon as being
indicative of future performance. Our prospects must be considered in light of
the risks, expenses and difficulties frequently experienced by companies in
early stages of development, particularly companies in new and rapidly evolving
markets like ours. Although we have experienced significant revenue growth
recently, this trend may not continue. Furthermore, we may not achieve or
maintain profitability in the future.
25
<PAGE>
Results of Operations
The following table presents selected financial data for the periods
indicated as a percentage of total revenues. Data for the year ended December
31, 1997 is not presented because we had no revenues during that period.
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
------------ ---------------
1998 1998 1999
------------ ------ ------
<S> <C> <C> <C>
Revenues:
License........................................ 87.5% 91.0% 81.9%
Service........................................ 12.5 9.0 18.1
------ ------ ------
Total revenues............................... 100.0 100.0 100.0
Cost of revenues:
License........................................ 2.6 2.3 2.4
Service........................................ 25.3 14.7 28.3
------ ------ ------
Total cost of revenues....................... 27.9 17.0 30.7
------ ------ ------
Gross profit..................................... 72.1 83.0 69.3
Operating expenses:
Sales and marketing............................ 185.3 281.4 108.2
Research and development....................... 110.0 227.7 57.8
General and administrative..................... 35.2 58.8 16.0
Amortization of stock-based compensation....... 60.0 104.0 24.9
------ ------ ------
Total operating expenses..................... 390.5 671.9 206.9
------ ------ ------
Operating loss................................... (318.4) (588.7) (137.5)
Other income, net................................ 9.2 16.9 7.9
------ ------ ------
Net loss..................................... (309.2)% (571.8)% (129.6)%
====== ====== ======
</TABLE>
Three Months Ended March 31, 1998 and 1999
Revenues
Total revenues increased from $177,000 in the quarter ended March 31, 1998
to $1.4 million in the quarter ended March 31, 1999. License revenue increased
from $161,000 in the quarter ended March 31, 1998 to $1.2 million in the
quarter ended March 31, 1999. This increase in license revenue was due
primarily to increased market acceptance of our products, expansion of our
product line and increased sales generated by our expanded sales force. Total
headcount in our sales department increased from four people at March 31, 1998
to 17 people at March 31, 1999. License revenue represented 91.0% of total
revenues for the quarter ended March 31, 1998 and 81.9% of total revenues for
the quarter ended March 31, 1999.
Service revenue increased from $16,000 in the quarter ended March 31, 1998
to $258,000 in the quarter ended March 31, 1999. This increase in service
revenue was due primarily to the increased licensing activity described above,
resulting in increased revenue from customer implementations, customization
projects and maintenance contracts, and the introduction of our hosted service.
Service revenue represented 9.0% of total revenues for the quarter ended March
31, 1998 and 18.1% of total revenues for the quarter ended March 31, 1999.
During the three months ended March 31, 1998, six customers each accounted
for more than 10% of total revenues. During the three months ended March 31,
1999, no customer accounted for
26
<PAGE>
more than 10% of total revenues. Revenue from international sales for the three
months ended March 31, 1998 and 1999 were less than 10% of total revenues.
Cost of Revenues
Cost of license revenue increased from $4,000 for the quarter ended March
31, 1998 to $34,000 for the quarter ended March 31, 1999. As a percentage of
license revenue, cost of license revenue was 2.5% for the quarter ended March
31, 1998 and 2.9% for the quarter ended March 31, 1999. The increase in the
cost of license revenue was due primarily to royalties, product documentation
costs and delivery costs for shipments to customers. We anticipate that the
cost of license revenue will increase in absolute dollars as we license
additional technologies, although cost of license revenue will vary as a
percentage of license revenue from period to period.
Cost of service revenue increased from $26,000 for the quarter ended March
31, 1998 to $402,000 for the quarter ended March 31, 1999. The growth in cost
of service revenue was attributable primarily to an increase in personnel
dedicated to support our growing number of customers. Cost of service revenue
as a percent of service revenue was 163% for the quarter ended March 31, 1998
and 156% for the quarter ended March 31, 1999. We anticipate that cost of
service revenue will increase in absolute dollars, but decline as a percentage
of service revenue, as we continue to expand our service offerings.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
compensation and related costs for sales and marketing personnel and
promotional expenditures, including public relations, advertising, trade shows,
and marketing collateral materials. Sales and marketing expenses increased from
$498,000 in the quarter ended March 31, 1998 to $1.5 million in the quarter
ended March 31, 1999. This increase was attributable primarily to the addition
of sales and marketing personnel and an increase in sales commissions
associated with increased revenues and, to a lesser extent, to higher marketing
costs. As a percentage of total revenues, sales and marketing expenses were
281% for the quarter ended March 31, 1998 and 108% for the quarter ended
March 31, 1999. This decrease in sales and marketing expense as a percent of
total revenues was due primarily to the increase in total revenues over the
period. We expect to continue to increase our marketing and promotional efforts
and hire additional sales personnel. Accordingly, we anticipate that sales and
marketing expenses will increase in absolute dollars, but will vary as a
percentage of total revenues from period to period.
Research and Development. Research and development expenses consist
primarily of compensation and related costs for research and development
employees and contractors. Research and development expenses increased from
$403,000 in the quarter ended March 31, 1998 to $823,000 in the quarter ended
March 31, 1999. This increase was attributable primarily to the addition of
personnel associated with product development. As a percentage of total
revenues, research and development expenses were 228% for the quarter ended
March 31, 1998 and 57.8% for the quarter ended March 31, 1999. This decrease in
research and development expense as a percent of total revenues was due
primarily to the increase in total revenues over the period. We expect to
continue to make substantial investments in research and development and
anticipate that research and development expenses will continue to increase in
absolute dollars, but will vary as a percentage of total revenues from period
to period.
General and Administrative. General and administrative expenses consist
primarily of compensation and related costs for administrative personnel,
legal, accounting and other general corporate expenses. General and
administrative expenses increased from $104,000 in the quarter ended March 31,
1998 to $227,000 in the quarter ended March 31, 1999, due primarily to
increased
27
<PAGE>
personnel and facilities expenses necessary to support our growth. As a
percentage of total revenues, general and administrative expenses were 58.8%
for the quarter ended March 31, 1998 and 16.0% for the quarter ended March 31,
1999. This decrease in general and administrative expenses as a percent of
total revenues was due primarily to the increase in total revenues over the
period. We expect that general and administrative expenses will increase in
absolute dollars as we add personnel and incur additional costs related to the
anticipated growth of our business and operation as a public company. However,
we expect that these expenses will vary as a percentage of total revenues from
period to period.
Other Income, Net
Other income, net consists primarily of interest earned on cash and short-
term investments, offset by interest expense related to a note payable. Other
income, net was $30,000 in the quarter ended March 31, 1998 and $112,000 in the
quarter ended March 31, 1999. The increase in other income, net was due
primarily to increased interest income earned on higher cash balances as a
result of our Series C preferred stock financing in September 1998.
Years Ended December 31, 1997 and 1998
Revenues
We began recognizing revenues in February 1998. Total revenues in 1998 were
$2.0 million. License revenue was $1.8 million in 1998. License revenue
resulted from introduction of our product line and market acceptance of our
products. License revenue represented 87.5% of total revenues for 1998.
Service revenue was $256,000 in 1998. Service revenue during 1998 consisted
of revenue from customer implementations, customization projects and
maintenance contracts. Service revenue represented 12.5% of total revenues for
1998.
Cost of Revenues
Cost of license revenue was $54,000 in 1998. As a percentage of license
revenue, cost of license revenue was 3.0% in 1998. Cost of license revenue
consisted of royalties paid to a third party, product documentation costs and
delivery costs for shipments to customers.
Cost of service revenue was $519,000 in 1998. As a percent of service
revenue, cost of service revenue was 203% in 1998. Cost of service revenue
consisted primarily of costs associated with building our customer service
organization.
Operating Expenses
Sales and Marketing. Sales and marketing expenses were $366,000 for 1997
and $3.8 million for 1998. The increase was due primarily to the addition of
sales and marketing personnel, increased sales commissions related to increased
total revenues and, to a lesser extent, increased marketing costs. As a
percentage of total revenues, sales and marketing expenses were 185% for 1998.
Research and Development. Research and development expenses were $699,000
for 1997 and $2.3 million for 1998. The increase was attributable primarily to
the addition of personnel associated with product development. As a percentage
of total revenues, research and development expenses were 110% for 1998.
General and Administrative. General and administrative expenses were
$257,000 for 1997 and $721,000 for 1998. The increase was due primarily to the
addition of management and financial
28
<PAGE>
personnel necessary to support our growth. As a percentage of total revenues,
general and administrative expenses were 35.2% for 1998.
Other Income, Net
Other income, net was $52,000 for 1997 and $188,000 for 1998. The increase
was due primarily to an increase in interest income earned on higher balances
of cash and short-term investments due primarily to our Series C preferred
stock financing in September 1998.
Provision for Income Taxes
We have incurred operating losses for all periods from inception through
March 31, 1999, and therefore have not recorded a provision for income taxes.
We have recorded a valuation allowance for the full amount of our net deferred
tax assets, as the future realization of the tax benefit is not currently
likely.
As of December 31, 1998, we had net operating loss carryforwards for
federal and state tax purposes of approximately $6.1 million. These federal and
state loss carryforwards are available to reduce future taxable income and
expire at various dates into the year 2018. Under the provisions of the
Internal Revenue Code, certain substantial changes in our ownership may limit
the amount of net operating loss carryforwards that could be utilized annually
in the future to offset taxable income.
29
<PAGE>
Quarterly Results of Operations
The following tables set forth a summary of our unaudited quarterly
operating results for each of the five quarters in the period ended March 31,
1999. The information has been derived from our consolidated unaudited
financial statements that, in management's opinion, have been prepared on a
basis consistent with the audited consolidated financial statements contained
elsewhere in this prospectus and include all adjustments, consisting of only
normal recurring adjustments, necessary for a fair presentation of such
information when read in conjunction with our audited consolidated financial
statements and notes thereto. The operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1998 1998 1998 1998 1999
-------- -------- --------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues:
License................ $ 161 $ 454 $ 478 $ 699 $ 1,165
Service................ 16 25 97 119 258
------- ------- ------- ------- -------
Total revenues......... 177 479 575 818 1,423
------- ------- ------- ------- -------
Cost of revenues:
License................ 4 12 17 21 34
Service................ 26 32 189 273 402
------- ------- ------- ------- -------
Total cost of
revenues.............. 30 44 206 294 436
------- ------- ------- ------- -------
Gross profit............ 147 435 369 524 987
------- ------- ------- ------- -------
Operating expenses:
Sales and marketing.... 498 900 1,111 1,287 1,539
Research and
development........... 403 462 668 721 823
General and
administrative........ 104 177 217 221 227
Amortization of stock-
based compensation.... 184 246 352 448 355
------- ------- ------- ------- -------
Total operating
expenses.............. 1,189 1,785 2,348 2,677 2,944
------- ------- ------- ------- -------
Operating loss.......... (1,042) (1,350) (1,979) (2,153) (1,957)
Other income, net....... 30 10 37 111 112
------- ------- ------- ------- -------
Net loss................ $(1,012) $(1,340) $(1,942) $(2,042) $(1,845)
======= ======= ======= ======= =======
As a Percentage of Total
Revenues:
Revenues:
License................ 91.0% 94.8% 83.1% 85.5% 81.9%
Service................ 9.0 5.2 16.9 14.5 18.1
------- ------- ------- ------- -------
Total revenues......... 100.0 100.0 100.0 100.0 100.0
------- ------- ------- ------- -------
Cost of revenues:
License................ 2.3 2.5 3.0 2.6 2.4
Service................ 14.7 6.7 32.9 33.4 28.3
------- ------- ------- ------- -------
Total cost of
revenues.............. 17.0 9.2 35.9 36.0 30.7
------- ------- ------- ------- -------
Gross profit............ 83.0 90.8 64.1 64.0 69.3
------- ------- ------- ------- -------
Operating expenses:
Sales and marketing.... 281.4 187.9 193.2 157.3 108.2
Research and
development........... 227.7 96.5 116.2 88.1 57.8
General and
administrative........ 58.8 37.0 37.7 27.0 16.0
Amortization of stock-
based compensation.... 104.0 51.4 61.2 54.8 24.9
------- ------- ------- ------- -------
Total operating
expenses.............. 671.9 372.8 408.3 327.2 206.9
------- ------- ------- ------- -------
Operating loss.......... (588.7) (281.8) (344.2) (263.2) (137.5)
Other income, net....... 16.9 2.1 6.4 13.6 7.9
------- ------- ------- ------- -------
Net loss................ (571.8)% (279.7)% (337.7)% (249.6)% (129.6)%
======= ======= ======= ======= =======
</TABLE>
The amount and timing of our operating expenses generally will vary from
quarter to quarter depending on our level of actual and anticipated business
activities. Our revenues and operating results are difficult to forecast and
will fluctuate, and we believe that period-to-period comparisons of our
operating results will not necessarily be meaningful. As a result, you should
not rely upon them as an indication of future performance.
30
<PAGE>
Liquidity and Capital Resources
Since inception, we have financed our operations primarily from private
sales of convertible preferred stock totaling $16.4 million and, to a lesser
extent, from bank borrowings and lease financing.
Our operating activities used $1.1 million during 1997, $4.9 million during
1998 and $1.0 million during the first quarter of 1999. This negative operating
cash flow resulted principally from our net losses experienced during these
periods as we invested in the development of our products, expanded our sales
force and expanded our infrastructure to support our growth.
Our investing activities, consisting of purchases of furniture, fixtures
and computer equipment to support our growing number of employees, used
$498,000 during 1997, $854,000 during 1998 and $331,000 during the first
quarter of 1999.
Our financing activities generated $4.9 million in cash during 1997 and
$12.3 million in cash during 1998. Of these financing activities, the issuance
of convertible preferred stock generated net proceeds of $4.6 million during
1997 and $11.6 million during 1998. We also had proceeds from bank borrowings
of $720,000 in 1998. There were no financing activities during the first
quarter of 1999.
At March 31, 1999, we had cash and cash equivalents aggregating $8.5
million and short-term investments totaling $160,000. Our short-term
investments secure a letter of credit issued in connection with the lease of
our corporate offices. In addition, our bank debt was $720,000 and we had
available $280,000 under an existing line of credit.
We expect to devote substantial resources to continue our research and
development efforts, expand our sales, support, marketing and product
development organizations, establish additional facilities worldwide and build
the infrastructure necessary to support our growth. Although we believe that
the proceeds of this offering, together with our current cash and cash
equivalents and our borrowing capacity, will be sufficient to fund our
activities for at least the next 12 months, there can be no assurance that we
will not require additional financing within this time frame or that such
additional funding, if needed, will be available on terms acceptable to us or
at all. In addition, although there are no present understandings, commitments
or agreements with respect to any acquisition of other businesses, products or
technologies, we may, from time to time, evaluate potential acquisitions of
other businesses, products and technologies. In order to consummate potential
acquisitions, we may issue additional securities or need additional equity or
debt financing and any financing may be dilutive to existing investors.
Year 2000 Compliance
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with these Year 2000 requirements or risk system
failure or miscalculations causing disruptions of normal business activities.
In the fourth quarter of 1998 we initiated a Year 2000 compliance program.
The program is being directed by our quality assurance group. Our quality
assurance group is charged with identifying issues of potential risk within
each department and making the appropriate evaluation, modification, upgrade or
replacement. Members of our quality assurance group have worked with members of
each of our principal internal divisions in the course of assessing our Year
2000 compliance.
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Scope of Year 2000 Assessment
The scope of our Year 2000 compliance program includes testing the Kana
platform and the IT and non-IT systems used at our office in Palo Alto,
California. We have other sales offices that do not use third-party hardware or
software systems that are different than those in our Palo Alto office.
Accordingly, our quality assurance group determined that it would not conduct
an independent review of those systems. The operational areas under
investigation include:
.products;
.software applications;
.facilities;
.suppliers and vendors; and
.computer systems.
We do not currently have any information concerning the Year 2000
compliance status of our customers. If our current or future customers fail to
achieve Year 2000 compliance or if they divert technology expenditures,
especially technology expenditures that were budgeted for our products, to
address Year 2000 compliance problems, our business could suffer.
Budget and Schedule
We have funded our Year 2000 plan from available cash and have not
separately accounted for these expenses in the past. To date, expenditures for
Year 2000 compliance have not been material and have totaled less than $20,000.
Because our products were designed to be Year 2000 compliant, most of our
expenses have related to, and are expected to continue to relate to, the
operating costs associated with time spent by employees in the evaluation
process and Year 2000 compliance matters generally. We expect to incur no more
than an additional $10,000 to verify that our IT and non-IT systems are capable
of properly distinguishing between 20th century and 21st century dates.
However, we may experience unanticipated, material problems and expenses
associated with Year 2000 compliance that could harm our business. Finally, we
are also subject to external forces that might generally affect industry and
commerce, such as Year 2000 compliance failures by utility or transportation
companies and related service interruptions.
We have completed the evaluation of our products and our third-party
software systems. We are in the process of obtaining Year 2000 assurances from
our principal third-party hardware vendors and service providers, and
installing Year 2000 "patch kits", where appropriate. We anticipate concluding
these activities by September 1999.
Products
We have completed testing of the products we have shipped to date. Our
testing has determined that these products are capable of properly
distinguishing between 20th and 21st century dates, when configured and used in
accordance with the related documentation, and provided that the underlying
operating system of the host machine and any other software used with these
products are also capable of properly distinguishing between 20th and 21st
century dates.
Third-party Hardware and Software Systems and Services
We are in the process of evaluating all of the material third-party systems
and software we use in our business. We have received assurances of Year 2000
compliance from substantially all of the providers of hardware used in our
business. We have identified approximately 20 different software
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vendors that provide software products in our business. To date, we have not
received adequate assurances from the provider of our accounting software, but
we anticipate a Year 2000 upgrade to be received in the next month. If any of
the assurances we have received from our third-party software or hardware
providers are false, our internal systems and our ability to ship our product
would by materially harmed.
We are in the process of obtaining assurances as to Year 2000 compliance
from our hosting service provider and our other third-party service providers,
including our Internet service providers, cellular telephone providers and all
of our utilities. We expect to receive assurances from such entities without
additional expenditures by us.
Contingency Plan
We expect our compliance program to be substantially completed by September
1999. If we encounter delays or are unable to meet this schedule, we will
engage in testing and re-testing of non-compliant areas and develop a back up
plan, which we would expect to complete by October 1999.
We may discover Year 2000 compliance problems in our systems that will
require substantial revision. In addition, third-party software, hardware or
services incorporated into the Kana solution may need to be revised or
replaced, all of which could be time-consuming and expensive and result in the
following, any of which could adversely affect our business:
.delay or loss of revenue;
.cancellation of customer contracts;
.diversion of development resources;
.damage to our reputation;
.increased service and warranty costs; and
.litigation costs.
Our failure to fix or replace our third-party software, hardware or
services on a timely basis could result in lost revenues, increased operating
costs, the loss of customers and other business interruptions.
Recently Issued Accounting Standards
The FASB issued Statement of Financial Accounting Standards, or SFAS, No.
133, Accounting for Derivative Instruments and Hedging Activity. SFAS No. 133
establishes accounting methods for derivative financial instruments and hedging
activities related to those instruments, as well as other hedging activities.
Because we do not currently hold any derivative instruments and do not engage
in hedging activities, we expect that the adoption of SFAS No. 133 will not
have a material impact on our financial position or results of operations. We
will adopt SFAS No. 133 effective January 1, 2000.
The American Institute of Certified Public Accountants, or AICPA, issued
Statement of Position, or SOP, No. 98-9, Modification of SOP No. 97-2, Software
Revenue Recognition with Respect to Certain Transactions. SOP No. 98-9 amends
SOP No. 97-2 to require an entity to recognize revenue for multiple element
arrangements by means of the "residual method" when:
. there is vendor specific evidence of the fair values of all of the
undelivered elements that are not accounted for by means of long-term
contract accounting;
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. vendor specific evidence of fair value does not exist for one or more of
the delivered elements; and
. all revenue recognition criteria of SOP No. 97-2, other than the
requirement for vendor specific evidence of the fair value of each
delivered element, are satisfied.
SOP No. 98-9 will be effective for our year beginning January 1, 2000. We
do not expect any material effect from the adoption of SOP No. 98-9.
Qualitative and Quantitative Disclosures About Market Risk
We develop products in the United States and sell these products in North
America, Europe, Asia and Australia. Generally, our sales are made in local
currency. As a result, our financial results could be affected by factors such
as changes in foreign currency exchange rates or weak economic conditions in
foreign markets. We do not currently use derivative instruments to hedge our
foreign exchange risk. Our interest income is sensitive to changes in the
general level of U.S. interest rates, particularly since the majority of our
investments are in short-term instruments. Due to the nature of our short-term
investments, we have concluded that there is no material market risk exposure.
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BUSINESS
Kana develops, markets and supports an integrated suite of e-Business
infrastructure solutions addressing online customer interactions. The Kana
software platform, together with our applications, provides an advanced and
scaleable solution that allows strategic online businesses, or e-Businesses, to
manage high volumes of e-mail and Web-based customer communications. In
addition, our software is designed to integrate with enterprise applications
and systems to help e-Businesses capitalize upon the extensive customer
information contained within online customer communications.
We also offer Kana Online, our hosted Web-based application service, for e-
Businesses that want to rapidly and efficiently deploy an online customer
interactions solution while minimizing their up-front investment in hardware,
software and services. Kana Online allows us to to manage important customer
data and monitor real-time, hands-on customer feedback on our software.
Our objective is to become the leading provider of mission-critical e-
Business infrastructure solutions addressing online customer interactions. We
intend to use our advanced Web-based architecture, which uses industry
standards, such as the Java programming language, and Extensible Mark-up
Language (XML) to facilitate scaleability and the integration of our platform
with other e-Business and legacy systems. In addition, we intend to expand our
suite of products to enter new markets, increase our global distribution
capabilities and partnerships, leverage our hosted application service and
continue to emphasize customer advocacy and satisfaction.
Our customers include e-Businesses in the communications, Internet,
retailing and technology industries, and companies employing e-Business
strategies in traditional industries such as financial services, energy,
automobile and airlines. As of June 30, 1999, more than 100 customers have
licensed our software, including:
.eBay Inc. .Chase Manhattan Bank
.eToys Inc. .Ford Motor Company
.Priceline.com .Northwest Airlines
Incorporated
Industry Background
With the widespread adoption of the Internet, new businesses can enter and
disrupt established markets virtually overnight. In this environment, most
companies' customers have a variety of purchasing options and are only a click
away from the competition. As a result, businesses need to be closer and more
responsive to their customers than ever before. Whether a company is a Global
2000 enterprise seeking to exploit the potential of e-commerce, or a newly
established Internet-based business, the ability to provide a high quality
customer experience, and thus to establish long-term customer relationships and
loyalty, is more important than ever as a key competitive advantage. In fact,
for many e-Businesses, customer interaction and the brand reputation that
results are becoming the key differentiating factors.
Until recently, most customer interactions took place in person, by
telephone or by letter. In order to respond to these types of customer
inquiries more effectively, many companies invested substantial resources in
expensive call centers. These call centers typically served a customer service
function, employed costly technology and did not scale effectively. With the
advent of the Internet and the proliferation of e-mail, the manner in which
businesses communicate with their customers has undergone a fundamental change:
customers are now demanding that businesses be accessible and communicate
online.
Given the emerging shift to online customer interaction, traditional
solutions are not addressing the fundamental changes required by e-Businesses.
The Gartner Group estimates that companies
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will receive 25% of all customer inquiries via e-mail and Web-based forms by
2001, so the incorporation of these new online communications channels is
critical to continued success. However, most companies remain unprepared to
address the dramatic growth of e-mail and Web-based customer interactions. A
survey of 125 companies with content, consumer brands, travel, retail and
financial services Web sites conducted by Jupiter Communications in late 1998
found that 42% of the surveyed companies' Web sites took longer than five days
to reply to e-mail inquiries, never replied or were not accessible by e-mail.
There can be negative consequences for an e-Business if it fails to
effectively manage online customer interactions. These consequences can include
the loss of customers, increased difficulty in acquiring new customers and a
deterioration of its competitive position. In addition, e-Businesses face
higher IT and operating costs without efficient and reliable management of
online customer interactions. Perhaps most significantly, e-Businesses may lose
the opportunity to take advantage of new revenue-generating opportunities by
failing to capitalize upon the wealth of information conveyed through online
customer interactions. While addressing these challenges, e-Businesses must
also be able to deploy a customer interactions solution across multiple
departments, to integrate the solution with existing e-Business and legacy
systems and databases and to scale the solution as volumes grow.
We believe that in order for companies to compete effectively in today's
rapidly changing e-Business environment, they must differentiate themselves by
providing the highest quality customer experience. To accomplish this,
e-Businesses require a software solution that:
. enables personalized online customer interaction that is timely,
relevant and specific to the needs of the customer;
. reduces operating and IT costs while integrating with existing e-
Business and legacy systems and databases across multiple departments;
and
. broadens the opportunities for revenue generation through the
extraction, analysis and management of the valuable information
contained within online customer interactions.
The Kana Solution
We develop, market and support an integrated suite of e-Business
infrastructure solutions addressing online customer interactions. The Kana
software platform, together with our applications, provides an advanced and
scaleable solution that allows e-Businesses to manage high volumes of e-mail
and Web-based customer communications. Furthermore, our software is designed to
integrate with enterprise applications and systems to capitalize upon the
extensive customer information contained within online customer communications.
The Kana solution enables enterprises to manage their online customer
communications in order to enhance customer relationships, reduce operating and
IT costs and generate additional revenue opportunities. Kana Online, our Web-
based service, offers the Kana solution on a hosted basis.
We believe our software solution provides the following business benefits:
Enhanced Customer Relationships. The Kana solution enables e-Businesses to
interact with their customers in a personalized and timely manner. The ability
to collaborate seamlessly across the enterprise facilitates the generation of
comprehensive, accurate responses. Our software provides e-Businesses with the
ability to track and manage online customer interactions and integrate the
online customer information with relevant data contained within existing
corporate databases and systems. e-Businesses can then analyze and report on
this information and launch customized initiatives in response to the gathered
information. We believe that the resulting improvements in the overall customer
experience will enable e-Businesses to significantly enhance customer retention
and loyalty.
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Reduced Operating and IT Costs. Our solution reduces the operating and IT
costs of e-Businesses by increasing the efficiency and effectiveness of online
communications, and by migrating customer interactions from expensive
telephony-based environments to the more cost-effective mediums of e-mail and
the Web. The Kana solution utilizes a combination of automation, intelligent
workflow and advanced messaging analysis technologies to allow e-Businesses to
respond to customer messages rapidly and accurately, which can decrease the
number of repeat inquiries received and increase the efficiency of users. Our
open, scaleable Web-based architecture is designed to be readily integrated
with e-Businesses' legacy systems, extending these systems' useful lives and
allowing e-Businesses to avoid expensive upgrades. In addition, our hosted Web-
based service, Kana Online, allows e-Businesses to utilize a customized Kana
solution while minimizing IT infrastructure costs.
Increased Revenue Opportunities. Our software enables e-Businesses to
track and manage online customer interactions and integrate the online customer
information with the relevant data contained within existing corporate
databases and systems. By integrating and using information in this way,
e-Businesses can identify and create additional revenue-generating
opportunities. For example, e-Businesses can:
. strategically cross-sell and up-sell existing products and services
during the response process;
. proactively market and sell existing products and services in a
targeted, individualized fashion using outbound messaging campaigns; and
. identify and develop new product and service offerings.
In addition to these business benefits, our solution differs from those of
our competitors as a result of the following core capabilities, which we
believe enable us to deliver superior value to e-Businesses:
Advanced Architecture. Our solution features an advanced, scaleable, Web-
based architecture based on industry standards.
. Web-Based. The Kana solution is based upon an advanced Web-based
architecture that supports multiple hardware and software platforms and
browser-based and thin client interfaces. Our solution runs on multiple
hardware resources simultaneously in order to enhance scalability. In
addition, our software is readily deployable and performs in demanding
operating environments.
. Scaleable. Our architecture scales to accommodate large numbers of
transactions and concurrent users. For example, by deploying our
advanced messaging analysis technologies e-Businesses can more
effectively categorize customer messages, automate responses and
increase message throughput. The architecture also scales to accommodate
new functionalities and applications that may be required by e-
Businesses.
. Open and Standards-Based. Our software supports industry-standard
application programming interfaces (APIs) and integrates easily with:
.existing enterprise software environments;
.e-mail, telephony, billing and customer relationship management
systems;
.product and other databases; and
.a broad range of other information systems.
The ability to share data across these multiple applications provides e-
Businesses with a powerful tool for capitalizing on their customer
interactions.
Intelligent Workflow. Our software is designed to optimize workflow,
information and communications associated with online customer interactions.
The Kana solution can be configured
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to trigger not only a message response but also other actions within an
organization. For example, our software can alert an e-Business' engineering
department when the e-Business receives repeat inquiries about a software
defect or the human resources department if a resume is attached to a
communication.
Enhanced Productivity and Queuing. Our software is designed to automate
key functions of the online communications process while simultaneously
providing high-quality customer interactions. Users can customize the
applications and access an integrated knowledge base of corporate information
to handle increased message volume. Our software also provides one-click access
to customer histories and all previous interactions so that users can provide
fully informed, accurate and personalized answers that are consistent across
the organization. System administrators can set preferences, routing rules and
user permissions and establish address books and message queues, all on a real-
time basis.
Comprehensive Data Analysis and Reporting. Our solution includes an
application that analyzes metrics ranging from system utilization to user
performance and provides a broad range of packaged reports that enable
management to maximize message volume and user productivity. It also enables
e-Businesses to maximize the value of their customer interactions by
collecting, extracting and analyzing the large amounts of information contained
within online customer communications. e-Businesses can use this information to
enhance their customer relationships and capitalize on new opportunities by
identifying trends, addressing problems and improving corporate decision-
making. In addition, e-Businesses can use any data created or captured by the
Kana solution to design custom reports and decision management tools.
Advanced Message Classification. Our software enables e-Businesses to
rapidly and accurately classify and respond to customer messages with the
desired level of human intervention. We are developing advanced messaging
analysis technologies that significantly increase the efficiency of the message
management process. e-Businesses experiencing a high volume of inbound messages
can choose the level of automation appropriate for their needs, including
routing a message to a particular queue or user for response, categorizing a
message for a fully automated response or allowing the creation of a fully
personalized response to the inquiry.
The Kana Strategy
Our objective is to become the leading provider of mission-critical e-
Business infrastructure solutions addressing online customer interactions. The
key elements of our strategy include:
Extend Market Leadership Position. Our objective is to extend our position
as a leader in the e-Business infrastructure market for managing online
customer interactions by leveraging our suite of software applications and
establishing ourselves as the solution of choice. We intend to take advantage
of our technological leadership, strategic customer base and distribution
capabilities to extend our current position as a market leader. Moreover, we
believe that by broadening our platform and suite of applications, we can
expand our market opportunities and solidify our position as a leading provider
of comprehensive e-Business infrastructure solutions.
Expand Our Suite of Products to Enter New Markets. We intend to expand our
suite of products to include additional e-commerce and content management
applications in order to enter new markets. In developing these applications,
we are working with our customers to identify the strategic and functional
needs of e-Businesses that operate in the rapidly changing Internet
environment. Our focus is to develop applications that address those needs and
integrate them seamlessly with our existing platform to help e-Businesses
establish broader and deeper customer relationships. We believe these
applications will be integrated to merge e-commerce transactions with customer
interactions to create further revenue opportunities for us.
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Increase Global Distribution Capabilities and Partnerships. We intend to
broaden and increase our worldwide distribution capabilities by combining the
efforts of our direct sales force and our partnerships with leading e-Business
service and infrastructure providers. By expanding existing partnerships and
aggressively developing new alliances, we can leverage their additional sales,
marketing and deployment capabilities to help establish Kana as a global
provider of e-Business infrastructure solutions addressing online customer
interactions.
Establish Technology Leadership with Open, Scaleable Web-based
Architecture. Our objective is to establish the Kana architecture as the
leading technology platform and market standard for e-Business infrastructure
solutions addressing online customer interactions. To deliver the high
performance required in the complex and rapidly changing e-Business
environment, we have designed our solution to be highly scaleable, easily
customizable and readily able to integrate with existing enterprise
applications and systems. Because our advanced Web-based architecture is based
on industry standards such as Java and Extensible Mark-up Language (XML), e-
Businesses and third parties are able to develop and deploy new applications on
top of the Kana platform. We intend to continue to develop and enhance our
advanced architecture to efficiently handle the growing volume of online
customer interactions while providing increased functionality across e-
Businesses.
Leverage Hosted Web-Based Application Service. We offer Kana Online, our
hosted Web-based application service, for e-Businesses that want to rapidly and
efficiently deploy an online customer interactions solution while minimizing
their up-front investment in hardware, software and services. Kana Online
allows us to manage important customer data and monitor real-time, hands-on
customer feedback on our software. We intend to continue developing this
service because it allows us to target additional markets that are
complementary to our software-based solution, provides us with recurring
revenue streams and may, in the future, allow us to enter into new business
opportunities.
Emphasize Customer Advocacy and Satisfaction. We believe that delivering
complete customer satisfaction is vital to growing our business. Our emphasis
on customer advocacy and satisfaction has provided us with a strong base of
referenceable customers. This strategy provides many benefits, including:
potentially shortened sales cycles, incremental sales opportunities to our
installed-base of customers and new and improved products resulting from
customer feedback. We intend to remain focused on providing the highest level
of satisfaction to our customers and to continue to design our solutions to
address their online customer interactions needs. In addition, we intend to
continue to build our professional services group, which maintains customer
relationships beyond the implementation phase and is responsible for providing
a superior customer experience.
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Products and Services
Kana Platform and Suite of Applications
The Kana solution is comprised of a platform and a suite of software
applications that work together to create an advanced and scaleable online
customer interactions solution for e-Businesses. The Kana platform consists of
the Kana Core Technology and Kana Control. The suite of software applications
consists of Kana Mail, Kana Direct, Kana Reports, Kana Link, Kana Classify and
Kana Web Connect. We generally license our software based on the number of
concurrent users of the system and the application components purchased.
Kana Application Components
Kana Technology Platform
Corporate Infrastructure
The graphic is a three-dimentional diagram comprised of three horizontal layers.
The first layer, labelled "Kana Application Components," is subdivided into
seven equal sized cubes labelled from left to right with the following titles;
"Kana Mail", "Kana Direct", "Kana Reports", "Kana Link", "Kana Classify", "Kana
Web Connect" and "Third Party App". The second layer, labelled "Kana Technology
Platform", lies directly under the "Kana Application Components" layer and is
subdivided into two sections, labelled from left to right "Kana Core Technology"
and "Kana Control". The third layer, labelled "Corporate Infrastructure", is an
undivided layer positioned directly beneath the layer "Kana Technology
Platform".
Kana Core Technology. The Kana Core Technology has a number of application
services, including queue management, collaboration, personalization,
automation, message transport and performance management. The Kana Core
Technology is developed using an open, scaleable, Web-based architecture and
serves as the foundation for the suite of Kana applications.
Kana Control. Kana Control is the business process and content
administration system for the Kana solution. Kana Control enables e-Businesses
to quickly and easily configure and change system content, automation rules and
workflow, user permissions and system parameters. Managers can make changes in
real time to redistribute workload and modify system content to meet changing
business conditions. Managers can also use Kana Control to monitor and modify
different activities associated with each Kana application.
Kana Mail. Kana Mail is the e-mail and Web communications management
application of the Kana solution that assists e-Businesses in responding to
large numbers of inbound customer interactions. Kana Mail provides rule-based
automation, intelligent workflow, message queuing, specialized user tools and a
centralized knowledge base of issues and responses. Kana Mail supports two high
performance user interfaces: Kana Windows Client and Kana Web Client. Kana
Windows Client runs locally on the Windows operating system, while Kana Web
Client runs through a standard Internet browser. Kana Web Client is
particularly useful to remote and part-time users, managers and organizations
standardizing on Web-based applications.
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Kana Direct. Kana Direct is the outbound e-mail application of the Kana
solution. Kana Direct enables e-Businesses to use the information obtained
through Kana Mail and other systems to send targeted e-mail to their customers.
Using Kana Direct, administrators can take advantage of the e-mail
communication channel to strengthen customer relationships, improve loyalty and
generate revenue. Since Kana Direct integrates seamlessly with Kana Mail,
customer responses to Kana Direct mailings are automatically processed by the
platform for maximum efficiency.
Kana Reports. Kana Reports is our reporting application that enables e-
Businesses to maximize the value of their online customer communications by
collecting, extracting and analyzing the large amounts of information contained
within online customer communications. e-Businesses can use this information to
enhance their customer relationships and capitalize on new opportunities by
identifying trends, addressing problems and improving corporate decision-
making. Kana Reports also provides a broad set of performance metrics that
enable managers to optimize the performance of their departments. In addition,
e-Businesses can use any data created or captured by the Kana solution to
design custom reports and decision management tools.
Kana Link. Kana Link is the part of our technology platform that allows e-
Businesses to integrate the Kana platform with their other enterprise
applications such as telephony, customer relationship management systems and e-
commerce infrastructures. This integration allows these applications to
exchange information so that e-Businesses may offer their customers efficient
and consistent communication.
Kana Classify. Kana Classify is our advanced messaging analysis technology
that drives automated actions. Kana Classify categorizes customer messages and
can automatically respond to customers, suggest responses for user review or
route messages to skill-based queues. Kana Classify is currently in limited
release with selected Kana customers.
Kana Web Connect. Kana Web Connect is designed to enable e-Businesses to
effectively manage their Web-based customer communications by tracking and
storing specific information collected from their customers via Web forms. By
securing highly targeted information, Kana Web Connect is designed to enable
enable e-Businesses to respond to customer communication with greater accuracy
and efficiency using simplified automation rules, precise content searches,
highly personalized responses and targeted reporting. Kana Web Connect is
currently in pre-release testing.
Kana Online
Kana Online is a hosted Web-based application service that offers the Kana
solution on an outsourced basis. Kana Online provides e-Businesses with access
to a customized Kana solution without the need to purchase, install or maintain
their own server or database infrastructure. With Kana Online, Kana hosts the
back-end infrastructure and the customer accesses Kana's powerful functionality
by deploying the core applications of the Kana solution.
The hardware and core technology supporting Kana Online is pre-installed
and managed at Exodus Communications, Inc., a leading provider of Internet
server hosting and management solutions. We believe that Exodus is equipped to
provide the security, reliability and performance required for hosting our
solution through its nationwide network operating centers and high-speed wide
area network backbone.
Kana Online offers several key benefits to e-Businesses:
. Low Initial Investment. e-Businesses gain the benefits of the core
components of the Kana solution with limited hardware and software
infrastructure costs.
. Low Cost of Ownership. Because we host the back-end infrastructure for
Kana Online, e-Businesses keep IT administration and overhead costs low
while achieving the benefits of the Kana solution.
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. Rapid Deployment. Since e-Businesses run the Kana solution locally, they
are not responsible for purchasing and configuring the appropriate
hardware and the system can often be set up in a matter of days. A Kana
Online representative works with the e-Business to ensure that the
system is configured to meet their specific needs.
In addition, because Kana Online requires a low initial investment, has a
low cost of ownership and is rapidly deployable, it can provide an easy
migration path to our software-based solution. We license Kana Online based on
a fixed fee for installation, configuration and training, and a variable fee
based on actual customer usage.
Professional Services
Our professional services group consists of client services, technical
services and solution services. As of June 30, 1999, our professional services
group consisted of 20 full-time employees.
Client Services. Our client services group implements the Kana solution,
trains end users and promotes customer independence. We tailor our
implementation services to the varying needs of our customers depending upon
the complexity of their environments. Following implementation, our client
services group is responsible for ongoing account management and customer
satisfaction.
Technical Services. Our technical services group provides "front line"
maintenance and technical support for our customers. This support includes
software and documentation updates, telephone and Web-based support, product
maintenance and emergency response. Most of our customers currently have
maintenance agreements that entitle them to these technical services. The
annual fee for technical services is typically 20% of the current software
license fee.
Solution Services. Our solution services group develops custom solutions
and undertakes integration projects for e-Businesses using the Kana platform.
We typically bill solution services on a time and materials basis.
Technology
The Kana solution features an advanced, scaleable, Web-based architecture.
Our software incorporates industry standards, such as Java and Extensible Mark-
up Language (XML), in order to facilitate customization and to enable efficient
development cycles. The Kana solution offers both Web- and Windows-based
interfaces.
Open, Standards-Based Architecture
The architecture of the Kana solution is "open" because it relies upon
industry standards that facilitate integration with customers' e-Business and
legacy databases and systems and the development of applications on the Kana
platform. These industry standards include:
. Java;
. JDBC (Java DataBase Connectivity);
. XML (Extensible Mark-up Language);
. standard relational databases from Oracle and Microsoft; and
. Microsoft ASP (Active Server Pages).
The use of industry standards also permits the Kana platform to be readily
customizable to users' preferences.
Multi-Tier Web-Based Architecture
The Kana platform relies on an advanced multi-tier Web-based architecture.
This architecture separates the different system components into logical
layers, supports multiple hardware and software platforms, supports browser-
based and thin client interfaces and enables the system to run
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on multiple hardware resources simultaneously in order to enhance scalability.
The tiers are the presentation, user interface, workflow, business object and
data layers.
Web- and Windows-Based Interfaces
The Kana architecture affords added flexibility by providing both a Web-
and Windows-based user interface. e-Businesses may use a Web interface that is
based on the cross-platform, hypertext mark-up language (HTML) and the
JavaScript programming language. We believe that our Web-based interface
facilitates rapid deployment for users and administrators. e-Businesses may
also use a 32-bit Windows desktop version of the Kana solution. The use of a
Windows-based interface accelerates message throughput for e-Businesses with
particularly demanding speed and responsiveness requirements.
Advanced Messaging Analysis Technologies
We have focused our research and development of advanced messaging analysis
technologies on Bayesian Network technology. Bayesian Network technology is an
advanced messaging analysis technology approach that combines machine learning
with human expertise to infer conclusions about new data. Using machine
learning, the system automatically builds a classification model from existing
customer messages, thereby reducing the cost and time of installation and
maintenance and allowing the system to improve as new issues arise. With human
expertise, the system enables managers to selectively add their knowledge to
the system in order to improve accuracy and adjust the model to anticipate new
issues or react to them in real time. Bayesian Network technology underlies
Kana Classify, which categorizes customer messages and drives system
automation.
Ease of Platform Upgrade
The Kana solution may be readily upgraded to new versions of the Kana
system. New versions of the software, when installed, are designed to recognize
the historical data and configurations from the previous version of the system
and automatically convert them to the new data format. This enables an e-
Business to upgrade our software without any programming or advanced technical
capability.
Sales and Marketing
Sales
Our sales strategy is to pursue targeted accounts through a combination of
our direct sales force and our strategic partners. To date, we have targeted
our sales efforts at the e-Business divisions of Global 2000 companies and
rapidly growing Internet companies. We maintain direct sales personnel
domestically in California, Connecticut, Georgia, Illinois, Maryland,
Massachusetts, New York and Texas, and internationally in the United Kingdom.
The direct sales force is organized into regional teams, which include both
sales representatives and systems engineers. Our direct sales force is
complemented by telemarketing representatives based at our headquarters in Palo
Alto, California.
We complement our direct sales force with a series of reseller and
strategic sales partnerships, such as those with MCI WorldCom, Inc. and
Convergys Corporation. Through these partnerships we are able to leverage
additional sales, marketing and deployment capabilities. In the future, we
intend to expand our distribution capabilities by increasing the size of our
direct sales force, establishing additional sales offices both domestically and
internationally and broadening our partnership activities. As of June 30, 1999,
approximately 27 of our employees were engaged in sales activities. See "--
Partners".
43
<PAGE>
Marketing
Our marketing programs are targeted at e-Businesses and are currently
focused on educating our target market, generating new sales opportunities and
creating awareness for our e-Business infrastructure solutions. We conduct
marketing programs worldwide to educate our target market. In addition, we
engage in a variety of marketing activities, including:
. conducting seminars;
. participating in industry and technology-related conferences and trade
shows;
. establishing and maintaining close relationships with recognized
industry analysts;
. conducting direct mailings and ongoing public relations campaigns;
. managing and maintaining our Web site;
.conducting market research; and
.creating and placing advertisements.
Our marketing organization also serves an integral role in acquiring,
organizing and prioritizing industry and customer feedback in order to help
provide product direction to our development organizations. We have a detailed
product management process that surveys customer and market needs to predict
and prioritize future customer requirements. We also focus on developing a
range of joint marketing strategies and programs with our partners in order to
leverage their existing strategic relationships and resources. These
partnerships provide collaborative resources to help extend the reach of our
presence in the marketplace. We intend to continue to pursue these partnerships
in the future. As of June 30, 1999, approximately eight of our employees were
engaged in marketing activities.
Partners
Kana has three types of partnerships, service partnerships, marketing
alliance partnerships and reseller partnerships, that are designed to leverage
our services, software development and sales capabilities. We view these
partners as critical to our success in providing enterprise-wide e-Business
interactions solutions.
Service Partners. Our service partners include system integrators, such as
Andersen Consulting and Scient Corporation, that provide implementation
consulting services that allow us to leverage the size and scope of their
organizations.
Marketing Alliance Partners. We have established a series of relationships
with marketing alliance partners across a variety of industries such as
customer relationship management software, sales force automation software,
telephony systems and IT hardware, that allow us to provide a comprehensive
solution to e-Businesses.
Reseller and Strategic Sales Partners. We complement our direct sales
force with a series of reseller and strategic sales partnerships with industry
leaders, such as MCI WorldCom, Inc. and Convergys Corporation.
In the future, we intend to establish additional strategic relationships to
broaden our product offerings by addressing multiple channels of online
communications and enhancing our distribution channels.
We rely to a significant degree on our relationships with our partners.
Many of these partners also work with competing software companies, and our
success will depend on their willingness and ability to devote sufficient
resources and efforts to the Kana solution. Our arrangements with these
44
<PAGE>
parties typically are in the form of non-exclusive agreements that may be
terminated by either party without cause or penalty and with limited notice.
Therefore, we can provide no guarantee that any of our partners will continue
their relationship with us.
Customers
Our customers range from Global 2000 companies pursuing an e-Business
strategy to rapidly growing Internet companies. As of June 30, 1999, we have
licensed our solution to more than 100 customers in a variety of industries
worldwide. Kana's representative customers include:
Portals e-Tailing Internet
Excite@Home barnesandnoble.com Critical Path
Lycos CDNOW eBay
GoTo.com eToys Priceline.com
Financial Technology Airlines
Chase Manhattan Bank Hewlett-Packard Canadian Airlines
Dime Savings Bank Netscape KLM Airlines
Dow Jones/Wall Street JournalPeopleSoft Northwest Airlines
Communications Call Centers Other
Ameritech Convergys Ford Motor Company
TCI.Net Modus Media The Gap
US West Stream International Shell International
No customer accounted for 10% or more of our total revenues for 1998 or the
first quarter of 1999. Although a substantial portion of our license and
service revenues in any given quarter has, and is expected to continue to be,
generated from a limited number of customers with large financial commitment
contracts, we do not depend on any ongoing commitments from our large
customers.
Research and Development
We believe that strong product development capabilities are essential to
our strategy of enhancing our core technology, developing additional
applications incorporating that technology and maintaining the competitiveness
of our product and service offerings. We have invested significant time and
resources in creating a structured process for undertaking all product
development. This process involves several functional groups at all levels
within Kana and is designed to provide a framework for defining and addressing
the activities required to bring product concepts and development projects to
market successfully. In addition, we have recruited key engineers and software
developers with experience in the customer communications and internetworking
markets and have complemented these individuals by hiring senior management
with experience in enterprise application development, sales and deployment.
Our research and development expenses totaled approximately $2.3 million
for the year ended December 31, 1998 and $699,000 for the year ended December
31, 1997. As of June 30, 1999, approximately 29 of our employees were engaged
in research and development activities. Our success depends, in part, on our
ability to enhance our existing customer interactions solutions and to develop
new services, functionality and technology that address the increasingly
sophisticated and varied needs of our prospective customers. Delays in bringing
to market new products or their
45
<PAGE>
enhancements, or the existence of defects in new products or enhancements,
could be exploited by our competitors. If we were to lose market share as a
result of lapses in our product management, our business would suffer.
Competition
The market for our solution is intensely competitive, evolving and subject
to rapid technological change. We expect the intensity of competition to
increase in the future. We currently face competition for our products from
systems designed by in-house and third-party development efforts. We expect
that these solutions will continue to be a principal source of competition for
the foreseeable future. Our competitors include a number of companies offering
one or more solutions for the e-Business infrastructure market, some of which
compete directly with our products. For example, our competitors include
companies providing stand-alone point solutions, including Brightware, Inc.,
eGain Communications Corp. and Mustang Software, Inc. In addition, we may
compete with companies providing customer management and communications
solutions, such as Clarify Inc., Genesys Telecommunications Laboratories, Inc.,
Lucent Technologies, Inc., Oracle Corporation, Pivotal Corporation, Siebel
Systems, Inc., Silknet Software, Inc. and Vantive Corporation.
We believe that the principal competitive factors affecting our market
include a significant base of referenceable customers, the breadth and depth of
a given solution, product quality and performance, customer service, core
technology, product scaleability and reliability, product features, the ability
to implement solutions and the value of a given solution. Although we believe
that our solution currently competes favorably with respect to these factors,
our market is relatively new and is evolving rapidly. We may not be able to
maintain our competitive position against current and potential competitors,
especially those with significantly greater financial, marketing, service,
support, technical and other resources.
Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition and a larger installed base of customers than do we.
In addition, many of our competitors have well-established relationships with
our current and potential customers and have extensive knowledge of our
industry. It is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. We also expect that
competition will increase as a result of industry consolidations. See "Risk
Factors--We face substantial competition and may not be able to compete
effectively".
Intellectual Property
We rely upon a combination of patent, copyright, trade secret and trademark
laws to protect our intellectual property. We currently have four U.S. patent
applications pending covering:
. An e-Business infrastructure solution for online customer interactions,
using rules and message categories to codify workflow, including use of
standard phrases, response templates, recipient lists and routing;
. An e-Business infrastructure solution for online customer interactions
in which advanced workflow features are used in conjunction with rules,
queues and timers;
. An e-Business infrastructure solution for online customer interactions
that uses queues and timers to track, route and escalate the priority of
messages; and
. An e-Business infrastructure solution for online customer interactions
that combines a rule-based workflow engine with a text classification
system to automate e-mail response.
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<PAGE>
These patents, if allowed, will cover a material portion of our solution.
In addition, we have one U.S. trademark registration and two pending U.S.
trademark applications. Although we rely on patent, copyright, trade secret and
trademark law to protect our technology, we believe that factors such as the
technological and creative skills of our personnel, new product developments,
frequent product enhancements and reliable product maintenance are more
essential to establishing and maintaining a technology leadership position. We
can give no assurance that others will not develop technologies that are
similar or superior to our technology.
We generally enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and generally control access to
and distribution of our software, documentation and other proprietary
information. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use our
products or technology or to develop products with the same functionality as
our products. Policing unauthorized use of our products is difficult, and we
cannot be certain that the steps we have taken will prevent misappropriation of
our technology, particularly in foreign countries where the laws may not
protect proprietary rights as fully as do the laws of the United States. In
addition, certain of our license agreements require Kana to place the source
code for our products into escrow. These agreements generally provide that some
parties will have a limited, nonexclusive right to use this code if:
. there is a bankruptcy proceeding instituted by or against Kana;
. Kana ceases to do business without a successor; or
. Kana discontinues providing maintenance and support.
Substantial litigation regarding intellectual property rights exists in the
software industry. Our software products may be increasingly subject to third-
party infringement claims as the number of competitors in the industry segments
grows and the functionality of products in different industry segments
overlaps. Some of our competitors in the market for customer communications
software may have filed or may intend to file patent applications covering
aspects of their technology that they may claim Kana's technology infringes. We
cannot be certain that any of these competitors will not make a claim of
infringement against us with respect to its products and technology.
Employees
As of June 30, 1999, we had 98 full-time employees, 20 of whom were engaged
in customer service and support, 35 in sales and marketing, 29 in research and
development, and 14 in finance, administration and operations. Our future
performance depends in significant part upon the continued service of our key
technical, sales and marketing, and senior management personnel, none of whom
is bound by an employment agreement requiring service for any defined period of
time. The loss of the services of one or more of our key employees could harm
our business.
Our future success also depends on our continuing ability to attract, train
and retain highly qualified technical, sales and managerial personnel.
Competition for these personnel is intense, particularly in the San Francisco
Bay Area where we are headquartered. Due to the limited number of people
available with the necessary technical skills and understanding of the
Internet, we can give no assurance that we can retain or attract key personnel
in the future. None of our employees is represented by a labor union. We have
not experienced any work stoppages and consider our relations with our
employees to be good. See "Risk Factors--We may be unable to hire and retain
the skilled personnel necessary to develop our engineering, professional
services and support capabilities" and "--We may face difficulties in hiring
and retaining qualified sales personnel to sell the Kana solution".
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<PAGE>
Facilities
Our corporate offices are located in Palo Alto, California, where we lease
approximately 15,600 square feet under a lease that expires in June 2003. As of
June 30, 1999, the annual base rent for this facility was approximately
$608,400. We believe that this facility will not be sufficient to meet our
needs through the next 12 months. To that end, in October 1999, we plan to move
our corporate offices to Redwood City, California, where we will lease
approximately 60,861 square feet under a lease that expires in October 2006.
The annual base rent for this facility for the first year is approximately $1.9
million. We are currently pursuing our options with respect to vacating our
Palo Alto corporate offices. In addition, we lease facilities and offices
domestically in Westport, Connecticut; Chicago, Illinois and Richardson, Texas;
and internationally in London, England. The terms of these leases expire
beginning in August 1999 and ending in January 2000, and automatically renew
unless earlier terminated. We believe that our corporate office space in
Redwood City and the other facilities we currently lease will be sufficient to
meet our needs through at least the next 12 months.
Legal Proceedings
We are not currently a party to any legal proceedings.
48
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information regarding the executive
officers and directors of Kana as of June 30, 1999:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Michael J. McCloskey..... 42 Chief Executive Officer and Director
Mark S. Gainey........... 31 President and Chairman of the Board of Directors
Joseph D. McCarthy....... 34 Vice President, Finance and Operations
Michael R. Wolfe......... 30 Vice President, Engineering
Paul R. Holland.......... 38 Vice President, Worldwide Sales
William R. Phelps........ 37 Vice President, Professional Services
David M. Beirne.......... 35 Director
Eric A. Hahn............. 39 Director
Charles A. Holloway,
Ph.D.................... 63 Director
Steven T. Jurvetson...... 32 Director
Ariel Poler.............. 32 Director
</TABLE>
Michael J. McCloskey. Mr. McCloskey joined Kana in June 1999 as Chief
Executive Officer and a director. Prior to joining Kana, from September 1996 to
February 1999, Mr. McCloskey served in various positions with Genesys
Telecommunications Laboratories, Inc., a provider of enterprise interaction
management software, including President from July 1998 to December 1998, Chief
Operating Officer from September 1997 to July 1998 and Vice President, Finance
and International, Chief Financial Officer and Secretary from September 1996 to
July 1998. From May 1995 to September 1996, he served as Vice President,
Finance, Chief Financial Officer and Vice President, Operations at Network
Appliance, Inc., a network data storage device company. From September 1993 to
May 1995, Mr. McCloskey served as Executive Vice President and Chief Financial
Officer at Digital Microwave Corporation, a telecommunications company. From
1991 to 1993, Mr. McCloskey was the Chief Operating Officer and a member of the
board of directors of Wavefront Technologies, a 3-D graphics visualization
software development company. Mr. McCloskey holds a B.S. in Business
Administration from Santa Clara University.
Mark S. Gainey. Mr. Gainey co-founded Kana in January 1996, served as
President, Chief Executive Officer and a director of Kana from January 1996 to
June 1999 and currently serves as its President and Chairman of the Board of
Directors. Prior to co-founding Kana, from April 1991 to September 1995, Mr.
Gainey served as an associate with TA Associates, Inc., a venture capital firm,
where he focused primarily on technology and business services investments. Mr.
Gainey holds a B.A. in General Studies from Harvard University.
Joseph D. McCarthy. Mr. McCarthy joined Kana in March 1998 as Director of
Finance and Operations and has served as Vice President, Finance and Operations
since April 1999. Prior to joining Kana, from September 1997 to March 1998, Mr.
McCarthy served as Vice President, Finance at Reasoning, Inc., a transformation
software company. From March 1995 to September 1997, Mr. McCarthy served as
Corporate Controller of Pure Atria Corporation (now Rational Software
Corporation), a software tools company, and from September 1993 to March 1995
he served as Controller of International Network Services, a network services
company. Mr. McCarthy holds a B.B.A. in Accounting from the University of Notre
Dame.
Michael R. Wolfe. Mr. Wolfe joined Kana in May 1997 as Director of
Engineering and has served as Vice President, Engineering since April 1998.
Prior to joining Kana, from March 1995 to February 1997, Mr. Wolfe served as
Director of Engineering at Internet Profiles Corporation, an internet marketing
company. From February 1994 to March 1995, Mr. Wolfe was an associate at
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<PAGE>
Wells Fargo Nikko specializing in software development. From June 1991 to
February 1994, Mr. Wolfe was a software programming analyst at Goldman, Sachs &
Co. Mr. Wolfe has taught computer science at Stanford University and the
University of California at Berkeley. Mr. Wolfe holds a B.S. and M.S. in
Computer Science from Stanford University.
Paul R. Holland. Mr. Holland joined Kana in December 1997, as Vice
President, Worldwide Sales. Prior to joining Kana, from September 1994 to
September 1997, Mr. Holland worked at Pure Atria Corporation (now Rational
Software Corporation), a software tools company, most recently as its Vice
President, Europe. From June 1992 to September 1994, Mr. Holland held various
sales positions at Pure Software Corporation. From 1988 to 1992, Mr. Holland
was director of marketing and sales for Rothchild Consultants, a high
technology market research company. Mr. Holland holds a B.S. in Public
Administration from James Madison University, an M.A. in Foreign Affairs from
the University of Virginia and an M.B.A. from the University of California at
Berkeley.
William R. Phelps. Mr. Phelps joined Kana in December 1998 as Vice
President, Professional Services. Prior to joining Kana, from March 1997 to
November 1998, Mr. Phelps served as Vice President, Professional Services for
CrossWorlds Software, Inc., an application integration software company. From
January 1994 to February 1997, Mr. Phelps served as a principal consultant at
Booz, Allen & Hamilton, a management consulting firm. Mr. Phelps holds a B.S.
in Industrial Engineering from Stanford University.
David M. Beirne. Mr. Beirne has served as a Director of Kana since
September 1997. Mr. Beirne has been a Managing Member of Benchmark Capital
Management Co., L.P., a venture capital firm, since June 1997. Prior to joining
Benchmark, Mr. Beirne founded Ramsey/Beirne Associates, an executive search
firm, and served as its Chief Executive Officer from October 1987 to June 1997.
Mr. Beirne serves on the board of directors of Scient Corporation, an e-
Business systems provider, and several private companies. Mr. Beirne holds a
B.S. in Management from Bryant College.
Eric A. Hahn. Mr. Hahn has served as a Director of Kana since June 1998.
Mr. Hahn is a founding partner of Inventures Group, a leading "mentor
investment" stage venture capital firm. From November 1996 to June 1998, Mr.
Hahn served as the Executive Vice President and Chief Technical Officer of
Netscape Communications Corporation and served as a member of Netscape's
Executive Committee. Mr. Hahn also served as General Manager of Netscape's
Server Products Division, overseeing Netscape's product development and
marketing activities for enterprise Internet, intranet and extranet servers,
from November 1995 to November 1996. Prior to joining Netscape, from February
1993 to November 1995, Mr. Hahn was founder and Chief Executive Officer of
Collabra Software, Inc., a groupware provider that was acquired by Netscape in
1995. Mr. Hahn holds a B.S. in Computer Science from the Worcester Polytechnic
Institute.
Dr. Charles A. Holloway. Dr. Holloway has served as a Director of Kana
since December 1996. Dr. Holloway holds the Kleiner, Perkins, Caufield & Byers
Professorship in Management at the Stanford Graduate School of Business and has
been a faculty member of the Stanford Graduate School of Business since 1968.
Dr. Holloway is also currently co-director of the Stanford Center for
Entrepreneurial Studies at the Graduate School of Business. Dr. Holloway was
the founding co-chair of the Stanford Integrated Manufacturing Association, a
cooperative effort between the Graduate School of Business and the School of
Engineering, which focuses on research and curriculum development in
manufacturing and technology. Dr. Holloway serves on the board of directors of
CMC Industries, Inc., a publicly traded electronic manufacturing services
company, and several private companies. Dr. Holloway holds a B.S. in Electrical
Engineering from the University of California at Berkeley and an M.S. in
Nuclear Engineering and Ph.D. in Business Administration from the University of
California, Los Angeles.
Steven T. Jurvetson. Mr. Jurvetson has served as a Director of Kana since
April 1997. Mr. Jurvetson has been a Managing Director of Draper Fisher
Jurvetson, a venture capital firm, since June 1995. Prior to joining Draper
Fisher Jurvetson, from July 1990 to September 1993,
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Mr. Jurvetson served as a consultant with Bain & Company, a management
consulting firm. Mr. Jurvetson served as a research and development engineer at
Hewlett-Packard during the summer months from June 1987 to August 1989. Mr.
Jurvetson serves on the boards of directors of Cognigine Corporation,
FastParts, Inc., iTv Corp., Tacit Knowledge Corporation, Third Voice, Inc. and
ReleaseNow.com Corporation. Mr. Jurvetson holds a B.S. and an M.S. in
Electrical Engineering from Stanford University and an M.B.A. from the Stanford
Graduate School of Business.
Ariel Poler. Mr. Poler has served as a Director of Kana since December
1996. Mr. Poler has been the Chief Executive Officer of Topica Inc., a compiler
and provider of e-mail lists, since January 1998 and has served as a director
of Topica since February 1998. Mr. Poler founded and served as Chief Executive
Officer of Internet Profiles Inc. (IPRO), a Web measurement and auditing
service company, from May 1994 to January 1996. Mr. Poler served on the board
of directors of LinkExchange, Inc., a privately held Web advertising network
from October 1996 to October 1998. Mr. Poler holds a B.S. in Mathematics with
Computer Science from the Massachusetts Institute of Technology and an M.B.A.
from the Stanford Graduate School of Business.
Board of Directors and Committees
Kana currently has authorized seven directors. Following this offering, the
board will consist of seven directors divided into three classes, with each
class serving for a term of three years. At each annual meeting of
stockholders, directors will be elected by the holders of common stock to
succeed the directors whose terms are expiring. Messrs. Beirne and Jurvetson
are Class I directors whose terms will expire in 2000, Messrs. Hahn and Poler
and Dr. Holloway are Class II directors whose terms will expire in 2001 and
Messrs. Gainey and McCloskey are Class III directors whose terms will expire in
2002. The officers serve at the discretion of the board.
Kana has established an audit committee composed of independent directors,
which reviews and supervises Kana's financial controls, including the selection
of its auditors, reviews the books and accounts, meets with its officers
regarding its financial controls, acts upon recommendations of the auditors and
takes further actions as the audit committee deems necessary to complete an
audit of Kana's books and accounts, as well as other matters that may come
before it or as directed by the board. The audit committee currently consists
of two directors, Dr. Holloway and Mr. Jurvetson.
Kana has established a compensation committee, which reviews and approves
the compensation and benefits for Kana's executive officers, administers its
stock plans and performs other duties as may from time to time be determined by
the board. The compensation committee currently consists of two directors,
Messrs. Beirne and Hahn.
Compensation Committee Interlocks and Insider Participation
During 1998, our compensation committee consisted of Messrs. Beirne and
Hahn. Neither Mr. Beirne nor Mr. Hahn were our employees or employees of our
subsidiary during 1998 or at any time prior to 1998. None of our executive
officers serves on the board of directors or compensation committee of any
entity that has one or more executive officers serving as a member of our board
of directors or compensation committee.
Director Compensation
Kana currently does not compensate any non-employee member of the board.
Directors who are also employees of Kana do not receive additional compensation
for serving as directors. In 1998, Kana granted an option to purchase 40,000
shares of common stock to Dr. Holloway at an exercise price of $0.05 per share
and an option to purchase 112,549 shares of common stock to Mr. Hahn at an
exercise price of $0.05 per share.
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<PAGE>
Non-employee directors will be eligible to receive discretionary option
grants and stock issuances under the 1999 Stock Incentive Plan. In addition,
under the 1999 Stock Incentive Plan, non-employee directors will receive
automatic option grants upon becoming directors and on the date of each annual
meeting of stockholders. The 1999 Stock Incentive Plan also contains a director
fee option grant program. Should this program be activated in the future, each
non-employee board member would have the opportunity to apply all or a portion
of any annual retainer fee otherwise payable in cash to the acquisition of an
option with an exercise price below the then fair market value. See
"Management--Benefit Plans".
Executive Compensation
Summary Compensation Table
The following table sets forth information concerning compensation during
the year ended December 31, 1998 of Kana's Chief Executive Officer and each of
the four other most highly compensated executive officers who earned an
annualized salary of more than $100,000 for the fiscal year ended December 31,
1998, referred to in this prospectus as the Named Executive Officers. In June
1999, Mr. Michael J. McCloskey joined Kana as its Chief Executive Officer. Mr.
McCloskey's annualized salary for 1999 is $150,000. In June 1999, the
compensation committee approved an increase in Mr. Gainey's annual salary to
$150,000. No individual who would otherwise have been includable in the table
on the basis of salary and bonus earned during 1998 has resigned or otherwise
terminated their employment during 1998. The compensation table excludes other
compensation in the form of perquisites and other personal benefits that
constitutes the lesser of $50,000 or 10% of the total annual salary and bonus
of each of the Named Executive Officers in 1998.
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
-------------------- ------------
Securities
Year Underlying All Other
Name and Principal Position Ended Salary Bonus Options (#) Compensation
- --------------------------- ----- -------------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Mark S. Gainey............. 1998 $ 72,500 -- -- --
President and former Chief
Executive
Officer
Joseph D. McCarthy(1)...... 1998 92,917 -- 160,000 --
Vice President, Finance
and Operations
Paul R. Holland............ 1998 75,000 $ 139,022 -- --
Vice President, Worldwide
Sales
William R. Phelps(2)....... 1998 8,917 -- -- --
Vice President, Profes-
sional Services
Christopher M. Noble(3).... 1998 109,374 -- 350,000 --
Former Vice President,
Marketing
</TABLE>
- --------
(1) Mr. McCarthy joined Kana in March 1998. His annualized salary for 1998 was
$120,000.
(2) Mr. Phelps joined Kana in December 1998. His annualized salary for 1998 was
$130,000.
(3) Mr. Noble joined Kana in February 1998. His annualized salary for 1998 was
$125,000. Mr. Noble left Kana in March 1999.
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<PAGE>
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 1998, including the
potential realizable value over the 10-year term of the options, based on
assumed rates of stock appreciation of 5% and 10%, compounded annually. No
stock appreciation rights were granted during 1998.
Option Grants in 1998
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------------
Potential Realizable Value
at Assumed Annual
Rates of Stock Price
Number of Appreciation for Option
Securities Percent of Total Exercise Term at Public
Underlying Options Granted Price Offering Price
Options to Employees in Per Expiration ---------------------------
Name Granted(#) 1998 Share Date 5% 10%
- ---- ---------- ---------------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark S. Gainey.......... -- -- -- --
Joseph D. McCarthy...... 160,000 9.22% $0.05 03/19/08
Paul R. Holland......... -- -- -- --
William R. Phelps....... -- -- -- --
Christopher M. Noble.... 350,000 20.18 0.05 02/12/08
</TABLE>
In 1998, Kana granted options to purchase up to a total of 1,734,549 shares
to employees, directors and consultants under Kana's 1997 Stock Option/Stock
Issuance Plan at exercise prices equal to the then existing fair market value
of Kana's common stock on the dates of grant, as determined in good faith by
the board of directors. Options granted are immediately exercisable in full,
but any shares purchased under these options that are not vested are subject to
repurchase by Kana at the option exercise price. Generally this repurchase
right lapses as to 25% of the shares after one year of service and as to the
remaining shares in equal monthly installments over an additional three-year
period.
The potential realizable value is calculated assuming the aggregate
exercise price on the date of grant appreciates at the indicated rate for the
entire term of the option and that the option is exercised and sold on the last
day of its term at the appreciated price. All options listed have a term of 10
years. Stock price appreciation rates of 5% and 10% are assumed pursuant to the
rules of the Securities and Exchange Commission. Kana can give no assurance
that the actual stock price will appreciate over the 10-year option term at the
assumed 5% and 10% levels or at any other defined level. Actual gains, if any,
on stock option exercises will be dependent on the future performance of Kana's
common stock. Unless the market price of the common stock appreciates over the
option term, no value will be realized from the option grants made to the Named
Executive Officers.
In June 1999, Kana granted to Mr. McCloskey, Kana's Chief Executive
Officer, an option to purchase 1,400,000 shares of common stock at an exercise
price of $0.45 per share. The option is immediately exercisable for vested and
unvested shares, but any shares purchased under these options that are not
vested are subject to repurchase by Kana at the option exercise price. This
repurchase right lapsed as to 280,000 shares on June 17, 1999 and lapses as to
the remaining shares in equal monthly installments over the 48-month period
following June 17, 1999. The option expires on June 16, 2009.
In June 1999, Kana granted to Mr. McCarthy an option to purchase 75,000
shares of common stock and granted to Mr. Phelps an option to purchase 35,000
shares of common stock, each at an exercise price of $0.45 per share. Each
option is immediately exercisable for vested and unvested shares, but any
shares purchased under these options that are not vested are subject to
repurchase by Kana at the option exercise price. The repurchase right lapses
for each of the grants as to 25% of the shares after one year of service from
June 17, 1999 and as to the remaining shares in equal monthly installments over
the 36-month period following June 17, 2000. Each option expires on June 16,
2009.
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Aggregated Option Exercises in Last Fiscal Year and Year-End Option Values
The following table sets forth information concerning the number and value
of shares of common stock underlying the unexercised options held by the Named
Executive Officers. No stock appreciation rights were exercised during 1998 and
no stock options granted to the Named Executive Officers or stock appreciation
rights were outstanding as of December 31, 1998. The value realized is based on
the fair market value of Kana's common stock on the date of exercise, as
determined by the board, less the exercise price payable for the shares.
<TABLE>
<CAPTION>
Number of
Shares Acquired Value
Name on Exercise Realized
---- --------------- --------
<S> <C> <C>
Mark S. Gainey.................................... -- --
Joseph D. McCarthy................................ 160,000 $ 0
Paul R. Holland................................... 608,558 0
William R. Phelps................................. -- --
Christopher M. Noble.............................. 350,000 0
</TABLE>
In February and June 1999, Mr. Phelps exercised options to purchase a total
of 310,000 shares of common stock. The exercise price for each grant equaled
the fair market value on the date of exercise and accordingly, Mr. Phelps did
not realize value on the exercises. In June 1999, Mr. McCloskey exercised an
option to purchase 1,400,000 shares of common stock. The exercise price equaled
the fair market value on the date of exercise and accordingly, Mr. McCloskey
did not realize value on the exercise. In June 1999, Mr. McCarthy exercised an
option to purchase 75,000 shares of common stock. The exercise price equaled
the fair market value on the date of exercise and accordingly, Mr. McCarthy did
not realize any value on the exercise.
Benefit Plans
1999 Stock Incentive Plan
Introduction. The 1999 Stock Incentive Plan is intended to serve as the
successor program to our 1997 Stock Option/Stock Issuance Plan. The 1999 plan
was adopted by the board in July 1999 and we expect it to be approved by the
stockholders in August 1999. The 1999 plan will become effective when the
underwriting agreement for this offering is signed. At that time, all
outstanding options under our existing 1997 plan will be transferred to the
1999 plan, and no further option grants will be made under the 1997 plan. The
transferred options will continue to be governed by their existing terms,
unless our compensation committee decides to extend one or more features of the
1999 plan to those options. Except as otherwise noted below, the transferred
options have substantially the same terms as will be in effect for grants made
under the discretionary option grant program of our 1999 plan.
Share Reserve. shares of our common stock have been authorized for
issuance under the 1999 plan. This share reserve consists of the number of
shares we estimate will be carried over from the 1997 plan plus an additional
increase of shares. The share reserve under our 1999 plan will
automatically increase on the first trading day in January each year, beginning
with calendar year 2000, by an amount equal to 4.25% of the total number of
shares of our common stock outstanding on the last trading day of December in
the prior year, but in no event will this annual increase exceed shares. In
addition, no participant in the 1999 plan may be granted stock options or
direct stock issuances for more than 1,000,000 shares of common stock in total
in any calendar year.
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Programs. Our 1999 plan has five separate programs:
.the discretionary option grant program, under which eligible individuals
in our employ may be granted options to purchase shares of our common
stock at an exercise price not less than the fair market value of those
shares on the grant date;
.the stock issuance program, under which eligible individuals may be
issued shares of common stock which will vest upon the attainment of
performance milestones or upon the completion of a period of service or
which are fully vested at issuance as a bonus for past services;
. the salary investment option grant program, under which our executive
officers and other highly compensated employees may be given the
opportunity to apply a portion of their base salary to the acquisition
of special below market stock option grants;
. the automatic option grant program, under which option grants will
automatically be made at periodic intervals to eligible non-employee
board members to purchase shares of common stock at an exercise price
equal to the fair market value of those shares on the grant date; and
. the director fee option grant program, under which our non-employee
board members may be given the opportunity to apply a portion of any
retainer fee otherwise payable to them in cash for the year to the
acquisition of special below-market option grants.
Eligibility. The individuals eligible to participate in our 1999 plan
include our officers and other employees, our board members and any consultants
we hire.
Administration. The discretionary option grant and stock issuance programs
will be administered by our compensation committee. This committee will
determine which eligible individuals are to receive option grants or stock
issuances under those programs, the time or times when the grants or issuances
are to be made, the number of shares subject to each grant or issuance, the
status of any granted option as either an incentive stock option or a
nonstatutory stock option under the federal tax laws, the vesting schedule to
be in effect for the option grant or stock issuance and the maximum term for
which any granted option is to remain outstanding. The compensation committee
will also have the authority to select the executive officers and other highly
compensated employees who may participate in the salary investment option grant
program in the event that program is put into effect for one or more calendar
years.
Plan Features. Our 1999 plan will include the following features:
. The exercise price for any options granted under the plan may be paid in
cash or in shares of our common stock valued at fair market value on the
exercise date. The option may also be exercised through a same-day sale
program without any cash outlay by the optionee.
. The compensation committee will have the authority to cancel outstanding
options under the discretionary option grant program, including any
transferred options from our 1997 plan, in return for the grant of new
options for the same or different number of option shares with an
exercise price per share based upon the fair market value of our common
stock on the new grant date.
. Stock appreciation rights may be issued under the discretionary option
grant program. These rights will provide the holders with the election
to surrender their outstanding options for a payment from us equal to
the fair market value of the shares subject to the surrendered options
less the exercise price payable for those shares. We may make the
payment in cash or in shares of our common stock. None of the options
under our 1997 plan have any stock appreciation rights.
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<PAGE>
Change in Control. The 1999 plan will include the following change in
control provisions which may result in the accelerated vesting of outstanding
option grants and stock issuances:
. In the event that we are acquired by merger or asset sale, each
outstanding option under the discretionary option grant program which is
not to be assumed by the successor corporation will immediately become
exercisable for all the option shares, and all outstanding unvested
shares will immediately vest, except to the extent our repurchase rights
with respect to those shares are to be assigned to the successor
corporation.
. The compensation committee will have complete discretion to grant one or
more options which will become exercisable for all the option shares in
the event those options are assumed in the acquisition but the
optionee's service with us or the acquiring entity is subsequently
terminated. The vesting of any outstanding shares under our 1999 plan
may be accelerated upon similar terms and conditions.
. The compensation committee may grant options and structure repurchase
rights so that the shares subject to those options or repurchase rights
will immediately vest in connection with a successful tender offer for
more than 50% of our outstanding voting stock or a change in the
majority of our board through one or more contested elections. Such
accelerated vesting may occur either at the time of such transaction or
upon the subsequent termination of the individual's service.
. The options currently outstanding under our 1997 plan will immediately
vest in the event we are acquired and the acquiring company does not
assume those options. Certain of those options, however, contain an
additional vesting acceleration feature which will result in the
immediate vesting of all or part of those options upon an involuntary
termination of the optionee's employment within 18 months following an
acquisition in which those options are assumed.
Salary Investment Option Grant Program. In the event the compensation
committee decides to put this program into effect for one or more calendar
years, each of our executive officers and other highly compensated employees
may elect to reduce his or her base salary for the calendar year by an amount
not less than $10,000 nor more than $50,000. Each selected individual who makes
such an election will automatically be granted, on the first trading day in
January of the calendar year for which his or her salary reduction is to be in
effect, an option to purchase that number of shares of common stock determined
by dividing the salary reduction amount by two-thirds of the fair market value
per share of our common stock on the grant date. The option will have an
exercise price per share equal to one-third of the fair market value of the
option shares on the grant date. As a result, the option will be structured so
that the fair market value of the option shares on the grant date less the
exercise price payable for those shares will be equal to the amount of the
salary reduction. The option will become exercisable in a series of 12 equal
monthly installments over the calendar year for which the salary reduction is
to be in effect.
Automatic Option Grant Program. Each individual who first becomes a non-
employee board member at any time after the effective date of this offering
will receive an option grant for 20,000 shares of common stock on the date such
individual joins the board. In addition, on the date of each annual
stockholders meeting held after the effective date of this offering, each non-
employee board member who is to continue to serve as a non-employee board
member, including each of our current non-employee board members, will
automatically be granted an option to purchase 5,000 shares of common stock,
provided such individual has served on the board for at least six months.
Each automatic grant will have an exercise price per share equal to the
fair market value per share of our common stock on the grant date and will have
a term of 10 years, subject to earlier termination following the optionee's
cessation of board service. The option will be immediately exercisable for all
of the option shares; however, we may repurchase, at the exercise price paid
per
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<PAGE>
share, any shares purchased under the option which are not vested at the time
of the optionee's cessation of board service. The shares subject to each annual
automatic grant will be fully vested when granted. The shares subject to each
initial 20,000-share automatic option grant will vest in a series of eight
successive semi-annual installments upon the optionee's completion of each six-
months of board service over the 48-month period measured from the grant date.
However, the shares will immediately vest in full upon certain changes in
control or ownership or upon the optionee's death or disability while a board
member.
The FASB recently issued an exposure draft of a proposed interpretation of
the current accounting principles applicable to equity incentive plans. Under
the proposed interpretation, option grants made to non-employee board members
after December 15, 1998 will result in a direct charge to the company's
reported earnings based upon the fair value of the option measured initially as
of the grant date of that option and then subsequently on the vesting date of
each installment of the underlying option shares. If the proposed
interpretation is adopted, then the following changes will be made to our
automatic stock option grant program:
. The initial 20,000-share option grant will not be made to a newly
elected or appointed non-employee board member until the first annual
stockholders meeting held more than 12 months after the date of his or
her initial election or appointment to the board. At that annual
meeting, the board member will also receive an option grant for an
additional 5,000 shares under the annual grant portion of the program.
. One-half of the shares subject to the initial 20,000-share option grant
will be immediately vested at the time of the option grant, and the
remaining shares will vest in a series of 24 successive equal monthly
installments upon the optionee's completion of each month of board
service over the 24-month period measured from the grant date. However,
the shares will immediately vest in full upon certain changes in control
or ownership or upon the optionee's death or disability while a board
member.
Director Fee Option Grant Program. If this program is put into effect in
the future, then each non-employee board member may elect to apply all or a
portion of any cash retainer fee for the year to the acquisition of a below-
market option grant. The option grant will automatically be made on the first
trading day in January in the year for which the non-employee board member
would otherwise be paid the cash retainer fee in the absence of his or her
election. The option will have an exercise price per share equal to one-third
of the fair market value of the option shares on the grant date, and the number
of shares subject to the option will be determined by dividing the amount of
the retainer fee applied to the program by two-thirds of the fair market value
per share of our common stock on the grant date. As a result, the option will
be structured so that the fair market value of the option shares on the grant
date less the exercise price payable for those shares will be equal to the
portion of the retainer fee applied to that option. The option will become
exercisable in a series of 12 equal monthly installments over the calendar year
for which the election is in effect. However, the option will become
immediately exercisable for all the option shares upon the death or disability
of the optionee while serving as a board member.
Additional Program Features. Our 1999 plan will also have the following
features:
. Outstanding options under the salary investment and director fee option
grant programs will immediately vest if we are acquired by a merger or
asset sale or if there is a successful tender offer for more than 50% of
our outstanding voting stock or a change in the majority of our board
through one or more contested elections.
. Limited stock appreciation rights will automatically be included as part
of each grant made under the salary investment option grant program and
the automatic and director fee option grant programs, and these rights
may also be granted to one or more officers as part of their option
grants under the discretionary option grant program. Options with this
feature may be
57
<PAGE>
surrendered to us upon the successful completion of a hostile tender
offer for more than 50% of our outstanding voting stock. In return for
the surrendered option, the optionee will be entitled to a cash
distribution from us in an amount per surrendered option share based
upon the highest price per share of our common stock paid in that tender
offer.
. The board may amend or modify the 1999 plan at any time, subject to any
required stockholder approval. The 1999 plan will terminate no later
than , 2009.
1999 Employee Stock Purchase Plan
Introduction. Our 1999 Employee Stock Purchase Plan was adopted by the
board in July 1999 and we expect it to be approved by the stockholders in
August 1999. The plan will become effective immediately upon the signing of
the underwriting agreement for this offering. The plan is designed to allow
our eligible employees and the eligible employees of our participating
subsidiaries to purchase shares of common stock, at semi-annual intervals,
with their accumulated payroll deductions.
Share Reserve. shares of our common stock will initially be reserved
for issuance. The reserve will automatically increase on the first trading day
in January each year, beginning in calendar year 2000, by an amount equal to
0.75% of the total number of outstanding shares of our common stock on the
last trading day in December in the prior year. In no event will any such
annual increase exceed shares.
Offering Periods. The plan will have a series of successive offering
periods, each with a maximum duration of 24 months. The initial offering
period will start on the date the underwriting agreement for this offering is
signed and will end on the last business day in October 2001. The next
offering period will start on the first business day in November 2001, and
subsequent offering periods will be set by our compensation committee.
Eligible Employees. Individuals scheduled to work more than 20 hours per
week for more than five calendar months per year may join an offering period
on the start date or any semi-annual entry date within that offering period.
Semi-annual entry dates will occur on the first business day of May and
November each year. Individuals who become eligible employees after the start
date of an offering period may join the plan on any subsequent semi-annual
entry date within that offering period.
Payroll Deductions. A participant may contribute up to 15% of his or her
cash earnings through payroll deductions, and the accumulated deductions will
be applied to the purchase of shares on each semi-annual purchase date. The
purchase price per share will be equal to 85% of the fair market value per
share on the participant's entry date into the offering period or, if lower,
85% of the fair market value per share on the semi-annual purchase date. Semi-
annual purchase dates will occur on the last business day of April and October
each year. In no event, however, may any participant purchase more than 750
shares on any purchase date, and not more than 75,000 shares may be purchased
in total by all participants on any purchase date.
Reset Feature. If the fair market value per share of our common stock on
any purchase date is less than the fair market value per share on the start
date of the two-year offering period, then that offering period will
automatically terminate, and a new two-year offering period will begin on the
next business day. All participants in the terminated offering will be
transferred to the new offering period.
Change in Control. Should we be acquired by merger or sale of all or
substantially all of our assets or more than 50% of our voting securities,
then all outstanding purchase rights will automatically be exercised
immediately prior to the effective date of the acquisition. The purchase price
will be equal to 85% of the market value per share on the participant's entry
date into the offering period in which an acquisition occurs or, if lower, 85%
of the fair market value per share immediately prior to the acquisition.
58
<PAGE>
Plan Provisions. The following provisions will also be in effect under the
plan:
. The plan will terminate no later than the last business day of October
2009.
. The board may at any time amend, suspend or discontinue the plan.
However, certain amendments may require stockholder approval.
Employment Contracts, Termination of Employment Agreements
and Change in Control Arrangements
Restricted Stock Purchase Agreements
In July 1996, Kana sold to Mr. Gainey, Kana's co-founder, President and
Chairman of the Board, 3,750,000 shares of common stock at a purchase price of
$0.0001 per share. In April 1997, Kana repurchased those shares of common stock
and sold to Mr. Gainey 3,750,000 shares of common stock at a purchase price of
$0.01 per share. These shares are subject to a right of repurchase granted to
Kana that lapses in a series of equal monthly installments over a four-year
period measured from June 4, 1996. In addition, Kana's right to repurchase 50%
of any unvested shares will lapse in the event of an acquisition of Kana by
merger or asset sale and if Mr. Gainey is not offered employment or is
terminated without cause by Kana or its successor.
Stock Purchase Agreements
In February 1997, Dr. Holloway, one of Kana's directors, exercised an
option to purchase 80,000 shares of common stock and entered into a stock
purchase agreement for the purchase of the shares. These shares are subject to
a right of repurchase granted to Kana. Under the stock purchase agreement, upon
an acquisition of Kana by merger or asset sale, Kana's right to repurchase all
of the unvested shares will automatically lapse in its entirety and the shares
will vest in full unless the repurchase right is assigned to the successor
entity.
In April 1998, Mr. Holland, Kana's Vice President, Worldwide Sales,
exercised an option to purchase 608,558 shares of common stock and entered into
a stock purchase agreement for the purchase of the shares. These shares are
subject to a right of repurchase granted to Kana. Under the stock purchase
agreement, upon an acquisition of Kana by merger or asset sale, Kana's right to
repurchase all of the unvested shares will automatically lapse in its entirety
and the shares will vest in full unless the repurchase right is assigned to the
successor entity. In addition, in the event of both an acquisition of Kana by
merger or asset sale and if Mr. Holland is not offered comparable employment by
the successor entity, Kana's right to repurchase all of the unvested shares
will automatically lapse and the shares will vest in full.
In June 1998, Mr. McCarthy, Kana's Vice President, Finance and Operations,
exercised an option to purchase 160,000 shares of common stock and entered into
a stock purchase agreement for the purchase of the shares. These shares are
subject to a right of repurchase granted to Kana. Under the stock purchase
agreement, upon an acquisition of Kana by merger or asset sale, Kana's right to
repurchase all of the unvested shares will automatically lapse in its entirety
and the shares will vest in full unless the repurchase right is assigned to the
successor entity. In addition, in the event of both an acquisition of Kana by
merger or asset sale and if Mr. McCarthy is not offered employment by the
successor entity, Kana's right to repurchase 50% of the unvested shares will
automatically lapse and the shares will vest in full.
59
<PAGE>
In July 1998, Mr. Hahn, one of Kana's directors, exercised an option to
purchase 112,549 shares of common stock and entered into a stock purchase
agreement for the purchase of the shares. These shares are subject to a right
of repurchase granted to Kana. Under the stock purchase agreement, upon an
acquisition of Kana by merger or asset sale, Kana's right to repurchase all of
the unvested shares will automatically lapse in its entirety and the shares
will vest in full.
In July 1998, Dr. Holloway exercised an option to purchase 40,000 shares of
common stock and entered into a stock purchase agreement for the purchase of
the shares. These shares are subject to a right of repurchase granted to Kana.
Under the stock purchase agreement, upon an acquisition of Kana by merger or
asset sale, Kana's right to repurchase all of the unvested shares will
automatically lapse in its entirety and the shares will vest in full unless the
repurchase right is assigned to the successor entity. In addition, in the event
of both an acquisition of Kana by merger or asset sale and if Dr. Holloway does
not provide services to the successor entity, Kana's right to repurchase 25% of
the unvested shares will automatically lapse and the shares will vest in full.
In February and June 1999, Mr. Phelps, Kana's Vice President, Professional
Services, exercised options to purchase a total of 310,000 shares of common
stock and entered into a stock purchase agreement for the purchase of the
shares. These shares are subject to a right of repurchase granted to Kana.
Under the stock purchase agreement, upon an acquisition of Kana by merger or
asset sale, Kana's right to repurchase all of the unvested shares will
automatically lapse in its entirety and the shares will vest in full unless the
repurchase right is assigned to the successor entity. In addition, in the event
of both an acquisition of Kana by merger or asset sale and if Mr. Phelps is not
offered employment by the successor entity, Kana's right to repurchase 25% of
the unvested shares will automatically lapse and the shares will vest in full.
In June 1999, Mr. McCloskey, Kana's Chief Executive Officer, exercised an
option to purchase 1,400,000 shares of common stock and entered into a stock
purchase agreement for the purchase of the shares. These shares are subject to
a right of repurchase granted to Kana. Under the stock purchase agreement and
the terms of Mr. McCloskey's employment arrangement, this stock is subject to
vesting, which accelerates under certain circumstances. See "--Employment
Arrangements".
In June 1999, Mr. McCarthy exercised an option to purchase 75,000 shares of
common stock and entered into a stock purchase agreement for the purchase of
the shares. These shares are subject to a right of repurchase granted to Kana.
Under the stock purchase agreement, upon an acquisition of Kana by merger or
asset sale, Kana's right to repurchase all of the unvested shares will
automatically lapse in its entirety and the shares will vest in full unless the
repurchase right is assigned to the successor entity. In addition, in the event
of both an acquisition of Kana by merger or asset sale and if Mr. McCarthy is
not offered employment by the successor entity, Kana's right to repurchase 25%
of the unvested shares will automatically lapse and the shares will vest in
full.
Employment Arrangements
In June 1999, Kana entered into an employment arrangement with Mr.
McCloskey. Mr. McCloskey serves as Chief Executive Officer on an at-will basis.
However, under the terms of the employment arrangement, upon a change of
control:
. if Mr. McCloskey is not offered full-time employment with the successor
corporation, all of his then unvested shares of common stock will
accelerate and vest in full;
. if Mr. McCloskey is offered full-time employment with the successor
corporation as that corporation's chief executive officer, all of his
then unvested shares of common stock will continue to vest in accordance
with their original terms;
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<PAGE>
. if Mr. McCloskey is offered full-time employment with the successor
corporation as other than that corporation's chief executive officer,
the rate at which his then unvested shares of common stock vest will
double, such that his shares of common stock will vest at a rate
equivalent to 46,667 shares of common stock per month;
. if Mr. McCloskey is offered full-time employment with the successor
corporation as set forth in the second and third points above and he
does not accept the position, his shares of common stock will be subject
to immediate repurchase; and
. if Mr. McCloskey is terminated without cause by the successor
corporation following the change in control, all of his then unvested
shares of common stock will accelerate and vest in full.
Limitation of Liability and Indemnification
Kana's certificate of incorporation eliminates to the maximum extent
allowed by the Delaware General Corporation Law, directors' personal liability
to Kana or its stockholders for monetary damages for breaches of fiduciary
duties. The certificate of incorporation does not, however, eliminate or limit
the personal liability of a director for the following:
. any breach of the director's duty of loyalty to Kana or its
stockholders;
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
. any transaction from which the director derived an improper personal
benefit.
Kana's bylaws provide that Kana shall indemnify its directors and executive
officers to the fullest extent permitted under the Delaware General Corporation
Law and may indemnify its other officers, employees and other agents as set
forth in the Delaware General Corporation Law. In addition, Kana has entered
into an indemnification agreement with each of its directors and officers. The
indemnification agreements contain provisions that require Kana, among other
things, to indemnify its directors and executive officers against certain
liabilities (other than liabilities arising from willful misconduct of a
culpable nature) that may arise by reason of their status or service as
directors or executive officers of Kana or other entities to which they provide
service at the request of Kana and to advance expenses they may incur as a
result of any proceeding against them as to which they could be indemnified.
Kana believes that these bylaw provisions and indemnification agreements are
necessary to attract and retain qualified directors and executive officers.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of Kana where indemnification would be
required or permitted, and Kana is not aware of any threatened litigation or
proceeding that might result in a claim for indemnification.
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TRANSACTIONS AND RELATIONSHIPS WITH RELATED PARTIES
Sales of Securities
Since July 1996, Kana has raised capital primarily through the sale of its
securities, including:
. In July 1996, Kana sold to Mark S. Gainey 3,750,000 shares of common
stock for a total consideration of $375. In April 1997, Kana repurchased
those shares and sold to Mr. Gainey 3,750,000 shares of common stock for
total consideration of $37,500.
. In July 1996, Kana sold to Michael T. Horvath 1,250,000 shares of common
stock for a total consideration of $125. In April 1997, Kana repurchased
those shares and sold to Mr. Horvath 625,000 shares of common stock for
total consideration of $6,250.
. In April 1997, Kana sold to various investors, including entities
affiliated with Draper Fisher Jurvetson, a total of 5,923,078 shares of
Series A preferred stock for total consideration of $770,000.
. In September 1997, Kana sold to various investors, including entities
affiliated with Draper Fisher Jurvetson and entities affiliated with
Benchmark Capital, a total of 7,453,704 shares of Series B preferred
stock for total consideration of $4,025,000.
. In June 1998, Kana sold to Eric A. Hahn 168,824 shares of Series B
preferred stock for total consideration of $91,165.
. In August and September 1998, Kana sold to various investors, including
entities affiliated with Draper Fisher Jurvetson, entities affiliated
with Benchmark Capital, entities affiliated with Amerindo Investment
Advisors, Inc. and Eric A. Hahn, a total of 5,121,148 shares of Series C
preferred stock for total consideration of $11,625,006.
. In July 1999, Kana sold to various investors, including entities
affiliated with Draper Fisher Jurvetson, entities affiliated with
Benchmark Capital and entities affiliated with Amerindo Investment
Advisors, a total of 1,257,707 shares of Series D preferred stock for
total consideration of $10,200,004.
The following table summarizes the shares of preferred stock purchased by
Kana's executive officers, directors and five percent stockholders and persons
associated with them since July 1996. The number of total shares on an as-
converted basis reflects a one-to-one conversion to common stock ratio for
each share of Series A, Series B, Series C and Series D preferred stock.
<TABLE>
<CAPTION>
Total Shares
of Preferred Stock
Series A Series B Series C Series D on an As-
Preferred Preferred Preferred Preferred Converted
Investor Stock Stock Stock Stock Basis
-------- --------- --------- --------- --------- ------------------
<S> <C> <C> <C> <C> <C>
Entities affiliated with
Draper Fisher
Jurvetson.............. 4,530,289 1,966,297 930,397 246,609 7,673,592
Entities affiliated with
Benchmark Capital...... 0 5,183,704 1,013,216 271,270 6,468,190
Entities affiliated with
Amerindo Investment
Advisors............... 0 0 1,762,115 369,915 2,132,030
Eric A. Hahn............ 0 168,824 44,053 0 212,877
</TABLE>
Holders of shares of preferred stock have registration rights in respect
of the common stock issued or issuable upon conversion thereof. See
"Description of Capital Stock--Registration Rights".
In February 1997, in connection with an option exercise, Kana issued
80,000 shares of common stock to Dr. Holloway, one of Kana's directors, for an
aggregate exercise price of $800.
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<PAGE>
In June 1998, in connection with option exercises, Kana issued 250,000
shares of common stock to Mr. Poler, one of Kana's directors, for an aggregate
exercise price of $2,500.
Agreements with Officers and Directors
In February 1997, Dr. Holloway, one of Kana's directors, exercised an
option to purchase a total of 80,000 shares of common stock.
In July 1996, Kana sold to Mr. Gainey, Kana's co-founder, President and
Chairman of the Board, 3,750,000 shares of common stock at a purchase price of
$0.0001 per share. In April 1997, Kana repurchased those shares of common stock
and sold to Mr. Gainey 3,750,000 shares of common stock at a purchase price of
$0.01 per share. These shares are subject to a right of repurchase granted to
Kana that lapses in equal monthly installments over a four-year period from
June 4, 1996. In addition, Kana's right to repurchase 50% of his then unvested
shares will lapse if Mr. Gainey is terminated without cause by Kana or its
successor.
In April 1998, Mr. Holland, Kana's Vice President, Worldwide Sales,
exercised an option to purchase 608,558 shares of common stock and entered into
a stock purchase agreement for the purchase of the shares. Mr. Holland paid the
$30,428 exercise price by delivering a five-year full-recourse promissory note
at a 5.7% annual interest rate. The note is secured by the shares of common
stock purchased by Mr. Holland. As of June 30, 1999, a total of $32,452 in
unpaid principal and interest was outstanding under the note.
In June 1998, Mr. McCarthy, Kana's Vice President, Finance and Operations,
exercised an option to purchase 160,000 shares of common stock and entered into
a stock purchase agreement for the purchase of the shares. Mr. McCarthy paid
the $8,000 exercise price by delivering a five-year full-recourse promissory
note at a 5.7% annual interest rate. The note is secured by the shares of
common stock purchased by Mr. McCarthy. As of June 30, 1999, a total of $8,456
in unpaid principal and interest was outstanding under the note.
In June 1998, Mr. Hahn, one of Kana's directors, exercised an option to
purchase 112,549 shares of common stock. Mr. Hahn paid the $5,627 exercise
price by delivering a five-year full-recourse promissory note at a 5.7% annual
interest rate. The note is secured by the shares of common stock purchased by
Mr. Hahn. As of June 30, 1999, a total of $5,948 in unpaid principal and
interest was outstanding under the note.
In June 1998, Mr. Poler, one of Kana's directors, exercised options to
purchase 250,000 shares of common stock.
In July 1998, Dr. Holloway exercised an option to purchase 40,000 shares of
common stock. Dr. Holloway paid the $2,000 exercise price by delivering a five-
year full-recourse promissory note at a 5.7% annual interest rate. The note is
secured by the shares of common stock purchased by Dr. Holloway. As of June 30,
1999, a total of $2,105 in unpaid principal and interest was outstanding under
the note.
In February 1999, Mr. Phelps, Kana's Vice President, Professional Services,
exercised an option to purchase 275,000 shares of common stock and entered into
a stock purchase agreement for the purchase of the shares. Mr. Phelps paid the
$63,250 exercise price by delivering a five-year full-recourse promissory note
at a 5.7% annual interest rate. The note is secured by the shares of common
stock purchased by Mr. Phelps. As of June 30, 1999, a total of $64,452 in
unpaid principal and interest was outstanding under the note.
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<PAGE>
In June 1999, Mr. McCloskey, Kana's Chief Executive Officer, exercised an
option to purchase 1,400,000 shares of common stock. Mr. McCloskey paid the
$630,000 exercise price by delivering a five-year full recourse promissory note
at a 5.7% annual interest rate. The note is secured by the shares of common
stock purchased by Mr. McCloskey.
In June 1999, Mr. McCarthy exercised an option to purchase 75,000 shares of
common stock. Mr. McCarthy paid the $33,750 exercise price by delivering a
five-year full recourse promissory note at 5.7% annual interest rate. The note
is secured by the shares of common stock purchased by Mr. McCarthy.
In June 1999, Mr. Phelps exercised an option to purchase 35,000 shares of
common stock. Mr. Phelps paid the $15,750 exercise price by delivering a five-
year full recourse promissory note at a 5.7% annual interest rate. The note is
secured by the shares of common stock purchased by Mr. Phelps.
Kana has entered into an employment arrangement with its Chief Executive
Officer. See "Management--Employment Contracts, Termination of Employment
Agreements and Change in Control Agreements--Employment Arrangements".
Kana has granted options to its executive officers and directors. See
"Management--Director Compensation" and "Principal Stockholders".
Kana has entered into an indemnification agreement with each of its
executive officers and directors containing provisions that may require it,
among other things, to indemnify its executive officers and directors against
liabilities that may arise by reason of their status or service as executive
officers or directors (other than liabilities arising from willful misconduct
of a culpable nature) and to advance expenses incurred as a result of any
proceeding against them as to which they could be indemnified. See
"Management--Limitation of Liability and Indemnification Matters".
Transactions with Promoters
Each of Mr. Gainey, Kana's President and Chairman of the Board, and Michael
T. Horvath, the former Treasurer and a former director of Kana, is a co-founder
of Kana and may be deemed a promoter for purposes of the federal securities
laws. In July 1996, Kana sold to Mr. Gainey 3,750,000 shares of common stock at
a purchase price of $0.0001 per share. In April 1997, Kana repurchased those
shares and sold to Mr. Gainey 3,750,000 shares of common stock at a purchase
price of $0.01 per share. In July 1996, Kana sold to Mr. Horvath 1,250,000
shares of common stock at a purchase price of $0.0001 per share. In April 1997,
Kana repurchased those shares and sold to Mr. Horvath 625,000 shares of common
stock at a purchase price of $0.01 per share. All other material transactions
with Mr. Gainey and Mr. Horvath are described in this section or elsewhere in
this prospectus. See "Management--Executive Compensation".
In April 1997, Kana entered into a consulting agreement with Mr. Horvath.
Under the agreement, Mr. Horvath agreed to provide up to 20 hours of consulting
services to Kana per month, at a rate of $25.00 per hour, until July 1, 2000.
In connection with the agreement, Mr. Horvath was granted a right to purchase
625,000 shares of common stock, which he purchased in April 1997, as described
above.
Kana believes that all of the transactions set forth above were made on
terms no less favorable to Kana than could have been otherwise obtained from
unaffiliated third parties. All future transactions, including loans, if any,
between Kana and its officers, directors and principal stockholders and their
affiliates and any transactions between Kana and any entity with which its
officers, directors or five percent stockholders are affiliated will be
approved by a majority of the board of directors, including a majority of the
independent and disinterested outside directors of the board of directors and
will be on terms no less favorable to Kana than could be obtained from
unaffiliated third parties.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The table below sets forth information regarding the beneficial ownership
of Kana's common stock as of July 9, 1999, by the following individuals or
groups:
. each person or entity who is known by Kana to own beneficially more than
five percent of Kana's outstanding stock;
. each of the Named Executive Officers;
. each director of Kana; and
. all directors and executive officers as a group.
Applicable percentage ownership in the following table is based on
30,736,568 shares of common stock outstanding as of July 9, 1999, as adjusted
to reflect the conversion of all outstanding shares of preferred stock upon the
closing of this offering and treating as outstanding all options exercisable
within 60 days of July 9, 1999 held by the particular stockholder and that are
included in the first column. The numbers shown in the table below assume no
exercise by the underwriters of their over-allotment option.
Unless otherwise indicated, the principal address of each of the
stockholders below is c/o Kana Communications, Inc., 87 Encina Avenue, Palo
Alto, CA 94301. Except as otherwise indicated, and subject to applicable
community property laws, the persons named in the table have sole voting and
investment power with respect to all shares of common stock held by them.
<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned
Number of Shares ------------------------------------
Name and Address of Beneficial Owner Beneficially Owned Prior to Offering After the Offering
------------------------------------ ------------------ ----------------- ------------------
<S> <C> <C> <C>
Entities affiliated
with Draper Fisher
Jurvetson (1)......... 7,673,592 25.0%
Entities affiliated
with Benchmark Capital
Partners L.P. (2)..... 6,468,190 21.0
Entities affiliated
with Amerindo
Investment Advisors,
Inc. (3).............. 2,132,030 6.9
Mark S. Gainey (4)..... 3,464,000 11.3
Michael J. McCloskey
(5)................... 1,400,000 4.6
Paul R. Holland (6).... 608,558 2.0
William R. Phelps (7).. 310,000 1.0
Joseph D. McCarthy
(8)................... 235,000 *
Christopher M. Noble... 94,791 *
Steven T. Jurvetson
(1)................... 7,673,592 25.0
David M. Beirne (2).... 6,468,190 21.0
Eric A. Hahn (9)....... 325,426 1.1
Ariel Poler (10)....... 250,000 *
Dr. Charles A. Holloway
(11).................. 120,000 *
All directors and
executive officers as
a group (11 persons).. 21,255,766 69.2
</TABLE>
- --------
* Less than one percent.
(1) Principal address is 400 Seaport Court, Suite 250, Redwood City, CA 94063.
Represents 5,611,247 shares of common stock held by Draper Fisher
Associates Fund IV, L.P. and 422,353 shares of common stock held by Draper
Fisher Partners IV, LLC. Mr. Jurvetson disclaims beneficial ownership of
these shares, except to the extent of his pecuniary interest in the Draper
Fisher Jurvetson Funds. Also includes 1,639,992 shares of common stock
held by the Draper 1999 Grandchildren's Trust.
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<PAGE>
(2) Principal address is 2480 Sand Hill Road, Suite 200, Menlo Park, CA 94025.
Includes 5,675,021 shares of common stock held by Benchmark Capital
Partners, L.P., and 793,169 shares of common stock held by Benchmark
Founders' Fund L.P. Mr. Beirne, one of Kana's directors, is a Managing
Member of Benchmark Capital Management Co., LLC. Mr. Beirne disclaims
beneficial ownership of these shares, except to the extent of his
pecuniary interest in the Benchmark funds.
(3) Principal address is 399 Park Avenue, 22nd Floor, New York, NY 10022.
Represents 1,654,115 shares of common stock held by ATGF II, a Panamanian
corporation, 250 shares of common stock held by Daniel Chapey, 50,000
shares of common stock held by the Ralph H. Cechettini 1995 Trust, 11,000
shares of common stock held by Anthony Ciulla, 4,500 shares of common
stock held by Joaquin Garcia-Larrieu, 12,500 shares of common stock held
by Mathew D. Fitzmaurice, 131,815 shares of common stock held by the
Litton Master Trust, 182,500 shares of common stock held by Emeric
McDonald, 350 shares of common stock held by William Slattery, 75,000
shares of common stock held by Pivotal Partners L.P., and 10,000 shares of
common stock held by James Stableford.
(4) Represents shares of common stock held by the Mark and Elisabeth Gainey
Family Trust. Includes 703,125 shares of common stock subject to Kana's
right of repurchase. This repurchase right lapses with respect to 78,125
shares per month.
(5) Includes 1,120,000 shares of common stock subject to Kana's right of
repurchase. This repurchase right lapses with respect to 23,333 shares per
month.
(6) Includes 342,315 shares of common stock subject to Kana's right of
repurchase. This repurchase right lapses with respect to 12,678 shares per
month.
(7) Includes 235,418 shares of common stock subject to Kana's right of
repurchase. This repurchase right lapses with respect to 5,729 shares per
month. Also includes 35,000 shares of common stock subject to Kana's right
of repurchase, which lapses with respect to 8,750 shares in June 2000 and
729 shares per month thereafter.
(8) Includes 100,001 shares of common stock subject to Kana's right of
repurchase. This repurchase right lapses with respect to 3,333 shares per
month. Also includes 75,000 shares of common stock subject to Kana's right
of repurchase, which lapses with respect to 18,750 shares in June 2000 and
1,563 shares per month thereafter.
(9) Includes 79,723 shares of common stock subject to Kana's right of
repurchase. This repurchase right lapses with respect to 2,345 shares per
month.
(10) Includes 27,778 shares of common stock subject to Kana's right of
repurchase. This repurchase right lapses with respect to 6,944 shares per
month.
(11) Includes 26,667 shares of common stock subject to Kana's right of
repurchase. This repurchase right lapses with respect to 3,333 shares per
month.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
At the closing of this offering, the authorized capital stock of Kana will
consist of 60,000,000 shares of common stock, $0.001 par value, and 5,000,000
shares of preferred stock, $0.001 par value, after giving effect to the
amendment of Kana's certificate of incorporation to delete references to the
existing preferred stock following conversion of that stock. The following
description of capital stock gives effect to the certificate of incorporation
to be filed upon the closing of this offering. Immediately following the
completion of this offering, and assuming no exercise of the underwriters'
over-allotment option, an aggregate of shares of common stock will be issued
and outstanding, and no shares of preferred stock will be issued and
outstanding.
The following description of Kana's capital stock is subject to and
qualified by Kana's certificate of incorporation and bylaws and by the
provisions of the applicable Delaware law.
Common Stock
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
apply to any outstanding preferred stock that may come into existence, the
holders of common stock are entitled to receive ratably those dividends, if
any, as may be declared from time to time by the board of directors out of
funds legally available for dividends. See "Dividend Policy". In the event of
liquidation, dissolution or winding up of Kana, 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. Upon completion of this offering, the common stock will have no
preemptive or conversion rights or other subscription rights. No redemption or
sinking fund provisions apply to the common stock. All outstanding shares of
common stock are fully paid and nonassessable, and the shares of common stock
to be outstanding upon completion of this offering will be fully paid and
nonassessable.
Preferred Stock
Kana's board of directors is authorized to issue from time to time, without
stockholder authorization, in one or more designated series, any or all of the
authorized but unissued shares of preferred stock of Kana with any dividend,
redemption, conversion and exchange provisions as may be provided in the
particular series. Any series of preferred stock may possess voting, dividend,
liquidation, redemption and other rights superior to those of the common stock.
The rights of the holders of common stock will be subject to, and may be
adversely affected by, the rights of the holders of any preferred stock that
may be issued in the future. Issuance of a new series of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of entrenching Kana's board of
directors and making it more difficult for a third party to acquire, or
discourage a third party from acquiring, a majority of the outstanding voting
stock of Kana. Kana has no present plans to issue any shares of or designate
any series of preferred stock.
Registration Rights
Upon completion of the offering, the holders of 24,401,670 shares of common
stock will be entitled to rights with respect to the registration of the shares
under the Securities Act. Under the terms of the registration rights agreement,
if Kana proposes to register any of its securities under the Securities Act,
either for its own account or for the account of other security holders
exercising registration rights, these holders are entitled to notice of the
registration and are entitled to include shares of common stock in the
registration. The rights are subject to conditions and limitations,
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<PAGE>
among them the right of the underwriters of an offering subject to the
registration to limit the number of shares included in the registration.
Holders of these rights may also require Kana to file a registration statement
under the Securities Act of 1933 at its expense with respect to their shares of
common stock, and Kana is required to use its best efforts to effect the
registration, subject to conditions and limitations. Furthermore, stockholders
with registration rights may require Kana to file additional registration
statements on Form S-3, subject to conditions and limitations.
Antitakeover Effects of Provisions of the Certificate of Incorporation,
Bylaws and Delaware Law
Kana's certificate of incorporation authorizes the board to establish one
or more series of undesignated preferred stock, the terms of which can be
determined by the board at the time of issuance. See "--Preferred Stock". The
certificate of incorporation also provides that all stockholder action must be
effected at a duly called meeting of stockholders and not by written consent.
In addition, the certificate of incorporation and bylaws do not permit
stockholders of Kana to call a special meeting of stockholders. Only Kana's
Chief Executive Officer, President, Chairman of the Board or a majority of the
board of directors are permitted to call a special meeting of stockholders. The
certificate of incorporation also provides that the board of directors is
divided into three classes, with each director assigned to a class with a term
of three years, and that the number of directors may only be determined by the
board of directors. The bylaws also require that stockholders give advance
notice to Kana's Secretary of any nominations for director or other business to
be brought by stockholders at any stockholders' meeting, and that the Chairman
has the authority to adjourn any meeting of the stockholders. The bylaws also
require a supermajority vote of members of the board of directors and/or
stockholders to amend certain bylaw provisions. These provisions of the
certificate of incorporation and the bylaws could discourage potential
acquisition proposals and could delay or prevent a change in control of Kana.
These provisions also may have the effect of preventing changes in the
management of Kana. See "Risk Factors--Our executive officers and directors
will exercise significant control over stockholder voting matters" and "--We
have adopted anti-takeover defenses that could delay or prevent an acquisition
of our company".
Kana is subject to Section 203 of the Delaware General Corporation Law,
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that the stockholder became an
interested stockholder, unless:
. prior to that date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned:
(i) by persons who are directors and also officers; and
(ii) by employee stock plans in which employee participants do not have
the right to determine confidentially whether shares held subject to
the plan will be tendered in a tender or exchange offer; or
. on or subsequent to that date, the business combination is approved by
the board of directors of the corporation and authorized at an annual or
special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock
that is not owned by the interested stockholder.
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<PAGE>
Section 203 defines "business combination" to include the following:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
. subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series
of the corporation beneficially owned by the interested stockholder; or
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by any of these entities or persons.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the common stock is ChaseMellon
Shareholder Services, L.L.C. Its address is 235 Montgomery Street, 23rd Floor,
San Francisco, California 94109, and its telephone number at this location is
(415) 743-1444.
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<PAGE>
SHARES AVAILABLE FOR FUTURE SALE
Prior to this offering, there has been no public market for Kana's common
stock, and Kana cannot predict the effect, if any, that market sales of shares
of common stock or the availability of shares of common stock for sale will
have on the market price of the common stock prevailing from time to time.
Nevertheless, sales of substantial amounts of common stock in the public market
could adversely affect the market price of Kana's common stock and could impair
Kana's future ability to raise capital through the sale of Kana's equity
securities.
Upon the completion of this offering, Kana will have shares of common
stock outstanding, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options. Of the outstanding shares, all
of the shares sold in this offering will be freely tradable, except that any
shares held by Kana's "affiliates," as that term is defined in Rule 144
promulgated under the Securities Act, may only be sold in compliance with the
limitations described below. The remaining 30,736,568 shares of common stock
will be deemed "restricted securities" as defined under Rule 144. Restricted
shares may be sold in the public market only if registered or if they qualify
for an exemption from registration under Rules 144, 144(k) or 701 promulgated
under the Securities Act, which rules are summarized below. Subject to the
lock-up agreements described below and the provisions of Rules 144, 144(k) and
701, additional shares will be available for sale in the public market as
follows:
<TABLE>
<CAPTION>
Number of
Shares Date
--------- ----
<C> <S>
After the date of this prospectus, freely tradable shares sold in
this offering and shares saleable under Rule 144(k) that are not
subject to the 180-day lock-up
24,402,670 After 180 days from the date of this prospectus, the 180-day lock-
up terminates and these shares are saleable under Rule 144
(subject, in some cases, to volume limitations) or Rule 144(k)
6,333,898 After 180 days from the date of this prospectus, the 180-day lock-
up is released and these shares are saleable under Rule 701
(subject to repurchase by the Company)
1,257,708 After 180 days from the date of this prospectus, restricted
securities that are held for less than one year and are not yet
saleable under Rule 144
</TABLE>
Rule 144
In general, under Rule 144 as currently in effect, a person, or group of
persons whose shares are required to be aggregated, including an affiliate of
Kana, who has beneficially owned shares for at least one year is entitled to
sell within any three-month period commencing 90 days after the date of this
prospectus, a number of shares that does not exceed the greater of one percent
of the then-outstanding shares of Kana's common stock, which will be
approximately shares immediately after this offering, or the average weekly
trading volume in Kana's common stock during the four calendar weeks preceding
the date on which notice of such sale is filed, subject to certain
restrictions. In addition, a person who is not deemed to have been an affiliate
at any time during the 90 days preceding a sale and who has beneficially owned
the shares proposed to be sold for at least two years would be entitled to sell
these shares under Rule 144(k) without regard to the requirements described
above. To the extent that shares were acquired from one of Kana's affiliates, a
person's holding period for the purpose of effecting a sale under Rule 144
would commence on the date of transfer from the affiliate.
Stock Options
As of June 30, 1999, options to purchase a total of 264,800 shares of
common stock were outstanding, all of which were currently exercisable. Kana
intends to file a Form S-8 registration
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<PAGE>
statement under the Securities Act to register all shares of common stock
issuable under its 1999 Stock Incentive Plan and its 1999 Employee Stock
Purchase Plan. Accordingly, shares of common stock underlying these options
will be eligible for sale in the public markets, subject to vesting
restrictions or the lock-up agreement described below. See "Management--Benefit
Plans".
Lock-up Agreements
Kana, each of its officers and directors who hold shares of common stock
and substantially all of its securityholders have agreed, subject to specified
exceptions, not to, without the prior written consent of Goldman, Sachs & Co.,
sell or otherwise dispose of any shares of Kana's common stock or options to
acquire shares of Kana's common stock during the 180-day period following the
date of this prospectus. Goldman, Sachs & Co. may, in its sole discretion and
at any time without notice, release all or any portion of the securities
subject to lock-up agreements. See "Underwriting".
Following this offering, under specified circumstances and subject to
customary conditions, holders of 24,401,670 shares of Kana's outstanding common
stock will have demand registration rights with respect to their shares of
common stock, subject to the 180-day lock-up arrangement described above, to
require Kana to register their shares of common stock under the Securities Act,
or rights to participate in any future registration of securities by Kana. If
the holders of these registrable securities request that Kana register their
shares, and if the registration is effected, these shares will become freely
tradable without restriction under the Securities Act. Any sales of securities
by these stockholders could have a material adverse effect on the trading price
of Kana's common stock. See "Description of Capital Stock--Registration
Rights".
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<PAGE>
LEGAL MATTERS
The validity of the common stock offered will be passed upon for Kana by
Brobeck, Phleger & Harrison LLP, Palo Alto, California. Members of the firm
Brobeck, Phleger & Harrison LLP beneficially own an aggregate of 25,000 shares
of Kana's common stock. Certain legal matters in connection with the offering
will be passed upon for the underwriters by Fenwick & West LLP, Palo Alto,
California.
CHANGE IN ACCOUNTANTS
PricewaterhouseCoopers LLP was previously the principal accountant for
Kana. On July 29, 1998, PricewaterhouseCoopers LLP was dismissed as principal
accountant and KPMG LLP was engaged to audit Kana's financial statements. The
board of directors has approved the appointment of KPMG LLP as principal
accountant for Kana.
In connection with the audits for the year ended December 31, 1997 and for
the period from July 11, 1996 (inception) through December 31, 1996, there were
no disagreements with PricewaterhouseCoopers LLP on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedures, which, if not resolved to PricewaterhouseCoopers' LLP's
satisfaction, would have caused them to reference the subject matter of the
disagreement in their opinion.
The audit report of PricewaterhouseCoopers LLP on Kana's financial
statements as of and for the year ended December 31, 1997 did not contain any
adverse opinion or disclaimer of opinion, nor were they qualified or modified
as to uncertainty, audit scope or accounting principles.
EXPERTS
The consolidated financial statements of Kana Communications, Inc. and
subsidiary as of December 31, 1997 and 1998 and for each of the years then
ended have been included in this prospectus and in the registration statement
in reliance upon the report of KPMG LLP, independent auditors, appearing
elsewhere in this prospectus, and upon the authority of said firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, under the Securities Act a registration statement on Form S-1 relating
to the common stock offered. 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 Kana and the shares we are
offering under this prospectus you should refer to the registration statement
and its exhibits and schedule. Statements contained in this prospectus as to
the contents of any contract, agreement or other document referred to are not
necessarily complete, and you should refer to the copy of that contract or
other document filed as an exhibit to the registration statement. You may read
or obtain a copy of the registration statement at the Commission's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may
obtain information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. The Commission maintains a Web site that contains
reports, proxy statements and other information that registrants file
electronically with the Commission. The address of this Web site is
http://www.sec.gov.
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Kana intends to furnish holders of its common stock with annual reports
containing, among other information, audited consolidated financial statements
certified by an independent public accounting firm and quarterly reports
containing unaudited condensed consolidated financial information for the first
three quarters of each fiscal year. Kana intends to furnish other reports as it
may determine or as may be required by law.
Information contained in Kana's Web site is not a prospectus and does not
constitute a part of this prospectus.
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KANA COMMUNICATIONS, INC. AND SUBSIDIARY
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Form of Independent Auditors' Report....................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations and Other Comprehensive Loss......... F-4
Consolidated Statements of Stockholders' Equity............................ F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
Form of Independent Auditors' Report
The Board of Directors
Kana Communications, Inc.
When the reincorporation described in Note 7(b) is consummated, we will be
in a position to render the following report.
/s/ KPMG LLP
We have audited the accompanying consolidated balance sheets of
Kana Communications, Inc. and subsidiary (the Company) as of
December 31, 1997 and 1998, and the related consolidated
statements of operations and other comprehensive loss,
stockholders' equity, and cash flows for each of 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
consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
consolidated 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 Kana Communications, Inc. and subsidiary as of
December 31, 1997 and 1998, and the results of their operations
and their cash flows for each of the years then ended in
conformity with generally accepted accounting principles.
Mountain View, California
June 25, 1999, except as to Note 7,
which is as of July 8, 1999
F-2
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
---------------- March 31,
1997 1998 1999
------- ------- -----------
(Unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents...................... $ 3,303 $ 9,792 $ 8,471
Short-term investments......................... 210 160 160
Accounts receivable............................ -- 817 1,023
Prepaid expenses and other current assets...... 37 96 156
------- ------- -------
Total current assets......................... 3,550 10,865 9,810
Property and equipment, net...................... 261 943 1,171
Other assets..................................... 13 161 157
------- ------- -------
Total assets................................. $ 3,824 $11,969 $11,138
======= ======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of notes payable............... $ 34 $ 360 $ 360
Accounts payable............................... 130 253 470
Accrued payroll and related expenses........... 37 285 454
Other accrued liabilities...................... 68 263 333
Deferred revenue............................... -- 410 627
------- ------- -------
Total current liabilities.................... 269 1,571 2,244
Notes payable, less current portion.............. 51 360 360
------- ------- -------
Total liabilities............................ 320 1,931 2,604
------- ------- -------
Commitments
Stockholders' equity:
Convertible preferred stock, $0.001 par value;
29,000,000, 50,000,000, and 50,000,000 shares
authorized; 13,376,782 18,768,962, and
18,768,962 shares issued and outstanding;
aggregate liquidation preference of $4,795,
$16,524, and $16,524.......................... 13 19 19
Common stock, $0.001 par value; 40,000,000,
60,000,000, and 60,000,000 shares authorized;
4,456,000, 8,288,107, and 8,357,607 shares
issued and outstanding........................ 4 8 8
Additional paid-in capital..................... 5,654 19,335 22,797
Deferred stock-based compensation.............. (784) (1,444) (4,463)
Notes receivable from stockholders............. -- (155) (243)
Accumulated other comprehensive losses......... -- (5) (19)
Accumulated deficit............................ (1,383) (7,720) (9,565)
------- ------- -------
Total stockholders' equity................... 3,504 10,038 8,534
------- ------- -------
Total liabilities and stockholders' equity... $ 3,824 $11,969 $11,138
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended Three Months Ended
December 31, March 31,
---------------- --------------------
1997 1998 1998 1999
------- ------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
License.............................. $ -- $ 1,793 $ 161 $ 1,165
Service.............................. -- 256 16 258
------- ------- --------- ---------
Total revenues..................... -- 2,049 177 1,423
------- ------- --------- ---------
Cost of revenues:
License.............................. -- 54 4 34
Service.............................. -- 519 26 402
------- ------- --------- ---------
Total cost of revenues............. -- 573 30 436
------- ------- --------- ---------
Gross profit....................... -- 1,476 147 987
------- ------- --------- ---------
Operating expenses:
Sales and marketing.................. 366 3,796 498 1,539
Research and development............. 699 2,254 403 823
General and administrative........... 257 721 104 227
Amortization of stock-based
compensation........................ 113 1,230 184 355
------- ------- --------- ---------
Total operating expenses........... 1,435 8,001 1,189 2,944
------- ------- --------- ---------
Operating loss..................... (1,435) (6,525) (1,042) (1,957)
Other income, net...................... 52 188 30 112
------- ------- --------- ---------
Net loss........................... (1,383) (6,337) (1,012) (1,845)
Other comprehensive loss............... -- (5) -- (14)
------- ------- --------- ---------
Comprehensive loss................. $(1,383) $(6,342) $ (1,012) $ (1,859)
======= ======= ========= =========
Net loss per share:
Basic and diluted.................... $ (0.62) $ (2.48) $ (0.55) $ (0.47)
======= ======= ========= =========
Weighted-average shares used in
computation......................... 2,246 2,555 1,824 3,939
======= ======= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Convertible Notes Accumulated
Preferred Stock Common Stock Additional Deferred Receivable Other Total
----------------- ----------------- Paid-in Stock-based from Comprehensive Accumulated Stockholders'
Shares Amount Shares Amount Capital Compensation Stockholders Losses Deficit Equity
---------- ------ --------- ------ ---------- ------------ ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
common stock to
founders........ -- $-- 5,000,000 $ 5 $ (4) $ -- $ -- $-- $ -- $ 1
Issuance of
common stock
upon exercise of
stock options... -- -- 80,000 -- -- -- -- -- -- --
Repurchase of
founders' common
stock, net...... -- (625,000) (1) 1 -- -- -- -- --
Issuance of
Series A
convertible
preferred stock,
net............. 5,923,078 6 -- -- 754 -- -- -- -- 760
Issuance of
shares of common
stock in
exchange for
services ....... -- 1,000 -- 7 -- -- -- -- 7
Issuance of
Series B
convertible
preferred stock,
net............. 7,453,704 7 -- -- 4,006 -- -- -- -- 4,013
Deferred stock-
based
compensation.... -- -- -- -- 890 (890) -- -- -- --
Amortization of
stock-based
compensation.... -- -- -- -- -- 106 -- -- -- 106
Net loss........ -- -- -- -- -- -- -- -- (1,383) (1,383)
---------- ---- --------- --- ------- ------- ----- ---- ------- -------
Balances,
December 31,
1997............ 13,376,782 13 4,456,000 4 5,654 (784) -- -- (1,383) 3,504
Issuance of
common stock
upon exercise of
stock options,
net of
repurchases..... -- -- 3,832,107 4 169 -- (155) -- -- 18
Issuance of
Series A
convertible
preferred stock
upon exercise of
warrant......... 102,208 -- -- -- -- -- -- -- -- --
Issuance of
Series B
convertible
preferred stock,
net............. 168,824 1 -- -- 90 -- -- -- -- 91
Issuance of
Series C
convertible
preferred stock,
net............. 5,121,148 5 -- -- 11,532 -- -- -- -- 11,537
Deferred stock-
based
compensation.... -- -- -- -- 1,890 (1,890) -- -- -- --
Amortization of
stock-based
compensation.... -- -- -- -- -- 1,230 -- -- -- 1,230
Other
comprehensive
loss............ -- -- -- -- -- -- -- (5) -- (5)
Net loss........ -- -- -- -- -- -- -- -- (6,337) (6,337)
---------- ---- --------- --- ------- ------- ----- ---- ------- -------
Balances,
December 31,
1998............ 18,768,962 19 8,288,107 8 19,335 (1,444) (155) (5) (7,720) 10,038
Issuance of
common stock
upon exercise of
stock options,
net of
repurchases
(unaudited)..... -- -- 69,500 -- 88 -- (88) -- --
Deferred stock-
based
compensation
(unaudited)..... -- -- -- -- 3,374 (3,374) -- -- -- --
Amortization of
stock-based
compensation
(unaudited)..... -- -- -- -- -- 355 -- -- -- 355
Other
comprehensive
loss
(unaudited)..... -- -- -- -- -- -- (14) (14)
Net loss
(unaudited)..... -- -- -- -- -- -- -- -- (1,845) (1,845)
---------- ---- --------- --- ------- ------- ----- ---- ------- -------
Balances, March
31, 1999
(unaudited)..... 18,768,962 $ 19 8,357,607 $ 8 $22,797 $(4,463) $(243) $(19) $(9,565) $ 8,534
========== ==== ========= === ======= ======= ===== ==== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended Three Months Ended
December 31, March 31,
---------------- --------------------
1997 1998 1998 1999
------- ------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................. $(1,383) $(6,337) $ (1,012) $ (1,845)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization........ 27 222 32 103
Amortization of stock-based
compensation........................ 113 1,230 184 355
Changes in operating assets and
liabilities:
Accounts receivable................. -- (817) (139) (206)
Prepaid expenses and other assets... (50) (207) -- (56)
Accounts payable and accrued
liabilities........................ 235 566 218 442
Deferred revenue.................... -- 410 21 217
------- ------- --------- ---------
Net cash used in operating
activities......................... (1,058) (4,933) (696) (990)
------- ------- --------- ---------
Cash flows from investing activities:
Property and equipment purchases...... (288) (904) (185) (331)
(Purchases) sales of short-term
investments.......................... (210) 50 -- --
------- ------- --------- ---------
Net cash used in investing
activities......................... (498) (854) (185) (331)
------- ------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common
stock................................ 1 13 -- --
Proceeds from issuance of convertible
preferred stock, net................. 4,603 11,628 -- --
Proceeds from convertible notes
payable.............................. 170 -- -- --
Proceeds from notes payable........... 85 720 437 --
Payments on notes payable............. -- (85) -- --
------- ------- --------- ---------
Net cash provided by financing
activities......................... 4,859 12,276 437 --
------- ------- --------- ---------
Net change in cash and cash
equivalents........................... 3,303 6,489 (444) (1,321)
Cash and cash equivalents at beginning
of period............................. -- 3,303 3,303 9,792
------- ------- --------- ---------
Cash and cash equivalents at end of
period................................ $ 3,303 $ 9,792 $ 2,859 $ 8,471
======= ======= ========= =========
Supplemental disclosure of cash flow
information:
Cash paid during period for interest.. $ 3 $ 36 $ 9 $ 17
======= ======= ========= =========
Noncash investing and financial
activities:
Issuance of Series A convertible
preferred stock upon conversion of
stockholder loan.................... $ 170 $ -- $ -- $ --
======= ======= ========= =========
Issuance of common stock in exchange
for notes receivable from
stockholders........................ $ -- $ 155 $ -- $ 88
======= ======= ========= =========
Grant of options to purchase common
stock with an exercise price below
fair value.......................... $ 890 $ 1,890 $ 673 $ 3,374
======= ======= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1998
(Information with respect to March 31, 1998 and 1999 is unaudited)
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
Kana Communications, Inc. and subsidiary (the Company) was incorporated on
July 11, 1996, but did not commence operations until 1997. The Company
develops, markets and supports an integrated suite of e-Business infrastructure
solutions addressing online customer interactions. The Company sells its
products primarily in the United States and, to a lesser extent, in Europe,
through its direct sales force.
(b) Basis of Presentation
The accompanying consolidated financial statements have been prepared using
an inception date of January 1, 1997, as no significant operating activities
occurred between July 11, 1996 and December 31, 1996. The consolidated
financial statements include the financial statements of Kana Communications,
Inc. and its wholly owned subsidiary, Kana Communications Europe Ltd., in the
United Kingdom. All significant intercompany balances and transactions have
been eliminated in consolidation.
(c) Interim Financial Statements
The unaudited interim consolidated financial statements of the Company as
of March 31, 1999 and for the three months ended March 31, 1998 and 1999
included herein have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). Certain
information and note 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 relating to interim
financial statements.
In the opinion of management, the accompanying unaudited interim
consolidated financial statements reflect all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial
position of the Company as of March 31, 1999, and the results of its operations
and its cash flows for the three months ended March 31, 1998 and 1999. Results
for the three months ended March 31, 1999 are not necessarily indicative of the
results to be expected for the entire year.
(d) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
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.
(e) Foreign Currency Translation
The functional currency for the Company's international subsidiary is the
local currency of the country in which it operates. Assets and liabilities are
translated using the exchange rate at the balance sheet date. Revenues,
expenses, gains, and losses are translated at the exchange rate on the date
those elements are recognized. Any translation adjustments are included in
other comprehensive loss.
F-7
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998
(Information with respect to March 31, 1998 and 1999 is unaudited)
(f) Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments with an original
maturity or reset date of three months or less to be cash equivalents. As of
December 31, 1997 and 1998 and March 31, 1999, cash equivalents consisted of
auction-rate securities and money market funds in the amounts of $3,213,000,
$9,647,000, and $8,299,000, respectively. The contractual maturities for the
auction-rate securities exceed 10 years; however, the Company has the option of
adjusting the interest rates or liquidating these investments on their
respective reset dates, which generally occur every 30 days.
The Company has classified its cash equivalents and short-term investments
as "available for sale." These items are carried at fair value, based on the
quoted market prices, and unrealized gains and losses, if material, are
reported as a separate component of accumulated other comprehensive income
(losses) in stockholders' equity. Because of the short-term nature of the
Company's cash equivalents and short-term investments, realized and unrealized
gains and losses have been immaterial to date. The Company's short-term
investments consisted of certificates of deposit with contractual maturities of
less than one year.
As of December 31, 1998, the Company has an outstanding standby letter of
credit for $150,000 to secure deposits on its current facility. The letter of
credit expired on January 15, 1999 and was secured by a certificate of deposit.
(g) Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method over
the estimated useful lives of the respective assets, generally three to five
years. Leasehold improvements are amortized over the lesser of the related
lease term or the life of the improvement.
The Company evaluates long-lived assets for impairment whenever changes in
circumstances indicate that the carrying amount of the asset 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 net cash flows expected
to be generated by the asset. If assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amounts exceed the fair values of the assets. Assets to be disposed of are
reported at the lower of carrying values or fair values, less costs of
disposal.
(h) Fair Value of Financial Instruments
The fair values of the Company's cash, cash equivalents, short-term
investments, accounts receivable, accounts payable and notes payable
approximate their carrying values due to the short maturity or variable rate
structure of those instruments.
(i) Concentration of Credit Risk
Financial instruments subjecting the Company to concentrations of credit
risk consist primarily of cash and cash equivalents, short-term investments and
trade accounts receivable. The Company maintains cash and cash equivalents with
two domestic financial institutions. From time to time, the Company's cash
balances with its financial institutions may exceed Federal Deposit Insurance
Corporation insurance limits.
F-8
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998
(Information with respect to March 31, 1998 and 1999 is unaudited)
The Company's customers are currently concentrated in the United States.
The Company performs ongoing credit evaluations, generally does not require
collateral and establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of customers, historical trends and other
information. To date, such losses have been immaterial.
(j) Revenue Recognition
The Company recognizes revenue in accordance with Statement of Position
(SOP) No. 97-2, Software Revenue Recognition. SOP No. 97-2 requires that
revenue recognized from software arrangements be allocated to each element of
the arrangement based on the relative fair values of the elements, such as
software products, upgrades, enhancements, post contract customer support,
installation, or training. Under SOP No. 97-2, the determination of fair value
is based on objective evidence that is specific to the vendor. If evidence of
fair value for each element of the arrangement does not exist, all revenue from
the arrangement is deferred until such time as evidence of fair value does
exist or until all elements of the arrangement are delivered.
License revenue is recognized when there is persuasive evidence of an
arrangement and delivery to the customer has occurred, provided the arrangement
does not require significant customization of the software, the fee is fixed
and determinable, and collectibility is considered probable. Maintenance
contracts generally call for the Company to provide technical support and
software updates and upgrades to customers. Revenue from maintenance contracts
is recognized ratably over the term of the maintenance contract, on a straight-
line basis.
(k) Software Development Costs
Software development costs are expensed as incurred until technological
feasibility of the underlying software product is achieved. After technological
feasibility is established, software development costs are capitalized.
Capitalized costs are then amortized on a straight-line basis over the
estimated product life, or based on the ratio of current revenue to total
projected product revenue, whichever is greater. To date, the period between
achieving technological feasibility and general availability of such software
has been short and software development costs qualifying for capitalization
have been insignificant. Accordingly, the Company has not capitalized any
software development costs.
(l) Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized
in the statement of operations in the period that includes the enactment date.
(m) Stock-Based Compensation
The Company accounts for its stock-based compensation arrangements with
employees using the intrinsic-value method. Deferred stock-based compensation
is recorded on the date of grant when the deemed fair value of the underlying
common stock exceeds the exercise price for stock options or the purchase price
for the shares of common stock.
F-9
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998
(Information with respect to March 31, 1998 and 1999 is unaudited)
Deferred stock-based compensation resulting from employee and nonemployee
option grants is amortized on an accelerated basis over the vesting period of
the individual options, generally four years, in accordance with Financial
Accounting Standards Board Interpretation No. 28.
(n) Comprehensive Loss
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income. SFAS 130
establishes standards of reporting and display of comprehensive income and its
components of net income and "Other Comprehensive Loss" in a full set of
general purpose financial statements. Other comprehensive loss refers to
revenues, expenses, gains and losses that are not included in net income but
rather are recorded directly to stockholders' equity. Other comprehensive loss
recorded by the Company for the year ended December 31, 1998 and the three
months ended March 31, 1999 was attributable to foreign currency translation
adjustments for the Company's U.K. subsidiary. Tax effects of comprehensive
loss are not material.
(o) Net Loss Per Share
Basic net loss per share is computed using the weighted-average number of
outstanding shares of common stock. Diluted net loss per share is computed
using the weighted-average number of outstanding shares of common stock and,
when dilutive, potential common shares from options and warrants to purchase
common stock using the treasury stock method, and from convertible securities
using the as-if converted basis. All potential common shares have been excluded
from the computation of diluted net loss per share for all periods presented
because the effect would have been antidilutive.
Diluted net loss per share does not include the effect of the following
antidilutive common equivalent shares:
<TABLE>
<CAPTION>
Years Ended December Three Months Ended
31, March 31,
--------------------- ---------------------
1997 1998 1998 1999
---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Stock options and warrants.... 2,682,473 225,300 3,426,858 316,300
Common stock subject to
repurchase................... 2,734,373 4,709,156 2,552,081 4,244,855
Convertible preferred stock .. 13,376,782 18,768,962 13,478,990 18,768,962
---------- ---------- ---------- ----------
18,793,628 23,703,418 19,457,929 23,330,117
========== ========== ========== ==========
</TABLE>
(p) Segment Reporting
During 1998, the Company adopted the provisions of SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information. SFAS No.
131 establishes annual and interim reporting standards for operating segments
of a company. SFAS No. 131 requires disclosures of selected segment-related
financial information about products, major customers, and geographic areas.
The Company is organized in a single operating segment for purposes of making
operating decisions or assessing performance. The chief operating decision
maker evaluates performance, makes operating decisions, and allocates resources
based on financial data consistent with the presentation in the accompanying
consolidated financial statements.
F-10
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998
(Information with respect to March 31, 1998 and 1999 is unaudited)
The Company's revenues have been earned primarily from customers in the
United States. In addition, all significant operations and assets are based in
the United States. No customer accounted for more than 10% of revenues for the
year ended December 31, 1998 and the three month period ended March 31, 1999.
In the three month period ended March 31, 1998, six customers each accounted
for more than 10% of total revenues.
(q) Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative and
Hedging Activities, effective for fiscal years beginning after June 15, 1999.
This standard requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measures those instruments at
fair value. The type and use of the derivative, and whether it qualifies for
hedge accounting, will determine the treatment of gains or losses resulting
from changes in the derivative. The Company believes the adoption of SFAS No.
133 will not have a material effect on its results of operations, financial
position, or cash flows. The statement will be effective for the Company
beginning January 1, 2000.
In December 1998, the American Institute of Certified Public Accountants
issued SOP No. 98-9, Modification of SOP No. 97-2, Software Revenue Recognition
with Respect to Certain Transactions. SOP No. 98-9 amends SOP No. 97-2 to
require the entity to recognize revenue for multiple element arrangements by
means of the "residual method" when: 1) there is vendor-specific evidence of
the fair values of all of the undelivered elements that are not accounted for
by means of long-term contract accounting; 2) vendor-specific evidence of fair
value does not exist for one or more of the delivered elements; and 3) all
revenue recognition criteria of SOP No. 97-2, other than the requirement for
vendor-specific evidence of the fair value of each delivered element, are
satisfied. SOP No. 98-9 will be effective beginning January 1, 2000. The
Company believes the adoption of SOP No. 98-9 will not have a material effect
on its results of operations, financial position or cash flows.
(2) Property and Equipment
Property and equipment as of December 31, 1997 and 1998 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1997 1998
---- ------
<S> <C> <C>
Computer equipment.............................................. $220 $ 810
Furniture and fixtures.......................................... 20 141
Leasehold improvements.......................................... 48 241
---- ------
288 1,192
Less accumulated depreciation and amortization.................. 27 249
---- ------
$261 $ 943
==== ======
</TABLE>
(3) Notes Payable
On January 23, 1998, the Company obtained a $1,000,000 line of credit from
a bank, of which up to $750,000 could be used for qualified property and
equipment purchases and $250,000 for working capital financing. Borrowings
under the line of credit are collateralized by all of the Company's assets and
bear interest at the bank's prime rate (7.75% as of December 31, 1998). The
F-11
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998
(Information with respect to March 31, 1998 and 1999 is unaudited)
Company was able to draw against the line of credit through January 22, 1999,
after which all borrowings are to be repaid in 24 equal monthly installments.
As of December 31, 1998, $720,000 was outstanding under this agreement. The
aggregate principal payments due under the line of credit subsequent to
December 31, 1998 are as follows: 1999, $360,000 and 2000, $360,000.
As of December 31, 1997, notes payable of $85,000 consisted of amounts due
under a $100,000 line of credit with a bank. The line of credit was fully paid
during 1998.
(4) Stockholders' Equity
(a) Convertible Preferred Stock
Convertible preferred stock as of December 31, 1998, consisted of the
following:
<TABLE>
<CAPTION>
Noncumulative Liquidation
Shares Dividend Preference
Outstanding per Share per Share
----------- ------------- -----------
<S> <C> <C> <C>
Series A............................... 6,025,286 $0.01 $0.13
Series B............................... 7,622,528 0.04 0.54
Series C............................... 5,121,148 0.18 2.27
----------
18,768,962
==========
</TABLE>
Each share of Series A, B, and C preferred stock is convertible at the
option of the holder into one share of common stock at any time, subject to
adjustment for antidilution. Each share of Series A, B, and C preferred stock
will be automatically converted upon written consent or agreement of holders of
at least two-thirds of the outstanding preferred shares or upon an initial
public offering of the Company's common stock. Each share of Series A, B, and C
preferred stock has voting rights equal to one share of common stock on an as-
if converted basis.
No dividends have been declared or paid on either preferred stock or common
stock since inception of the Company.
In connection with the Series A preferred stock issuance, the Company
issued a warrant to two investors to purchase 134,615 shares of Series A
preferred stock with an exercise price of $0.13 per share. The warrants were
exercisable any time prior to April 7, 1998. The fair value of the warrants
computed using the Black-Scholes option pricing model on the date of grant was
not material. In lieu of paying cash upon exercise of the warrants in 1998, the
warrant holders surrendered 32,407 shares of Series A perferred stock back to
the Company.
(b) Common Stock
The Company has issued to the Company's founders 5,000,000 shares of common
stock, which are subject to repurchase on termination of employment. Such
repurchase rights lapse in a series of equal monthly installments over a four
year period ending June 4, 2000. As of December 31, 1998, 1,550,000 shares were
subject to repurchase. During 1997, the Company repurchased a net of 625,000
shares from one founder at the original exercise price of $0.0001 per share.
F-12
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998
(Information with respect to March 31, 1998 and 1999 is unaudited)
Certain option holders have exercised options to purchase shares of
restricted common stock in exchange for five-year full recourse promissory
notes. The notes bear interest at 5.7% and expire on various dates through
2004. The Company has the right to repurchase all unvested shares purchased by
the notes at the original exercise price in the event of employee termination.
The number of shares subject to this repurchase right decreases as the shares
vest under the original option terms, generally over four years. As of December
31, 1998, there were 3,068,535 shares subject to repurchase. These options were
exercised at prices ranging from $0.01 to $0.23 with a weighted-average
exercise price of $0.04 per share. The options exercised to date have a
weighted-average fair value of $0.70 per share.
(c) Stock Option Plan
The Company's 1997 Stock Option Plan (the 1997 Plan) provides for stock
options to be granted to employees, independent contractors, officers, and
directors. Options are generally granted at an exercise price equivalent to the
estimated fair market value per share at the date of grant, as determined by
the Company's Board of Directors. All options are granted at the discretion of
the Company's Board of Directors and have a term not greater than 10 years from
the date of grant. Options are immediately exercisable and generally vest over
four years, 25% one year after the grant date and the remainder at a rate of
1/36 per month thereafter.
A summary of stock option activity follows:
<TABLE>
<CAPTION>
Years Ended
-------------------------------------------- Three Months Ended
1997 1998 March 31, 1999
--------------------- ---------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Options Exercise Options Exercise
Outstanding Price Outstanding Price Outstanding Price
----------- --------- ----------- --------- ----------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. -- $0.01 2,547,858 $0.03 225,300 $0.06
Options granted........ 2,627,858 0.03 1,734,549 0.07 550,500 0.24
Options exercised...... (80,000) 0.01 (3,892,107) 0.05 (439,500) 0.23
Options canceled....... -- -- (165,000) 0.05 (20,000) 0.23
--------- ---------- --------
Outstanding at end of
period................. 2,547,858 0.03 225,300 0.06 316,300 0.08
========= ========== ========
Shares available for
future grant........... 1,858,142 1,198,593 943,302
========= ========== ========
</TABLE>
At December 31, 1998, the range of exercise prices and the weighted-average
remaining contractual life of outstanding options was $0.02 to $0.23 and 9.18
years, respectively.
At December 31, 1997 and 1998, the number of vested shares under options
was 319,747 and 169,900, respectively, and the weighted-average exercise price
of those options was $0.03 and $0.05, respectively.
The Company uses the intrinsic-value method in accounting for its stock-
based compensation plans. Accordingly, compensation cost has been recognized in
the financial statements for those
F-13
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998
(Information with respect to March 31, 1998 and 1999 is unaudited)
options issued with exercise prices at less than fair value at date of grant.
With respect to the stock options granted from inception through March 31,
1999, the Company recorded deferred stock-based compensation of $6,154,000 for
the difference at the grant date between the exercise price and the fair value
of the common stock underlying the options. Had compensation costs been
determined in accordance with SFAS No. 123 for all of the Company's stock-based
compensation plans, net loss and basic and diluted net loss per share would not
have been materially impacted.
The Company calculated the fair value of each option grant on the grant
date using the minimum value method with the following assumptions: dividend
yield at 0%; weighted-average expected option term of three years; risk-free
interest rate of 6.22% and 5.15% for the years ended December 31, 1997 and
1998, respectively. The weighted-average fair value of options granted during
1997 and 1998 was $0.34 and $1.22 per share, respectively.
(5) Commitments
The Company leases its facilities under noncancelable operating leases with
various expiration dates through June 30, 2003. The Company also subleases its
previous facility under a noncancelable sublease expiring in January 2003. Rent
expense, net of sublease payments, was $37,000 and $360,000 for the years ended
December 31, 1997 and 1998, respectively. Sublease payments approximated
$113,000 in the year ended December 31, 1998.
Future minimum lease payments under noncancelable operating leases and
subleases, as of December 31, 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
Year ending Operating
December 31, Leases Subleases
------------ --------- ---------
<S> <C> <C>
1999................................................... $ 794 $244
2000................................................... 809 209
2001................................................... 834 218
2002................................................... 860 227
2003................................................... 342 --
------ ----
$3,639 $898
====== ====
</TABLE>
(6) Income Taxes
The 1997 and 1998 income tax expense differed from the amounts computed by
applying the U.S. federal income tax rate of 34% to pretax income as a result
of the following (in thousands):
<TABLE>
<CAPTION>
1997 1998
----- -------
<S> <C> <C>
Federal tax benefit at statutory rate...................... $(424) $(1,736)
Current year net operating loss and temporary differences
for which no benefit has been recognized.................. 424 1,736
----- -------
Total.................................................... $ -- $ --
===== =======
</TABLE>
F-14
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998
(Information with respect to March 31, 1998 and 1999 is unaudited)
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>
1997 1998
---- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss and credit carryforwards................. $567 $2,682
Accruals and reserves....................................... 23 77
---- -------
Total gross deferred tax assets........................... 590 2,759
Valuation allowance......................................... (590) (2,759)
---- -------
Total deferred tax assets................................. $-- $ --
==== =======
</TABLE>
Management has established a full valuation allowance against its net
deferred tax assets because it is more likely than not that sufficient taxable
income will not be generated during the carryforward periods.
As of December 31, 1998, the Company had net operating loss carryforwards
for federal and California income tax purposes of approximately $6,146,000 and
$6,143,000, respectively. The federal net operating loss carryforwards, if not
offset against future taxable income, will expire from 2011 through 2018. The
California net operating loss carryforwards, if not offset against future
taxable income, expire in 2004.
As of December 31, 1998, unused research and development tax credits of
approximately $27,000 and $23,000 were available to reduce future federal and
California income taxes, respectively. Federal credit carryforwards expire from
2011 through 2012; California credits will carry forward indefinitely.
The Tax Reform Act of 1986 imposes substantial restrictions on the
utilization of net operating losses and tax credits in the event of an
"ownership change" as defined. Some of the U.S. federal and California net
operating loss carryforwards are subject to limitation as a result of these
restrictions. The ownership change restrictions are not expected to impair the
Company's ability to utilize the affected carryforward items. If there should
be a subsequent ownership change, as defined, of the Company, its ability to
utilize its carryforwards could be reduced.
(7) Subsequent Events
(a) Initial Public Offering
On July 7, 1999, the Company's Board of Directors authorized the filing of
a registration statement with the SEC that would permit the Company to sell
shares of the Company's common stock in connection with a proposed initial
public offering (IPO). If the IPO is consummated under the terms presently
anticipated, upon the closing of the proposed IPO all of the then outstanding
shares of the Company's convertible preferred stock will automatically convert
into shares of common stock based on their respective conversion ratios.
F-15
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998
(Information with respect to March 31, 1998 and 1999 is unaudited)
(b) Reincorporation
On July 7, 1999, the Company's Board of Directors authorized the
reincorporation of the Company into the State of Delaware. As part of the
reincorporation the common stock will be assigned a par value equal to $0.001
per share. The accompanying financial statements have been retroactively
restated to reflect the effect of this reincorporation.
(c) Stock Plans
On July 7, 1999, the Company's Board of Directors approved the 1999 Stock
Incentive Plan (the 1999 Plan), which will serve as the successor plan to the
1997 Plan. The Board of Directors also approved a 1999 Employee Stock Purchase
Plan (the 1999 ESPP). These plans will become effective immediately prior to
the anticipated IPO. The common stock reserved for future issuances under these
plans will be 18% of the shares of common stock outstanding immediately after
the IPO. Additionally, the share reserve in each plan will automatically
increase on the first trading day in January each year, beginning with calendar
year 2000, equal to the lesser of (i) the number of shares initially reserved
for such increase in each respective plan, (ii) 4.25% and 0.75% of the then
outstanding shares for the 1999 Plan and the 1999 ESPP, respectively, or (iii)
an amount determined by the Board of Directors.
(d) Series D Convertible Preferred Stock
On July 8, 1999, the Company issued 1,257,708 shares of Series D
Convertible Preferred Stock at a purchase price of $8.11 per share for total
proceeds of approximately $10.2 million. Holders of Series D Preferred Stock
are entitled to receive annual noncumulative dividends at a rate of $0.6488 per
share. Each outstanding share is convertible into common stock on a one-for-one
basis. Upon liquidation, the holders of the Series D Preferred Stock will be
entitled to receive $8.11 per share. Holders of the Series D Preferred stock
are subject to all other rights and preferences of the previously issued series
of preferred stock.
F-16
<PAGE>
UNDERWRITING
Kana and the underwriters named below will enter into an underwriting
agreement with respect to the shares being offered. Subject to certain
conditions, each underwriter will severally agree to purchase the number of
shares indicated in the following table. Goldman, Sachs & Co., Hambrecht &
Quist LLC and Wit Capital Corporation are the representatives of the
underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co. .......................................
Hambrecht & Quist LLC.......................................
Wit Capital Corporation.....................................
---------
Total.......................................................
=========
</TABLE>
----------------
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
shares from Kana to cover these sales. They may exercise that option for 30
days. If any shares are purchased upon exercise of this option, the
underwriters will separately purchase shares in approximately the same
proportion as set forth in the table above.
The following tables show the per share and total underwriting discount to
be paid to the underwriters by Kana. These amounts are shown assuming both no
exercise and full exercise of the underwriters' option to purchase additional
shares.
<TABLE>
<CAPTION>
Paid by Kana
-------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share.......................................... $ $
------ ------
Total.............................................. $ $
====== ======
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $ per share from the initial public offering price. Any of
these securities dealers may resell any shares purchased from the underwriters
to certain other brokers or dealers at a discount of up to $ per share from
the initial public offering price. If all of the shares are not sold at the
initial public offering price, the representatives may change the offering
price and the other selling terms.
Kana and its officers, directors who hold shares of common stock and
substantially all of its securityholders have agreed with the underwriters not
to dispose of or hedge any of their common stock or securities convertible into
or exchangeable for shares of common stock during the period from the date of
this prospectus continuing through the date 180 days after the date of this
prospectus, except with the prior written consent of Goldman, Sachs & Co. on
behalf of the underwriters. See "Shares Available for Future Sale" for a
discussion of these and other transfer restrictions.
U-1
<PAGE>
Prior to this offering, there has been no public market for the common
stock. The initial public offering price for the common stock will be
negotiated among Kana and the representatives. Among the factors to be
considered in determining the initial public offering price of the shares, in
addition to prevailing market conditions, will be Kana's historical
performance, estimates of Kana's business potential and earnings prospects, an
assessment of Kana's management and the consideration of the above factors in
relation to market valuation of companies in related businesses.
Kana has applied to have the common stock listed on the Nasdaq National
Market under the symbol "KANA".
In connection with this offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of that underwriter in stabilizing or short-sale
covering transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
At the request of Kana, the underwriters have reserved for sale, at the
initial public offering price, up to shares of common stock in the offering
to directors, officers, employees and friends of Kana through a directed share
program. Of this total, shares have been reserved for entities affiliated
with Amerindo Investment Advisors, shares have been reserved for purchasers
of Kana's Series C preferred stock and shares have been reserved for the
directors, officers, employees and friends of Kana. The number of shares of
common stock available for sale to the general public will be reduced to the
extent these persons purchase these reserved shares. The underwriters will
offer any reserved shares not purchased by these persons to the general public
on the same basis as other shares in the offering.
Wit Capital, a member of the National Association of Securities Dealers,
Inc., will participate in the offering as one of the underwriters. The National
Association of Securities Dealers, Inc. approved the membership of Wit Capital
on September 4, 1997.
Kana estimates that the total expenses of the offering, excluding the
underwriting discount, will be approximately $ .
Kana has agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933.
U-2
<PAGE>
Inside back cover
A depiction of the screens viewed by the user of the Kana solution, centered on
the page, cascading to the right side. At the top of the screen shot is a
depiction of the Kana logo, consisting of the letter "K" surrounded by a
partially open oval. Left to right over the top of the screen are the titles of
options available to the user, including "more," "new," "find," "sender
history," "view source," "note," "no answer," "route," and "categorize." Below
this tool bar is a representation of unread e-mail messages entering the Kana
system. Below this middle band is a sample response message which contains a
salutation and a sample question, "do you have any job openings."
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or any other person is authorized to give any
information or to represent anything not contained in this prospectus. You
must not rely on any unauthorized information or representations. This
prospectus is an offer to sell only the shares offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus is current only as of its date.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 20
Dividend Policy.......................................................... 20
Preemptive Rights........................................................ 20
Capitalization........................................................... 21
Dilution................................................................. 22
Selected Consolidated Financial Data..................................... 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 24
Business................................................................. 35
Management............................................................... 49
Transactions and Relationships with Related Parties...................... 62
Principal Stockholders................................................... 65
Description of Capital Stock............................................. 67
Shares Available for Future Sale......................................... 70
Legal Matters............................................................ 72
Change in Accountants.................................................... 72
Experts.................................................................. 72
Additional Information................................................... 72
Index to Consolidated Financial Statements............................... F-1
Underwriting............................................................. U-1
</TABLE>
-----------
Through and including , 1999 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether
or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to an unsold
allotment or subscription.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Shares
Kana Communications, Inc.
Common Stock
-----------
[LOGO OF KANA COMMUNICATIONS]
-----------
Goldman, Sachs & Co.
Hambrecht & Quist
Wit Capital Corporation
Representatives of the Underwriters
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than the
underwriting discounts payable by Kana in connection with the sale of common
stock being registered. All amounts are estimates except the SEC registration
fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC Registration Fee................................................ $11,190
NASD Filing Fee..................................................... 4,525
Nasdaq National Market Listing Fee.................................. *
Printing and Engraving Expenses..................................... *
Legal Fees and Expenses............................................. *
Accounting Fees and Expenses........................................ *
Blue Sky Fees and Expenses.......................................... *
Transfer Agent Fees................................................. *
Miscellaneous....................................................... *
-------
Total............................................................. *
=======
</TABLE>
- --------
*To be filed by amendment
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit this
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article VII, Section 6 of Kana's Bylaws
provides for mandatory indemnification of its directors and executive officers
and permissible indemnification of employees and other agents to the maximum
extent permitted by the Delaware General Corporation Law. Kana's Certificate
of Incorporation provides that, subject to Delaware law, its directors will
not be personally liable for monetary damages for breach of the directors'
fiduciary duty as directors to Kana and its stockholders. This provision in
the Certificate of Incorporation does not eliminate the directors' fiduciary
duty, and in appropriate circumstances equitable remedies such as injunctive
or other forms of non-monetary relief will remain available under Delaware
law. In addition, each director will continue to be subject to liability for
breach of the director's duty of loyalty to Kana or its stockholders, for acts
or omissions not in good faith or involving intentional misconduct, for
knowing violations of law, for actions leading to improper personal benefit to
the director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws. Kana has entered into
indemnification agreements with its officers and directors, a form of which
will be filed with the Securities and Exchange Commission (the "Commission")
as an Exhibit to the Registrant's Registration Statement on Form S-1
(No. 333- ) (the "Indemnification Agreements"). The Indemnification
Agreements provide Kana's executive officers and directors with further
indemnification to the maximum extent permitted by the Delaware General
Corporation Law. Reference is also made to Section 8 of the Underwriting
Agreement contained in Exhibit 1.1 hereto, indemnifying officers and directors
of Kana against certain liabilities, and Section 1.10 of the Third Amended and
Restated Investors' Rights Agreement contained in Exhibit 4.2 hereto,
indemnifying certain of Kana's stockholders, including controlling
stockholders, against certain liabilities.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities
During the past three years, the Registrant has issued unregistered
securities to a limited number of persons as described below:
(a) In July 1996, the Registrant issued and sold 5,000,000 shares of
its Common Stock to Mark S. Gainey and Michael T. Horvath for an aggregate
purchase price of $500 pursuant to Common Stock Purchase Agreements. In
April 1997, the Registrant repurchased those shares of Common Stock for
$43,812.
(b) In April 1997, the Registrant issued and sold 4,375,000 shares of
its Common Stock to Mark S. Gainey and Michael T. Horvath for an aggregate
purchase price of $43,750 pursuant to Restricted Stock Purchase
Agreements.
(c) In April 1997, the Registrant issued and sold 5,923,078 shares of
its Series A Preferred Stock to investors for an aggregate purchase price
of $770,000, which included $170,000 of cancellation of indebtedness.
(d) In April 1997, the Registrant issued warrants to investors to
purchase up to 134,615 shares of its Series A Preferred Stock at an
exercise price of $0.13 per share.
(e) In March 1998, the Registrant issued 102,208 shares of its Series
A Preferred Stock pursuant to the net exercise of warrants issued to
investors.
(f) In June 1997, the Registrant issued 1,000 shares of its Common
Stock to a consultant as consideration for services rendered to the
Registrant pursuant to a Stock Issuance Agreement.
(g) In September 1997, the Registrant issued and sold 7,453,704 shares
of its Series B Preferred Stock to investors for an aggregate purchase
price of $4,025,000.
(h) In July 1998, the Registrant issued and sold 168,824 shares of its
Series B Preferred Stock to a director for an aggregate purchase price of
$91,165.
(i) In August and September 1998, the Registrant issued and sold
5,121,148 shares of its Series C Preferred Stock to investors for an
aggregate purchase price of $11,625,006.
(j) In July 1999, the Registrant issued and sold 1,257,707 shares of
its Series D Preferred Stock to investors for an aggregate purchase price
of $10,200,004.
(k) Since inception, the Registrant has issued and sold an aggregate
of 330,000 shares of its Common Stock to two of the Registrant's directors
for an aggregate consideration of $3,300.
(l) Since inception, the Registrant has granted stock options to its
employees, directors and consultants under its 1997 Stock Option/Stock
Issuance Plan exercisable for up to an aggregate of 6,814,907 shares of
its Common Stock, with exercise prices ranging from $0.01 to $1.50. The
Registrant has issued and sold an aggregate of 6,360,107 shares of its
Common Stock to its employees, directors and consultants under this plan
for an aggregate consideration of $34,477 in cash and $1.3 million in
promissory notes with a five year term and interest rate of 5.7% per
annum, compounding annually.
None of the foregoing transactions involved any underwriters, underwriting
discounts or commissions, or any public offering, and the Registrant believes
that each transaction was exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof, Regulation D promulgated
thereunder or Rule 701 pursuant to compensatory benefit plans and contracts
relating to compensation as provided under Rule 701. The recipients in these
transactions represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to the share
certificates and instruments issued in these transactions. All recipients had
adequate access, through their relationships with the Registrant, to
information about the Registrant.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
The exhibits listed in the Exhibit Index are filed as part of this
Registration Statement.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
1.1* Form of Underwriting Agreement among the Registrant, Goldman Sachs &
Co., Hambrecht & Quist LLC and Wit Capital Corporation.
3.1 Amended and Restated Certificate of Incorporation, to be effective
upon consummation of this offering.
3.2 Amended and Restated Bylaws, to be effective upon consummation of
this offering.
4.1* Form of Registrant's Specimen Common Stock Certificate.
4.2 Third Amended and Restated Investors' Rights Agreement dated July 8,
1999 by and among the Registrant and parties listed on Schedule A
therein.
5.1* Opinion of Brobeck, Phleger & Harrison LLP, counsel for the
Registrant, with respect to the common stock being registered.
10.1 Registrant's 1997 Stock Option/Stock Issuance Plan.
10.2* Registrant's 1999 Stock Incentive Plan.
10.3* Registrant's 1999 Employee Stock Purchase Plan.
10.4 Form of Registrant's Directors' and Officers' Indemnification
Agreement.
10.5 Form of Registrant's License Agreement.
10.6* Letter of Credit, dated July , 1999, with Silicon Valley Bank and
the Registrant.
10.7 Lease, dated May 1998, by and between Encina Properties and the
Registrant.
10.8* Office/R&D Lease, dated June 17, 1999, by and between Chestnut Bay
LLC and the Registrant.
10.9 Form of Registrant's Kana Online Service Agreement.
10.10 Form of Registrant's Restricted Stock Purchase Agreement.
16.1 Letter from PricewaterhouseCoopers LLP, dated July 8, 1999 regarding
change in accountant.
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP, Independent Auditors.
23.2* Consent of Brobeck, Phleger & Harrison LLP (contained in their
opinion filed as Exhibit 5.1).
24.1 Power of Attorney. Reference is made to Page II-5.
27.1 Financial Data Schedule. (In EDGAR format only)
</TABLE>
- --------
*To be filed by amendment
(b) Financial Statement Schedule
None.
Item 17. Undertakings
Kana hereby undertakes to provide to the underwriters at the closing
specified in the Underwriting Agreement, certificates in such denominations
and registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of Kana
pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or the Bylaws of Kana, Indemnification Agreements entered into
II-3
<PAGE>
between Kana and its officers and directors, the Underwriting Agreement, or
otherwise, Kana has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act,
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by Kana of
expenses incurred or paid by a director, officer, or controlling person of
Kana in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, Kana will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by Kana pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective;
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it
meets all the requirements for filing on Form S-1 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Palo Alto, State of California, on
this 9th day of July, 1999.
KANA COMMUNICATIONS, INC.
/s/ Michael J. McCloskey
By: _________________________________
Michael J. McCloskey
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints, jointly and severally, Mark S. Gainey
and Joseph D. McCarthy, and each one of them, his true and lawful attorneys-
in-fact and agents, each with full power of substitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same offering
covered by this Registration Statement that is to be effective upon filing
pursuant to Rule 462(b) promulgated under the Securities Act of 1933, as
amended, and all post-effective amendments thereto, and to file the same, with
all exhibits thereto and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming that each of said attorneys-in-fact
and agents or any of them, or his or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the persons whose signatures
appear below, which persons have signed such Registration Statement in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Michael J. McCloskey Chief Executive Officer July 9, 1999
______________________________________ (Principal Executive
Michael J. McCloskey Officer)
/s/ Joseph D. McCarthy Vice President, Finance July 9, 1999
______________________________________ and Operations (Principal
Joseph D. McCarthy Financial and Accounting
Officer)
/s/ David M. Beirne Director July 9, 1999
______________________________________
David M. Beirne
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Mark S. Gainey President and Chairman of July 9, 1999
______________________________________ the Board
Mark S. Gainey
/s/ Eric A. Hahn Director July 9, 1999
______________________________________
Eric A. Hahn
/s/ Dr. Charles A. Holloway Director July 9, 1999
______________________________________
Dr. Charles A. Holloway
/s/ Steven T. Jurvetson Director July 9, 1999
______________________________________
Steven T. Jurvetson
/s/ Ariel Poler Director July 9, 1999
______________________________________
Ariel Poler
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title Page
------- ------------- ----
<C> <S> <C>
1.1* Form of Underwriting Agreement among the Registrant, Goldman
Sachs & Co., Hambrecht & Quist LLC and Wit Capital
Corporation.
3.1 Amended and Restated Certificate of Incorporation, to be
effective upon consummation of this offering.
3.2 Amended and Restated Bylaws, to be effective upon
consummation of this offering.
4.1* Form of Registrant's Specimen Common Stock Certificate.
4.2 Third Amended and Restated Investors' Rights Agreement dated
July 8, 1999 by and among the Registrant and parties listed
on Schedule A therein.
5.1* Opinion of Brobeck, Phleger & Harrison LLP, counsel for the
Registrant, with respect to the common stock being
registered.
10.1 Registrant's 1997 Stock Option/Stock Issuance Plan.
10.2* Registrant's 1999 Stock Incentive Plan.
10.3* Registrant's 1999 Employee Stock Purchase Plan.
10.4 Form of Registrant's Directors' and Officers' Indemnification
Agreement.
10.5 Form of Registrant's License Agreement.
10.6* Letter of Credit, dated July , 1999, with Silicon Valley
Bank and the Registrant.
10.7 Lease, dated May 1998, by and between Encina Properties and
the Registrant.
10.8* Office/R&D Lease, dated June 17, 1999, by and between
Chestnut Bay LLC and the Registrant.
10.9 Form of Registrant's Kana Online Service Agreement.
10.10 Form of Registrant's Restricted Stock Purchase Agreement.
16.1 Letter from PricewaterhouseCoopers LLP, dated July 8, 1999
regarding change in accountant.
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP, Independent Auditors.
23.2* Consent of Brobeck, Phleger & Harrison LLP (contained in
their opinion filed as Exhibit 5.1).
24.1 Power of Attorney. Reference is made to Page II-5.
27.1 Financial Data Schedule. (In EDGAR format only)
</TABLE>
- --------
*To be filed by amendment
<PAGE>
EXHIBIT 3.1
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
KANA COMMUNICATIONS, INC.
The undersigned, Mark S. Gainey and Warren T. Lazarow, hereby certify
that:
ONE: They are the duly elected, qualified and acting President and
---
Secretary, respectively, of Kana Communications, Inc., a Delaware corporation.
TWO: The Certificate of Incorporation of said corporation was
---
originally filed in the Office of the Secretary of State of the State of
Delaware on June 17, 1999 and the Amended and Restated Certificate of
Incorporation of said corporation was originally filed in such office on July
__, 1999.
THREE: The Amended and Restated Certificate of Incorporation of said
-----
corporation is amended and restated to read in its entirety as follows:
ARTICLE I
The name of this corporation is Kana Communications, Inc. (the
"Corporation").
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is 1013 Centre Road, City of Wilmington, County of New Castle, Delaware
19801. The name of the Corporation's registered agent at such address is the
Corporation Service Company.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware (the "GCL").
ARTICLE IV
The Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares that the Corporation is authorized to issue is Sixty-Five
Million (65,000,000). Sixty Million (60,000,000) shares shall be Common Stock,
par value $0.001 per share, and Five Million (5,000,000) shares shall be
Preferred Stock, par value $0.001 per share.
The Preferred Stock may be issued from time to time in one or more
series, without further stockholder approval. The Board of Directors of the
Corporation is hereby
<PAGE>
authorized to fix or alter the rights, preferences, privileges and restrictions
granted to or imposed upon each series of Preferred Stock, and the number of
shares constituting any such series and the designation thereof, or of any of
them. The rights, privileges, preferences and restrictions of any such
additional series may be subordinated to, pari passu with (including, without
----------
limitation, inclusion in provisions with respect to liquidation and acquisition
preferences, redemption and/or approval of matters by vote), or senior to any of
those of any present or future class or series of Preferred Stock or Common
Stock. The Board of Directors is also authorized to increase or decrease the
number of shares of any series prior or subsequent to the issue of that series,
but not below the number of shares of such series then outstanding. In case the
number of shares of any series shall be so decreased, the shares constituting
such decrease shall resume the status which they had prior to the adoption of
the resolution originally fixing the number of shares of such series.
ARTICLE V
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, repeal, alter,
amend and rescind any or all of the Bylaws of the Corporation. In addition, the
Bylaws may be amended by the affirmative vote of holders of at least sixty-six
and two-thirds percent (66 2/3%) of the outstanding shares of voting stock of
the Corporation entitled to vote at an election of directors.
ARTICLE VI
The number of directors of the Corporation shall be determined by
resolution of the Board of Directors.
Elections of directors need not be by written ballot unless the Bylaws
of the Corporation shall so provide. Advance notice of stockholder nominations
for the election of directors and of any other business to be brought before any
meeting of the stockholders shall be given in the manner provided in the Bylaws
of this Corporation.
At each annual meeting of stockholders, directors of the Corporation
shall be elected to hold office until the expiration of the term for which they
are elected, or until their successors have been duly elected and qualified;
except that if any such election shall not be so held, such election shall take
place at a stockholders' meeting called and held in accordance with the GCL.
The directors of the Corporation shall be divided into three (3)
classes as nearly equal in size as is practicable, hereby designated Class I,
Class II and Class III. For the purposes hereof, the initial Class I, Class II
and Class III directors shall be those directors so designated by a resolution
of the Board of Directors. At the first annual meeting of stockholders
following the closing of the initial public offering of the Corporation's Common
Stock, the term of office of the Class I directors shall expire and Class I
directors shall be elected for a full term of three (3) years. At the second
annual meeting of stockholders following the closing of the initial public
offering of the Corporation's Common
2
<PAGE>
Stock, the term of office of the Class II directors shall expire and Class II
directors shall be elected for a full term of three (3) years. At the third
annual meeting of stockholders following the initial public offering of the
Corporation's Common Stock, the term of office of the Class III directors shall
expire and Class III directors shall be elected for a full term of three (3)
years. At each succeeding annual meeting of stockholders, directors shall be
elected for a full term of three (3) years to succeed the directors of the class
whose terms expire at such annual meeting. If the number of directors is
hereafter changed, each director then serving as such shall nevertheless
continue as a director of the Class of which he is a member until the expiration
of his current term and any newly created directorships or decrease in
directorships shall be so apportioned among the classes as to make all classes
as nearly equal in number as is practicable.
Vacancies occurring on the Board of Directors for any reason may be
filled by vote of a majority of the remaining members of the Board of Directors,
even if less than a quorum, at any meeting of the Board of Directors. A person
so elected by the Board of Directors to fill a vacancy shall hold office for the
remainder of the full term of the director for which the vacancy was created or
occurred and until such director's successor shall have been duly elected and
qualified. A director may be removed from office by the affirmative vote of the
holders of 66 2/3% of the outstanding shares of voting stock of the Corporation
entitled to vote at an election of directors, provided that such removal is for
cause.
ARTICLE VII
Stockholders of the Corporation shall take action by meetings held
pursuant to this Amended and Restated Certificate of Incorporation and the
Bylaws and shall have no right to take any action by written consent without a
meeting. Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. Special meetings of the stockholders, for
any purpose or purposes, may only be called by the Board of Directors of the
Corporation. The books of the Corporation may be kept (subject to any provision
contained in the statutes) outside the State of Delaware at such place or places
as may be designated from time to time by the Board of Directors or in the
Bylaws of the Corporation.
ARTICLE VIII
To the fullest extent permitted by applicable law, this Corporation is
authorized to provide indemnification of (and advancement of expenses to)
directors, officers, employees and agents (and any other persons to which
Delaware law permits this Corporation to provide indemnification) through Bylaw
provisions, agreements with such agents or other persons, vote of stockholders
or disinterested directors or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 145 of the GCL, subject only to
limits created by applicable Delaware law (statutory or non-statutory), with
respect to action for breach of duty to the Corporation, its stockholders, and
others.
No director of the Corporation shall be personally liable to the
Corporation or any stockholder for monetary damages for breach of fiduciary duty
as a director, except for any matter in respect of which such director shall be
liable under Section 174 of the GCL or any amendment thereto or shall be liable
by reason that, in addition to any and all other requirements for such
liability, such director (1) shall have breached the director's duty of loyalty
to the Corporation or its stockholders, (2) shall have acted in manner involving
intentional misconduct or a knowing violation of law or, in failing to act,
shall have acted in a manner involving
3
<PAGE>
intentional misconduct or a knowing violation of law, or (3) shall have derived
an improper personal benefit. If the GCL is hereafter amended to authorize the
further elimination or limitation of the liability of a director, the liability
of a director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the GCL, as so amended.
Each person who was or is made a party or is threatened to be made a
party to or is in any way involved in any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), including any appeal therefrom, by
reason of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer of the Corporation or a direct
or indirect subsidiary of the Corporation, or is or was serving at the request
of the Corporation as a director or officer of another entity or enterprise, or
was a director or officer of a foreign or domestic corporation which was
predecessor corporation of the Corporation or of another entity or enterprise at
the request of such predecessor corporation, shall be indemnified and held
harmless by the Corporation, and the Corporation shall advance all expenses
incurred by any such person in defense of any such proceeding prior to its final
determination, to the fullest extent authorized by the GCL. In any proceeding
against the Corporation to enforce these rights, such person shall be presumed
to be entitled to indemnification and the Corporation shall have the burden of
proving that such person has not met the standards of conduct for permissible
indemnification set forth in the GCL. The rights to indemnification and
advancement of expenses conferred by this Article VIII shall be presumed to have
been relied upon by the directors and officers of the Corporation in serving or
continuing to serve the Corporation and shall be enforceable as contract rights.
Said rights shall not be exclusive of any other rights to which those seeking
indemnification may otherwise be entitled. The Corporation may, upon written
demand presented by a director or officer of the Corporation or of a direct or
indirect subsidiary of the Corporation, or by a person serving at the request of
the Corporation as a director or officer of another entity or enterprise, enter
into contracts to provide such persons with specified rights to indemnification,
which contracts may confer rights and protections to the maximum extent
permitted by the GCL, as amended and in effect from time to time.
If a claim under this Article VIII is not paid in full by the
Corporation within sixty (60) days after a written claim has been received by
the Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expenses of
prosecuting such claim. It shall be a defense to any such action (other than an
action brought to enforce the right to be advanced expenses incurred in
defending any proceeding prior to its final disposition where the required
undertaking, if any, has been tendered to the Corporation ) that the claimant
has not met the standards of conduct which make it permissible under the GCL for
the Corporation to indemnify the claimant for the amount claimed, but the
claimant shall be presumed to be entitled to indemnification and the Corporation
shall have the burden of proving that the claimant has not met the standards of
conduct for permissible indemnification set forth in the GCL.
If the GCL is hereafter amended to permit the Corporation to provide
broader indemnification rights than said law permitted the Corporation to
provide prior to such amendment, the indemnification rights conferred by this
Article VIII shall be broadened to the fullest extent permitted by the GCL, as
so amended.
4
<PAGE>
ARTICLE IX
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation. Notwithstanding the foregoing, the provisions set forth in
Articles V, VI, VII, VIII and IX of this Amended and Restated Certificate of
Incorporation may not be repealed or amended in any respect without the
affirmative vote of holders at least 66-2/3% of the outstanding voting stock of
the Corporation entitled to vote at election of directors.
FOUR: The foregoing amendment and restatement has been duly adopted
----
by the Corporation's Board of Directors in accordance with the applicable
provisions of Sections 242 and 245 of the General Corporation Law of the State
of Delaware.
FIFTH: The foregoing amendment and restatement was approved by the
-----
holders of the requisite number of shares of the Corporation in accordance with
Section 228 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the undersigned have executed this certificate on
July ___, 1999.
__________________________________________
Mark S. Gainey
President
__________________________________________
Warren T. Lazarow
Secretary
5
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
OF
KANA COMMUNICATIONS, INC.
ARTICLE I
OFFICES
Section 1. The registered office shall be in the City of Wilmington,
----------
County of New Castle, State of Delaware.
Section 2. The corporation may also have offices at such other places
----------
both within and without the State of Delaware as the Board of Directors may from
time to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election of
----------
directors shall be held at such place as may be fixed from time to time by the
Board of Directors, or at such other place either within or without the State of
Delaware as shall be designated from time to time by the Board of Directors and
stated in the notice of the meeting. Meetings of stockholders for any other
purpose may be held at such time and place, within or without the State of
Delaware, as shall be stated in the notice of the meeting or in a duly executed
waiver of notice thereof.
Section 2. Annual meetings of stockholders shall be held at such date
----------
and time as shall be designated from time to time by the Board of Directors and
stated in the notice of the meeting. At each annual meeting, the stockholders
shall elect directors to succeed those directors whose terms expire in that year
and shall transact such other business as may properly be brought before the
meeting.
1
<PAGE>
Section 3. Written notice of the annual meeting stating the place,
----------
date and hour of the meeting shall be given to each stockholder entitled to vote
at such meeting not less than ten (10) nor more than sixty (60) days before the
date of the meeting.
Section 4. The officer who has charge of the stock ledger of the
----------
corporation shall prepare and make available, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 5. Special meetings of the stockholders, for any purpose or
----------
purposes, unless otherwise prescribed by statute or by the certificate of
incorporation, may only be called by the Board.
Section 6. Written notice of a special meeting stating the place,
----------
date and hour of the meeting and the purpose or purposes for which the meeting
is called, shall be given not fewer than ten (10) nor more than sixty (60) days
before the date of the meeting, to each stockholder entitled to vote at such
meeting.
Section 7. Business transacted at any special meeting of stockholders
----------
shall be limited to the purposes stated in the notice.
2
<PAGE>
Section 8. The holders of a majority of the stock issued and
----------
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, either the Chairman of the
Board, the stockholders entitled to vote thereat, present in person or
represented by proxy, shall have power to adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum shall be
present or represented. At such adjourned meeting at which a quorum shall be
present or represented any business may be transacted that might have been
transacted at the meeting as originally notified. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote of the
----------
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or of
the certificate of incorporation, a different vote is required, in which case
such express provision shall govern and control the decision of such question.
Section 10. Unless otherwise provided in the certificate of
-----------
incorporation each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power held by such stockholder, but no proxy shall be voted on
after three (3) years from its date, unless the proxy provides for a longer
period.
3
<PAGE>
Section 11. Nominations for election to the Board of Directors must
-----------
be made by the Board of Directors or by a committee appointed by the Board of
Directors for such purpose or by any stockholder of any outstanding class of
capital stock of the corporation entitled to vote for the election of directors.
Nominations by stockholders must be preceded by notification in writing received
by the secretary of the corporation not less than one-hundred twenty (120) days
prior to any meeting of stockholders called for the election of directors. Such
notification shall contain the written consent of each proposed nominee to serve
as a director if so elected and the following information as to each proposed
nominee and as to each person, acting alone or in conjunction with one or more
other persons as a partnership, limited partnership, syndicate or other group,
who participates or is expected to participate in making such nomination or in
organizing, directing or financing such nomination or solicitation of proxies to
vote for the nominee:
(a) the name, age, residence, address, and business address of
each proposed nominee and of each such person;
(b) the principal occupation or employment, the name, type of
business and address of the corporation or other organization in which such
employment is carried on of each proposed nominee and of each such person;
(c) the amount of stock of the corporation owned beneficially,
either directly or indirectly, by each proposed nominee and each such person;
and
(d) a description of any arrangement or understanding of each
proposed nominee and of each such person with each other or any other person
regarding future employment or any future transaction to which the corporation
will or may be a party.
4
<PAGE>
The presiding officer of the meeting shall have the authority to
determine and declare to the meeting that a nomination not preceded by
notification made in accordance with the foregoing procedure shall be
disregarded.
Section 12. At any meeting of the stockholders, only such business
-----------
shall be conducted as shall have been brought before the meeting (a) pursuant to
the corporation's notice of meeting, (b) by or at the direction of the Board of
Directors or (c) by any stockholder of the corporation who is a stockholder of
record at the time of giving of the notice provided for in this Bylaw, who shall
be entitled to vote at such meeting and who complies with the notice procedures
set forth in this Bylaw.
For business to be properly brought before any meeting by a
stockholder pursuant to clause (c) above of this Section 12, the stockholder
must have given timely notice thereof in writing to the secretary of the
corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the corporation not
less than one hundred twenty (120) days prior to the date of the meeting. A
stockholder's notice to the secretary shall set forth as to each matter the
stockholder proposes to bring before the meeting (a) a brief description of the
business desired to be brought before the meeting and the reasons for conducting
such business at the meeting, (b) the name and address, as they appear on the
corporation's books, of the stockholder proposing such business, and the name
and address of the beneficial owner, if any, on whose behalf the proposal is
made, (c) the class and number of shares of the corporation which are owned
beneficially and of record by such stockholder of record and by the beneficial
owner, if any, on whose behalf of the proposal is made and (d) any material
interest of such stockholder of record and the beneficial owner, if any, on
whose behalf the proposal is made in such business.
5
<PAGE>
Notwithstanding anything in these Bylaws to the contrary, no business
shall be conducted at a meeting except in accordance with the procedures set
forth in this Section 12. The presiding officer of the meeting shall, if the
facts warrant, determine and declare to the meeting that business was not
properly brought before the meeting and in accordance with the procedures
prescribed by this Section 12, and if such person should so determine, such
person shall so declare to the meeting and any such business not properly
brought before the meeting shall not be transacted. Notwithstanding the
foregoing provisions of this Section 12, a stockholder shall also comply with
all applicable requirements of the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder with respect to the matters set forth
in this Section 12.
Section 13. Effective upon the closing of the corporation's initial
-----------
public offering of securities pursuant to a registration statement filed under
the Securities Act of 1933, as amended, the stockholders of the Corporation may
not take action by written consent without a meeting but must take any such
actions at a duly called annual or special meeting in accordance with these
Bylaws and the Certificate of Incorporation.
ARTICLE III
DIRECTORS
Section 1. The number of directors of this corporation that shall
----------
constitute the whole board shall be determined by resolution of the Board of
Directors; provided, however, that no decrease in the number of directors shall
have the effect of shortening the term of an incumbent director. The Board of
Directors shall be classified, with respect to the time for which they severally
hold office, into three classes, as nearly equal in number as possible, as
determined by the Board of Directors, one class ("Class I") to hold office
initially for a term
6
<PAGE>
expiring at the annual meeting to be held in 2000, another class ("Class II") to
hold office initially for a term expiring at the annual meeting of stockholders
held in 2001 and another class ("Class III") to hold office initially for a term
expiring at the annual meeting of stockholders to be held in 2002, with the
members of each class to hold office until their successors are elected and
qualified. At each annual meeting of stockholders, the successors of the class
of directors whose term expires at that meeting shall be elected to hold office
for a term expiring at the annual meeting of stockholders held in the third year
following the year of their election.
Section 2. Vacancies and newly created directorships resulting from
----------
any increase in the authorized number of directors may be filled by a majority
of the directors then in office, even if less than a quorum, or by a sole
remaining director, and the directors so chosen shall hold office until the next
election of the class for which such directors were chosen and until their
successors are duly elected and qualified or until earlier resignation or
removal. If there are no directors in office, then an election of directors may
be held in the manner provided by statute.
Section 3. The business of the corporation shall be managed by or
----------
under the direction of its Board of Directors which may exercise all such powers
of the corporation and do all such lawful acts and things as are not by statute
or by the certificate of incorporation or by these bylaws directed or required
to be exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
Section 4. The Board of Directors of the corporation may hold
----------
meetings, both regular and special, either within or without the State of
Delaware.
Section 5. The first meeting of each newly elected Board of Directors
----------
shall be held at such time and place as shall be fixed by the vote of the
stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to
7
<PAGE>
constitute the meeting, provided a quorum shall be present. In the event of the
failure of the stockholders to fix the time or place of such first meeting of
the newly elected Board of Directors, or in the event such meeting is not held
at the time and place so fixed by the stockholders, the meeting may be held at
such time and place as shall be specified in a notice given as hereinafter
provided for special meetings of the Board of Directors, or as shall be
specified in a written waiver signed by all of the directors.
Section 6. Regular meetings of the Board of Directors may be held
----------
without notice at such time and at such place as shall from time to time be
determined by the board.
Section 7. Special meetings of the board may be called by the
----------
Chairman of the Board or the president on twelve (12) hours' notice to each
director either personally or by telephone, telegram, facsimile or electronic
mail; special meetings shall be called by the president or secretary in like
manner and on like notice on the written request of a majority of the Board
unless the Board consists of only one director, in which case special meetings
shall be called by the Chairman of the Board, the president or secretary in like
manner and on like notice on the written request of the sole director. A
written waiver of notice, signed by the person entitled thereto, whether before
or after the time of the meeting stated therein, shall be deemed equivalent to
notice.
Section 8. At all meetings of the board a majority of the directors
----------
shall constitute a quorum for the transaction of business and the act of a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute or by the certificate of incorporation. If a
quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may
8
<PAGE>
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present.
Section 9. Unless otherwise restricted by the certificate of
----------
incorporation or these bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if all members of the board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the board or committee.
Section 10. Unless otherwise restricted by the certificate of
-----------
incorporation or these bylaws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
COMMITTEES OF DIRECTORS
Section 11. The Board of Directors may, by resolution passed by a
-----------
majority of the whole board, designate one (1) or more committees, each
committee to consist of one (1) or more of the directors of the corporation.
The board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee.
In the absence of disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member.
9
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Any such committee, to the extent provided in the resolution of the
Board of Directors, shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers that may require it; but no such committee shall have the power or
authority in reference to amending the certificate of incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property and
assets, recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the bylaws of the corporation; and,
unless the resolution or the certificate of incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock. Such committee or committees shall have such
name or names as may be determined from time to time by resolution adopted by
the Board of Directors.
Section 12. Each committee shall keep regular minutes of its meetings
-----------
and report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
Section 13. Unless otherwise restricted by the certificate of
-----------
incorporation or these bylaws, the Board of Directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, of attendance at each meeting of the Board of Directors and may be paid
a fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director. No such payment shall preclude any director from serving
the corporation in any other capacity and receiving compensation therefor.
Members of special or standing committees may be allowed like compensation for
attending committee meetings.
10
<PAGE>
REMOVAL OF DIRECTORS
Section 14. Unless otherwise restricted by the certificate of
-----------
incorporation or bylaws, any director or the entire Board of Directors may be
removed, with or without cause, by the holders of a majority of shares entitled
to vote at an election of directors.
ARTICLE IV
NOTICES
Section 1. Whenever, under the provisions of the statutes or of the
----------
certificate of incorporation or of these bylaws, notice is required to be given
to any director or stockholder, it shall not be construed to mean personal
notice (except as provided in Section 7 of Article III of these Bylaws), but
such notice may be given in writing, by mail, addressed to such director or
stockholder, at his address as it appears on the records of the corporation,
with postage thereon prepaid, and such notice shall be deemed to be given at the
time when the same shall be deposited in the United States mail. Notice to
directors may also be given by telephone, telegram or facsimile.
Section 2. Whenever any notice is required to be given under the
----------
provisions of the statutes or of the certificate of incorporation or of these
bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the corporation shall be chosen by the
----------
Board of Directors and shall be a president, a chief financial officer and a
secretary. The Board of Directors may elect from among its members a Chairman
of the Board. The Board of Directors
11
<PAGE>
may also choose one or more vice-presidents, assistant secretaries and assistant
treasurers. Any number of offices may be held by the same person, unless the
certificate of incorporation or these bylaws otherwise provide.
Section 2. The Board of Directors at its first meeting after each
----------
annual meeting of stockholders shall choose a president, a chief financial
officer, and a secretary and may choose vice presidents.
Section 3. The Board of Directors may appoint such other officers and
----------
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the board.
Section 4. The salaries of all officers of the corporation shall be
----------
fixed by the Board of Directors or any committee established by the Board of
Directors for such purpose. The salaries of agents of the corporation shall,
unless fixed by the Board of Directors, be fixed by the president or any vice-
president of the corporation.
Section 5. The officers of the corporation shall hold office until
----------
their successors are chosen and qualify. Any officer elected or appointed by
the Board of Directors may be removed at any time by the affirmative vote of a
majority of the Board of Directors. Any vacancy occurring in any office of the
corporation shall be filled by the Board of Directors.
THE CHAIRMAN OF THE BOARD
Section 6. The Chairman of the Board, if any, shall preside at all
----------
meetings of the Board of Directors and of the stockholders at which he/she shall
be present. He/she shall have and may exercise such powers as are, from time to
time, assigned to him/her by the Board and as may be provided by law.
12
<PAGE>
Section 7. In the absence of the Chairman of the Board, the
----------
president, shall preside at all meetings of the Board of Directors and of the
stockholders at which he shall be present. He shall have and may exercise such
powers as are, from time to time, assigned to him by the Board and as may be
provided by law.
THE PRESIDENT AND VICE-PRESIDENTS
Section 8. The president shall be the chief executive officer of the
----------
corporation unless such title is assigned to another officer of the corporation;
and in the absence of the Chairman of the Board he/she shall preside at all
meetings of the stockholders and the Board of Directors; he/she shall have
general and active management of the business of the corporation and shall see
that all orders and resolutions of the Board of Directors are carried into
effect.
Section 9. The president or any vice president shall execute bonds,
----------
mortgages and other contracts requiring a seal, under the seal of the
corporation, except where required or permitted by law to be otherwise signed
and executed and except where the signing and execution thereof shall be
expressly delegated by the Board of Directors to some other officer or agent of
the corporation.
Section 10. In the absence of the president or in the event of his
-----------
inability or refusal to act, the vice-president, if any, (or in the event there
be more than one vice-president, the vice-presidents in the order designated by
the directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the president, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
president. The vice-presidents shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
13
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THE SECRETARY AND ASSISTANT SECRETARY
Section 11. The secretary shall attend all meetings of the Board of
-----------
Directors and all meetings of the stockholders and record all the proceedings of
the meetings of the corporation and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. He/she shall give, or cause to be given, notice of all meetings
of the stockholders and special meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors or
president, under whose supervision he/she shall be. He/she shall have custody
of the corporate seal of the corporation and he/she, or an assistant secretary,
shall have authority to affix the same to any instrument requiring it and when
so affixed, it may be attested by his signature or by the signature of such
assistant secretary. The Board of Directors may give general authority to any
other officer to affix the seal of the corporation and to attest the affixing by
his signature.
Section 12. The assistant secretary, or if there be more than one,
-----------
the assistant secretaries in the order determined by the Board of Directors (or
if there be no such determination, then in the order of their election) shall,
in the absence of the secretary or in the event of his inability or refusal to
act, perform the duties and exercise the powers of the secretary and shall
perform such other duties and have such other powers as the board of directors
may from time to time prescribe.
THE CHIEF FINANCIAL OFFICER
Section 13. The chief financial officer shall be the chief financial
-----------
officer and treasurer of the corporation, shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the
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<PAGE>
corporation and shall deposit all moneys and other valuable effects in the name
and to the credit of the corporation in such depositories as may be designated
by the Board of Directors.
Section 14. He/she shall disburse the funds of the corporation as may
-----------
be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the president and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as treasurer and of the financial condition of the
corporation.
Section 15. Along with the president or any vice president, he/she
-----------
shall be authorized to execute bonds, mortgages and other contracts requiring a
seal, under the seal of the corporation, except where required or permitted by
law to be otherwise signed and executed and except where the signing and
execution thereof shall be expressly delegated by the Board of Directors to some
other officer or agent of the corporation.
Section 16. If required by the Board of Directors, he/she shall give
-----------
the corporation a bond (which shall be renewed every six years) in such sum and
with such surety or sureties as shall be satisfactory to the Board of Directors
for the faithful performance of the duties of his/her office and for the
restoration to the corporation, in case of his/her death, resignation,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in his possession or under his/her control
belonging to the corporation.
Section 17. The assistant treasurer, or if there shall be more than
-----------
one, the assistant treasurers in the order determined by the Board of Directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the chief financial officer or in the event of his
inability or refusal to act, perform the duties and exercise the powers
15
<PAGE>
of the chief financial officer and shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
ARTICLE VI
CERTIFICATE OF STOCK
Section 1. Every holder of stock in the corporation shall be entitled
----------
to have a certificate, signed by, or in the name of the corporation by, the
Chairman of the Board of Directors, or the president or a vice-president and the
treasurer or an assistant treasurer, or the secretary or an assistant secretary
of the corporation, certifying the number of shares owned by him/her in the
corporation.
Certificates may be issued for partly paid shares and in such case
upon the face or back of the certificates issued to represent any such partly
paid shares, the total amount of the consideration to be paid therefor, and the
amount paid thereon shall be specified.
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate that the corporation shall issue to represent such class or
series of stock, a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating,
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<PAGE>
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights.
Any of or all the signatures on the certificate may be facsimile. In
case any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the corporation with the same effect as if he/she were such
officer, transfer agent or registrar at the date of issue.
LOST CERTIFICATES
Section 2. The Board of Directors may direct a new certificate or
----------
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his/her
legal representative, to advertise the same in such manner as it shall require
and/or to give the corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
TRANSFER OF STOCK
Section 3. Upon surrender to the corporation or the transfer agent of
----------
the corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignation or authority to transfer, it shall be
the duty of the corporation to issue a
17
<PAGE>
new certificate to the person entitled thereto, cancel the old certificate and
record the transaction upon its books.
FIXING RECORD DATE
Section 4. In order that the corporation may determine the
----------
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty (60) nor less than ten (10) days before the
date of such meeting, nor more than sixty (60) days prior to any other action.
A determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
REGISTERED STOCKHOLDERS
Section 5. The corporation shall be entitled to recognize the
----------
exclusive right of a person registered on its books as the owner of shares to
receive dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
18
<PAGE>
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the capital stock of the corporation,
----------
subject to the provisions of the certificate of incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property, or in shares of the capital
stock, subject to the provisions of the certificate of incorporation.
Section 2. Before payment of any dividend, there may be set aside out
----------
of any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purposes as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
CHECKS
Section 3. All checks or demands for money and notes of the
----------
corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
FISCAL YEAR
Section 4. The fiscal year of the corporation shall be fixed by
----------
resolution of the Board of Directors.
SEAL
Section 5. The Board of Directors may adopt a corporate seal having
----------
inscribed thereon the name of the corporation, the year of its organization and
the words "Corporate Seal,
19
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Delaware." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
INDEMNIFICATION
Section 6. The corporation shall, to the fullest extent authorized
----------
under the laws of the State of Delaware, as those laws may be amended and
supplemented from time to time, indemnify any director made, or threatened to be
made, a party to an action or proceeding, whether criminal, civil,
administrative or investigative, by reason of being a director of the
corporation or a predecessor corporation or, at the corporation's request, a
director or officer of another corporation, provided, however, that the
corporation shall indemnify any such agent in connection with a proceeding
initiated by such agent only if such proceeding was authorized by the Board of
Directors of the corporation. The indemnification provided for in this Section
6 shall: (i) not be deemed exclusive of any other rights to which those
indemnified may be entitled under any bylaw, agreement or vote of stockholders
or disinterested directors or otherwise, both as to action in their official
capacities and as to action in another capacity while holding such office, (ii)
continue as to a person who has ceased to be a director, and (iii) inure to the
benefit of the heirs, executors and administrators of such a person. The
corporation's obligation to provide indemnification under this Section 6 shall
be offset to the extent of any other source of indemnification or any otherwise
applicable insurance coverage under a policy maintained by the corporation or
any other person.
Expenses incurred by a director of the corporation in defending a
civil or criminal action, suit or proceeding by reason of the fact that he is or
was a director of the corporation (or was serving at the corporation's request
as a director or officer of another corporation) shall be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon
20
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receipt of an undertaking by or on behalf of such director to repay such amount
if it shall ultimately be determined that he is not entitled to be indemnified
by the corporation as authorized by relevant sections of the General Corporation
Law of Delaware. Notwithstanding the foregoing, the corporation shall not be
required to advance such expenses to an agent who is a party to an action, suit
or proceeding brought by the corporation and approved by a majority of the Board
of Directors of the corporation which alleges willful misappropriation of
corporate assets by such agent, disclosure of confidential information in
violation of such agent's fiduciary or contractual obligations to the
corporation or any other willful and deliberate breach in bad faith of such
agent's duty to the corporation or its stockholders.
The foregoing provisions of this Section 6 shall be deemed to be a
contract between the corporation and each director who serves in such capacity
at any time while this bylaw is in effect, and any repeal or modification
thereof shall not affect any rights or obligations then existing with respect to
any state of facts then or theretofore existing or any action, suit or
proceeding theretofore or thereafter brought based in whole or in part upon any
such state of facts.
The Board of Directors in its discretion shall have power on behalf of
the corporation to indemnify any person, other than a director, made a party to
any action, suit or proceeding by reason of the fact that he, his testator or
intestate, is or was an officer or employee of the corporation.
To assure indemnification under this Section 6 of all directors,
officers and employees who are determined by the corporation or otherwise to be
or to have been "fiduciaries" of any employee benefit plan of the corporation
which may exist from time to time, Section 145 of the General Corporation Law of
Delaware shall, for the purposes of this Section
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6, be interpreted as follows: an "other enterprise" shall be deemed to include
such an employee benefit plan, including without limitation, any plan of the
corporation which is governed by the Act of Congress entitled "Employee
Retirement Income Security Act of 1974," as amended from time to time; the
corporation shall be deemed to have requested a person to serve an employee
benefit plan where the performance by such person of his duties to the
corporation also imposes duties on, or otherwise involves services by, such
person to the plan or participants or beneficiaries of the plan; excise taxes
assessed on a person with respect to an employee benefit plan pursuant to such
Act of Congress shall be deemed "fines."
ARTICLE VIII
AMENDMENTS
Section 1. These bylaws may be altered, amended or repealed or new
----------
bylaws may be adopted by the affirmative vote of holders of at least 66-2/3%
vote of the outstanding voting stock of the corporation. These bylaws may also
be altered, amended or repealed or new bylaws may be adopted by the Board of
Directors, when such power is conferred upon the Board of Directors by the
certificate of incorporation. The foregoing may occur at any regular meeting of
the stockholders or of the Board of Directors or at any special meeting of the
stockholders or of the Board of Directors if notice of such alteration,
amendment, repeal or adoption of new bylaws be contained in the notice of such
special meeting. If the power to adopt, amend or repeal bylaws is conferred
upon the Board of Directors by the certificate of incorporation it shall not
divest or limit the power of the stockholders to adopt, amend or repeal bylaws.
22
<PAGE>
CERTIFICATE OF ADOPTION BY THE
SECRETARY OF
KANA COMMUNICATIONS, INC.
The undersigned, Warren T. Lazarow, hereby certifies that he is the
duly elected and acting Secretary of Kana Communications, Inc., a Delaware
corporation (the "Corporation"), and that the Amended and Restated Bylaws
attached hereto constitute the Bylaws of said Corporation as duly adopted by the
Board of Directors and the Stockholders of the Corporation and as in effect on
the date hereof.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his name
this _____ day of July, 1999.
_____________________________________
Warren T. Lazarow
Secretary
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<PAGE>
EXHIBIT 4.2
KANA COMMUNICATIONS, INC.
________________
THIRD AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
________________
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Registration Rights................................................ 1
1.1 Definitions.................................................. 1
1.2 Request for Registration..................................... 2
1.3 Company Registration......................................... 5
1.4 Obligations of the Company................................... 5
1.5 Furnish Information.......................................... 7
1.6 Expenses of Demand Registration.............................. 7
1.7 Expenses of Company Registration............................. 8
1.8 Underwriting Requirements.................................... 8
1.9 Delay of Registration........................................ 8
1.10 Indemnification.............................................. 8
1.11 Reports Under 1934 Act....................................... 10
1.12 Form S-3 Registration........................................ 11
1.13 Assignment of Registration Rights............................ 12
1.14 Limitations on Subsequent Registration Rights................ 12
1.15 "Market Stand-Off" Agreement................................. 13
1.16 Termination of Registration Rights........................... 13
2. Covenants of the Company .......................................... 14
2.1 Financial Statements and Other Information................... 14
2.2 Inspection of Property....................................... 15
2.3 Board Observation Rights..................................... 15
2.4 Board Actions................................................ 15
3. Miscellaneous ..................................................... 15
3.1 Successors and Assigns....................................... 15
3.2 Prior Agreement.............................................. 16
3.3 Governing Law................................................ 16
3.4 Counterparts................................................. 16
3.5 Titles and Subtitles......................................... 16
3.6 Notices...................................................... 16
3.7 Expenses..................................................... 16
3.8 Amendments and Waivers....................................... 16
3.9 Severability................................................. 16
3.10 Aggregation of Stock......................................... 17
3.11 Entire Agreement............................................. 17
3.12 Confidentiality.............................................. 17
</TABLE>
i
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THIRD AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
------------------------------------------------------
THIS THIRD AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT is made as
of the ____ day of July 1999, by and among Kana Communications, Inc., a
California corporation (the "Company"), and the parties listed on Schedule A
----------
hereto (collectively, the "Investors").
RECITALS
--------
WHEREAS, certain of the Investors (the "Existing Investors") hold
shares of the Company's Series A Preferred Stock, Series B Preferred Stock
and/or Series C Preferred Stock and possess certain rights pursuant to a Second
Amended and Restated Investors' Rights Agreement dated as of August 20, 1998 and
September 3, 1998, as amended, by and among the Company and such Investors
(collectively, the "Prior Agreement"); and
WHEREAS, the Existing Investors desire to terminate the Prior
Agreement and to accept the rights created pursuant hereto in lieu of the rights
granted to them under the Prior Agreement; and
WHEREAS, certain Investors are parties to the Series D Preferred Stock
Purchase Agreement dated as of even date herewith among the Company and certain
of the Investors (the "Purchase Agreement"), and certain of the Company's and
such Investors' obligations under the Purchase Agreement are conditioned upon
the execution of this Agreement by such Investors, the Existing Investors and by
the Company;
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth herein, the Existing Investors who are parties to the Prior Agreement
hereby agree that the Prior Agreement shall be superseded and replaced in its
entirety by this Agreement, and the parties hereto hereby further agree as
follows:
1. Registration Rights. The Company covenants and agrees as follows:
1.1 Definitions. For purposes of this Section 1:
(a) "Act" means the Securities Act of 1933, as amended.
(b) "Form S-3" means such form under the Act as in effect on the
date hereof or any registration form under the Act subsequently adopted by the
SEC which permits inclusion or incorporation of substantial information by
reference to other documents filed by the Company with the SEC.
(c) "Holder" means any person owning or having the right to
acquire Registrable Securities or any assignee thereof in accordance with
Section 1.13 hereof.
(d) "New Holder" means any person owning or having the right to
acquire New Registrable Securities or any assignee thereof in accordance with
Section 1.13 hereof.
<PAGE>
(e) "1934 Act" shall mean the Securities Exchange Act of 1934,
as amended.
(f) "Register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Act, and the declaration or ordering of
effectiveness of such registration statement or document.
(g) "Registrable Securities" means (i) Common Stock issuable or
issued upon conversion of the Series A Preferred Stock, Series A1 Preferred
Stock, Series B Preferred Stock, Series B1 Preferred Stock, Series C Preferred
Stock, Series C1 Preferred Stock, Series D Preferred Stock and Series D1
Preferred Stock (ii) Common Stock issued to Mark Gainey and Michael Horvath (for
purposes only of Sections 1.3, 1.7, 1.8, 1.10 and 3.8 of this Agreement), (iii)
the Common Stock issuable or issued upon conversion of the Series A Preferred
Stock (including the Series A1 Preferred Stock) issued upon exercise of two
warrants held by Ragnhild Horvath and the Beni M. Horvath Trust 1991 and (iv)
any Common Stock of the Company issued as (or issuable upon the conversion or
exercise of any warrant, right or other security which is issued as) a dividend
or other distribution with respect to, or in exchange for or in replacement of
the shares referenced in (i), (ii) and (iii) above, excluding in all cases,
however, any Registrable Securities sold by a person in a transaction in which
such person's rights under this Section 1 are not assigned.
(h) "New Registrable Securities" means (i) Common Stock issuable
or issued upon conversion of the Series D Preferred Stock and Series D1
Preferred Stock and (ii) any Common Stock of the Company issued as (or issuable
upon the conversion or exercise of any warrant, right or other security which is
issued as) a dividend or other distribution with respect to, or in exchange for
or in replacement of the shares referenced in (i), excluding in all cases,
however, any New Registrable Securities sold by a person in a transaction in
which such person's rights under this Section 1 are not assigned.
(i) The number of shares of "Registrable Securities then
outstanding" shall be determined by the number of shares of Common Stock
outstanding which are, and the number of shares of Common Stock issuable
pursuant to then exercisable or convertible securities which are, Registrable
Securities.
(j) "SEC" shall mean the Securities and Exchange Commission.
1.2 Request for Registration.
(a) If the Company shall receive at any time after six (6)
months after the effective date of the first registration statement for a public
offering of securities of the Company (other than a registration statement
relating either to the sale of securities to employees of the Company pursuant
to a stock option, stock purchase or similar plan or a SEC Rule 145
transaction), a written request from the Holders of at least thirty-five percent
(35%) of the Registrable Securities then outstanding that the Company file a
registration statement under the Act covering the registration of at least
twenty percent (20%) of the Registrable Securities then
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held by such Holders (or any lesser percentage if the aggregate gross proceeds
from the offering exceed $10,000,000) then the Company shall:
(i) within ten (10) days of the receipt thereof, give
written notice of such request to all Holders; and
(ii) use its best efforts to effect as soon as practicable,
the registration under the Act of all Registrable Securities which the Holders
request to be registered, subject to the limitations of subsection 1.2(b),
within twenty (20) days of the mailing of such notice by the Company in
accordance hereof.
(b) If the Holders initiating the registration request hereunder
("Initiating Holders") intend to distribute the Registrable Securities covered
by their request by means of an underwriting, they shall so advise the Company
as a part of their request made pursuant to subsection 1.2(a) and the Company
shall include such information in the written notice referred to in subsection
1.2(a). The underwriter will be selected by the Company and shall be reasonably
acceptable to a majority in interest of the Initiating Holders. In such event,
the right of any Holder to include such Holder's Registrable Securities in such
registration shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting (unless otherwise mutually agreed by a majority in interest of the
Initiating Holders and such Holder) to the extent provided herein. All Holders
proposing to distribute their securities through such underwriting shall
(together with the Company as provided in subsection 1.4(e)) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting. Notwithstanding any other provision of this
Section 1.2, if the underwriter advises the Initiating Holders in writing that
marketing factors require a limitation of the number of shares to be
underwritten, then the Initiating Holders shall so advise all Holders of
Registrable Securities which would otherwise be underwritten pursuant hereto,
and the number of shares of Registrable Securities that may be included in the
underwriting shall be allocated among all Holders thereof, including the
Initiating Holders, in proportion (as nearly as practicable) to the amount of
Registrable Securities of the Company owned by each Holder; provided, however,
that the number of shares of Registrable Securities to be included in such
underwriting shall not be reduced unless all other securities are first entirely
excluded from the underwriting.
(c) If the Company shall receive at any time after six (6)
months after the effective date of the first registration statement for a public
offering of securities of the Company (other than a registration statement
relating either to the sale of securities to employees of the Company pursuant
to a stock option, stock purchase or similar plan or a SEC Rule 145
transaction), a written request from the New Holders of at least thirty-five
percent (35%) of the New Registrable Securities then outstanding that the
Company file a registration statement under the Act covering the registration of
at least twenty percent (20%) of the New Registrable Securities then held by
such New Holders (or any lesser percentage if the aggregate gross proceeds from
the offering exceed $10,000,000) then the Company shall:
(i) within ten (10) days of the receipt thereof, give
written notice of such request to all Holders; and
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(ii) use its best efforts to effect as soon as practicable,
the registration under the Act of all Registrable Securities which the Holders
request to be registered, subject to the limitations of subsection 1.2(d),
within twenty (20) days of the mailing of such notice by the Company in
accordance hereof.
(d) If the New Holders initiating the registration request
hereunder ("New Initiating Holders") intend to distribute the New Registrable
Securities covered by their request by means of an underwriting, they shall so
advise the Company as a part of their request made pursuant to subsection 1.2(c)
and the Company shall include such information in the written notice referred to
in subsection 1.2(c). In the event of a registration of Company securities
solely by shareholders of the Company, the underwriter will be selected by the
New Initiating Holders holding a majority of the New Registrable Securities. In
the event of a registration of Company securities by the Company and such New
Holders, the underwriter will be selected by the mutual agreement of the Company
and the New Initiating Holders holding a majority of the New Registrable
Securities. In each such event, the right of any New Holder or Holders to
include such New Holder's or such Holder's Registrable Securities in such
registration shall be conditioned upon such New Holder's or such Holder's
participation in such underwriting and the inclusion of such New Holder's New
Registrable Securities or such Holder's Registrable Securities in the
underwriting (unless otherwise mutually agreed by a majority in interest of the
New Initiating Holders and such New Holder) to the extent provided herein. All
New Holders and Holders proposing to distribute their securities through such
underwriting shall (together with the Company as provided in subsection 1.4(e))
enter into an underwriting agreement in customary form with the underwriter or
underwriters selected for such underwriting. Notwithstanding any other provision
of this Section 1.2, if the underwriter advises the New Initiating Holders in
writing that marketing factors require a limitation of the number of shares to
be underwritten, then the New Initiating Holders shall so advise all Holders of
Registrable Securities which would otherwise be underwritten pursuant hereto,
and the number of shares of Registrable Securities that may be included in the
underwriting shall be allocated among all Holders thereof, including the
Initiating New Holders, in proportion (as nearly as practicable) to the amount
of Registrable Securities of the Company owned by each Holder; provided,
however, that the number of shares of Registered Securities to be included in
such underwriting shall not be reduced unless all other securities are first
entirely excluded from the underwriting.
(e) Notwithstanding the foregoing, if the Company shall furnish
to Holders and/or New Holders requesting a registration statement pursuant to
this Section 1.2, a certificate signed by the Chief Executive Officer of the
Company stating that in the good faith judgment of the Board of Directors of the
Company, it would be seriously detrimental to the Company and its shareholders
for such registration statement to be filed and it is therefore essential to
defer the filing of such registration statement, the Company shall have the
right to defer taking action with respect to such filing for a period of not
more than ninety (90) days after receipt of the request of the Initiating
Holders or New Initiating Holders; provided, however, that the Company may not
utilize this right more than once in any twelve-month period.
(f) In addition, the Company shall not be obligated to effect,
or to take any action to effect, any registration pursuant to this Section 1.2:
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(i) After the Company has effected two registrations
pursuant to Section 1.2(a) and one registration pursuant to Section 1.2(c) and
such registrations have been declared or ordered effective;
(ii) During the period starting with the date thirty (30)
days prior to the Company's good faith estimate of the date of filing of, and
ending on a date one hundred and eighty (180) days after the effective date of a
registration subject to Section 1.3 hereof; provided that the Company is
actively employing in good faith all reasonable efforts to cause such
registration statement to become effective; or
(iii) If the Holders propose to dispose of shares of
Registrable Securities that may be immediately registered on Form S-3 pursuant
to a request made pursuant to Section 1.12 below.
1.3 Company Registration. If (but without any obligation to do so)
the Company proposes to register (including for this purpose a registration
effected by the Company for shareholders other than the Holders) any of its
stock or other securities under the Act in connection with the public offering
of such securities solely for cash (other than a registration relating solely to
the sale of securities to participants in a Company stock plan, a registration
on any form which does not include substantially the same information as would
be required to be included in a registration statement covering the sale of the
Registrable Securities or a registration in which the only Common Stock being
registered is Common Stock issuable upon conversion of debt securities which are
also being registered or an SEC Rule 145 transaction), the Company shall, at
such time, promptly give each Holder written notice of such registration. Upon
the written request of each Holder given within twenty (20) days after mailing
of such notice by the Company in accordance with Section 3.6, the Company shall,
subject to the provisions of Section 1.8, use its best efforts to cause to be
registered under the Act all of the Registrable Securities that each such Holder
has requested to be registered. In no event, however, shall any holder of
registration rights be granted registration rights under this Section 1.3 that
are superior to the registration rights of the holders of Series A Preferred
Stock, Series A1 Preferred Stock, Series B Preferred Stock, Series B1 Preferred
Stock, Series C Preferred Stock, Series C1 Preferred Stock, Series D Preferred
Stock, Series D1 Preferred Stock and the Common Stock issuable upon conversion
thereon without the written consent of the holders of at least 51% of the Series
A Preferred Stock, Series A1 Preferred Stock, Series B Preferred Stock, Series
B1 Preferred Stock, Series C Preferred Stock, Series C1 Preferred Stock, Series
D Preferred Stock, Series D1 Preferred Stock and the Common Stock issued upon
conversion of the Series A Preferred Stock, Series A1 Preferred Stock, Series B
Preferred Stock, Series B1 Preferred Stock, Series C Preferred Stock, Series C1
Preferred Stock, Series D Preferred Stock, and Series D1 Preferred Stock.
1.4 Obligations of the Company. Whenever required under this Section
1 to effect the registration of any Registrable Securities, the Company shall,
as expeditiously as reasonably possible:
(a) prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and, upon the request of the Holders
of a majority of the Registrable Securities
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registered thereunder, keep such registration statement effective for a period
of up to one hundred twenty (120) days or until the distribution contemplated in
the Registration Statement has been completed; provided, however, that (i) such
120-day period shall be extended for a period of time equal to the period the
Holder refrains from selling any securities included in such registration at the
request of an underwriter of Common Stock (or other securities) of the Company;
and (ii) in the case of any registration of Registrable Securities on Form S-3
which are intended to be offered on a continuous or delayed basis, such 120-day
period shall be extended, if necessary, to keep the registration statement
effective until all such Registrable Securities are sold, provided that Rule
415, or any successor rule under the Act, permits an offering on a continuous or
delayed basis, and provided further that applicable rules under the Act
governing the obligation to file a post-effective amendment permit, in lieu of
filing a post-effective amendment which (i) includes any prospectus required by
Section 10(a)(3) of the Act or (ii) reflects facts or events representing a
material or fundamental change in the information set forth in the registration
statement, the incorporation by reference of information required to be included
in (i) and (ii) above to be contained in periodic reports filed pursuant to
Section 13 or 15(d) of the 1934 Act in the registration statement;
(b) prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Act with respect to the disposition of all securities covered by such
registration statement;
(c) furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Act, and such other documents as they may reasonably request in order to
facilitate the disposition of Registrable Securities owned by them;
(d) use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders;
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions, unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Act;
(e) in the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering. Each Holder participating
in such underwriting shall also enter into and perform its obligations under
such an agreement;
(f) notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing;
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(g) cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which similar securities
issued by the Company are then listed;
(h) provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereunder and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration;
(i) furnish, at the request of any Holder requesting registration of
Registrable Securities pursuant to this Section 1, on the date that such
Registrable Securities are delivered to the underwriters for sale in connection
with a registration pursuant to this Section 1, if such securities are being
sold through underwriters, or, if such securities are not being sold through
underwriters, on the date that the registration statement with respect to such
securities becomes effective, (i) an opinion, dated such date, of counsel
representing the Company for the purposes of such registration, in form and
substance as is customarily given to underwriters in an underwritten public
offering, addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities and (ii) a letter dated such date, from
the independent certified public accountants of the Company, in form and
substance as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and to the Holders requesting registration of Registrable Securities.
1.5 Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Section 1 with
respect to the Registrable Securities of any selling Holder that such Holder
shall furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of such securities
as shall be required to effect the registration of such Holder's Registrable
Securities.
1.6 Expenses of Demand Registration. All expenses (other than underwriting
discounts and commissions and fees and expenses in excess of $10,000 for one
counsel for the selling Holders) incurred in connection with registrations,
filings or qualifications pursuant to Section 1.2, including (without
limitation) all registration, filing and qualification fees, printers' and
accounting fees, and fees and disbursements of counsel for the Company and up to
$10,000 of the reasonable fees and disbursements of one counsel for the selling
Holders shall be borne by the Company, except that the expenses of any special
audit in excess of $15,000 required in connection with any demand registration
pursuant to either Section 1.2 or Section 1.12 shall be borne pro rata by the
selling Holders; provided, however, that the Company shall not be required to
pay for any expenses of any registration proceeding begun pursuant to Section
1.2 if the registration request is subsequently withdrawn at the request of the
Holders of a majority of the Registrable Securities to be registered (in which
case all participating Holders shall bear such expenses), unless the Holders of
a majority of the Registrable Securities agree to forfeit their right to one
demand registration pursuant to Section 1.2; provided further, however, that if
at the time of such withdrawal, the Holders have learned of a material adverse
change in the condition, business, or prospects of the Company from that known
to the Holders at the time of their request and have withdrawn the request with
reasonable promptness following disclosure
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by the Company of such material adverse change, then the Holders shall not be
required to pay any of such expenses and shall retain their rights pursuant to
Section 1.2.
1.7 Expenses of Company Registration. The Company shall bear and pay all
expenses incurred in connection with any registration, filing or qualification
of Registrable Securities with respect to the registrations pursuant to Section
1.3 for each Holder (which right may be assigned as provided in Section 1.13),
including (without limitation) all registration, filing, and qualification fees,
and printers and accounting fees relating or apportionable thereto selected by
them, but excluding underwriting discounts and commissions relating to
Registrable Securities, and up to $10,000 of the reasonable fees and expenses of
one counsel for the Holders.
1.8 Underwriting Requirements. In connection with any offering involving
an underwriting of shares of the Company's capital stock, the Company shall not
be required under Section 1.3 to include any of the Holders' securities in such
underwriting unless they accept the terms of the underwriting as agreed upon
between the Company and the underwriters selected by it (or by other persons
entitled to select the underwriters), and then only in such quantity as the
underwriters determine in their sole discretion will not jeopardize the success
of the offering by the Company. If the total amount of securities, including
Registrable Securities, requested by shareholders to be included in such
offering exceeds the amount of securities sold other than by the Company that
the underwriters determine in their sole discretion is compatible with the
success of the offering, then the Company shall be required to include in the
offering only that number of such securities, including Registrable Securities,
which the underwriters determine in their sole discretion will not jeopardize
the success of the offering (the securities so included to be apportioned pro
rata among the selling shareholders according to the total amount of securities
entitled to be included therein owned by each selling shareholder or in such
other proportions as shall mutually be agreed to by such selling shareholders).
For purposes of the preceding parenthetical concerning apportionment, for any
selling shareholder which is a holder of Registrable Securities and which is a
partnership or corporation, the partners, retired partners and shareholders of
such holder, or the estates and family members of any such partners and retired
partners and any trusts for the benefit of any of the foregoing persons shall be
deemed to be a single "selling shareholder," and any pro rata reduction with
respect to such "selling shareholder" shall be based upon the aggregate amount
of shares carrying registration rights owned by all entities and individuals
included in such "selling shareholder," as defined in this sentence.
1.9 Delay of Registration. No Holder shall have any right to obtain or
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 1.
1.10 Indemnification. In the event any Registrable Securities are included
in a registration statement under this Section 1:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, any underwriter (as defined in the Act) for such
Holder and each person, if any, who controls such Holder or underwriter within
the meaning of the Act or the 1934 Act, against any losses, claims, damages, or
liabilities (joint or several) to which they may
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become subject under the Act, the 1934 Act or other federal or state law,
insofar as such losses, claims, damages, or liabilities (or actions in respect
thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively a "Violation"): (i) any untrue statement
or alleged untrue statement of a material fact contained in such registration
statement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto, (ii) the omission or alleged
omission to state therein a material fact required to be stated therein, or
necessary to make the statements therein not misleading, or (iii) any violation
or alleged violation by the Company of the Act, the 1934 Act, any state
securities law or any rule or regulation promulgated under the Act, the 1934 Act
or any state securities law; and the Company will pay to each such Holder,
underwriter or controlling person, as incurred, any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability, or action; provided, however, that the
indemnity agreement contained in this subsection 1.10(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability, or action
if such settlement is effected without the consent of the Company (which consent
shall not be unreasonably withheld), nor shall the Company be liable in any such
case for any such loss, claim, damage, liability, or action to the extent that
it arises out of or is based upon a Violation which occurs in reliance upon and
in conformity with written information furnished expressly for use in connection
with such registration by any such Holder, underwriter or controlling person.
(b) To the extent permitted by law, each selling Holder will indemnify
and hold harmless the Company, each of its directors, each of its officers who
has signed the registration statement, each person, if any, who controls the
Company within the meaning of the Act, any underwriter, any other Holder selling
securities in such registration statement and any controlling person of any such
underwriter or other Holder, against any losses, claims, damages, or liabilities
(joint or several) to which any of the foregoing persons may become subject,
under the Act, the 1934 Act or other federal or state law, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereto) arise
out of or are based upon any Violation, in each case to the extent (and only to
the extent) that such Violation occurs in reliance upon and in conformity with
written information furnished by such Holder expressly for use in connection
with such registration; and each such Holder will pay any legal or other
expenses reasonably incurred by any person intended to be indemnified pursuant
to this subsection 1.10(b), in connection with investigating or defending any
such loss, claim, damage, liability, or action; provided, however, that the
indemnity agreement contained in this subsection 1.10(b) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Holder, which consent
shall not be unreasonably withheld; provided, that, in no event shall any
indemnity under this subsection 1.10(b) exceed the net proceeds (defined as
gross proceeds less payment of the underwriting discounts and commissions
applicable to such securities) from the offering received by such Holder.
(c) Promptly after receipt by an indemnified party under this Section
1.10 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 1.10, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however,
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that an indemnified party (together with all other indemnified parties which may
be represented without conflict by one counsel) shall have the right to retain
one separate counsel, with the fees and expenses to be paid by the indemnifying
party, if representation of such indemnified party by the counsel retained by
the indemnifying party would be inappropriate due to actual or potential
differing interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to deliver written
notice to the indemnifying party within a reasonable time of the commencement of
any such action, if prejudicial to its ability to defend such action, shall
relieve such indemnifying party of any liability to the indemnified party under
this Section 1.10, but the omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that it may have to any
indemnified party otherwise than under this Section 1.10.
(d) If the indemnification provided for in this Section 1.10 is held
by a court of competent jurisdiction to be unavailable to an indemnified party
with respect to any loss, liability, claim, damage, or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage, or expense
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the other in
connection with the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
(e) Notwithstanding the foregoing, to the extent that the provisions
on indemnification and contribution contained in the underwriting agreement
entered into in connection with the underwritten public offering are in conflict
with the foregoing provisions, the provisions in the underwriting agreement
shall control.
(f) The obligations of the Company and Holders under this Section 1.10
shall survive the completion of any offering of Registrable Securities in a
registration statement under this Section 1, and otherwise.
1.11 Reports Under 1934 Act. With a view to making available to the Holders
the benefits of Rule 144 promulgated under the Act and any other rule or
regulation of the SEC that may at any time permit a Holder to sell securities of
the Company to the public without registration or pursuant to a registration on
Form S-3, the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in SEC Rule 144, at all times after ninety (90) days
after the effective date of the first registration statement filed by the
Company for the offering of its securities to the general public;
(b) take such action, including the voluntary registration of its
Common Stock under Section 12 of the 1934 Act, as is necessary to enable the
Holders to utilize
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Form S-3 for the sale of their Registrable Securities, such action to be taken
as soon as practicable after the end of the fiscal year in which the first
registration statement filed by the Company for the offering of its securities
to the general public is declared effective;
(c) file with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the 1934 Act; and
(d) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144 (at
any time after ninety (90) days after the effective date of the first
registration statement filed by the Company), the Act and the 1934 Act (at any
time after it has become subject to such reporting requirements), or that it
qualifies as a registrant whose securities may be resold pursuant to Form S-3
(at any time after it so qualifies), (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed by
the Company, and (iii) such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the SEC which permits the
selling of any such securities without registration or pursuant to such form.
1.12 Form S-3 Registration. In case the Company shall receive from any
Holder or Holders holding at least twenty percent (20%) of the Registrable
Securities or thirty percent (30%) of the New Registrable Securities then
outstanding a written request or requests that the Company effect a registration
on Form S-3 and any related qualification or compliance with respect to all or a
part of the Registrable Securities owned by such Holder or Holders, the Company
will:
(a) promptly give written notice of the proposed registration,
and any related qualification or compliance, to all other Holders; and
(b) use its best efforts to effect, as soon as practicable, such
registration and all such qualifications and compliances as may be so requested
and as would permit or facilitate the sale and distribution of all or such
portion of such Holder's or Holders' Registrable Securities as are specified in
such request, together with all or such portion of the Registrable Securities of
any other Holder or Holders joining in such request as are specified in a
written request given within fifteen (15) days after receipt of such written
notice from the Company; provided, however, that the Company shall not be
obligated to effect any such registration, qualification or compliance, pursuant
to this Section 1.12: (1) if Form S-3 is not available for such offering by the
Holders; (2) if the Holders, together with the holders of any other securities
of the Company entitled to inclusion in such registration, propose to sell
Registrable Securities and such other securities (if any) at an aggregate price
to the public (net of any underwriters' discounts or commissions) of less than
$3,000,000; (3) if the Company shall furnish to the Holders a certificate signed
by the President of the Company stating that in the good faith judgment of the
Board of Directors of the Company, it would be seriously detrimental to the
Company and its shareholders for such Form S-3 Registration to be effected at
such time, in which event the Company shall have the right to defer the filing
of the Form S-3 registration statement for a period of not more than sixty (60)
days after receipt of the request of the Holder or Holders under this Section
1.12; provided, however, that the Company shall not utilize this right more than
once in any twelve (12) month period; (4) if the Company has, within the twelve
11
<PAGE>
(12) month period preceding the date of such request, already effected two
registrations on Form S-3 for the Holders pursuant to this Section 1.12; or (5)
in any particular jurisdiction in which the Company would be required to qualify
to do business or to execute a general consent to service of process in
effecting such registration, qualification or compliance.
(c) Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities and other securities
so requested to be registered as soon as practicable after receipt of the
request or requests of the Holders. All expenses incurred in connection with a
registration requested pursuant to Section 1.12, including (without limitation)
all registration, filing, qualification, printer's and accounting fees and the
fees and disbursements of counsel for the Company and up to $10,000 of the
reasonable fees and disbursements of one counsel for the Holders associated with
the Registrable Securities, but excluding any underwriters' discounts or
commissions and fees and expenses in excess of such $10,000, expenses referred
to in Section 1.6, shall be borne by the Company. Registrations effected
pursuant to this Section 1.12 shall not be counted as demands for registration
or registrations effected pursuant to Section 1.2 or 1.3.
(d) The Company shall not be obligated to effect any registration
pursuant to this Section 1.12 if the Company delivers to the Holders requesting
registration under this Section 1.12 an opinion, in form and substance
acceptable to such Holders, of counsel satisfactory to such Holders, that the
Registrable Securities so requested to be registered may be sold or transferred
pursuant to Rule 144(k) under the Act.
1.13 Assignment of Registration Rights. The rights to cause the
Company to register Registrable Securities pursuant to this Section 1 may be
assigned by a Holder to a transferee or assignee of such securities provided
only (a) if the transfer involves not less than 100,000 shares of Registrable
Securities (as presently constituted and subject to subsequent adjustments for
stock splits, stock dividends, reverse stock splits and the like), (b) to a
transferee of all of the Registrable Securities held by the Holder, or (c) to
the constituent partners or shareholders of a Holder who agree to act through a
single representative provided that the Company is given a written notice at the
time of or within a reasonable time after such transfer or assignment, stating
the name and address of the transferee or assignee and identifying the
securities with respect to which such registration rights are being transferred
or assigned, and, provided further, that the transferee or assignee of such
rights assumes the obligations of such Holder under this Section 1.
1.14 Limitations on Subsequent Registration Rights. From and after the
date of this Agreement, the Company shall not, without the prior written consent
of the Holders of a majority of the outstanding Registrable Securities, enter
into any agreement with any holder or prospective holder of any securities of
the Company which would allow such holder or prospective holder (a) to include
such securities in any registration filed under Section 1.2 hereof, unless under
the terms of such agreement, such holder or prospective holder may include such
securities in any such registration only to the extent that the inclusion of
such holder's securities will not reduce the amount of the Registrable
Securities of the Holders which is included or (b) to make a demand registration
which could result in such registration statement being declared effective prior
to the earlier of either of the dates set forth in subsection 1.2(a) or
12
<PAGE>
within one hundred twenty (120) days of the effective date of any registration
effected pursuant to Section 1.2.
1.15 "Market Stand-Off" Agreement. Each Investor hereby agrees that,
during the period of duration specified by the Company and an underwriter of
common stock or other securities of the Company, following the effective date of
a registration statement of the Company filed under the Act, it shall not, to
the extent requested by the Company and such underwriter, directly or indirectly
sell, offer to sell, contract to sell (including, without limitation, any short
sale), grant any option to purchase or otherwise transfer or dispose of (other
than to donees who agree to be similarly bound) any securities of the Company
held by it at any time during such period except common stock included in such
registration; provided, however, that:
(a) such agreement shall be applicable only to the first such
registration statement of the Company which covers common stock to be sold on
its behalf to the public in an underwritten offering;
(b) all officers and directors of the Company, all one percent
(1%) or greater shareholders and all other persons with registration rights
(whether or not pursuant to this Agreement) enter into similar agreements;
(c) such market stand-off time period shall not exceed one
hundred eighty (180) days; and
(d) such agreement shall not be applicable to any shares acquired
in the initial public offering or acquired by an Investor in an open-market
transaction after the initial public offering.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Investor (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such period.
Notwithstanding the foregoing, the obligations described in this
Section 1.15 shall not apply to a registration relating solely to employee
benefit plans on Form S-l or Form S-8 or similar forms which may be promulgated
in the future, or a registration relating solely to a Commission Rule 145
transaction on Form S-4 or similar forms which may be promulgated in the future.
1.16 Termination of Registration Rights.
(a) No Holder shall be entitled to exercise any right provided
for in this Section 1 after five (5) years following the consummation of the
sale of securities pursuant to a registration statement filed by the Company
under the Act in connection with the initial offering of its securities to the
general public.
(b) In addition, the right of any Holder to request registration
or inclusion in any registration pursuant to Section 1.3 shall terminate on the
closing of the first Company-initiated registered public offering of Common
Stock of the Company if all shares of
13
<PAGE>
Registrable Securities held or entitled to be held upon conversion by such
Holder may immediately be sold under Rule 144 during any ninety (90)-day period,
or on such date after the closing of the first Company-initiated registered
public offering of Common Stock of the Company as all shares of Registrable
Securities held or entitled to be held upon conversion by such Holder may
immediately be sold under Rule 144 during any ninety (90)-day period.
2. Covenants of the Company. Until the earlier of (i) the consummation
date of the Company's offering of its securities to the general public or (ii)
the acquisition of the Company by means of merger or other form of corporate
reorganization in which outstanding shares of the Company are exchanged for
securities or other consideration issued, or caused to be issued, by the
acquiring corporation or its subsidiary (other than a mere reincorporation
transaction) and pursuant to which the holders of the outstanding voting
securities of the Company immediately prior to such consolidation, merger or
other transaction fail to hold equity securities representing a majority of the
voting power of the Company or surviving entity immediately following such
consolidation, merger or other transaction or (iv) the sale of all or
substantially all of the assets of the Company, the Company shall comply with
the following covenants:
2.1 Financial Statements and Other Information. The Company shall
deliver to each Holder so long as such Holder beneficially owns at least 440,000
shares of Registrable Securities (subject to appropriate adjustment for stock
splits, stock dividends, combinations and other recapitalizations) or 125,000
shares of Series D Preferred Stock (subject to appropriate adjustment for stock
splits, stock dividends, combinations and other recapitalizations).
(a) as soon as available, but in any event within thirty (30)
days after the end of each month, monthly unaudited consolidated statements of
income and cash flows of the Company and its subsidiaries and monthly unaudited
consolidated balance sheets of the Company and its subsidiaries, and all such
statements shall be prepared in accordance with U.S. generally accepted
accounting principles ("GAAP"), consistently applied, except that they may not
contain full footnote disclosures and may be subject to normal year-end
adjustments for recurring accruals;
(b) within thirty (30) days after the end of each quarter,
quarterly unaudited consolidated statements of income and cash flows of the
Company and its subsidiaries and quarterly unaudited consolidated balance sheets
of the Company and its subsidiaries, and all such statements shall be prepared
in accordance with GAAP, consistently applied, except that they may not contain
full footnote disclosures and may be subject to normal year-end adjustments for
recurring accruals;
(c) as soon as available but in any event within one hundred
twenty (120) days after the end of each fiscal year, audited consolidated
statements of income and cash flows of the Company and its subsidiaries for such
fiscal year, and an audited consolidated balance sheet of the Company and its
subsidiaries as of the end of the fiscal year, all prepared in accordance with
GAAP, consistently applied; and
(d) at least thirty (30) days prior to the end of the Company's
fiscal year, an annual budget and operating plan prepared on a monthly basis for
the Company and its
14
<PAGE>
subsidiaries for the following fiscal year requested (displaying anticipated
statements of income and cash flows and balance sheets), approved by the
Company's Board of Directors, and promptly upon preparation thereof any material
revisions of such annual or other budgets and operating plans.
2.2 Inspection of Property. The Company shall permit each Holder so
long as the Holder beneficially owns at least 440,000 shares of Registrable
Securities (subject to appropriate adjustment for stock splits, stock dividends,
combinations and other recapitalizations), upon reasonable notice and during
normal business hours and at such other times as any such person may reasonably
request, to (a) examine the corporate and financial records of the Company and
its subsidiaries and make copies thereof or extracts therefrom and (b) discuss
the affairs, finances and accounts of any such entities with the directors,
officers, key employees and independent accountants of the Company and its
subsidiaries; provided, however, that the Company shall not be obligated
pursuant to any requirement to provide access to any information which it
reasonably considers to be a trade secret or similar confidential information.
2.3 Board Observation Rights. The Company shall permit a
representative of Amerindo Investment Advisors Inc. (the "Observer") to attend
all meetings of the Company's Board of Directors (the "Board") (whether in
person, telephonic or other) in a non-voting, observer capacity and shall
provide to the Observer, concurrently with the members of the Board, and in the
same manner, notice of such meeting and a copy of all materials provided to such
members; provided, however, that the Company reserves the right to withhold any
information and to exclude the Observer from any meeting or portion thereof if
the Company reasonably believes that access to such information or attendance at
such meeting would (a) involve a conflict of interest regarding the Observer,
(b) be necessary in order to meet or protect any fiduciary obligations of the
Board or (c) adversely affect the confidentiality or attorney-client privilege
between the Company and its counsel or would result in disclosure of trade
secrets to such Observer or its representative is a direct or indirect
competitor of the Company, as determined in good faith by the Board of
Directors.
2.4 Board Actions. The Company shall not take any of the following
actions without the approval of two-thirds of the members of the Board of
Directors:
(a) issue any equity securities to employees or lenders or
lessors; or
(b) issue any equity securities for strategic business
relationships or corporate partnership arrangements.
3. Miscellaneous.
3.1 Successors and Assigns. Except as otherwise provided herein, the
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any shares of Registrable Securities). Nothing in this Agreement,
express or implied, is intended to confer upon any party other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations, or liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement.
15
<PAGE>
3.2 Prior Agreement. Effective upon the execution and delivery of
this Agreement by all parties thereto, the Prior Agreement hereby shall be
terminated and shall be of no further force and effect and shall be superseded
and replaced in its entirety by this Agreement.
3.3 Governing Law. This Agreement shall be governed by and construed
under the laws of the State of California.
3.4 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
3.5 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
3.6 Notices. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with the United States Post Office, by registered or certified mail,
postage prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page hereof, or at such other address
as such party may designate by ten (10) days' advance written notice to the
other parties.
3.7 Expenses. If any action at law or in equity is necessary to
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
3.8 Amendments and Waivers. Any term of this Agreement may be amended
and the observance of any term of this Agreement may be waived (either generally
or in a particular instance and either retroactively or prospectively), only
with the written consent of the Company and the holders of a majority of the
Registrable Securities then outstanding; provided however that no amendment or
waiver that materially adversely affects the rights of Mark Gainey, Michael
Horvath, Ragnhild Horvath or the Beni M. Horvath Trust 1991 shall be made
without the consent of each of such persons or entity and provided however that
any amendment or waiver that materially adversely affects the rights of the
holders of Series C Preferred Stock in a manner different than any other holder
of Preferred Stock shall require the written consent of the holders of a
majority of the Series C Preferred Stock. Any amendment or waiver effected in
accordance with this paragraph shall be binding upon each holder of any
Registrable Securities then outstanding, each future holder of all such
Registrable Securities, and the Company.
3.9 Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
16
<PAGE>
3.10 Aggregation of Stock. All shares of Registrable Securities held
or acquired by affiliated entities or persons shall be aggregated together for
the purpose of determining the availability of any rights under this Agreement.
3.11 Entire Agreement. This Agreement (including the Exhibits hereto,
if any) constitutes the full and entire understanding and agreement between the
parties with regard to the subjects hereof and thereof.
3.12 Confidentiality. Each Investor not otherwise subject to a
fiduciary duty agrees that it will maintain the confidentiality of any
information obtained by it, pursuant to this Agreement or by virtue of its
relationship as a stockholder of the Company, which is not otherwise lawfully
available from other sources, subject to the disclosure of information of a non-
technical nature, including summary financial information, which such Investor
is obligated to disclose to its partners and/or stockholders.
17
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
KANA COMMUNICATIONS, INC.
/s/ Mark S. Gainey
By:------------------------------------
Mark S. Gainey
President
INVESTORS:
/s/ Mark Gainey
---------------------------------------
MARK S. GAINEY
<PAGE>
ATGF II, a Panamanian corporation
/s/ Gary Tanaka
By:----------------------------------------
Its: Director
<PAGE>
New Millennium Partners - Kana, L.P.
/s/ Robert Senoff
---------------------------------------------
Robert Senoff
Managing Member
New Millenium Venture Partners, LLC;
General Partner
for New Millenium Partners - Kana, L.P.
<PAGE>
Benchmark Capital Partners, L.P.
By: Benchmark Capital Management Co., L.L.C.
Its General Partner
By: /s/ DAVID BEIRNE
------------------------------------------
Name: DAVID BEIRNE
-----------------------------------
Title: ___________________________________
Address: ___________________________________
___________________________________
Benchmark Founders' Fund, L.P.
By: Benchmark Capital Management Co., L.L.C.
Its General Partner
By: /s/ DAVID BEIRNE
------------------------------------------
Name: DAVID BEIRNE
-----------------------------------
Title: ___________________________________
Address: ___________________________________
___________________________________
<PAGE>
Draper Fisher Associates Fund IV, LP
By: /s/ Steve Jurvetson
----------------------------------
Title: ______________________________
Address:______________________________
______________________________
Draper Fisher Partners IV, LLC
By: /s/ Steve Jurvetson
----------------------------------
Title: ______________________________
Address:______________________________
______________________________
<PAGE>
Draper Richards L.P.
By: /s/ ROBIN R. DONOHOE
---------------------------------
Title: VP
------------------------------
Address: __________________________
__________________________
<PAGE>
/s/ Gary Tanaka
-------------------------------
Litton Master Trust
/s/ Emeric J. McDonald
-------------------------------
Emeric J. McDonald
/s/ Christopher Lord
-------------------------------
Pivotal Partners L.P.
/s/ Ralph H. Cechettini
-------------------------------
Ralph H. Cechettini 1995 Trust
/s/ Matthew O. Fitzmaurice
-------------------------------
Matthew O. Fitzmaurice
/s/ Anthony Ciulla
-------------------------------
Anthony Ciulla
/s/ Joaquin Garcia-Larrieu
-------------------------------
Joaquin Garcia-Larrieu
/s/ Bill Slattery
-------------------------------
Bill Slattery
/s/ Dan Chapey
-------------------------------
Dan Chapey
<PAGE>
Convergys Corporation
By: /s/ Steven G. Rolls
---------------------------------
Its: CFO
---------------------------------
<PAGE>
SCHEDULE A
----------
Benchmark Capital Partners, L.P.
Benchmark Founders' Fund, L.P.
Draper Fisher Associates Fund IV, L.P.
Draper Fisher Partners IV, LLC
Draper Richards, L.P.
Mark Gainey
Eric A. Hahn
High Street Partners, L.P.
Michael Horvath
Beni M. Horvath Trust 1991
Ragnhild Horvath
Stanford University
J.H. Whitney III, L.P.
Whitney Strategic Partners III, L.P.
ATGF II, a Panamanian corporation
James Stableford
Anthony Cuilla
Joaquin Garcia Larrieu
Emeric McDonald
Aspect Telecommunications
Litton Master Trust
Emeric J. McDonald
Pivotal Partners L.P.
Ralph H. Cechettini 1995 Trust
Matthew O. Fitzmaurice
Anthony Ciulla
Joaquin Garcia-Larrieu
Bill Slattery
Dan Chapey
New Millenium Venture Partners, LLC
<PAGE>
EXHIBIT 10.1
KANA COMMUNICATIONS, INC.
1997 STOCK OPTION/STOCK ISSUANCE PLAN
-------------------------------------
(Amended and Restated as of October 8, 1997)
I. PURPOSES OF THE PLAN
A. This 1997 Stock Option/Stock Issuance Plan is intended to promote
the interests of Kana Communications, Inc., a California corporation, by
providing a method whereby eligible individuals who provide valuable services to
the Corporation (or any Parent or Subsidiary) may be offered incentives and
rewards which will encourage them to acquire a proprietary interest, or
otherwise increase their proprietary interest, in the Corporation and continue
to render services to the Corporation (or any Parent or Subsidiary).
B. Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into two (2) separate equity programs:
- the Option Grant Program under which eligible persons
may, at the discretion of the Plan Administrator, be granted options to purchase
shares of Common Stock, and
- the Stock Issuance Program under which eligible persons
may, at the discretion of the Plan Administrator, be issued shares of Common
Stock directly, either through the immediate purchase of such shares or as a
bonus for services rendered the Corporation (or any Parent or Subsidiary).
B. The provisions of Articles One and Four shall apply to both
equity programs under the Plan and shall accordingly govern the interests of all
persons under the Plan.
III. ADMINISTRATION OF THE PLAN
A. The Plan shall be administered by the Board. However, any or all
administrative functions otherwise exercisable by the Board may be delegated to
the Committee. Members of the Committee shall serve for such period of time as
the Board may determine and shall be subject to removal by the Board at any
time. The Board may also at any time terminate the functions of the Committee
and reassume all powers and authority previously delegated to the Committee.
B. The Plan Administrator shall have full power and authority
(subject to the provisions of the Plan) to establish such rules and regulations
as it may deem appropriate for proper administration of the Plan and to make
such determinations under, and issue such interpretations of,
<PAGE>
the Plan and any outstanding options or stock issuances thereunder as it may
deem necessary or advisable. Decisions of the Plan Administrator shall be final
and binding on all parties who have an interest in the Plan or any option or
stock issuance thereunder.
IV. ELIGIBILITY
A. The persons eligible to participate in the Plan are as follows:
(i) Employees,
(ii) non-employee members of the Board or the non-employee
members of the board of directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary).
B. The Plan Administrator shall have full authority to determine,
(i) with respect to the grants under the Option Grant Program, which eligible
persons are to receive the option grants, the time or times when those grants
are to be made, the number of shares to be covered by each such grant, the
status of the granted option as either an Incentive Option or a Non-Statutory
Option, the time or times when each option is to become exercisable, the vesting
schedule (if any) applicable to the option shares and the maximum term for which
the option is to remain outstanding, and (ii) with respect to stock issuances
under the Stock Issuance Program, which eligible persons are to receive such
stock issuances, the time or times when those issuances are to be made, the
number of shares to be issued to each Participant, the vesting schedule (if any)
applicable to the issued shares and the consideration to be paid by the
Participant for such shares.
C. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Option Grant Program or to effect stock
issuances in accordance with the Stock Issuance Program.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock. The maximum number of shares of Common
Stock which may be issued over the term of the Plan shall not exceed 4,486,000
shares. Such share reserve includes (i) 2,700,000 shares of Common Stock that
were initially reserved for issuance under the Plan and (ii) an additional
increase of 1,786,000 shares of Common Stock authorized by the Board on October
8, 1997, and subsequently approved by the shareholders on October 8, 1997.
B. Shares of Common Stock subject to outstanding options shall be
available for subsequent issuance under the Plan to the extent (i) the options
expire or terminate for any reason prior to exercise in full or (ii) the options
are cancelled in accordance with the cancellation-regrant provisions of Article
Two. Unvested shares issued under the Plan and subsequently repurchased by the
Corporation, at the option exercise or direct issue price paid per share,
pursuant
2.
<PAGE>
to the Corporation's repurchase rights under the Plan shall be added back to the
number of shares of Common Stock reserved for issuance under the Plan and shall
accordingly be available for reissuance through one or more subsequent option
grants or direct stock issuances under the Plan.
C. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and/or class of securities issuable
under the Plan and (ii) the number and/or class of securities and the exercise
price per share in effect under each outstanding option under the Plan in order
to prevent the dilution or enlargement of benefits thereunder. The adjustments
determined by the Plan Administrator shall be final, binding and conclusive. In
no event shall any such adjustments be made in connection with the conversion of
one or more outstanding shares of the Corporation's preferred stock into shares
of Common Stock.
3.
<PAGE>
ARTICLE TWO
OPTION GRANT PROGRAM
--------------------
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
--------
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. Exercise Price.
--------------
1. The exercise price per share shall be fixed by the Plan
Administrator in accordance with the following provisions:
(i) The exercise price per share shall not be less than
eighty-five percent (85%) of the Fair Market Value per share of Common
Stock on the option grant date.
(ii) If the person to whom the option is granted is a 10%
Shareholder, then the exercise price per share shall not be less than one
hundred ten percent (110%) of the Fair Market Value per share of Common
Stock on the option grant date.
2. The exercise price shall become immediately due upon exercise of
the option and shall, subject to the provisions of Section I of Article Four and
the documents evidencing the option, be payable in cash or check made payable to
the Corporation. Should the Common Stock be registered under Section 12(g) of
the 1934 Act at the time the option is exercised, then the exercise price may
also be paid as follows:
(i) in shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise Date, or
4.
<PAGE>
(ii) to the extent the option is exercised for vested
shares, through a special sale and remittance procedure pursuant to which
the Optionee shall concurrently provide irrevocable instructions (A) to a
Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be
withheld by the Corporation by reason of such exercise and (B) to the
Corporation to deliver the certificates for the purchased shares directly
to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. Exercise and Term of Options. Each option shall be exercisable
----------------------------
at such time or times, during such period and for such number of shares as shall
be determined by the Plan Administrator and set forth in the documents
evidencing the option grant. However, no option shall have a term in excess of
ten (10) years measured from the option grant date.
C. Effect of Termination of Service.
--------------------------------
1. The following provisions shall govern the exercise of any options
held by the Optionee at the time of cessation of Service or death:
(i) Should the Optionee cease to remain in Service for any
reason other than death, Disability or Misconduct, then the Optionee shall
have a period of three (3) months following the date of such cessation of
Service during which to exercise each outstanding option held by such
Optionee.
(ii) Should Optionee's Service terminate by reason of
Disability, then the Optionee shall have a period of twelve (12) months
following the date of such cessation of Service during which to exercise
each outstanding option held by such Optionee.
(iii) If the Optionee dies while holding an outstanding
option, then the personal representative of his or her estate or the person
or persons to whom the option is transferred pursuant to the Optionee's
will or the laws of inheritance shall have a twelve (12)-month period
following the date of the Optionee's death to exercise such option.
(iv) Under no circumstances, however, shall any such option
be exercisable after the specified expiration of the option term.
(v) During the applicable post-Service exercise period,
the option may not be exercised in the aggregate for more than the number
of vested
5.
<PAGE>
shares for which the option is exercisable on the date of the Optionee's
cessation of Service. Upon the expiration of the applicable exercise period
or (if earlier) upon the expiration of the option term, the option shall
terminate and cease to be outstanding for any vested shares for which the
option has not been exercised. However, the option shall, immediately upon
the Optionee's cessation of Service, terminate and cease to be outstanding
with respect to any and all option shares for which the option is not
otherwise at the time exercisable or in which the Optionee is not otherwise
at that time vested.
(vi) Should Optionee's Service be terminated for
Misconduct, then all outstanding options held by the Optionee shall
terminate immediately and cease to remain outstanding.
2. The Plan Administrator shall have the discretion, exercisable
either at the time an option is granted or at any time while the option remains
outstanding, to:
(i) extend the period of time for which the option is to
remain exercisable following Optionee's cessation of Service or death from
the limited period otherwise in effect for that option to such greater
period of time as the Plan Administrator shall deem appropriate, but in no
event beyond the expiration of the option term, and/or
(ii) permit the option to be exercised, during the
applicable post-Service exercise period, not only with respect to the
number of vested shares of Common Stock for which such option is
exercisable at the time of the Optionee's cessation of Service but also
with respect to one or more additional installments in which the Optionee
would have vested under the option had the Optionee continued in Service.
D. Shareholder Rights. The holder of an option shall have no
------------------
shareholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. Unvested Shares. The Plan Administrator shall have the
---------------
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares,
the Corporation shall have the right to repurchase, at the exercise price paid
per share, any or all of those unvested shares. The terms upon which such
repurchase right shall be exercisable (including the period and procedure for
exercise and the appropriate vesting schedule for the purchased shares) shall be
established by the Plan Administrator and set forth in the document evidencing
such repurchase right. The Plan Administrator may not impose a vesting schedule
upon the option grant or any shares of Common Stock subject to that option which
is more restrictive than twenty percent (20%) per year vesting, with the initial
vesting to occur not later than one (1) year after the option grant date.
However, such limitation shall not be applicable to any option grants made to
individuals who are officers of the Corporation, non-employee Board members or
independent consultants.
6.
<PAGE>
F. First Refusal Rights. Until such time as the Common Stock is
--------------------
first registered under Section 12(g) of the 1934 Act, the Corporation shall have
the right of first refusal with respect to any proposed disposition by the
Optionee (or any successor in interest) of any shares of Common Stock issued
under the Plan. Such right of first refusal shall be exercisable in accordance
with the terms established by the Plan Administrator and set forth in the
document evidencing such right.
G. Limited Transferability of Options. During the lifetime of the
----------------------------------
Optionee, the option shall be exercisable only by the Optionee and shall not be
assignable or transferable other than by will or by the laws of descent and
distribution following the Optionee's death.
H. Withholding. The Corporation's obligation to deliver shares of
-----------
Common Stock upon the exercise of any options granted under the Plan shall be
subject to the satisfaction of all applicable Federal, state and local income
and employment tax withholding requirements.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of the Plan shall be applicable to Incentive Options. Options which
are specifically designated as Non-Statutory Options shall not be subject to the
---
terms of this Section II.
A. Eligibility. Incentive Options may only be granted to Employees.
-----------
B. Exercise Price. The exercise price per share shall not be less
--------------
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.
C. Dollar Limitation. The aggregate Fair Market Value of the shares
-----------------
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one (1) calendar year
shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the
extent the Employee holds two (2) or more such options which become exercisable
for the first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
D. 10% Shareholder. If any Employee to whom an Incentive Option is
---------------
granted is a 10% Shareholder, then the option term shall not exceed five (5)
years measured from the option grant date.
7.
<PAGE>
III. CORPORATE TRANSACTION
A. The shares subject to each option outstanding under the Plan at
the time of a Corporate Transaction shall automatically vest in full so that
each such option shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable for all of the shares of Common Stock at
the time subject to that option and may be exercised for any or all of those
shares as fully-vested shares of Common Stock. However, the shares subject to
an outstanding option shall not vest on such an accelerated basis if and to the
extent: (i) such option is assumed by the successor corporation (or parent
thereof) in the Corporate Transaction and the Corporation's repurchase rights
with respect to the unvested option shares are concurrently assigned to such
successor corporation (or parent thereof) or (ii) such option is to be replaced
with a cash incentive program of the successor corporation which preserves the
spread existing on the unvested option shares at the time of the Corporate
Transaction and provides for subsequent payout in accordance with the same
vesting schedule applicable to those unvested option shares or (iii) the
acceleration of such option is subject to other limitations imposed by the Plan
Administrator at the time of the option grant.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Corporate Transaction,
except to the extent: (i) those repurchase rights are assigned to the successor
corporation (or parent thereof) in connection with such Corporate Transaction or
(ii) such accelerated vesting is precluded by other limitations imposed by the
Plan Administrator at the time the repurchase right is issued.
C. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction, had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to (i) the number and class of
securities available for issuance under the Plan following the consummation of
such Corporate Transaction and (ii) the exercise price payable per share under
each outstanding option, provided the aggregate exercise price payable for such
--------
securities shall remain the same.
E. The Plan Administrator shall have the discretion, exercisable
either at the time the option is granted or at any time while the option remains
outstanding, to provide for the automatic acceleration (in whole or in part) of
one or more outstanding options (and the immediate termination of the
Corporation's repurchase rights with respect to the shares subject to those
options) upon the occurrence of a Corporate Transaction, whether or not those
options are to be assumed in the Corporate Transaction.
8.
<PAGE>
F. The Plan Administrator shall also have full power and authority,
exercisable either at the time the option is granted or at any time while the
option remains outstanding, to structure such option so that the shares subject
to that option will automatically vest on an accelerated basis should the
Optionee's Service terminate by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (18) months) following the effective
date of any Corporate Transaction in which the option is assumed and the
repurchase rights applicable to those shares do not otherwise terminate. Any
option so accelerated shall remain exercisable for the fully-vested option
shares until the earlier of (i) the expiration of the option term or (ii) the
-------
expiration of the one (1)-year period measured from the effective date of the
Involuntary Termination. In addition, the Plan Administrator may provide that
one or more of the Corporation's outstanding repurchase rights with respect to
shares held by the Optionee at the time of such Involuntary Termination shall
immediately terminate on an accelerated basis, and the shares subject to those
terminated rights shall accordingly vest at that time.
G. The portion of any Incentive Option accelerated in connection
with a Corporate Transaction shall remain exercisable as an Incentive Option
only to the extent the applicable One Hundred Thousand Dollar limitation is not
exceeded. To the extent such dollar limitation is exceeded, the accelerated
portion of such option shall be exercisable as a Non-Statutory Option under the
Federal tax laws.
H. The grant of options under the Plan shall in no way affect the
right of the Corporation to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Plan and to grant in
substitution therefor new options covering the same or different number of
shares of Common Stock but with an exercise price per share based on the Fair
Market Value per share of Common Stock on the new option grant date.
9.
<PAGE>
ARTICLE THREE
STOCK ISSUANCE PROGRAM
----------------------
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below.
A. Purchase Price.
--------------
1. The purchase price per share shall be fixed by the Plan
Administrator but shall not be less than eighty-five percent (85%) of the Fair
Market Value per share of Common Stock on the issue date. However, the purchase
price per share of Common Stock issued to a 10% Shareholder shall not be less
than one hundred and ten percent (110%) of such Fair Market Value.
2. Subject to the provisions of Section I of Article Four, shares of
Common Stock may be issued under the Stock Issuance Program for any of the
following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any Parent or
Subsidiary).
B. Vesting Provisions.
------------------
1. Shares of Common Stock issued under the Stock Issuance Program
may, in the discretion of the Plan Administrator, be fully and immediately
vested upon issuance or may vest in one or more installments over the
Participant's period of Service or upon attainment of specified performance
objectives. However, the Plan Administrator may not impose a vesting schedule
upon any stock issuance effected under the Stock Issuance Program which is more
restrictive than twenty percent (20%) per year vesting, with initial vesting to
occur not later than one (1) year after the issuance date. Such limitation
shall not apply to any Common Stock issuances made to the officers of the
Corporation, non-employee Board members or independent consultants.
10.
<PAGE>
2. Any new, substituted or additional securities or other property
(including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.
3. The Participant shall have full shareholder rights with respect
to any shares of Common Stock issued to the Participant under the Stock Issuance
Program, whether or not the Participant's interest in those shares is vested.
Accordingly, the Participant shall have the right to vote such shares and to
receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while holding
one or more unvested shares of Common Stock issued under the Stock Issuance
Program or should the performance objectives not be attained with respect to one
or more such unvested shares of Common Stock, then those shares shall be
immediately surrendered to the Corporation for cancellation, and the Participant
shall have no further shareholder rights with respect to those shares. To the
extent the surrendered shares were previously issued to the Participant for
consideration paid in cash or cash equivalent (including the Participant's
purchase-money indebtedness), the Corporation shall repay to the Participant the
cash consideration paid for the surrendered shares and shall cancel the unpaid
principal balance of any outstanding purchase-money note of the Participant
attributable to such surrendered shares.
5. The Plan Administrator may in its discretion waive the surrender
and cancellation of one or more unvested shares of Common Stock (or other assets
attributable thereto) which would otherwise occur upon the non-completion of the
vesting schedule applicable to such shares. Such waiver shall result in the
immediate vesting of the Participant's interest in the shares of Common Stock as
to which the waiver applies. Such waiver may be effected at any time, whether
before or after the Participant's cessation of Service or the attainment or non-
attainment of the applicable performance objectives.
C. First Refusal Rights. Until such time as the Common Stock is
--------------------
first registered under Section 12(g) of the 1934 Act, the Corporation shall have
the right of first refusal with respect to any proposed disposition by the
Participant (or any successor in interest) of any shares of Common Stock issued
under the Stock Issuance Program. Such right of first refusal shall be
exercisable in accordance with the terms established by the Plan Administrator
and set forth in the document evidencing such right.
11.
<PAGE>
II. CORPORATE TRANSACTION
A. Upon the occurrence of a Corporate Transaction, all outstanding
repurchase rights under the Stock Issuance Program shall terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, except to the extent: (i) those repurchase
rights are assigned to the successor corporation (or parent thereof) in
connection with such Corporate Transaction or (ii) such accelerated vesting is
precluded by other limitations imposed by the Plan Administrator at the time the
repurchase right is issued.
B. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights with respect to those shares remain
outstanding, to provide that those rights shall automatically terminate on an
accelerated basis, and the shares of Common Stock subject to those terminated
rights shall immediately vest, in the event the Participant's Service should
subsequently terminate by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (18) months) following the effective
date of any Corporate Transaction in which those repurchase rights are assigned
to the successor corporation (or parent thereof).
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.
12.
<PAGE>
ARTICLE FOUR
MISCELLANEOUS
-------------
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price or the purchase price for shares issued to such person
under the Plan by delivering a full-recourse, interest-bearing promissory note
payable in one or more installments and secured by the purchased shares.
However, any promissory note delivered by a consultant must be secured by
collateral in addition to the purchased shares of Common Stock. In no event
shall the maximum credit available to the Optionee or Participant exceed the sum
---
of (i) the aggregate option exercise price or purchase price payable for the
purchased shares plus (ii) any Federal, state and local income and employment
tax liability incurred by the Optionee or the Participant in connection with the
option exercise or share purchase.
II. EFFECTIVE DATE AND TERM OF PLAN
A. The Plan shall become effective upon adoption by the Board on May
22, 1997, but no option granted under the Plan may be exercised, and no shares
shall be issued under the Plan, until the Plan is approved by the Corporation's
shareholders. If such shareholder approval is not obtained within twelve (12)
months after the date of the Board's adoption of the Plan, then all options
previously granted under the Plan shall terminate and cease to be outstanding,
and no further options shall be granted and no shares shall be issued under the
Plan. Subject to such limitation, the Plan Administrator may grant options and
issue shares under the Plan at any time after the effective date of the Plan and
before the date fixed herein for termination of the Plan.
B. The Plan shall terminate upon the earliest to occur of (i) the
--------
expiration of the ten (10)-year period measured from the May 22, 1997 effective
date of the Plan, (ii) the date on which all shares available for issuance under
the Plan shall have been issued as vested shares or (iii) the termination of all
outstanding options in connection with a Corporate Transaction. All options and
unvested stock issuances outstanding at that time under the Plan shall continue
to have full force and effect in accordance with the provisions of the documents
evidencing such options or issuances.
13.
<PAGE>
III. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, no such amendment
or modification shall adversely affect the rights and obligations with respect
to options or unvested stock issuances at the time outstanding under the Plan
unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require shareholder approval
pursuant to applicable laws and regulations.
B. The Plan was amended and restated by the Board on October 8, 1997
to increase the maximum number of shares of Common Stock authorized for issuance
over the term of the Plan by an additional 1,786,000 shares to 4,486,000 shares.
This amendment and restatement of the Plan was approved by the Company's
shareholders on October 8, 1997.
C. Options may be granted under the Option Grant Program and shares
may be issued under the Stock Issuance Program which are in each instance in
excess of the number of shares of Common Stock then available for issuance under
the Plan, provided any excess shares actually issued under those programs shall
be held in escrow until there is obtained shareholder approval of an amendment
sufficiently increasing the number of shares of Common Stock available for
issuance under the Plan. If such shareholder approval is not obtained within
twelve (12) months after the date the first such excess issuances are made, then
(i) any unexercised options granted on the basis of such excess shares shall
terminate and cease to be outstanding and (ii) the Corporation shall promptly
refund to the Optionees and the Participants the exercise or purchase price paid
for any excess shares issued under the Plan and held in escrow, together with
interest (at the applicable Short Term Federal Rate) for the period the shares
were held in escrow, and such shares shall thereupon be automatically cancelled
and cease to be outstanding.
IV. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.
V. WITHHOLDING
The Corporation's obligation to deliver shares of Common Stock upon
the exercise of any options or upon the issuance or vesting of any shares issued
under the Plan shall be subject to the satisfaction of all applicable Federal,
state and local income and employment tax withholding requirements.
VI. REGULATORY APPROVALS
The implementation of the Plan, the granting of any options under the
Plan and the issuance of any shares of Common Stock (i) upon the exercise of any
option or (ii) under the Stock Issuance Program shall be subject to the
Corporation's procurement of all approvals and permits
14.
<PAGE>
required by regulatory authorities having jurisdiction over the Plan, the
options granted under it and the shares of Common Stock issued pursuant to it.
VII. NO EMPLOYMENT OR SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
VIII. FINANCIAL REPORTS
The Corporation shall deliver a balance sheet and an income statement
at least annually to each individual holding an outstanding option under the
Plan, unless such individual is a key Employee whose duties in connection with
the Corporation (or any Parent or Subsidiary) assure such individual access to
equivalent information.
15.
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. Board shall mean the Corporation's Board of Directors.
-----
B. Code shall mean the Internal Revenue Code of 1986, as amended.
----
C. Committee shall mean a committee of two (2) or more Board members
---------
appointed by the Board to exercise one or more administrative functions under
the Plan.
D. Common Stock shall mean the Corporation's common stock.
------------
E. Corporate Transaction shall mean either of the following shareholder-
---------------------
approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
F. Corporation shall mean Kana Communications, Inc., a California
-----------
corporation, and any successor corporation to all or substantially all of the
assets or voting stock of Kana Communications, Inc. which shall by appropriate
action adopt the Plan.
G. Disability shall mean the inability of the Optionee or the
----------
Participant to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment and shall be determined by
the Plan Administrator on the basis of such medical evidence as the Plan
Administrator deems warranted under the circumstances.
H. Employee shall mean an individual who is in the employ of the
--------
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
I. Exercise Date shall mean the date on which the Corporation shall have
-------------
received written notice of the option exercise.
J. Fair Market Value per share of Common Stock on any relevant date shall
-----------------
be determined in accordance with the following provisions:
1.
<PAGE>
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market or any successor system. If there is no closing selling
price for the Common Stock on the date in question, then the Fair Market
Value shall be the closing selling price on the last preceding date for
which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for the
Common Stock on the date in question, then the Fair Market Value shall be
the closing selling price on the last preceding date for which such
quotation exists.
(iii) If the Common Stock is at the time neither listed on any
Stock Exchange nor traded on the Nasdaq National Market, then the Fair
Market Value shall be determined by the Plan Administrator after taking
into account such factors as the Plan Administrator shall deem appropriate.
K. Incentive Option shall mean an option which satisfies the requirements
----------------
of Code Section 422.
L. Involuntary Termination shall mean the termination of the Service of
-----------------------
any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation which materially reduces
his or her level of responsibility, (B) a reduction in his or her level of
compensation (including base salary, fringe benefits and target bonuses
under any corporate-performance based bonus or incentive programs) by more
than fifteen percent (15%) or (C) a relocation of such individual's place
of employment by more than fifty (50) miles, provided and only if such
change, reduction or relocation is effected without the individual's
consent.
M. Misconduct shall mean the commission of any act of fraud, embezzlement
----------
or dishonesty by the Optionee or Participant, any unauthorized use or disclosure
by such person of confidential information or trade secrets of the Corporation
(or any Parent or Subsidiary), or any other intentional misconduct by such
person adversely affecting the business or affairs of the
2.
<PAGE>
Corporation (or any Parent or Subsidiary) in a material manner. The foregoing
definition shall not be deemed to be inclusive of all the acts or omissions
which the Corporation (or any Parent or Subsidiary) may consider as grounds for
the dismissal or discharge of any Optionee, Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).
N. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.
--------
O. Non-Statutory Option shall mean an option not intended to satisfy the
--------------------
requirements of Code Section 422.
P. Option Grant Program shall mean the option grant program in effect
--------------------
under the Plan.
Q. Optionee shall mean any person to whom an option is granted under the
--------
Plan.
R. Parent shall mean any corporation (other than the Corporation) in an
------
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
S. Participant shall mean any person who is issued shares of Common Stock
-----------
under the Stock Issuance Program.
T. Plan shall mean the Corporation's 1997 Stock Option/Stock Issuance
----
Plan, as set forth in this document.
U. Plan Administrator shall mean either the Board or the Committee acting
------------------
in its capacity as administrator of the Plan.
V. Service shall mean the provision of services to the Corporation (or
-------
any Parent or Subsidiary) by a person in the capacity of an Employee, a non-
employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant.
W. Stock Exchange shall mean either the American Stock Exchange or the
--------------
New York Stock Exchange.
X. Stock Issuance Agreement shall mean the agreement entered into by the
------------------------
Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.
Y. Stock Issuance Program shall mean the stock issuance program in effect
----------------------
under the Plan.
3.
<PAGE>
Z. Subsidiary shall mean any corporation (other than the Corporation) in
----------
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
AA. 10% Shareholder shall mean the owner of stock (as determined under
---------------
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
4.
<PAGE>
Z. Subsidiary shall mean any corporation (other than the Corporation) in
----------
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
AA. 10% Shareholder shall mean the owner of stock (as determined under
---------------
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
4.
<PAGE>
EXHIBIT 10.4
KANA COMMUNICATIONS, INC
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (this "Agreement") is made and entered
into this ____ day of _______, 1999 between Kana Communications, Inc., a
Delaware corporation (the "Company"), and Name~ ("Indemnitee").
WHEREAS, Indemnitee, a member of the Board of Directors or an officer,
employee or agent of the Company, performs a valuable service in such capacity
for the Company;
WHEREAS, the stockholders of the Company have adopted Bylaws (the
"Bylaws") providing for the indemnification of the officers, directors,
employees and agents of the Company to the maximum extent authorized by Section
145 of the Delaware General Corporation Law, as amended (the "Code");
WHEREAS, the Bylaws and the Code, by their non-exclusive nature,
permit contracts between the Company and the members of its Board of Directors,
officers, employees or agents with respect to indemnification of such directors,
officers, employees or agents;
WHEREAS, in accordance with the authorization as provided by the Code,
the Company either has purchased and presently maintains or intends to purchase
and maintain a policy or policies of Directors and Officers Liability Insurance
("D & O Insurance") covering certain liabilities which may be incurred by its
directors and officers in the performance of their duties as directors and
officers of the Company;
WHEREAS, as a result of developments affecting the terms, scope and
availability of D & O Insurance there exists general uncertainty as to the
extent of protection afforded members of the Board of Directors or officers,
employees or agents by such D & O Insurance and by statutory and bylaw
indemnification provisions; and
WHEREAS, in order to induce Indemnitee to continue to serve as a
member of the Board of Directors, officer, employee or agent of the Company, the
Company has determined and agreed to enter into this contract with Indemnitee.
NOW, THEREFORE, in consideration of Indemnitee's continued service as
a director, officer, employee or agent after the date hereof, and for other good
and valid consideration, the receipt and adequacy of which is hereby
acknowledged, the parties hereto agree as follows:
1. Indemnification of Indemnitee. The Company hereby agrees to hold
-----------------------------
harmless and indemnify Indemnitee to the fullest extent authorized or permitted
by the provisions of the Code, as may be amended from time to time.
<PAGE>
2. Additional Indemnity. Subject only to the exclusions set forth
--------------------
in Sections 3 and 6(c) hereof, the Company hereby further agrees to hold
harmless and indemnify Indemnitee:
(a) against any and all expenses (including attorneys' fees),
witness fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by Indemnitee in connection with any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (including an action by or in the right of the Company) to which
Indemnitee is, was or at any time becomes a party, or is threatened to be made a
party, by reason of the fact that Indemnitee is, was or at any time becomes a
director, officer, employee or agent of the Company or any subsidiary of the
Company, or is or was serving or at any time serves at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise;
and
(b) otherwise to the fullest extent as may be provided to
Indemnitee by the Company under the non-exclusivity provisions of Article VII,
Section 6 of the Bylaws of the Company and the Code.
3. Limitations on Additional Indemnity.
-----------------------------------
(a) No indemnity pursuant to Section 2 hereof shall be paid by
the Company:
i) in respect to remuneration paid to Indemnitee if it
shall be determined by a final judgment or other final adjudication that such
remuneration was in violation of law;
ii) on account of any suit in which judgment is rendered
against Indemnitee for an accounting of profits made from the purchase or sale
by Indemnitee of securities of the Company pursuant to the provisions of Section
16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar
provisions of any federal, state or local statutory law;
iii) on account of Indemnitee's conduct which is finally
adjudged to have been knowingly fraudulent or deliberately dishonest or to
constitute willful misconduct;
iv) on account of Indemnitee's conduct which is the subject
of an action, suit or proceeding described in Section 6(c)(ii) hereof;
v) on account of any action, claim or proceeding (other
than a proceeding referred to in Section 7(b) hereof) initiated by the
Indemnitee unless such action, claim or proceeding was authorized in the
specific case by action of the Board of Directors;
vi) if a final decision by a Court having jurisdiction in
the matter shall determine that such indemnification is not lawful (and, in this
respect, both the Company and Indemnitee have been advised that the Securities
and Exchange Commission
2
<PAGE>
believes that indemnification for liabilities arising under the federal
securities laws is against public policy and is, therefore, unenforceable and
that claims for indemnification should be submitted to appropriate courts for
adjudication); and
vii) except to the extent the aggregate of losses to be
indemnified thereunder exceeds the sum of (a) such losses for which the
Indemnitee is indemnified pursuant to Section 1 hereof and (b) any additional
amount paid to the Indemnitee pursuant to any D & O Insurance purchased and
maintained by the Company.
(b) No indemnity pursuant to Section 1 or 2 hereof shall be paid
by the Company if the action, suit or proceeding with respect to which a claim
for indemnity hereunder is made arose from or is based upon any of the
following:
i) Any solicitation of proxies by Indemnitee, or by a
group of which he was or became a member consisting of two or more persons that
had agreed (whether formally or informally and whether or not in writing) to act
together for the purpose of soliciting proxies, in opposition to any
solicitation of proxies approved by the Board of Directors.
ii) Any activities by Indemnitee that constitute a breach
of or default under any agreement between Indemnitee and the Company.
4. Contribution. If the indemnification provided in Sections 1 and
------------
2 hereof is unavailable by reason of a Court decision described in Section
3(a)(vi) hereof based on grounds other than any of those set forth in paragraphs
(i) through (v) of Section 3 (a) hereof, then in respect of any threatened,
pending or completed action, suit or proceeding in which the Company is jointly
liable with Indemnitee (or would be if joined in such action, suit or
proceeding), the Company shall contribute to the amount of expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred and paid or payable by Indemnitee in such proportion as is
appropriate to reflect (i) the relative benefits received by the Company on the
one hand and Indemnitee on the other hand from the transaction from which such
action, suit or proceeding arose, and (ii) the relative fault of the Company on
the one hand and of Indemnitee on the other in connection with the events which
resulted in such expenses, judgments, fines or settlement amounts, as well as
any other relevant equitable considerations. The relative fault of the Company
on the one hand and of Indemnitee on the other shall be determined by reference
to, among other things, the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent the circumstances resulting in
such expenses, judgments, fines or settlement amounts. The Company agrees that
it would not be just and equitable if contribution pursuant to this Section 4
were determined by pro rata allocation or any other method of allocation which
does not take account of the foregoing equitable considerations.
5. Notification and Defense of Claim. Not later than thirty (30)
---------------------------------
days after receipt by Indemnitee of notice of the commencement of any action,
suit or proceeding, Indemnitee shall, if a claim in respect thereof is to be
made against the Company under this Agreement, notify the Company of the
commencement thereof; but Indemnitee's omission so to notify the Company will
not relieve the Company from any liability which it may have to
3
<PAGE>
Indemnitee otherwise than under this Agreement. With respect to any such action,
suit or proceeding as to which Indemnitee notifies the Company of the
commencement thereof:
(a) The Company will be entitled to participate therein at its
own expense.
(b) Except as otherwise provided below, to the extent that it
may wish, the Company shall, jointly with any other indemnifying party similarly
notified, be entitled to assume the defense thereof, with counsel reasonably
satisfactory to Indemnitee. After notice from the Company to Indemnitee of its
election to assume the defense thereof, the Company will not be liable to
Indemnitee under this Agreement for any legal or other expenses subsequently
incurred by Indemnitee in connection with the defense thereof, other than
reasonable costs of investigation or as otherwise provided below. Indemnitee
shall have the right to employ its own counsel in such action, suit or
proceeding, but the fees and expenses of such counsel incurred after notice from
the Company of the Company's assumption of the defense thereof shall be at the
expense of Indemnitee unless (i) the employment of counsel by Indemnitee has
been authorized by the Company; (ii) Indemnitee shall have reasonably concluded
that there may be a conflict of interest between the Company and Indemnitee in
the conduct of the defense of such action; or (iii) the Company shall not in
fact have employed counsel to assume the defense of such action; in each of
which cases the fees and expenses of Indemnitee's separate counsel shall be paid
by the Company. The Company shall not be entitled to assume the defense of any
action, suit or proceeding brought by or on behalf of the Company or as to which
Indemnitee shall have made the conclusion provided for in (ii) above.
(c) The Company shall not be liable to indemnify Indemnitee
under this Agreement for any amounts paid in settlement of any action or claim
effected without its written consent. The Company shall be permitted to settle
any action except that it shall not settle any action or claim in any manner
which would impose any penalty or limitation on Indemnitee without Indemnitee's
written consent. Neither the Company nor Indemnitee will unreasonably withhold
its consent to any proposed settlement.
6. Advancement and Repayment of Expenses.
-------------------------------------
(a) In the event that Indemnitee employs his or her own counsel
pursuant to Sections 5(b)(i) through (iii) above, the Company shall advance to
Indemnitee, prior to any final disposition of any threatened or pending action,
suit or proceeding, whether civil, criminal, administrative or investigative,
any and all reasonable expenses (including legal fees and expenses) incurred in
investigating or defending any such action, suit or proceeding within ten (10)
days after receiving from Indemnitee copies of invoices presented to Indemnitee
for such expenses.
(b) Indemnitee agrees that Indemnitee will reimburse the Company
for all reasonable expenses paid by the Company in investigating or defending
any civil or criminal action, suit or proceeding against Indemnitee in the event
and only to the extent it shall be ultimately determined by a final judicial
decision (from which there is no right of appeal) that Indemnitee is not
entitled, under the provisions of the Code, the Bylaws, this Agreement or
otherwise, to be indemnified by the Company for such expenses.
4
<PAGE>
(c) Notwithstanding the foregoing, the Company shall not be
required to advance such expenses to Indemnitee in respect of any action arising
from or based upon any of the matters set forth in subsection (b) of Section 3
or if Indemnitee (i) commences any action, suit or proceeding as a plaintiff
unless such advance is specifically approved by a majority of the Board of
Directors or (ii) is a party to an action, suit or proceeding brought by the
Company and approved by a majority of the Board which alleges willful
misappropriation of corporate assets by Indemnitee, disclosure of confidential
information in violation of Indemnitee's fiduciary or contractual obligations to
the Company, or any other willful and deliberate breach in bad faith of
Indemnitee's duty to the Company or its shareholders.
7. Enforcement.
-----------
(a) The Company expressly confirms and agrees that it has
entered into this Agreement and assumed the obligations imposed on the Company
hereby in order to induce Indemnitee to continue as a director, officer,
employee or other agent of the Company, and acknowledges that Indemnitee is
relying upon this Agreement in continuing in such capacity.
(b) In the event Indemnitee is required to bring any action to
enforce rights or to collect moneys due under this Agreement and is successful
in such action, the Company shall reimburse Indemnitee for all Indemnitee's
reasonable fees and expenses, including attorney's fees, in bringing and
pursuing such action.
8. Subrogation. In the event of payment under this agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
9. Continuation of Obligations. All agreements and obligations of
---------------------------
the Company contained herein shall commence upon the date that Indemnitee first
became a member of the Board of Directors or an officer, employee or agent of
the Company, as the case may be, and shall continue during the period Indemnitee
is a director, officer, employee or agent of the Company (or is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise) and shall continue thereafter so long as Indemnitee shall be
subject to any possible claim or threatened, pending or completed action, suit
or proceeding, whether civil, criminal or investigative, by reason of the fact
that Indemnitee was a director, officer, employee or agent of the Company or
serving in any other capacity referred to herein.
10. Survival of Rights. The rights conferred on Indemnitee by this
------------------
Agreement shall continue after Indemnitee has ceased to be a director, officer,
employee or other agent of the Company and shall inure to the benefit of
Indemnitee's heirs, executors and administrators.
11. Non-Exclusivity of Rights. The rights conferred on Indemnitee by
-------------------------
this Agreement shall not be exclusive of any other right which Indemnitee may
have or hereafter acquire under any statute, provision of the Company's
Certificate of Incorporation or Bylaws, agreement, vote of stockholders or
directors, or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office; provided, however, that this
5
<PAGE>
Agreement shall supersede and replace any prior indemnification agreements
entered into by and between the Company and Indemnitee and that any such prior
indemnification agreement shall be terminated upon the execution of this
Agreement.
12. Separability. Each of the provisions of this Agreement is a
------------
separate and distinct agreement and independent of the others, so that if any or
all of the provisions hereof shall be held to be invalid or unenforceable for
any reason, such invalidity or unenforceability shall not affect the validity or
enforceability of the other provisions hereof or the obligation of the Company
to indemnify the Indemnitee to the full extent provided by the Bylaws or the
Code.
13. Governing Law. This Agreement shall be interpreted and enforced
-------------
in accordance with the laws of the State of Delaware.
14. Binding Effect. This Agreement shall be binding upon Indemnitee
--------------
and upon the Company, its successors and assigns, and shall inure to the benefit
of Indemnitee, his or her heirs, personal representatives and assigns and to the
benefit of the Company, its successors and assigns.
15. Amendment and Termination. No amendment, modification,
-------------------------
termination or cancellation of this Agreement shall be effective unless it is in
writing and is signed by both parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
and as of the day and year first above written.
KANA COMMUNICATIONS, INC.
a Delaware corporation
By:___________________________________
INDEMNITEE
______________________________________
Name, Title
Address: ______________________________________
______________________________________
6
<PAGE>
EXHIBIT 10.5
Kana Communications, Inc.
SOFTWARE LICENSE AGREEMENT
This Software License Agreement ("Agreement") is effective as of
__________________________, 199______ ("Effective Date"), and is made by and
between:
Kana Communications, Inc., a California corporation , with its principal place
of business at 87 Encina Avenue, Palo Alto, California 94301 ("Kana") and
___________________, a _________________________ corporation, with its
principal offices at _________________________________________________
________________________________ ("Customer").
Whereas, Kana owns, or has licensed from the owner(s), copyrights and other
rights to the software product identified in Schedule A, and contained in the
master disk(s) ("Master Disk(s)") and associated documentation provided by Kana
under this Agreement (collectively, the "Software"); whereas, Customer desires
to receive a non-exclusive license to use such Software at the site(s) listed
below; and whereas, Kana is willing to grant such non-exclusive license to
Customer on the terms and conditions set forth below; the parties agree as
follows:
1. License. Subject to the terms of this Agreement, Kana grants to Customer a
-------
personal, nontransferable, nonsublicensable, nonexclusive, limited license to:
(a) use the Software in accordance with the documentation supplied by Kana only
on the machines and only at the location ("Licensed Site") and for the number of
authorized concurrent users ("Authorized Users") specified on Schedule A, and
----------
(b) make up to _________________________ (_____) duplicated copies of the
Software and the included documentation ("Authorized Duplicates"), provided such
Authorized Duplicates are used only at the Licensed Site. Any copies of the
Software made in violation of this Agreement shall be deemed copyright
infringement. Customer may install the Software onto, and use the Software on,
single station hard disks within the Licensed Site.
The Master Disk(s) shall only be used to make Authorized Duplicates and
shall be stored in a cool, safe place, along with a copy of this Agreement, when
not being so used. Customer shall make Authorized Duplicates of the Software
only from the Master Disk(s); no Authorized Duplicates shall be used to make
other Authorized Duplicates. Customer shall conspicuously label all Authorized
Duplicates as "Authorized Kana Duplicates."
2. Ownership of Software. As between the parties, title to and ownership of
---------------------
the Software, all proprietary rights therein, any accompanying printed materials
and all copies and portions thereof shall be and at all times remain in Kana.
The Software and accompanying printed materials are protected by copyright,
trademark and trade secret laws and international treaty provisions.
3. Restrictions. Customer agrees that under no circumstance shall it, or
------------
shall it cause or permit any third party to, (a) distribute or allow others to
distribute copies of the Software or the associated documentation to a person or
entity outside of the Licensed Site, (b) reproduce, modify or copy the Software
and associated documentation except as expressly permitted by this Agreement, or
as permitted by Kana in writing (c) provide, rent, sell, lease or otherwise
transfer the Software or any copy or part thereof or use it for the benefit of a
third party (d) reverse assemble, reverse compile or reverse engineer the
Software, or otherwise attempt to discover any Software source code or
underlying Proprietary Information (as defined below).
4. Confidentiality; Assignment.
---------------------------
a. Customer acknowledges that, in the course of using the Software and
performing its duties under this Agreement, it may obtain information relating
to the Software and/or to Kana ("Proprietary Information"). Such Proprietary
Information shall belong solely to Kana and includes, but is not limited to, the
existence of the Software, its features and mode of operation, this Agreement,
trade secrets, know-how, inventions (whether or not patentable), techniques,
processes, programs, ideas, algorithms, schematics, testing procedures, software
design and architecture, computer code, internal documentation, design and
function specifications, product requirements, problem reports, analysis and
performance information, software documents, and other technical, business,
product, marketing and financial information, plans and data.
<PAGE>
b. During and after the term of this Agreement, Customer shall:
i. not use (except as expressly authorized by this Agreement) or
disclose Proprietary Information without the prior written consent of Kana,
unless such Proprietary Information becomes part of the public domain without
breach of this Agreement by Customer, its officers, directors, employees or
agents;
ii. take all reasonable measures to maintain the Proprietary
Information and Software in confidence;
iii. disclose the Software and Proprietary Information only to those
of its employees and consultants as are necessary for the use expressly licensed
hereunder, and only after such employees and contractors have agreed in writing
to be bound by the provisions of this Agreement;
iv. not, without the prior written consent of Kana, disclose or
otherwise make available the Software or copies thereof to any third party;
v. comply with all export laws and restrictions and regulations of
the U.S. Department of Commerce or other United States or foreign agency or
authority, and not, under any circumstances, export or re-export, or allow the
export or re-export of the Software any Proprietary Information or any copy or
direct product thereof or in violation of any such restrictions, laws or
regulations, or to any Group D:1 or E:2 country (or any national of such
country) specified in the then current Supplement No. 1 to Part 740, or, in
violation of the embargo provisions in Part 746, of the U.S. Export
Administration Regulations (or any successor regulations or supplement), even if
Customer is in compliance with all licenses and approvals required under
applicable export laws and regulations, including without limitation, those of
the U.S. Department of Commerce.
c. Customer hereby assigns to Kana any invention, work of authorship,
idea or know-how (whether or not patentable) relating to the Software that is
conceived, learned or reduced to practice in the course of performance under
this Agreement and any patent rights, copyrights (including moral rights;
provided that non-assignable moral rights are waived to the extent permitted by
law), trade secret rights, and other rights with respect thereto. Customer
agrees to take any action reasonably requested by Kana to evidence, perfect,
obtain, maintain, enforce or defend the foregoing.
5. License Fee; Payment. Customer shall pay the license fee for the Software
--------------------
("License Fee") as set forth in Schedule A hereto. All payments are due and
----------
payable thirty (30) days after the date of Kana's invoice and shall be made in
U.S. Dollars in the United States. All such license fees are exclusive of
shipping, taxes, duties and the like, which shall be paid by Customer. All late
payments shall be assessed a service charge of 1.5% per month to the extent
allowed by law.
6. Installation; Training. Installation and training for the Software, if
----------------------
applicable, shall be provided only pursuant to the installation and training
terms and conditions set forth in Schedule A hereto.
----------
7. Upgrades; Support; Maintenance. Support and maintenance for the Software,
------------------------------
and all upgrades and new versions thereof, shall be provided only pursuant to
the support and maintenance terms and conditions set forth in Schedule A hereto.
----------
8. Termination. The license granted herein is effective until terminated.
-----------
The license in Section 1 may be terminated upon the following events; however,
upon termination, the terms of this Agreement, except for Sections 6 and 7, will
otherwise survive and remain in effect.
a. Termination by Customer. Upon termination by Customer, Customer will
-----------------------
cease all use of the Software and destroy or return to Kana the Master Disk(s),
all Authorized Duplicates and all documentation and copies thereof to Kana along
with a signed written statement expressing Customer's desire to terminate the
license and certifying that Customer has destroyed or returned to Kana, and is
no longer in possession of, any Software, Master Disk(s), Authorized Duplicates,
related documentation or any copies, portions or derivatives of any of the
foregoing.
Page 2 of 4
<PAGE>
b. Termination by Kana. Kana may immediately terminate this Agreement if
-------------------
Kana determines that Customer has failed to comply with any of the terms and
conditions of this Agreement. Upon such termination by Kana, all licenses and
rights granted hereunder shall terminate, Customer will cease all use of the
Software, and Customer shall immediately return to Kana, the Software, the
Master Disk(s), all Authorized Duplicates, Proprietary Information, together
with any and all documents, notes and other materials relating to the Software,
including, without limitation, all Proprietary Information and all copies and
extracts of the foregoing and all documentation and copies thereof, along with a
signed written statement certifying that Customer has returned to Kana, and is
no longer in possession of, any Software, Master Disk(s), Authorized Duplicates,
related documentation or any copies, portions or derivatives of any of the
foregoing.
9. Limited Warranty and Disclaimer. Kana warrants that, for a period of
-------------------------------
ninety (90) days from the date of installation of the Software, (a) the Software
will perform substantially in accordance with the accompanying printed
materials, and (b) the medium upon which the Software is provided by Kana to
Customer shall be free from defects in material and workmanship under normal
use. This warranty covers only problems reported to Kana during the warranty
period. WARRANTY DISCLAIMER: EXCEPT AS EXPRESSLY STATED HEREIN, THE SOFTWARE IS
PROVIDED "AS IS" WITHOUT WARRANTY OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING,
BUT NOT LIMITED TO, WARRANTIES OF PERFORMANCE OR MERCHANTABILITY OR FITNESS FOR
A PARTICULAR PURPOSE OR NONINFRINGEMENT. CUSTOMER BEARS ALL RISK RELATING TO
QUALITY AND PERFORMANCE OF THE SOFTWARE. The performance of the Software varies
with various manufacturers' equipment with which it is used. Kana does not
warrant that the Software or the functions contained in the Software will meet
Customer's requirements, operate without interruption or be error free.
Customer's exclusive remedy for breach by Kana of its limited warranty set forth
above shall be replacement of any defective Software or medium upon its return
to Kana within the warranty period, or if Kana is unable to provide a
replacement which is free of defect, refund of the license fee paid by Customer.
10. Limitation of Remedies and Damages. ANY LIABILITY OF KANA WILL BE LIMITED
----------------------------------
TO PRODUCT REPLACEMENT OR, IF REPLACEMENT IS INADEQUATE OR IN KANA'S OPINION
IMPRACTICAL, TO REFUND OF THE LICENSE FEE. KANA SHALL NOT BE RESPONSIBLE OR
LIABLE WITH RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT OR TERMS AND
CONDITIONS RELATED THERETO UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR
OTHER THEORY (A) FOR LOSS OR INACCURACY OF DATA OR COST OF PROCUREMENT OF
SUBSTITUTE GOODS, SERVICES OR TECHNOLOGY, OR (B) FOR ANY INDIRECT, INCIDENTAL OR
CONSEQUENTIAL DAMAGES INCLUDING, BUT NOT LIMITED TO LOSS OF REVENUES, LOSS OF
PROFITS, BUSINESS INTERRUPTION, LOSS OR INACCURACY OF DATA OR COST OF
PROCUREMENT OF SUBSTITUTE GOODS, ARISING OUT OF THE USE OF OR INABILITY TO USE
THE SOFTWARE, EVEN IF KANA HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
IN NO EVENT WILL KANA'S LIABILITY EXCEED THE AMOUNT PAID BY CUSTOMER FOR THE
SOFTWARE. KANA SHALL NOT BE RESPONSIBLE FOR ANY MATTER BEYOND ITS REASONABLE
CONTROL. Because some jurisdictions do not allow the exclusion or limitation of
liability of consequential or incidental damages, the above limitation may not
apply.
11. Government Use.
--------------
If Customer is a unit or agency of the government, or acquiring the Software
with government funds, the software and documentation are provided subject to
Kana's standard commercial license; provided, however, that any contracts with
non-defense agencies subject to the FAR, the Government shall have the rights
set forth in subparagraph (c) of FAR 52.227-19, "Commercial Computer Software-
Restricted Rights," as applicable.
12. Nonassignability. Neither the rights nor the obligations arising under
----------------
this Agreement are
Page 3 of 4
<PAGE>
assignable or transferable by Customer, and any such attempted assignment or
transfer shall be void and without effect.
13. Execution of Agreement, Controlling Law, Attorneys' Fee. This Agreement
-------------------------------------------------------
shall become effective as of the Effective Date and only upon its execution by
both Kana and Customer. This Agreement shall be governed by and construed in
accordance with the laws of the State of California without regard to the
conflicts of law provisions thereof and without regard to the United Nations
Convention on the International Sales of Goods. In any action to enforce this
Agreement the prevailing party will be entitled to costs and attorneys' fees.
14. Equitable Relief. Customer acknowledges and agrees that due to the unique
----------------
nature of Kana's Proprietary Information, there can be no adequate remedy at law
for any breach of its obligations hereunder, that any such breach may allow
Customer or third parties to unfairly compete with Kana resulting in irreparable
harm to Kana and, therefore, that upon any such breach or threat thereof, Kana
shall be entitled to injunctions and other appropriate equitable relief, in
addition to whatever remedies it may have at law.
15. Notice. Any notice, report, approval or consent required or permitted
------
hereunder shall be in writing and will be deemed to have been effectively given:
(i) immediately upon personal delivery or facsimile transmission to the parties
to be notified, (ii) one (1) day after deposit with a commercial overnight
courier with tracking capabilities, or (iii) three (3) days after deposit with
the United States Postal Service, by registered or certified mail, postage
prepaid to the respective addresses of the parties as set forth above.
16. Waiver. The waiver by either party of a breach of this Agreement or any
------
right hereunder shall not constitute a waiver of any subsequent breach of this
Agreement; nor shall any delay by either party to exercise any right under this
Agreement operate as a waiver of any such right. If any provision of this
Agreement shall be adjudged by any court of competent jurisdiction to be
unenforceable or invalid, that provision shall be limited or eliminated to the
minimum extent necessary so that this Agreement shall otherwise remain in full
force and effect and enforceable.
17. BASIS OF BARGAIN. EACH PARTY RECOGNIZES AND AGREES THAT THE WARRANTY
----------------
DISCLAIMERS AND LIABILITY AND REMEDY LIMITATIONS IN THIS AGREEMENT ARE MATERIAL
BARGAINED FOR BASES OF THIS AGREEMENT AND THAT THEY HAVE BEEN TAKEN INTO ACCOUNT
AND REFLECTED IN DETERMINING THE CONSIDERATION TO BE GIVEN BY EACH PARTY UNDER
THIS AGREEMENT AND IN THE DECISION BY EACH PARTY TO ENTER INTO THIS AGREEMENT.
18. Entire Agreement. This Agreement constitutes the entire agreement between
----------------
the parties hereto related to the subject matter hereof, and any and all written
or oral agreements, except for any Nondisclosure Agreements or Beta Test
Agreements, heretofore existing between the parties hereto, are expressly
cancelled. Any modifications of this Agreement must be in writing and signed by
both parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
Effective Date.
KANA COMMUNICATIONS, INC.
By_____________________________________
_______________________________________
Name (Print)
_______________________________________
Title
CUSTOMER
By_____________________________________
_______________________________________
Name (Print)
_______________________________________
Title
Page 4 of 4
<PAGE>
Schedule A
----------
SEE ATTACHED QUOTATION
<PAGE>
EXHIBIT 10.7
LEASE
THIS LEASE ("Lease") is dated for reference purposes only as of May _,
1998 by and between Encina Properties, a California limited partnership
("Lessor") and Kana Communications, Inc., a California corporation ("Lessee").
Lessor and Lessee hereby agree as follows:
1. HIRING: Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor, on the terms and conditions set forth herein, the premises described in
the following Schedule:
SCHEDULE
A. DESCRIPTION OF PREMISES: Two (2)-story building ("Building")
located at 87 Encina Avenue, Palo Alto, California, consisting of
approximately 15,600 square feet of space
B. TERM: Five (5) years, commencing on July 1, 1998, and ending at
-------------- ------------
midnight on the date that is five (5) years after the Commencement
-------------------------------------
Date, or June 30,2003.
----------------------
C. BASE RENT: See Paragraph 2.A.
Base Rent shall payable in equal monthly installments in the amounts
set forth in Paragraph 2 in advance on the first (1st) day of each
-----------
month, commencing on the Commencement Date and continuing on the same
day of each month for the balance of the Term. Rent (as defined in
Paragraph 2) shall be payable to Lessor at 1900 Embarcadero Road,
----------------------
Suite 200, Palo Alto, CA 94303 or at such other place as Lessor may
------------------------------
designate in writing. Lessor acknowledges receipt of the following
Base Rent for the first month of the Term upon execution of this
Lease: $50,700.00.
----------
D. SECURITY DEPOSIT: See Paragraph 3.
E. USE OF PREMISES: General Office and all legally permitted
ancillary uses.
F. LESSEE IMPROVEMENTS ALLOWANCE TO BE PROVIDED BY LESSOR: See
Paragraph 7.C.
G. LESSEE'S INSURANCE:
Bodily Injury Liability and Property Damage Liability: $1,000,000 each
occurrence; $3,000,000 aggregate. See also Paragraph 11.
H. TAXES: See Paragraph 13.
I. PARKING: All surface spaces, consisting of approximately 51
spaces.
<PAGE>
J. BROKER: Cornish & Carey Commercial, representing Lessor.
Colliers Parrish International, Inc., representing
Lessee.
2. TERM; RENT; ADDITIONAL RENT; OPTION TO EXTEND; EARLY ENTRY:
A. Term; Base Rent. The term of this Lease ("Term") is specified in
---------------
the Schedule. Lessee agrees to pay Base Rent during the Term as follows:
Months Base Rent
1 - 12 $3.25 NNN per square foot, or $50,700.00 per month
13 - 24 $3.35 NNN per square foot, or $52,260.00 per month
25 - 36 $3.45 NNN per square foot, or $53,820.00 per month
37 - 48 $3.55 NNN per square foot, or $55,380.00 per month
49 - 60 $3.65 NNN per square foot, or $56,940.00 per month
B. Additional Rent. Beginning with the Commencement Date, Lessee
---------------
shall pay to Lessor as additional rent ("Additional Rent"), in addition to
monthly Base Rent, the following:
(i) All Taxes relating to the premises as set forth in
Paragraph 13;
(ii) All insurance premiums and deductibles relating to the
premises, as set forth in Paragraph 11;
(iii) All expenses for maintenance and repair of the Premises as
set forth in Paragraph 8.B.; and
(iv) All charges, costs and expenses which lessee is required
to pay under this Lease, together with all interest and penalties, costs and
expenses, including reasonable attorneys' fees and legal expenses, that may
accrue with respect thereto in the event of Lessee's failure to pay such
amounts, and all damages, reasonable costs and expenses which Lessor may incur
by reason of default of Lessee or failure on Lessee's part to comply with the
terms of this Lease. In the event of non-payment of Additional Rent, Lessor
shall have the same rights and remedies with respect thereto that Lessor has for
non-payment of Base Rent.
The Additional Rent due hereunder shall be paid to Lessor as set forth
in the pertinent provisions of this Lease or, if no time is set forth in such
provisions, within twenty (20) days after receipt of Lessor's invoice therefor.
As used herein, "month" shall mean a period beginning on the first
(1st) day of a calendar month and ending on the last day of that month. Monthly
Base Rent and Additional Rent hereinafter sometimes collectively shall be
referred to as "Rent". Rent for any period
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during the Term hereof which is for less than one month of the Term shall be a
prorata portion of the monthly installment based on a 30-day month. Rent shall
be payable to Lessor at the address set forth in the Schedule without notice or
demand and without any deduction, offset, or abatement, in lawful money of the
United States of America.
C. Option to Extend.
----------------
(i) Provided that Lessee shall not be in default hereunder,
after expiration of any applicable cure period, either at the time of the
exercise of the option referenced herein, or at the time that the Extension Term
(as defined herein) would otherwise commence but for such default, Lessor hereby
grants to Lessee one (1) option ("Option") to extend the Term of this Lease for
an additional term of three (3) years ("Extension Term"), commencing when the
original Term expires, upon the terms and conditions set forth in this
Paragraph. Lessee may exercise the Option by giving Lessor written notice of its
intention not less than one hundred eighty (180) days before the expiration of
the original Term of this Lease.
(ii) If the Option is exercised, the Base Rent for the premises
during the Extension Term shall be one hundred percent of the fair market rental
value (the "Fair Market Rent") for the premises as of the commencement date of
the Extension Term, but in no event less than the Base Rent payable during the
last year of the original Term. All other terms and conditions contained in this
Lease shall remain in full force and effect and shall apply during the Extension
Term, except that (i) Lessee shall have no further option to extend the Term,
and (ii) Lessor shall not be obligated to provide any Lessee Improvements
Allowance; and (iii) so long as Lessee is not in default, beyond applicable cure
periods, upon the commencement of the Extension Term, Lessor shall return the
Replacement LC (as defined below) to Lessee, and Lessee shall not be obligated
to provide an LC for the Extension Term.
(iii) Fair Market Rent shall be determined as follows:
(A) The parties' written agreement within one hundred
twenty (120) days after the date of Lessee's written notice of the exercise of
the Option shall be a conclusive determination between the parties of the Fair
Market Rent for the Extension Tenn.
(B) If the parties have not agreed in writing to a new
Fair Market Rent on or before one hundred twenty (120) days after the date of
Lessee's written notice of the exercise of the Option, Lessor and Lessee shall
each appoint an appraiser and give written notice of the name and address of
such appraiser to the other party. The two appraisers thus appointed shall,
within twenty (20) days after appointment of the later of the two appraisers to
be appointed, appoint a third appraiser and serve written notice of the name and
address of such appraiser on Lessor and Lessee in the manner prescribed by this
Lease for service of notice. All appraisers appointed under this Paragraph shall
be, at the time of their appointment, members in good standing of the American
Institute of Real Estate Appraisers with not less than five (5) years of
commercial real estate appraisal experience.
(C) Within thirty (30) days after the appointment of the
third appraiser, the three appraisers shall confer and each shall submit in
writing to Lessor and Lessee his honest appraisal of the Fair Market Rent,
exclusive of the improvements paid for by Lessee.
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In making their determination, the appraisers shall consider (i) the absence of
payment of any leasing commissions, and (ii) the lack of improvements required
by Lessee upon renewal.
(D) The appraised Fair Market Rent agreed on in writing
by any two of the three appointed appraisers shall be conclusive and binding on
the parties, and shall establish the Fair Market Rent. Should no two of the
three be able to agree on the Fair Market Rent, both the highest appraisal and
the lowest appraisal submitted by any of the three appraisers shall be
disregarded, and the remaining appraisal shall be binding and conclusive on the
parties to this Lease and shall establish the Fair Market Rent for the premises
for purposes of this Paragraph.
(E) If either party fails to appoint an appraiser as
required by this Paragraph within fifteen (15) days after service on it of
written demand to do so, the appraiser appointed by the other party shall act
for both Lessor and Lessee. The decision in writing of such appraiser shall, in
such event, be binding on both Lessor and Lessee and shall establish the Fair
Market Rent for the premises for purposes of this Paragraph.
(F) If the two appraisers appointed respectively by
Lessor and Lessee fail, for any reason, to appoint a third appraiser within the
time required by this Paragraph, either party may petition the Superior Court
for Santa Clara County to appoint this appraiser-
(G) The appraisers shall, in any event, provide their
determination of Fair Market Rent in accordance with this Paragraph at least
thirty (30) days before the commencement of the Extension Tenn.
(H) Lessor and Lessee shall each pay the fees and all
expenses incurred by the appraiser appointed by each of them, and one-half of
all expenses and the fee incurred by the third appraiser appointed pursuant to
this Paragraph.
D. Right of Early Entry. Lessee shall have the right, commencing on
--------------------
June 1, 1998 and continuing through June 30, 1998, without any obligation to pay
Base Rent under this Lease but subject to all other terms and conditions hereof
(including, without limitation, the obligation to pay Additional Rent, to
provide Lessor with certificates of insurance as required by Paragraph 11.A.
hereof and to assume responsibility for the maintenance and repair of the
premises as required by Paragraph 8 hereof), to enter the premises for the
purpose of installing its equipment, data, telecommunications and cabling
systems, furniture and trade fixtures, configuring its Lessee Improvements (as
defined below) and commencing construction thereof. Lessee shall use good faith
efforts to minimize interference with Lessor's performance of its obligations
pursuant to 7.A. below; if Lessee's activities interfere with Lessor's work,
Lessor shall notify Lessee in writing of the nature of the interference and
Lessee promptly shall cease the activity until Lessor's completion of the work
interfered with. As of June 1, 1998, Lessee shall be solely responsible for the
cost, maintenance and repair of the security system serving the premises.
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3. SECURITY DEPOSIT:
A. Cash Deposit. Upon the execution of this Lease, Lessee will pay
------------
to Lessor as a security deposit the sum of One Hundred Thirteen Thousand Eight
Hundred Eighty and No/100 Dollars ($113,880.00 )("Cash Security Deposit"). The
Cash Security Deposit shall be held by Lessor as a security deposit for the
faithful performance by Lessee of all of the terms, covenants and conditions of
this Lease to be kept and performed by Lessee.
B. Letter of Credit. Also upon Sublessee's execution of this Lease,
----------------
Sublessee shall deliver to Lessor an unconditional, clean, irrevocable letter of
credit in the amount of Two Hundred Fifty Thousand and No/100 Dollars
($250,000.00), which letter of credit shall be issued by a money-center bank (a
bank which accepts deposits, maintains accounts, has a local Silicon Valley
office which will negotiate a letter of credit, and whose deposits are insured
by the FDIC) reasonably acceptable to Lessor, shall be for a term continuing
through the last day of the Term, and shall be in a form and content reasonably
acceptable to Lessor. Such letter of credit, together with any other renewal or
replacement letters of credit delivered or to be delivered by Lessee hereunder
shall be referred to collectively herein as the "LC." Lessee shall pay all
expenses, points and/or fees incurred by Lessee in obtaining the LC. The LC
shall be held by Lessor as a security deposit for the faithful performance by
Lessee of all of the terms, covenants and conditions of this Lease to be kept
and performed by Lessee. The LC shall not be mortgaged, assigned or encumbered
in any manner whatsoever by Lessee without Lessor's prior written consent.
C. Application of Cash Security Deposit and LC. If Lessee defaults
-------------------------------------------
(following any notice and applicable cure periods) with respect to any provision
of this Lease, including, but not limited to, provisions relating to the payment
of Rent, Lessor may, but shall not be required to, draw down upon all or any
portion of the Cash Security Deposit or the LC for payment of any Rent or other
sum in default, or for the payment of any out-of-pocket amount that Lessor may
reasonably spend or may become obligated to spend by reason of Lessee's default
or to compensate Lessor for any loss or damage which Lessor has suffered
thereby. The use, application or retention of either the Cash Security Deposit
or the Letter of Credit, or any portion thereof, by Lessor shall not prevent
Lessor from exercising any other right or remedy provided by this Lease or by
law, it being intended that Lessor shall not first be required to proceed
against the Cash Security Deposit, and the Cash Security Deposit or the LC shall
not operate as a limitation on any recovery to which Lessor otherwise may be
entitled. If any portion of the Cash Security Deposit is used by Lessor, upon
demand Lessee shall deposit cash with Lessor in an amount sufficient to restore
the Cash Security Deposit to the amount required hereunder. If any portion of
the LC is drawn upon, Lessee, within five (5) days after written demand
therefor, shall either (i) deposit cash with Lessor (which cash shall be applied
by Lessor to the Cash Security Deposit) in an amount sufficient to cause the sum
of the additional cash and the LC to be equivalent to the amount of the LC
required hereunder; or (ii) reinstate the LC to the amount required under this
Lease, and if any portion of the LC again is used or applied, Lessee shall,
within five (5) days after written demand therefor, deposit cash with Lessor
(which cash shall be applied by Lessor to the Cash Security Deposit) in an
amount sufficient to restore the total of the Cash Security Deposit and the LC
to the amount required under this Lease. Lessee's failure to restore either the
Cash Security Deposit or the LC as required hereunder shall be a default under
this Lease.
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D. Return of LC. Notwithstanding anything to the contrary contained
------------
in this Paragraph 3, so long as Lessee has not been in default, beyond
applicable cure periods, prior to the date of Lessee's notice, if an initial
public offering of Lessee's stock is made on any public stock exchange and
Lessee's publicly traded stock has a market value of at least Twenty Million and
No/100 Dollars ($20,000,000.00), as averaged over the last twenty-one (21) days
of public trading of Lessee's common stock immediately prior to the date of
Lessee's notice to Lessor, then effective as of the first day of the calendar
month following the date of Lessee's notice, Lessor shall return the LC to
Lessee.
E. Reduction in LC. Subject to the provisions of Paragraph 3.D.
---------------
above, so long as Lessee has not been in default, beyond applicable cure
periods, for the first twenty- four (24) months of the Term and has timely paid
Base Rent for Month 25 of the Term, after receipt of written approval from
Lessor, Lessee may apply to the issuing bank to amend the LC to reduce the
amount thereof by Fifty Thousand and No/100 Dollars ($50,000.00), to Two Hundred
Thousand and No/100 Dollars ($200,000.00). If Lessee has not been in default,
beyond applicable cure periods, for (i) Months 25 through 36; and (ii) Months 37
through 48, respectively, and has paid Base Rent for Month 37 and Month 49,
respectively, Lessee may apply to the issuing bank to amend the LC to reduce the
then-applicable amount by an additional Fifty Thousand and No/ 100 Dollars for
each twelve (12)- month period (i.e., to One Hundred Fifty Thousand and No/100
----
Dollars ($150,000.00) for Months 37 through 48, and to One Hundred Thousand and
No/100 Dollars ($100,000.00) for Months 49 through 60). Any replacement LC
("Replacement LC") shall be upon all of the terms and conditions set forth in
this Paragraph except for the amounts thereof, which shall be as set forth
herein. Lessor shall return the LC it then is holding to Lessee promptly after
its receipt of the applicable Replacement LC from Lessee. If Lessee fails to
provide the Replacement LC to Lessor, Lessor shall be under no obligation to
return the original LC or any Replacement LC, as applicable, to Lessee, and the
original LC shall remain in full force and effect until the expiration of the
Term.
F. Procedure. Except as otherwise provided herein, if Lessee shall
---------
pay all Rent and observe and perform all of the terms, covenants, and conditions
of this Lease during the term and all extensions and renewals thereof, Lessor
shall return the Cash Security Deposit to Lessee, without interest, and return
the LC to Lessee, or so much of the Cash Security Deposit and the LC as is not
required to cure any default of Lessee, within thirty (30) days after Lessee
surrenders the premises in the condition required by this Lease.
4. POSSESSION: If Lessor is unable to deliver possession of the premises
to Lessee on June 1, 1998 for any reason whatsoever, this Lease shall not be
void or voidable, nor shall Lessor be liable to Lessee for any loss or damage
resulting therefrom, but Additional Rent shall abate until Lessor delivers
possession of the premises to Lessee. Notwithstanding the foregoing, if Lessor
is unable to deliver possession of the premises to Lessee by July 15, 1998, this
Lease may be terminated by Lessee by written notice to Lessor at any time
thereafter prior to the date possession is delivered to Lessee.
5. USE: The premises shall be used for the purpose specified in the
Schedule, and for no other purpose without the prior written consent of Lessor.
Lessee shall abide by and promptly observe and comply with all laws, rules,
regulations, ordinances and requirements of any governmental or quasi-
governmental entity ("Laws") applicable to the use or occupancy of
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the premises, including any such Laws which require the installation of any
improvements in the premises, whether or not such requirements would be required
of any occupant of the premises, or are required because of the particular use
of the premises to be made by Lessee. Lessor represents and warrants for the
benefit of Lessee that, as of the date of Lessor's execution of this Lease, to
the best of Lessor's actual acknowledge, the premises is in compliance with the
Americans with Disabilities Act of 1990 ("ADA"). Notwithstanding anything to the
contrary contained in this Paragraph, if any change in Laws (other than a change
in the ADA, with which Lessee shall comply at its sole cost) requires the
installation of capital improvements in the premises, Lessor shall pay the cost
of such improvements and amortize them, with interest on the unamortized balance
at the rate paid by Lessor on funds borrowed to finance such improvements (or,
if Lessor finances such improvements out of Lessor's funds without borrowing,
the rate that Lessor would have paid to borrow such funds) over such useful life
as Lessor shall reasonably determine in accordance with generally accepted
accounting principles, and Lessee shall pay as Additional Rent each month
thereafter such monthly amortized cost falling due during the Term (as
extended).
6. ABANDONMENT: Lessee shall not abandon or vacate the premises for a
period exceeding ten (10) consecutive business days, or surrender the premises
during the term, and if Lessee does vacate or abandon the premises, or is
dispossessed by process of law, or otherwise, any personal property belonging to
Lessee left on the premises shall be deemed to be abandoned at the option of
Lessor.
7. CONDITION OF PREMISES; SURRENDER; LESSEE IMPROVEMENTS ALLOWANCE:
A. Condition of Premises. No promise to alter, remodel, or improve
---------------------
the premises or the Building and no representation respecting the condition of
the premises or the Building have been made by Lessor to Lessee except as
expressly set forth in this Paragraph. Lessee acknowledges that Lessee is taking
the premises in their then-existing, "as is" condition, without representation
or warranty of any kind from Lessor. Notwithstanding the foregoing, Lessor, at
no cost to Lessee, shall have completed the following by July 1, 1998 (subject
to delays caused by weather and the ability to receive required materials and
equipment: (i) premises front entry walls shall be repaired, marred or damaged
ceiling tiles shall be replaced, all burned out or broken light bulbs and
ballasts shall be replaced, and the premises shall be in broom clean condition;
(ii) the Building structure integrity shall be intact, in Lessor's reasonable
estimation; (iii) the roof membrane shall be in watertight condition; (iv) the
existing HVAC system shall have been serviced and repaired if required, and
shall be in good working order; (v) all existing electrical and lighting systems
and fixtures shall be in good working order; (vi) any existing fire protection
system shall be in good working order; (vii) the existing plumbing system shall
be in good working order; (viii) other existing interior fixtures shall be in
good working order; (ix) the front flower garden shall be refreshed; (x) the
fence surrounding the location of the former generator shall be removed; and
(xi) a new refrigerator or refrigerator/freezer, at Lessee's election, shall be
installed. Lessor shall use good faith efforts to complete the foregoing, if
delayed by weather or availability of equipment or materials, as quickly as is
reasonably possible. Within a reasonable period after Lessee notifies Lessor
that Lessee has completed its initial Lessee Improvements in the premises,
Lessor shall have the premises windows washed, and shall patch and paint as
necessary the premises walls. Lessee waives all
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right to make repairs at the expense of Lessor, or to deduct the cost thereof
from Rent, and Lessee waives all rights under Sections 1941 and 1942 of the
Civil Code of the State of California.
B. Surrender. At the termination of this Lease by lapse of time or
---------
otherwise, Lessee shall surrender the premises, including all structural
elements, building systems and mechanical systems, in as clean and good
condition and repair as when Lessee took possession, ordinary wear and tear or
loss by fire or other natural force excepted, failing which Lessor may restore
the premises to such condition and Lessee shall pay the cost thereof to Lessor
upon demand. The parties stipulate that the premises consist of the number of
square feet of space identified in the Schedule. Lessee shall not remove any
fixtures or leasehold improvements which have become an integral part of the
premises, including an elevator, if installed by Lessee, without Lessor's prior
written consent. Lessee shall repair any damage to the premises caused by
removal of any property. All of such removal and restoration shall be
accomplished at Lessee's expense on of before the expiration or earlier
termination of this Lease.
C. Lessee Improvements Allowance. Lessor shall provide Lessee with
-----------------------------
an improvement allowance in an amount of up to and including Fifty Thousand and
No/ I 00 Dollars ($50,000.00) ("Lessee Improvements Allowance") so that Lessee
may install new carpet in the Premises and perform other improvements
(collectively, "Lessee Improvements"), all of which shall be performed by Lessee
after receipt of Lessor's prior written approval of Lessee's plans therefor,
which shall not be unreasonably withheld or delayed, and otherwise in accordance
with the provisions of Paragraph 8.A. below. Upon completion of Lessee's
Improvements, Lessee shall submit to Lessor all invoices and other supporting
documentation reasonably requested by Lessor evidencing the cost of the
Improvements. Lessor shall provide the Lessee Improvements Allowance to Lessee
by permitting Lessee to credit against the Base Rent due for January, 1999 the
amount spent by Lessee in performing the Improvements, not to exceed the Lessee
Improvements Allowance.
8. ALTERATIONS AND REPAIRS:
A. Alterations. Lessee shall not make or permit to be made any
-----------
alterations, additions, improvements, or changes in the premises without the
prior written consent of Lessor, which consent Lessor shall not unreasonably
withhold or delay, provided that Lessor may make such consent subject to
reasonable conditions. The parties contemplate that Lessee will reconfigure
and/or remove, at its sole cost and expense, some or all of the non-structural
elements of the Building (i.e., certain existing half-height partitions and some
----
or all of the mounted or hard wall partitions constituting private
offices)(collectively, "Lessee Improvements"). Subject to obtaining Lessor's
approval of Lessee's plans therefor, as provided above, Lessee shall be entitled
to construct the Lessee Improvements so long as Lessee provides Lessor with
reasonable insurance with respect to the construction thereof, employs a
licensed general contractor and obtains all required permits from governmental
authorities with jurisdiction over the premises, and so long as the alterations
are performed in accordance with all applicable Law (including, without
limitation, the Americans with Disabilities Act of 1990 ["ADA"]), using new
equipment and materials of good quality. So long as the Lessee Improvements do
not, in Lessor's reasonable estimation, diminish the quality or general design
of the premises as its exists on the Commencement Date, Lessee shall not be
obligated to remove
8
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the alterations and restore the premises to its condition existing prior to the
installation of the alterations. With respect to any additional alterations
installed by Lessee, at Lessee's request, Lessor shall notify Lessee in writing
whether Lessor shall require that the Alterations be removed by Lessee upon the
expiration or earlier termination of this Lease. All alterations (including the
Lessee Improvements) installed by Lessee shall be at Lessee's sole cost and
expense, and Lessee shall be solely responsible for the cost associated with
constructing the alterations in compliance with applicable Law, including,
without limitation, the ADA with respect thereto.
B. Maintenance and Repair Obligations.
----------------------------------
(i) Lessee's Obligations. Except as expressly provided in this
--------------------
Paragraph 8.B., Lessee shall, at Lessee's own expense, keep the property upon
which the premises is located and the entire premises, and all improvements
thereon, including, without limitation, all landscaping and hardscaping, parking
structure, building systems, roof membrane, fire protection and/or life safety
systems, in good order, maintenance, condition and repair (including replacement
of such items if necessary) during the Term (as it may be extended), including,
without limitation, the replacement of all broken glass with glass of the same
size and quality under the supervision and with the approval of Lessor. If
Lessee does not make repairs or replacements promptly and adequately, Lessor
may, but need not, make such repairs or replacements, and Lessee shall pay to
Lessor upon demand the reasonable cost thereof, together with interest thereon
at the maximum rate permitted by law from the date the cost was incurred through
the date of payment to Lessor. Notwithstanding anything to the contrary
contained in this Paragraph, with respect to capital expenditures associated
with the roof, HVAC, repaving of the parking lot, replacement of landscaping and
the painting of the exterior of the premises costing for any one expenditure in
excess of Five Thousand and No/100 Dollars ($5,000.00), Lessor shall pay such
expenditures and amortize them, with interest on the unamortized balance at the
rate paid by Lessor on funds borrowed to finance such improvements (or, if
Lessor finances such improvements out of Lessor's funds without borrowing, the
rate that Lessor would have paid to borrow such funds) over such useful life as
Lessor shall reasonably determine in accordance with generally accepted
accounting principles, and Lessee shall pay as Additional Rent each month
thereafter such monthly amortized cost falling due during the Term (as
extended). Lessee shall pay for all such expenditures costing less than Five
Thousand and No/100 Dollars ($5,000.00).
(ii) Lessor's Rights and Obligations. At all times during the
-------------------------------
Term, at its sole cost and without right of reimbursement except as provided in
this Paragraph, Lessor shall keep and maintain the exterior and structural
walls, roof structure and foundations in good order, condition and repair. Any
capital expenditure associated with the foundation or exterior and structural
walls of the premises shall be solely at Lessor's cost unless the need for such
expenditure is the result of any act or omission of Lessee, its agents,
employees or contractors, or the result of any alteration to the premises made
by Lessee, in which case Lessee shall be solely responsible for the costs
therefor. At any time or times, Lessor, either voluntarily or pursuant to
governmental requirement, may, at Lessor's own expense, make repairs,
alterations, or improvements in or to the Building or any part thereof,
including the premises, and, during such operations, Lessor may close entrances,
doors, corridors, elevators, or other facilities, all without any liability to
Lessee by reason of interference, inconvenience or annoyance; provided that
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Lessee shall have access to the premises sufficient for conduct of Lessee's
business. Except to the extent caused by the gross negligence or willful
misconduct of Lessor, its agents, employees or contractors, Lessor shall not be
liable to Lessee for any expense, injury, loss or damage resulting from work
done in or upon, or the use of, any adjacent or nearby building, land, street or
alley, provided that Lessor makes a reasonable effort to minimize the disruption
to Lessee's business. In the event Lessee requests that repairs, alterations,
decorating or other work in the premises that are the obligation of Lessor
hereunder be made during a period other than ordinary business hours, Lessee
shall pay Lessor for overtime and other additional expenses incurred because of
such request.
9. LIENS: Lessee agrees to keep the premises and the property on which
the premises are located free from any liens arising out of any work performed,
materials furnished, or obligations incurred by Lessee.
10. INDEMNIFICATION: Lessee waives all claims against Lessor for damages
to property, or to goods, wares, and merchandise stored in, upon, or about the
premises, and for injuries to persons in, upon, or about the premises from any
cause arising at any time, except as may be caused by the gross negligence or
willful misconduct of Lessor, its agents, employees and contractors, and Lessee
agrees to indemnify, defend, protect and hold Lessor exempt and harmless from
and on account of any damage or injury to any person or property arising from
the use of the premises by Lessee, the breach of any obligation of Lessee
hereunder, the failure of Lessee to keep the premises in good condition as
herein provided and the negligence or willful misconduct of Lessee, its agents,
employees, contractors or invitees. Lessor shall not be liable to Lessee for any
damage because of any act or negligence of any co-tenant or other occupant of
the Building, or by any owner or occupant of adjoining or contiguous property,
nor for overflow, breakage, or leakage of water, steam, gas or electricity from
pipes, wires, or otherwise. Lessee shall pay for all damage to the premises and
to the tenants and occupants thereof (if any) caused by the misuse or neglect of
the premises by Lessee, its agents, employees, contractors or invitees.
11. INSURANCE:
A. Lessee's Insurance. Lessee at Lessee's expense will provide and
------------------
keep in force during the Term of this Lease and for the benefit of Lessor and
Lessee general liability insurance policies with a recognized casualty insurance
company qualified to do business in California and reasonably acceptable to
Lessor, protecting Lessor and Lessee against any and all liability occasioned by
occurrence in amounts not less than that specified in the Schedule, and shall
insure all Lessee Improvements, alterations installed by Lessee and the personal
property, equipment and fixtures of Lessee with a policy of "all risk" or
similar coverage, for the full replacement cost thereof. Lessee agrees to
furnish certificates of insurance of all required policies to Lessor, and Lessor
shall be named as an additional insured on each such policy.
B. Lessor's Insurance. Lessor agrees during the Term to carry fire
------------------
and extended coverage insurance, including, at Lessor's election, damage from
earthquake and/or flood, insuring Lessor's interest in the premises for the full
replacement cost thereof, as well as comprehensive general liability insurance,
or other comparable coverage insuring Lessor and such parties as Lessor shall
elect, or be required, to provide such coverage. Lessor shall have no
obligation to insure against loss by Lessee to Lessee's leasehold improvements
(i.e., the Lessee
----
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Improvements) or alterations, fixtures, furniture, or other personal property in
or about the premises occurring from any cause whatsoever, and Lessee shall have
no interest in the proceeds of any insurance carried by Lessor. Lessor shall
have the right to carry any additional insurance as Lessor reasonably shall
require, including, without limitation, business interruption insurance.
C. Payment by Lessee. Lessee shall reimburse to Lessor, within
-----------------
thirty (30) days of receipt of Lessor's statement therefor, the cost of all
insurance maintained by Lessor with respect to the premises. Lessee also shall
be responsible for payment of all deductibles applicable to the insurance
carried by Lessor.
12. SUBROGATION: Lessor and Lessee hereby waive all rights of subrogation
which their respective insurance carriers might have under all policies of
insurance now existing or hereafter purchased during the Term by either Lessor
or Lessee, insuring or covering the premises or any portion thereof, or Lessee's
leasehold improvements, furniture, fixtures, personal property, business, or
operations in, or about the premises. Lessor and Lessee shall inform the other
if their respective insurers will not permit a waiver of subrogation rights as
provided herein, and each shall cooperate to the fullest extent reasonably
necessary to provide the other with equivalent protection.
13. TAXES: Lessee shall pay before delinquency any and all taxes,
assessments, license fees and public charges levied, assessed or imposed and
which become payable during the Term hereof upon the premises and the real
property upon which the premises is constructed, and any upon any improvements
therein or thereon, and on Lessee's fixtures, furniture and personal property
installed or located in the premises, including any leasehold improvements made
by Lessee to the premises. Lessee shall be considered the owner during the Term
of any leasehold improvements or alterations installed at Lessee's expense, and
any such leasehold improvements and alterations may be assessed to Lessee for
property tax purposes.
14. SERVICES: Lessee shall separately contract for any and all utilities
or services to be provided to the premises, and shall pay the cost thereof
directly to the provider of such utilities or services. Lessor shall not be
liable to Lessee or to any other party for any claim, injury, damage, rebate or
charge of any kind whatsoever which may arise or accrue in case of the
interruption of any supply of water, heat, electricity, elevator service, air
conditioning, gas, compressed air, or refrigeration caused by any occurrence
whatsoever, including, without limitation, by accident, failure of power supply,
repairs, strikes, fire, flood, act of God, or on account of any defect of the
Building or the premises, nor shall any such interruption be grounds for
termination of this Lease.
15. PARKING: Lessee shall be entitled to use the parking spaces specified
in the Schedule.
16. DESTRUCTION: In the event of a partial destruction of the premises or
appurtenances during the Term from a cause which is insured under Lessor's fire
and extended coverage insurance, Lessor shall forthwith repair the same, in a
manner consistent with then- current Laws and regulations of state, county,
federal, or municipal authorities, and following receipt of insurance proceeds
sufficient for the all restoration work required to be performed by Lessor.
Such partial destruction shall not annul or void this Lease, except that Lessee
shall be
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entitled to a proportionate reduction of Rent while such repairs are being made,
such proportionate reduction to be based upon the extent to which the making of
such repairs interferes with the business carried on by Lessee in the premises.
Provided Lessor proceeds with the repair of damage or destruction to the
premises, Lessee shall pay to Lessor the deductible amount with respect to
insurance maintained by Lessor for the premises.
If the partial destruction is caused by a casualty which is not
insured under Lessor's fire and extended covered insurance (or any other
insurance maintained by the parties relating to the Premises) or if such repairs
cannot be made in ninety (90) days, either Lessor or Lessee may terminate this
Lease by giving written notice to the other party within thirty (30) days after
the damage occurs. If the Lease is not terminated, Lessor shall make such
repairs within a reasonable time with this Lease continuing in full force and
effect, and the Rent shall be proportionately reduced while the repairs are
being made.
In the event the Building is destroyed to the extent of not less than
33 1/3% of the then-current replacement cost thereof, Lessor or Lessee may elect
to terminate this Lease by giving written notice of termination to the other
within thirty (30) days after such damage occurs, regardless of whether the
premises are damaged, whether the partial destruction is caused by a casualty
which is covered by insurance, or whether the repairs can be made within ninety
(90) days. A total destruction of the Building shall terminate this Lease
(unless Lessee elects to have the premises repaired or rebuilt as provided
herein). Except as expressly set forth herein, the provisions of Section 1932,
Subdivision 2, and of Section 1933, Subdivision 4, of the Civil Code of the
State of California hereby are waived by Lessee.
In the event of termination of this Lease pursuant to any of the
provisions of this Paragraph, Rent shall be apportioned on a per diem basis and
shall be paid to the date of the casualty. In no event shall Lessor be liable
to Lessee for any damages resulting to Lessee from the happening of such
casualty or from the repairing or reconstruction of the premises or of the
building, or from the termination of this Lease as herein provided, nor shall
Lessee be relieved thereby or in any such event from Lessee's obligations
hereunder except to the extent and upon the conditions expressly stated in this
Paragraph.
Notwithstanding the foregoing, if Lessor properly elects to terminate
the Lease hereunder, Lessee may elect, by written notice to Lessor delivered
within no more than thirty (30) days after Lessor's notice, to require the
premises to be rebuilt, and require that all insurance proceeds actually
received by Lessor in connection with such casualty be applied toward such
repair or rebuilding, in which case Lessee shall deposit with Lessor, or
otherwise demonstrate to the satisfaction of Lessor that Lessee has immediately
available sufficient funds to complete any such restoration, and Lessee shall
pay any and all amounts in excess of insurance proceeds actually received by
Lessor, or paid by Lessor's insurance carrier, as required to complete
restoration of the damage in question.
17. EMINENT DOMAIN: If the whole or any substantial part of the premises
or appurtenant real property shall be taken or condemned by any competent
authority for any public use or purpose, the Term of this Lease shall end upon,
and not before, the date when the possession of the part so taken shall be
required for such use or purpose. Rent shall be apportioned as of the date of
such termination. Lessee shall be entitled to receive any damages
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awarded by the condemning authority for (i) leasehold improvements installed at
Lessee's expense; and (ii) relocation costs and moving expenses. Lessor also
shall permit Lessee to participate in any such condemnation proceedings. The
entire balance of the award shall be the property of Lessor.
18. ASSIGNMENT AND SUBLETTING: Lessee shall not assign this Lease, or any
interest herein, and shall not sublet the premises or any part thereof, or any
right or privilege appurtenant thereto, or suffer any other person to occupy or
use the premises, or any portion thereof, without the prior written consent of
Lessor, and a consent to one assignment, subletting, occupation, or use by any
other person shall not be deemed to be a consent to any subsequent assignment,
subletting, occupation or use by any other person. Any such assignment or
subletting without such consent shall be void, and shall, at the option of
Lessor, terminate this Lease. Any transfer or assignment of this Lease without
the written consent of Lessor shall make this Lease voidable at the option of
Lessor.
Lessor will not unreasonably withhold, condition or delay its consent
to an assignment or subletting by Lessee, provided that (a) the assignee or
Lessee is financially responsible and proposes to use the premises for the same
purpose or a purpose which is permitted by applicable zoning ordinances and
regulations; (b) the proposed use is not injurious to the premises and will not
disturb other tenants of Lessor in the building (if any) or the immediate
vicinity; and (c) the assignee or Lessee executes and delivers to Lessor a
written assumption of this Lease in form acceptable to Lessor. Lessor shall use
its reasonable good faith efforts to respond to a request for consent to an
assignment or subletting with fifteen (I 5) days (but Lessor shall respond in
any event not later than thirty (30) days) after receipt of Lessee's written
request for such consent, which request shall be accompanied by all information
reasonably required by Lessor to evaluate the proposed transfer.
Every assignment or sublease shall recite that it is and shall be
subject and subordinate to the provisions of this Lease, and that the
termination of this Lease shall constitute a termination of every such
assignment or Lease. The Option to renew the Term of this Lease granted to
Lessee may be assigned to any Permitted Transferee, as defined below.
Provided that Lessee is not a publicly-traded company, the transfer by
Lessee of fifty percent (50%) or more of the capital stock or other ownership
interest of Lessee shall constitute an assignment of this Lease, and such
assignment shall require the consent of Lessor as set forth herein.
Notwithstanding any other provision hereof, provided that Lessee is not then in
default hereunder, Lessee may, without Lessor's consent, assign this Lease to an
entity controlling, controlled by or under common control with Lessee, or any
entity resulting from a merger with Lessee, provided that the net worth of the
entity to whom this Lease is assigned shall have a net worth, determined in
accordance with generally accepted accounting principles, that is at least equal
to the greater of (i) the net worth of Lessee as of the date hereof, or (ii) the
net worth of Lessee immediately preceding the transfer in question. Nothing
herein shall waive or diminish the requirement that the approval of Lessor be
obtained for any other assignment or sublease of the Premises.
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Lessee shall pay Lessor as Additional Rent hereunder a reasonable
attorneys' and administrative fee for costs actually incurred in connection with
evaluating any request for consent to an assignment or sublease.
If for any proposed assignment or sublease Lessee receives rent or
other consideration, either initially or over the term of the assignment or
sublease, in excess of the Rent called for hereunder, or, in case of the
sublease of a portion of the premises in excess of such Rent fairly allocable to
such portion, after appropriate adjustments to assure that all other payments
called for hereunder are taken into account, Lessee shall pay to Lessor as
Additional Rent hereunder fifty percent (50%)of the excess of each such payment
of Rent or other consideration received (after Lessee has deducted therefrom its
reasonable brokerage commissions, the unamortized cost to Lessee of any
alterations or improvements made by Lessee to the premises prior to the date of
the transfer and legal fees incurred to effect the assignment or sublease) by
Lessee promptly after its receipt.
19. SUBORDINATION: The rights of Lessee under this Lease shall be and they
are subject and subordinate at all times to the lien of any mortgage or deed of
trust now or hereafter in force against the premises and the real property upon
which the premises is located, and to all advances made or hereafter to be made
upon the security thereof, and Lessee shall execute such further instruments
subordinating this Lease to the lien of any such encumbrance, as shall be
requested by Lessor, provided the holder of any such future encumbrance agrees
in writing to recognize Lessee's interest hereunder if Lessee is not then in
default. Lessee's failure to comply with the provisions of this Paragraph
within ten (10) business days after receipt of any request for execution shall
be deemed an incurable default hereunder.
If any mortgagee or beneficiary elects to have this Lease superior to
its mortgage or deed of trust and gives notice of such fact to Lessee, then this
Lease shall be deemed superior to the lien of any such encumbrance, whether this
Lease or a memorandum thereof is dated or recorded before or after said
encumbrance.
20. SIGNS: Lessee shall not place any signs, lettering, marks,
photographs, or any other material whatsoever on the exterior of the doors,
windows, or any other place, on or about the premises, the building, or its
appurtenances, without Lessor's prior written approval, which approval will not
be unreasonably withheld or delayed, of the size, style, design, color,
materials, manner of applying or fastening, and location thereof. Any signage
installed by Lessee shall be at Lessee sole cost and expense and in accordance
with all rules, ordinances, laws and regulations imposed by the governmental
authority with jurisdiction over the premises.
21. REMEDIES: If (i) Lessee fails to make any payment of any sum due under
this Lease for five (5) days after notice from Lessor, or (ii) Lessee fails to
perform any other obligation of Lessee under this Lease for thirty (30) days
after notice from Lessor, or such longer period of time as is reasonably
required to perform the obligation in question, provided that Lessee has
commenced such cure and is using its best efforts to perform such obligation, or
(iii) Lessee's interest herein, or any part thereof, is assigned or transferred,
either voluntarily or by operation of law (except as expressly permitted by
other provisions of this Lease), including, without limitation, the filing of a
petition by or against Lessee (the cure period for which filing shall be sixty
(60) days), or (iv) any member of Lessee if Lessee is a partnership or joint
venture
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under any insolvency or bankruptcy laws, or (v) Lessee makes a general
assignment for the benefit of its creditors, then, in any of such events, Lessor
may, at its option, elect the remedies specified in either subparagraph (a) or
(b) below.
(a) Lessor may repossess the premises and remove all persons and
property therefrom. If Lessor repossesses the premises because of a breach of
this Lease, this Lease shall terminate and Lessor may recover from Lessee:
(1) the worth at the time of award of the unpaid rent which had
been earned at the time of termination;
(2) the worth at the time of award of the amount by which the
unpaid Rent which would have been earned, after termination until the time of
award exceeds the amount of such rental loss that Lessee proves could have been
reasonably avoided;
(3) the worth at the time of award of the amount by which the
unpaid Rent for the balance of the term after the time of award exceeds the
amount of such rental loss for the same period that Lessee proves could be
reasonably avoided; and
(4) any other amount necessary to compensate Lessor for all the
detriment proximately caused by Lessee's failure to perform its obligations
under this Lease or which in the ordinary course of things would be likely to
result therefrom. As used in (1) and (2) above, the "worth at the time of
award" is computed by allowing interest at the rate of the discount rate of the
Federal Reserve Bank of San Francisco plus five (5%) percent per annum. As used
in (3) above, the "worth at the time of award" is computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco at the
time of award plus one percent (1%).
(b) If Lessor does not repossess the premises, then this Lease shall
continue in effect for so long as Lessor does not terminate Lessee's right to
possession, and Lessor may enforce all of its rights and remedies under this
Lease, including the right to recover the rent and other sums due from Lessee
hereunder. For the purposes of this Paragraph 2 1, there shall be no
termination of this Lease as a result of the acts of Lessor, unless Lessor so
notifies Lessee in writing, and the following do not constitute a termination of
Lessee's right to possession:
(1) acts of maintenance or preservation by Lessor or efforts by
Lessor to relet the premises; or
(2) the appointment of a receiver by Lessor to protect Lessor's
interests under this Lease.
22. REMOVAL OF PROPERTY: In the event of a default by Lessee, beyond
applicable cure periods, Lessor may enter upon the premises, in the event of
default by Lessee in the payment of any Rent herein reserved, or in the
performance of any term, covenant or condition herein contained to be kept or
performed by Lessee, and to remove any and all furniture and personal property
whatsoever situated upon the premises, and to place such property in storage for
the account of and at the expense of Lessee. In the event that Lessee shall
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<PAGE>
not pay the cost of storing any such property after the property has been stored
for a period of ninety (90) days or more, Lessor may sell any or all of such
property, at public or private sale, in such manner and at such times and places
as Lessor in its sole discretion may deem proper, without notice to Lessee or
any demand upon Lessee for the payment of any part of such charges or the
removal of any of such property, and shall apply the proceeds of such sale first
to the cost and expenses of such sale, including reasonable attorneys' fees
actually incurred; second, to the payment of the costs of or charges for storing
any such property; third, to the payment of any other sums of money which may
then or thereafter be due to Lessor from Lessee under any of the terms hereof,
and fourth, the balance, if any, to Lessee.
23. SURRENDER: The voluntary or other surrender of this Lease by Lessee,
or a mutual cancellation thereof shall not work a merger, and shall, at the
option of Lessor, terminate all or any existing leases or subtenancies, or may,
at the option of Lessor, operate as an assignment to Lessor of any or all such
leases or subtenancies.
24. TRANSFER OF SECURITY: Lessor may transfer or deliver any security
given by Lessee to secure the faithful performance of any of the covenants of
this Lease to the purchaser or successor of Lessor's interest in the premises,
and thereupon Lessor shall be discharged from any further liability in reference
thereto.
25. WAIVER: The waiver by Lessor or Lessee of any breach of any term,
covenant, or condition herein contained shall not be deemed to be a waiver of
such term, covenant, or condition or any subsequent breach of the same or any
other term, covenant, or condition herein contained. The subsequent acceptance
of Rent hereunder by Lessor shall not be deemed to be a waiver of any preceding
breach by Lessee of any term, covenant, or condition of this Lease, other than
the failure of Lessee to pay the particular Rent so accepted, regardless of
Lessor's knowledge of such preceding breach at the time of acceptance of such
Rent.
26. HOLDING OVER: Any holding over after the expiration of the Term, with
the consent of Lessor, shall be construed to be a tenancy from month-to-month on
the same terms and conditions specified herein so far as applicable, except that
the Base Rent shall be increased to an amount equal to one hundred fifty percent
(150%) of the amount payable during the last month of the Term hereof. Lessee
shall indemnify, protect, defend and hold Lessor harmless from any and all
damages, liabilities, costs and expenses arising in connection with its failure
to timely surrender the premises in the condition required by this Lease,
including, without limitation, any claim made by any succeeding Lessee founded
on or resulting from such failure to surrender, together with reasonable
attorneys' fees and costs.
27. RIGHT OF ENTRY: Lessor and its agents may enter the premises at any
reasonable time to inspect the premises or to perform the obligations of Lessor.
Except in the case of an emergency, in which case no notice shall be required,
Lessor shall reasonable prior notice of entry, and shall comply with Lessee's
reasonable security regulations. Any entry into the Premises or portions
thereof by Lessor in accordance with this Paragraph shall not under any
circumstances be construed to be or to be a forcible or unlawful entry into, or
a detainer of, the premises, or an eviction, actual or constructive, of Lessee
from the premises or any portion thereof
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28. ATTORNEYS' FEES: If any action at law or in equity shall be brought to
recover any Rent under this Lease, or for or on account of any breach of or to
enforce or interpret any of the terms, covenants, agreements, or conditions of
this Lease, or for the recovery of the possession of the premises, the
prevailing party shall be entitled to recover from the other party as a part of
the prevailing party's costs a reasonable attorneys' fee and all costs and
expenses, the amount of which shall be fixed by the court and shall be made a
part of any judgment rendered.
29. NOTICES: All notices to be given to Lessee may be given in writing
personally, by nationally recognized overnight courier or by depositing the same
in the United States mail. postage prepaid, and addressed to Lessee at the
premises, whether or not Lessee has departed from, abandoned, or vacated the
premises. Notice to Lessor may be given in writing personally, by nationally
recognized overnight courier or by depositing the same in the U.S. mail, postage
prepaid, and addressed to Lessor at the address at which the Rent is paid.
30. COMMISSION: Lessor and Lessee warrant to the other that it has had no
dealings with any real estate broker or agent in connection with the negotiation
of this Lease except for the Broker(s) specified in the Schedule, and that
neither knows of any other real estate broker or agent who is or might be
entitled to a commission in connection with this Lease. Lessor and Lessee shall
each indemnify, defend, protect and hold harmless the other from any cost,
expense or liability arising out of a claim for any compensation, commission or
charges by any other realtor, broker or agent claiming by or through the
indemnifying party with respect to this Lease.
31. AUTHORITY: Each individual executing this Lease represents and
warrants that he is authorized to bind the entity which he represents by the
execution and delivery of this Lease. Lessee shall provide a resolution of the
Board of Directors of Lessee authorizing the execution and delivery of this
Lease authorizing the execution and delivery of the referenced guaranty. Upon
ten (10) days prior written notice from Lessor, Lessee shall provide Lessor with
Lessee's most recent and best available financial statements and, if available,
financial statements of the preceding two (2) years, all prepared in accordance
with generally accepted accounting principles consistently applied. Lessor shall
keep all such financial statements confidential.
32. GENERAL PROVISIONS: This Lease contains all of the terms, covenants,
and conditions agreed to by Lessor and Lessee and it may not be modified orally
or in any manner other than by an agreement in writing signed by all of the
parties to this Lease or their respective successors in interest.
Each term and each provision of this Lease performable by Lessee shall
be construed to be both a covenant and a condition.
The covenants and conditions hereof, subject to the provisions as to
subletting and assignment, shall apply to and bind the heirs, successors,
executors, administrators, Lessees, and assigns of the parties.
All persons who have signed this Lease shall be jointly and severally
liable hereunder.
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When the context of this Lease requires, the masculine gender includes
the feminine, a corporation, or a partnership, and the singular number includes
the plural.
The captions of this Lease are for convenience only and are not a part
of this Lease and do not in any way limit or simplify the terms and provisions
of this Lease.
This Lease shall be governed by and construed in accordance with the
laws of the State of California.
Time is of the essence as to all of the provisions of this Lease.
33. RULES: The following rules and regulations relating to the safety,
care, and cleanliness of the premises, and the preservation of good order
thereon, are hereby expressly made a part hereof, and Lessee agrees to obey all
such rules and regulations:
A. Peaceful Enjoyment. Lessee, its employees and visitors shall not
------------------
interfere with the peaceful enjoyment of the premises by other lessees, if any,
or those having business with them. Lessee shall not permit the placing of
litter in or upon the building and grounds and shall not permit any animal,
bicycle, motorcycle, or vehicle to be brought into or kept in the building.
B. Moving Heavy Objects. Lessee shall be responsible for repairing
--------------------
any damage occasioned by the moving of freight, furniture, or other objects
into, within, or out of the building, or the placing of any heavy objects of any
nature in the premises.
C. Outside Storage. No materials, supplies, equipment, finished
---------------
products, or semi-finished products, raw materials, or articles of any nature
shall be stored upon or permitted to remain on any portion of the premises
outside of the building constructed thereon, except in properly designated
areas.
34. HAZARDOUS MATERIALS:
A. Definitions.
-----------
(1) "Hazardous Materials" shall mean any substance: (i)
that now or in the future is regulated or governed by, requires investigation or
remediation under, or is defined as a hazardous waste, hazardous substance,
pollutant or contaminant under any governmental statute, code, ordinance,
regulation, rule or order, and any amendment thereto, including the
Comprehensive Environmental Response Compensation and Liability Act, 42 U.S.C.
(S)9601 et seq., and the Resource Conservation and Recovery Act, 42 U.S.C.
------
(S)6901 et seq., or (ii) that is toxic, explosive, corrosive, flammable,
------
radioactive, carcinogenic, dangerous or otherwise hazardous, including gasoline,
diesel fuel, petroleum hydrocarbons, polychlorinated biphenyls (PCBs), asbestos,
radon and urea formaldehyde foam insulation.
(2) "Environmental Requirements" shall mean all present
and future Laws, orders, permits, licenses, approvals, authorizations and other
requirements of any kind applicable to Hazardous Materials.
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(3) "Handled by Lessee" and "Handling by Lessee" shall
mean and refer to any installation, handling, generation, storage, use,
disposal, discharge, release, abatement, removal, transportation, or any other
activity of any type by Lessee or its agents, employees, contractors, licensees,
assignees, Lessees, transferees or representatives (collectively,
"Representatives") or its guests, customers, invitees, or visitors
(collectively, "Visitors"), at or about the premises in connection with or
involving Hazardous Materials.
(4) "Environmental Losses" shall mean all costs and
expenses of any kind, damages, including foreseeable and unforeseeable
consequential damages, fines and penalties incurred in connection with any
violation of and compliance with Environmental Requirements and all losses of
any kind attributable to the diminution of value, loss of use or adverse effects
on marketability or use of any portion of the premises or real property on which
the premises is located ("property").
B. Lessee's Covenants. No Hazardous Materials shall be Handled by
------------------
Lessee at or about the premises or property without Lessor's prior written
consent, which consent may be granted, denied, or conditioned upon compliance
with Lessor's requirements, all in Lessor's absolute discretion. Notwithstanding
the foregoing, normal quantities and use of those Hazardous Materials
customarily used in the conduct of general office activities, such as copier
fluids and cleaning supplies ("Permitted Hazardous Materials"), may be used and
stored at the premises without Lessor's prior written consent, provided that
Lessee's activities at or about the premises and property and the Handling by
Lessee of all Hazardous Materials shall comply at all times with all
Environmental Requirements. At the expiration or termination of the Lease,
Lessee shall promptly remove from the premises and property all Hazardous
Materials Handled by Lessee at the premises or the property. Lessee shall keep
Lessor fully and promptly informed of all Handling by Lessee of Hazardous
Materials other than Permitted Hazardous Materials. Lessee shall be responsible
and liable for the compliance with all of the provisions of this Paragraph by
all of Lessee's Representatives and Visitors, and all of Lessee's obligations
under this Paragraph (including its indemnification obligations under
subparagraph E below) shall survive the expiration or termination of this Lease.
C. Compliance. Lessee shall at Lessee's expense promptly take all
----------
actions required by any governmental agency or entity in connection with or as a
result of the Handling by Lessee of Hazardous Materials at or about the premises
or property, including inspection and testing, performing all cleanup, removal
and remediation work required with respect to those Hazardous Materials,
complying with all closure requirements and post-closure monitoring, and filing
all required reports or plans. All of the foregoing work and all Handling by
Lessee of all Hazardous Materials shall be performed in a good, safe and
workmanlike manner by consultants qualified and licensed to undertake such work
and in a manner that will not interfere with any other lessees' quiet enjoyment
of the premises or Lessor's use, operation, leasing and sale of the premises.
Lessee shall deliver to Lessor prior to delivery to any governmental agency, or
promptly after receipt from any such agency, copies of all permits, manifests,
closure or remedial action plans, notices, and all other documents relating to
the Handling by Lessee of Hazardous Materials at or about the premises or
property. If any lien attaches to the premises or the property in connection
with or as a result of the Handling by Lessee of Hazardous Materials, and Lessee
does not cause the same to be released, by payment, bonding or otherwise, within
twenty (20) days after the attachment thereof, Lessor shall have the right but
not the obligation to cause
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the same to be released and any sums expended by Lessor (plus Lessor's
administrative costs) in connection therewith shall be payable by Lessee on
demand.
D. Lessor's Rights. Lessor shall have the right, but not the
---------------
obligation, to enter the premises at any reasonable time, upon reasonable notice
(and without any notice requirement for any emergency) (i) to confirm Lessee's
compliance with the provisions of this Paragraph 34, and (ii) to perform
Lessee's obligations under this Paragraph if Lessee has failed to do so after
reasonable notice to Lessee. Lessor shall also have the right to engage
qualified Hazardous Materials consultants to inspect the premises and review the
Handling by Lessee of Hazardous Materials, including review of all permits,
reports, plans, and other documents regarding same. Lessee shall pay to Lessor
on demand the costs of Lessor's consultants' fees and all costs incurred by
Lessor in performing Lessee's obligations under this Paragraph. Lessor shall use
reasonable efforts to minimize any interference with Lessee's business caused by
Lessor's entry into the premises, but Lessor shall not be responsible for any
interference caused thereby.
E. Lessee's Indemnification. Lessee agrees to indemnify, defend,
------------------------
protect and hold harmless Lessor and its partners or members and its or their
partners, members, directors, officers, shareholders, employees and agents from
all Environmental Losses and all other claims, actions, losses, damages,
liabilities, costs and expenses of every kind, including reasonable attorneys',
experts' and consultants' fees and costs, incurred at any time and arising from
or in connection with the Handling by Lessee of Hazardous Materials at or about
the premises or Lessee's failure to comply in full with all Environmental
Requirements with respect to the premises.
F. Lessor's Responsibilities. Lessor hereby represents and warrants
-------------------------
to Lessee that, to the best of Lessor's actual knowledge: (i) the premises and
the property as of the Commencement Date are in compliance with all
Environmental Requirements; and (ii) any handling, transportation, storage,
treatment, disposal, release or use of Hazardous Materials that has occurred on
or about the premises and the property prior to the Commencement Date has been
in compliance with all Environmental Requirements. Lessor further represents and
warrants that, to the best of Lessor's actual knowledge, no litigation has been
brought or threatened, nor any settlements reached with any governmental or
private party, concerning the actual or alleged presence of Hazardous Materials
on or about the premises or the property, nor has Lessor received written notice
of any violation of Environmental Requirements, pending claims or pending
investigations with respect to the presence of Hazardous Materials on or about
the premises or the property. Lessee shall not be responsible for any costs or
expenses arising out of the need to remediate, remove or otherwise clean up any
Hazardous Materials existing on, in or under the premises or the property as of
the Commencement Date. Lessor shall not use the premises or the property for any
activities involving the use, generation, handling, release, threatened release,
treatment, storage, discharge, disposal or transportation of any Hazardous
Materials, except in such quantity or concentration that is customarily used,
stored or disposed in the ordinary course of the business so long as such
activity duly complies with applicable Laws and good business practice. If
Lessor violates the foregoing covenant resulting in an Environmental Claim (as
hereinafter defined) with respect to the premises, then Lessor agrees to (a)
notify Lessee immediately of any such Environmental Claim and (b) clean up any
contamination in full compliance with all applicable Laws. "Environmental Claim"
means any
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claim, demand, action, cause of action, suit, damage, punitive damage, fine,
penalty, expense, liability, criminal liability, judgment, or governmental
investigation relating to remediation or compliance with requirements of Laws
covering Hazardous Materials. The term "Environmental Claim" also includes any
costs incurred in responding to efforts to require remediation and any claim
based upon any asserted or actual breach or violation of any requirements of any
Laws covering Hazardous Materials.
G. Third Parties. Except as provided in the immediately preceding
-------------
subparagraph G, if any third party (other than Lessor or its representatives, or
Lessee or its representatives) places Hazardous Materials on the premises or the
property on or after the Commencement Date, then Lessor shall have the right to
recover the costs of remediation and removal from Lessee as Additional Rent.
35. SEWER LINE INSTALLATION: Lessee acknowledges that the Palo Alto
Medical Foundation intends to take a sewer line through the parking lot for the
Premises. Lessor shall use reasonable good faith efforts to work with the
Foundation and the City of Palo Alto to (i) have the installation of the sewer
line completed by July 1, 1998; and (ii) minimize interference with Lessee's use
of the parking lot and the premises until the installation has been completed.
IN WITNESS WHEREOF, this Lease is executed as of the later of the
dates set forth below.
<TABLE>
<S> <C>
LESSOR: LESSEE:
ENCINA PROPERTIES, a California limited KANA COMMUNICATIONS, INC., a
partnership California corporation
By: /s/ Al Hoover By: /s/ MARK S.GAINEY
----------------------------------- --------------------------------------
Its: General Partner Its: President and CEO
--------------------------------------
By: /s/ JOSEPH D. McCARTHY
--------------------------------------
Its: Director of Finance and Operations
--------------------------------------
</TABLE>
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EXHIBIT 10.9
Kana Communications, Inc.
ONLINE SERVICES AGREEMENT
This Agreement ("Agreement") is effective as of __________________________,
199__ ("Effective Date"), and is made by and between:
Kana Communications, Inc., a California corporation , with its principal place
of business at 87 Encina Avenue, Palo Alto, California 94301 ("Kana") and
___________________________, a _______________________________ corporation, with
its principal offices at __________________________("Customer").
Whereas, Kana desires to provide to Customer the Services described in Schedule
A ("Services"); whereas Kana owns, or has licensed from the owner(s), copyrights
and other rights to the software product identified in Schedule A, and
associated documentation related to the Services provided by Kana under this
Agreement (collectively, the "Software"); whereas, Customer desires to receive a
non-exclusive license to use such Software at the site(s) listed below and to
receive the Services; and whereas, Kana is willing to grant such a non-exclusive
license to Customer for the Licensed Software for use in connection with the
Services on the terms and conditions set forth below; the parties agree as
follows:
1. Kana's Duties and Obligations.
-----------------------------
a. Kana shall provide the Services described in Schedule A attached
hereto, which may be modified from time to time at Kana's sole discretion.
b. Pursuant to the provisions of Services hereto and subject to the terms
of this Agreement, Kana grants to Customer a personal, nontransferable,
nonsublicensable, nonexclusive, limited license to: (a) use the Software in
accordance with the documentation supplied by Kana only at the location
("Licensed Site") and for the number of authorized users ("Authorized Users")
specified on Schedule A. Any copies of the Software made in violation of this
----------
Agreement shall be deemed copyright infringement.
Ownership of Software. As between the parties, title to and ownership of the
- ---------------------
Software, all proprietary rights therein, any accompanying printed materials and
all copies and portions thereof shall be and at all times remain in Kana. The
Software and accompanying printed materials are protected by copyright,
trademark and trade secret laws and international treaty provisions.
3. Customer's Duties and Responsibilities; Restrictions.
----------------------------------------------------
a. Data and Information. Customer shall make available in a timely manner
--------------------
at no charge to Kana all technical data, files, documentation, sample output, or
other information and resources required by Kana for the performance of the
Services. Customer will be responsible for, and assumes the risk of any problems
resulting from, the content, accuracy, completeness and consistency of all such
data, materials and information supplied by Customer.
b. Tasks; Assistance With Third Parties. Tasks that are primarily the
------------------------------------
responsibility of Customer's personnel will remain Customer's responsibility and
will remain under Customer's supervision, management and control, even if Kana
assists Customer in performing such tasks. Customer shall cooperate with Kana
and provide such assistance as Kana may reasonably request, in connection with
Kana's efforts to obtain all consents, approvals and authorizations of and
cooperation from third parties needed by Kana and give all notices to third
parties which may be necessary or required in
<PAGE>
order to effectuate the transactions contemplated hereby. Customer shall bear
any costs (including those above and beyond Kana's quoted costs and including
added time) resulting from Customer's failure to meet there obligations.
c. Contact Person. Each party will appoint in writing an employee or
--------------
agent of such party to act as the "Contact Person" for all communication between
the parties related to the Services. The Contact Person will be responsible for
monitoring the status of the Services and will schedule regular meetings with
both technical and management personnel of each party to review the status of
the Services. Either party may change its Contact Person upon written notice to
the other.
d. No Reverse Engineering; Third Parties. Customer agrees that under no
-------------------------------------
circumstance shall it, or shall it cause or permit any third party to, (a)
distribute or allow others to distribute copies of the Software or the
associated documentation to a person or entity outside of the Licensed Site, (b)
reproduce, modify or copy the Software and associated documentation except as
expressly permitted by this Agreement, or as permitted by Kana in writing (c)
provide, rent, sell, lease or otherwise transfer the Software or any copy or
part thereof (d) reverse assemble, reverse compile or reverse engineer the
Software, or otherwise attempt to discover any Software source code or
underlying Proprietary Information (as defined below).
e. Compliance with Laws. Customer agrees that it shall comply with all
--------------------
export laws and restrictions and regulations of the U.S. Department of Commerce
or other United States or foreign agency or authority, and not, under any
circumstances, export or re-export, or allow the export or re-export of the
Software any Proprietary Information (as defined in Section 5 hereto) or any
copy or direct product thereof or in violation of any such restrictions, laws or
regulations, or to any Group D:1 or E:2 country (or any national of such
country) specified in the then current Supplement No. 1 to Part 740, or, in
violation of the embargo provisions in Part 746, of the U.S. Export
Administration Regulations (or any successor regulations or supplement), even if
Customer is in compliance with all licenses and approvals required under
applicable export laws and regulations, including without limitation, those of
the U.S. Department of Commerce.
4. Audit; Inspections.
------------------
a. Customer shall keep, maintain and preserve for at least two (2) years
following termination or expiration of the term of this Agreement or any
renewal(s) thereof, accurate records relating to Customer's obligations
hereunder. Such records shall be maintained as confidential, but shall be
available for inspection and audit as provided herein. Kana shall have the
right at least twice per calendar year to have an independent public accountant,
reasonably acceptable to Customer, examine Customer 's relevant books, records
and accounts for the purpose of verifying the accuracy of payments made as
required under this Agreement. Kana acknowledges and agrees that such
accountant shall not have access to the books, records, and accounts relating to
other products or services except as such books, records and accounts also
directly relate to the payments due hereunder. Each audit will be conducted at
Customer's place of business, or other place agreed to by the Parties, during
Customer's normal business hours and with at least five (5) business days prior
written notice to Customer. Kana shall pay the fees and expenses of the auditor
for the examination; provided that should any examination disclose a greater
than five percent (5%) shortfall in the payments due Kana for the period being
audited, Customer shall pay the reasonable fees and expenses of the auditor for
that examination.
b. The Software is the Proprietary Information (as defined in Section 5)
of Kana and is subject to all the terms and conditions of this Agreement.
Additionally, Customer agrees to use the Software under carefully controlled
conditions solely for the purposes set forth herein and subject to the
restrictions in Section 3 above, and to inform all employees who are given
access to the Software by Customer that such materials are confidential trade
secrets of Kana and are licensed to Customer as such. Customer agrees to take
all necessary steps to prevent the unauthorized disclosure of the Software
including, without limitation, restricting access to the Software only to a
limited number of employees who have agreed to be bound by a written agreement
which incorporates at least the protections and restrictions set forth herein
5. Confidentiality; Assignment
---------------------------
<PAGE>
a. Each party ("Receiving Party") agrees to keep confidential and not
disclose or use except in performance of its obligations under this Agreement,
confidential or proprietary information related to the other party's
("Disclosing Party") technology or business that the Receiving Party learns in
connection with this Agreement and any other information received from the
other, including without limitation, to the extent previously, currently or
subsequently disclosed to the Receiving Party hereunder or otherwise:
information relating to products or technology of the Disclosing Party or the
properties, composition, structure, use or processing thereof, or systems
therefor, or to the Disclosing Party's business (including, without limitation,
computer programs, code, algorithms, schematics, data, know-how, processes,
ideas, inventions (whether patentable or not), names and expertise of employees
and consultants, all information relating to customers and customer transactions
and other technical, business, financial, customer and product development
plans, forecasts, strategies and information), all of the foregoing,
"Confidential Information"). Neither party shall disclose the terms of this
Agreement to any third party without the prior written consent of the other
party. Each party shall use reasonable precautions to protect the other's
Confidential Information and employ at least those precautions that such party
employs to protect its own confidential or proprietary information.
b. "Confidential Information" shall not include information the Receiving
Party can document (a) is in or (through no improper action or inaction by the
Receiving Party or any affiliate, agent or employee) enters the public domain
(and is readily available without substantial effort), or (b) was rightfully in
the Receiving Party's possession or known by it prior to receipt from the
Disclosing Party, or (c) was rightfully disclosed to the Receiving Party by
another person without restriction, or (d) was independently developed by the
Receiving Party by persons without access to such information and without use of
any Confidential Information of the Disclosing Party.
c. Each party, with prior written notice to the Disclosing Party, may
disclose such Confidential Information to the minimum extent possible that is
required to be disclosed to a governmental entity or agency in connection with
seeking any governmental or regulatory approval, or pursuant to the lawful
requirement or request of a governmental entity or agency, provided that
reasonable measures are taken to guard against further disclosure, including
without limitation, seeking appropriate confidential treatment or a protective
order, or assisting the other party to do so.
d. The Receiving Party acknowledges and agrees that due to the unique
nature of the Disclosing Party's Confidential Information, there can be no
adequate remedy at law for any breach of its obligations hereunder, that any
such breach may allow the Receiving Party or third parties to unfairly compete
with the Disclosing Party resulting in irreparable harm to the Disclosing Party,
and therefore, that upon any such breach or any threat thereof, the Disclosing
Party shall be entitled to appropriate equitable relief in addition to whatever
remedies it might have at law and to be indemnified by the Receiving Party from
any loss or harm, including, without limitation, lost profits and attorney's
fees, in connection with any breach or enforcement of the Receiving Party's
obligations hereunder or the unauthorized use or release of any such
Confidential Information. The Receiving Party will notify the Disclosing Party
in writing immediately upon the occurrence of any such unauthorized release or
other breach. Any breach of this Section 6 will constitute a material breach of
this Agreement.
e. Customer hereby assigns to Kana any invention, work of authorship, idea
or know-how (whether or not patentable) relating to the Software that is
conceived, learned or reduced to practice in the course of performance under
this Agreement and any patent rights, copyrights (including moral rights;
provided that non-assignable moral rights are waived to the extent permitted by
law), trade secret rights, and other rights with respect thereto. Customer
agrees to take any action reasonably requested by Kana to evidence, perfect,
obtain, maintain, enforce or defend the foregoing.
Services Fee; Payment. Customer shall pay the fees for the Services ("Services
- ---------------------
Fee") as set forth in Schedule A hereto. All payments are due and payable thirty
----------
(30) days after the date of Kana's invoice and shall be made in U.S. Dollars in
the United States. All such services fees are exclusive of shipping, taxes,
duties and the like, which shall be paid by Customer. All late payments shall be
assessed a service charge of 1.5% per month to the extent allowed by law.
<PAGE>
Installation; Training. Installation and training for the Software, if
- ----------------------
applicable, shall be provided only pursuant to the installation and training
terms and conditions set forth in Schedule A hereto.
----------
Termination. The term of this Agreement and the rights granted herein is one (1)
- -----------
month. At the end of that term, this Agreement shall renew automatically for
additional one (1) month terms unless either party provides notice to the other
at least five (5) days before the end of the then current term. Notwithstanding
the foregoing, the rights granted herein may be terminated upon the following
events; however, upon termination, the terms of this Agreement, will otherwise
survive and remain in effect.
a. Termination by Customer. Upon termination by Customer, Customer will
-----------------------
cease all use of the Software and destroy or return to Kana all copies thereof
to Kana along with a signed written statement expressing Customer's desire to
terminate the license and certifying that Customer has destroyed or returned to
Kana, and is no longer in possession of, any Software, related documentation or
any copies, portions or derivatives of any of the foregoing.
b. Termination by Kana. Kana may immediately terminate this Agreement if
-------------------
Kana determines that Customer has failed to comply with any of the terms and
conditions of this Agreement. Upon such termination by Kana, all licenses and
rights granted hereunder shall terminate, Customer will cease all use of the
Software, and Customer shall immediately return to Kana, the Software, the
Master Disk(s), all Authorized Duplicates, Proprietary Information, together
with any and all documents, notes and other materials relating to the Software,
including, without limitation, all Proprietary Information and all copies and
extracts of the foregoing and all documentation and copies thereof, along with a
signed written statement certifying that Customer has returned to Kana, and is
no longer in possession of, any Software, Master Disk(s), Authorized Duplicates,
related documentation or any copies, portions or derivatives of any of the
foregoing.
Limited Warranty and Disclaimer. Kana warrants that it will use commercially
- -------------------------------
reasonable efforts to meet the service levels during the term of this Agreement.
Kana warrants that, for a period of ninety (90) days from the date of
installation of the Software, (a) the Software will perform substantially in
accordance with the accompanying printed materials, and (b) the medium upon
which the Software is provided by Kana to Customer shall be free from defects in
material and workmanship under normal use. This warranty covers only problems
reported to Kana during the warranty period. WARRANTY DISCLAIMER: EXCEPT AS
EXPRESSLY STATED HEREIN, THE SERVICES AND SOFTWARE ARE PROVIDED "AS IS" WITHOUT
WARRANTY OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO,
WARRANTIES OF PERFORMANCE OR MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE
OR NONINFRINGEMENT. CUSTOMER BEARS ALL RISK RELATING TO QUALITY AND PERFORMANCE
OF THE SERVICES AND THE SOFTWARE. Performance of the Services and Software
hereunder varies with various manufacturers' equipment with which it is used.
Kana does not warrant that the Services or the functions contained in the
Software will meet Customer's requirements, operate without interruption or be
error free. Customer's exclusive remedy for breach by Kana of its limited
warranty set forth above shall be replacement of any defective Software or
medium upon its return to Kana within the warranty period, or if Kana is unable
to provide a replacement which is free of defect, refund of the services fee
paid by Customer.
Limitation of Remedies and Damages. ANY LIABILITY OF KANA WILL BE LIMITED TO
- ----------------------------------
PRODUCT REPLACEMENT OR, IF REPLACEMENT IS INADEQUATE OR IN KANA'S OPINION
IMPRACTICAL, TO REFUND OF THE FEES PAID BY CUSTOMER HEREUNDER. KANA SHALL NOT BE
RESPONSIBLE OR LIABLE WITH RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT OR
TERMS AND CONDITIONS RELATED THERETO UNDER ANY CONTRACT, NEGLIGENCE, STRICT
LIABILITY OR OTHER THEORY (A) FOR LOSS OR INACCURACY OF DATA OR COST OF
PROCUREMENT OF SUBSTITUTE GOODS, SERVICES OR TECHNOLOGY, OR (B) FOR ANY
INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES INCLUDING, BUT NOT LIMITED TO LOSS
OF REVENUES, LOSS OF PROFITS, BUSINESS INTERRUPTION, LOSS OR INACCURACY OF
<PAGE>
DATA OR COST OF PROCUREMENT OF SUBSTITUTE GOODS, ARISING OUT OF THE USE OF OR
INABILITY TO USE THE SERVICES, EVEN IF KANA HAS BEEN ADVISED OF THE POSSIBILITY
OF SUCH DAMAGES. IN NO EVENT WILL KANA'S LIABILITY EXCEED THE AMOUNT PAID BY
CUSTOMER FOR THE SERVICES. KANA SHALL NOT BE RESPONSIBLE FOR ANY MATTER BEYOND
ITS REASONABLE CONTROL. Because some jurisdictions do not allow the exclusion or
limitation of liability of consequential or incidental damages, the above
limitation may not apply.
Government Use. If Customer is a unit or agency of the government, or acquiring
- --------------
the Services with government funds, the software and documentation are provided
subject to Kana's standard commercial license; provided, however, that any
contracts with non-defense agencies subject to the FAR, the Government shall
have the rights set forth in subparagraph (c) of FAR 52.227-19, "Commercial
Computer Software-Restricted Rights," as applicable.
Nonassignability. Neither the rights nor the obligations arising under this
- ----------------
Agreement are assignable or transferable by Customer, and any such attempted
assignment or transfer shall be void and without effect.
Execution of Agreement, Controlling Law, Attorneys' Fees. This Agreement shall
- --------------------------------------------------------
become effective as of the Effective Date and only upon its execution by both
Kana and Customer. This Agreement shall be governed by and construed in
accordance with the laws of the State of California without regard to the
conflicts of law provisions thereof and without regard to the United Nations
Convention on the International Sales of Goods. In any action to enforce this
Agreement the prevailing party will be entitled to costs and attorneys' fees.
Equitable Relief. Customer acknowledges and agrees that due to the unique nature
- ----------------
of Kana's Proprietary Information, there can be no adequate remedy at law for
any breach of its obligations hereunder, that any such breach may allow Customer
or third parties to unfairly compete with Kana resulting in irreparable harm to
Kana and, therefore, that upon any such breach or threat thereof, Kana shall be
entitled to injunctions and other appropriate equitable relief, in addition to
whatever remedies it may have at law.
Notice. Any notice, report, approval or consent required or permitted hereunder
- ------
shall be in writing and will be deemed to have been effectively given: (i)
immediately upon personal delivery or facsimile transmission to the parties to
be notified, (ii) one (1) day after deposit with a commercial overnight courier
with tracking capabilities, or (iii) three (3) days after deposit with the
United States Postal Service, by registered or certified mail, postage prepaid
to the respective addresses of the parties as set forth above.
Waiver. The waiver by either party of a breach of this Agreement or any right
- ------
hereunder shall not constitute a waiver of any subsequent breach of this
Agreement; nor shall any delay by either party to exercise any right under this
Agreement operate as a waiver of any such right. If any provision of this
Agreement shall be adjudged by any court of competent jurisdiction to be
unenforceable or invalid, that provision shall be limited or eliminated to the
minimum extent necessary so that this Agreement shall otherwise remain in full
force and effect and enforceable.
BASIS OF BARGAIN. EACH PARTY RECOGNIZES AND AGREES THAT THE WARRANTY DISCLAIMERS
- ----------------
AND LIABILITY AND REMEDY LIMITATIONS IN THIS AGREEMENT ARE MATERIAL BARGAINED
FOR BASES OF THIS AGREEMENT AND THAT THEY HAVE BEEN TAKEN INTO ACCOUNT AND
REFLECTED IN DETERMINING THE CONSIDERATION TO BE GIVEN BY EACH PARTY UNDER THIS
AGREEMENT AND IN THE DECISION BY EACH PARTY TO ENTER INTO THIS AGREEMENT.
Entire Agreement. This Agreement constitutes the entire agreement between the
- ----------------
parties hereto related to the subject matter hereof, and any and all written or
oral agreements, except for any Nondisclosure Agreements or Beta Test
Agreements, heretofore existing between the parties hereto, are expressly
cancelled. Any modifications of this Agreement must be in writing and signed by
both parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
Effective Date.
KANA COMMUNICATIONS, INC.
By
___________________________________
<PAGE>
Name (Print) By
___________________________________ ___________________________________
Title Name (Print)
CUSTOMER
___________________________________
Title
<PAGE>
EXHIBIT 10.10
KANA COMMUNICATIONS, INC.
STOCK PURCHASE AGREEMENT
------------------------
AGREEMENT made this ______ day of ________________________ 199____, by
and between Kana Communications, Inc., a California corporation, and
______________________, Optionee under the Corporation's 1997 Stock Option/Stock
Issuance Plan.
All capitalized terms in this Agreement shall have the meaning
assigned to them in this Agreement or in the attached Appendix.
I. EXERCISE OF OPTION
------------------
1. Exercise. Optionee hereby purchases _____________ shares of
--------
Common Stock (the "Purchased Shares") pursuant to that certain option (the
"Option") granted Optionee on ________________ (the "Grant Date") to
purchase up to ______________ shares of Common Stock (the "Option Shares") under
the Plan at the exercise price of $_________ per share (the "Exercise Price").
2. Payment. Concurrently with the delivery of this Agreement to the
-------
Corporation, Optionee shall pay the Exercise Price for the Purchased Shares in
accordance with the provisions of the Option Agreement and shall deliver
whatever additional documents may be required by the Option Agreement as a
condition for exercise, together with a duly-executed blank Assignment Separate
from Certificate (in the form attached hereto as Exhibit I) with respect to the
Purchased Shares.
3. Shareholder Rights. Until such time as the Corporation exercises
------------------
the Repurchase Right or the First Refusal Right, Optionee (or any successor in
interest) shall have all the rights of a shareholder (including voting, dividend
and liquidation rights) with respect to the Purchased Shares, subject, however,
to the transfer restrictions of Articles B and C.
A. SECURITIES LAW COMPLIANCE
-------------------------
1. Restricted Securities. The Purchased Shares have not been
---------------------
registered under the 1933 Act and are being issued to Optionee in reliance upon
the exemption from such registration provided by SEC Rule 701 for stock
issuances under compensatory benefit plans such as the Plan. Optionee hereby
confirms that Optionee has been informed that the Purchased Shares are
restricted securities under the 1933 Act and may not be resold or transferred
unless the Purchased Shares are first registered under the Federal securities
laws or unless an exemption from such registration is available. Accordingly,
Optionee hereby acknowledges that Optionee is prepared to hold the Purchased
Shares for an indefinite period and that Optionee is aware that SEC Rule 144
issued under the 1933 Act which exempts certain resales of unrestricted
securities is not presently available to exempt the resale of the Purchased
Shares from the registration requirements of the 1933 Act.
<PAGE>
2. Restrictions on Disposition of Purchased Shares. Optionee shall
-----------------------------------------------
make no disposition of the Purchased Shares (other than a Permitted Transfer)
unless and until there is compliance with all of the following requirements:
(i) Optionee shall have provided the Corporation with a written
summary of the terms and conditions of the proposed disposition.
(ii) Optionee shall have complied with all requirements of this
Agreement applicable to the disposition of the Purchased Shares.
(iii) Optionee shall have provided the Corporation with written
assurances, in form and substance satisfactory to the Corporation, that (a)
the proposed disposition does not require registration of the Purchased
Shares under the 1933 Act or (b) all appropriate action necessary for
compliance with the registration requirements of the 1933 Act or any
exemption from registration available under the 1933 Act (including Rule
144) has been taken.
The Corporation shall not be required (i) to transfer on its books any
---
Purchased Shares which have been sold or transferred in violation of the
provisions of this Agreement or (ii) to treat as the owner of the Purchased
--
Shares, or otherwise to accord voting, dividend or liquidation rights to, any
transferee to whom the Purchased Shares have been transferred in contravention
of this Agreement.
3. Restrictive Legends. The stock certificates for the Purchased
-------------------
Shares shall be endorsed with one or more of the following restrictive legends:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933. The shares may not be sold or
offered for sale in the absence of (a) an effective registration statement
for the shares under such Act, (b) a "no action" letter of the Securities
and Exchange Commission with respect to such sale or offer or (c)
satisfactory assurances to the Corporation that registration under such Act
is not required with respect to such sale or offer."
"The shares represented by this certificate are subject to
certain repurchase rights and rights of first refusal granted to the
Corporation and accordingly may not be sold, assigned, transferred,
encumbered, or in any manner disposed of except in conformity with the
terms of a written agreement dated ___________________, 199____ between the
Corporation and the registered holder of the shares (or the predecessor in
interest to the shares). A copy of such agreement is maintained at the
Corporation's principal corporate offices."
B. TRANSFER RESTRICTIONS
---------------------
1. Restriction on Transfer. Except for any Permitted Transfer,
-----------------------
Optionee shall not transfer, assign, encumber or otherwise dispose of any of the
Purchased Shares which are subject to the Repurchase Right. In addition,
Purchased Shares which are released from the Repurchase Right shall not be
transferred, assigned, encumbered or otherwise disposed of in contravention of
the First Refusal Right or the Market Stand-Off.
<PAGE>
2. Transferee Obligations. Each person (other than the Corporation)
----------------------
to whom the Purchased Shares are transferred by means of a Permitted Transfer
must, as a condition precedent to the validity of such transfer, acknowledge in
writing to the Corporation that such person is bound by the provisions of this
Agreement and that the transferred shares are subject to (i) the Repurchase
Right, (ii) the First Refusal Right and (iii) the Market Stand-Off, to the same
extent such shares would be so subject if retained by Optionee.
3. Market Stand-Off.
----------------
(a) In connection with any underwritten public offering by the
Corporation of its equity securities pursuant to an effective registration
statement filed under the 1933 Act, including the Corporation's initial public
offering, Owner shall not sell, make any short sale of, loan, hypothecate,
pledge, grant any option for the purchase of, or otherwise dispose or transfer
for value or otherwise agree to engage in any of the foregoing transactions with
respect to, any Purchased Shares without the prior written consent of the
Corporation or its underwriters. Such restriction (the "Market Stand-Off")
shall be in effect for such period of time from and after the effective date of
the final prospectus for the offering as may be requested by the Corporation or
such underwriters. In no event, however, shall such period exceed one hundred
eighty (180) days.
(b) Owner shall be subject to the Market Stand-Off provided and
------------
only the officers and directors of the Corporation are also subject to similar
- ----
restrictions.
(c) Any new, substituted or additional securities which are by
reason of any Recapitalization or Reorganization distributed with respect to the
Purchased Shares shall be immediately subject to the Market Stand-Off, to the
same extent the Purchased Shares are at such time covered by such provisions.
(d) In order to enforce the Market Stand-Off, the Corporation
may impose stop-transfer instructions with respect to the Purchased Shares until
the end of the applicable stand-off period.
C. REPURCHASE RIGHT
----------------
1. Grant. The Corporation is hereby granted the right (the
-----
"Repurchase Right"), exercisable at any time during the sixty (60)-day period
following the date Optionee ceases for any reason to remain in Service or (if
later) during the sixty (60)-day period following the execution date of this
Agreement, to repurchase at the Exercise Price any or all of the Purchased
Shares in which Optionee is not, at the time of his or her cessation of Service,
vested in accordance with the Vesting Schedule applicable to those shares or the
special acceleration provisions of Paragraph D.6 of this Agreement (such shares
to be hereinafter referred to as the "Unvested Shares").
2. Exercise of the Repurchase Right. The Repurchase Right shall be
--------------------------------
exercisable by written notice delivered to each Owner of the Unvested Shares
prior to the expiration of the sixty (60)-day exercise period. The notice shall
indicate the number of Unvested Shares to be repurchased and the date on which
the repurchase is to be effected, such date to be not more than thirty (30) days
after the date of such notice. The certificates
<PAGE>
representing the Unvested Shares to be repurchased shall be delivered to the
Corporation on or before the close of business on the date specified for the
repurchase. Concurrently with the receipt of such stock certificates, the
Corporation shall pay to Owner, in cash or cash equivalents (including the
cancellation of any purchase-money indebtedness), an amount equal to the
Exercise Price previously paid for the Unvested Shares which are to be
repurchased from Owner.
3. Termination of the Repurchase Right. The Repurchase Right shall
-----------------------------------
terminate with respect to any Unvested Shares for which it is not timely
exercised under Paragraph D.2. In addition, the Repurchase Right shall
terminate and cease to be exercisable with respect to any and all Purchased
Shares in which Optionee vests in accordance with the Vesting Schedule. All
Purchased Shares as to which the Repurchase Right lapses shall, however, remain
subject to (i) the First Refusal Right and (ii) the Market Stand-Off.
4. Aggregate Vesting Limitation. If the Option is exercised in more
----------------------------
than one increment so that Optionee is a party to one or more other Stock
Purchase Agreements (the "Prior Purchase Agreements") which are executed prior
to the date of this Agreement, then the total number of Purchased Shares as to
which Optionee shall be deemed to have a fully-vested interest under this
Agreement and all Prior Purchase Agreements shall not exceed in the aggregate
the number of Purchased Shares in which Optionee would otherwise at the time be
vested, in accordance with the Vesting Schedule, had all the Purchased Shares
(including those acquired under the Prior Purchase Agreements) been acquired
exclusively under this Agreement.
5. Recapitalization. Any new, substituted or additional securities
----------------
or other property (including cash paid other than as a regular cash dividend)
which is by reason of any Recapitalization distributed with respect to the
Purchased Shares shall be immediately subject to the Repurchase Right and any
escrow requirements hereunder, but only to the extent the Purchased Shares are
at the time covered by such right or escrow requirements. Appropriate
adjustments to reflect such distribution shall be made to the number and/or
class of Purchased Shares subject to this Agreement and to the price per share
to be paid upon the exercise of the Repurchase Right in order to reflect the
effect of any such Recapitalization upon the Corporation's capital structure;
provided, however, that the aggregate purchase price shall remain the same.
- --------
6. Corporate Transaction.
---------------------
(a) The Repurchase Right shall automatically terminate in its
entirety, and all the Purchased Shares shall vest in full, immediately prior to
the consummation of any Corporate Transaction, except to the extent the
Repurchase Right is to be assigned to the successor entity in such Corporate
Transaction.
(b) To the extent the Repurchase Right remains in effect
following a Corporate Transaction, such right shall apply to any new securities
or other property (including any cash payments) received in exchange for the
Purchased Shares in consummation of the Corporate Transaction, but only to the
extent the Purchased Shares are at the time covered by such right. Appropriate
adjustments shall be made to the price per share payable upon exercise of the
Repurchase Right to reflect the effect of the Corporate Transaction upon the
Corporation's capital structure; provided, however, that the aggregate purchase
--------
price shall remain the same.
<PAGE>
The new securities or other property (including any cash payments) issued or
distributed with respect to the Purchased Shares in consummation of the
Corporate Transaction shall be immediately deposited in escrow with the
Corporation (or the successor entity) and shall not be released from escrow
until Optionee vests in such securities or other property in accordance with the
same Vesting Schedule in effect for the Purchased Shares.
(c) The Repurchase Right may also terminate on an accelerated basis,
and the Purchased Shares shall immediately vest in accordance with the terms and
conditions of any special addendum attached to this Agreement.
D. RIGHT OF FIRST REFUSAL
----------------------
1. Grant. The Corporation is hereby granted the right of first
-----
refusal (the "First Refusal Right"), exercisable in connection with any proposed
transfer of the Purchased Shares in which Optionee has vested in accordance with
the provisions of Article D. For purposes of this Article E, the term
"transfer" shall include any sale, assignment, pledge, encumbrance or other
disposition of the Purchased Shares intended to be made by Owner, but shall not
include any Permitted Transfer.
2. Notice of Intended Disposition. In the event any Owner of
------------------------------
Purchased Shares in which Optionee has vested desires to accept a bona fide
third-party offer for the transfer of any or all of such shares (the Purchased
Shares subject to such offer to be hereinafter referred to as the "Target
Shares"), Owner shall promptly (i) deliver to the Corporation written notice
(the "Disposition Notice") of the terms of the offer, including the purchase
price and the identity of the third-party offeror, and (ii) provide satisfactory
proof that the disposition of the Target Shares to such third-party offeror
would not be in contravention of the provisions set forth in Articles B and C.
3. Exercise of the First Refusal Right. The Corporation shall, for a
-----------------------------------
period of twenty-five (25) days following receipt of the Disposition Notice,
have the right to repurchase any or all of the Target Shares subject to the
Disposition Notice upon the same terms as those specified therein or upon such
other terms (not materially different from those specified in the Disposition
Notice) to which Owner consents. Such right shall be exercisable by delivery of
written notice (the "Exercise Notice") to Owner prior to the expiration of the
twenty-five (25)-day exercise period. If such right is exercised with respect
to all the Target Shares, then the Corporation shall effect the repurchase of
such shares, including payment of the purchase price, not more than five (5)
business days after delivery of the Exercise Notice; and at such time the
certificates representing the Target Shares shall be delivered to the
Corporation.
Should the purchase price specified in the Disposition Notice be
payable in property other than cash or evidences of indebtedness, the
Corporation shall have the right to pay the purchase price in the form of cash
equal in amount to the value of such property. If Owner and the Corporation
cannot agree on such cash value within ten (10) days after the Corporation's
receipt of the Disposition Notice, the valuation shall be made by an appraiser
of recognized standing selected by Owner and the Corporation or, if they cannot
agree on an appraiser within twenty (20) days after the Corporation's receipt of
the Disposition Notice, each shall select an appraiser of recognized standing
and the two (2) appraisers shall designate a third appraiser of
<PAGE>
recognized standing, whose appraisal shall be determinative of such value. The
cost of such appraisal shall be shared equally by Owner and the Corporation. The
closing shall then be held on the later of (i) the fifth (5th) business day
-----
following delivery of the Exercise Notice or (ii) the fifth (5th) business day
after such valuation shall have been made.
4. Non-Exercise of the First Refusal Right. In the event the
---------------------------------------
Exercise Notice is not given to Owner prior to the expiration of the twenty-five
(25)-day exercise period, Owner shall have a period of thirty (30) days
thereafter in which to sell or otherwise dispose of the Target Shares to the
third-party offeror identified in the Disposition Notice upon terms (including
the purchase price) no more favorable to such third-party offeror than those
specified in the Disposition Notice; provided, however, that any such sale or
--------
disposition must not be effected in contravention of the provisions of Articles
B and C. The third-party offeror shall acquire the Target Shares free and clear
of the First Refusal Right, but the acquired shares shall remain subject to the
provisions of Article B and Paragraph C.3. In the event Owner does not effect
such sale or disposition of the Target Shares within the specified thirty (30)-
day period, the First Refusal Right shall continue to be applicable to any
subsequent disposition of the Target Shares by Owner until such right lapses.
5. Partial Exercise of the First Refusal Right. In the event the
-------------------------------------------
Corporation makes a timely exercise of the First Refusal Right with respect to a
portion, but not all, of the Target Shares specified in the Disposition Notice,
Owner shall have the option, exercisable by written notice to the Corporation
delivered within five (5) business days after Owner's receipt of the Exercise
Notice, to effect the sale of the Target Shares pursuant to either of the
following alternatives:
(i) sale or other disposition of all the Target Shares to the
third-party offeror identified in the Disposition Notice, but in full
compliance with the requirements of Paragraph E.4, as if the Corporation
did not exercise the First Refusal Right; or
(ii) sale to the Corporation of the portion of the Target Shares
which the Corporation has elected to purchase, such sale to be effected in
substantial conformity with the provisions of Paragraph E.3. The First
Refusal Right shall continue to be applicable to any subsequent disposition
of the remaining Target Shares until such right lapses.
Owner's failure to deliver timely notification to the Corporation
shall be deemed to be an election by Owner to sell the Target Shares pursuant to
alternative (i) above.
6. Recapitalization/Reorganization.
-------------------------------
(a) Any new, substituted or additional securities or other
property which is by reason of any Recapitalization distributed with respect to
the Purchased Shares shall be immediately subject to the First Refusal Right,
but only to the extent the Purchased Shares are at the time covered by such
right.
(b) In the event of a Reorganization, the First Refusal Right
shall remain in full force and effect and shall apply to the new capital stock
or other property received
<PAGE>
in exchange for the Purchased Shares in consummation of the Reorganization, but
only to the extent the Purchased Shares are at the time covered by such right.
7. Lapse. The First Refusal Right shall lapse upon the earliest to
----- --------
occur of (i) the first date on which shares of the Common Stock are held of
record by more than five hundred (500) persons, (ii) a determination is made by
the Board that a public market exists for the outstanding shares of Common Stock
or (iii) a firm commitment underwritten public offering, pursuant to an
effective registration statement under the 1933 Act, covering the offer and sale
of the Common Stock in the aggregate amount of at least ten million dollars
($10,000,000). However, the Market Stand-Off shall continue to remain in full
force and effect following the lapse of the First Refusal Right.
E. SPECIAL TAX ELECTION
--------------------
The acquisition of the Purchased Shares may result in adverse tax
consequences which may be avoided or mitigated by filing an election under Code
Section 83(b). Such election must be filed within thirty (30) days after the
date of this Agreement. A description of the tax consequences applicable to the
acquisition of the Purchased Shares and the form for making the Code Section
83(b) election are set forth in Exhibit II. OPTIONEE SHOULD CONSULT WITH HIS OR
HER TAX ADVISOR TO DETERMINE THE TAX CONSEQUENCES OF ACQUIRING THE PURCHASED
SHARES AND THE ADVANTAGES AND DISADVANTAGES OF FILING THE CODE SECTION 83(b)
ELECTION. OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE'S SOLE RESPONSIBILITY, AND
NOT THE CORPORATION'S, TO FILE A TIMELY ELECTION UNDER CODE SECTION 83(b), EVEN
IF OPTIONEE REQUESTS THE CORPORATION OR ITS REPRESENTATIVES TO MAKE THIS FILING
ON HIS OR HER BEHALF.
F. GENERAL PROVISIONS
------------------
1. Assignment. The Corporation may assign the Repurchase Right
----------
and/or the First Refusal Right to any person or entity selected by the Board,
including (without limitation) one or more shareholders of the Corporation. If
the assignee of the Repurchase Right is other than (i) a wholly owned subsidiary
of the Corporation or (ii) the parent corporation owning one hundred percent
(100%) of the Corporation's outstanding capital stock, then such assignee must
make a cash payment to the Corporation, upon the assignment of the Repurchase
Right, in an amount equal to the excess (if any) of (i) the Fair Market Value of
the Purchased Shares at the time subject to the assigned Repurchase Right over
(ii) the aggregate repurchase price payable for the Purchased Shares.
2. No Employment or Service Contract. Nothing in this Agreement or
---------------------------------
in the Plan shall confer upon Optionee any right to continue in Service for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Parent or Subsidiary employing or
retaining Optionee) or of Optionee, which rights are hereby expressly reserved
by each, to terminate Optionee's Service at any time for any reason, with or
without cause.
<PAGE>
3. Notices. Any notice required to be given under this Agreement
-------
shall be in writing and shall be deemed effective upon personal delivery or upon
deposit in the U.S. mail, registered or certified, postage prepaid and properly
addressed to the party entitled to such notice at the address indicated below
such party's signature line on this Agreement or at such other address as such
party may designate by ten (10) days advance written notice under this paragraph
to all other parties to this Agreement.
4. No Waiver. The failure of the Corporation in any instance to
---------
exercise the Repurchase Right or the First Refusal Right shall not constitute a
waiver of any other repurchase rights and/or rights of first refusal that may
subsequently arise under the provisions of this Agreement or any other agreement
between the Corporation and Optionee. No waiver of any breach or condition of
this Agreement shall be deemed to be a waiver of any other or subsequent breach
or condition, whether of like or different nature.
5. Cancellation of Shares. If the Corporation shall make available,
----------------------
at the time and place and in the amount and form provided in this Agreement, the
consideration for the Purchased Shares to be repurchased in accordance with the
provisions of this Agreement, then from and after such time, the person from
whom such shares are to be repurchased shall no longer have any rights as a
holder of such shares (other than the right to receive payment of such
consideration in accordance with this Agreement). Such shares shall be deemed
purchased in accordance with the applicable provisions hereof, and the
Corporation shall be deemed the owner and holder of such shares, whether or not
the certificates therefor have been delivered as required by this Agreement.
G. MISCELLANEOUS PROVISIONS
------------------------
1. Optionee Undertaking. Optionee hereby agrees to take whatever
--------------------
additional action and execute whatever additional documents the Corporation may
deem necessary or advisable in order to carry out or effect one or more of the
obligations or restrictions imposed on either Optionee or the Purchased Shares
pursuant to the provisions of this Agreement.
2. Agreement is Entire Contract. This Agreement, together with the
----------------------------
Plan and the Addendum, constitutes the entire contract between the parties
hereto with regard to the subject matter hereof. This Agreement is made
pursuant to the provisions of the Plan and shall in all respects be construed in
conformity with the terms of the Plan and the Addendum.
3. Governing Law. This Agreement shall be governed by, and construed
-------------
in accordance with, the laws of the State of California without resort to that
State's conflict-of-laws rules.
4. Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
5. Successors and Assigns. The provisions of this Agreement shall
----------------------
inure to the benefit of, and be binding upon, the Corporation and its successors
and assigns and upon Optionee, Optionee's permitted assigns and the legal
representatives, heirs and legatees of
<PAGE>
Optionee's estate, whether or not any such person shall have become a party to
this Agreement and have agreed in writing to join herein and be bound by the
terms hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
day and year first indicated above.
KANA COMMUNICATIONS, INC.
By:_____________________________
Title:__________________________
Address:________________________
OPTIONEE
Address:________________________
<PAGE>
SPOUSAL ACKNOWLEDGMENT
The undersigned spouse of Optionee has read and hereby approves the
foregoing Stock Purchase Agreement. In consideration of the Corporation's
granting Optionee the right to acquire the Purchased Shares in accordance with
the terms of such Agreement, the undersigned hereby agrees to be irrevocably
bound by all the terms of such Agreement, including (without limitation) the
right of the Corporation (or its assigns) to purchase any Purchased Shares in
which Optionee is not vested at time of his or her cessation of Service.
OPTIONEE'S SPOUSE
Address:___________________________________
<PAGE>
EXHIBIT I
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED ______________________ hereby sell(s), assign(s)
and transfer(s) unto Kana Communications, Inc. (the "Corporation"),
_______________________ (______) shares of the Common Stock of the Corporation
standing in his or her name on the books of the Corporation represented by
Certificate No. ___________________ herewith and do(es) hereby irrevocably
constitute and appoint _______________________________ Attorney to transfer the
said stock on the books of the Corporation with full power of substitution in
the premises.
Dated: ________________
Signature_________________________________
Instruction: Please do not fill in any blanks other than the signature line.
Please sign exactly as you would like your name to appear on the issued stock
certificate. The purpose of this assignment is to enable the Corporation to
exercise the Repurchase Right without requiring additional signatures on the
part of Optionee.
<PAGE>
EXHIBIT II
FEDERAL INCOME TAX CONSEQUENCES AND
SECTION 83(b) TAX ELECTION
II. Federal Income Tax Consequences and Section 83(b) Election For
--------------------------------------------------------------
Exercise of Non-Statutory Option. If the Purchased Shares are acquired pursuant
- --------------------------------
to the exercise of a Non-Statutory Option, as specified in the Grant Notice,
then under Code Section 83, the excess of the Fair Market Value of the Purchased
Shares on the date any forfeiture restrictions applicable to such shares lapse
over the Exercise Price paid for such shares will be reportable as ordinary
income on the lapse date. For this purpose, the term "forfeiture restrictions"
includes the right of the Corporation to repurchase the Purchased Shares
pursuant to the Repurchase Right. However, Optionee may elect under Code
Section 83(b) to be taxed at the time the Purchased Shares are acquired, rather
than when and as such Purchased Shares cease to be subject to such forfeiture
restrictions. Such election must be filed with the Internal Revenue Service
within thirty (30) days after the date of the Agreement. Even if the Fair
Market Value of the Purchased Shares on the date of the Agreement equals the
Exercise Price paid (and thus no tax is payable), the election must be made to
avoid adverse tax consequences in the future. The form for making this election
is attached as part of this exhibit. FAILURE TO MAKE THIS FILING WITHIN THE
APPLICABLE THIRTY (30)-DAY PERIOD WILL RESULT IN THE RECOGNITION OF ORDINARY
INCOME BY OPTIONEE AS THE FORFEITURE RESTRICTIONS LAPSE.
III. Federal Income Tax Consequences and Conditional Section 83(b)
-------------------------------------------------------------
Election For Exercise of Incentive Option. If the Purchased Shares are acquired
- -----------------------------------------
pursuant to the exercise of an Incentive Option, as specified in the Grant
Notice, then the following tax principles shall be applicable to the Purchased
Shares:
(i) For regular tax purposes, no taxable income will
be recognized at the time the Option is exercised.
(ii) The excess of (a) the Fair Market Value of the
Purchased Shares on the date the Option is exercised or (if
later) on the date any forfeiture restrictions applicable to the
Purchased Shares lapse over (b) the Exercise Price paid for the
Purchased Shares will be includible in Optionee's taxable income
for alternative minimum tax purposes.
(iii) If Optionee makes a disqualifying disposition of
the Purchased Shares, then Optionee will recognize ordinary
income in the year of such disposition equal in amount to the
excess of (a) the Fair Market Value of the Purchased Shares on
the date the Option is exercised or (if later) on the date any
forfeiture restrictions applicable to the Purchased Shares lapse
over (b) the Exercise Price paid for the Purchased Shares. Any
additional gain recognized upon the disqualifying disposition
will be either short-term or long-term capital gain depending
upon the period for which the Purchased Shares are held prior to
the disposition.
<PAGE>
(iv) For purposes of the foregoing, the term
"forfeiture restrictions" will include the right of the
Corporation to repurchase the Purchased Shares pursuant to the
Repurchase Right. The term "disqualifying disposition" means any
sale or other disposition /1/ of the Purchased Shares within two
(2) years after the Grant Date or within one (1) year after the
exercise date of the Option.
(v) In the absence of final Treasury Regulations
relating to Incentive Options, it is not certain whether Optionee
may, in connection with the exercise of the Option for any
Purchased Shares at the time subject to forfeiture restrictions,
file a protective election under Code Section 83(b) which would
limit (a) Optionee's alternative minimum taxable income upon
exercise and (b) Optionee's ordinary income upon a disqualifying
disposition to the excess of the Fair Market Value of the
Purchased Shares on the date the Option is exercised over the
Exercise Price paid for the Purchased Shares. Accordingly, such
election if properly filed will only be allowed to the extent the
final Treasury Regulations permit such a protective election.
Page 2 of the attached form for making the election should be
filed with any election made in connection with the exercise of
an Incentive Option.
_______________
/1/ Generally, a disposition of shares purchased under an Incentive Option
includes any transfer of legal title, including a transfer by sale, exchange or
gift, but does not include a transfer to the Optionee's spouse, a transfer into
joint ownership with right of survivorship if Optionee remains one of the joint
owners, a pledge, a transfer by bequest or inheritance or certain tax free
exchanges permitted under the Code.
<PAGE>
SECTION 83(b) ELECTION
This statement is being made under Section 83(b) of the Internal
Revenue Code, pursuant to Treas. Reg. Section 1.83-2.
(1) The taxpayer who performed the services is:
Name:
Address:
Taxpayer Ident. No.:
(2) The property with respect to which the election is being made is
____________ shares of the common stock of Kana Communications, Inc..
(3) The property was issued on _____________, 199__.
(4) The taxable year in which the election is being made is the calendar year
199__.
(5) The property is subject to a repurchase right pursuant to which the issuer
has the right to acquire the property at the original purchase price if for
any reason taxpayer's employment with the issuer is terminated. The
issuer's repurchase right lapses in a series of installments over a
__________-year period ending on _______________.
(6) The fair market value at the time of transfer (determined without regard to
any restriction other than a restriction which by its terms will never
lapse) is $_____________per share.
(7) The amount paid for such property is $_______ per share.
(8) A copy of this statement was furnished to Kana Communications, Inc. for
whom taxpayer rendered the services underlying the transfer of property.
(9) This statement is executed on _______________________, 199__.
Spouse (if any) Taxpayer
This election must be filed with the Internal Revenue Service Center with which
taxpayer files his or her Federal income tax returns and must be made within
thirty (30) days after the execution date of the Stock Purchase Agreement. This
filing should be made by registered or certified mail, return receipt requested.
Optionee must retain two (2) copies of the completed form for filing with his or
her Federal and state tax returns for the current tax year and an additional
copy for his or her records.
The property described in the above Section 83(b) election is
comprised of shares of common stock acquired pursuant to the exercise of an
incentive stock option under Section
<PAGE>
422 of the Internal Revenue Code (the "Code"). Accordingly, it is the intent of
the Taxpayer to utilize this election to achieve the following tax results:
1. The purpose of this election is to have the alternative minimum
taxable income attributable to the purchased shares measured by the amount by
which the fair market value of such shares at the time of their transfer to the
Taxpayer exceeds the purchase price paid for the shares. In the absence of this
election, such alternative minimum taxable income would be measured by the
spread between the fair market value of the purchased shares and the purchase
price which exists on the various lapse dates in effect for the forfeiture
restrictions applicable to such shares. The election is to be effective to the
full extent permitted under the Code.
2. Section 421(a)(1) of the Code expressly excludes from income any
excess of the fair market value of the purchased shares over the amount paid for
such shares. Accordingly, this election is also intended to be effective in the
event there is a "disqualifying disposition" of the shares, within the meaning
of Section 421(b) of the Code, which would otherwise render the provisions of
Section 83(a) of the Code applicable at that time. Consequently, the Taxpayer
hereby elects to have the amount of disqualifying disposition income measured by
the excess of the fair market value of the purchased shares on the date of
transfer to the Taxpayer over the amount paid for such shares. Since Section
421(a) presently applies to the shares which are the subject of this Section
83(b) election, no taxable income is actually recognized for regular tax
purposes at this time, and no income taxes are payable, by the Taxpayer as a
result of this election.
THIS PAGE 2 IS TO BE ATTACHED TO ANY SECTION 83(b) ELECTION FILED IN CONNECTION
WITH THE EXERCISE OF AN INCENTIVE STOCK OPTION UNDER THE FEDERAL TAX LAWS.
APPENDIX
--------
The following definitions shall be in effect under the Agreement:
A. Agreement shall mean this Stock Purchase Agreement.
---------
B. Board shall mean the Corporation's Board of Directors.
-----
C. Code shall mean the Internal Revenue Code of 1986, as amended.
----
D. Common Stock shall mean the Corporation's common stock.
------------
E. Corporate Transaction shall mean either of the following
---------------------
shareholder-approved transactions:
<PAGE>
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined
voting power of the Corporation's outstanding securities are
transferred to a person or persons different from the persons
holding those securities immediately prior to such transaction,
or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete
liquidation or dissolution of the Corporation.
F. Corporation shall mean Kana Communications, Inc., a California
-----------
corporation, and any successor corporation to all or substantially all of the
assets or voting stock of Kana Communications, Inc. which shall by appropriate
action adopt the Plan.
G. Disposition Notice shall have the meaning assigned to such term in
------------------
Paragraph E.2.
H. Exercise Notice shall have the meaning assigned to such term in
---------------
Paragraph E.3.
I. Exercise Price shall have the meaning assigned to such term in
--------------
Paragraph A.1.
J. Fair Market Value of a share of Common Stock on any relevant date,
-----------------
prior to the initial public offering of the Common Stock, shall be determined by
the Plan Administrator after taking into account such factors as it shall deem
appropriate.
K. First Refusal Right shall mean the right granted to the
-------------------
Corporation in accordance with Article E.
L. Grant Date shall have the meaning assigned to such term in
----------
Paragraph A.1.
M. Grant Notice shall mean the Notice of Grant of Stock Option
------------
pursuant to which Optionee has been informed of the basic terms of the Option.
N. Incentive Option shall mean an option which satisfies the
----------------
requirements of Code Section 422.
O. Market Stand-Off shall mean the market stand-off restriction
----------------
specified in Paragraph C.3.
P. 1933 Act shall mean the Securities Act of 1933, as amended.
--------
Q. 1934 Act shall mean the Securities Exchange Act of 1934, as
--------
amended.
R. Non-Statutory Option shall mean an option not intended to satisfy
--------------------
the requirements of Code Section 422.
<PAGE>
S. Option shall have the meaning assigned to such term in Paragraph
------
A.1.
T. Option Agreement shall mean all agreements and other documents
----------------
evidencing the Option.
U. Optionee shall mean the person to whom the Option is granted under
--------
the Plan.
V. Owner shall mean Optionee and all subsequent holders of the Purchased
-----
Shares who derive their chain of ownership through a Permitted Transfer from
Optionee.
W. Parent shall mean any corporation (other than the Corporation) in
------
an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
X. Permitted Transfer shall mean (i) a gratuitous transfer of the
------------------
Purchased Shares, provided and only if Optionee obtains the Corporation's prior
written consent to such transfer, (ii) a transfer of title to the Purchased
Shares effected pursuant to Optionee's will or the laws of intestate succession
following Optionee's death or (iii) a transfer to the Corporation in pledge as
security for any purchase-money indebtedness incurred by Optionee in connection
with the acquisition of the Purchased Shares.
Y. Plan shall mean the Corporation's 1997 Stock Option/Stock Issuance
----
Plan.
Z. Plan Administrator shall mean either the Board or a committee of
------------------
the Board acting in its capacity as administrator of the Plan.
AA. Prior Purchase Agreement shall have the meaning assigned to such
------------------------
term in Paragraph D.4.
BB. Purchased Shares shall have the meaning assigned to such term in
----------------
Paragraph A.1.
CC. Recapitalization shall mean any stock split, stock dividend,
----------------
recapitalization, combination of shares, exchange of shares or other change
affecting the Corporation's outstanding Common Stock as a class without the
Corporation's receipt of consideration.
DD. Reorganization shall mean any of the following transactions:
--------------
(i) a merger or consolidation in which the
Corporation is not the surviving entity,
<PAGE>
(ii) a sale, transfer or other disposition of all or
substantially all of the Corporation's assets,
(iii) a reverse merger in which the Corporation is the
surviving entity but in which the Corporation's outstanding
voting securities are transferred in whole or in part to a person
or persons different from the persons holding those securities
immediately prior to the merger, or
(iv) any transaction effected primarily to change the
state in which the Corporation is incorporated or to create a
holding company structure.
EE. Repurchase Right shall mean the right granted to the Corporation
----------------
in accordance with Article D.
FF. SEC shall mean the Securities and Exchange Commission.
---
GG. Service shall mean the Optionee's performance of services for the
-------
Corporation (or any Parent or Subsidiary) in the capacity of an employee,
subject to the control and direction of the employer entity as to both the work
to be performed and the manner and method of performance, a non-employee member
of the board of directors or an independent consultant.
HH. Subsidiary shall mean any corporation (other than the
----------
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
II. Target Shares shall have the meaning assigned to such term in
-------------
Paragraph E.2.
JJ. Vesting Schedule shall mean the vesting schedule specified in the
----------------
Grant Notice pursuant to which the Optionee is to vest in the Option Shares in a
series of installments over his or her period of Service.
KK. Unvested Shares shall have the meaning assigned to such term in
---------------
Paragraph D.1.
<PAGE>
EXHIBIT 16.1
[LOGO]
[Letterhead of PricewaterhouseCoopers LLP Appears Here]
July 8, 1999
Securities and Exchange Commission
450 Fifth Street
Washington, D.C. 20549
Dear Ladies and Gentlemen:
We have read the section entitled "Change in Accountants" included in the
attached Form S-1 dated July 9, 1999 of Kana Communications Inc. to be filed
with the Securities and Exchange Commission and are in agreement with the
statements contained therein.
Very truly yours,
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Jose, California
<PAGE>
EXHIBIT 21.1
List of Subsidiaries for Kana Communications, Inc.
--------------------------------------------------
(1) Kana Communications Europe LTD, a corporation formed under the laws of
England.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Kana Communciations, Inc.:
We consent to the use of our form of report included herein and to the
references to our firm under the headings "Selected Consolidated Financial
Data," "Change in Accountants," and "Experts" in the prospectus.
/s/ KPMG LLP
Mountain View, California
July 9, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM KANA
COMMUNICATIONS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 MAR-31-1999
<CASH> 9,792 8,471
<SECURITIES> 160 160
<RECEIVABLES> 877 1,083
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 96 156
<PP&E> 1,192 1,523
<DEPRECIATION> (249) (352)
<TOTAL-ASSETS> 11,969 11,138
<CURRENT-LIABILITIES> 1,571 2,244
<BONDS> 0 0
0 0
19 19
<COMMON> 8 8
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 11,969 11,138
<SALES> 1,793 1,165
<TOTAL-REVENUES> 2,049 1,423
<CGS> 54 34
<TOTAL-COSTS> 573 436
<OTHER-EXPENSES> 8,001 2,944
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 36 17
<INCOME-PRETAX> (6,337) (1,845)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (6,337) (1,845)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,337) (1,845)
<EPS-BASIC> (2.48) (0.47)
<EPS-DILUTED> (2.48) (0.47)
</TABLE>
