<PAGE>
As filed with the Securities and Exchange Commission on August 16, 1999
Registration No. 333-82587
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO.1
TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
KANA COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
---------------
<TABLE>
<S> <C> <C>
Delaware 7372 77-0435679
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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)
---------------
Copies to:
<TABLE>
<S> <C>
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
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
---------------
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. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
<CAPTION>
Proposed Maximum
Proposed Maximum Aggregate Amount of
Title of Each Class of Amount to Offering Price Offering Registration
Securities to be Registered be Registered(1) Per Share(2) Price(2) Fee(3)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 per share... 3,795,000 $13.00 $49,335,000 $13,715.63
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 495,000 shares of Common Stock issuable upon exercise of the
Underwriters' over-allotment option, if any.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(a).
(3) Includes $11,190 previously paid.
---------------
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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 August 16, 1999.
3,300,000 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 3,300,000 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 $11.00 and $13.00. 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 risks 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 495,000 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 customer communication software products and
services for e-Businesses. We define e-Businesses as companies that leverage
the reach and efficiency of the Internet to enhance their competitive market
position. Our products and services allow these companies to manage high
volumes of inbound and outbound e-mail and Website-based communications, while
facilitating the delivery of specific and personalized information to each
customer. We offer our products on both a licensed and a hosted basis. Our
customers include both pure Internet companies and traditional companies
seeking to exploit the potential of the Internet.
Our objective is to become the leading provider of online customer
communication software products and services for e-Businesses. To achieve our
objective, we intend to expand our 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.
As of June 30, 1999, more than 100 customers had licensed our software,
including eBay Inc., eToys Inc., Priceline.com Incorporated, Chase Manhattan
Bank, Ford Motor Company and Northwest Airlines.
Recent Developments
On August 13, 1999, we acquired Connectify, Inc. Connectify develops,
markets and supports electronic direct marketing software for e-Businesses.
Connectify's software enables e-Businesses to profile and target potential and
existing customers and then deliver and track personalized e-mails to their
customers. By using electronic direct marketing software in this way, e-
Businesses can build customer loyalty, increase the probability of repeat
transactions and reduce customer attrition. In connection with this merger, we
issued 3,491,282 shares of our common stock in exchange for all outstanding
shares of Connectify capital stock and assumed all outstanding Connectify
options and warrants. We reserved 208,345 shares of our common stock for
issuance upon the exercise of assumed Connectify options and warrants.
Corporate Information
We were founded by Mark Gainey and Michael Horvath in 1996. We were first
incorporated in California in July 1996 as Kana Net Works, Inc., and we changed
our name to Kana.com, Inc. in January 1997. We then changed our name to Kana
Communications, Inc. in October 1997. We plan to reincorporate in Delaware
before completion of this offering. References in this prospectus to "Kana",
"we", "our", and "us" collectively refer to Kana Communications, Inc., a
Delaware corporation, its subsidiaries and its California predecessor, and not
to the underwriters. Our principal executive offices are located at 87 Encina
Avenue, Palo Alto, California 94301 and our telephone number is (650) 325-9850.
3
<PAGE>
We derive our revenues from the sale of software product licenses and from
professional services including implementation, customization, hosting and
maintenance. In the six months ended June 30, 1999, 78.1% of our total revenues
were license revenue and 21.9% were service revenue. During this period we
incurred a net loss of $9.9 million, and we expect to continue to incur
additional losses in the future.
After this offering, our executive officers and directors, their affiliates
and other substantial stockholders will together control approximately 57.1% 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.
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......... 3,300,000 shares
Common stock to be
outstanding after the
offering.................... 28,542,328 shares
Use of proceeds.............. For general corporate purposes, including
working capital, product development and capital
expenditures, and for possible acquisitions.
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 July 31, 1999, and includes
the issuance of 3,491,282 shares of common stock issued in August 1999 in
exchange for all outstanding shares of Connectify capital stock in connection
with the Connectify merger, and excludes:
. 862,300 shares of common stock issuable upon exercise of stock options
outstanding as of July 31, 1999 at a weighted average exercise price of
$1.04 per share;
. 4,647,618 shares of common stock reserved for issuance under our 1999
Stock Incentive Plan which incorporates our 1997 Stock Option/Stock
Issuance Plan;
. 490,000 shares of common stock reserved for issuance under our 1999
Employee Stock Purchase Plan; and
. 208,345 shares of common stock reserved for issuance upon exercise of
Connectify options and warrants assumed in connection with the Connectify
merger.
See "Capitalization", "Management--Benefit Plans", "Description of Capital
Stock" and Notes 4 and 7 of Notes to Supplemental Consolidated Financial
Statements.
4
<PAGE>
Summary Supplemental Consolidated Financial Data
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, June 30,
---------------- ------------------
1997 1998 1998 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
Supplemental Consolidated Statement of
Operations Data:
Total revenues.......................... $ -- $ 2,049 $ 656 $ 3,578
Gross profit............................ -- 1,476 583 2,365
Authorization of deferred stock-based
compensation........................... 113 1,263 430 3,063
Operating loss.......................... (1,435) (7,564) (2,466) (9,961)
Net loss................................ $(1,383) $(7,378) $ (2,425) $ (9,854)
======= ======= ======== ========
Basic and diluted net loss per share.... $ (0.92) $ (2.58) $ (1.58) $ (1.89)
======= ======= ======== ========
Shares used in computing basic and
diluted net loss per share............. 1,497 2,864 1,535 5,204
======= ======= ======== ========
Pro forma basic and diluted net loss per
share.................................. $ (0.59) $ (0.56)
======= ========
Shares used in computing pro forma basic
and diluted net loss per share......... 12,547 17,716
======= ========
</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.
The supplemental consolidated financial data in this prospectus reflects
our acquisition of Connectify, Inc., which closed on August 13, 1999, and which
was accounted for as a pooling of interests. This means that for accounting and
financial reporting purposes, we treat the two companies as if they had always
been combined.
<TABLE>
<CAPTION>
June 30, 1999
-----------------------------
Actual Pro Forma As Adjusted
------- --------- -----------
<S> <C> <C> <C>
Supplemental Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term
investments.................................... $ 8,049 $18,249 $53,677
Working capital................................. 4,829 15,029 50,457
Total assets.................................... 12,325 22,525 57,953
Notes payable, less current portion............. 638 638 638
Total stockholders' equity...................... 6,323 16,523 51,951
</TABLE>
The supplemental consolidated balance sheet data as of June 30, 1999 gives
effect to the issuance of 3,491,282 shares of common stock in the Connectify
Merger and is set forth:
. on an actual basis;
. on a pro forma basis to give effect to the sale in July 1999 of
838,472 shares of our preferred stock for total proceeds of $10.2
million, 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 the shares of common
stock offered at an assumed initial public offering price of $12.00
per share and after deducting the estimated underwriting discount and
estimated offering expenses. See "Use of Proceeds" and
"Capitalization".
5
<PAGE>
----------------
Except as set forth in the supplemental 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 two for three 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.
The occurrence of any of the following risks could materially and adversely
affect our business, financial condition and operating results. In this case,
the trading price of our common stock could decline and you might lose 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.
Thus, we have a limited operating history upon which you can evaluate our
business and prospects. Due to our limited operating history, it is difficult
or impossible for us to predict future results of operations. For example, we
cannot forecast operating expenses based on our historical results because they
are limited, and we are required to forecast expenses in part on future revenue
projections. Moreover, due to our limited operating history, any evaluation of
our business and prospects must be made in light of the risks and uncertainties
often encountered by early-stage companies in Internet-related markets. Many of
these risks are discussed in the subheadings below, and include our ability to:
. attract more customers;
. implement our sales, marketing and after-sales service initiatives, both
domestically and internationally; and
. execute our product development activities.
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 particularly because our
products and services are relatively new and our prospects uncertain. 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 factors described in the subheadings below as
well as:
. the evolving and varying demand for customer communication software
products and services for e-Businesses, particularly our products and
services;
. the timing of new releases of our products;
. the discretionary nature of our customers' purchasing and budgetary
cycles;
. changes in our pricing policies or those of our competitors;
. the timing of execution of large contracts that materially affect our
operating results;
. the mix of sales channels through which our products and services are
sold;
. the mix of our domestic and international sales;
. costs related to the customization of our products;
7
<PAGE>
. 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; and
. global economic conditions, as well as those specific to large
enterprises with high e-mail volume.
We also often offer volume-based pricing, which may affect our operating
margins. Most of our expenses, such as employee compensation and rent, are
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 "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, which may
reduce the trading price of our common stock
Since we began operations in 1997, we have incurred substantial operating
losses in every quarter. As a result of accumulated operating losses, at June
30, 1999, we had an accumulated deficit of approximately $18.6 million. For the
six months ended June 30, 1999, we had a net loss of $9.9 million, or 275% of
revenues for that period. 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. As a result, we expect to continue to
experience losses and negative cash flows, even if sales of our products and
services continue to grow, and may not generate sufficient revenues to achieve
profitability in the future.
In addition, as a result of the Connectify merger, we expect that our
losses will increase even more significantly because of additional costs and
expenses related to:
. an increase in the number of our employees;
. an increase in research and development activities;
. an increase in sales and marketing activities; and
. assimilation of operations and personnel.
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 "Supplemental
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 products and services 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.
We currently face competition for our products from systems designed by in-
house and third-party development efforts. We expect that these systems will
continue to be a principal source of
8
<PAGE>
competition for the foreseeable future. Our competitors include a number of
companies offering one or more products for the e-Business communications
market, some of which compete directly with our products. For example, our
competitors include companies providing stand-alone point solutions, including
Annuncio, Inc., Brightware, Inc., eGain Communications Corp., Mustang Software,
Inc. and Responsys.com. In addition, we may compete with companies providing
customer management and communications solutions, such as Clarify Inc., Digital
Impact, Inc., Genesys Telecommunications Laboratories, Inc., Lucent
Technologies, Inc., Message Media, 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. We may lose potential customers to competitors for various reasons,
including the ability or willingness of our competitors to offer lower prices
and other incentives that we cannot match. 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.
We may not be able to forecast our revenues accurately because our products
have a long and variable sales cycle
The long sales cycle for our products may cause license revenue and
operating results to vary significantly from period to period. To date, the
sales cycle for our products has taken three to 12 months and has required pre-
purchase evaluation by a significant number of individuals in our customers'
organizations. Along with third parties that often jointly market our software
with us, we invest significant amounts of time and resources educating and
providing information to our prospective customers regarding the use and
benefits of our products. 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 our products.
Difficulties in implementing our products could harm our revenues and margins
Forecasting our revenues depends upon the timing of implementation of our
products. 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
9
<PAGE>
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.
Our business depends on the acceptance of our products and services, and it is
uncertain whether the market will accept our products and services
Of our total revenue of $3.6 million for the six months ended June 30,
1999, $2.8 million was derived from licenses of our product and $783,000 from
related services. We are not certain that our target customers will widely
adopt and deploy our products and services. Our future financial performance
will depend on the successful development, introduction and customer acceptance
of new and enhanced versions of our products and services. In the future, we
may not be successful in marketing our products and services 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 in order to
continue to grow
We intend to at least double our sales, marketing, engineering,
professional services and product management personnel over the next 12 months.
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 group may limit the rate at
which we can develop and install new products or product enhancements, which
would harm our business. 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 our products and services, which could harm our ability to increase our
revenues in the future
Our financial success depends to a large degree on the ability of our
direct sales force to increase sales to a level required to adequately fund
marketing and product development activities. 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. 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 our Chief Executive Officer, President and 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. In
particular, we depend upon the continued services of Michael J. McCloskey, our
Chief Executive Officer, and Mark S. Gainey, our President and co-founder. The
loss of the services of any of these individuals could harm our business and
operations. In addition, we have not obtained life insurance benefiting Kana on
any of our key employees or entered into employment agreements with 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.
10
<PAGE>
A failure to manage our internal operating and financial functions could lead
to inefficiencies in conducting our business and subject us to increased
expenses
Our ability to offer our products and services successfully in a rapidly
evolving market requires an effective planning and management process. We have
limited experience in managing rapid growth. 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. For example, we added 38 employees between July 1,
1999 and August 13, 1999, and 31 new employees who joined us as a result of the
Connectify merger. Moreover, we will need to assimilate substantially all of
Connectify's operations into our operations. The rate of our recent growth has
made management of that growth more difficult. 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, 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, our ability to respond to
our customers, and retain key personnel, and our business in general. We plan
to move our corporate offices to a new location in November 1999. This move may
disrupt our business and operations. See "Business--Facilities".
The integration of key new employees and officers into our management team may
interfere with our operations
We have recently hired a number of key employees and officers including our
Chief Executive Officer, Michael J. McCloskey, who joined us in June 1999, and
our Vice President of Business Development, Vice President of Marketing, Vice
President of Electronic Direct Marketing and Vice President of International
Sales, each of whom has been with us for less than two months. To integrate
into our company, these individuals must spend a significant amount of time
learning our business model and management system, in addition to performing
their regular duties. Accordingly, the integration of new personnel has
resulted and will continue to result in some disruption to our ongoing
operations.
The Connectify merger may result in disruptions to our business and management
due to difficulties in assimilating personnel and operations
We may not realize the benefits from the Connectify merger. We may not be
able to successfully assimilate the additional personnel, operations, acquired
technology and products into our business. In particular, we will need to
assimilate and retain key professional services, engineering and marketing
personnel. Other key Connectify personnel may decide not to work for us. In
addition, Connectify's product will have to be integrated into our products,
and it is uncertain whether we may accomplish this easily. These difficulties
could disrupt our ongoing business, distract our management and employees or
increase our expenses. In connection with the merger, we issued a total of
3,491,282 shares of our common stock in exchange for all outstanding shares of
Connectify capital stock and reserved 208,345 shares of common stock for
issuance upon the exercise of Connectify options and warrants we assumed in the
merger. The issuance of these securities is dilutive to our existing
stockholders.
If we are presented with appropriate opportunities, we intend to make other
investments in complementary companies, products or technologies. We may not
realize the anticipated benefits of any other acquisition or investment. If we
buy another company, we will likely face the same risks, uncertainties and
disruptions as discussed above with respect to the Connectify merger.
Furthermore, we may have to incur debt or issue equity securities to pay for
any additional future acquisitions or investments, the issuance of which could
be dilutive to us or our existing stockholders. In addition,
11
<PAGE>
our profitability may suffer because of acquisition-related costs or
amortization costs for acquired goodwill and other intangible assets.
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. If
we experience product 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 either our internal or our outsourced computer and
communications systems could interrupt our Kana Online service
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 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 or interruption. Exodus does not guarantee that our Internet access will
be uninterrupted, error-free or secure. We have no formal disaster recovery
plan in the event of damage or interruption, and our insurance policies may 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".
If we fail to build skills necessary to sell our Kana Online service, we will
lose revenue opportunities and our sales will suffer
The skills necessary to market and sell Kana Online are different than
those relating to our software products. We license our software products 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 depending on
actual customer usage. Our sales force sells both our software products and
Kana Online. Because different skills are necessary to sell Kana Online versus
our software products, our sales and marketing groups may not be able to
maintain or increase the level of sales of either Kana Online or our software
products.
12
<PAGE>
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 software. 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;
. any patents issued 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 rely upon trademarks, copyrights and trade secrets to protect our
proprietary rights, which may not be sufficient to protect our intellectual
property
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 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 foreign
countries;
. other companies may claim common law trademark rights based upon state
or foreign laws 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
13
<PAGE>
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 might
cause product shipment delays, require us to develop non-infringing technology
or require us to enter into royalty or license agreements, which might 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 higher costs and lost sales if our software contains errors
We face the possibility of higher costs as a result of the complexity of
our products and the potential for undetected errors. Due to the mission-
critical nature of our products and services, 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 expected from the new product and an
immediate and significant loss of market share;
. loss of existing customers that upgrade to the new product and of new
customers;
. failure to achieve market acceptance;
. diversion of development resources;
. injury to our reputation;
. increased service and warranty costs;
. legal actions by customers against us; and
. increased insurance costs.
We may face liability claims that could result in unexpected costs and damage
to our reputation
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.
We intend to expand our international operations, which could divert management
attention and present financial issues
Our international operations are located in the United Kingdom and, to
date, have been limited. 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;
14
<PAGE>
. customize our 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 our products 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.
Our growth could be limited if we fail to execute our plan to expand
internationally
For the six months ended June 30, 1999, we derived approximately 9.6% of
our total revenues from sales outside North America. We also have established
an office in the United Kingdom. As of June 30, 1999 we had five sales persons
in our United Kingdom office. The United Kingdom office oversees and processes
all orders for our products and services in Europe. Non-European international
sales are handled by sales representatives in the United States. As a result,
we face risks from doing business on an international basis, any of which could
impair our internal revenues. Although our business has not yet been materially
affected by the following risks, we could, in the future, face:
. 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 may suffer foreign exchange rate losses
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. We have not yet but may in the future experience
foreign exchange rate losses, especially to the extent that we do not engage in
hedging.
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. We do not have a long
enough operating history to know with certainty whether our existing cash and
the proceeds of this offering will be sufficient to finance our anticipated
growth. 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
15
<PAGE>
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 57.1% 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.
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 failure to manage multiple technologies and technological change could harm
our future product demand
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 communication software is
characterized by:
. rapid technological change;
. frequent new product introductions;
. changes in customer requirements; and
. evolving industry standards.
Our products are 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
16
<PAGE>
customers use. For example, the server component of the current version of our
products runs on the Windows NT operating system from Microsoft, and we must
develop products and services that are 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.
If we fail to respond to changing customer preferences in our market, demand
for our products and our ability to enhance our revenues will suffer
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 software 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 entails significant technical and business risks and
requires substantial expenditures and lead time.
If the Internet and e-mail fail to grow and be accepted as a medium of
communication, demand for our products and services will decline
We sell our products and services primarily to organizations that receive
large volumes of e-mail and Web-based communications. Consequently, our future
revenues and profits, if any, substantially 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 products
and services that process e-mail, including our products and services.
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, federal and foreign regulators could adopt laws and regulations
that impose additional burdens on those companies that conduct business online.
These laws and regulations could discourage communication by e-mail or other
Web-based communications, particularly targeted e-mail of the type facilitated
by the Connectify product, which could reduce demand for our products and
services.
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,
17
<PAGE>
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. 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 our products and services
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 may apply the proceeds of this offering to uses that do not increase our
operating results or market value
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 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".
Our stock price may be highly volatile and could drop, particularly because our
business depends on the Internet
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 does develop, 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.
18
<PAGE>
The price of our common stock after this offering may be lower than the price
you pay
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 28,542,328 shares
of our common stock, assuming no exercise of the underwriters' over-allotment
option. Of these shares, the 3,300,000 shares sold in this offering will be
freely tradable and 15,429,975 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, 4,382,599 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, 838,472 shares will not be saleable under Rule 144 until July 2000
and 3,491,282 shares will not be saleable under Rule 144 until August 2000.
Holders of 19,759,063 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 all shares
of our common stock that we may issue under our stock option plans and employee
stock purchase plan. 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".
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 62.8% of the total amount paid to fund our company but
will own only 16.0% of our outstanding shares. Additionally, if the holders of
outstanding options exercise their options, you will experience further
dilution. See "Dilution".
19
<PAGE>
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 our assumptions. Words such as "anticipates", "expects",
"intends", "plans", "believes", "seeks" and "estimates", and variations of
these words and similar expressions, are intended to identify forward-looking
statements. These statements are not guarantees of future performance and are
subject to risks, uncertainties and other factors, some of which are beyond our
control, 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. Except as required by
law, we undertake no obligation to update any forward-looking statement,
whether as a result of new information, future events or otherwise.
20
<PAGE>
USE OF PROCEEDS
The net proceeds to Kana from the sale of the 3,300,000 shares of common
stock offered are estimated to be approximately $35.4 million (approximately
$41.0 million if the underwriters' over-allotment option is exercised in full),
at an assumed initial public offering price of $12.00 per share and after
deducting the estimated 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, with the exception of the Connectify merger, 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, investment-grade, interest-bearing 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 4,252,571 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".
21
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Kana as of June 30,
1999 based upon the supplemental consolidated financial statements and notes to
supplemental consolidated financial statements appearing elsewhere in this
prospectus, which gives effect to the issuance of 3,491,282 shares of common
stock in the Connectify Merger:
. on an actual basis;
. on a pro forma basis to give effect to the sale of 838,472 shares of
preferred stock issued in July 1999 for total proceeds of $10.2 million,
the conversion of all shares of convertible preferred stock into
13,351,113 shares of common stock upon the completion of this offering;
and
. as adjusted to reflect the estimated net proceeds from the sale of the
3,300,000 shares of common stock offered by Kana at an assumed initial
public offering price of $12.00 per share and after deducting the
estimated underwriting discount and estimated offering expenses.
<TABLE>
<CAPTION>
June 30, 1999
------------------------------
Actual Pro Forma As Adjusted
------- --------- -----------
(In thousands, except share
and per share data)
<S> <C> <C> <C>
Notes payable, less current portion............. $ 638 $ 638 $ 638
------- ------- -------
Stockholders' equity:
Convertible preferred stock, $0.001 par value
per share; 50,000,000, 5,000,000 and 5,000,000
shares authorized actual, pro forma and as
adjusted, respectively; 12,512,641, no shares
and no shares issued and outstanding actual,
pro forma and as adjusted, respectively....... 13 -- --
Common stock, $0.001 par value per share;
60,000,000 shares authorized actual, pro forma
and as adjusted; 9,694,284, 23,045,397 and
26,345,397 shares issued and outstanding
actual, pro forma and as adjusted,
respectively.................................. 10 23 26
Additional paid-in capital..................... 38,906 49,106 84,531
Deferred stock-based compensation.............. (13,397) (13,397) (13,397)
Notes receivable from stockholders............. (557) (557) (557)
Accumulated other comprehensive losses......... (37) (37) (37)
Accumulated deficit............................ (18,615) (18,615) (18,615)
------- ------- -------
Total stockholders' equity.................... 6,323 16,523 51,951
------- ------- -------
Total capitalization......................... $ 6,961 $17,161 $52,589
======= ======= =======
</TABLE>
The number of shares outstanding as of June 30, 1999 excludes:
. 1,237,350 shares of common stock issuable upon exercise of stock options
outstanding as of June 30, 1999 at a weighted average exercise price of
$0.60 per share;
. 864,100 shares of common stock issued or issuable upon exercise of stock
options granted by us between June 30, 1999 and July 31, 1999 at a
weighted average exercise price of $4.76 per share;
22
<PAGE>
. 4,647,618 shares of common stock reserved for issuance under our 1999
Stock Incentive Plan which incorporates our 1997 Stock Option/Stock
Issuance Plan; and
. 490,000 shares of common stock reserved for issuance under our 1999
Employee Stock Purchase Plan.
See "Management--Benefit Plans", "Description of Capital Stock" and Note 4
of Notes to Supplemental Consolidated Financial Statements.
23
<PAGE>
DILUTION
The pro forma net tangible book value of Kana at June 30, 1999, was
approximately $16.5 million, or $0.72 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 the 3,300,000 shares of common stock offered by Kana at
an assumed initial public offering price of $12.00 per share and after
deducting the estimated underwriting discount and estimated offering expenses,
Kana's pro forma net tangible book value at June 30, 1999, would have been
$52.0 million, or $1.97 per share. This represents an immediate increase in net
tangible book value of $1.25 per share to existing stockholders and an
immediate dilution of $10.03 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
3,300,000 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................... $12.00
Pro forma net tangible book value per share as of June 30,
1999........................................................... $0.72
Increase per share attributable to new investors................ 1.25
-----
Pro forma net tangible book value per share after the offering.... 1.97
------
Dilution per share to new investors............................... $10.03
======
</TABLE>
The following table summarizes, as of June 30, 1999, on a pro forma basis,
the total number of shares purchased, the 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 $12.00 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.......... 23,045,397 87.5% $31,266,000 44.1% $ 1.36
New investors.................. 3,300,000 12.5 39,600,000 55.9 12.00
---------- ----- ----------- -----
Totals....................... 26,345,397 100.0% $70,866,000 100.0%
========== ===== =========== =====
</TABLE>
The foregoing computations are based on the number of shares of common
stock outstanding as of June 30, 1999 and includes 838,472 shares of common
stock issuable upon conversion of preferred stock issued in July 1999 and
3,491,283 shares of common stock issued in the Connectify merger in August 1999
and excludes:
. 1,237,350 shares of common stock issuable upon exercise of stock options
outstanding as of June 30, 1999 at a weighted average exercise price of
$0.60 per share;
. 864,100 shares of common stock issued or issuable upon exercise of stock
options granted by us between June 30, 1999 and July 31, 1999 at a
weighted average exercise price of $4.76 per share;
. 3,485,714 shares of common stock reserved for issuance under our 1999
Stock Incentive Plan which incorporates our 1997 Stock Option/Stock
Issuance Plan; and
. 367,500 shares of common stock reserved for issuance under our 1999
Employee Stock Purchase Plan.
To the extent that any of these options are exercised, there would be
further dilution to new investors. See "Capitalization", "Management--Benefit
Plans", "Description of Capital Stock" and Notes 4 and 7 of Notes to
Supplemental Consolidated Financial Statements.
24
<PAGE>
SUPPLEMENTAL SELECTED CONSOLIDATED FINANCIAL DATA
You should read the supplemental selected consolidated financial data set
forth below in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the supplemental
consolidated financial statements of Kana Communications, Inc. and the notes to
supplemental consolidated financial statements included elsewhere in this
prospectus.
Kana was incorporated in July 1996 but had no significant operations until
1997. The supplemental consolidated statement of operations data for each of
the years in the two-year period ended December 31, 1998, and the supplemental
consolidated balance sheet data at December 31, 1997 and 1998, are derived from
our supplemental consolidated financial statements. These supplemental
consolidated financial statements have been audited by KPMG LLP, independent
auditors, and are included elsewhere in this prospectus. The supplemental
consolidated statement of operations data for the six-months ended June 30,
1998 and 1999, and the supplemental consolidated balance sheet data at June 30,
1999, are derived from our unaudited interim supplemental consolidated
financial statements included elsewhere in this prospectus. The unaudited
interim supplemental consolidated financial statements have been prepared on
substantially the same basis as the audited supplemental consolidated financial
statements and, in our opinion, include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of our 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 to Supplemental 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 Six Months Ended
December 31, June 30,
---------------- ------------------
1997 1998 1998 1999
------- ------- -------- --------
(In thousands, except
per share data)
<S> <C> <C> <C> <C>
Supplemental Consolidated Statement of
Operations Data:
Revenues:
License................................ $ -- $ 1,793 $ 615 $ 2,795
Service................................ -- 256 41 783
------- ------- -------- --------
Total revenues....................... -- 2,049 656 3,578
------- ------- -------- --------
Cost of revenues:
License................................ -- 54 16 72
Service................................ -- 519 57 1,141
------- ------- -------- --------
Total cost of revenues............... -- 573 73 1,213
------- ------- -------- --------
Gross profit............................ -- 1,476 583 2,365
------- ------- -------- --------
Operating expenses:
Sales and marketing.................... 366 3,938 1,421 4,957
Research and development............... 699 2,835 884 3,320
General and administrative............. 257 1,004 314 986
Amortization of stock-based
compensation.......................... 113 1,263 430 3,063
------- ------- -------- --------
Total operating expenses............. 1,435 9,040 3,049 12,326
------- ------- -------- --------
Operating loss....................... (1,435) (7,564) (2,466) (9,961)
Other income, net....................... 52 186 41 107
------- ------- -------- --------
Net loss............................. $(1,383) $(7,378) $ (2,425) $ (9,854)
======= ======= ======== ========
Basic and diluted net loss per share.... $ (0.92) $ (2.58) $ (1.58) $ (1.89)
======= ======= ======== ========
Shares used in computing basic and
diluted net loss per share............. 1,497 2,864 1,535 5,204
======= ======= ======== ========
Pro forma basic and diluted net loss per
share.................................. $ (0.59) $ (0.56)
======= ========
Shares used in computing pro forma basic
and diluted net loss per share......... 12,547 17,716
======= ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------- June 30,
1997 1998 1999
------ ------- --------
<S> <C> <C> <C>
Supplemental Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments...... $3,513 $13,115 $8,049
Working capital........................................ 3,281 12,224 4,829
Total assets........................................... 3,824 15,275 12,325
Notes payable, less current portion.................... 51 360 638
Total stockholders' equity............................. 3,504 13,066 6,323
</TABLE>
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
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.
On August 13, 1999, we closed a merger with Connectify, Inc. pursuant to
which Connectify became our wholly owned subsidiary. Connectify develops,
markets and supports electronic direct marketing software for e-Businesses.
Connectify's software enables e-Businesses to profile and target potential and
existing customers and then deliver and track personalized e-mails to their
customers. By using electronic direct marketing software in this way, e-
Businesses can build customer loyalty, increase the probability of repeat
transactions and reduce customer attrition. Connectify is based in San Mateo,
California, and has 31 employees.
In connection with the merger, we issued a total of 3,491,282 shares of our
common stock in exchange for all outstanding shares of Connectify capital stock
and reserved 208,345 shares of common stock for issuance upon the exercise of
Connectify options and warrants we assumed in connection with the merger. We
will account for the Connectify merger as a pooling of interests. In addition,
in connection with the Connectify merger, we recorded a significant amount of
deferred compensation that will significantly reduce our earnings and
profitability for the foreseeable future.
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, the cost of the 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.
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
26
<PAGE>
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 $17.8 million
through June 30, 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 $1.3 million of stock-based compensation amortization expense during
the year ended December 31, 1998, and approximately $3.1 million of stock-based
compensation amortization expense during the six months ended June 30, 1999. As
of June 30, 1999, we had a total of $14.1 million of deferred stock-based
compensation that had not been amortized. We expect to record additional
deferred stock-based compensation of at least $3.0 million for stock option
grants made during the three months ended September 30, 1999. The amortization
of the remaining deferred stock-based compensation will result in additional
charges to operations through July 2003. The amortization of deferred 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, for the six months
ended June 30, 1999, incurred a net loss of $9.9 million. As of June 30, 1999,
had an accumulated deficit of $18.6 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. From July 1, 1999 to August
13,1999 we add 38 new employees, and 31 new employees are joining us as a
result of the Connectify Merger. 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.
27
<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 are not presented because we had no revenues during that period.
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, June 30,
------------ ---------------
1998 1998 1999
------------ ------ ------
<S> <C> <C> <C>
Revenues:
License........................................ 87.5 % 93.8 % 78.1 %
Service........................................ 12.5 6.2 21.9
------ ------ ------
Total revenues............................... 100.0 100.0 100.0
Cost of revenues:
License........................................ 2.6 2.4 2.0
Service........................................ 25.3 8.7 31.9
------ ------ ------
Total cost of revenues....................... 27.9 11.1 33.9
------ ------ ------
Gross profit..................................... 72.1 88.9 66.1
Operating expenses:
Sales and marketing............................ 192.2 216.6 138.5
Research and development....................... 138.4 134.8 92.8
General and administrative..................... 49.0 47.9 27.6
Amortization of stock-based compensation....... 61.6 65.5 85.6
------ ------ ------
Total operating expenses..................... 441.2 464.8 344.5
------ ------ ------
Operating loss................................... (369.1) (375.9) (278.4)
Other income, net................................ 9.1 6.3 3.0
------ ------ ------
Net loss..................................... (360.0)% (369.6)% (275.4)%
====== ====== ======
</TABLE>
Six Months Ended June 30, 1998 and 1999
Revenues
Total revenues increased from $656,000 for the six months ended June 30,
1998 to $3.6 million for the six months ended June 30, 1999. License revenue
increased from $615,000 for the six months ended June 30, 1998 to $2.8 million
for the six months ended June 30, 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 five people at June 30, 1998
to 29 people at June 30, 1999. License revenue represented 93.8% of total
revenues for the six months ended June 30, 1998 and 78.1% of total revenues for
the six months ended June 30, 1999.
Service revenue increased from $41,000 for the six months ended June 30,
1998 to, $783,000 for the six months ended June 30, 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 hosted service. Service
revenue represented 6.2% of total revenues for the six months ended June 30,
1998 and 21.9% of total revenues for the six months ended June 30, 1999.
During the six months ended June 30, 1998, two customers each accounted for
more than 10% of total revenues. During the six months ended June 30, 1999, no
customer accounted for more than
28
<PAGE>
10% of total revenues. Revenue from international sales for the six months
ended June 30, 1998 and 1999 were less than 10% of total revenues.
Cost of Revenues
Cost of license revenue includes third party software royalties, product
packaging, documentation and production. Cost of license revenue increased from
$16,000 for the six months ended June 30, 1998 to $72,000 for the six months
ended June 30, 1999. As a percentage of license revenue, cost of license
revenue was 2.4% for the six months ended June 30, 1998 and 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 consists primarily of personnel, facilities and
system costs incurred in providing customer support. Cost of service revenue
increased from $57,000 for the six months ended June 30, 1998 to $1.1 million
for the six months ended June 30, 1999. The growth in cost of service revenue
was attributable primarily to an increase in personnel dedicated to support our
growing number of customers and related facility expenses and in system costs.
Cost of service revenue as a percent of service revenue was 139% for the six
months ended June 30, 1998 and 146% for the six months ended June 30, 1999. We
anticipate that cost of service revenue will increase in absolute dollars.
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
$1.4 million for the six months ended June 30, 1998 to $5.0 million for the six
months ended June 30, 1999. This increase was attributable primarily to the
addition of sales and marketing personnel, an increase in sales commissions
associated with increased revenues and higher marketing costs due to expanded
promotional activities. As a percentage of total revenues, sales and marketing
expenses were 217% for the six months ended June 30, 1998 and 139% for the six
months ended June 30, 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. We further expect our
sales and marketing expenses to increase due to the Connectify merger.
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 and enhancement of existing products and quality
assurance activities. Research and development expenses increased from $884,000
for the six months ended June 30, 1998 to $3.3 million for the six months ended
June 30, 1999. This increase was attributable primarily to the addition of
personnel associated with product development and related benefits, consulting
and recruiting costs. As a percentage of total revenues, research and
development expenses were 135% for the six months ended June 30, 1998 and 93.0%
for the six months ended June 30, 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.
We further expect our research and development expenses to increase due to the
Connectify merger.
29
<PAGE>
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 $314,000 for the six months ended June
30, 1998 to $986,000 for the six months ended June 30, 1999, due primarily to
increased personnel, consultants and facilities expenses necessary to support
our growth. As a percentage of total revenues, general and administrative
expenses were 47.9% for the six months ended June 30, 1998 and 27.6% for the
six months ended June 30, 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. We further expect our general and administrative
expenses to increase due to the Connectify merger. 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 and loss
from disposition of assets. Other income, net was $41,000 for the six months
ended June 30, 1998 and $107,000 for the six months ended June 30, 1999. The
increase in other income, net was due primarily to increased interest income
earned on higher cash balances offset by a loss from disposition of assets and
interest expense.
Net Loss
Our net loss increased from $2.4 million for the six months ended June 30,
1998 to $9.9 million for the comparable period in 1999. We expect to continue
to incur additional losses in the future.
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 2.9% 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.
30
<PAGE>
Operating Expenses
Sales and Marketing. Sales and marketing expenses were $366,000 for 1997
and $3.9 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 192% for 1998.
Research and Development. Research and development expenses were $699,000
for 1997 and $2.8 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 138% for 1998.
General and Administrative. General and administrative expenses were
$257,000 for 1997 and $1.0 million for 1998. The increase was due primarily to
the addition of management and financial personnel necessary to support our
growth. As a percentage of total revenues, general and administrative expenses
were 49.0% for 1998.
Other Income, Net
Other income, net was $52,000 for 1997 and $186,000 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.
Net Loss
Our net loss increased from $1.4 million in 1997 to $7.4 million in 1998.
Provision for Income Taxes
We have incurred operating losses for all periods from inception through
June 30, 1999, and therefore have not recorded a provision for income taxes. We
have recorded a valuation allowance for the full amount of our gross 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 $6.6 million. These federal and
state loss carryforwards are available to reduce future taxable income. The
federal loss carryforwards expire at various dates into the year 2018. Under
the provisions of the Internal Revenue Code, 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.
31
<PAGE>
Supplemental Quarterly Results of Operations
The following tables set forth a summary of our unaudited supplemental
quarterly operating results for each of the six quarters in the period ended
June 30, 1999. The information has been derived from our supplemental
consolidated unaudited financial statements that, in management's opinion, have
been prepared on a basis consistent with the audited supplemental 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, June 30,
1998 1998 1998 1998 1999 1999
-------- -------- --------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Supplemental
Consolidated Statement
of
Operations Data:
Revenues:
License................ $ 161 $ 454 $ 478 $ 699 $ 1,165 1,630
Service................ 16 25 97 119 258 525
------- ------- ------- ------- ------- -------
Total revenues......... 177 479 575 818 1,423 2,155
------- ------- ------- ------- ------- -------
Cost of revenues:
License................ 4 12 17 21 34 38
Service................ 26 31 189 273 402 739
------- ------- ------- ------- ------- -------
Total cost of
revenues.............. 30 43 206 294 436 777
------- ------- ------- ------- ------- -------
Gross profit............ 147 436 369 524 987 1,378
------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing.... 498 923 1,159 1,358 1,707 3,250
Research and
development........... 403 481 774 1,177 1,435 1,885
General and
administrative........ 104 210 308 382 435 551
Amortization of
deferred stock-based
compensation.......... 184 246 352 481 435 2,628
------- ------- ------- ------- ------- -------
Total operating
expenses.............. 1,189 1,860 2,593 3,398 4,012 8,314
------- ------- ------- ------- ------- -------
Operating loss.......... (1,042) (1,424) (2,224) (2,874) (3,025) (6,936)
Other income, net....... 30 11 38 109 139 (32)
------- ------- ------- ------- ------- -------
Net loss................ $(1,012) $(1,413) $(2,186) $(2,765) $(2,886) $(6,968)
======= ======= ======= ======= ======= =======
As a Percentage of Total
Revenues:
Revenues:
License................ 91.0% 94.8% 83.1% 85.5% 81.9% 75.6%
Service................ 9.0 5.2 16.9 14.5 18.1 24.4
------- ------- ------- ------- ------- -------
Total revenues......... 100.0 100.0 100.0 100.0 100.0 100.0
------- ------- ------- ------- ------- -------
Cost of revenues:
License................ 2.3 2.5 3.0 2.6 2.4 1.8
Service................ 14.7 6.7 32.9 33.4 28.3 34.3
------- ------- ------- ------- ------- -------
Total cost of
revenues.............. 17.0 9.2 35.9 36.0 30.7 36.1
------- ------- ------- ------- ------- -------
Gross profit............ 83.0 90.8 64.1 64.0 69.3 63.9
------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing.... 281.4 192.7 201.6 166.0 120.0 150.9
Research and
development........... 227.7 100.4 134.6 143.9 100.8 87.5
General and
administrative........ 58.8 43.6 53.6 46.7 30.6 25.6
Amortization of
deferred stock-based
compensation.......... 104.0 51.4 61.2 58.8 30.6 122.0
------- ------- ------- ------- ------- -------
Total operating
expenses.............. 671.9 388.1 451.0 451.4 282.0 386.0
------- ------- ------- ------- ------- -------
Operating loss.......... (588.7) (297.3) (386.9) (351.4) (212.7) (322.1)
Other income, net....... 16.9 2.1 6.6 13.3 9.8 (1.4)
------- ------- ------- ------- ------- -------
Net loss................ (571.8)% (295.2)% (380.3)% (338.1)% (202.9)% (323.5)%
======= ======= ======= ======= ======= =======
</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
32
<PAGE>
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.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily from private
sales of convertible preferred stock totaling $26.6 million and, to a lesser
extent, from bank borrowings and lease financing.
Our operating activities used $1.1 million during 1997, $5.7 million during
1998 and $5.0 million during the six months ended June 30, 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 computer equipment,
furniture, fixtures and leasehold improvements to support our growing number of
employees and net purchases of short-term investments, used $498,000 during
1997, $937,000 during 1998 and $3.4 million during the six months ended June
30, 1999.
Our financing activities generated $4.9 million in cash during 1997 and
$16.3 million in cash during 1998 and $1.3 million during the six months ended
June 30, 1999. Of these financing activities, the issuance of convertible
preferred stock generated net proceeds of $4.6 million during 1997 and $15.3
million during 1998. We had proceeds from bank borrowings of $720,000 in 1998
and $1.7 million during the six months ended June 30, 1999.
At June 30, 1999, we had cash and cash equivalents aggregating $5.8 million
and short-term investments totaling $2.2 million. Our short-term investments
secure a letter of credit issued in connection with the lease of our corporate
offices. We have two lines of credit totaling $4.0 million, which are secured
by all of our assets, bear interest at the bank's prime rate (7.75% as of June
30, 1999), and expire on March 2, 2000 and June 30, 2000. Our total bank debt
was $1.9 million at June 30, 1999.
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. 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. However, we may have to obtain additional financing
within this time frame or thereafter. This additional funding, if needed, may
not 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.
33
<PAGE>
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.
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. Our other sales offices use the same third-party hardware and
software systems as 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 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.
34
<PAGE>
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 written statements of
Year 2000 compliance from substantially all of the providers of hardware used
in our business. We have identified approximately 20 different software vendors
that provide software products in our business. To date, we have not received
compliance statements 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
compliance statements 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 written compliance statements 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 compliance statements
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 our products and services 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
35
<PAGE>
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;
. 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.
36
<PAGE>
BUSINESS
Kana develops, markets and supports customer communication software
products and services for e-Businesses. We define e-Businesses as companies
that leverage the reach and efficiency of the Internet to enhance their
competitive market position. Our products and services allow these companies to
manage high volumes of inbound and outbound e-mail and Website-based
communications, while facilitating the delivery of specific and personalized
information to each customer. By using our software products and services, e-
Businesses can, among other things:
. compile customer and communication history;
. profile and send targeted communications to potential and existing
customers;
. generate automated confirmations, notifications and receipts related to
e-commerce transactions;
. respond to online service and support inquiries; and
. trigger follow-on actions within the e-Business.
As a result, we enable e-Businesses to enhance customer relationships,
generate additional revenue opportunities and reduce the cost of online
communications.
Our software, which consists of applications built upon our technology
platform, is designed with a Web-based architecture. By Web-based, we mean that
our software design is based on the unique characteristics of the Internet and
uses industry standards, such as the Java programming language, and Extensible
Mark-up Language (XML). This Web-based architecture allows our products to
facilitate scaleability and the integration of our platform with other e-
Business and legacy systems. By integrating with databases and other enterprise
systems, our technology platform functions as the online communications
infrastructure for e-Businesses.
We offer our products on both a license and a hosted basis. We also offer
implementation, customization and maintenance services to support our
customers. Kana Online, our hosted application service, allows e-Businesses to
rapidly and efficiently deploy an online customer communication system while
minimizing their up-front investment in hardware, software and services.
We recently acquired Connectify, Inc., a provider of electronic direct
marketing software for e-Businesses. Connectify's software enables e-Businesses
to profile and target potential and existing customers and then deliver and
track personalized e-mails to these individuals. By using electronic direct
marketing software, e-Businesses can build customer loyalty, increase the
probability of repeat transactions and reduce customer attrition.
Our objective is to become the leading provider of online customer
communication software products and services for e-Businesses. To achieve our
objective, we intend to expand our products to enter new markets, increase our
global distribution capabilities and alliances, leverage our hosted application
service and continue to emphasize customer advocacy and satisfaction.
Our customers include both pure Internet companies and traditional
companies seeking to exploit the potential of the Internet. As of June 30,
1999, more than 100 customers had licensed our software, including:
. eBay Inc. . Chase Manhattan Bank
. eToys Inc. . Ford Motor Company
. Priceline.com Incorporated . Northwest Airlines
37
<PAGE>
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, 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. In fact, for
many e-Businesses, superior customer service and the brand reputation that
results are becoming key competitive advantages.
Until recently, most customer communications 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 and traditional direct marketing initiatives. Call
centers typically served a customer service function, employed costly
technology and did not scale effectively. Traditional direct marketing is
typically expensive and not effective in terms of conversion and response
rates. 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 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 communications. 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 manage
online customer communications effectively. These consequences can include loss
of customers, increased difficulty in acquiring new customers and a
deterioration of competitive position. In addition, e-Businesses face higher
operating and information technology costs without efficient and reliable
management of online customer communications. 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 communications. While addressing these challenges,
e-Businesses must also be able to deploy a customer communications 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 information technology 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.
38
<PAGE>
The Kana Solution
Our products and services enable e-Businesses to manage their online
customer communications in order to generate additional revenue opportunities,
enhance customer relationships, and reduce operating and information technology
costs. Kana Online, our Web-based service, offers the Kana solution on a hosted
basis.
We believe our products and services provide the following business
benefits:
Increased Revenue Opportunities. Our software enables e-Businesses to
track and manage online customer communications and integrate online customer
information with 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:
. sell additional products and services, such as product upgrades, 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.
Enhanced Customer Relationships. Kana's products and services enable 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 communications
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.
Reduced Operating and Information Technology Costs. Our products and
services reduce the operating and information technology costs of e-Businesses
by increasing the efficiency and effectiveness of online customer
communications. For instance, an e-Business using our software will be able to
handle significantly greater volumes of customer e-mails, thereby increasing
efficiency and productivity, and reducing costs. Costs are further reduced as a
result of migrating customer communications from expensive telephony-based
environments to the more cost-effective channels of e-mail and the Web.
Our products use a combination of automation, business process and Bayesian
Network-based artificial intelligence 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 integrated readily 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 product while minimizing information
technology infrastructure costs.
In addition to these business benefits, our products and services differ
from those of our competitors, and as a result of the following we believe they
enable us to deliver superior value to e-Businesses:
Advanced Architecture. Our software features a scaleable, Web-based
architecture that incorporates industry standards.
39
<PAGE>
. Web-Based. Kana software is based upon a Web-based architecture that
supports multiple hardware and software platforms and browser-based
interfaces. Our software runs on multiple hardware platforms
simultaneously in order to enhance scaleability. 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 message classification technologies, e-Businesses can more
effectively categorize customer messages, automate responses and
increase message volume. Our architecture also scales to accommodate new
functionalities and applications that may be required by e-Businesses.
. Open and Standards-Based. Our software supports open industry standards
such as the Java programming language and Extensible Mark-up Language
(XML), 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
communications.
Optimize Key Business Processes. Our software is designed to optimize
workflow, information and communications associated with online customer
communications. Our software can be configured 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 if 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 communications. 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 communications 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 software 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 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. In addition, e-Businesses can use any data created or captured by Kana
software to design custom reports and decision management tools.
Advanced Message Classification. Our software enables e-Businesses to
classify and respond to customer messages rapidly and accurately with the
desired level of human intervention. We are developing advanced message
classification technologies that significantly increase the efficiency of the
message management process. e-Businesses experiencing a high volume of
40
<PAGE>
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 online
customer communication software products and services for e-Businesses. 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 software market for managing online customer
communications 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 products and services.
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
communications to create further revenue opportunities for us.
Increase Global Distribution Capabilities and Alliances. We intend to
broaden and increase our worldwide distribution capabilities by combining the
efforts of our direct sales force and our alliances with leading e-Business
service and infrastructure providers. By expanding existing alliances and
aggressively developing new ones, we can leverage their additional sales,
marketing and deployment capabilities to help establish Kana as a global
provider of e-Business products and services to manage online customer
communications.
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 products and
services to manage online customer communications. To deliver the high
performance required in the complex and rapidly changing e-Business
environment, we have designed our products to be highly scaleable, easily
customizable and readily able to integrate with existing enterprise
applications and systems. Because our 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 communications 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 deploy an
online customer communication system rapidly and efficiently 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
41
<PAGE>
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
communications 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.
Products and Services
Kana Platform and Suite of Applications
Our products are comprised of a software platform and a suite of customer
communication applications. Together the platform and the applications create
an advanced and scaleable online customer communication system for e-
Businesses. The Kana platform consists of the Kana Core Technology and Kana
Control. The suite of software applications consists of Kana Response, Kana
Direct, Kana Analysis, Kana Link, Kana Classify and Kana Web Connect. License
fees for our software are typically based on the number of users authorized to
access our software at any given time, and is also dependent upon the specific
application licensed.
[GRAPHIC APPEARS HERE]
The graphic is a three-dimensional 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 Response", "Kana Direct", "Kana Analysis", "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
capabilities, 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 our software products. 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.
42
<PAGE>
Kana Response. Kana Response is our e-mail and Web communications
management application that assists e-Businesses in responding to large numbers
of inbound customer communications. Kana Response provides rule-based
automation, intelligent workflow, message queuing, specialized user tools and a
centralized knowledge base of issues and responses. Kana Response 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.
Kana Direct. Kana Direct is our outbound e-mail application. 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 for maximum efficiency.
Kana Analysis. Kana Analysis 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 Analysis 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 our products and services
to design custom reports and decision management tools.
Kana Link. Kana Link is the part of our software 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 message classification
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
pre-release testing.
Kana Web Connect. Kana Web Connect is designed to enable e-Businesses to
manage their Web-based customer communications effectively 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
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 Web-based application service that offers the Kana
software on a hosted basis. Kana Online provides e-Businesses with access to a
customized version of our software 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
43
<PAGE>
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 software 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 software.
. Rapid Deployment. Since e-Businesses run the Kana software 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 its 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.
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
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 software offers both Web- and Windows-
based interfaces.
44
<PAGE>
Open, Standards-Based Architecture
The architecture of the Kana software 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
customized to users' preferences.
Scaleable Web-Based Architecture
Our software relies on a scaleable Web-based architecture. This
architecture separates the different system components into logical layers,
supports multiple hardware and software platforms, supports browser-based
interfaces and enables the system to run on multiple hardware platforms
simultaneously in order to enhance scaleability. The tiers are the
presentation, user interface, workflow, business object and data layers.
Web- and Windows-Based Interfaces
Our software affords flexibility by providing both Web- and Windows-based
user interfaces. 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 volume for e-Businesses with particularly
demanding speed and responsiveness requirements.
Advanced Message Classification Technologies
We have focused our research and development of advanced message
classification technologies on Bayesian Network technology. Bayesian Network
technology is a classification 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 add their knowledge selectively
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
Our software 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.
45
<PAGE>
Sales and Marketing
Sales
Our sales strategy is to pursue targeted accounts through a combination of
our direct sales force and our strategic alliances. To date, we have targeted
our sales efforts at the e-Business divisions of Global 2000 companies and at
rapidly growing Internet companies. We maintain direct sales personnel
domestically in California, Connecticut, Georgia, Illinois, Maryland,
Massachusetts, Michigan, New York, Texas and Virginia, and internationally in
the United Kingdom. The direct sales force is organized into regional teams,
which include both sales representatives and systems engineers. Our sales force
in the United Kingdom consisted of five employees at June 30, 1999, and handles
all European sales. Sales managers currently based in the United States handle
non-European international sales and report to our Vice President of
International Sales. 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 sales
alliances, such as those with MCI WorldCom, Inc. and Convergys Corporation.
Through these alliances 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 alliance activities. As of June 30, 1999, 27 of our employees were engaged
in sales activities. See "--Strategic Alliances".
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 customer communications software. 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 in order to leverage their
existing strategic relationships and resources. These alliances provide
collaborative resources to help extend the reach of our presence in the
marketplace. We intend to continue to pursue these alliances in the future. As
of June 30, 1999, eight of our employees were engaged in marketing activities.
46
<PAGE>
Strategic Alliances
Kana has three types of strategic alliances: service alliances, marketing
alliances and reseller and strategic sales alliances, that are designed to
leverage our services, software development and sales capabilities. We view
these alliances as critical to our success in providing enterprise-wide e-
Business communication software products and services.
Service Alliances. Our service alliances include system integrators, such
as Andersen Consulting and Scient Corporation, that afford us access to the
size and scope of these organizations.
Marketing Alliances. We have established a series of relationships with
marketing partners across a variety of industries, including alliance partners
that sell 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 Alliances. We complement our direct sales
force with a series of reseller and strategic sales alliances 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 alliances. Many of the companies
with which we have struck alliances also work with competing software
companies, and our success will depend on their willingness and ability to
devote sufficient resources and efforts to our products and services. Our
arrangements with these 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 these
parties will continue their relationship with us.
47
<PAGE>
Customers
Our customers range from Global 2000 companies pursuing an e-Business
strategy to rapidly growing Internet companies. As of June 30, 1999, we had
licensed our solution to more than 100 customers in a variety of industries
worldwide. The following is a list of our customers that we believe is
representative of our overall customer base:
<TABLE>
<S> <C> <C>
Internet Services Financial e-Tailing
City Index Ameritrade barnesandnoble.com
eBay CBOE CDNow
Efax Chase Manhattan Bank Cendant
Excite@Home Datek Drugstore.com
InfoBeat Dime Savings Bank eToys
iVendor Dow Jones Furniture.com
iVillage Financial Engines Insweb
Lycos Wit Capital Reel.com
Priceline.com Tickets.com
Quokka Sports Communications
The Motley Fool Other
The Street.com Ameritech
Convergys 1-800-Flowers
Travel Modus Media Drug Emporium
NTL Estee Lauder
American Airlines Sprynet (Mindspring) Ford Motor Company
Canadian Airlines Stream International General Motors
Mapquest.com TCI.Net Hewlett-Packard
Northwest Telstra Shell International
Swedish Railroads US West The Gap
Travelocity (Sabre) Williams-Sonoma
</TABLE>
No customer accounted for 10% or more of our total revenues for 1998 or the
first half of 1999. Although a substantial portion of our license and service
revenues in any given quarter has been, 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 $699,000 for
the year ended December 31, 1997 and $2.8 million for the year ended December
31, 1998. For the first half of 1999, research and development expenses totaled
$3.3 million. As of June 30, 1999, 29 of our employees were engaged in research
and development activities. Our success depends, in part, on
48
<PAGE>
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 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 products and services 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 systems will continue to be a principal source of
competition for the foreseeable future. Our competitors include a number of
companies offering one or more products for the e-Business customer
communication market, some of which compete directly with our products. For
example, our competitors include companies providing stand-alone point
solutions, including Annuncio, Inc., Brightware, Inc., eGain Communications
Corp., Mustang Software, Inc. and Responsys.com. In addition, we may compete
with companies providing customer management and communications solutions, such
as Clarify Inc., Digital Impact, Inc., Genesys Telecommunications Laboratories,
Inc., Lucent Technologies, Inc., Message Media, 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:
. A customer communication software product for e-mail and Website-based
communications, using rules and message categories to codify workflow,
including use of standard phrases, response templates, recipient lists
and routing;
. A customer communication software product for e-mail and Website-based
communications in which advanced workflow features are used in
conjunction with rules, queues and timers;
. A customer communication software product for e-mail and Website-based
communications that uses queues and timers to track, route and escalate
the priority of messages; and
49
<PAGE>
. A customer communication software product for e-mail and Website-based
communications that combines a rule-based workflow engine with a text
classification system to automate e-mail response.
These patents, if allowed, will cover a material portion of our products
and services.
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 alliance 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, some 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, non-exclusive 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 our industry segment
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.
Some of these competitors may 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 in our
professional services group, 35 in sales and marketing, 29 in research and
development, and 14 in finance, administration and operations. We added 38
employees between July 1, 1999 and August 13, 1999 and 31 new employees as a
result of the Connectify merger. 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
50
<PAGE>
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 in
order to continue to grow" and "--We may face difficulties in hiring and
retaining qualified sales personnel to sell our products and services, which
could harm our ability to increase our revenues in the future".
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 November 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.
51
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth information regarding the executive officers
and directors of Kana as of August 12, 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 G. Ansanelli...... 29 Vice President, Marketing
Ian Cavanagh............. 34 Vice President, Business Development
Alexander E. Evans....... 42 Vice President, International Sales
Gregory C. Gretsch....... 32 Vice President, Electronic Direct Marketing
Paul R. Holland.......... 38 Vice President, Worldwide Sales
Joseph D. McCarthy....... 34 Vice President, Finance and Operations
William R. Phelps........ 37 Vice President, Professional Services
Michael R. Wolfe......... 30 Vice President, Engineering
David M. Beirne.......... 35 Director
Robert W. Frick.......... 62 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 G. Ansanelli. Mr. Ansanelli joined Kana in August 1999 as Vice
President, Marketing in connection with Kana's acquisition of Connectify, Inc.
Mr. Ansanelli co-founded Connectify in May 1998 and served as its President and
Chief Executive Officer. From February 1997 to May 1998, Mr. Ansanelli managed
a consulting company where he focused primarily on strategic marketing and
business development services for internet companies. From April 1996 to
January 1997, Mr. Ansanelli served as Director of Internet Product Marketing
for Macromedia, Inc., an Internet and multimedia tools software company. From
May 1992 to March 1996, Mr. Ansanelli held various product marketing positions
at Apple Computer, Inc. Mr. Ansanelli holds a B.S. in Applied Economics with a
concentration in Marketing from the Wharton School at the University of
Pennsylvania.
52
<PAGE>
Ian Cavanagh. Mr. Cavanagh joined Kana in July 1999 as Vice President,
Business Development. Prior to joining Kana, from February 1996 to July 1999,
Mr. Cavanagh served in various management roles at Genesys Telecommunications
Laboratories, Inc., a provider of enterprise interaction management software,
most recently as Vice President, Asia Pacific and Managing Director, Canada.
From 1994 to February 1996, Mr. Cavanagh served as Senior Manager-Call Centre
Service Development with the New Brunswick Telephone Company. Prior to 1994,
Mr. Cavanagh served as Senior Manager-Service Development with Stentor Canadian
Network Management, an alliance of Canadian telecommunication service
providers. Previously, Mr. Cavanagh held several engineering positions with
NBTel. Mr. Cavanagh holds a Bachelor of Electrical Engineering from the
Technical University of Nova Scotia and Acadia University.
Alexander E. Evans. Mr. Evans joined Kana in July 1999 as Vice President,
International Sales. Prior to joining Kana, from May 1994 to July 1999, Mr.
Evans served as the Managing Director, Europe for Genesys Telecommunications
Laboratories, Inc., with responsibility for Europe, Middle East and Africa.
Prior to May 1994, Mr. Evans served in various managerial and sales capacities
at Digital Systems Ltd., a company that supplies outbound predictive dialers.
Previously, Mr. Evans served in various managerial, technical and marketing
positions at Digital Equipment Corp. Prior to then, Mr. Evans worked in various
technical and project roles involving MRP, process control and automated
manufacturing systems at Dupont, Mars & Metal Box. Mr. Evans holds a degree in
Electronics from John Moore University, England.
Gregory C. Gretsch. Mr. Gretsch joined Kana in August 1999 as Vice
President, Electronic Direct Marketing in connection with Kana's acquisition of
Connectify. Mr. Gretsch co-founded Connectify in May 1998 and served as its
Chairman of the Board of Directors and Vice President of Business Development.
In August 1996, Mr. Gretsch co-founded GiftONE, an email based direct marketing
service, and served as GiftONE's Chief Executive Officer until its sale in
October 1997. From January 1993 to August 1996, Mr. Gretsch served as the Chief
Executive Officer of Vicarious, Inc., an education and reference CD-ROM
publisher co-founded by Mr. Gretsch. From December 1988 to January 1993, Mr.
Gretsch served in several positions at Apple Computer, Inc. and its IBM joint-
venture Kaleida Labs, Inc., culminating as Manager of Evangelism for Kaleida.
Mr. Gretsch holds a B.B.A. in Management Information Systems from the
University of Georgia.
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 Atria Corporation (then 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.
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.
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
53
<PAGE>
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.
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 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.
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.
Robert W. Frick. Mr. Frick has served as a director of Kana since August
1999. Mr. Frick previously served as the Vice Chairman of the Board, Chief
Financial Officer and head of the World Banking Group for Bank of America, as
Managing Director of BankAmerica International, and as President of Bank of
America's venture capital subsidiary. He is now retired. Mr. Frick previously
served as a director of Connectify, Inc. from its founding to its acquisition
by Kana, and he currently serves on the board of directors of five private
companies. Mr. Frick holds a B.S. in Civil Engineering and an M.B.A. from
Washington University.
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.
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., an 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.
54
<PAGE>
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, 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 eight directors. Following this offering, the
board will consist of eight 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, Frick 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 any further actions the audit committee deems necessary to complete an
audit of Kana's books and accounts, as well as addressing 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 was an employee of Kana or its
subsidiaries 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.
55
<PAGE>
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 1996, Kana granted options to purchase 166,666
shares of common stock to Mr. Poler at an exercise price of $0.02 per share and
an option to purchase 53,333 shares of common stock to Dr. Holloway at an
exercise price of $0.02 per share. In 1998, Kana granted an option to purchase
26,666 shares of common stock to Dr. Holloway at an exercise price of $0.08 per
share and an option to purchase 75,033 shares of common stock to Mr. Hahn at an
exercise price of $0.08 per share.
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".
56
<PAGE>
Executive Compensation
Summary Compensation Table
The following table sets forth information concerning compensation during
the year ended December 31, 1998 for 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 that year, 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
constituted less than 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
Name and Principal Position Ended Salary Bonus Options (#)
--------------------------- ----- -------------------- ------------
<S> <C> <C> <C> <C>
Mark S. Gainey......................... 1998 $ 72,500 -- --
President and former Chief Executive
Officer
Joseph D. McCarthy(1).................. 1998 92,917 -- 106,666
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, Professional Services
Christopher M. Noble(3)................ 1998 109,374 -- 233,333
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.
57
<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 Exercise Term at Public
Underlying Percent of Total Price Offering Price
Options Options Granted Per Expiration ---------------------------
Name Granted(#) in 1998 Share Date 5% 10%
- ---- ---------- ---------------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark S. Gainey.......... -- -- -- --
Joseph D. McCarthy...... 106,666 9.2% $0.08 03/19/08 $ 1,207,479 $ 3,059,986
Paul R. Holland......... -- -- -- --
William R. Phelps....... -- -- -- --
Christopher M. Noble.... 233,333 20.2 0.08 02/12/08 2,641,357 6,693,718
</TABLE>
In 1998, Kana granted options to purchase up to a total of 1,156,366 shares
to employees, directors and consultants under Kana's 1997 Stock Option/Stock
Issuance Plan at exercise prices equal to the 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 were 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 based on the assumed initial
offering price 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 933,333 shares of common stock at an exercise
price of $0.68 per share. The option was immediately exercisable, but any
shares purchased under this option that are not vested are subject to
repurchase by Kana at the option exercise price. This repurchase right lapsed
as to 186,666 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 50,000
shares of common stock and granted to Mr. Phelps an option to purchase 23,333
shares of common stock, each at an exercise price of $0.68 per share. Each
option was immediately exercisable, 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.
58
<PAGE>
Aggregated Option Exercises in Last Fiscal Year
The following table sets forth the number of shares acquired by the Named
Executive Officers through the exercise of options in 1998 and the value
realized on those exercises. No stock appreciation rights were exercised during
1998 and no stock options or stock appreciation rights granted to the Named
Executive Officers 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................................ 106,666 $ 0
Paul R. Holland................................... 405,705 0
William R. Phelps................................. -- --
Christopher M. Noble.............................. 233,333 0
</TABLE>
In February and June 1999, Mr. Phelps exercised options to purchase a total
of 206,666 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 any value on the exercises. In June 1999, Mr. McCloskey exercised
an option to purchase 933,333 shares of common stock. The exercise price
equaled the fair market value on the date of exercise and, accordingly, Mr.
McCloskey did not realize any value on the exercise. In June 1999, Mr. McCarthy
exercised an option to purchase 50,000 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. We have authorized 4,647,618 shares of our common stock 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 including the shares
subject to outstanding options under the 1997 plan that will be transferred to
our 1999 plan plus an additional 3,512,023 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
2,000,000 shares. No participant in the 1999 plan may be granted stock options
or direct stock issuances for more than a total of 1,000,000 shares of common
stock in any calendar year.
59
<PAGE>
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 that will vest upon the attainment of
performance milestones or upon the completion of a period of service or
that 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 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 to the acquisition of
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 a 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 has any stock appreciation rights.
60
<PAGE>
Change in Control. The 1999 plan includes 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 that 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. Most of those options, however, contain an
additional vesting acceleration feature that will result in the
immediate vesting of 25% of unvested option shares if the optionee is
not offered employment by the acquiring company and 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 meeting of
stockholders 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
61
<PAGE>
share, any shares purchased under the option that 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 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 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
62
<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 August 13, 2009.
Connectify, Inc. 1998 Stock Plan
In connection with the Connectify merger, we assumed the outstanding
options issued under the Connectify 1998 Stock Plan and reserved 208,345
shares of our common stock for issuance upon exercise of these assumed
options. The terms of the Connectify options are generally similar to the
terms of options issuable under our 1997 Stock Option/Stock Issuance Plan.
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. We have initially reserved 490,000 shares of our common
stock. 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 of December in the prior year. In no event will any such
annual increase exceed 333,333 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. The plan administrator may
increase or decrease the per-participant and total participant amounts at its
discretion as of the start of any new offering period under the plan.
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
63
<PAGE>
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.
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,
subject to any required stockholder approval.
Employment Arrangements, Termination of Employment Arrangements
and Change in Control Arrangements
In February 1997, Dr. Holloway, one of Kana's directors, exercised an
option to purchase 53,333 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, if
Kana is acquired 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.
Also in February 1997, Mr. Poler, one of Kana's directors, exercised
options to purchase a total of 166,666 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, if Kana is acquired 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 1997, Kana sold to Mr. Gainey, Kana's co-founder, President and
Chairman of the Board, 2,500,000 shares of common stock at a purchase price of
$0.02 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 if Kana is acquired by merger or asset sale
and if Mr. Gainey is not offered employment or 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 405,705 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, if Kana is acquired by merger or asset sale and
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 106,666 shares of common stock and entered into
a stock purchase agreement for the
64
<PAGE>
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, if Kana is acquired by merger or asset sale and 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.
In July 1998, Mr. Hahn, one of Kana's directors, exercised an option to
purchase 75,033 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, if Kana is
acquired 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.
Also in July 1998, Dr. Holloway exercised an option to purchase 26,666
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, if Kana is acquired by merger or asset sale and 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 206,666 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, if Kana is
acquired by merger or asset sale and 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, Kana entered into an employment arrangement with Mr.
McCloskey, Kana's Chief Executive Officer. In connection with this arrangement,
Kana granted Mr. McCloskey an option to purchase 933,333 shares of common
stock, which Mr. McCloskey exercised in June 1999. 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 upon change of control under the following
circumstances:
. 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;
. 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 31,112 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
65
<PAGE>
. 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.
Also in June 1999, Mr. McCarthy exercised an option to purchase 50,000
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, if Kana is acquired by merger or asset sale and 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.
Generally, Kana's option grants to employees provide that if Kana is
acquired by merger or asset sale and the employee is not offered employment by
the successor entity, Kana's right to repurchase 25% of any unvested shares
will automatically lapse.
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; or
. any transaction from which the director derived an improper personal
benefit.
Kana's bylaws provide that Kana must 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 executive
officers. The indemnification agreements contain provisions that require Kana,
among other things, to indemnify its directors and executive officers against
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.
66
<PAGE>
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 2,500,000 shares of common
stock for a total consideration of $375. In April 1997, Kana repurchased
those shares for $37,500 and sold to Mr. Gainey 2,500,000 shares of
common stock for total consideration of $37,500.
. In July 1996, Kana sold to Michael T. Horvath 833,333 shares of common
stock for a total consideration of $125. In April 1997, Kana repurchased
those shares for $6,250 and sold to Mr. Horvath 416,666 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 3,948,718 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 4,969,136 shares of Series B preferred
stock for total consideration of $4,025,000.
. In June 1998, Kana sold to Eric A. Hahn 112,549 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 3,414,098 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 838,472 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.............. 3,020,192 1,310,864 620,264 164,405 5,115,725
Entities affiliated with
Benchmark Capital...... 0 3,455,802 675,477 180,846 4,312,125
Entities affiliated with
Amerindo Investment
Advisors............... 0 0 1,174,744 246,610 1,421,354
Eric A. Hahn............ 0 112,549 29,369 0 141,918
</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 June 1998, in connection with option exercises, Kana issued 166,666
shares of common stock to Mr. Poler, one of Kana's directors, for an aggregate
exercise price of $2,500.
67
<PAGE>
Loans to and Other Arrangements with Officers and Directors
In connection with the option exercises described under "--Employment
Arrangements, Termination of Employment Arrangements and Change of Control
Arrangements," the following officers and directors delivered five-year full
recourse promissory notes, bearing interest at an annual rate of 5.7%, in
amounts and with the balances indicated:
<TABLE>
<CAPTION>
Original Amount of Amount Outstanding
Officer or Director Promissory Note at June 30, 1999
- ------------------- ------------------ ------------------
<S> <C> <C>
Michael J. McCloskey...................... $630,000 $630,000
Paul R. Holland........................... 30,428 32,452
Joseph D. McCarthy........................ 41,750 42,206
William R. Phelps......................... 79,000 80,202
Charles A. Holloway....................... 2,000 2,105
</TABLE>
Kana has entered into an employment arrangement with its Chief Executive
Officer. See "Management--Employment Arrangements, Termination of Employment
Arrangements and Change in Control Arrangements".
Kana has granted options to its executive officers and directors. See
"Management--Executive Compensation" and "--Director Compensation".
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".
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 2,500,000 shares of common stock at
a purchase price of $0.0002 per share. In April 1997, Kana repurchased those
shares and sold to Mr. Gainey 2,500,000 shares of common stock at a purchase
price of $0.02 per share. In July 1996, Kana sold to Mr. Horvath 833,333 shares
of common stock at a purchase price of $0.0002 per share. In April 1997, Kana
repurchased those shares and sold to Mr. Horvath 416,666 shares of common stock
at a purchase price of $0.02 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
416,666 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.
68
<PAGE>
RECENT DEVELOPMENTS
The Connectify Merger
On August 13, 1999, a new subsidiary of ours merged with Connectify so that
Connectify became our wholly owned subsidiary. The following description sets
forth the material terms of the merger agreement, the merger and related
transactions. The merger agreement and related agreements are included as
exhibits to the registration statement of which this prospectus forms a part.
We will account for the merger using the pooling method of accounting. The
merger is intended to qualify as a tax-free reorganization under Section 368 of
the Internal Revenue Code. At the closing of the merger, we issued 3,491,282
shares of our common stock in exchange for the 11,004,906 outstanding shares of
Connectify capital stock. We also reserved 208,345 shares of our common stock
for issuance upon exercise of the 653,394 Connectify options and warrants that
we assumed. The exchange ratio is 0.3172478 shares of our common stock for each
share of Connectify capital stock. Upon completion of the offering, the shares
of our common stock issued and reserved for issuance in connection with the
merger will constitute approximately 15% of our common stock.
Each Connectify option we assume will continue to have, and be subject to,
the same terms and conditions as set forth in the incentive stock plan of
Connectify and the option agreements governing the option immediately prior to
the merger, except that the option will be exercisable for shares of our common
stock and the number of shares subject to the option and the exercise price
will be adjusted to reflect the exchange ratio in the merger. The Connectify
options that we assumed generally vest at the rate of 1/4th of the total number
of shares subject to the options 12 months after the date of grant, and 1/48th
of the total number of shares each month thereafter.
Under the merger agreement, Connectify made representations and warranties
regarding matters including its corporate good standing, capital structure,
intellectual property ownership, pending litigation, assets and liabilities,
employee relations, material contracts, tax good standing, compliance with laws
and regulations and customers. We also made representations and warranties to
Connectify regarding matters including our corporate good standing, our
authority to enter into the merger, the disclosures set forth in the
registration statement of which this prospectus forms a part, and our
compliance with laws and regulations.
Connectify has agreed to indemnify us and each of our officers, directors
and affiliates with respect to breaches of any representations, warranties,
covenants or other agreements made by Connectify in the merger agreement. These
indemnification obligations are subject to minimum threshold limitations
specified in the merger agreement. To secure these indemnification obligations,
306,524 of the shares of our common stock issued to Connectify stockholders are
held in escrow until the date that is the earlier of
. the one year anniversary of the closing of the merger;
. six months following the closing of this offering or
. the final date of the report issued by Kana's auditors for the year
ended December 31, 1999.
In connection with the merger, one of Connectify's directors, Mr. Robert
Frick, was appointed to our board of directors.
69
<PAGE>
Connectify has agreed that its stockholders and optionholders will enter
into lock-up agreements similar to those entered into by our directors,
officers and stockholders. Up to 3,491,282 shares of our common stock to be
issued in exchange for outstanding shares of Connectify capital stock will be
eligible for sale in the public market beginning in August 2000, in accordance
with the restrictions of Rule 144 under the Securities Act. In addition, we
intend to register on Form S-8 the shares of Common Stock issuable upon options
assumed by us in the merger.
In connection with the Connectify merger, each of Mr. Ansanelli, our Vice
President, Marketing, and Mr. Gretsch, our Vice President, Electronic Direct
Marketing, entered into a non-competition agreement, under which he agreed,
until August 2001, not to
. compete with our or Connectify's business;
. solicit any of our or Connectify's employees;
. own any shares in an entity that competes with us or Connectify; or
. permit his name to be used in connection with any entity that competes
with us or Connectify.
In addition, we granted to the former Connectify stockholders registration
rights similar to those held by our current preferred stockholders. See
"Description of Capital Stock--Registration Rights".
Recent Option Grants
In July 1999, we granted under our 1997 Stock Option/Stock Issuance Plan
options to purchase an aggregate of 864,100 shares of our common stock at an
exercise price of $4.76 per share. We granted most of these options to new
employees. The options granted in July 1999 have been considered to be
compensatory. Deferred compensation associated with these options
is approximately $3.0 million. This amount will be amortized to expense on a
straight-line basis over the four-year vesting periods of the applicable
options through the fiscal year ending December 31, 2003.
70
<PAGE>
PRINCIPAL STOCKHOLDERS
The table below sets forth information regarding the beneficial ownership
of Kana's common stock as of July 30, 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
24,142,328 shares of common stock outstanding as of July 30, 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 30, 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
Name and Address of Number of Shares ------------------------------------
Beneficial Owner Beneficially Owned Prior to Offering After the Offering
------------------- ------------------ ----------------- ------------------
<S> <C> <C> <C>
Entities affiliated with
Draper Fisher
Jurvetson (1).......... 5,115,725 21.2% 17.9%
Entities affiliated with
Benchmark Capital
Partners L.P. (2)...... 4,312,125 17.9 15.1
Entities affiliated with
Amerindo Investment
Advisors, Inc. (3)..... 1,421,354 5.9 4.9
Mark S. Gainey (4)...... 2,376,000 9.8 8.3
Michael J. McCloskey
(5).................... 933,333 3.9 3.3
Paul R. Holland (6)..... 405,705 1.7 1.4
William R. Phelps (7)... 206,666 * *
Joseph D. McCarthy (8).. 156,666 * *
Christopher M. Noble.... 63,194 * *
Steven T. Jurvetson
(1).................... 5,115,725 21.2 17.9
David M. Beirne (2)..... 4,312,125 17.9 15.1
Eric A. Hahn (9)........ 216,949 * *
Ariel Poler (10)........ 160,666 * *
Dr. Charles A. Holloway
(11)................... 80,000 * *
Robert W. Frick (6)..... 40,185 * *
All directors and
executive officers as a
group (16 persons)..... 16,293,446 67.5 57.1
</TABLE>
- --------
* Less than one percent.
(1) Principal address is 400 Seaport Court, Suite 250, Redwood City, CA 94063.
Includes 3,740,832 shares of common stock held by Draper Fisher Associates
Fund IV, L.P. and 281,569 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 1,093,328 shares of common stock
held by the Draper 1999 Grandchildren's Trust.
71
<PAGE>
(2) Principal address is 2480 Sand Hill Road, Suite 200, Menlo Park, CA 94025.
Represents 3,783,347 shares of common stock held by Benchmark Capital
Partners, L.P., and 528,779 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 1,102,744 shares of common stock held by ATGF II, a Panamanian
corporation, 121,666 shares of common stock held by Emeric McDonald,
87,877 shares of common stock held by the Litton Master Trust, 50,000
shares of common stock held by Pivotal Partners L.P., 33,333 shares of
common stock held by the Ralph H. Cechettini 1995 Trust, 8,333 shares of
common stock held by Mathew D. Fitzmaurice, 7,333 shares of common stock
held by Anthony Ciulla, 6,666 shares of common stock held by James
Stableford, 3,000 shares of common stock held by Joaquin Garcia-Larrieu,
233 shares of common stock held by William Slattery and 166 shares of
common stock held by Daniel Chapey.
(4) Represents shares of common stock held by the Mark and Elisabeth Gainey
Family Trust. Includes 468,750 shares of common stock subject to Kana's
right of repurchase. This repurchase right lapses with respect to 52,083
shares per month.
(5) Includes 731,112 shares of common stock subject to Kana's right of
repurchase. This repurchase right lapses with respect to 15,554 shares per
month.
(6) Includes 13,333 shares of common stock held by The Paul Holland Grantor
Retained Annuity Trust, 13,333 shares of common stock held by The Linda
Yates Holland Grantor Retained Annuity Trust, 26,666 shares of common
stock held by the Yates/Holland 1999 Irrevocable Trust, 285,705 shares of
common stock held by The Yates/Holland Family Trust and 66,666 shares of
common stock held by Paul Holland and Linda Yates as community property.
Includes 228,210 shares of common stock subject to Kana's right of
repurchase. This repurchase right lapses with respect to 8,451 shares per
month.
(7) Includes 13,333 shares of common stock held by The William Phelps Grantor
Retained Annuity Trust, 13,333 shares of common stock held by The Margaret
Phelps Grantor Retained Annuity Trust and 180,000 shares of common stock
held by The Phelps Family Trust. Includes 156,945 shares of common stock
subject to Kana's right of repurchase. This repurchase right lapses with
respect to 7,638 shares per month. Also includes 23,333 shares of common
stock subject to Kana's right of repurchase, which lapses with respect to
5,833 shares in June 2000 and 486 shares per month thereafter.
(8) Includes 16,666 shares of common stock held by The Joseph McCarthy Grantor
Retained Annuity Trust, 16,666 shares of common stock held by Siobhan
Lawlor Grantor Retained Annuity Trust. Includes 66,667 shares of common
stock subject to Kana's right of repurchase. This repurchase right lapses
with respect to 2,222 shares per month. Also includes 50,000 shares of
common stock subject to Kana's right of repurchase, which lapses with
respect to 12,500 shares in June 2000 and 1,042 shares per month
thereafter.
(9) Includes 50,021 shares of common stock subject to Kana's right of
repurchase. This repurchase right lapses with respect to 1,564 shares per
month.
(10) Includes 18,518 shares of common stock subject to Kana's right of
repurchase. This repurchase right lapses with respect to 4,629 shares per
month.
(11) Includes 17,778 shares of common stock subject to Kana's right of
repurchase. This repurchase right lapses with respect to 2,222 shares per
month.
72
<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 the material terms of Kana's 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 28,542,328 shares
of common stock will be issued and outstanding, and no shares of preferred
stock will be issued and outstanding.
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, that 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 sold in 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 that 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.
Warrants
In August 1999, in connection with the Connectify merger, we assumed
warrants to purchase a total of 24,157 shares of our common stock at an
exercise price of $0.80 per share. These warrants expire in August 2005. They
are exercisable for shares of common stock on a net exercise basis without
tender of cash.
73
<PAGE>
Registration Rights
Upon completion of the offering, the holders of 19,759,063 shares of common
stock will be entitled to rights with respect to the registration of those
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, 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.
Anti-takeover 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 meeting of stockholders, and that the
Chairman of the Board has the authority to adjourn any meeting of stockholders.
The bylaws also require a supermajority vote of members of the board of
directors and/or stockholders to amend specified 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
74
<PAGE>
. 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.
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; and
. 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.
75
<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 28,062,328 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 24,142,328 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 Rule 144, 144(k) or 701
promulgated under the Securities Act, which rules are summarized below. Subject
to the lock-up agreements described below and the provisions of Rules 144,
144(k) and 701, additional shares will be available for sale in the public
market as follows:
<TABLE>
<CAPTION>
Number of
Shares Date
--------- ----
<C> <S>
3,300,000 After the date of this prospectus, freely tradable shares sold in
this offering and shares saleable under Rule 144(k) that are not
subject to the 180-day lock-up
15,429,975 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)
4,382,599 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)
4,329,755 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 285,424 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 the sale is filed. In addition, a person
who is not deemed to have been an affiliate at any time during the 90 days
preceding a sale and who has beneficially owned the shares proposed to be sold
for at least two years would be entitled to sell these shares under Rule 144(k)
without regard to the requirements described above. To the extent that shares
were acquired from one of 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.
76
<PAGE>
Stock Options
As of July 31, 1999, options to purchase a total of 862,300 shares of
common stock were outstanding, all of which were currently exercisable. In
August 1999, we assumed options to purchase 208,345 shares of common stock in
connection with the Connectify merger. Kana intends to file a Form S-8
registration statement under the Securities Act to register all shares of
common stock subject to outstanding options and all shares of common stock
issuable under its 1999 Stock Incentive Plan and its 1999 Employee Stock
Purchase Plan. Accordingly, shares of common stock issued under these plans
will be eligible for sale in the public markets, subject to vesting
restrictions and the lock-up agreement described below. See "Management--
Benefit Plans".
Lock-up Agreements
Kana, each of its officers and directors 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, subject to specified blackout periods, holders of
19,759,063 shares of Kana's outstanding common stock will have two 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".
77
<PAGE>
LEGAL MATTERS
The validity of the common stock offered will be passed upon for Kana by
Brobeck, Phleger & Harrison LLP, Palo Alto, California. Attorneys of the firm
Brobeck, Phleger & Harrison LLP beneficially own an aggregate of 18,666 shares
of Kana's common stock. Specified 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 was it 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.
The financial statements of Connectify, Inc. as of December 31, 1998 and
for the period from May 14, 1998 (date of inception) to December 31, 1998 have
been included in this prospectus and in the registration statement in reliance
upon the report of PricewaterhouseCoopers LLP, independent auditors, appearing
elsewhere in this prospectus, and upon the authority of said firm as experts in
accounting and auditing.
The supplemental consolidated financial statements of Kana Communications,
Inc. and subsidiaries 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.
78
<PAGE>
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. For
further information with respect to Kana and the common stock we are offering
under this prospectus you should refer to the registration statement and its
exhibits. Statements contained in this prospectus as to the contents of any
contract, agreement or other document to which reference is made 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.
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.
79
<PAGE>
INDEX TO FINANCIAL STATEMENTS
KANA COMMUNICATIONS, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
Page
----
<S> <C>
Historical Consolidated Financial Statements:
Form of Independent Auditors' Report.................................... F-2
Consolidated Balance Sheets............................................. F-3
Consolidated Statements of Operations and 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
CONNECTIFY, INC.
Report of Independent Accountants......................................... F-18
Balance Sheet............................................................. F-19
Statement of Operations................................................... F-20
Statement of Stockholders' Equity......................................... F-21
Statement of Cash Flows................................................... F-22
Notes to Financial Statements............................................. F-23
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
Supplemental Consolidated Financial Statements:
Form of Independent Auditors' Report.................................... F-34
Supplemental Consolidated Balance Sheets................................ F-35
Supplemental Consolidated Statements of Operations and Comprehensive
Loss................................................................... F-36
Supplemental Consolidated Statements of Stockholders' Equity............ F-37
Supplemental Consolidated Statements of Cash Flows...................... F-38
Notes to Supplemental Consolidated Financial Statements................. F-39
</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 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 August , 1999
F-2
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
---------------- June 30,
1997 1998 1999
------- ------- -----------
(Unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents...................... $ 3,303 $ 9,792 $ 4,632
Short-term investments......................... 210 160 1,560
Accounts receivable............................ -- 817 1,278
Prepaid expenses and other current assets...... 37 96 646
------- ------- -------
Total current assets......................... 3,550 10,865 8,116
Property and equipment, net...................... 261 943 1,697
Other assets..................................... 13 161 154
------- ------- -------
Total assets................................. $ 3,824 $11,969 $ 9,967
======= ======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of notes payable............... $ 34 $ 360 $ 341
Accounts payable............................... 130 253 938
Accrued payroll and related expenses........... 37 285 952
Other accrued liabilities...................... 68 263 588
Deferred revenue............................... -- 410 968
------- ------- -------
Total current liabilities.................... 269 1,571 3,787
Notes payable, less current portion.............. 51 360 538
------- ------- -------
Total liabilities............................ 320 1,931 4,325
------- ------- -------
Commitments
Stockholders' equity:
Convertible preferred stock, $0.001 par value;
29,000,000, 50,000,000, and 50,000,000 shares
authorized; 8,917,855, 12,512,641, and
12,512,641 shares issued and outstanding;
aggregate liquidation preference of $4,795,
$16,524, and $16,524.......................... 9 13 13
Common stock, $0.001 par value; 40,000,000,
60,000,000, and 60,000,000 shares authorized;
2,970,667, 5,525,405, and 6,206,599 shares
issued and outstanding ....................... 3 6 6
Additional paid-in capital..................... 5,659 19,343 33,389
Deferred stock-based compensation.............. (784) (1,444) (12,225)
Notes receivable from stockholders............. -- (155) (557)
Accumulated other comprehensive losses......... -- (5) (37)
Accumulated deficit............................ (1,383) (7,720) (14,947)
------- ------- -------
Total stockholders' equity................... 3,504 10,038 5,642
------- ------- -------
Total liabilities and stockholders' equity... $ 3,824 $11,969 $ 9,967
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, June 30,
---------------- ------------------
1997 1998 1998 1999
------- ------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
License................................ $ -- $ 1,793 $ 615 $ 2,795
Service................................ -- 256 41 783
------- ------- -------- --------
Total revenues....................... -- 2,049 656 3,578
------- ------- -------- --------
Cost of revenues:
License................................ -- 54 16 72
Service................................ -- 519 57 1,141
------- ------- -------- --------
Total cost of revenues............... -- 573 73 1,213
------- ------- -------- --------
Gross profit......................... -- 1,476 583 2,365
------- ------- -------- --------
Operating expenses:
Sales and marketing.................... 366 3,796 1,398 4,407
Research and development............... 699 2,254 865 1,836
General and administrative............. 257 721 282 596
Amortization of deferred stock-based
compensation.......................... 113 1,230 430 2,826
------- ------- -------- --------
Total operating expenses............. 1,435 8,001 2,975 9,665
------- ------- -------- --------
Operating loss....................... (1,435) (6,525) (2,392) (7,300)
Other income, net........................ 52 188 41 73
------- ------- -------- --------
Net loss............................. (1,383) (6,337) (2,351) (7,227)
Other comprehensive loss................. -- (5) -- (32)
------- ------- -------- --------
Comprehensive loss................... $(1,383) $(6,342) $ (2,351) $ (7,259)
======= ======= ======== ========
Net loss per share:
Basic and diluted...................... $ (0.92) $ (3.72) $ (1.72) $ (2.53)
======= ======= ======== ========
Weighted-average shares used in
computation........................... 1,497 1,704 1,367 2,855
======= ======= ======== ========
</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........ -- $-- 3,333,333 $ 3 $ (2) $ -- $ -- $-- $ -- $ 1
Issuance of
common stock
upon exercise of
stock options... -- -- 53,333 -- -- -- -- -- -- --
Repurchase of
founders' common
stock, net...... -- (416,666) -- -- -- -- -- -- --
Issuance of
Series A
convertible
preferred stock,
net............. 3,948,719 4 -- -- 756 -- -- -- -- 760
Issuance of
shares of common
stock in
exchange for
services ....... -- 667 -- 7 -- -- -- -- 7
Issuance of
Series B
convertible
preferred stock,
net............. 4,969,136 5 -- -- 4,008 -- -- -- -- 4,013
Deferred stock-
based
compensation.... -- -- -- -- 890 (890) -- -- -- --
Amortization of
deferred stock-
based
compensation.... -- -- -- -- -- 106 -- -- -- 106
Net loss........ -- -- -- -- -- -- -- -- (1,383) (1,383)
---------- ---- --------- --- ------- -------- ----- ---- -------- -------
Balances,
December 31,
1997............ 8,917,855 9 2,970,667 3 5,659 (784) -- -- (1,383) 3,504
Issuance of
common stock
upon exercise of
stock options,
net of
repurchases..... -- -- 2,554,738 3 170 -- (155) -- -- 18
Issuance of
Series A
convertible
preferred stock
upon exercise of
warrant......... 68,139 -- -- -- -- -- -- -- -- --
Issuance of
Series B
convertible
preferred stock,
net............. 112,549 1 -- -- 90 -- -- -- -- 91
Issuance of
Series C
convertible
preferred stock,
net............. 3,414,098 3 -- -- 11,534 -- -- -- -- 11,537
Deferred stock-
based
compensation.... -- -- -- -- 1,890 (1,890) -- -- -- --
Amortization of
deferred stock-
based
compensation.... -- -- -- -- -- 1,230 -- -- -- 1,230
Other
comprehensive
loss............ -- -- -- -- -- -- -- (5) -- (5)
Net loss........ -- -- -- -- -- -- -- -- (6,337) (6,337)
---------- ---- --------- --- ------- -------- ----- ---- -------- -------
Balances,
December 31,
1998............ 12,512,641 13 5,525,405 6 19,343 (1,444) (155) (5) (7,720) 10,038
Issuance of
common stock
upon exercise of
stock options,
net of
repurchases
(unaudited)..... -- -- 681,194 -- 439 -- (402) -- 37
Deferred stock-
based
compensation
(unaudited)..... -- -- -- -- 13,607 (13,607) -- -- -- --
Amortization of
deferred stock-
based
compensation
(unaudited)..... -- -- -- -- -- 2,826 -- -- -- 2,826
Other
comprehensive
loss
(unaudited)..... -- -- -- -- -- -- (32) (32)
Net loss
(unaudited)..... -- -- -- -- -- -- -- -- (7,227) (7,227)
---------- ---- --------- --- ------- -------- ----- ---- -------- -------
Balances, June
30, 1999
(unaudited)..... 12,512,641 $ 13 6,206,599 $ 6 $33,389 $(12,225) $(557) $(37) $(14,947) $ 5,642
========== ==== ========= === ======= ======== ===== ==== ======== =======
</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 Six Months Ended
December 31, June 30,
---------------- ------------------
1997 1998 1998 1999
------- ------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................ $(1,383) $(6,337) $ (2,352) $ (7,227)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization.......... 27 222 78 259
Loss on disposal of equipment.......... -- -- -- 105
Amortization of deferred stock-based
compensation.......................... 113 1,230 430 2,825
Changes in operating assets and
liabilities:
Accounts receivable................... -- (817) (474) (462)
Prepaid expenses and other assets..... (50) (207) (236) (543)
Accounts payable and accrued
liabilities.......................... 235 571 249 1,678
Deferred revenue...................... -- 410 108 557
------- ------- -------- --------
Net cash used in operating
activities........................... (1,058) (4,928) (2,197) (2,806)
------- ------- -------- --------
Cash flows from investing activities:
Property and equipment purchases........ (288) (904) (291) (1,118)
(Purchases) sales of short-term
investments............................ (210) 50 -- (1,400)
------- ------- -------- --------
Net cash used in investing
activities........................... (498) (854) (291) (2,518)
------- ------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock.. 1 13 8 37
Proceeds from issuance of convertible
preferred stock, net................... 4,603 11,628 -- --
Proceeds from convertible notes
payable................................ 170 -- -- --
Proceeds from notes payable............. 85 720 437 685
Payments on notes payable............... -- (85) (3) (526)
------- ------- -------- --------
Net cash provided by financing
activities........................... 4,859 12,276 442 196
------- ------- -------- --------
Effect of exchange rate changes on cash
and cash equivalents.................... -- (5) -- (32)
------- ------- -------- --------
Net change in cash and cash equivalents.. 3,303 6,489 (2,046) (5,160)
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 $ 1,257 $ 4,632
======= ======= ======== ========
Supplemental disclosure of cash flow
information:
Cash paid during period for interest.... $ 3 $ 36 $ 13 $ 27
======= ======= ======== ========
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 $ 107 $ 402
======= ======= ======== ========
Grant of options to purchase common
stock with an exercise price below
fair value............................ $ 890 $ 1,890 $ 1,060 $13,607
======= ======= ======== ========
</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 June 30, 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 or Kana) were
incorporated on July 11, 1996, but did not commence operations until 1997. The
Company develops, markets and supports customer communications software
products and services for e-Business. 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 June 30, 1999 and for the six months ended June 30, 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 June 30, 1999, and the results of its operations
and its cash flows for the three months ended June 30, 1998 and 1999. Results
for the six months ended June 30, 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 June 30, 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 June 30, 1999, cash equivalents consisted of
auction-rate securities and money market funds in the amounts of $3,213,000,
$9,647,000, and $3,979,000, 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.
(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.
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
F-8
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)
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.
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 June 30, 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 six months
ended June 30, 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, excluding common stock subject to
repurchase. 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 and common
stock subject to repurchase 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 Six Months Ended
December 31, June 30,
--------------------- ---------------------
1997 1998 1998 1999
---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Stock options and warrants........ 1,788,316 150,200 335,567 1,113,200
Common stock subject to
repurchase....................... 1,822,915 3,139,437 3,392,704 3,272,940
Convertible preferred stock ...... 8,917,855 12,512,641 9,098,543 12,512,641
---------- ---------- ---------- ----------
12,529,086 15,802,278 12,826,814 16,898,781
========== ========== ========== ==========
</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 and 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 June 30, 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 total revenues
for the year ended December 31, 1998 and the six months ended June 30, 1999. In
the six months ended June 30, 1998, two 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
Instruments 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 measure 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, 2001.
In December 1998, the American Institute of Certified Public Accountants
(AICPA) 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.
In April 1998, the AICPA issued SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use, which provides
guidance for determining whether computer software is internal-use software and
for accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold. SOP 98-1, which is
effective for the year ended December 31, 1999, also provides guidance on
capitalization of the costs incurred for computer software developed or
obtained for internal use. The adoption of SOP 98-1 did not have a material
effect on the consolidated financial statements.
On April 3, 1998, the Accounting Standards Executive Committee of the AICPA
issued SOP No. 98-5, Reporting on the Costs of Start-Up Activities, which
provides guidance on the financial reporting of start-up costs. SOP 98-5
requires costs of start-up activities and organization costs to be expensed as
incurred. The Company adopted SOP 98-5 on January 1, 1999. As the Company had
not capitalized such costs, the adoption of SOP 98-5 did not have an impact on
the consolidated financial statements of the Company.
F-11
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)
(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
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.
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
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. As of
June 30, 1999, the borrowings under this line of credit were repaid in full.
On May 28, 1999, the Company entered into two term loan obligations
totaling $685,042. The loans bear interest at a fixed rate of approximately
14.5% and mature in June 2002. The aggregate principal payments due under these
obligations are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1999............................................................. $ 35,599
2000............................................................. 232,366
2001............................................................. 268,461
2002............................................................. 148,616
--------
$685,042
========
</TABLE>
In June 1999, the Company entered into a line of credit secured by all
assets of the Company, bearing interest at the bank's prime rate (7.75% as of
June 30, 1999) and expiring in March 2000. As of June 30, 1999, borrowings
under the line of credit amounted to approximately $194,000.
F-12
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)
(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............................... 4,016,858 $0.02 $0.20
Series B............................... 5,081,685 0.06 0.81
Series C............................... 3,414,098 0.27 3.41
----------
12,512,641
==========
</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 89,744 shares of Series A
preferred stock with an exercise price of $0.20 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 43,209 shares of Series A perferred stock back to
the Company.
(b) Common Stock
The Company issued to the Company's founders 3,333,333 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, 1,033,333 shares were
subject to repurchase. During 1997, the Company repurchased a net of 416,666
shares from one founder at the original exercise price of $0.0002 per share.
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 2,045,691 shares subject to repurchase. These options were
exercised at prices ranging from $0.02 to $0.35 with a weighted-average
exercise price of $0.06 per share. The options exercised through December 31,
1998 have a weighted-average fair value of $1.05 per share.
F-13
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)
(c) Stock Option Plan
The Company's 1997 Stock Option/Stock Issuance 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 1/36th of
the remainder each month thereafter.
A summary of stock option activity follows:
<TABLE>
<CAPTION>
Years Ended
-------------------------------------------- Six Months Ended
1997 1998 June 30, 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.............. -- $ -- 1,698,572 $0.05 150,200 $0.09
Options granted........ 1,751,905 0.05 1,156,367 0.11 1,855,000 0.63
Options exercised...... (53,333) 0.02 (2,594,739) 0.08 (878,667) 0.53
Options canceled....... -- -- (110,000) 0.08 (13,333) 0.35
--------- ---------- ---------
Outstanding at end of
period................. 1,698,572 0.05 150,200 0.09 1,113,200 0.65
========= ========== =========
Shares available for
future grant........... 1,238,761 799,063 488,201
========= ========== =========
</TABLE>
At December 31, 1998, the range of exercise prices and the weighted-average
remaining contractual life of outstanding options was $0.03 to $0.35 and 9.18
years, respectively.
At December 31, 1997 and 1998, the number of vested shares under options
was 213,165 and 113,267, respectively, and the weighted-average exercise price
of those options was $0.05 and $0.08, 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 options issued with exercise prices at less
than fair value at date of grant. With respect to the stock options granted
from inception through June 30, 1999, the Company recorded deferred stock-based
compensation of approximately $16,387,000 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 $0.51 and $1.83 per share, respectively.
F-14
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)
(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. On
June 18, 1999, the Company entered into a lease agreement for a new facility.
Payments under this lease will begin in November 1999. In connection with this
lease, the Company entered into a letter of credit in July 1999 for $1,400,000,
expiring in July 2000. The letter of credit is secured by a certificate of
deposit.
Future minimum lease payments under noncancelable operating leases,
including the lease signed in June 1999, and subleases, as of December 31,
1998, were as follows (in thousands):
<TABLE>
<CAPTION>
Year ending Operating
December 31, Leases Subleases
------------ --------- ---------
<S> <C> <C>
1999................................................... $ 1,111 $244
2000................................................... 2,723 209
2001................................................... 2,815 218
2002................................................... 2,910 227
2003................................................... 2,464 --
Thereafter............................................. 6,418 --
------- ----
$18,441 $898
======= ====
</TABLE>
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.
(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>
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>
F-15
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)
Management has established a full valuation allowance against its gross
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.
(b) Reincorporation
On July 7, 1999, the Company's Board of Directors authorized the
reincorporation of the Company into the State of Delaware and a two for three
reverse stock split of the Company's common and preferred stock. 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 and reverse stock split.
(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
F-16
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)
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, by an amount 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 838,472 shares of Series D Convertible
Preferred Stock at a purchase price of $12.17 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 $0.97 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 $12.17 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.
(e) Business Combination
On August 13, 1999, the Company issued approximately 3,491,283 shares of
its common stock to the stockholders of Connectify, Inc. (Connectify) in
exchange for all of the outstanding capital stock of Connectify. Prior to the
consummation of the merger, 5,095,819 shares of preferred stock of the Company
were converted into an equal number of shares of common stock. As a result of
the conversion, the Company created a controlling class of common stock. The
merger will be accounted for as a pooling of interests, and, accordingly, the
Company's historical consolidated financial statements presented in future
periods will be restated to include the results of operations, financial
position, and cash flows of Connectify. No significant adjustments will be
required to conform the accounting policies of the Company and Connectify.
In connection with the merger with Connectify, the Company will record a
nonrecurring charge for merger integration costs ranging from $1,000,000 to
$2,000,000, consisting primarily of transaction fees for attorneys,
accountants, and financial printing, employee severance benefits, and facility
related costs during the third quarter of 1999.
F-17
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Stockholders of
Connectify, Inc. (formerly
Connectify.com, Inc.)
In our opinion, the accompanying balance sheet and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Connectify, Inc. (formerly
Connectify.com, Inc.) (a company in the development stage) at December 31,
1998, and the results of its operations and its cash flows for the period from
May 14, 1998 (date of inception) to December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
May 19, 1999 except for Note 8 for
which the date is August 13, 1999.
F-18
<PAGE>
CONNECTIFY, INC.
(formerly Connectify.com, Inc.)
(a company in the development stage)
BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ -----------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................... $ 3,163 $ 1,166
Short-term investments.............................. -- 691
Accounts receivable................................. -- 131
Prepaid expenses and other current assets........... 45 89
------- -------
Total current assets.............................. 3,208 2,077
Property and equipment, net........................... 98 249
Other assets.......................................... -- 32
------- -------
Total assets...................................... $ 3,306 $ 2,358
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of borrowings under line of credit.. $ -- $ 900
Convertible note payable............................ -- 50
Accounts payable.................................... 78 201
Accrued liabilities................................. 138 243
Deferred revenue.................................... 40 165
Capital lease obligations, current.................. 7 7
------- -------
Total current liabilities......................... 263 1,566
Other liabilities:
Borrowings under line of credit, less current
portion............................................ -- 100
Capital lease obligations, less current portion..... 15 11
------- -------
Total liabilities................................. 278 1,677
------- -------
Commitments (Note 4)
Stockholders' equity:
Convertible preferred stock, $0.001 par value
Authorized: 8,200,000 shares
Issued and outstanding: 7,614,696 shares at
December 31, 1998
and June 30, 1999 (unaudited)..................... 8 8
(Liquidation value: $4,000)
Common stock, $0.001 par value
Authorized: 25,000,000 shares
Issued and outstanding: 8,157,634 shares at
December 31, 1998
and 8,875,665 at June 30, 1999 (unaudited)........ 8 9
Additional paid-in capital.......................... 4,404 5,504
Unearned stock-based compensation................... (351) (1,172)
Deficit accumulated during the development stage.... (1,041) (3,668)
------- -------
Total stockholders' equity........................ 3,028 681
------- -------
Total liabilities and stockholders' equity...... $ 3,306 $ 2,358
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
CONNECTIFY, INC.
(formerly Connectify.com, Inc.)
(a company in the development stage)
STATEMENTS OF OPERATIONS
(in thousands, except share data)
<TABLE>
<CAPTION>
From May 14,
1998 From May 14, From May 14,
(date of 1998 1998
inception) (date of (date of
to inception) Six Months inception)
December 31, to June 30, Ended June to June 30,
1998 1998 30, 1999 1999
------------ ------------ ----------- ------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Operating expenses:
Research and
development............. $ 582 $ 19 $ 1,484 $ 2,066
Selling, general and
administrative.......... 426 55 940 1,366
Stock-based
compensation............ 32 -- 237 269
--------- ------- --------- ---------
Total operating
expenses.............. 1,040 74 2,661 3,701
--------- ------- --------- ---------
Operating loss............. (1,040) (74) (2,661) (3,701)
Interest income (expense),
net....................... (1) -- 34 33
--------- ------- --------- ---------
Net loss................... $ (1,041) $ (74) $ (2,627) $ (3,668)
========= ======= ========= =========
Net loss attributable to
common stockholders....... $ (1,041) $ (74) $ (2,627) $ (3,668)
========= ======= ========= =========
Net loss per common share--
basic and diluted......... $ (0.42) $ (0.09) $ (0.75) $ (1.25)
========= ======= ========= =========
Weighted average common
shares--basic and
diluted................... 2,453,623 797,872 3,497,761 2,933,631
========= ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
CONNECTIFY, INC.
(formerly Connectify.com, Inc.)
(a company in the development stage)
STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Deficit
Convertible Accumulated
Preferred Stock Common Stock Additional Unearned During the Total
---------------- ---------------- Paid-In Stock-based Development Stockholders'
Shares Amount Shares Amount Capital Compensation Stage Equity
--------- ------ --------- ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
in June 1998 for cash
at $0.002 per share.... -- $ -- 7,500,000 $ 7 $ 8 $ -- $ -- $ 15
Issuance of common stock
in August 1998 for
intellectual property
at $0.03 per share..... -- -- 172,634 -- 5 -- -- 5
Issuance of warrants to
purchase Series A
convertible preferred
stock in August 1998... -- -- -- -- 35 -- -- 35
Issuance of Series A
convertible preferred
stock in September 1998
for cash at $0.5253 per
share, net of issuance
costs of $24........... 7,043,596 7 -- -- 3,669 -- -- 3,676
Issuance of Series A
convertible preferred
stock in September
1998, on conversion of
notes payable.......... 571,100 1 -- -- 299 -- -- 300
Issuance of common stock
in August through
October 1998 for cash
at $0.01 to $0.03 per
share under stock
option plan............ -- -- 485,000 1 5 -- -- 6
Unearned employee stock-
based compensation..... -- -- -- -- 324 (324) -- --
Amortization of employee
stock-based
compensation........... -- -- -- -- -- 20 -- 20
Unearned service
provider stock-based
compensation........... -- -- -- -- 59 (59) -- --
Amortization of stock-
based compensation for
service provider....... -- -- -- -- -- 12 -- 12
Net loss................ -- -- -- -- -- -- (1,041) (1,041)
--------- ----- --------- ---- ------ ------- ------- -------
Balances, December 31,
1998................... 7,614,696 8 8,157,634 8 4,404 (351) (1,041) 3,028
Issuance of common stock
in February through May
1999 for cash at $0.01
to $0.06 per share
under stock option plan
(unaudited)............ -- -- 718,031 1 42 -- -- 43
Unearned employee stock-
based compensation
(unaudited)............ -- -- -- -- 912 (912) -- --
Amortization of employee
stock-based
compensation
(unaudited)............ -- -- -- -- -- 183 -- 183
Unearned service
provider stock-based
compensation
(unaudited)............ -- -- -- -- 146 (146) -- --
Amortization of stock-
based compensation for
service provider
(unaudited)............ -- -- -- -- -- 54 -- 54
Net loss (unaudited).... -- -- -- -- -- -- (2,627) (2,627)
--------- ----- --------- ---- ------ ------- ------- -------
Balances, June 30, 1999
(unaudited)............ 7,614,696 $ 8 8,875,665 $ 9 $5,504 $(1,172) $(3,668) $ 681
========= ===== ========= ==== ====== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
CONNECTIFY, INC.
(formerly Connectify.com, Inc.)
(a company in the development stage)
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
From May 14,
1998 (date of From May 14, Six Months From May 14,
inception) to 1998 (date of Ended 1998 (date of
December 31, inception) to June 30, inception) to
1998 June 30, 1998 1999 June 30, 1999
------------- ------------- ----------- -------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $(1,041) $(74) $(2,627) $(3,668)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization......... 11 1 34 45
Stock-based
compensation......... 32 -- 237 269
Non-cash interest
expense.............. 35 -- -- 35
Common stock issued
for intellectual
property............. 5 -- -- 5
Change in operating
assets and
liabilities:
Accounts receivable... -- -- (131) (131)
Prepaid expenses and
other current
assets............... (45) (9) (44) (89)
Other assets.......... -- -- (32) (32)
Accounts payable...... 78 -- 123 201
Accrued liabilities... 138 47 105 243
Deferred revenue...... 40 -- 125 165
------- ---- ------- -------
Net cash used in
operating
activities.......... (747) (35) (2,210) (2,957)
------- ---- ------- -------
Cash flows from
investing activities:
Acquisition of property
and equipment......... (83) (8) (185) (268)
Purchase of short-term
investments........... -- -- (691) (691)
------- ---- ------- -------
Net cash used in
investing
activities.......... (83) (8) (876) (959)
------- ---- ------- -------
Cash flows from
financing activities:
Proceeds from issuance
of common stock....... 21 15 43 64
Principal payments on
capital lease
obligations........... (4) -- (4) (8)
Proceeds from issuance
of convertible
preferred stock, net
of issuance costs..... 3,676 -- -- 3,676
Proceeds from the
issuance of
convertible notes
payable............... 265 -- 50 315
Proceeds from the
issuance of warrants.. 35 -- -- 35
Proceeds from issuance
of notes payable to
founders.............. 30 30 -- 30
Principal payments on
notes payable to
founders ............. (30) -- -- (30)
Proceeds from line of
credit................ -- -- 1,000 1,000
------- ---- ------- -------
Net cash provided by
financing
activities.......... 3,993 45 1,089 5,082
------- ---- ------- -------
Net increase (decrease)
in cash and cash
equivalents............ 3,163 2 (1,997) 1,166
Cash and cash
equivalents, beginning
of period.............. -- -- 3,163 --
------- ---- ------- -------
Cash and cash
equivalents, end of
period................. $ 3,163 $ 2 $ 1,166 $ 1,166
======= ==== ======= =======
Supplemental disclosure
of cash flow
information:
Taxes paid............. $ 1 $ -- $ 2 $ 3
======= ==== ======= =======
Supplemental non-cash
financing and investing
activities:
Conversion of
convertible promissory
notes payable into
Series A convertible
preferred stock....... $ 300 $ -- $ -- $ 300
======= ==== ======= =======
Acquisition of property
and equipment under
capital lease......... $ 26 $ 11 $ -- $ 26
======= ==== ======= =======
Unearned stock-based
compensation.......... $ 383 $ -- $ 1,058 $ 1,441
======= ==== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
CONNECTIFY, INC.
(formerly Connectify.com, Inc.)
(a company in the development stage)
NOTES TO FINANCIAL STATEMENTS
(Information with respect to June 30, 1999 and 1998 is unaudited)
1. Formation and Business of the Company
Connectify, Inc. (the "Company") was incorporated in the state of Delaware
on May 14, 1998 originally under the name Connectify.com, Inc. The Company is
an electronic direct marketing software provider. Through December 31, 1998,
the Company was active in developing its initial product technology, raising
capital and recruiting personnel; accordingly, the Company was in the
development stage.
The Company's operations are currently funded by proceeds from the issuance
of Series A convertible preferred stock and a $1,000,000 line of credit
provided by Silicon Valley Bank. The Company plans to enter into a merger
agreement with Kana Communications, Inc. and for the surviving corporation to
raise approximately $40,000,000 in an initial public offering of its common
stock. The Company has obtained an unconditional commitment from Kana
Communications, Inc. that they will provide financial support and assistance to
Connectify for the period to August 7, 2000.
2. Summary of Significant Accounting Policies
Unaudited interim results
The accompanying interim financial statements as of June 30, 1999, and for
the period ended June 30, 1998 and six months ended June 30, 1999, are
unaudited. The unaudited interim financial statements have been prepared on the
same basis as the annual financial statements and, in the opinion of
management, reflect all adjustments, which include only normal recurring
adjustments, necessary to present fairly the Company's financial position,
results of operations and its cash flows as of June 30, 1999 and for the period
ended June 30, 1998 and six months ended June 30, 1999. The financial data and
other information disclosed in these notes to financial statements related to
these periods are unaudited. The results for the six months ended June 30, 1999
are not necessarily indicative of the results to be expected for the year
ending December 31, 1999.
Use of estimates
Preparation of the accompanying financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of expenses during the
reporting period. Actual results could differ from those estimates.
Comprehensive income (loss)
Effective on the date of inception, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for reporting
comprehensive income (loss) and its components in the financial statements.
Comprehensive income (loss), as defined, includes all changes in equity during
a period from non-owner sources. For the period ended December 31, 1998, the
Company had no sources of other comprehensive income (loss).
F-23
<PAGE>
CONNECTIFY, INC.
(formerly Connectify.com, Inc.)
(a company in the development stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Financial instruments
The carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents and accounts payable approximate fair value
due to their short-term maturities.
Cash and cash equivalents and certain risks and concentrations
The Company considers all highly liquid investments with original or
remaining maturities of three months or less at the date of purchase to be cash
equivalents.
The Company's cash and cash equivalents are deposited with one major
financial institution in the United States. At times, such deposits may be in
excess of the amount of insurance provided on such deposits. The Company has
not experienced any losses on its deposits of cash and cash equivalents.
Property and equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets,
generally three years.
Research and development
Research and development costs are charged to operations as incurred.
Net loss per common share
Basic net loss per share is computed by dividing the net loss available to
common stockholders for the period by the weighted average number of common
shares outstanding during the period. Diluted net loss per common share is
computed by dividing the net loss for the period by the weighted average number
of common and common equivalent shares outstanding during the period. Common
equivalent shares, composed of common shares issuable upon the exercise of
stock options and warrants and upon conversion of Series A convertible
preferred stock, are included in the diluted net loss per share computation to
the extent such shares are dilutive. A reconciliation of the numerator and
denominator used in the calculation of basic and diluted net loss per common
share follows (in thousands, except per share data):
<TABLE>
<CAPTION>
From May 14, From May 14, From May 14,
1998 (date of 1998 (date of Six Months 1998 (date of
inception) to inception) to Ended inception) to
December 31, June 30, June 30, June 30,
1998 1998 1999 1999
------------- ------------- ----------- -------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Numerator
Net loss attributable
to common
stockholders......... $ (1,041) $ (74) $ (2,627) $ (3,668)
----------- ----------- ----------- -----------
Denominator
Weighted average
common shares........ 8,058,633 3,191,489 8,466,127 8,237,653
Less shares subject to
repurchase........... (5,605,010) (2,393,617) (4,968,366) (5,304,022)
----------- ----------- ----------- -----------
Denominator for basic
and diluted
calculation............ 2,453,623 797,872 3,497,761 2,933,631
----------- ----------- ----------- -----------
Net loss per-share--
basic and diluted...... $ (0.42) $ (0.09) $ (0.75) $ (1.25)
=========== =========== =========== ===========
</TABLE>
F-24
<PAGE>
CONNECTIFY, INC.
(formerly Connectify.com, Inc.)
(a company in the development stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes common stock equivalents that are not
included in the diluted net loss per share calculation of the denominator above
because to do so would be antidilutive for the periods indicated:
<TABLE>
<CAPTION>
From May 14,
1998 (date of From May 14, Six Months From May 14,
inception) to 1998 (date of Ended 1998 (date of
December 31, inception) to June 30, inception) to
1998 June 30, 1998 1999 June 30, 1999
------------- ------------- ----------- -------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Weighted average effect
of common stock
equivalents:
Series A convertible
preferred stock...... 3,032,693 -- 7,614,696 5,045,660
Options to purchase
common stock......... 169,162 -- 428,431 232,791
Warrants to purchase
convertible preferred
stock................ 72,684 -- 114,218 90,931
Common stock subject
to repurchase........ 5,605,010 2,393,617 4,968,366 5,304,022
--------- --------- ---------- ----------
8,879,549 2,393,617 13,125,711 10,673,404
========= ========= ========== ==========
</TABLE>
Stock-based compensation
The Company has adopted the disclosure provisions of Financial Accounting
Standards Board ("FASB") SFAS No. 123, "Accounting for Stock-based
Compensation." The Company has elected to continue accounting for stock-based
compensation issued to employees using Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly,
pro forma disclosures required under SFAS No. 123 have been presented. Under
APB No. 25, compensation expense is based on the difference, if any, on the
date of the grant, between the fair value of the Company's stock and the
exercise price. Stock issued to non-employees has been accounted for in
accordance with SFAS No. 123 and valued using the Black-Scholes model.
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.
Income taxes
Deferred tax assets and liabilities are determined based on temporary
differences between the financial reporting and tax basis of assets and
liabilities, measured at tax rates that will be in effect for the year in which
the differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
F-25
<PAGE>
CONNECTIFY, INC.
(formerly Connectify.com, Inc.)
(a company in the development stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Recent accounting pronouncements
In March 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SOP") No. 98-1, "Software for Internal Use,"
which provides guidance on accounting for the cost of computer software
developed or obtained for internal use. SOP No. 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998. The Company does
not expect that the adoption of SOP No. 98-1 will have a material impact on its
financial statements.
In April 1998, AcSEC issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities." This SOP provides guidance on the financial reporting of start-up
costs and organization costs. It requires the costs of start-up activities and
organization costs to be expensed as incurred. The SOP is effective for
financial statements for fiscal years beginning after December 15, 1998. The
Company does not expect that the adoption of SOP No. 98-5 will have a material
impact on its financial statements.
In June 1998, FASB issued SFAS No. 133, or SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. SFAS No. 133 requires that all derivatives be recognized at fair
value in the statement of financial position, and that the corresponding gains
or losses be reported either in the statement of operations or as a component
of comprehensive income, depending on the type of hedging relationship that
exists. SFAS No. 133 will be effective for fiscal years beginning after June
15, 1999. The Company does not currently hold derivative instruments or engage
in hedging activities.
3. Balance sheet accounts
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Property and equipment (in thousands)
Computer equipment............................................ $ 86
Furniture and fixtures........................................ 23
----
109
Less accumulated depreciation and amortization.................. (11)
----
$ 98
====
</TABLE>
Property and equipment includes $26,000 of computer equipment under capital
leases at December 31, 1998. Accumulated amortization of assets under capital
leases totaled $4,000 at December 31, 1998.
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Accrued liabilities (in thousands)
Accrued salaries and benefits................................. $ 97
Other accrued expenses........................................ 41
----
$138
====
</TABLE>
F-26
<PAGE>
CONNECTIFY, INC.
(formerly Connectify.com, Inc.)
(a company in the development stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Commitments
Leases
The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through November 2001. The
Company has subleased certain property for the period from February 1999 to
June 2000. Rent expense for the period ended December 31, 1998 was $43,000.
Future minimum lease payments under noncancelable operating and capital
leases, including lease commitments entered into subsequent to December 31,
1998 and future minimum sub-lease rental receipts under noncancelable operating
leases are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating Sublease
Year Ended December 31, Leases Leases Leases
----------------------- ------- --------- --------
<S> <C> <C> <C>
1999........................................... $10 $233 $49
2000........................................... 10 210 22
2001........................................... 8 178 --
--- ---- ---
Total minimum lease payments and sublease
income........................................ 28 $621 $71
==== ===
Less: Amount representing finance costs........ (6)
---
Present value of capital lease obligations..... 22
Less: Current portion.......................... (7)
---
Long-term portion of capital lease
obligations................................. $15
===
</TABLE>
5. Borrowings
Line of credit
At December 31, 1998, the Company had an unutilized line of credit with
Silicon Valley Bank (the "Bank") for equipment purchases and operating
expenses. The line of credit provides for borrowings of up to $1,000,000 which
are collateralized by any property of any and every kind belonging to the
Company. The line of credit is repayable in monthly installments of principal
plus interest commencing, at the earliest, on July 31, 1999 and bears interest
at the Bank's prime rate (7.75% at December 31, 1998).
6. Stockholders' Equity
Convertible preferred stock
Under the Company's Articles of Incorporation, the Company's preferred
stock is issuable in series and the Company's Board of Directors is authorized
to determine the rights, preferences and terms of each share. At December 31,
1998, the amounts, terms and liquidation values of Series A convertible
preferred stock are as follows:
<TABLE>
<CAPTION>
Shares
Shares Issued and Liquidation
Authorized Outstanding Value
---------- ----------- -----------
<S> <C> <C> <C>
Series A..................................... 8,200,000 7,614,696 $ 4,000,000
========= ========= ===========
</TABLE>
F-27
<PAGE>
CONNECTIFY, INC.
(formerly Connectify.com, Inc.)
(a company in the development stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Dividends
The holders of Series A convertible preferred stock are entitled to receive
dividends, out of any assets legally available, prior and in preference to any
declaration or payment of any dividend on the common stock of the Company, at
the rate of 8% per share per annum. Such dividends are payable when, as and if
declared by the Board of Directors, and are not cumulative. At December 31,
1998, no dividends have been declared or paid.
Liquidation
In the event of any liquidation, dissolution, or winding up of the Company,
either voluntary or involuntary, the holders of the then outstanding Series A
convertible preferred stock are entitled to receive, prior and in preference to
any distribution of any of the assets of the Company to the holders of the
common stock, the amount of $0.5253 per share for Series A convertible
preferred stock plus any declared but unpaid dividends prior to and in
preference to any distribution to the holders of common stock. If, upon
occurrence of such event, the assets and funds thus distributed among the
holders of the Series A convertible preferred stock shall be insufficient to
permit the payment to such holders of the full preferential amount, then the
entire assets and funds of the Company legally available for distribution will
be distributed ratably among the holders of the Series A convertible preferred
stock in proportion to the number of such shares owned by each stockholder.
Voting
Each share of convertible preferred stock entitles the holder to voting
rights equal to the number of shares of common stock into which it is
convertible.
Conversion
Each share of Series A convertible preferred stock is convertible into such
number of shares of common stock as determined by dividing $0.5253 by the
conversion price at the time in effect for each such share of preferred stock.
The initial conversion price shall be $0.5253 per share for Series A
convertible preferred stock. Conversion is either at the option of the holder
or is automatic upon the closing date of a public offering of the Company's
common stock for which the price per share is not less than $2.00 and the
aggregate offering price is not less than $7,500,000.
Warrants for convertible preferred stock
In connection with the issuance of convertible notes payable of $300,000,
the Company issued warrants to purchase 114,218 shares of Series A convertible
preferred stock for $0.5253 per share in August 1998. Such warrants are
outstanding at December 31, 1998 and expire at the earlier of an initial public
offering of the Company's common stock, a consolidation pursuant to which the
stockholders of the Company own less than 50% of the voting securities of the
surviving company or August 2005. Using the Black-Scholes pricing model, the
Company determined that the fair value of the warrants was $35,000 at the date
of grant. Accordingly, following the conversion of the convertible notes
payable to Series A convertible preferred stock, the Company recorded $35,000
interest expense associated with the warrants.
F-28
<PAGE>
CONNECTIFY, INC.
(formerly Connectify.com, Inc.)
(a company in the development stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Common stock
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 25,000,000 shares of $0.001 par value common stock. A portion of the
shares sold are subject to a right of repurchase by the Company subject to
vesting, which is generally over a four year period from the earlier of grant
date or employee hire date, as applicable, until vesting is complete. At
December 31, 1998, there were 5,124,464 common shares outstanding subject to
repurchase.
Each share of common stock is entitled to one vote. The holders of common
stock are entitled to receive dividends whenever funds are legally available
and declared by the Board of Directors subject to the prior rights of holders
of all classes of stock. No dividends have been declared or paid as of December
31, 1998.
Stock Option Plan
In 1998, the Company adopted the 1998 Stock Plan (the Plan) under which
3,750,000 shares of the Company's common stock were reserved for issuance to
employees, directors and consultants. Options granted under the Plan may be
incentive stock options or non-statutory stock options. Incentive stock options
may only be granted to employees.
The Plan is administered by a committee appointed by the Board of Directors
which identifies optionees and determines the terms of options granted,
including the exercise price, number of shares subject to the option grant and
the exercisability thereof.
Each stock option agreement shall specify the date when all or any
installment of the option is to become exercisable. To the extent required by
applicable law, an option shall become exercisable no less rapidly than the
rate of 20% per year for each of the first five years from the grant date.
The exercise price of incentive stock options and non-statutory stock
options shall be no less than 100% and 85%, respectively, of the fair market
value per share of the Company's common stock on the grant date. If an
individual owns stock representing more than 10% of the outstanding shares, the
price of each share shall be at least 110% of fair market value, as determined
by the Board of Directors. The maximum term of the options is ten years.
F-29
<PAGE>
CONNECTIFY, INC.
(formerly Connectify.com, Inc.)
(a company in the development stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Activity under the Plan (period from January 1, 1999 to June 30, 1999 is
unaudited) is as follows:
<TABLE>
<CAPTION>
Outstanding Options
------------------------------- Weighted
Shares Aggregate Average
Available Number Price Exercise Exercise
for Grant of Shares Per Share Price Price
---------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Options reserved at Plan
inception............... 2,500,000
Options authorized....... 1,250,000
Options granted.......... (1,419,000) 1,419,000 $0.01-0.06 $46,000 $0.03
Options exercised........ -- (485,000) 0.01-0.06 (6,000) 0.01
Options cancelled........ 315,000 (315,000) 0.03-0.06 (9,000) 0.03
---------- --------- ------- -----
Balances, December 31,
1998.................... 2,646,000 619,000 0.01-0.06 31,000 0.05
Options granted.......... (818,531) 818,531 0.06 49,000 0.06
Options exercised........ -- (718,031) 0.01-0.06 (43,000) 0.06
Options cancelled........ 132,500 (132,500) 0.03-0.06 (7,000) 0.05
---------- --------- ------- -----
Balances, June 30, 1999.. 1,959,969 587,000 $0.01-0.06 $30,000 $0.05
========== ========= ======= =====
</TABLE>
The weighted average fair value of options granted in the period ended
December 31, 1998 was $0.12.
The following table summarizes information about stock options outstanding
and currently exercisable by price at December 31, 1998:
<TABLE>
<CAPTION>
Options Currently
Options Outstanding Exercisable
-------------------------------- --------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
-------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.01.............. 87,000 9.65 $0.01 417 $0.01
$0.03.............. 59,500 9.67 $0.03 2,000 $0.03
$0.06.............. 472,500 9.84 $0.06 250,313 $0.06
------- -----
$0.01-$0.06........ 619,000 9.80 $0.05 252,730 $0.06
</TABLE>
The Company has agreements with certain key employees whereby options
granted become immediately exercisable, subject to repurchase by the Company.
The repurchase rights lapse over the options vesting period of four years. Of
the options exercisable at December 31, 1998, 250,000 would be subject to
repurchase if exercised.
F-30
<PAGE>
CONNECTIFY, INC.
(formerly Connectify.com, Inc.)
(a company in the development stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
and currently exercisable by price at June 30, 1999 (unaudited):
<TABLE>
<CAPTION>
Options Currently
Options Outstanding Exercisable
-------------------------------- --------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
-------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.01.............. 82,000 9.15 $0.01 1,042 $0.01
$0.03.............. 22,000 9.17 $0.03 2,000 $0.03
$0.06.............. 483,000 9.56 $0.06 18,604 $0.06
------- -----
$0.01-$0.06........ 587,000 9.49 $0.05 21,646 $0.05
</TABLE>
None of the options exercisable at June 30, 1999 would be subject to
repurchase if exercised.
Fair value disclosures
The Company calculated the minimum fair value of each option grant on the
date of grant using the minimum value option pricing model as prescribed by
SFAS No. 123 using the following assumptions:
<TABLE>
<S> <C>
Risk-free interest rate......................................... 4.4%-5.5%
Expected life................................................... 5 years
Dividend yield.................................................. 0%
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. The Company's
pro forma information follows (in thousands):
<TABLE>
<CAPTION>
From May 14,
1998 (date of Six Months
inception) to Ended
December 31, June 30,
1998 1999
------------- -----------
(unaudited)
<S> <C> <C>
Net loss as reported............................ $(1,041) $(2,627)
------- -------
Net loss--SFAS 123 adjusted..................... $(1,043) $(2,636)
------- -------
Net loss per share--as reported (Note 2)
Basic and diluted.............................. $ (0.42) $ (0.75)
------- -------
Net loss per share--SFAS 123 adjusted
Basic and diluted.............................. $ (0.42) $ (0.75)
------- -------
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure may not be
indicative of future amounts. Additional awards in future years are
anticipated.
F-31
<PAGE>
CONNECTIFY, INC.
(formerly Connectify.Com, Inc.)
(a company in the development stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock-based compensation
In connection with certain stock option grants to employees during the
period ended December 31, 1998, the Company recorded unearned stock-based
compensation totaling $324,000, which is being amortized over the vesting
periods of the related options which is generally four years. Amortization of
this stock-based compensation recognized during the period ended December 31,
1998 totaled approximately $20,000.
Additionally, the Company recorded unearned stock-based compensation for
restricted common stock granted to service providers of $59,000, which is being
amortized over four years. Amortization of the fair value of this restricted
common stock resulted in stock-based compensation of $12,000 during the period
ended December 31, 1998.
Stock-based compensation (unaudited)
In connection with certain stock option grants to employees during the six
months ended June 30, 1999, the Company recorded unearned stock-based
compensation totalling $912,000, which is being amortized over the vesting
period which is generally four years. Amortization of stock-based compensation,
for these and the 1998 option grants, recognized during the six months ended
June 30, 1999 totalled $183,000.
Additionally, the Company recorded unearned stock-based compensation for
restricted common stock granted to service providers of $146,000, which is
being amortized over four years. Amortization of stock-based compensation, for
these and the 1998 restricted stock grants, recognized during the six months
ended June 30, 1999 totalled $54,000.
The remaining unearned stock-based compensation for both option and
restricted stock grants will be amortized as follows: $355,000 for the
remainder of 1999, $449,000 in 2000; $243,000 in 2001, $108,000 in 2002 and
$17,000 in 2003.
7. Income Taxes
The Company accounts for income taxes using the liability method. Under
this method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using the current tax laws and rates. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
The principal items accounting for the difference between income taxes
computed at the U.S. statutory rate and the provision for income taxes are as
follows:
<TABLE>
<S> <C>
U.S. statutory rate.................................................. 34%
Operating losses not benefited....................................... -34%
---
0%
---
</TABLE>
F-32
<PAGE>
CONNECTIFY, INC.
(formerly Connectify.com, Inc.)
(a company in the development stage)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Temporary differences which give rise to significant portions of the
deferred tax asset at December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
Net operating loss carryforwards................................... $ 210
Capitalized startup costs.......................................... 169
Research and development credit carry over......................... 45
Other.............................................................. 8
-----
Total deferred tax asset........................................... 432
Less valuation allowance........................................... (432)
-----
Net deferred tax asset............................................. $ --
=====
</TABLE>
The Company has established a 100% valuation allowance because at this time
it appears more likely than not that the benefit will not be realized for its
deferred tax asset.
At December 31, 1998, the Company had federal and state net operating loss
carry-forwards of approximately $524,000 and $539,000, respectively, available
to offset future regular and alternative minimum taxable income. The Company's
federal and state net operating loss carry forwards expire in 2006 through
2018.
At December 31, 1998, the Company had federal and state research and
development and other credits of approximately $33,000 and $18,000,
respectively. The research and development credit carry-forwards expire in
2018, if not utilized.
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carry-forwards in certain situations where changes occur in the stock
ownership of a company. If the Company should have an ownership change, as
defined, utilization of the carry-forwards could be restricted.
8. Subsequent Events
At June 30, 1999, the line of credit with Silicon Valley Bank of $1,000,000
(unaudited) was fully utilized.
On August 13, 1999, the Company entered into a merger agreement with Kana
Communications, Inc. ("Kana"). Under the terms of the agreement, Kana will
acquire all the Company's outstanding capital stock and all unexpired and
unexercised options and warrants in return for 15% of the total post closing
capital stock of Kana on a fully-diluted basis.
F-33
<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
the position to render the following report.
/s/ KPMG LLP
We have audited the accompanying supplemental consolidated balance
sheets of Kana Communications, Inc. and subsidiaries (the Company) as
of December 31, 1997 and 1998, and the related supplemental
consolidated statements of operations and comprehensive loss,
stockholders' equity, and cash flows for each of the years then ended.
These supplemental consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these supplemental consolidated financial
statements based on our audits. We did not audit the financial
statements of Connectify, Inc. for the year ended December 31, 1998,
which statements reflect total assets constituting 22% as of December
31, 1998 of the related supplemental consolidated total. The
statements of Connectify, Inc. were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Connectify, Inc. for the year
ended December 31, 1998, is based solely upon the report of the other
auditors.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The supplemental consolidated financial statements give
retroactive effect to the merger of the Company and Connectify, Inc.
on August 13, 1999, which has been accounted for as a pooling of
interests as described in Note 2 to the supplemental consolidated
financial statements. Generally accepted accounting principles
proscribe giving effect to a consummated business combination
accounted for by the pooling-of-interests method in financial
statements that do not include the date of consummation. These
supplemental financial statements do not extend through the date of
consummation. However, they will become the historical consolidated
financial statements of the Company after financial statements
covering the date of consummation of the business combination are
issued.
In our opinion, the supplemental consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of the Company 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 applicable after financial statements are issued for a
period which includes the date of consummation of the business
combination.
Mountain View, California
August 13, 1999, except as to
Note 8, which is as of August
, 1999
F-34
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31, June 30, 1999
---------------- --------------------
1997 1998 Historical Pro forma
------- ------- ---------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents............. $ 3,303 $12,955 $ 5,798 15,998
Short-term investments................ 210 160 2,251 2,251
Accounts receivable................... -- 817 1,409 1,409
Prepaid expenses and other current
assets............................... 37 141 735 735
------- ------- ------- -------
Total current assets................ 3,550 14,073 10,193 20,393
Property and equipment, net............. 261 1,041 1,946 1,946
Other assets............................ 13 161 186 186
------- ------- ------- -------
Total assets........................ $ 3,824 $15,275 $12,325 22,525
======= ======= ======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of notes payable...... $ 34 $ 360 $ 1,241 1,241
Accounts payable...................... 130 330 1,139 1,139
Accrued payroll and related expenses.. 37 353 1,012 1,012
Other accrued liabilities............. 68 355 839 839
Deferred revenue...................... -- 450 1,133 1,133
------- ------- ------- -------
Total current liabilities........... 269 1,849 5,364 5,364
Notes payable, less current portion..... 51 360 638 638
------- ------- ------- -------
Total liabilities................... 320 2,209 6,002 6,002
------- ------- ------- -------
Commitments
Stockholders' equity:
Convertible preferred stock, $0.001
par value; 29,000,000, 50,000,000,
and 50,000,000 shares authorized;
8,917,855, 12,512,641 and 12,512,641
shares issued and outstanding (none
pro forma); aggregate liquidation
preference of $4,795, $16,524, and
$16,524 (none pro forma)............. 9 13 13 --
Common stock, $0.001 par value;
40,000,000, 60,000,000, and
60,000,000 shares authorized;
2,970,667, 8,861,227, and
9,694,284 shares issued and
outstanding (23,045,397 pro forma)... 3 9 10 23
Additional paid-in capital............ 5,659 23,760 38,906 49,106
Deferred stock-based compensation..... (784) (1,795) (13,397) (13,397)
Notes receivable from stockholders.... -- (155) (557) (557)
Accumulated other comprehensive
losses............................... -- (5) (37) (37)
Accumulated deficit................... (1,383) (8,761) (18,615) (18,615)
------- ------- ------- -------
Total stockholders' equity.......... 3,504 13,066 6,323 16,523
------- ------- ------- -------
Total liabilities and stockholders'
equity............................. $ 3,824 $15,275 $12,325 $22,525
======= ======= ======= =======
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-35
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
.SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, June 30,
---------------- ------------------
1997 1998 1998 1999
------- ------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
License................................ $ -- $ 1,793 $ 615 $ 2,795
Service................................ -- 256 41 783
------- ------- -------- --------
Total revenues....................... -- 2,049 656 3,578
------- ------- -------- --------
Cost of revenues:
License................................ -- 54 16 72
Service................................ -- 519 57 1,141
------- ------- -------- --------
Total cost of revenues............... -- 573 73 1,213
------- ------- -------- --------
Gross profit......................... -- 1,476 583 2,365
------- ------- -------- --------
Operating expenses:
Sales and marketing.................... 366 3,938 1,421 4,957
Research and development............... 699 2,835 884 3,320
General and administrative............. 257 1,004 314 986
Amortization of deferred stock-based
compensation.......................... 113 1,263 430 3,063
------- ------- -------- --------
Total operating expenses............. 1,435 9,040 3,049 12,326
------- ------- -------- --------
Operating loss....................... (1,435) (7,564) (2,466) (9,961)
Other income, net........................ 52 186 41 107
------- ------- -------- --------
Net loss............................. (1,383) (7,378) (2,425) (9,854)
Other comprehensive loss................. -- (5) -- (32)
------- ------- -------- --------
Comprehensive loss................... $(1,383) $(7,383) $ (2,425) $ (9,886)
======= ======= ======== ========
Net loss per share:
Basic and diluted...................... $ (0.92) $ (2.58) $ (1.58) $ (1.89)
======= ======= ======== ========
Weighted-average shares used in
computation........................... 1,497 2,864 1,535 5,204
======= ======= ======== ========
Pro forma net loss per share (unaudited):
Basic and diluted...................... $ (0.59) $ (0.56)
======= ========
Weighted-average shares used in
computation........................... 12,547 17,716
======= ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-36
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
SUPPLEMENTAL 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
Kana founders... -- $-- 3,333,333 $ 3 $ (2) $ -- $ -- $-- $ -- $ 1
Issuance of
common stock
upon exercise of
stock options... -- -- 53,333 -- -- -- -- -- -- --
Repurchase of
founders' common
stock, net...... -- (416,666) -- -- -- -- -- -- --
Issuance of
Series A
convertible
preferred stock,
net............. 3,948,719 4 -- -- 756 -- -- -- -- 760
Issuance of
shares of common
stock in
exchange for
services ....... -- 667 -- 7 -- -- -- -- 7
Issuance of
Series B
convertible
preferred stock,
net............. 4,969,136 5 -- -- 4,008 -- -- -- -- 4,013
Deferred stock-
based
compensation.... -- -- -- -- 890 (890) -- -- -- --
Amortization of
deferred stock-
based
compensation.... -- -- -- -- -- 106 -- -- -- 106
Net loss........ -- -- -- -- -- -- -- -- (1,383) (1,383)
---------- ---- --------- --- ------- -------- ------ ---- -------- -------
Balances,
December 31,
1997............ 8,917,855 9 2,970,667 3 5,659 (784) -- -- (1,383) 3,504
Issuance of
common stock to
Connectify
founders........ -- -- 1,586,240 2 13 -- -- -- -- 15
Issuance of
common stock
upon exercise of
stock options,
net of
repurchases..... -- -- 2,657,312 3 176 -- (155) -- -- 24
Issuance of
common stock for
intellectual
property........ -- -- 36,512 -- 5 -- -- -- -- 5
Issuance of
Series A
convertible
preferred stock
upon exercise of
warrant......... 68,139 -- -- -- -- -- -- -- -- --
Issuance of
warrants to
purchase common
stock........... -- -- -- -- 35 -- -- -- -- 35
Issuance of
common stock.... -- -- 1,610,496 1 3,975 -- -- -- -- 3,976
Issuance of
Series B
convertible
preferred stock,
net............. 112,549 1 -- -- 90 -- -- -- -- 91
Issuance of
Series C
convertible
preferred stock,
net............. 3,414,098 3 -- -- 11,534 -- -- -- -- 11,537
Deferred stock-
based
compensation.... -- -- -- -- 2,273 (2,273) -- -- -- --
Amortization of
deferred stock-
based
compensation.... -- -- -- -- -- 1,262 -- -- -- 1,262
Other
comprehensive
loss............ -- -- -- -- -- -- -- (5) -- (5)
Net loss........ -- -- -- -- -- -- -- -- (7,378) (7,378)
---------- ---- --------- --- ------- -------- ------ ---- -------- -------
Balances,
December 31,
1998............ 12,512,641 13 8,861,227 9 23,760 (1,795) (155) (5) (8,761) 13,066
Issuance of
common stock
upon exercise of
stock options,
net of
repurchases
(unaudited)..... -- -- 833,057 1 481 -- (402) -- 80
Deferred stock-
based
compensation
(unaudited)..... -- -- -- -- 14,665 (14,665) -- -- -- --
Amortization of
deferred stock-
based
compensation
(unaudited)..... -- -- -- -- -- 3,063 -- -- -- 3,063
Other
comprehensive
loss
(unaudited)..... -- -- -- -- -- -- (32) (32)
Net loss
(unaudited)..... -- -- -- -- -- -- -- -- (9,854) (9,854)
---------- ---- --------- --- ------- -------- ------ ---- -------- -------
Balances, June
30, 1999
(unaudited)..... 12,512,641 $ 13 9,694,284 $10 $38,906 $(13,397) $(557) $(37) $(18,615) $ 6,323
========== ==== ========= === ======= ======== ====== ==== ======== =======
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-37
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, June 30,
----------------- ------------------
1997 1998 1998 1999
------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................... $(1,383) $ (7,378) $ (2,426) $ (9,854)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization......... 27 233 79 293
Loss on disposal of assets............ -- -- -- 105
Amortization of stock-based
compensation and other stock-based
items ............................... 113 1,302 430 3,063
Changes in operating assets and
liabilities:
Accounts receivable.................. -- (817) (474) (592)
Prepaid expenses and other assets.... (50) (252) (245) (619)
Accounts payable and accrued
liabilities......................... 235 787 296 1,906
Deferred revenue..................... -- 450 108 682
------- -------- -------- --------
Net cash used in operating
activities.......................... (1,058) (5,675) (2,232) (5,016)
------- -------- -------- --------
Cash flows from investing activities:
Property and equipment purchases....... (288) (987) (299) (1,303)
(Purchases) sales of short-term
investments........................... (210) 50 -- (2,091)
------- -------- -------- --------
Net cash used in investing
activities.......................... (498) (937) (299) (3,394)
------- -------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock
and warrants.......................... 1 3,744 23 80
Proceeds from issuance of convertible
preferred stock, net.................. 4,603 11,628 -- --
Proceeds from convertible notes
payable............................... 170 265 -- 50
Proceeds from notes payable............ 85 750 467 1,685
Payments on notes payable.............. -- (118) (3) (530)
------- -------- -------- --------
Net cash provided by financing
activities.......................... 4,859 16,269 487 1,285
------- -------- -------- --------
Effect of exchange rate changes on cash
and cash equivalents................... -- (5) -- (32)
------- -------- -------- --------
Net change in cash and cash
equivalents............................ 3,303 9,652 (2,044) (7,157)
Cash and cash equivalents at beginning
of period.............................. -- 3,303 3,303 12,955
------- -------- -------- --------
Cash and cash equivalents at end of
period................................. $ 3,303 $ 12,955 $ 1,259 $ 5,798
======= ======== ======== ========
Supplemental disclosure of cash flow
information:
Cash paid during period for interest... $ 3 $ 36 $ 13 $ 27
======= ======== ======== ========
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 $ 107 $ 402
======= ======== ======== ========
Grant of options to purchase common
stock with an exercise price below
fair value........................... $ 890 $ 2,273 $ 1,060 $ 14,665
======= ======== ======== ========
Issuance of common stock upon
conversion of convertible note
payable.............................. $ -- $ 300 $ -- $ --
======= ======== ======== ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-38
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
Kana Communications, Inc. and subsidiaries (the Company or Kana) were
incorporated on July 11, 1996, but did not commence operations until 1997. The
Company develops, markets and supports customer communications software
products and services for e-Businesses. 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 supplemental consolidated financial statements of the
Company have been prepared to give retroactive effect to the August 13, 1999
merger with Connectify, Inc. Generally accepted accounting principles proscribe
giving effect to a consummated business combination accounted for by the
pooling-of-interests method in financial statements that do not include the
date of consummation. These supplemental financial statements do not extend
through the date of consummation, however, they will become the historical
consolidated financial statements of the Company after financial statements
covering the date of consummation of the business combination are issued.
(c) Principles of Consolidation
The accompanying supplemental 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 subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
(d) Interim Supplemental Financial Statements
The unaudited interim supplemental consolidated financial statements of the
Company as of June 30, 1999 and for the six months ended June 30, 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
supplemental consolidated financial statements reflect all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
the financial position of the Company as of June 30, 1999, and the results of
its operations and its cash flows for the six months ended June 30, 1998 and
1999. Results for the six months ended June 30, 1999 are not necessarily
indicative of the results to be expected for the entire year.
(e) Use of Estimates
The preparation of supplemental financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the
F-39
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)
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.
(f) 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.
(g) 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 June 30, 1999, cash equivalents consisted of
auction-rate securities and money market funds in the amounts of $3,213,000,
$12,780,000, and $5,081,000, 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.
(h) 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.
F-40
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)
(i) 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.
(j) 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.
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.
(k) 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.
(l) 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.
F-41
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)
(m) 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.
(n) 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.
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.
(o) 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 six months
ended June 30, 1999 was attributable to foreign currency translation
adjustments for the Company's U.K. subsidiary. Tax effects of comprehensive
loss are not material.
(p) Net Loss Per Share
Basic net loss per share is computed using the weighted-average number of
outstanding shares of common stock, excluding common stock subject to
repurchase. 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 and common
stock subject to repurchase 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.
F-42
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)
Diluted net loss per share does not include the effect of the following
antidilutive common equivalent shares:
<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, June 30,
--------------------- ---------------------
1997 1998 1998 1999
---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Stock options and warrants........ 1,788,316 281,119 335,565 1,261,507
Common stock subject to
repurchase....................... 1,822,915 4,162,840 4,549,337 4,262,667
Convertible preferred stock ...... 8,917,855 12,512,641 9,098,543 12,512,641
---------- ---------- ---------- ----------
12,529,086 16,956,600 13,983,445 18,036,815
========== ========== ========== ==========
</TABLE>
(q) 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 and 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.
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 June 30, 1999. In
the six month period ended June 30, 1998, two customers each accounted for more
than 10% of total revenues.
(r) Pro Forma Stockholders' Equity (unaudited)
The accompanying unaudited pro forma stockholders' equity at June 30, 1999
reflects the issuance of 838,472 shares of Series D Convertible Preferred Stock
at a purchase price of $12.17 per share on July 8, 1999 and the conversion of
all outstanding shares of preferred stock, including the Series D Convertible
Preferred Stock, as if such events occurred on June 30, 1999.
(s) Pro Forma Net Loss Per Share (unaudited)
Pro forma net loss per share for the year ended December 31, 1998 and the
six months ended June 30, 1999, is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's convertible preferred stock into shares of the
Company's common stock effective upon the closing of the Company's initial
public offering as if such conversion occurred on January 1, 1998, or at the
date of issuance, if later. Pro forma common equivalent shares, comprised of
incremental common shares issuable upon the exercise of stock options and
warrants are not included in pro forma diluted net loss per share because they
would be anti-dilutive.
F-43
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)
(t) 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, 2001.
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.
In April 1998, the AICPA issued SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use, which provides
guidance for determining whether computer software is internal-use software and
for accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold. SOP 98-1 also provides
guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. The adoption of SOP 98-1 did not have a
material effect on the consolidated financial statements.
On April 3, 1998, the Accounting Standards Executive Committee of the AICPA
issued SOP No. 98-5, Reporting on the Costs of Start-Up Activities which
provides guidance on the financial reporting of start-up costs. SOP 98-5
requires costs of start-up activities and organization costs to be expensed as
incurred. SOP 98-5 was adopted by the Company on January 1, 1999. As the
Company had not capitalized such costs, the adoption of SOP 98-5 did not have
an impact on the consolidated financial statements of the Company.
(2) Business Combination
On August 13, 1999, the Company issued approximately 3,491,283 shares of
its common stock to the shareholders of Connectify, Inc. (Connectify) in
exchange for all of the outstanding capital stock of Connectify. Prior to the
consummation of the merger, 5,095,819 shares of the outstanding Kana preferred
stock were converted to an equal number shares of Kana common stock. As a
result of the conversion, the Company created a controlling class of common
stock. The merger has been accounted for as a pooling of interests, and,
accordingly, the Company's supplemental consolidated financial statements have
been restated for all periods prior to the merger to include the results of
F-44
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)
operations, financial position, and cash flows of Connectify. No significant
adjustments were required to conform the accounting policies of the Company and
Connectify.
In connection with the merger with Connectify, the Company will record a
nonrecurring charge for merger integration costs ranging from $1,000,000 to
$2,000,000, consisting primarily of transaction fees for attorneys,
accountants, and financial printing, employee severance benefits, and facility
related costs during the third quarter of 1999.
Connectify has not reported revenues in any of the periods presented. Net
loss for the individual entities as previously reported were as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended June 30,
------------ ----------------
1998 1998 1999
------------ ------- -------
<S> <C> <C> <C>
Kana.......................................... $(6,337) $(2,351) $(7,227)
Connectify.................................... (1,041) (74) (2,627)
------- ------- -------
(7,378) (2,425) (9,854)
======= ======= =======
</TABLE>
(3) 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 $ 896
Furniture and fixtures.......................................... 20 164
Leasehold improvements.......................................... 48 241
---- ------
288 1,301
Less accumulated depreciation and amortization.................. 27 260
---- ------
$261 $1,048
==== ======
</TABLE>
(4) Notes Payable
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.
The Company holds various lines of credit providing for borrowings of up to
$2,000,000 and $4,000,000 as of December 31, 1998 and June 30, 1999,
respectively, to be used for qualified equipment purchases or working capital
needs. Borrowings under the lines 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 and June 30, 1999). Total borrowings as of December 31, 1998
and June 30, 1999 were $720,000 and $1,194,000, respectively.
F-45
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)
On May 18, 1999, the Company entered into two term loan obligations
totaling $685,000. The loans bear interest at a fixed rate of approximately
14.5% and mature in June 2002. The aggregate principal payments due under these
obligations are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1999.................................................................. $ 36
2000.................................................................. 232
2001.................................................................. 268
2002.................................................................. 149
----
$685
====
</TABLE>
(5) 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............................... 4,016,858 $0.02 $0.20
Series B............................... 5,081,685 0.06 0.81
Series C............................... 3,414,098 0.27 3.41
----------
12,512,641
==========
</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 89,744 shares of Series A
preferred stock with an exercise price of $0.20 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 21,605 shares of Series A preferred stock back to
the Company.
(b) Common Stock
The Company has issued to the Company's founders 4,919,973 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 in June 2000 and May 2002. As of December 31, 1998,
2,177,151 shares were subject to repurchase. During 1997, the Company
repurchased a net of 416,666 shares from one founder at the original exercise
price of $0.0001 per share.
F-46
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998
(Information with respect to June 30, 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 2,045,691 shares subject to repurchase. These options were
exercised at prices ranging from $0.02 to $0.35 with a weighted-average
exercise price of $0.06 per share. The options exercised through December 31,
1998 have a weighted-average fair value of $1.05 per share.
In connection with the issuance of convertible notes payable of $300,000,
the Company issued warrants to purchase 24,157 shares of common stock for $2.49
per share in August 1998. Such warrants are outstanding at December 31, 1998
and expire in August 2005. Using the Black-Scholes pricing model, the Company
determined that the fair value of the warrants was $35,000 at the date of
grant. Accordingly, following the conversion of the convertible notes payable
to Series A convertible preferred stock, the Company recorded $35,000 of
interest expense associated with the warrants.
(c) Stock Option Plans
The Company's 1997 Stock Option/Stock Issuance 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. Connectify's 1998 Stock Plan
has similar terms as those of the 1997 Plan. Outstanding options under
Connectify's 1998 Stock Plan were assumed in the merger.
A summary of stock option activity follows:
<TABLE>
<CAPTION>
Years Ended
-------------------------------------------- Six Months Ended
1997 1998 June 30, 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.............. -- $-- 1,698,572 $0.05 281,117 $0.17
Options granted........ 1,751,905 0.05 1,456,483 0.12 2,028,119 0.15
Options exercised...... (53,333) 0.02 (2,697,315) 0.08 (1,030,529) 0.50
Options canceled....... -- -- (176,623) 0.11 (41,357) 0.29
--------- ---------- ----------
Outstanding at end of
period................. 1,698,572 0.05 281,117 0.09 1,237,350 0.60
========= ========== ==========
Shares available for
future grant........... 1,238,761 358,688 902,732
========= ========== ==========
</TABLE>
F-47
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)
At December 31, 1998, the range of exercise prices and the weighted-average
remaining contractual life of outstanding options was $0.03 to $0.35 and 9.47
years, respectively.
At December 31, 1997 and 1998, the number of vested shares under options
was 213,165 and 113,267, respectively, and the weighted-average exercise price
of those options was $0.05 and $0.08, 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 options issued with exercise prices at less
than fair value at date of grant. With respect to the stock options granted
from inception through June 30, 1999, the Company recorded deferred stock-based
compensation of $17,828,000 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 $0.51 and $1.57 per share, respectively.
(6) 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. On
June 18, 1999, the Company entered into a lease agreement for a new facility.
Payments under this lease will begin in November 1999. In connection with this
lease, the Company entered into a letter for credit in July 1999 for
$1,400,000, expiring in July 2000. The letter of credit is secured by a
certificate of deposit.
Future minimum lease payments under noncancelable operating leases,
including the lease signed in June 1999 and subleases, as of December 31, 1998,
were as follows (in thousands):
<TABLE>
<CAPTION>
Year ending Operating
December 31, Leases Subleases
------------ --------- ---------
<S> <C> <C>
1999................................................... $ 1,344 $293
2000................................................... 2,933 231
2001................................................... 2,993 218
2002................................................... 2,910 227
2003................................................... 2,464 --
Thereafter............................................. 6,418 --
------- ----
$19,062 $969
======= ====
</TABLE>
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.
F-48
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)
(7) 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) $(2,090)
Current year net operating loss and temporary differences
for which no benefit has been recognized.................. 424 2,090
----- -------
Total.................................................... $ -- $ --
===== =======
</TABLE>
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 $2,892
Capitalized startup costs.................................... -- 169
Accruals and reserves........................................ 23 130
---- ------
Total gross deferred tax assets............................ 590 3,191
Valuation allowance.......................................... (590) (3,191)
---- ------
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 $6,670,000 and
$6,682,000, 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 from 2004 through 2006.
As of December 31, 1998, unused research and development tax credits of
approximately $60,000 and $41,000 were available to reduce future federal and
California income taxes, respectively. Federal credit carryforwards expire from
2011 through 2018; 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.
F-49
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998
(Information with respect to June 30, 1998 and 1999 is unaudited)
(8) 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.
(b) Reincorporation
On July 7, 1999, the Company's Board of Directors authorized the
reincorporation of the Company into the State of Delaware and a two for three
reverse stock split of the Company's common stock and preferred stock. 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 and reverse stock split.
(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 838,477 shares of Series D Convertible
Preferred Stock at a purchase price of $12.17 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 $0.97 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 $12.17 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-50
<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 severally purchase shares in approximately the same
proportion as set forth in the table above.
The following table shows the per share and total underwriting 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 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, its officers and directors 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 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 264,000 shares of common stock in the
offering to directors, officers, employees and other persons associated with
Kana through a directed share program. Of this total, 99,000 shares have been
reserved for individuals and entities affiliated with Amerindo Investment
Advisors and a total of 66,000 shares has been reserved for holders of our
Series A and Series B preferred stock. 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 $1,305,000.
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, and 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.......................................................... 21
Dividend Policy.......................................................... 21
Preemptive Rights........................................................ 21
Capitalization........................................................... 22
Dilution................................................................. 24
Supplemental Selected Consolidated Financial Data........................ 25
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 26
Business................................................................. 37
Management............................................................... 52
Transactions and Relationships with Related Parties...................... 67
Recent Developments...................................................... 69
Principal Stockholders................................................... 71
Description of Capital Stock............................................. 73
Shares Available for Future Sale......................................... 76
Legal Matters............................................................ 78
Change in Accountants.................................................... 78
Experts.................................................................. 78
Additional Information................................................... 79
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,300,000 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 discount payable by Kana in connection with the sale of common
stock being registered. All amounts are estimates except the SEC registration
fee, the NASD filing fee and the Nasdaq National Market Listing Fee.
<TABLE>
<S> <C>
SEC Registration Fee............................................. $ 13,700
NASD Filing Fee.................................................. 5,500
Nasdaq National Market Listing Fee............................... 17,000
Printing and Engraving Expenses.................................. 225,000
Legal Fees and Expenses.......................................... 600,000
Accounting Fees and Expenses..................................... 400,000
Blue Sky Fees and Expenses....................................... 15,000
Transfer Agent Fees.............................................. 25,000
Miscellaneous.................................................... 98,800
----------
Total.......................................................... $1,400,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit 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
has been filed with the Securities and Exchange Commission (the "Commission")
as an Exhibit to the Registrant's Registration Statement on Form S-1
(No. 333-82587) (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 3,333,333 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 2,916,666 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 3,949,138 shares of
its Series A Preferred Stock to entities affiliated with Draper Fisher
Jurvetson, Draper Richards L.P., High Street Partners, L.P., Beni M.
Horvath Trust 1991 and Ragnhild Horvath for an aggregate purchase price of
$770,000, which included $170,000 of cancellation of indebtedness.
(d) In April 1997, the Registrant issued a warrant to Beni M. Horvath
Trust 1991 to purchase up to 25,641 shares of its Series A Preferred Stock
at an exercise price of $0.20 per share.
(e) In April 1997, the Registrant issued a warrant to Ragnhild Horvath
to purchase up to 64,102 shares of its Series A Preferred Stock at an
excise price of $0.20 per share.
(f) In March 1998, the Registrant issued 19,468 shares of its Series A
Preferred Stock pursuant to the net exercise of a warrant issued to Beni
M. Horvath Trust 1991.
(g) in March 1998, the Registrant issued 48,670 shares of its Series A
Preferred Stock pursuant to the net exercise of a warrant issued to
Ragnhild Horvath.
(h) In June 1997, the Registrant issued 666 shares of its Common Stock
to Howell Hsiao as consideration for services rendered to the Registrant
pursuant to a Stock Issuance Agreement.
(i) In September 1997, the Registrant issued and sold 4,969,136 shares
of its Series B Preferred Stock to entities affiliated with Benchmark
Capital Partners L.P., entities affiliated with Draper Fisher Jurvetson,
Draper Richards L.P., High Street Partners, L.P. and Stanford University
for an aggregate purchase price of $4,025,000.
(j) In July 1998, the Registrant issued and sold 112,549 shares of its
Series B Preferred Stock to Eric A. Hahn for an aggregate purchase price
of $91,165.
(k) In August and September 1998, the Registrant issued and sold
3,414,098 shares of its Series C Preferred Stock to entities affiliated
with Benchmark Capital Partners L.P., entities affiliated with Draper
Fisher Jurvetson, Draper Richards L.P., Eric A. Hahn, Stanford University,
J.H. Whitney III, L.P., Whitney Strategic Partners III, L.P., entities
affiliated with Amerindo Investment Advisors, Inc. and Aspect
Telecommunications for an aggregate purchase price of $11,625,006.
(l) In July 1999, the Registrant issued and sold 838,472 shares of its
Series D Preferred Stock to Convergys Corporation, entities affiliated
with Benchmark Capital Partners L.P., entities affiliated with Draper
Fisher Jurvetson, Draper Richards L.P., entities affiliated with Amerindo
Investment Advisors, Inc. and New Millenium Venture Partners, LLC for an
aggregate purchase price of $10,200,004.
(m) Since inception, the Registrant has issued and sold an aggregate
of 53,333 shares of its Common Stock to Dr. Charles Holloway for an
aggregate consideration of $800.
(n) Since inception, the Registrant has issued and sold an aggregate
of 166,666 shares of its Common Stock to Ariel Poler for an aggregate
consideration of $2,500.
II-2
<PAGE>
(o) In August 1999, in connection with the acquisition of Connectify,
Inc. the Registrant issued 3,491,282 shares of common stock in exchange
for all outstanding shares of Connectify's capital stock and reserved
208,345 shares of common stock for issuance upon the exercise of assumed
Connectify options and warrants.
(p) 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 4,543,272 shares of
its Common Stock, with exercise prices ranging from $0.02 to $2.25. The
Registrant has issued and sold an aggregate of 4,240,072 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, any
underwriting discounts or commissions, or any public offering, and the
Registrant believes that the transactions set forth in (a) through (o) were
exempt from the registration requirements of the Securities Act by virtue of
Section 4(2) thereof and the transactions set forth in (p) were exempt from
the registration requirements of the Securities Act by virtue of Rule 701
pursuant to compensatory benefit plans and contracts relating to compensation
as provided under Rule 701 promulgated thereunder. 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-3
<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.
2.1 Agreement and Plan of Reorganization by and among the Registrant,
KCI Acquisition, Inc. and Connectify, Inc. dated August 13, 1999.
3.1** Second 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 Fourth Amended and Restated Investors' Rights Agreement dated August
13, 1999 by and among the Registrant and parties listed on Schedule
A therein.
4.3* Form of Warrant for Connectify Investors.
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 9, 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 18, 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.
10.11 QuickStart Loan and Security Agreement, dated November 6, 1998, with
Silicon Valley Bank and Connectify, Inc.
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).
23.3 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
24.1** Power of Attorney.
27.1 Financial Data Schedule. (In EDGAR format only)
</TABLE>
- --------
* To be filed by amendment
** Previously filed.
(b) Financial Statement Schedules
None.
II-4
<PAGE>
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
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; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Palo
Alto, State of California, on this 16th day of August, 1999.
KANA COMMUNICATIONS, INC.
/s/ Michael J. McCloskey
By: _________________________________
Michael J. McCloskey
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to Registration Statement has been signed by the following
persons in the capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
* Chief Executive Officer August 16, 1999
______________________________________ and Director (Principal
Michael J. McCloskey Executive Officer)
/s/ Joseph D. McCarthy Vice President, Finance August 16, 1999
______________________________________ and Operations (Principal
Joseph D. McCarthy Financial and Accounting
Officer)
* Director August 16, 1999
______________________________________
David M. Beirne
Director August 16, 1999
______________________________________
Robert W. Frick
/s/ Mark S. Gainey President and Chairman of August 16, 1999
______________________________________ the Board of Directors
Mark S. Gainey
* Director August 16, 1999
______________________________________
Eric A. Hahn
* Director August 16, 1999
______________________________________
Dr. Charles A. Holloway
* Director August 16, 1999
______________________________________
Steven T. Jurvetson
* Director August 16, 1999
______________________________________
Ariel Poler
</TABLE>
/s/ Mark S. Gainey
*By: _______________________
Mark S. Gainey (attorney-in-fact)
II-6
<PAGE>
EXHIBIT INDEX
<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.
2.1 Agreement and Plan of Reorganization by and among the
Registrant, KCI Acquisition, Inc. and Connectify, Inc. dated
August 13, 1999.
3.1** Second 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 Fourth Amended and Restated Investors' Rights Agreement dated
August 13, 1999 by and among the Registrant and parties listed
on Schedule A therein.
4.3* Form of Warrant for Connectify Investors.
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 9, 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 18, 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.
10.11 QuickStart Loan and Security Agreement, dated November 6, 1998,
with Silicon Valley Bank and Connectify, Inc.
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).
23.3 Consent of PricewaterhouseCoopers LLP, Independant Accountants.
24.1** Power of Attorney.
27.1 Financial Data Schedule. (In EDGAR format only)
</TABLE>
- --------
* To be filed by amendment
** Previously filed
<PAGE>
EXHIBIT 2.1
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
KANA COMMUNICATIONS, INC.,
KCI ACQUISITION CORP.
AND
CONNECTIFY, INC.
August 13, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<C> <S>
ARTICLE I THE MERGER.............................................. 1
- ---------
1.1 The Merger............................................ 1
----------
1.2 Closing; Effective Time............................... 2
-----------------------
1.3 Effect of the Merger.................................. 2
--------------------
1.4 Certificate of Incorporation; Bylaws.................. 2
-------------------------------------
1.5 Directors and Officers................................ 2
----------------------
1.6 Effect on Capital Stock............................... 3
-----------------------
1.7 Surrender of Certificates............................. 4
-------------------------
1.8 No Further Ownership Rights in Target Capital Stock... 5
---------------------------------------------------
1.9 Lost, Stolen or Destroyed Certificates................ 6
---------------------------------------
1.10 Tax and Accounting Consequences....................... 6
-------------------------------
1.11 Exemption from Registration........................... 6
---------------------------
1.12 Taking of Necessary Action; Further Action............ 6
------------------------------------------
ARTICLE II REPRESENTATIONS AND WARRANTIES OF TARGET............... 6
- ----------
2.1 Organization, Standing and Power...................... 7
--------------------------------
2.2 Capital Structure..................................... 7
-----------------
2.3 Authority............................................. 8
---------
2.4 Financial Statements.................................. 9
--------------------
2.5 Absence of Certain Changes............................ 9
--------------------------
2.6 Absence of Undisclosed Liabilities.................... 9
----------------------------------
2.7 Litigation............................................ 10
----------
2.8 Restrictions on Business Activities................... 10
-----------------------------------
2.9 Governmental Authorization............................ 10
--------------------------
2.10 Title to Property..................................... 10
-----------------
2.11 Intellectual Property................................. 11
---------------------
2.12 Manufacturing and Marketing Rights.................... 12
----------------------------------
2.13 Taxes................................................. 12
-----
2.14 Employee Benefit Plans................................ 13
----------------------
2.15 Certain Agreements Affected by the Merger............. 15
----------------------------------------
2.16 Employee Matters...................................... 15
----------------
2.17 Interested Party Transactions......................... 16
-----------------------------
2.18 Insurance............................................. 16
---------
2.19 Compliance With Laws.................................. 16
--------------------
2.20 Minute Books.......................................... 16
------------
2.21 Complete Copies of Materials.......................... 16
----------------------------
2.22 Brokers' and Finders' Fees............................ 17
--------------------------
2.23 Affiliate and Stockholder Agreement; Irrevocable
Proxies............................................... 17
-------
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
2.24 Vote Required......................................... 17
-------------
2.25 Board Approval........................................ 17
--------------
2.26 [Reserved]............................................ 17
----------
2.27 Material Contracts.................................... 17
------------------
2.28 No Breach of Material Contracts....................... 18
-------------------------------
2.29 Material Third Party Consents......................... 18
-----------------------------
2.30 Pooling of Interests.................................. 18
--------------------
2.31 Representations Complete.............................. 19
------------------------
2.32 Year 2000............................................. 19
---------
2.33 Products Liability.................................... 19
------------------
2.34 Service Provider Agreements........................... 20
---------------------------
ARTICLE III REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND MERGER SUB 20
- -----------
3.1 Organization, Standing and Power...................... 20
-------------------------------
3.2 Capital Structure of Acquiror......................... 21
-----------------------------
3.3 Authority............................................. 21
---------
3.4 Financial Statements of Acquiror...................... 22
--------------------------------
3.5 Absence of Undisclosed Liabilities.................... 22
----------------------------------
3.6 Litigation............................................ 22
----------
3.7 Governmental Authorization............................ 23
--------------------------
3.8 Board Approval........................................ 23
--------------
3.9 SEC Filings........................................... 23
-----------
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME.................... 23
- ----------
4.1 Conduct of Business of Target and Acquiror............ 23
------------------------------------------
4.2 Conduct of Business of Target......................... 24
-----------------------------
4.3 No Solicitation....................................... 26
---------------
ARTICLE V ADDITIONAL AGREEMENTS................................... 27
- ---------
5.1 [Reserved]............................................ 27
----------
5.2 Meeting or Consent of Stockholders.................... 27
----------------------------------
5.3 Access to Information................................. 27
---------------------
5.4 Confidentiality....................................... 28
---------------
5.5 Public Disclosure..................................... 28
-----------------
5.6 Consents; Cooperation................................. 28
---------------------
5.7 Stockholder Representation Agreements................. 28
-------------------------------------
5.8 Stockholder Agreement/Irrevocable Proxies............. 28
-----------------------------------------
5.9 Lock-Up Agreements and NASD Questionnaires............ 29
------------------------------------------
5.10 Legal Requirements.................................... 29
------------------
5.11 Blue Sky Laws......................................... 29
-------------
5.12 Employee Benefit Plans................................ 29
----------------------
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
5.13 Escrow Agreement...................................... 30
----------------
5.14 Reserved.............................................. 30
--------
5.15 Employees............................................. 30
---------
5.16 Expenses.............................................. 31
--------
5.17 Treatment as Reorganization........................... 31
---------------------------
5.18 Reasonable Efforts and Further Assurances............. 31
-----------------------------------------
5.19 Preferred Stock....................................... 31
---------------
5.20 Pooling Accounting.................................... 31
------------------
5.21 Pooling Letters....................................... 31
---------------
5.22 Disclosure Schedule Supplement........................ 32
------------------------------
5.23 Board Member.......................................... 32
------------
5.24 Investors' Rights Agreement........................... 32
---------------------------
ARTICLE VI CONDITIONS TO THE MERGER............................... 32
- ----------
6.1 Conditions to Obligations of Each Party to Effect the 32
Merger................................................
------
6.2 Additional Conditions to Obligations of Target........ 33
----------------------------------------------
6.3 Additional Conditions to the Obligations of Acquiror
and Merger Sub........................................ 33
--------------
ARTICLE VII TERMINATION, AMENDMENT AND WAIVER...................... 37
- -----------
7.1 Termination............................................ 37
-----------
7.2 Effect of Termination.................................. 38
---------------------
7.3 Expenses and Termination Fees.......................... 38
-----------------------------
7.4 Extension; Waiver...................................... 38
----------------
ARTICLE VIII ESCROW AND INDEMNIFICATION............................ 38
- ------------
8.1 Escrow Fund............................................ 38
-----------
8.2 Indemnification........................................ 39
---------------
8.3 Escrow Period.......................................... 40
-------------
8.4 Claims upon Escrow Fund................................ 40
-----------------------
8.5 Stockholders' Agent.................................... 41
-------------------
8.6 Actions of the Stockholders' Agent..................... 41
----------------------------------
8.7 Claims................................................. 41
------
ARTICLE IX GENERAL PROVISIONS...................................... 42
- ----------
9.1 Survival at Effective Time............................. 42
--------------------------
9.2 Notices................................................ 42
-------
9.3 Interpretation......................................... 43
--------------
9.4 Counterparts........................................... 43
------------
9.5 Attorneys Fees......................................... 44
--------------
9.6 Entire Agreement; Nonassignability; Parties in
Interest............................................... 44
--------
9.7 Severability........................................... 44
------------
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
9.8 Remedies Cumulative................................... 44
-------------------
9.9 Governing Law......................................... 44
-------------
9.10 Rules of Construction................................. 45
---------------------
</TABLE>
iv
<PAGE>
SCHEDULES
- ---------
Acquiror Disclosure Schedule
Target Disclosure Schedule
<TABLE>
<S> <C> <C>
Schedule 2.2 - Capital Structure
Schedule 2.3 - Authority
Schedule 2.4 - Financial Statements
Schedule 2.5 - Absence of Certain Changes
Schedule 2.6 - Absence of Undisclosed Liabilities
Schedule 2.7 - Litigation
Schedule 2.10 - Target Real Property
Schedule 2.11 - Target Intellectual Property
Schedule 2.12 - Environmental Matters
Schedule 2.13 - Taxes
Schedule 2.14 - Target Employee Plans
Schedule 2.27 - List of Material Contracts
Schedule 2.29 - Material Third Party Consents
Schedule 4.2 - Conduct of Business of Target
Schedule 5.8 - Target Affiliates
Schedule 5.8 - Acquiror Affiliates
Schedule 5.12 - Holders of Outstanding Target Options and Warrants
Schedule 5.15 - List of Employees
Schedule 6.3(o) - List of Service Providers
</TABLE>
EXHIBITS
- --------
<TABLE>
<S> <C> <C>
Exhibit A - Agreement of Merger
Exhibit B - Exchange Ratio
Exhibit C - Target Stockholder List
Exhibit D - Affiliate and Stockholder Agreement, including form of Irrevocable Proxy
Exhibit E - Stockholder Representation Agreement
Exhibit F - Investors' Rights Agreement
Exhibit G - Escrow Agreement
Exhibit H - Form of Non-Competition Agreement
Exhibit I - Acquiror's Legal Opinions
Exhibit J - Target's Legal Opinions
Exhibit K - FIRPTA Notice
Exhibit L - Form of Lock-Up Agreement
Exhibit M - Form of NASD Questionnaire
</TABLE>
v
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made
and entered into as of August 13, 1999, by and among Kana Communications, Inc.,
a California corporation ("Acquiror"), KCI Acquisition Corp., a Delaware
corporation and wholly-owned subsidiary of Acquiror ("Merger Sub") and
Connectify, Inc., a Delaware corporation ("Target").
RECITALS
A. The Boards of Directors of Target, Merger Sub and Acquiror believe
it is in the best interests of their respective companies and the stockholders
of their respective companies that Target and Acquiror combine into a single
company through the statutory merger of Merger Sub with and into Ta
rget (the
"Merger") and, in furtherance thereof, have approved the Merger.
B. Pursuant to the Merger, among other things, each outstanding share
of capital stock of Target ("Target Capital Stock") shall be converted into the
right to receive shares of common stock of Acquiror ("Acquiror Common Stock"),
at the rate set forth herein and each outstanding right to acquire capital stock
of Target shall be converted into the right to receive Acquiror Common Stock at
the rate set forth herein.
C. Target, the Securityholders, Merger Sub and Acquiror desire to
make certain representations and warranties and other agreements in connection
with the Merger.
D. The parties intend, by executing this Agreement, to adopt a plan
of reorganization within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended (the "Code"), and to cause the Merger to qualify as a
reorganization under the provisions of Sections 368(a)(1)(A) of the Code.
E. The parties inten
d to cause the Merger to be accounted for as a
pooling of interests pursuant to APB Opinion No. 16, Staff Accounting Series
Releases 130, 135 and 146 and Staff Accounting Bulletins Topic Two.
F. Concurrent with the execution of this Agreement and as an
inducement to Acquiror to enter into this Agreement, the affiliates of Target
who are stockholders, officers or directors have on the date hereof entered into
an agreement to vote the shares of Target's Capital Stock owned by such persons
to approve the Merger.
NOW, THEREFORE, in consideration of the covenants and representations
set forth herein, and for other good and valuable consideration, the parties
agree as follows:
<PAGE>
ARTICLE I
---------
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
----------
subject to and upon the terms and conditions of this Agreement, the Agreement of
Merger attached hereto as Exhibit A (the "Agreement of Merger") and the
---------
applicable provisions of the California Corporations Code ("California Law") and
the Delaware General Corporations Law ("Delaware Law"), Merger Sub shall be
merged with and into Target, the separate corporate existence of Merger Sub
shall cease and Target shall continue as the surviving corporation, with the end
result that Target shall be a wholly-owned subsidiary of Acquiror. Target as the
surviving corporation after the Merger is hereinafter sometimes referred to as
the "Surviving Corporation."
1.2 Closing; Effective Time. The closing of the transactions contemplated
-----------------------
hereby (the "Closing") shall take place as soon as practicable after the
satisfaction or waiver of each of the conditions set forth in Article VI hereof
or at such other time as the parties hereto agree (the "Closing Date"). The
Closing shall take place at the offices of Brobeck, Phleger & Harrison LLP, Two
Embarcadero Place, 2200 Geng Road, Palo Alto, California, or at such other
location as the parties hereto agree. In connection with the Closing, the
parties hereto shall cause the Merger to be consummated by filing the
Certificate of Merger, together with the required officers' certificates, with
the Secretary of State of the State of Delaware and, if applicable, with the
State of California, in accordance with the relevant provisions of Delaware Law
(the time of such filing being the "Effective Time").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
--------------------
shall be as provided in this Agreement, the Certificate of Merger and the
applicable provisions of Delaware Law and California Law. Without limiting the
generality of the foregoing, and subject thereto, at the Effective Time, all the
property, rights, privileges, powers and franchises of Target and Merger Sub
shall vest in the Surviving Corporation, and all debts, liabilities and duties
of Target and Merger Sub shall become the debts, liabilities and duties of the
Surviving Corporation, and the Surviving Corporation shall be a wholly-owned
subsidiary of Acquiror.
1.4 Certificate of Incorporation; Bylaws.
------------------------------------
(a) At the Effective Time, the Certificate of Incorporation of Merger
Sub, as in effect immediately prior to the Effective Time, shall be the
Certificate of Incorporation of the Surviving Corporation until thereafter
amended as provided by Delaware Law and such Certificate of Incorporation.
(b) The Bylaws of Merger Sub, as in effect immediately prior to the
Effective Time, shall be the Bylaws of the Surviving Corporation until
thereafter amended.
1.5 Directors and Officers. At the Effective Time, the directors of Merger
----------------------
Sub, as in effect immediately prior to the Effective Time, shall be the
directors of the Surviving Corporation, until their respective successors are
duly elected or appointed and qualified. The officers of Merger Sub, as in
effect immediately prior to the Effective Time, shall be the officers
2
<PAGE>
of the Surviving Corporation, until their respective successors are duly elected
or appointed and qualified.
1.6 Effect on Capital Stock. By virtue of the Merger and without any
-----------------------
action on the part of Acquiror, Target or the holders of any of Target's
securities:
(a) Conversion of Target Capital Stock. The maximum number of shares
----------------------------------
of Acquiror Common Stock to be issued (including Acquiror Common Stock to be
reserved for issuance upon exercise of options and warrants to purchase shares
of Target Common Stock ("Target Options") assumed by Acquiror) in exchange for
the acquisition by Acquiror of all outstanding Target Capital Stock and all
unexpired and unexercised options and warrants to acquire Target Capital Stock
shall be equal to 5,549,442 shares (the number of shares determined as set forth
above being referred to herein as the "Total Acquiror Shares"), reduced as a
result of any Dissenting Shares (as defined below). Subject to the terms and
conditions of this Agreement and the Agreement of Merger as of the Effective
Time, by virtue of the Merger and without any action on the part of the holder
of any shares of Target Capital Stock:
(A) At the Effective Time, each share of Target Common Stock and
any Target Preferred Stock issued and outstanding immediately prior to the
Effective Time (other than shares to be cancelled pursuant to Section
1.6(b) and shares, if any, held by persons who have not voted such shares
for approval of the Merger and with respect to which such persons shall
become entitled to exercise dissenters' rights in accordance with
California Law or Delaware Law ("Dissenting Shares")) shall be converted
and exchanged for the right to receive such number of shares of Acquiror
Common Stock as shall be determined in accordance with item (i) of Exhibit
-------
B hereof (the "Exchange Ratio").
-
(B) At the Effective Time, each Target Option granted and
outstanding immediately prior to the Effective Time shall be assumed and be
converted into options and/or warrants to purchase such number of shares of
Acquiror Common Stock as shall be determined in accordance with item (ii)
of Exhibit B hereof using the Exchange Ratio.
-------
(b) Cancellation of Target Capital Stock Owned by Target. At the
----------------------------------------------------
Effective Time, all shares of Target Capital Stock that are owned by Target as
treasury stock, immediately prior to the Effective Time shall be canceled and
extinguished without any conversion thereof.
(c) Target Stock Option Plans. At the Effective Time, the Target 1998
-------------------------
Stock Plan, (the "Target Stock Option Plan"), and all options to purchase Target
Common Stock then outstanding under the Target Stock Option Plan and warrants to
purchase Target Capital Stock shall be assumed by Acquiror in accordance with
Section 5.12 of this Agreement.
(d) Adjustments to Exchange Ratio. The Exchange Ratio shall be
-----------------------------
adjusted to reflect fully the effect of any stock split, reverse split, stock
dividend (including any dividend or distribution of securities convertible into
Acquiror Common Stock or Target Capital Stock), reorganization, recapitalization
or other like change with respect to Acquiror Common Stock or Target Capital
Stock occurring (or for which the record date occurs) after the date hereof and
prior to the Effective Time.
3
<PAGE>
(e) Conversion of Merger Sub Capital Stock. Each share of common stock
--------------------------------------
of Merger Sub issued and outstanding immediately prior to the Effective Time
shall be converted into and exchanged for one newly and validly issued, fully
paid and nonassessable share of common stock of the Surviving Corporation.
(f) Dissenters' Rights. Any Dissenting Shares shall not be converted
------------------
into Acquiror Common Stock but shall instead be converted into the right to
receive such consideration as may be determined to be due with respect to such
Dissenting Shares pursuant to California Law or Delaware Law. Target agrees
that, except with the prior written consent of Acquiror,
or as required under
California Law or Delaware Law, it will not voluntarily make any payment with
respect to, or settle or offer to settle, any such purchase demand. Each holder
of Dissenting Shares ("Dissenting Stockholder") who, pursuant to the provisions
of California Law or Delaware Law, becomes entitled to payment of the fair value
for shares of Target Capital Stock shall receive payment therefor (but only
after the value therefor shall have been agreed upon or finally determined
pursuant to such provisions). If, after the Effective Time, any Dissenting
Shares shall lose their status as Dissenting Shares, Acquiror shall issue and
deliver, upon surrender by such stockholder of certificate or certificates
representing shares of Target Capital Stock, the number of shares of Acquiror
Common Stock to which such stockholder would otherwise be entitled under this
Section 1.6 and the Agreement of Merger less the number of shares allocable to
such stockholder that have been deposited in the Escrow Fund (as
defined below)
in respect of such shares of Acquiror Common Stock pursuant to Section 1.7(b)
and Article VIII hereof.
1.7 Surrender of Certificates.
-------------------------
(a) Acquiror to Provide Common Stock. At the Closing, Acquiror shall
--------------------------------
deliver to Target, (i) the shares of Acquiror Common Stock issuable pursuant to
Section 1.6(a) in exchange for shares of Target Capital Stock outstanding
immediately prior to the Effective Time less the number of shares of Acquiror
Common Stock to be deposited into an escrow fund (the "Escrow Fund") pursuant to
the requirements of Article VIII, which Acquiror Common Stock shall be issuable
to the persons and in the amounts set forth on Exhibit C, and (ii) Target will
---------
deliver 16,507,361 shares of Target Capital Stock to Acquiror properly endorsed
for transfer.
(b) Exchange Procedures. Upon surrender o
f a certificate or
certificates which immediately prior to the Effective Time represented
outstanding shares of Target Capital Stock (a "Certificate") for cancellation at
the Closing or to such agent or agents as may be appointed by Acquiror, the
holder of such Certificate shall be entitled to receive in exchange therefor a
certificate representing the number of whole shares of Acquiror Common Stock
less the number of shares of Acquiror Common Stock to be deposited in the Escrow
Fund on such holder's behalf pursuant to Article VIII hereof, and the
Certificate so surrendered shall forthwith be canceled. Until so surrendered,
each outstanding Certificate that, prior to the Effective Time, represented
shares of Target Capital Stock will be deemed from and after the Effective Time,
for all corporate purposes, other than the payment of dividends, to evidence the
ownership of the number of full shares of Acquiror Common Stock into which such
shares of Target Capital Stock shall have been so converted. As soon
as
practicable after the Effective Time, and subject to and in accordance with the
provisions of Article VIII hereof, Acquiror shall cause to be distributed to the
Escrow Agent (as defined in Article VIII hereof) a certificate or certificates
representing ten
4
<PAGE>
percent (10%) of the Total Acquiror Shares (other than shares issuable upon
exercise of outstanding options under the Target Stock Plan or upon exercise of
warrants or still subject to vesting (after an acceleration of vesting at
closing)) which shall be registered in the names of the Target stockholders who
otherwise would receive them pursuant to this Agreement. The shares distributed
to the Escrow Agent shall be shares that are not subject to any repurchase
rights by Target. The shares distributed to the Escrow Agent shall be
beneficially owned by such holders and shall be held in escrow and shall be
available to compensate Acquiror for damages as provided in Article VIII. To the
extent not used for such purpose, such shares shall be released, all as provided
in Article VIII hereof.
(c) Distributions With Respect to Unexchanged Shares. No dividends or
other distributions with respect to Acquiror Common Stock with a record date
after the Effective Time will be paid to the holder of any unsurrendered
Certificate with respect to the shares of Acquiror Common Stock represented
thereby until the holder of record of such Certificate shall surrender such
Certificate. Subject to applicable law, following surrender of any such
Certificate, there shall be paid to the record holder of the certificates
representing whole shares of Acquiror Common Stock issued in exchange therefor,
without interest, at the time of such surrender, the amount of any such
dividends or other distributions with a record date after the Effective Time
theretofore payable (but for the provisions of this Section 1.7(c)) with respect
to such shares of Acquiror Common Stock.
(d) Transfers of Ownership. If any certificate for shares of Acquiror
----------------------
Common Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the Certificate so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange will have paid to Acquiror or any agent designated by it any transfer
or other taxes required by reason of the issuance of a certificate for shares of
Acquiror Common Stock in any name other than that of the registered holder of
the Certificate surrendered, or established to the satisfaction of Acquiror or
any agent designated by it that such tax has been paid or is not payable.
(e) Dissenting Shares. The provisions of this Section 1.7 shall also
-----------------
apply to Dissenting Shares that lose their status as such, except that the
obligations of Acquiror under this Section 1.7 shall commence on the date of
loss of such status and the holder of such shares shall be entitled to receive
in exchange for such shares the number of shares of Acquiror Common Stock to
which such holder is entitled pursuant to Section 1.6 hereof.
1.8 No Further Ownership Rights in Target Capital Stock. All shares of
---------------------------------------------------
Acquiror Common Stock issued upon the surrender for exchange of shares of Target
Capital Stock in accordance with the terms hereof (including any cash paid in
lieu of fractional shares) shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of Target Capital Stock,
and there shall be no further registration of transfers on the records of the
Surviving Corporation of shares of Target Capital Stock which were outstanding
immediately prior to the Effective Time.
1.9 Lost, Stolen or Destroyed Certificates. In the event any Certificates
--------------------------------------
shall have been lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or
5
<PAGE>
destroyed Certificates, upon the making of an affidavit of that fact by the
holder thereof, such shares of Acquiror Common Stock as may be required pursuant
to Section 1.6; provided, however, that Acquiror may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed Certificates to deliver a bond in such sum as it may
reasonably direct as indemnity against any claim that may be made against
Acquiror with respect to the Certificates alleged to have been lost, stolen or
destroyed.
1.10 Tax and Accounting Consequences. It is intended by the parties hereto
-------------------------------
that the Merger shall (i) constitute a reorganization within the meaning of
Section 368 of the Code and (ii) qualify for accounting treatment as a pooling
of interests.
1.11 Exemption from Registration. The shares of Acquiror Common Stock to be
---------------------------
issued in connection with the Merger will be issued in a transaction exempt from
registration under the Securities Act of 1933, as amended (the "Securities
Act"), by reason of Section 4(2) thereof and exempt from the qualification
requirements of Section 25110 of the Corporate Securities Law of 1968, as
amended, of the State of California, by reason of Section 25103(h) thereunder.
1.12 Taking of Necessary Action; Further Action. If, at any time after the
------------------------------------------
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest Acquiror and the Surviving Corporation
with full right, title and possession to all assets, property, rights,
privileges, powers and franchises of Target, the officers and directors of
Target, Acquiror and Merger Sub are fully authorized in the name of their
respective corporations or otherwise to take, and will take, all such lawful and
necessary action, so long as such action is not inconsistent with this
Agreement.
ARTICLE II
----------
REPRESENTATIONS AND WARRANTIES OF TARGET
In this Agreement, any reference to any event, change, condition or
effect being "material" with respect to any entity or group of entities means
any material event, change, condition or effect related to the condition
(financial or otherwise), properties, assets (including intangible assets),
liabilities, business, prospects, operations or results of operations of such
entity or group of entities. In this Agreement, any reference to a "Material
Adverse Effect" with respect to any entity or group of entities means any event,
change or effect that is materially adverse to the condition (financial or
otherwise), properties, assets, liabilities, business, operations or results of
prospects, operations of such entity and its subsidiaries, taken as a whole.
In this Agreement, any reference to a party's "knowledge" means
knowledge after due and diligent inquiry of such party's officers and directors.
Except as disclosed in a document of even date herewith and delivered
by Target to Acquiror prior to the execution and delivery of this Agreement and
referring to the representations and warranties in this Agreement (the "Target
Disclosure Schedule"), Target represents and warrants to Acquiror as follows:
6
<PAGE>
2.1 Organization, Standing and Power. Target is a corporation duly
--------------------------------
organized, validly existing and in good standing under the laws of its
jurisdiction of organization. Target has the corporate power to own its
properties and to carry on its business as now being conducted and as proposed
to be conducted and is duly qualified to do business and is in good standing in
each jurisdiction in which the failure to be so qualified and in good standing
would have a Material Adverse Effect on Target. Target has delivered a true and
correct copy of the Certificate of Incorporation and Bylaws or other charter
documents, as applicable, of Target as amended to date, to Acquiror. Target is
not in violation of any of the provisions of its Certificate of Incorporation or
Bylaws. Target does not own and never has owned directly or indirectly any
equity or similar interest in, or any interest convertible or exchangeable or
exercisable for, any equity or similar interest in, any corporation, subsidiary,
partnership, joint venture or other business association or entity.
2.2 Capital Structure. The authorized capital stock of Target consists of
-----------------
25,000,000 shares of Common Stock and 8,200,000 shares of Preferred Stock, of
which there were issued and outstanding as of the close of business on July 9,
1999, 8,875,665 shares of Common Stock and 7,614,696 shares of Series A
Preferred Stock (the "Preferred Stock"). There are no other outstanding shares
of capital stock or voting securities and no outstanding commitments to issue
any shares of capital stock or voting securities after July 9, 1999 other than
pursuant to the exercise of options outstanding as of such date under the Target
Stock Option Plan and warrants to purchase 114,218 shares of Series A Preferred
Stock outstanding as such date. All outstanding shares of Target Capital Stock
are duly authorized, validly issued, fully paid and non-assessable and are free
of any liens or encumbrances other than any liens or encumbrances created by or
imposed upon the holders thereof, and are not subject to preemptive rights or
rights of first refusal created by statute, the Articles of Incorporation or
Bylaws of Target or any agreement to which Target is a party or by which it is
bound. As of the close of business on July 9, 1999, Target has reserved (i)
sufficient shares of Common Stock for issuance upon conversion of the
outstanding preferred stock and warrants, and (ii) 2,546,969 shares of Common
Stock for issuance to employees and consultants pursuant to the Target Stock
Option Plan, of which 587,000 shares are subject to outstanding, unexercised
options, and no shares are subject to outstanding stock purchase rights. Target
will not issue or grant additional options under the Target Stock Option Plan.
Each share of Preferred Stock converts into one share of Common Stock. Except
for (i) the rights created pursuant to this Agreement and (ii) Target's right to
repurchase any unvested shares under the Target Stock Option Plan, there are no
other options, warrants, calls, rights, commitments or agreements of any
character to which Target is a party or by which it is bound obligating Target
to issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered,
sold, repurchased or redeemed, any shares of capital stock of Target or
obligating Target to grant, extend, accelerate the vesting of, change the price
of, or otherwise amend, modify or enter into any such option, warrant, call,
right, commitment or agreement. The consummation of the Merger shall not cause
an acceleration in the vesting or lapse of any restriction or right of any of
Target's securities. Except as set forth on the Target Disclosure Schedule,
there are no contracts, commitments or agreements relating to voting, purchase
or sale of Target's capital stock (i) between or among Target and any of its
securityholders and (ii) to the Target's knowledge, between or among any of
Target's securityholders. The terms of the Target Stock Option Plan and the
applicable stock option agreements and the warrants and warrant agreements
permit the assumption or substitution of options or warrants, as applicable, to
purchase Acquiror Capital Stock as provided in this Agreement, without the
consent or
7
<PAGE>
approval of the holders of such securities, the Target stockholders, or
otherwise. True and complete copies of all agreements and instruments relating
to or issued under the Target Stock Option Plan have been provided to Acquiror
and such agreements and instruments have not been amended, modified or
supplemented, and there are no agreements to amend, modify or supplement such
agreements or instruments in any case from the form provided to Acquiror. All
outstanding shares of Common Stock and Preferred Stock were issued in compliance
with all applicable federal and state securities laws.
2.3 Authority. Target has all requisite corporate power and authority to
---------
enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Target, subject only to the approval of the
Merger by Target's stockholders as contemplated by Section 6.3(n). This
Agreement has been duly executed and delivered by Target and constitutes the
valid and binding obligation of Target enforceable against Target in accordance
with its terms, except that such enforceability may be limited by bankruptcy,
insolvency, moratorium or other similar laws affecting or relating to creditors'
rights generally, and is subject to general principles of equity. The execution
and delivery of this Agreement by Target does not, and the consummation of the
transactions contemplated hereby will not, conflict with, or result in any
violation of, or default under (with or without notice or lapse of time, or
both), or give rise to a right of termination, cancellation or acceleration of
any obligation or loss of any benefit under (i) any provision of the Certificate
of Incorporation or Bylaws of Target as amended, or (ii) any material mortgage,
indenture, lease, contract or other agreement or instrument, permit, concession,
franchise, license, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Target or any of its properties or assets. No consent,
approval, order or authorization of, or registration, declaration or filing
with, any court, administrative agency or commission or other governmental
authority or instrumentality ("Governmental Entity") is required by or with
respect to Target in connection with the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby, except
for (i) the filing of the Agreement of Merger, together with the required
officers' certificates, as provided in Section 1.2; (ii) such consents,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under applicable state securities laws and the securities laws
of any foreign country; and (iii) such other consents, authorizations, filings,
approvals and registrations which, if not obtained or made, would not have a
Material Adverse Effect on Target and would not prevent, or materially alter or
delay any of the transactions contemplated by this Agreement.
2.4 Financial Statements. Target has delivered to Acquiror its audited
--------------------
financial statements on a consolidated basis for the year ended December 31,
1998, and its unaudited financial statements (balance sheet, statement of
operations and statement of cash flows) on a consolidated basis as at, and for
the six-month period ended June 30, 1999 (collectively, the "Financial
Statements"). The Financial Statements have been prepared in accordance with
generally accepted accounting principles (except that the unaudited financial
statements do not have notes thereto) applied on a consistent basis throughout
the periods indicated and with each other. The Financial Statements fairly
present the financial condition and operating results of Target as of the dates,
and for the periods, indicated therein, subject to normal year-end audit
adjustments. Target maintains and will continue to maintain a standard system of
accounting established and administered in accordance with generally accepted
accounting principles.
8
<PAGE>
2.5 Absence of Certain Changes. Since December 31, 1998 (the "Target
--------------------------
Balance Sheet Date"), Target has conducted its business in the ordinary course
consistent with past practice and there has not occurred: (i) any change, event
or condition (whether or not covered by insurance) that has resulted in, or
might reasonably be expected to result in, a Material Adverse Effect to Target;
(ii) any acquisition, sale or transfer of any material asset of Target; (iii)
any change in accounting methods or practices (including any change in
depreciation or amortization policies or rates) by Target or any revaluation by
Target of any of its assets; (iv) any declaration, setting aside, or payment of
a dividend or other distribution with respect to the shares of Target, or any
direct or indirect redemption, purchase or other acquisition by Target of any of
its shares of capital stock, except repurchases of its capital stock pursuant to
existing agreements with Target's employees and consultants; (v) any material
contract entered into by Target, or any material amendment or termination of, or
default under, any material contract to which Target is a party or by which it
is bound; (vi) any amendment or change to the Certificate of Incorporation or
Bylaws of Target; or (vii) other than in the ordinary course of business
consistent with past practice, any increase in or modification of the
compensation or benefits payable or to become payable by Target to any of its
directors or employees. There has not been any negotiation or agreement by
Target to do any of the things described in the preceding clauses (ii), (iii),
(iv), (v) or (vii) (other than negotiations with Acquiror and its
representatives regarding the transactions contemplated by this Agreement).
2.6 Absence of Undisclosed Liabilities. Target has no obligations or
----------------------------------
liabilities of any nature (matured or unmatured, fixed or contingent) other than
(i) those set forth or adequately provided for in the Balance Sheet included in
the Financial Statements as of December 31, 1998 (the "Target Balance Sheet"),
(ii) those incurred in the ordinary course of business and not required to be
set forth in the Target Balance Sheet under generally accepted accounting
principles and (iii) those incurred in the ordinary course of business since the
Target Balance Sheet Date and consistent with past practice.
2.7 Litigation. There is no private or governmental action, suit,
----------
proceeding, claim, arbitration or investigation pending before any agency, court
or tribunal, foreign or domestic, or, to the knowledge of Target, threatened
against Target or any of its properties or any of its officers or directors (in
their capacities as such). There is no judgment, decree or order against Target,
or, to the knowledge of Target, any of its directors or officers (in their
capacities as such), that could prevent, enjoin, or materially alter or delay
any of the transactions contemplated by this Agreement, or that could reasonably
be expected to have a Material Adverse Effect on Target. The Target Disclosure
Schedule also lists all litigation that Target has pending against other
parties.
2.8 Restrictions on Business Activities. There is no agreement, judgment,
-----------------------------------
injunction, order or decree binding upon Target which has or could reasonably be
expected to have the effect of prohibiting or impairing any current or future
business practice of Target, any acquisition of property by Target or the
conduct of business by Target as currently conducted or as currently proposed to
be conducted by Target.
2.9 Governmental Authorization. Target has obtained each federal, state,
--------------------------
county, local or foreign governmental consent, license, permit, grant, or other
authorization of a Governmental Entity (i) pursuant to which Target currently
operates or holds any interest in any
9
<PAGE>
of its properties or (ii) that is required for the operation of Target's
business or the holding of any such interest ((i) and (ii) herein collectively
called "Target Authorizations"), and all of such Target Authorizations are in
full force and effect, except where the failure to obtain or have any such
Target Authorizations could not reasonably be expected to have a Material
Adverse Effect on Target.
2.10 Title to Property. Target has good and marketable title to all of its
-----------------
properties, interests in properties and assets, real and personal, reflected in
the Target Balance Sheet or acquired after the Target Balance Sheet Date (except
properties, interests in properties and assets sold or otherwise disposed of
since the Target Balance Sheet Date in the ordinary course of business), or with
respect to leased properties and assets, valid leasehold interests in, free and
clear of all mortgages, liens, pledges, charges or encumbrances of any kind or
character, except (i) the lien of current taxes not yet due and payable, (ii)
such imperfections of title, liens and easements as do not and will not
materially detract from or interfere with the use of the properties subject
thereto or affected thereby, or otherwise materially impair business operations
involving such properties and (iii) liens securing debt which is reflected on
the Target Balance Sheet. The plants, property and equipment of Target that are
used in the operations of its business are in good operating condition and
repair, subject to normal wear and tear. All properties used in the operations
of Target are reflected in the Target Balance Sheet to the extent generally
accepted accounting principles require the same to be reflected. Schedule 2.10
-------------
identifies each parcel of real property owned or leased by Target.
2.11 Intellectual Property.
---------------------
(a) Target owns, or is licensed or otherwise possesses legally
enforceable rights to use all patents, trademarks, trade names, service marks,
copyrights, and any applications therefor, maskworks, net lists, schematics,
technology, know-how, trade secrets, inventory, ideas, algorithms, processes,
computer software programs or applications (in source code and/or object code
form), and tangible or intangible proprietary information or material
("Intellectual Property") that are used or currently proposed to be used in the
business of Target as currently conducted by Target. Target has not (i) licensed
any of its Intellectual Property in source code form to any party or (ii)
entered into any exclusive agreements relating to its Intellectual Property with
any party.
(b) Schedule 2.11 lists (i) all patents and patent applications, all
pending or registered trademarks, trade names and service marks, and all
registered copyrights and maskworks, included in the Intellectual Property,
including the jurisdictions in which each such Intellectual Property right has
been issued or registered or in which any application for such issuance and
registration has been filed, (ii) all licenses, sublicenses and other agreements
as to which Target is a party and pursuant to which any person is authorized to
use any Intellectual Property, and (iii) all licenses, sublicenses and other
agreements as to which Target is a party and pursuant to which Target is
authorized to use any third party patents, trademarks or copyrights, including
software ("Third Party Intellectual Property Rights") which are incorporated in,
are, or form a part of any Target product.
(c) There is no unauthorized use, disclosure, infringement or
misappropriation of any Intellectual Property rights of Target or any
Intellectual Property right of any third party
10
<PAGE>
to the extent licensed by or through Target by any third party, including any
employee or former employee of Target. Target has not entered into any agreement
to indemnify any other person against any charge of infringement of any
Intellectual Property, other than indemnification provisions contained in
purchase orders arising in the ordinary course of business.
(d) Target is not, nor will it be as a result of the execution and
delivery of this Agreement or the performance of its obligations under this
Agreement, in breach of any license, sublicense or other agreement relating to
the Intellectual Property or Third Party Intellectual Property Rights.
(e) All patents, pending or registered trademarks and service marks
and copyrights held by Target are valid and subsisting. Target (i) has not been
sued in any suit, action or proceeding which involves a claim of infringement of
any patents, trademarks, service marks, copyrights or violation of any trade
secret or other proprietary right of any third party; (ii) has no knowledge that
the manufacturing, marketing, licensing or sale of its products infringes any
patent, trademark, service mark, copyright, trade secret or other proprietary
right of any third party and (iii) has not brought any action, suit or
proceeding for infringement of Intellectual Property or breach of any license or
agreement involving Intellectual Property against any third party.
(f) Target has taken all necessary and appropriate steps to protect
and preserve the confidentiality of all Intellectual Property not otherwise
protected by patents, patent applications or copyright ("Confidential
Information"). All use, disclosure or appropriation of Confidential Information
owned by Target by or to a third party has been pursuant to the terms of a
written agreement between Target and such third party. All use, disclosure or
appropriation of Confidential Information not owned by Target has been pursuant
to the terms of a written agreement between Target and the owner of such
Confidential Information, or is otherwise lawful.
(g) Target does not believe it is or will be necessary to use any
inventions of any of its employees (or persons it currently intends to hire)
made prior to their employment by Target other than those which have been
assigned to Target.
(h) Pursuant to various agreements, Target acquired the exclusive
right, title and interest in and to the GiftONE software technology from Gregory
C. Gretsch and Paul Bauersfield. Target has secured all third party consents and
assignments required to be obtained in connection with such transfer to Target.
2.12 Manufacturing and Marketing Rights. Target has not granted rights to
----------------------------------
manufacture, produce, assemble, license, market, or sell its products to any
other person and is not bound by any agreement that affects Target's exclusive
right to develop, manufacture, assemble, distribute, market, or sell its
products.
2.13 Taxes. Target and any consolidated, combined, unitary or aggregate
group for Tax (as defined below) purposes of which Target is or has been a
member, have timely filed all Tax Returns required to be filed by them and have
paid all Taxes shown thereon to be due. Target has provided adequate accruals in
accordance with generally accepted accounting
11
<PAGE>
principles in its financial statements for any Taxes that have not been paid,
whether or not shown as being due on any Tax Returns. There is (i) no material
claim for Taxes that is a lien against the property of Target is currently being
asserted against Target other than liens for Taxes not yet due and payable, (ii)
no audit of any Tax Return of Target being conducted by a Tax authority, (iii)
no extension of the statute of limitations on the assessment of any Taxes
granted by Target and currently in effect, and (iv) no agreement, contract or
arrangement to which Target is a party that may result in the payment of any
amount that would not be deductible by reason of Sections 280G (other than
agreements or arrangements for which stockholder approval meeting the
requirements of Section 280G(b)(5)(B) will be obtained prior to the Closing) or
404 of the Code. For purposes of this Agreement, the following terms have the
following meanings: "Tax" (and, with correlative meaning, "Taxes" and "Taxable")
means (i) any net income, alternative or add-on minimum tax, gross income, gross
receipts, sales, use, ad valorem, transfer, franchise, profits, license,
withholding, payroll, employment, excise, severance, stamp, occupation, premium,
property, environmental or windfall profit tax, custom, duty or other tax
governmental fee or other like assessment or charge of any kind whatsoever,
together with any interest or any penalty, addition to tax or additional amount
imposed by any Governmental Entity (a "Tax authority") responsible for the
imposition of any such tax (domestic or foreign), (ii) any liability for the
payment of any amounts of the type described in (i) as a result of being a
member of an affiliated, consolidated, combined or unitary group for any Taxable
period and (iii) any liability for the payment of any amounts of the type
described in (i) or (ii) as a result of any express or implied obligation to
indemnify any other person. As used herein, "Tax Return" shall mean any return,
statement, report or form (including, without limitation,) estimated Tax Returns
and reports, withholding Tax Returns and reports and information reports and
Returns required to be filed with respect to Taxes.
2.14 Employee Benefit Plans.
----------------------
(a) Schedule 2.14 lists, with respect to Target, and any trade or
-------------
business (whether or not incorporated) which is treated as a single employer
with Target (an "ERISA Affiliate") within the meaning of Section 414(b), (c),
(m) or (o) of the Code, (i) all material employee benefit plans (as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), (ii) each loan to a non-officer employee in excess of $10,000, loans
to officers and directors and any stock option, stock purchase, phantom stock,
stock appreciation right, supplemental retirement, severance, sabbatical,
medical, dental, vision care, disability, employee relocation, cafeteria benefit
(Code section 125) or dependent care (Code Section 129), life insurance or
accident insurance plans, programs or arrangements, (iii) all bonus, pension,
profit sharing, savings, deferred compensation or incentive plans, programs or
arrangements, (iv) other fringe or employee benefit plans, programs or
arrangements that apply to senior management of Target and that do not generally
apply to all employees, and (v) any current or former employment or executive
compensation or severance agreements, written or otherwise, as to which
unsatisfied obligations of Target of greater than $10,000 remain for the benefit
of, or relating to, any present or former employee, consultant or director of
Target (together, the "Target Employee Plans").
(b) Target has furnished to Acquiror a copy of each of the Target
Employee Plans and related plan documents (including trust documents, insurance
policies or contracts, employee booklets, summary plan descriptions and other
authorizing documents, and any
12
<PAGE>
material employee communications relating thereto) and has, with respect to each
Target Employee Plan which is subject to ERISA reporting requirements, provided
copies of the Form 5500 reports filed since inception. Any Target Employee Plan
intended to be qualified under Section 401(a) of the Code has either obtained
from the Internal Revenue Service a favorable determination letter, opinion,
advisory or notification as to its qualified status under the Code, including
all amendments to the Code effected by the Tax Reform Act of 1986 and subsequent
legislation, or has applied to the Internal Revenue Service for such a
determination letter, opinion, advisory or notification prior to the expiration
of the requisite period under applicable Treasury Regulations or Internal
Revenue Service pronouncements in which to apply for such determination letter,
opinion, advisory or notification and to make any amendments necessary to obtain
a favorable determination. Target has also furnished Acquiror with the most
recent Internal Revenue Service determination letter, opinion, advisory or
notification issued with respect to each such Target Employee Plan, and nothing
has occurred since the issuance of each such letter which could reasonably be
expected to cause the loss of the tax-qualified status of any Target Employee
Plan subject to Code Section 401(a).
(c) (i) None of the Target Employee Plans promises or provides
retiree medical or other retiree welfare benefits to any person; (ii) there has
been no "prohibited transaction," as such term is defined in Section 406 of
ERISA and Section 4975 of the Code, with respect to any Target Employee Plan,
which could reasonably be expected to have, in the aggregate, a Material Adverse
Effect; (iii) each Target Employee Plan has been administered in accordance with
its terms and in compliance with the requirements prescribed by any and all
statutes, rules and regulations (including ERISA and the Code), except as would
not have, in the aggregate, a Material Adverse Effect on Target, and Target and
each ERISA Affiliate have performed all obligations required to be performed by
them under, are not in any material respect in default under or violation of,
and have no knowledge of any material default or violation by any other party
to, any of the Target Employee Plans; (iv) neither Target nor any ERISA
Affiliate is subject to any liability or penalty under Sections 4976 through
4980 of the Code or Title I of ERISA with respect to any of the Target Employee
Plans; (v) all material contributions required to be made by Target or ERISA
Affiliate to any Target Employee Plan have been made on or before their due
dates and a reasonable amount has been accrued for contributions to each Target
Employee Plan for the current plan years; (vi) with respect to each Target
Employee Plan, no "reportable event" within the meaning of Section 4043 of ERISA
(excluding any such event for which the thirty (30) day notice requirement has
been waived under the regulations to Section 4043 of ERISA) nor any event
described in Section 4062, 4063 or 4041 or ERISA has occurred; (vii) no Target
Employee Plan is covered by, and neither Target nor any ERISA Affiliate has
incurred or expects to incur any liability under Title IV of ERISA or Section
412 of the Code; and (viii) each Target Employee Plan can be amended, terminated
or otherwise discontinued after the Effective Time in accordance with its terms,
without liability to Acquiror (other than ordinary administrative expenses
typically incurred in a termination event). With respect to each Target Employee
Plan subject to ERISA as either an employee pension plan within the meaning of
Section 3(2) of ERISA or an employee welfare benefit plan within the meaning of
Section 3(1) of ERISA, Target has prepared in good faith and timely filed all
requisite governmental reports (which were true and correct as of the date
filed) and has properly and timely filed and distributed or posted all notices
and reports to employees required to be filed, distributed or posted with
respect to each such Target Employee Plan except as would not have in the
aggregate a Material Adverse Effect on Target. No suit, administrative
proceeding, action or
13
<PAGE>
other litigation has been brought, or to the knowledge of Target is threatened,
against or with respect to any such Target Employee Plan, including any audit or
inquiry by the IRS or United States Department of Labor (other than routine
benefits claims). No payment or benefit which will or may be made by Target to
any employee will be characterized as an "excess parachute payment" within the
meaning of Section 280G(b)(1) of the Code.
(d) With respect to each Target Employee Plan, Target has complied
with (i) the applicable health care continuation and notice provisions of the
Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") and the
regulations (including proposed regulations) thereunder, (ii) the applicable
requirements of the Family Medical and Leave Act of 1993 and the regulations
thereunder, except to the extent that such failure to comply would not, in the
aggregate, have a Material Adverse Effect, and (iii) the applicable requirements
of the Health Insurance Portability and Accountability Act of 1996 and the
regulations (including proposed regulations) thereunder, except to the extent
that such failure to comply would not, in the aggregate, have a Material Adverse
Effect.
(e) The consummation of the transactions contemplated by this
Agreement will not (i) entitle any current or former employee or other service
provider of Target or any ERISA Affiliate to severance benefits or any other
payment or (ii) accelerate the time of payment or vesting, or increase the
amount of compensation due any such employee or service provider.
(f) There has been no amendment to, written interpretation or
announcement (whether or not written) by Target, or other ERISA Affiliate
relating to, or change in participation or coverage under, any Target Employee
Plan which would materially increase the per capita expense of maintaining such
Plan above the level of per capita expense incurred with respect to that Plan
for the most recent fiscal year included in Target's Financial Statements.
(g) Target does not currently maintain, sponsor, participate in or
contribute to, nor has it ever maintained, established, sponsored, participated
in, or contributed to, any pension plan (within the meaning of Section 3(2) of
ERISA) which is subject to Part 3 of Subtitle B of Title I of ERISA, Title IV of
ERISA or Section 412 of the Code.
(h) Neither Target nor any ERISA Affiliate is a party to, or has made
any contribution to or otherwise incurred any obligation under, any
"multiemployer plan" as defined in Section 3(37) of ERISA.
2.15 Certain Agreements Affected by the Merger. Neither the execution and
-----------------------------------------
delivery of this Agreement nor the consummation of the transaction contemplated
hereby will (i) result in any payment (including, without limitation, severance,
unemployment compensation, golden parachute, bonus or otherwise) becoming due to
any director or employee of Target, (ii) materially increase any benefits
otherwise payable by Target or (iii) result in the acceleration of the time of
payment or vesting of any such benefits.
2.16 Employee Matters. Target is in compliance in all material respects
----------------
with all currently applicable laws and regulations respecting employment,
discrimination in employment, terms and conditions of employment, wages, hours
and occupational safety and health and
14
<PAGE>
employment practices, and is not engaged in any material respect in any unfair
labor practice. Target has withheld all amounts required by law or by agreement
to be withheld from the wages, salaries, and other payments to employees; and is
not liable for any arrears of wages or any taxes or any penalty for failure to
comply with any of the foregoing. Target is not liable for any payment to any
trust or other fund or to any governmental or administrative authority, with
respect to unemployment compensation benefits, social security or other benefits
or obligations for employees (other than routine payments to be made in the
normal course of business and consistent with past practice). There are no
pending claims against Target under any workers compensation plan or policy or
for long term disability. There are no controversies pending or, to the
knowledge of Target, threatened, between Target and any of their respective
employees, which controversies have or could reasonably be expected to result in
an action, suit, proceeding, claim, arbitration or investigation before any
agency, court or tribunal, foreign or domestic. Target is not a party to any
collective bargaining agreement or other labor unions contract nor does Target
know of any activities or proceedings of any labor union or efforts to organize
any such employees. No employees of Target have given notice to Target, nor is
Target otherwise aware, that any such employee intends to terminate his or her
employment with Target. There are no written employment or separation
agreements, or oral employment or separation agreements other than those
establishing an "at-will" employment relationship between Target and any of its
employees. Target does not have any obligation (a) to provide any particular
form or period of notice prior to termination except such obligations as are
imposed by law generally or (b) to pay any of such employees any severance
benefits in connection with their termination of employment service. In
addition, no severance pay will become due to any Target employees or other
service providers in connection with the Merger, as a result of any Target
agreement, plan or program.
2.17 Interested Party Transactions. Target is not indebted to any director,
-----------------------------
officer, employee or agent of Target (except for amounts due as normal salaries
and bonuses and in reimbursement of ordinary expenses), and no such person is
indebted to Target.
2.18 Insurance. Target has policies of insurance and bonds of the type and
---------
in amounts which Target believes are adequate given the business or assets of
Target. There is no material claim pending under any of such policies or bonds
as to which coverage has been questioned, denied or disputed by the underwriters
of such policies or bonds. All premiums due and payable under all such policies
and bonds have been paid and Target is otherwise in compliance with the terms of
such policies and bonds. Target has no knowledge of any threatened termination
of, or material premium increase with respect to, any of such policies.
2.19 Compliance With Laws. Target has complied with, is not in violation
--------------------
of, and has not received any notices of violation with respect to, any federal,
state, local or foreign statute, law or regulation with respect to the conduct
of its business, or the ownership or operation of its business, except for such
violations or failures to comply as could not be reasonably expected to have a
Material Adverse Effect on Target.
2.20 Minute Books. The minute books of Target made available to Acquiror
------------
contain a fair and accurate summary of all meetings of directors and
stockholders or actions by written consent since the time of incorporation of
Target through the date of this Agreement, and reflect all transactions referred
to in such minutes accurately in all material respects.
15
<PAGE>
2.21 Complete Copies of Materials. Target has delivered or made available
----------------------------
true and complete copies of each document which has been requested by Acquiror
or its counsel in connection with their legal and accounting review of Target.
2.22 Brokers' and Finders' Fees. Target has not incurred, nor will it
--------------------------
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or investment bankers' fees or any similar charges in
connection with this Agreement or any transaction contemplated hereby.
2.23 Affiliate and Stockholder Agreement; Irrevocable Proxies. Holders of
--------------------------------------------------------
more than 51% of the sum of (i) all of the Target Common Stock issued and
outstanding and (ii) all of the Target Preferred Stock issued and outstanding,
and holders of more than 51% of the shares of Target Preferred Stock have agreed
in writing to vote for approval of the Merger pursuant to agreements attached
hereto as Exhibit D ("Affiliate and Stockholder Agreements"), and pursuant to
---------
Irrevocable Proxies attached thereto as Exhibit A ("Irrevocable Proxies").
---------
2.24 Vote Required. The affirmative vote of the holders of at least 51% of
-------------
the shares of Target Capital Stock and at least 51% of the shares of Target
Preferred Stock outstanding on the record date set for the Target Stockholders
Meeting (as defined below) is the only vote of the holders of any of Target's
Capital Stock necessary to approve this Agreement and the transactions
contemplated hereby.
2.25 Board Approval. The Board of Directors of Target has unanimously (i)
--------------
approved this Agreement and the Merger, (ii) determined that in its opinion the
Merger is in the best interests of the stockholders of Target and is on terms
that are fair to such stockholders and (iii) recommended that the stockholders
of Target approve this Agreement and the Merger.
2.26 [Reserved].
--------
2.27 Material Contracts. Except for the material contracts described in
------------------
Schedule 2.27 (collectively, the "Material Contracts"), Target is not a party to
- -------------
or bound by any material contract, including without limitation:
(a) any distributor, sales, advertising, agency or manufacturer's
representative contract;
(b) any continuing contract for the purchase of materials, supplies,
equipment or services involving in the case of any such contact more than
$20,000 over the life of the contract;
(c) any contract that expires or may be renewed at the option of any
person other than the Target so as to expire more than one year after the date
of this Agreement;
(d) any trust indenture, mortgage, promissory note, loan agreement or
other contract for the borrowing of money, any currency exchange, commodities or
other hedging arrangement or any leasing transaction of the type required to be
capitalized in accordance with generally accepted accounting principles;
16
<PAGE>
(e) any contract for capital expenditures in excess of $20,000 in the
aggregate;
(f) any contract limiting the freedom of the Target to engage in any
line of business or to compete or which requires Target to maintain the
confidentiality of any proprietary information of any third party or any other
material confidentiality, secrecy or non-disclosure contract;
(g) any contract pursuant to which the Target is a lessor of any
machinery, equipment, motor vehicles, office furniture, fixtures or other
personal property involving in the case of any such contract more than $50,000
over the life of the contract;
(h) any contract with any person with whom the Target does not deal
at arm's length within the meaning of the Internal Revenue Code; or
(i) any agreement of guarantee, support, indemnification, assumption
or endorsement of, or any similar commitment with respect to, the obligations,
liabilities (whether accrued, absolute, contingent or otherwise) or indebtedness
of any other Person.
2.28 No Breach of Material Contracts. The Target has performed all of the
-------------------------------
obligations required to be performed by it and is entitled to all benefits
under, and is not alleged to be in default in respect of any Material Contract.
Each of the Material Contracts is in full force and effect, unamended, and there
exists no default or event of default or event, occurrence, condition or act,
with respect to Target or to Target's knowledge with respect to the other
contracting party, which, with the giving of notice, the lapse of the time or
the happening of any other event or conditions, would become a default or event
of default under any Material Contract. True, correct and complete copies of all
Material Contracts have been delivered to the Acquiror.
2.29 Material Third Party Consents. Schedule 2.29 includes every contract
----------------------------- -------------
which, if no novation occurs to make Acquiror a party thereto or if no consent
to assignment is obtained, would have a material adverse effect on Acquiror's
ability to operate the business in the same manner as the business was operated
by Target prior to the Effective Time.
2.30 Pooling of Interests. Neither Target, nor, to the knowledge of Target,
--------------------
any of its directors, officers or stockholders has taken any action which would
interfere with Acquiror's ability to account for the Merger as a pooling.
2.31 Representations Complete. Target has provided Acquiror with all the
------------------------
information reasonably available to it that Acquiror has requested for deciding
whether to enter into this Agreement and all information that Target believes is
necessary to enable Acquiror to make such decision. None of the representations
or warranties made by Target herein or in any Schedule hereto, including the
Target Disclosure Schedule, or certificate furnished by Target pursuant to this
Agreement, when all such documents are read together in their entirety, contains
or will contain at the Effective Time any untrue statement of a material fact,
or omits or will omit at the Effective Time to state any material fact necessary
in order to make the statements contained herein or therein, in the light of the
circumstances under which made, not misleading.
17
<PAGE>
2.32 Year 2000. All computer software products that are owned by Target,
---------
exclusively licensed to Target, licensed, sold or otherwise distributed to
others by Target or are otherwise required for the conduct of its business,
other than third party off-the-shelf software that is not integrated into
Target's products ("Software") are Year 2000 Compliant. As used herein, "Year
2000 Compliant" shall mean, with respect to any such Software, the ability of
such Software to perform the following date-related functions:
(i) consistently handle date information before, during and
after January 1, 2000, including, but not limited to, accepting date input,
providing date output and performing calculations on dates or portions of
dates;
(ii) function accurately in accordance with the documentation
relating to the applicable software and without interruption before, during
and after January 1, 2000, without any change in operations associated with
the advent of the new century;
(iii) respond to two-digit date input in a way that resolves any
ambiguity as to the century; and
(iv) store and provide output of date information in ways that
are unambiguous as to century.
2.33 Products Liability. There are no claims against Target, fixed or
------------------
contingent, asserting (a) any damage, loss or injury caused by any product or
(b) any breach of any express or implied product warranty or any other similar
claim with respect to any product other than standard warranty obligations (to
replace, repair or refund) made by Target in the ordinary course of business,
except for those claims that, if adversely determined against Target, would not
have a Material Adverse Effect on Target. As used herein, "product" shall mean
any products manufactured, designed, developed, distributed, sold, re-sold,
customized or serviced by Target.
2.34 Service Provider Agreements. To Target's knowledge, no service
---------------------------
provider of Target is in violation of any term of any employment agreement
(whether written or verbal), patent or trademark disclosure agreement, or any
other contract or agreement relating to the relationship of any such service
provider with Target or any other party (including prior employers), or any term
of any judgment, decree or order, because of the nature of, and resulting in a
Material Adverse Effect on Target. Each current service provider of Target has
executed a proprietary information and inventions agreement (or similar
agreement) with Target in the form then being used by Target, which forms have
been previously delivered to Acquiror by Target. No former service provider of
Target has executed such an agreement but, Target has the rights to any and all
Intellectual Property Rights developed by each such person for Target while
providing services to Target. Each employee or consultant-inventor has executed
a written agreement validly assigning his or her rights to Target on all
inventions, pending patent applications, all patents issued, and all other
intellectual property rights developed by such service provider while working
for or on behalf of Target to the extent that the failure to obtain such written
agreements is material to the business condition or future prospects of Target.
To the extent Target has ever utilized consultants or independent contractors,
each consultant or independent contractor has executed a written agreement,
validly assigning to Target his or her
18
<PAGE>
rights in and to all copyrights and works of authorship relating to products,
services or technology designed, developed, manufactured, licensed, sold,
marketed or serviced by Target and its business to the extent that the failure
to obtain such written agreements is material to the business condition or
future prospects of Target. None of Target's service providers is in violation
thereof. None of Target's service providers is obligated under any contract
(including licenses, covenants or commitments of any nature) or other agreement,
or subject to any judgment, decree or order of any court or administrative
agency, that would interfere with the use of his or her best efforts to promote
the interests of Target or that would materially conflict with Target's business
as conducted or as proposed to be conducted or that would prevent any such
service provider from assigning inventions to Target. It is not now and Target
is not aware that it will be necessary for Target to utilize any inventions
material to the business condition or future prospects of Target of any of its
service providers (or people it currently intends to hire) made prior to their
employment by or relationship with Target, that are material to the business
condition or future prospects of Target.
ARTICLE III
-----------
REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND MERGER SUB
Except as disclosed in a document of even date herewith and delivered
by Acquiror to Target prior to the execution and delivery of this Agreement and
referring to the representations and warranties in this Agreement (the "Acquiror
Disclosure Schedule"), Acquiror and Merger Sub, jointly and severally, represent
and warrant to Target as follows:
3.1 Organization, Standing and Power. Each of Acquiror and its
--------------------------------
subsidiaries (including Merger Sub) is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
organization. Each of Acquiror and its subsidiaries (including Merger Sub) has
the corporate power to own its properties and to carry on its business as now
being conducted and as proposed to be conducted and is duly qualified to do
business and is in good standing in each jurisdiction in which the failure to be
so qualified and in good standing would have a Material Adverse Effect on
Acquiror. Neither Acquiror nor any of its subsidiaries (including Merger Sub) is
in violation of any of the provisions of its Articles of Incorporation or Bylaws
or equivalent organizational documents.
3.2 Capital Structure of Acquiror. The authorized capital stock of
Acquiror consists of 69,000,000 shares of Common Stock, no par value per share,
and 39,600,000 shares of Preferred Stock, no par value per share, consisting of
6,500,000 shares of Series A Preferred Stock, 6,500,000 shares of Series A-1
Preferred Stock, 8,000,000 shares of Series B Preferred Stock, 8,000,000 shares
of Series B-1 Preferred Stock, 5,300,000 shares of Series C Preferred stock,
5,300,000 shares of Series C-1 Preferred Stock, 1,500,000 shares of Series D
Preferred Stock and 1,500,000 shares of Series D-1 Preferred Stock, of which
there were issued and outstanding as of the close of business on July 9, 1999,
10,749,898 shares of Common Stock, 6,025,286 shares of Series A Preferred Stock,
7,622,528 shares of Series B Preferred Stock, 5,121,148 shares of Series C
Preferred Stock, 1,257,708 shares of Series D Preferred Stock and no shares of
Series A-1, Series B-1, Series C-1 or Series D-1 Preferred Stock. All
outstanding shares of Acquiror have been duly authorized, validly issued, fully
paid and are nonassessable
19
<PAGE>
and free of any liens or encumbrances other than any liens or encumbrances
created by or imposed upon the holders thereof, and are not subject to
preemptive rights or rights of first refusal created by statute, the Articles of
Incorporation or Bylaws of Acquiror or any agreement to which Acquiror is a
party or by which it is bound. As of the close of business on July 9, 1999,
Acquiror has reserved (i) sufficient shares of Common Stock for issuance upon
conversion of the outstanding preferred stock, and (ii) 7,336,000 shares of
Common Stock for issuance to employees and consultants pursuant to Acquiror's
1997 Stock Option/Stock Issuance Plan, of which 224,800 shares are subject to
outstanding, unexercised options, and no shares are subject to outstanding stock
purchase rights. The consummation of the Merger shall not cause an acceleration
in the vesting or lapse of any restriction or right of any of Acquiror's
securities. All outstanding shares of Common Stock and Preferred Stock were
issued in compliance with all federal and state securities laws. The shares of
Acquiror Common Stock to be issued pursuant to the Merger, including shares
issuable on exercise of the options assumed by Acquiror under the Target Stock
Option Plan and issuable upon exercise of warrants, will be duly authorized,
validly issued, fully paid and non-assessable.
3.3 Authority. Acquiror and Merger Sub have all requisite corporate power
---------
and authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Acquiror and Merger Sub. This
Agreement has been duly executed and delivered by Acquiror and Merger Sub and
constitutes the valid and binding obligations of Acquiror and Merger Sub. The
execution and delivery of this Agreement do not, and the consummation of the
transactions contemplated hereby will not, conflict with, or result in any
violation of, or default under (with or without notice or lapse of time, or
both), or give rise to a right of termination, cancellation or acceleration of
any obligation or loss of a benefit under (i) any provision of the Articles of
Incorporation or Bylaws of Acquiror or Certificate of Incorporation of Merger
Sub, or (ii) any material mortgage, indenture, lease, contract or other
agreement or instrument, permit, concession, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to
Acquiror or Merger Sub or any of their properties or assets. No consent,
approval, order or authorization of, or registration, declaration or filing
with, any Governmental Entity, is required by or with respect to Acquiror or
Merger Sub in connection with the execution and delivery of this Agreement by
Acquiror or Merger Sub or the consummation by Acquiror or Merger Sub of the
transactions contemplated hereby, except for (i) the filing of the Certificate
of Merger, together with the required officers' certificates, as provided in
Section 1.2, (ii) any filings as may be required under applicable state
securities laws and the securities laws of any foreign country, and (iii) such
other consents, authorizations, filings, approvals and registrations which, if
not obtained or made, would not have a Material Adverse Effect on Acquiror or
Merger Sub and would not prevent, materially alter or delay any of the
transactions contemplated by this Agreement.
3.4 Financial Statements of Acquiror. Acquiror has made available to
--------------------------------
Target the financial statements of Acquiror, including the notes thereto, for
the fiscal year ended December 31, 1998 and for the six-month period ended June
30, 1999 (the "Acquiror Financial Statements"). The Acquiror Financial
Statements are complete and correct in all material respects as of their
respective dates, complied as to form in all material respects with applicable
accounting requirements, and have been prepared in accordance with generally
accepted
20
<PAGE>
accounting principles applied on a basis consistent throughout the periods
indicated and consistent with each other. The Acquiror Financial Statements
fairly present the consolidated financial condition and operating results of
Acquiror and its subsidiaries at the dates and during the periods indicated
therein (subject, in the case of unaudited statements, to normal, recurring
year-end adjustments).
3.5 Absence of Undisclosed Liabilities. Neither Acquiror nor Merger Sub
----------------------------------
have any material obligations or liabilities of any nature (matured or
unmatured, fixed or contingent) other than (i) those set forth or adequately
provided for in the balance sheet dated June 30, 1999 of Acquiror (the "Acquiror
Balance S
heet"), (ii) those incurred in the ordinary course of business and not
required to be set forth in the Acquiror Balance Sheet under generally accepted
accounting principles, and (iii) those incurred in the ordinary course of
business since the Acquiror Balance Sheet Date and consistent with past
practice.
3.6 Litigation. There is no private or governmental action, suit,
----------
proceeding, claim, arbitration or investigation pending before any agency, court
or tribunal, foreign or domestic, or, to the knowledge of Acquiror, threatened
against Acquiror or any of its subsidiaries (including Merger Sub) or any of
their respective properties or any of their respective officers or directors (in
their capacities as such) that, individually or in the aggregate, could
reasonably be expected to have a Material Adverse Effect on Acquiror or Merger
Sub. There is no judgment, decree or order against Acquiror or any of its
subsidiaries (including Merger Sub) or, to the knowledge of Acquiror or any
of
its subsidiaries (including Merger Sub), any of their respective directors or
officers (in their capacities as such) that could prevent, enjoin, or materially
alter or delay any of the transactions contemplated by this Agreement, or that
could reasonably be expected to have a Material Adverse Effect on Acquiror or
Merger Sub.
3.7 Governmental Authorization. Acquiror and each of its subsidiaries
--------------------------
(including Merger Sub) have obtained each federal, state, county, local or
foreign governmental consent, license, permit, grant, or other authorization of
a Governmental Entity (i) pursuant to which Acquiror or any of its subsidiaries
(including Merger Sub) currently operates or holds any interest in any of its
properties or (ii) that is required for the operation of Acquiror's or any of
its subsidiaries' business or the holding of any such interest ((i) and (ii)
herein collectively called "Acquiror Authorizations"), and all of such Acquiror
Authorizations are in ful
l force and effect, except where the failure to obtain
or have any of such Acquiror Authorizations could not reasonably be expected to
have a Material Adverse Effect on Acquiror.
3.8 Board Approval. The Board of Directors of Acquiror has unanimously (i)
--------------
approved this Agreement and the Merger, (ii) determined that in its opinion the
Merger is in the best interests of the shareholders of Acquiror and is on terms
that are fair to such shareholders and (iii) recommended that the shareholders
of Acquiror approve this Agreement and the Merger.
3.9 SEC Filings. The Registration Statement on Form S-1 filed by Acquiror
-----------
with the Securities and Exchange Commission on July 9, 1999 (i) at the time it
was filed, complied as to form in all material respects with the requirements of
the Securities Act and (ii) did not at the time it was filed (or if amended or
superseded by a filing prior to the date of this Agreement, then on the date of
such filing) contain
any untrue statement of a material fact or omit to state a
21
<PAGE>
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
ARTICLE IV
----------
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business of Target and Acquiror. During the period from the
------------------------------------------
date of this Agreement and continuing until the earlier of the termination of
this Agreement or the Effective Time, each of Target and Acquiror agrees (except
to the extent expressly contemplated by this Agreement or as consented to in
writing by the other), to carry on its business in the usual, regular and
ordinary course in substantially the same manner as heretofore conducted. Target
further agrees to pay debts and Taxes when due subject (i) to good faith
disputes over such debts or Taxes and (ii) to Acquiror's consent to the filing
of material Tax Returns if applicable other than Target's corporate Tax Return
for the year ended December 31, 1998, to pay or perform other obligations when
due, and to use all reasonable efforts consistent with past practice and
policies to preserve intact its present business organizations, keep available
the services of its present officers and key employees and preserve its
relationships with customers, suppliers, distributors, licensors, licensees, and
others having business dealings with it to the end that its goodwill and ongoing
businesses shall be unimpaired at the Effective Time. Each of Target and
Acquiror agrees to promptly notify the other of any event or occurrence not in
the ordinary course of business, and of any event which could have a Material
Adverse Effect. Each of Target and Acquiror agrees not to take any action which
would interfere with Acquiror's ability to account for the Merger as a pooling
of interests.
4.2 Conduct of Business of Target. During the period from the date of this
-----------------------------
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, except as set forth in the Target Disclosure Schedule or
as expressly contemplated by this Agreement, Target shall not do, cause or
permit any of the following, without the prior written consent of Acquiror:
(a) Charter Documents. Cause or permit any amendments to its
-----------------
Certificate of Incorporation or Bylaws;
(b) Dividends; Changes in Capital Stock. Declare or pay any dividends
-----------------------------------
on or make any other distributions (whether in cash, stock or property) in
respect of any of its capital stock, or split, combine or reclassify any of its
capital stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock, or
repurchase or otherwise acquire, directly or indirectly, any shares of its
capital stock except from former employees, directors and consultants in
accordance with agreements providing for the repurchase of shares in connection
with any termination of service to it;
(c) Stock Option Plans, Etc. Accelerate, amend or change the period
------------------------
of exercisability or vesting of options or other rights granted under its stock
plans or authorize cash payments in exchange for any options or other rights
granted under any of such plans;
22
<PAGE>
(d) Material Contracts. Enter into any material contract or
------------------
commitment, or violate, amend or otherwise modify or waive any of the terms of
any of its material contracts, other than in the ordinary course of business
consistent with past practice;
(e) Issuance of Securities. Issue, deliver or sell or authorize or
----------------------
propose the issuance, delivery or sale of, any shares of its capital stock or
securities convertible into, or subscriptions, rights, warrants or options to
acquire, or other agreements or commitments of any character obligating it to
issue any such shares or other convertible securities, other than the issuance
of shares of its Common Stock pursuant to the exercise of stock options,
warrants or other rights therefor outstanding as of the date of this Agreement;
(f) Intellectual Property. Transfer to any person or entity any
---------------------
rights to its Intellectual Property other than in the ordinary course of
business consistent with past practice;
(g) Exclusive Rights. Enter into or amend any agreements pursuant to
----------------
which any other party is granted exclusive marketing or other exclusive rights
of any type or scope with respect to any of its products or technology;
(h) Dispositions. Sell, lease, license or otherwise dispose of or
------------
encumber any of its properties or assets which are material, individually or in
the aggregate, to its business, except for sales of products in the ordinary
course;
(i) Indebtedness. Incur any indebtedness for borrowed money or
------------
guarantee any such indebtedness or issue or sell any debt securities or
guarantee any debt securities of others;
(j) Leases. Enter into any operating lease in excess of $10,000;
------
(k) Payment of Obligations. Pay, discharge or satisfy in an amount in
----------------------
excess of $10,000 in any one case or $25,000 in the aggregate, any claim,
liability or obligation (absolute, accrued, asserted or unasserted, contingent
or otherwise) arising other than in the ordinary course of business, other than
the payment, discharge or satisfaction of liabilities reflected or reserved
against in the Target Financial Statements;
(l) Capital Expenditures. Make any capital expenditures, capital
--------------------
additions or capital improvements except in the ordinary course of business and
consistent with past practice;
(m) Insurance. Materially reduce the amount of any material insurance
---------
coverage provided by existing insurance policies;
(n) Termination or Waiver. Terminate or waive any right of
---------------------
substantial value, other than in the ordinary course of business;
(o) Employee Benefit Plans; New Hires; Pay Increases. Adopt or amend
------------------------------------------------
any employee benefit or stock purchase or option plan, or hire any new director
level or officer level employee, pay any special bonus or special remuneration
to any employee or director or, other than in the ordinary course consistent
with past practice, increase the salaries or wage rates of its employees;
23
<PAGE>
(p) Severance Arrangements. Grant any severance or termination pay
----------------------
(i) to any director or officer or (ii) to any other employee except payments
made pursuant to standard written agreements outstanding on the date hereof;
(q) Lawsuits. Commence a lawsuit other than (i) for the routine
--------
collection of bills, (ii) in such cases where it in good faith determines that
failure to commence suit would result in the material impairment of a valuable
aspect of its business, provided that it consults with Acquiror prior to the
filing of such a suit, or (iii) for a breach of this Agreement;
(r) Acquisitions. Acquire or agree to acquire by merging or
------------
consolidating with, or by purchasing a substantial portion of the assets of, or
by any other manner, any business or any corporation, partnership, association
or other business organization or division thereof, or otherwise acquire or
agree to acquire any assets which are material, individually or in the
aggregate, to its business, taken as a whole;
(s) Taxes. Other than in the ordinary course of business, make or
-----
change any material election in respect of Taxes, adopt or change any accounting
method in respect of Taxes, file any material Tax Return or any amendment to a
material Tax Return other than Target's corporate Tax Return for the year ended
December 31, 1998, enter into any closing agreement, settle any claim or
assessment in respect of Taxes, or consent to any extension or waiver of the
limitation period applicable to any claim or assessment in respect of Taxes;
(t) Notices. Target shall give all notices and other information
-------
required to be given to the employees of Target, any collective bargaining unit
representing any group of employees of Target, and any applicable government
authority under the WARN Act, the National Labor Relations Act, the Internal
Revenue Code, the Consolidated Omnibus Budget Reconciliation Act, and other
applicable law in connection with the transactions provided for in this
Agreement;
(u) Revaluation. Revalue any of its assets, including without
-----------
limitation writing down the value of inventory or writing off notes or accounts
receivable other than in the ordinary course of business; or
(v) Other. Take or agree in writing or otherwise to take, any of the
-----
actions described in Sections 4.2(a) through (u) above, or any action which
would make any of its representations or warranties contained in this Agreement
untrue or incorrect in any material respect or prevent it from performing or
cause it not to perform its covenants hereunder in any material respect.
4.3 No Solicitation. Target and the officers, directors, employees or
---------------
other agents of Target will not, directly or indirectly, (i) take any action to
solicit, initiate or encourage any acquisition of or investment in Target or
(ii) engage in negotiations with, or disclose any nonpublic information relating
to Target to, or afford access to the properties, books or records of Target to,
any person that has advised Target that it may be considering making, or that
has made, a proposal to acquire an interest in Target. Target shall not, and
shall not permit any of its officers, directors, employees or other
representatives to agree to or endorse any acquisition of or investment in
Target. Target will promptly notify Acquiror after receipt of any offer for
Target
24
<PAGE>
or any notice that any person is considering making an offer for Target or any
request for nonpublic information relating to Target or for access to the
properties, books or records of Target by any person that has advised Target
that it may be considering making, or that has made, an offer for Target and
will keep Acquiror fully informed of the status and details of any such offer
for Target notice, request or any correspondence or communications related
thereto and shall provide Acquiror with a true and complete copy of such offer
for Target notice or request or correspondence or communications related
thereto, if it is in writing, or a written summary thereof, if it is not in
writing.
ARTICLE V
---------
ADDITIONAL AGREEMENTS
5.1 [Reserved].
--------
5.2 Meeting or Consent of Stockholders. Target shall promptly after the
----------------------------------
date hereof take all action necessary in accordance with Delaware Law and its
Certificate of Incorporation and Bylaws to convene a meeting of its stockholders
(the "Target Stockholders Meeting") or to secure the written consent of its
stockholders within fifteen (15) days of the date of this Agreement. Target
shall consult with Acquiror regarding the date of the Target Stockholders
Meeting or written consent and use all reasonable efforts and shall not postpone
or adjourn (other than for the absence of a quorum) the Target Stockholders
Meeting, if any, without the consent of Acquiror. Target shall use its best
efforts to solicit from stockholders of Target proxies or written consents in
favor of the Merger and shall take all other action necessary or advisable to
secure the vote or consent of stockholders required to effect the Merger.
5.3 Access to Information.
---------------------
(a) Target shall afford Acquiror and its accountants, counsel and
other representatives, reasonable access during normal business hours during the
period prior to the Effective Time to (i) all of Target's properties, books,
contracts, commitments and records, and (ii) all other information concerning
the business, properties and personnel of Target as Acquiror may reasonably
request. Target agrees to provide to Acquiror and its accountants, counsel and
other representatives copies of internal financial statements promptly upon
request.
(b) Subject to compliance with applicable law, from the date hereof
until the Effective Time, each of Acquiror and Target shall confer on a regular
and frequent basis with one or more representatives of the other party to report
operational matters of materiality and the general status of ongoing operations.
(c) No information or knowledge obtained in any investigation
pursuant to this Section 5.3 shall affect or be deemed to modify any
representation or warranty contained herein or the conditions to the obligations
of the parties to consummate the Merger.
(d) Target shall cause Target's accountants to cooperate with
Acquiror in auditing the financial statements of Target's business, including
but not limited to, executing any and all representation or other letters or
agreements reasonably required by Acquiror's
25
<PAGE>
accountants. Target shall use reasonable commercial efforts to cause Target's
accountants to consent in writing or agree to consent in writing on a timely
basis to the inclusion of Target's financial statements in any registration
statement or in any report to be filed with the SEC by Acquiror.
5.4 Confidentiality. The parties acknowledge that Acquiror and Target have
---------------
previously executed a non-disclosure agreement (the "Confidentiality
Agreement"), which Confidentiality Agreement shall continue in full force and
effect in accordance with its terms.
5.5 Public Disclosure. Unless otherwise permitted by this Agreement,
-----------------
Acquiror and Target shall consult with each other before issuing any press
release or otherwise making any public statement or making any other public (or
non-confidential) disclosure (whether or not in response to an inquiry)
regarding the terms of this Agreement and the transactions contemplated hereby,
and neither shall issue any such press release or make any such statement or
disclosure without the prior approval of the other (which approval shall not be
unreasonably withheld).
5.6 Consents; Cooperation. Each of Acquiror and Target shall promptly
---------------------
apply for or otherwise seek, and use its best efforts to obtain, all consents
and approvals required to be obtained by it for the consummation of the Merger,
and shall use commercially reasonable efforts to obtain all necessary consents,
waivers and approvals under any of its material contracts in connection with the
Merger for the assignment thereof or otherwise. The parties hereto will consult
and cooperate with one another, and consider in good faith the views of one
another, in connection with any analyses, appearances, presentations, memoranda,
briefs, arguments, opinions and proposals made or submitted by or on behalf of
any party hereto in connection with all proceedings under any federal or state
antitrust or fair trade law.
5.7 Stockholder Representation Agreements. Target shall use its best
-------------------------------------
efforts to deliver or cause to be delivered to Acquiror, concurrently with the
execution of this Agreement (and in each case at least three (3) days prior to
the Effective Time) from each of the securityholders of Target who has not
executed a Stockholder Agreement, an executed Stockholder Representation
Agreement (the "Stockholder Representation Agreement") in the form attached
hereto as Exhibit E.
---------
5.8 Stockholder Agreement/Irrevocable Proxies. Target shall use its best
-----------------------------------------
efforts, on behalf of Acquiror, to cause (i) all affiliates of Target, (ii)
holders of more than 90% of the sum of (x) all shares of Target Common Stock
issued and outstanding and (y) all shares of Target Preferred Stock issued and
outstanding and (iii) holders of more than 90% of Target Preferred Stock issued
and outstanding to execute and deliver to Acquiror an Affiliate and Stockholder
Agreement substantially in the form of Exhibit D and an Irrevocable Proxy
---------
substantially in the form of Exhibit A attached thereto concurrently with the
---------
execution of this Agreement.
5.9 Lock-Up Agreements and NASD Questionnaires. Target shall use its best
------------------------------------------
efforts, on behalf of Acquiror, to cause all stockholders and optionholders of
Target to execute and deliver to Acquiror a Lock-Up Agreement in the form of
Exhibit L hereto and an NASD Questionnaire in the form of Exhibit M hereto.
- --------- ---------
26
<PAGE>
5.10 Legal Requirements. Each of Acquiror and Target will, and will cause
------------------
their respective subsidiaries to, take all reasonable actions necessary to
comply promptly with all legal requirements which may be imposed on them with
respect to the consummation of the transactions contemplated by this Agreement
and will promptly cooperate with and furnish information to any party hereto
necessary in connection with any such requirements imposed upon such other party
in connection with the consummation of the transactions contemplated by this
Agreement and will take all reasonable actions necessary to obtain (and will
cooperate with the other parties hereto in obtaining) any consent, approval,
order or authorization of, or any registration, declaration or filing with, any
Governmental Entity or other person, required to be obtained or made in
connection with the taking of any action contemplated by this Agreement.
5.11 Blue Sky Laws. Acquiror shall take such steps as may be necessary to
-------------
comply with the securities and blue sky laws of all jurisdictions which are
applicable to the issuance of the Acquiror Common Stock in connection with the
Merger. Target shall use its best efforts to assist Acquiror as may be necessary
to comply with the securities and blue sky laws of all jurisdictions which are
applicable in connection with the issuance of Acquiror Common Stock and options
and warrants in connection with the Merger.
5.12 Employee Benefit Plans.
----------------------
(a) Assumption of Options and Warrants. At the Effective Time, the
----------------------------------
Target Stock Option Plan and each outstanding option to purchase shares of
Target Common Stock under the Target Stock Option Plan, whether vested or
unvested, will be assumed by Acquiror. Schedule 5.12 hereto sets forth a true
-------------
and complete list as of the date hereof of all holders of outstanding options
under the Target Stock Option Plan including the number of shares of Target
Capital Stock subject to each such option, the exercise or vesting schedule, the
exercise price per share and the term of each such option. On the Closing Date,
Target shall deliver to Acquiror an updated Schedule 5.12 hereto current as of
-------------
such date. Each such option so assumed by Acquiror under this Agreement shall
continue to have, and be subject to, the same terms and conditions set forth in
the Target Stock Option Plan and the applicable stock option agreement
immediately prior to the Effective Time, except that (i) such option will be
exercisable for that number of whole shares of Acquiror Common Stock equal to
the product of the number of shares of Target Common Stock that were issuable
upon exercise of such option immediately prior to the Effective Time multiplied
by the Common Exchange Ratio and rounded down to the nearest whole number of
shares of Acquiror Common Stock, and (ii) the per share exercise price for the
shares of Acquiror Common Stock issuable upon exercise of such assumed option
will be equal to the quotient determined by dividing the exercise price per
share of Target Common Stock at which such option was exercisable immediately
prior to the Effective Time by the Common Exchange Ratio, rounded up to the
nearest whole cent. Consistent with the terms of the Target Stock Option Plan
and the documents governing the outstanding options under such Plan, the Merger
will not terminate any of the outstanding options under the Target Stock Option
Plan. Within 20 business days after the Effective Time, Acquiror will issue to
each person who, immediately prior to the Effective Time was a holder of an
outstanding option under the Target Stock Option Plan or warrant a document in
form and substance satisfactory to Target evidencing the foregoing assumption of
such option by Acquiror and the assumption of the warrants by Acquiror.
Following the consummation of its initial public offering Acquiror agrees
27
<PAGE>
to file (and thereafter keep effective) at the time it files its first Form S-8
Registration Statement an S-8 Registration Statement covering the sale of the
shares underlying such options.
(b) Assignment of Repurchase Options. All outstanding rights of
--------------------------------
Target which it may hold immediately prior to the Effective Time to repurchase
unvested shares of Target Common Stock (the "Repurchase Options") shall be
assigned to Acquiror in the Merger and shall thereafter be exercisable by
Acquiror upon the same terms and conditions in effect immediately prior to the
Effective Time, except that the shares purchasable pursuant to the Repurchase
Options and the purchase price per share shall be adjusted to reflect the Common
Exchange Ratio.
(c) Termination of Pension Plan. If required by Acquiror in writing,
---------------------------
Target shall, immediately prior to the Closing Date, terminate the Target 401(k)
Plan (the "Plan") and no further contributions shall be made to the Plan. Target
shall provide to Acquiror (i) executed resolutions by the Board of Directors of
Target authorizing the termination and (ii) an executed amendment to the Plan
sufficient to assure compliance with all applicable requirements of the Internal
Revenue Code and regulations thereunder so that the tax-qualified status of the
Plan will be maintained at the time of termination.
5.13 Escrow Agreement. On or before the Effective Time, the Escrow Agent
----------------
and the Stockholders' Agent (as defined in Article VIII hereto) will execute the
Escrow Agreement contemplated by Article VIII in substantially the form attached
hereto as Exhibit F ("Escrow Agreement").
---------
5.14 Reserved.
--------
5.15 Employees. Joseph Ansanelli, Gregory C. Gretsch, James Harker and Ken
---------
Kim will enter into Non-Competition Agreements, substantially in the form of
Exhibit H hereto. Acquiror will negotiate in good faith to hire the employees
- ---------
listed on Schedule 5.15 with salary and benefits in accordance with Acquiror's
-------------
current plans and which are not materially inferior to such employee's current
salary and benefits. Target shall cooperate with Acquiror to assist Acquiror in
hiring such employees. Acquiror shall have no obligation to make an offer of
employment to any employee of Target except those listed on Schedule 5.15.
-------------
5.16 Expenses. Whether or not the Merger is consummated, all costs and
--------
expenses incurred in connection with this Agreement, the Agreement of Merger and
the transactions contemplated hereby and thereby shall be paid by the party
incurring such expense.
5.17 Treatment as Reorganization. Neither Target nor Acquiror shall take
---------------------------
any action prior to or following the Closing that would cause the merger to fail
to qualify as a "reorganization" within the meaning of Section 368(a) of the
Code.
5.18 Reasonable Efforts and Further Assurances. Each of the parties to this
-----------------------------------------
Agreement shall use its commercially reasonable efforts to effectuate the
transactions contemplated hereby and to fulfill and cause to be fulfilled the
conditions to closing under this Agreement. Each party hereto, at the reasonable
request of another party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be
28
<PAGE>
necessary or desirable for effecting completely
the consummation of this Agreement and the transactions contemplated hereby.
5.19 Preferred Stock. Target shall use its best efforts to ensure that all
---------------
of Target's outstanding Preferred Stock shall have been converted into Common
Stock in accordance with the Certificate of Incorporation of Target, with the
holders of the Target Preferred Stock receiving in the Merger, in exchange for
their shares of converted Target Common Stock, shares of Acquiror Common Stock.
5.20 Pooling Accounting. Acquiror and Target shall each use reasonable
------------------
commercial efforts to cause the business combination to be effected by the
Merger to be accounted for as a pooling of interests. Each of Acquiror and
Target shall use its best efforts to cause its affiliates not to take any action
that would adversely affect the ability of Acquiror to account for the business
combination to be effected by the merger as a pooling of interest.
5.21 Pooling Letters.
---------------
(a) Target shall use all reasonable efforts to cause to be delivered
to Acquiror a letter of PricewaterhouseCoopers LLP, Target's independent
auditors, dated on the Closing Date to the effect that Target (1) is autonomous;
(2) is independent; (3) has not changed the equity interests of its voting
capital stock in contemplation of effecting the Merger either within two years
before the plan of combination was initiated or between the dates the
combination was initiated and consummated and (4) has not acquired any shares of
capital stock in excess of the number permissible for pooling of interests
accounting for the Merger. Such letter shall be in a form reasonably
satisfactory to Acquiror and customary in scope and substance for letters
delivered by independent public accountants in connection with transactions of
this type.
(b) Acquiror shall use all reasonable efforts to cause to be
delivered to Target a letter of KPMG LLP, Acquiror's independent auditors, dated
on the Closing Date to the effect that the Merger qualifies for pooling of
interests accounting treatment if consummated in accordance with this Agreement.
Such letter shall be in a form reasonably satisfactory to Target and customary
in scope and substance for letters delivered by independent public accountants
in connection with transactions of this type.
5.22 Disclosure Schedule Supplement. From time to time prior to the
------------------------------
Closing Date, with the written consent of Acquiror, Target may supplement or
amend the Target Disclosure Schedule with respect to any matter arising after
the date of this Agreement which, if existing or occurring at or prior to the
date of this Agreement, would have been required to be set forth or described in
the Disclosure Schedule or which is necessary to correct any information in the
Disclosure Schedule or in any representation or warranty of Target which has
been rendered inaccurate by such after-occurring event. Notwithstanding any
other provision of this Agreement, if the Closing occurs, the Disclosure
Schedule, as amended and supplemented through the Closing Date, with the written
consent of Acquiror, shall be deemed to be the Disclosure Schedule for all
purposes of this Agreement, and no claim for breach of this Agreement or
indemnification hereunder may be made with respect to any inaccuracy on the
initial Disclosure Schedule or any supplement or amendment thereto which has
been corrected in the Disclosure Schedule as amended or supplemented through the
Closing Date.
29
<PAGE>
5.23 Board Member. Acquiror shall use commercially reasonable efforts to
------------
increase the authorized number of directors of Acquiror's Board of Directors by
one (1) member, and to appoint Robert Frick thereto as soon as practicable after
the Closing.
5.24 Investors' Rights Agreement. Acquiror shall use commercially
---------------------------
reasonable efforts to cause its Third Restated Investors' Rights Agreement to be
amended substantially as set forth as
Exhibit F hereto.
- ---------
ARTICLE VI
----------
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
------------------------------------------------------------
respective obligations of each party to this Agreement to consummate and effect
this Agreement and the transactions contemplated hereby shall be subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions, any of which may be waived, in writing, by agreement of all the
parties hereto:
(a) No Injunctions or Restraints; Illegality. No temporary
----------------------------------------
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal or regulatory restraint or
prohibition preventing the consummation of the Merger shall be in effect, nor
shall any proceeding brought by an administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking any of
the foregoing be pending; nor shall there be any action taken, or any statute,
rule, regulation or order enacted, entered, enforced or deemed applicable to the
Merger, which makes the consummation of the Merger illegal. In the event an
injunction or other order shall have been issued, each party agrees to use its
reasonable efforts to have such injunction or other order lifted.
(b) Governmental Approval. Acquiror and Target and their respective
---------------------
subsidiaries (including, in the case of Acquiror, Merger Sub) shall have timely
obtained from each Governmental Entity all approvals, waivers and consents, if
any, necessary for consummation of or in connection with the Merger and the
several transactions contemplated hereby, including such approvals, waivers and
consents as may be required under the Securities Act and under state Blue Sky
laws.
(c) Tax Opinion. Acquiror and Target shall have received written
-----------
opinions of Acquiror's legal counsel and Target's legal counsel, respectively,
in form and substance reasonably satisfactory to them, and dated on or about the
Closing Date to the effect that the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Code, and such opinions shall not
have been withdrawn. In rendering such opinions, counsel shall be entitled to
rely upon, among other things, reasonable assumptions as well as representations
of Acquiror and Target.
(d) Escrow Agreement. Acquiror, Target, Escrow Agent and the
----------------
Stockholder's Agent (as defined in Article VIII hereto) shall have entered into
an Escrow Agreement substantially in the form attached hereto as Exhibit G.
---------
30
<PAGE>
6.2 Additional Conditions to Obligations of Target. The obligations of
----------------------------------------------
Target to consummate and effect this Agreement and the transactions contemplated
hereby shall be subject to the satisfaction at or prior to the Effective Time of
each of the following conditions, any of which may be waived, in writing, by
Target:
(a) Representations, Warranties and Covenants. Except as disclosed in
-----------------------------------------
the Acquiror Disclosure Schedule dated the date of this Agreement or otherwise
contemplated by this Agreement, (i) the representations and warranties of
Acquiror and Merger Sub in this Agreement shall be true and correct in all
material respects (except for such representations and warranties that are
qualified by their terms by a reference to materiality which representations and
warranties as so qualified shall be true and correct in all respects) on and as
of the Effective Time as though such representations and warranties were made on
and as of such time and (ii) Acquiror and Merger Sub shall have performed and
complied in all material respects with all covenants, obligations and conditions
of this Agreement required to be performed and complied with by them as of the
Effective Time.
(b) Certificate of Acquiror and Merger Sub. Target shall have been
--------------------------------------
provided with a certificate executed on behalf of Acquiror and Merger Sub by its
President and its Chief Financial Officer to the effect that, as of the
Effective Time:
(i) except as disclosed in the Acquiror Disclosure Schedule
dated the date of this Agreement, all representations and warranties made
by Acquiror and Merger Sub under this Agreement are true and complete in
all material respects (except for such representations and warranties that
are qualified by their terms by reference to materiality which
representations and warranties as so qualified shall be true and correct in
all respects); and
(ii) all covenants, obligations and conditions of this
Agreement to be performed by Acquiror and Merger Sub on or before such date
have been so performed in all material respects.
(c) Legal Opinion. Target shall have received a legal opinion from
-------------
Acquiror's legal counsel substantially in the form of Exhibit I hereto.
---------
(d) Board Member. Robert Frick shall have been appointed to
------------
Acquiror's Board of Directors, effective at the Closing.
(e) Injunctions or Restraints on Merger and Conduct of Business. No
-----------------------------------------------------------
proceeding brought by any administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking to
prevent the consummation of the Merger shall be pending.
(f) Investors' Rights Agreement. Acquiror's Third Amended and
---------------------------
Restated Investors' Rights Agreement shall have been amended as provided in
Section 5.24.
(g) Letter of Accountants. Target shall have received the letters
---------------------
referred to in Section 5.21 from KPMG LLP and PricewaterhouseCoopers LLP.
31
<PAGE>
6.3 Additional Conditions to the Obligations of Acquiror and Merger Sub.
-------------------------------------------------------------------
The obligations of Acquiror to consummate and effect this Agreement and the
transactions contemplated hereby shall be subject to the satisfaction at or
prior to the Effective Time of each of the following conditions, any of which
may be waived, in writing, by Acquiror and Merger Sub:
(a) Representations, Warranties and Covenants. Except as disclosed in
-----------------------------------------
the Target Disclosure Schedule dated the date of this Agreement or otherwise
contemplated by this Agreement (i) the representations and warranties of Target
in this Agreement shall be true and correct in all material respects (except for
such representations and warranties that are qualified by their terms by a
reference to materiality which representations and warranties as so qualified
shall be true in all respects) on and as of the Effective Time as though such
representations and warranties were made on and as of such time, without giving
effect to any supplement or amendment to the Target Disclosure Schedule, and
(ii) Target shall have performed and complied in all material respects with all
covenants, obligations and conditions of this Agreement required to be performed
and complied with by it as of the Effective Time.
(b) Certificate of Target. Acquiror shall have been provided with a
---------------------
certificate executed on behalf of Target by its President and Chief Financial
Officer to the effect that, as of the Effective Time:
(i) except as set forth in the Target Disclosure Schedule
dated the date of this Agreement, without giving effect to any supplement
or amendment to the Target Disclosure Schedule, all representations and
warranties made by Target under this Agreement are true and complete in all
material respects (except for such representations and warranties that are
qualified by their terms by reference to materiality which representations
and warranties as so qualified shall be true and correct in all respects);
and
(ii) all covenants, obligations and conditions of this
Agreement to be performed by Target on or before such date have been so
performed.
(c) Third Party Consents. Acquiror shall have been furnished with
--------------------
evidence satisfactory to it of the consent or approval of those persons whose
consent or approval shall be required in connection with the Merger under the
contracts of Target set forth on Schedule 2.29 hereto.
-------------
(d) Injunctions or Restraints on Merger and Conduct of Business. No
-----------------------------------------------------------
proceeding brought by any administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking to
prevent the consummation of the Merger shall be pending. In addition, no
temporary restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal or regulatory
restraint provision limiting or restricting Acquiror's conduct or operation of
the business of Target, following the Merger shall be in effect, nor shall any
proceeding brought by an administrative agency or commission or other
Governmental Entity, domestic or foreign, seeking the foregoing be pending.
32
<PAGE>
(e) Legal Opinion. Acquiror shall have received a legal opinion from
-------------
Target's legal counsel, in substantially the form of Exhibit J.
---------
(f) Stockholder Agreements; Stockholder Representation Agreements.
-------------------------------------------------------------
Acquiror shall have received from holders of at least 90% of the sum of (x) all
shares of Target Common Stock issued and outstanding and (y) all shares of
Target Preferred Stock issued and outstanding an executed Stockholder Agreement
in substantially the form attached hereto as Exhibit D. Acquiror shall have
---------
received from each other stockholder an executed Stockholder Representation
Agreement in substantially the form attached hereto as
Exhibit E.
---------
(g) FIRPTA Certificate. Target shall, prior to the Closing Date,
------------------
provide Acquiror with a properly executed FIRPTA Notification Letter,
substantially in the form of Exhibit K attached hereto, which states that shares
---------
of capital stock of Target do not constitute "United States real property
interests" under Section 897(c) of the Code, for purposes of satisfying
Acquiror's obligations under Treasury Regulation Section 1.1445-2(c)(3). In
addition, simultaneously with delivery of such Notification Letter, Target shall
have provided to Acquiror, as agent for Target, a form of notice to the Internal
Revenue Service in accordance with the requirements of Treasury Regulation
Section 1.897-2(h)(2) and substantially in the form of Exhibit K attached hereto
---------
along with written authorization for Acquiro to deliver such notice form to the
Internal Revenue Service on behalf of Target upon the Closing of the Merger.
(h) Resignation of Directors and Officers. The directors and officers
-------------------------------------
of Target in office immediately prior to the Effective Time shall have resigned
as directors and officers, as applicable, of Target effective as of the
Effective Time.
(i) Preferred Stock. All of Target's outstanding Preferred Stock
---------------
shall have been converted into Common Stock in accordance with the Certificate
of Incorporation of Target or the terms of such Preferred Stock shall provide
for their exchange in the Merger for shares of Acquiror Common Stock.
(j) Non-Competition Agreements. Messrs. Ansanelli, Gretsch, Harker
--------------------------
and Kim shall have accepted employment with Acquiror and shall have entered into
Non-Competition Agreements substantially in the form attached hereto as
Exhibit H.
---------
(k) Certificates of Good Standing. Target shall, prior to the Closing
-----------------------------
Date, provide Acquiror a certificate from the Secretary of State of California
and the Franchise Tax Board of California and the Secretary of State of the
State of Delaware as to Target's good standing and payment of all applicable
taxes.
(l) Letter of Accountants. Acquiror shall have received the letters
---------------------
referred to in Section 5.21 from KPMG LLP and PricewaterhouseCoopers LLP,
independent auditors.
(m) Liabilities. All liabilities and obligations of the parties set
-----------
forth in Target's Series A Preferred Stock Purchase Agreement, Investors' Rights
Agreement and Right of First Refusal and Co-Sale Agreement each dated on or
about September 30, 1998 shall be terminated in their entirety with no residual
liability to any party.
33
<PAGE>
(n) Securityholder Approval. This Agreement, the Escrow Agreement and
-----------------------
the Agreement of Merger shall have been approved and adopted by the affirmative
vote of the holders of at least 95% of the then outstanding shares of Target's
Capital Stock and the holders of not more than 5.0% of Target's Capital Stock
shall have exercised their appraisal rights pursuant to Section 262 of the
Delaware Law or applicable California Law.
(o) Proprietary Agreements. Target's service providers as of the
----------------------
Closing Date listed on Schedule 6.3(o) shall have entered into Acquiror's
standard proprietary information and inventions agreement or any such failure to
execute such agreemen
t shall have no Material Adverse Effect on Target or
Acquiror.
(p) Lock-Up Agreements and NASD Questionnaires. Acquiror shall have
------------------------------------------
received from all of Target's stockholders and optionholders executed Lock-Up
Agreements in the form of Exhibit L hereto and from all of Target's stockholders
---------
executed NASD Questionnaires in the form of Exhibit M hereto.
---------
ARTICLE VII
-----------
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. At any time prior to the Effective Time, whether before
-----------
or after approval of the matters presented in connection with the Merger by the
stockholders of Target, this Agreement may be terminated:
(a) by mutual consent duly authorized by the Board of Direct
ors of
Acquiror and Target;
(b) by either Acquiror or Target, if the Closing shall not have
occurred on or before September 30, 1999 (provided, a later date may be agreed
upon in writing by the parties hereto, and provided further that the right to
terminate this Agreement under this Section 7.1(b) shall not be available to any
party whose willful action or intentional failure to act has been the cause or
resulted in the failure of the Merger to occur on or before such date and such
action or failure to act constitutes a breach of this Agreement);
(c) by Acquiror, if (i) Target shall breach in any material respect
any representation, warranty, obligation or agreement hereunder (except for such
representations and warranties that are qualified by their terms by reference to
materiality which representations and warranties as so qualified shall have been
breached in any respect) and such breach shall not have been cured within ten
(10) business days of receipt by Target of written n
otice of such breach
provided that the right to terminate this Agreement by Acquiror under this
Section 7.1(c)(i) shall not be available to Acquiror where Acquiror is at that
time in breach of this Agreement, (ii) the Board of Directors of Target shall
have withdrawn or modified its recommendation of this Agreement or the Merger in
a manner adverse to Acquiror or shall have resolved to do any of the foregoing,
or (iii) for any reason Target fails to call and hold the Target Stockholders
Meeting or obtain the requisite stockholders' consent by August 31, 1999;
34
<PAGE>
(d) by Target, if Acquiror shall breach in any material respect any
representation, warranty, obligation or agreement hereunder (except for such
representations and warranties that are qualified by their terms by reference to
materiality which representations and warranties as so qualified shall have been
breached in any respect) and such breach shall not have been cured within ten
(10) days following receipt by Acquiror of written notice of such breach,
provided that the right to terminate this Agreement by Target under this Section
7.1(d) shall not be available to Target where Target is at that time in breach
of this Agreement;
(e) by Acquiror if (i) any permanent injunction or other order of a
court or other competent authority preventing the consummation of the Merger
shall have become final and nonappealable or (ii) if any required approval of
the stockholders of Target shall not have been obtained by reason of the failure
to obtain the required vote upon a vote held at a duly held meeting of
stockholders or at any adjournment thereof; or
(f) by Target if (i) any permanent injunction or other order of a
court or other competent authority preventing the consummation of the Merger
shall have become final and nonappealable or (ii) if any required approval of
the stockholders of Target shall not have been obtained by reason of the failure
to obtain the required vote upon a vote held at a duly held meeting of
stockholders or at any adjournment thereof.
7.2 Effect of Termination. In the event of termination of this Agreement
---------------------
as provided in Section 7.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of Acquiror or Target or their
respective officers, directors, stockholders or affiliates, except to the extent
that such termination results from the willful breach by a party hereto of any
of its representations, warranties or covenants set forth in this Agreement;
provided that the provisions of Section 5.4 (Confidentiality), Section 7.3
(Expenses and Termination Fees) and this Section 7.2 shall remain in full force
and effect and survive any termination of this Agreement.
7.3 Expenses and Termination Fees. Whether or not the Merger is
-----------------------------
consummated, all costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby (including, without limitation, the
fees and expenses of its advisers, accountants and legal counsel) shall be paid
by the party incurring such expense.
7.4 Extension; Waiver. At any time prior to the Effective Time any party
-----------------
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto and (iii)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
35
<PAGE>
ARTICLE VIII
------------
ESCROW AND INDEMNIFICATION
8.1 Escrow Fund. As soon as practicable after the Effective Time, ten
-----------
percent (10%) of the Total Acquiror Shares (other than shares issuable upon
exercise of outstanding options under the Target Stock Plan or upon exercise of
warrants or still subject to vesting (after an acceleration of vesting at
closing) (the "Escrow Shares"), registered in the names of the Target
stockholders who otherwise would receive them pursuant to this Agreement, shall
be deposited with, State Street Bank and Trust Company of California, N.A. (or
other entity selected by Acquiror with the reasonable consent of Target) as
escrow agent (the "Escrow Agent"), such deposit (together with interest and
other income thereon) to constitute the Escrow Fund and to be governed by the
terms set forth herein and in the Escrow Agreement attached hereto as Exhibit G.
---------
The shares distributed to the Escrow Agent shall be shares that are not subject
to any repurchase rights by Target. The Escrow Fund shall be available to
compensate Acquiror pursuant to the indemnification obligations of the
stockholders of Target.
8.2 Indemnification.
---------------
(a) If the Merger is consummated, the stockholders of Target will
indemnify and hold harmless Acquiror and its officers, directors, agents and
employees, and each person, if any, who controls or may control Acquiror within
the meaning of the Securities Act of 1933, as amended, (hereinafter referred to
individually as an "Indemnified Person" and collectively as "Indemnified
Persons") from and against any and all losses, costs, damages, liabilities and
expenses arising from claims, demands, actions, causes of action, including,
without limitation, legal fees and any and all expenses incurred in
investigating, preparing, and defending against any litigation, commenced or
threatened, and any claim whatsoever, and any and all amounts paid in settlement
of any claim or litigation (collectively, "Damages") arising out of any
misrepresentation or breach of or default in or nonfulfillment of or in
connection with any of the representations, warranties, covenants and agreements
given or made by Target in this Agreement, the Target Disclosure Schedules or
any exhibit or schedule to this Agreement. The Escrow Fund shall be security for
this indemnity obligation subject to the limitations in this Agreement. If the
Merger is consummated, recovery from the Escrow Fund shall be the exclusive
remedy under this Agreement for any breach or default in connection with any of
the representations, warranties, covenants or agreements set forth in this
Agreement, the Target Disclosure Schedules, or any exhibit or schedule to this
Agreement.
(b) No investigation made by or on behalf of Acquiror with respect to
Target shall be deemed to affect Acquiror's reliance on the representations,
warranties, covenants and agreements made by Target contained in this Agreement
and shall not be a waiver of Acquiror's rights to indemnity as herein provided
for the breach or inaccuracy of, or failure to perform or comply with, any of
Target's representations, warranties, covenants or agreements under this
Agreement. All representations and warranties set forth in this Agreement shall
be deemed to have been made again by Target at and as of the Closing. No
performance or execution of this Agreement in whole or in part by any party
hereto, no course of dealing between or among the parties hereto or any delay or
failure on the part of any party in exercising any rights hereunder
36
<PAGE>
or at law or in equity, and no investigation by any party hereto shall operate
as a waiver of any rights of such party.
(c) The exclusive contractual remedy for indemnification under this
Agreement after the Closing of the Merger is the Escrow as set forth in this
Article VIII. Nothing in this Agreement shall be construed as limiting any other
remedy that may be available to a party in the event of fraud relating to the
representations, warranties, agreements or covenants made by any other party in
this Agreement.
(d) Subject to the limitations provided in this Article VIII, the
stockholders of Target shall have liabilities and obligations for Damages (as
defined herein) under this Article VIII only with respect to claims submitted or
notice of claims provided during the time period of survivability of the
specific representation, warranty, covenant or agreement as set forth herein.
Notwithstanding the expiration date of the representations, warranties,
covenants and agreements set forth herein, if Acquiror shall notify the Escrow
Agent with respect to the submission of a claim during the time period of
survivability of such representation, warranty, covenant or agreement in
conformity with the terms of the Escrow Agreement, such liability or obligation
for Damages shall continue in full force and effect until those claims timely
made are finally settled.
(e) Notwithstanding the foregoing, Acquiror may not receive any
shares from the Escrow Fund unless and until an Officer's Certificate or
certificates (as defined in Section 8.4 below) identifying Damages the aggregate
amount of which exceeds $100,000 has been delivered to the Escrow Agent as
provided in Section 8.4 below and such amount is determined pursuant to this
Article VIII to be payable, in which case Acquiror shall receive shares equal in
value to the full amount of Damages; provided, however, that in no event shall
Acquiror receive more than the number of shares of Acquiror Common Stock
originally placed in the Escrow Fund.
8.3 Escrow Period. The escrow period (the "Escrow Period") shall terminate
-------------
upon the earliest to occur of (i) the one year anniversary of the Effective
Time, (ii) six months following the closing of Acquiror's initial public
offering or (iii) the final date of the auditor's report for Acquiror for fiscal
year 1999; provided, however, that a portion of the Escrow Shares, which in the
reasonable judgment of Acquiror, is necessary to satisfy any unsatisfied claims
specified in any Officer's Certificate theretofore delivered to the Escrow Agent
prior to termination of the Escrow Period with respect to facts and
circumstances existing prior to expiration of the Escrow Period, shall remain in
the Escrow Fund until such claims have been resolved.
8.4 Claims upon Escrow Fund.
-----------------------
(a) Subject to the provisions of paragraph (b) below, upon receipt by
the Escrow Agent on or before the last day of the Escrow Period of a certificate
signed by any officer of Acquiror (an "Officer's Certificate") (i) stating that
Damages exist in an aggregate amount greater than $100,000 and (ii) specifying
in reasonable detail the individual items of such Damages included in the amount
so stated, the date each such item was paid, or properly accrued or arose, the
nature of the misrepresentation, breach of warranty or claim to which such item
is
37
<PAGE>
related, the Escrow Agent shall deliver to Acquiror out of the Escrow Fund, as
promptly as practicable, Acquiror Common Stock or other assets held in the
Escrow Fund having a value equal to such Damages.
(b) At the time of delivery of any Officer's Certificate to the
Escrow Agent, a duplicate copy of such Certificate shall be delivered to the
Stockholders' Agent (as defined below), and for a period of 30 days after
receipt by the Escrow Agent, the Escrow Agent shall make no delivery to Acquiror
of any Acquiror Common Stock or other assets held in the Escrow Fund pursuant
hereto unless the Escrow Agent shall have received written authorization from
the Stockholders' Agent to make such delivery. No payment or delivery may be
made if the Stockholders' Agent shall object in a written statement to the claim
made in the Officer's Certificate and such statement shall have been delivered
to the Escrow Agent prior to the expiration of such 30-day period.
(c) For the purpose of compensating Acquiror for its Damages
pursuant to this Agreement, the Acquiror's Common Stock in the Escrow Fund shall
be valued at the mid-point of the range for the Acquiror's initial public
offering price per share, as set forth on the cover page of Acquiror's
preliminary prospectus.
8.5 Stockholders' Agent.
-------------------
(a) Prior to the Closing, the stockholders of Target shall constitute
and appoint an agent ("Stockholders' Agent") for and on behalf of the Target
stockholders to give and receive notices and communications, to authorize
delivery to Acquiror of the Acquiror Common Stock or other property from the
Escrow Fund in satisfaction of claims by Acquiror, to object to such deliveries,
to agree to, negotiate, enter into settlements and compromises of, and demand
arbitration and comply with orders of courts and awards of arbitrators with
respect to such claims, and to take all actions necessary or appropriate in the
judgment of the Stockholders' Agent for the accomplishment of the foregoing.
Such agency may be changed by the holders of a majority in interest of the
Escrow Fund from time to time upon not less than 10 days' prior written notice
to Acquiror. No bond shall be required of the Stockholders' Agent. Notices or
communications to or from the Stockholders' Agent shall constitute notice to or
from each of the Target stockholders.
(b) The Stockholders' Agent shall not be liable for any act done or
omitted hereunder as Stockholders' Agent while acting in good faith and in the
exercise of reasonable judgment, and any act done or omitted pursuant to the
advice of counsel shall be conclusive evidence of such good faith. The Target
stockholders shall severally indemnify the Stockholders' Agent and hold him
harmless against any loss, liability or expense incurred without gross
negligence or bad faith on the part of the Stockholders' Agent and arising out
of or in connection with the acceptance or administration of his duties
hereunder.
(c) The Stockholders' Agent shall have reasonable access to
information about Target and the reasonable assistance of Target's officers and
employees for purposes of performing its duties and exercising its rights
hereunder, provided that the Stockholders' Agent shall treat confidentially and
not disclose any nonpublic information from or about Target to anyone (except on
a need to know basis to individuals who agree to treat such information
confidentially).
38
<PAGE>
8.6 Actions of the Stockholders' Agent. A decision, act, consent or
----------------------------------
instruction of the Stockholders' Agent shall constitute a decision of all Target
stockholders for whom shares of Acquiror Common Stock otherwise issuable to them
are deposited in the Escrow Fund and shall be final, binding and conclusive upon
each such Target stockholder, and the Escrow Agent and Acquiror may rely upon
any decision, act, consent or instruction of the Stockholders' Agent as being
the decision, act, consent or instruction of each and every such Target
stockholder. The Escrow Agent and Acquiror are hereby relieved from any
liability to any person for any acts done by them in accordance with such
decision, act, consent or instruction of the Stockholders' Agent.
8.7 Claims. In the event Acquiror becomes aware of a claim which Acquiror
------
believes may result in a demand against the Escrow Fund, Acquiror shall promptly
notify the Stockholders' Agent of such claim. The Stockholders' Agent and the
Target stockholders for whom shares of Acquiror Common Stock otherwise issuable
to them are deposited in the Escrow Fund shall be entitled, at their expense, to
participate in any defense of such claim. Acquiror shall have the right to
settle any such claim; provided, however, that Acquiror may not effect the
settlement of any such claim without the consent of the Stockholders' Agent,
which consent shall not be unreasonably withheld. In the event that the
Stockholders' Agent has consented to any such settlement, the Stockholders'
Agent shall have no power or authority to object under Section 8.6 or any other
provision of this Article VIII to a claim by Acquiror against the Escrow Fund
for indemnity for the settlement amount agreed to by the Stockholders' Agent
with respect to such settlement.
ARTICLE IX
----------
GENERAL PROVISIONS
9.1 Survival at Effective Time. The representations and warranties set
--------------------------
forth in Article II will survive until the expiration of the Escrow Period. The
representations and warranties set forth in Article III shall survive until the
earlier of the date on which Acquiror's initial public offering is consummated
and the expiration of the Escrow Period. The agreements set forth in this
Agreement shall terminate at the Effective Time, except that the agreements set
forth in Article I, Section 5.3 (Access to Information), Section 5.4
(Confidentiality), 5.7 (Stockholder Representation Agreements), 5.8 (Stockholder
Agreement/Irrevocable Proxies), 5.9 (Lock-Up Agreements and NASD
Questionnaires), 5.11 (Employee Benefit Plans), 5.18 (Reasonable Efforts and
Further Assurances), 7.3 (Expenses and Termination Fees), 7.4 (Extension;
Waiver), Article VIII and this Article IX shall survive the Effective Date and
the Closing.
9.2 Notices. All notices and other communications hereunder shall be in
-------
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return receipt
requested) or sent via facsimile (with confirmation of receipt) to the parties
at the following address (or at such other address for a party as shall be
specified by like notice):
39
<PAGE>
(a) if to Acquiror or Merger Sub, to:
Kana Communications, Inc.
87 Encina Avenue
Palo Alto, CA 94301
Attention: President
Facsimile No.: (650) 566-2401
Telephone No.: (650) 325-9850
with a copy to:
Brobeck, Phleger & Harrison LLP
2200 Geng Road
Two Embarcadero Place
Palo Alto, CA 94303
Attention: Warren T. Lazarow, Esq.
Facsimile No.: (650) 496-2885
Telephone No.: (650) 424-0160
(b) if to Target, to:
Connectify, Inc.
One Waters Park Drive, Suite 200
San Mateo, CA 94403
Attention: President
Facsimile No.: (650) 349-6899
Telephone No.: (650) 349-6800
with a copy to:
Pillsbury Madison & Sutro LLP
2550 Hanover Street
Palo Alto, California 94304
Attention: John L. Donahue, Esq.
Facsimile No.: (650) 233-4545
Telephone No.: (650) 233-4687
9.3 Interpretation. When a reference is made in this Agreement to
--------------
Exhibits, such reference shall be to an Exhibit to this Agreement unless
otherwise indicated. The words "include," "includes" and "including" when used
herein shall be deemed in each case to be followed by the words "without
limitation." The phrase "made available" in this Agreement shall mean that the
information referred to has been made available if requested by the party to
whom such information is to be made available. The phrases "the date of this
Agreement", "the date hereof", and terms o
f similar import, unless the context
otherwise requires, shall be deemed to refer to August 13, 1999. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement.
40
<PAGE>
9.4 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
9.5 Attorneys Fees. 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 attorney's fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
9.6 Entire Agreement; Nonassignability; Parties in Interest. This
-------------------------------------------------------
Agreement and the documents and instruments and other agreements specifically
referred to herein or delivered pursuant hereto, including the Exhibits, the
Schedules, including the Target Disclosure Schedule and the Acquiror Disclosure
Schedule and a side letter dated the date hereof regarding employees of Target
(a) constitute the entire agreement among the parties with respect to the
subject matter hereof and supersede all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof, except for the Confidentiality Agreement, which shall continue in full
force and effect, and shall survive any termination of this Agreement or the
Closing, in accordance with its terms (b) are not intended to confer upon any
other person any rights or remedies hereunder, except as set forth in Sections
1.6(a) and (c)-(e), 1.7, 1.9-1.11, Article III, 5.12 and 5.15; and (c) shall not
be assigned by operation of law or otherwise except as otherwise specifically
provided. The stockholders of Target shall be third party beneficiaries of the
representations and warranties of Acquiror made in Article III.
9.7 Severability. In the event that any provision of this Agreement, or
------------
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
9.8 Remedies Cumulative. Except as otherwise provided herein, any and all
-------------------
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
9.9 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of California without reference to such state's
principles of conflicts of law. Each of the parties hereto irrevocably consents
to the exclusive jurisdiction of any court located within the County of Santa
Clara, State of California, in connection with any matter based upon or arising
out of this Agreement or the matters contemplated herein, agrees that process
may be served upon them in any manner authorized by the laws of the State of
California for such persons and waives and covenants not to assert or plead any
objection which they might otherwise have to such jurisdiction and such process.
41
<PAGE>
9.10 Rules of Construction. The parties hereto agree that they have been
---------------------
represented by counsel during the negotiation, preparation and execution of this
Agreement and, therefore, waive the application of any law, regulation, holding
or rule of construction providing that ambiguities in an agreement or other
document will be construed against the party drafting such agreement or
document.
42
<PAGE>
[Signature Page to Agreement and Plan of Reorganization]
IN WITNESS WHEREOF, Merger Sub, Target and Acquiror have caused this
Agreement to be executed and delivered by their respective officers and persons
thereunto duly authorized, all as of the date first written above.
ACQUIROR:
By /s/ Michael J. McCloskey
----------------------------------------
Name Michael J. McCloskey
----------------------------------------
Title Chief Executive Officer
----------------------------------------
MERGER SUB:
By /s/ Michael J. McCloskey
----------------------------------------
Name Michael J. McCloskey
----------------------------------------
Title Chief Executive Officer
----------------------------------------
TARGET:
By /s/ Joseph Ansanelli
----------------------------------------
Name Joseph Ansanelli
----------------------------------------
Title President and Chief Executive Officer
----------------------------------------
43
<PAGE>
Exhibit 4.2
KANA COMMUNICATIONS, INC.
----------------
FOURTH 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......................... 3
1.3 Company Registration............................. 5
1.4 Obligations of the Company....................... 6
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.................................. 9
1.11 Reports Under 1934 Act........................... 11
1.12 Form S-3 Registration............................ 11
1.13 Assignment of Registration Rights................ 12
1.14 Limitations on Subsequent Registration Rights.... 13
1.15 "Market Stand-Off" Agreement..................... 13
1.16 Termination of Registration Rights............... 14
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.......................................... 16
3.1 Successors and Assigns........................... 16
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..................................... 17
3.10 Aggregation of Stock............................. 17
3.11 Entire Agreement................................. 17
3.12 Confidentiality.................................. 17
</TABLE>
i
<PAGE>
FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
-------------------------------------------------------
THIS FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT is made
as of the 13th day of August 1999, by and among Kana Communications, Inc., a
California corporation (the "Company"), the parties listed on Schedule A hereto
----------
(the "Existing Investors") and the parties listed on Schedule B hereto (the
----------
"Connectify Stockholders" and collectively with the Existing Investors, the
"Investors").
RECITALS
--------
WHEREAS, certain the Existing Investors hold shares of the Company's
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock
and/or Series D Preferred Stock and possess certain rights pursuant to a Third
Amended and Restated Investors' Rights Agreement dated as of July 8, 1999, 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, the Connectify Stockholders will receive shares of the
Company's common stock pursuant to the Agreement and Plan of Reorganization
dated as of August 13th, 1999 by and among the Company, KCI Acquisition, Inc.
and Connectify, Inc. ("Connectify") (the "Plan of Reorganization"), and certain
of the Company's and Connectify's obligations under the Plan of Reorganization
are conditioned upon the execution of this Agreement by the Investors and 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.
<PAGE>
(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.
(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, (iv) all
shares held by the parties listed on Schedule B hereto acquired or to be
----------
acquired in connection with the Company's acquisition of Connectify pursuant to
the Plan of Reorganization and (v) 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), (iii) and
(iv) 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 C Preferred Stock, Series C1 Preferred
Stock, Series D Preferred Stock and Series D1 Preferred Stock, (ii) all shares
held by the parties listed on Schedule B hereto acquired or to be acquired in
----------
connection with the Company's acquisition of Connectify pursuant to the Plan of
Reorganization and (iii) 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) and (ii), 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.
2
<PAGE>
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 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
3
<PAGE>
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
(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
4
<PAGE>
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:
(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
5
<PAGE>
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 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
6
<PAGE>
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;
(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
7
<PAGE>
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 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
8
<PAGE>
controversy that might arise with respect to the interpretation or
implementation of this Section 1.
1.10 Indemnification. In the event any Registrable Securities are
included in a registration statement under this Section 1:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, any underwriter (as defined in the Act) for such
Holder and each person, if any, who controls such Holder or underwriter within
the meaning of the Act or the 1934 Act, against any losses, claims, damages, or
liabilities (joint or several) to which they may become subject under the Act,
the 1934 Act or other federal or state law, insofar as such losses, claims,
damages, or liabilities (or actions in respect thereof) arise out of or are
based upon any of the following statements, omissions or violations
(collectively a "Violation"): (i) any untrue statement or alleged untrue
statement of a material fact contained in such registration statement, including
any preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Act, the 1934 Act, any state securities law or
any rule or regulation promulgated under the Act, the 1934 Act or any state
securities law; and the Company will pay to each such Holder, underwriter or
controlling person, as incurred, any legal or other expenses reasonably incurred
by them in connection with investigating or defending any such loss, claim,
damage, 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
9
<PAGE>
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, 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.
10
<PAGE>
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 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
11
<PAGE>
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 (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.
12
<PAGE>
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 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 A 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.
13
<PAGE>
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 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
14
<PAGE>
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 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
15
<PAGE>
(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.
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
16
<PAGE>
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.
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.
By:/s/ MARK S. GAINEY
---------------------------------
Mark S. Gainey
President
EXISTING INVESTORS:
MARK S. GAINEY
/s/ MARK S. GAINEY
-----------------------------------
PAUL HOLLAND
/s/ PAUL HOLLAND
-----------------------------------
MICHAEL MCCLOSKEY
/s/ MICHAEL MCCLOSKEY
-----------------------------------
<PAGE>
BENCHMARK CAPITAL PARTNERS, L.P.
By: Benchmark Capital Management Co., L.L.C.
Its General Partner
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
BENCHMARK FOUNDERS' FUND, L.P.
By: Benchmark Capital Management Co., L.L.C.
Its General Partner
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
<PAGE>
DRAPER FISHER ASSOCIATES FUND IV, L.P.
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
DRAPER FISHER PARTNERS IV, LLC
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
<PAGE>
DRAPER RICHARDS L.P.
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
<PAGE>
ATGF II, a Panamanian Corporation
By: ATGF II, a Panamanain Corporation
Its General Partner
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
<PAGE>
Convergys Corporation
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
<PAGE>
INVESTORS:
<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>
SCHEDULE B
----------
CONNECTIFY STOCKHOLDERS
<PAGE>
EXHIBIT 5.1
August 13, 1999
Kana Communications, Inc.
87 Encina Avenue
Palo Alto, California 94301
Re: Kana Communications, Inc. Registration Statement on Form S-1
for 3,795,000 Shares of Common Stock
------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Kana Communications, Inc., a California
corporation (the "Company"), in connection with the proposed issuance and sale
by the Company of up to 3,795,000 shares of the Company's Common Stock (the
"Shares") pursuant to the Company's Registration Statement on Form S-1 (the
"Registration Statement") filed with the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "Act").
This opinion is being furnished in accordance with the requirements of
Item 16(a) of Form S-1 and Item 601(b)(5)(i) of Regulation S-K.
We have reviewed the Company's charter documents and the corporate
proceedings taken by the Company in connection with the issuance and sale of the
Shares. Based on such review, we are of the opinion that the Shares have been
duly authorized, and if, as and when issued in accordance with the Registration
Statement and the related prospectus (as amended and supplemented through the
date of issuance) will be legally issued, fully paid and non-assessable.
We consent to the filing of this opinion letter as Exhibit 5.1 to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the prospectus which is part of the Registration Statement.
In giving this consent, we do not thereby admit that we are within the category
of persons whose consent is required under Section 7 of the Act, the rules and
regulations of the Securities and Exchange Commission promulgated thereunder, or
Item 509 of Regulation S-K.
This opinion letter is rendered as of the date first written above and
we disclaim any obligation to advise you of facts, circumstances, events or
developments which hereafter may be brought to our attention and which may
alter, affect or modify the opinion expressed herein. Our opinion is expressly
limited to the matters set forth above and we render no opinion,
<PAGE>
Kana Communications, Inc.
Page 2
whether by implication or otherwise, as to any other matters relating to the
Company or the Shares.
Very truly yours,
/s/ BROBECK, PHLEGER & HARRISON LLP
BROBECK, PHLEGER & HARRISON LLP
<PAGE>
EXHIBIT 10.2
KANA COMMUNICATIONS, INC.
1999 STOCK INCENTIVE PLAN
-------------------------
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 1999 Stock Incentive Plan is intended to promote the interests of
Kana Communications, Inc., a Delaware corporation, by providing eligible persons
in the Corporation's service with the opportunity to acquire a proprietary
interest, or otherwise increase their proprietary interest, in the Corporation
as an incentive for them to remain in such service.
Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into five separate equity incentives
programs:
- the Discretionary Option Grant Program under which eligible
persons may, at the discretion of the Plan Administrator, be granted options to
purchase shares of Common Stock,
- the Salary Investment Option Grant Program under which eligible
employees may elect to have a portion of their base salary invested each year in
special option grants,
- 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),
- the Automatic Option Grant Program under which eligible non-
employee Board members shall automatically receive option grants at designated
intervals over their period of continued Board service, and
- the Director Fee Option Grant Program under which non-employee
Board members may elect to have all or any portion of their annual retainer fee
otherwise payable in cash applied to a special stock option grant.
B. The provisions of Articles One and Seven shall apply to all equity
programs under the Plan and shall govern the interests of all persons under the
Plan.
<PAGE>
III. ADMINISTRATION OF THE PLAN
A. The Primary Committee shall have sole and exclusive authority to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to Section 16 Insiders. Administration of the Discretionary Option Grant
and Stock Issuance Programs with respect to all other persons eligible to
participate in those programs may, at the Board's discretion, be vested in the
Primary Committee or a Secondary Committee, or the Board may retain the power to
administer those programs with respect to all such persons. However, any
discretionary option grants or stock issuances for members of the Primary
Committee must be authorized by a disinterested majority of the Board.
B. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions of
any Secondary Committee and reassume all powers and authority previously
delegated to such committee.
C. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, 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 Discretionary Option Grant and
Stock Issuance Programs and to make such determinations under, and issue such
interpretations of, the provisions of those programs and any outstanding options
or stock issuances thereunder as it may deem necessary or advisable. Decisions
of the Plan Administrator within the scope of its administrative functions under
the Plan shall be final and binding on all parties who have an interest in the
Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or
any stock option or stock issuance thereunder.
D. The Primary Committee shall have the sole and exclusive authority
to determine which Section 16 Insiders and other highly compensated Employees
shall be eligible for participation in the Salary Investment Option Grant
Program for one or more calendar years. However, all option grants under the
Salary Investment Option Grant Program shall be made in accordance with the
express terms of that program, and the Primary Committee shall not exercise any
discretionary functions with respect to the option grants made under that
program.
E. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.
F. Administration of the Automatic Option Grant and Director Fee
Option Grant Programs shall be self-executing in accordance with the terms of
those programs, and no Plan Administrator shall exercise any discretionary
functions with respect to any option grants or stock issuances made under those
programs.
2.
<PAGE>
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or the board of directors
of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary).
B. Only Employees who are Section 16 Insiders or other highly
compensated individuals shall be eligible to participate in the Salary
Investment Option Grant Program.
C. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority to determine,
(i) with respect to the option grants under the Discretionary Option Grant
Program, which eligible persons are to receive such 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 issuances, the time or times when the 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 for such
shares.
D. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Discretionary Option Grant Program or to
effect stock issuances in accordance with the Stock Issuance Program.
E. The individuals who shall be eligible to participate in the
Automatic Option Grant Program shall be limited to (i) those individuals who
first become non-employee Board members on or after the Underwriting Date,
whether through appointment by the Board or election by the Corporation's
stockholders, and (ii) those individuals who continue to serve as non-employee
Board members at one or more Annual Stockholders Meetings held after the
Underwriting Date. A non-employee Board member who has previously been in the
employ of the Corporation (or any Parent or Subsidiary) shall not be eligible to
receive an option grant under the Automatic Option Grant Program at the time he
or she first becomes a non-employee Board member, but shall be eligible to
receive periodic option grants under the Automatic Option Grant Program while he
or she continues to serve as a non-employee Board member.
F. All non-employee Board members shall be eligible to participate in
the Director Fee Option Grant Program.
3.
<PAGE>
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The number of shares of Common Stock initially
reserved for issuance over the term of the Plan shall not exceed Three Million
Four Hundred Eighty-Five Thousand Seven Hundred Fourteen (3,485,714) shares.
Such reserve shall consist of (i) the number of shares estimated to remain
available for issuance, as of the Plan Effective Date, under the Predecessor
Plan as last approved by the Corporation's stockholders, including the shares
subject to outstanding options under that Predecessor Plan, (ii) plus an
additional increase of Two Million Six Hundred Thrity Four Thousand Seventeen
(2,634,017) shares to be approved by the Corporation's stockholders prior to the
Underwriting Date.
B. The number of shares of Common Stock available for issuance under
the Plan shall automatically increase on the first trading day of January each
calendar year during the term of the Plan, beginning with calendar year 2000, by
an amount equal to four and one-fourth percent (4.25%) of the total number of
shares of Common Stock outstanding on the last trading day in December of the
immediately preceding calendar year, but in no event shall any such annual
increase exceed One Million Five Hundred Thousand (1,500,000) shares.
C. No one person participating in the Plan may receive stock options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 1,000,000 shares of Common Stock in the aggregate per calendar year.
D. Shares of Common Stock subject to outstanding options (including
options incorporated into this Plan from the Predecessor Plan) shall be
available for subsequent issuance under the Plan to the extent (i) those 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 cancelled or
repurchased by the Corporation at the original issue price paid per share,
pursuant to the Corporation's repurchase rights under the Plan shall be added
back to the number of shares of Common Stock reserved for issuance under the
Plan and shall accordingly be available for reissuance through one or more
subsequent option grants or direct stock issuances under the Plan. However,
should the exercise price of an option under the Plan be paid with shares of
Common Stock or should shares of Common Stock otherwise issuable under the Plan
be withheld by the Corporation in satisfaction of the withholding taxes incurred
in connection with the exercise of an option or the vesting of a stock issuance
under the Plan, then the number of shares of Common Stock available for issuance
under the Plan shall be reduced by the gross number of shares for which the
option is exercised or which vest under the stock issuance, and not by the net
number of shares of Common Stock issued to the holder of such option or stock
issuance. Shares of Common Stock underlying one or more stock appreciation
rights exercised under Section IV of Article Two, Section III of Article Three,
Section II of Article Five or Section III of Article Six of the Plan shall not
be available for subsequent issuance under the Plan.
4.
<PAGE>
E. If any change is 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 by the Plan Administrator to (i) the maximum number and/or class of
securities issuable under the Plan, (ii) the maximum number and/or class of
securities for which any one person may be granted stock options, separately
exercisable stock appreciation rights and direct stock issuances under the Plan
per calendar year, (iii) the number and/or class of securities for which grants
are subsequently to be made under the Automatic Option Grant Program to new and
continuing non-employee Board members, (iv) the number and/or class of
securities and the exercise price per share in effect under each outstanding
option under the Plan, (v) the number and/or class of securities and exercise
price per share in effect under each outstanding option incorporated into this
Plan from the Predecessor Plan and (vi) the maximum number and/or class of
securities by which the share reserve is to increase automatically each calendar
year pursuant to the provisions of Section V.B of this Article One. Such
adjustments to the outstanding options are to be effected in a manner which
shall preclude the enlargement or dilution of rights and benefits under such
options. The adjustments determined by the Plan Administrator shall be final,
binding and conclusive.
5.
<PAGE>
ARTICLE TWO
DISCRETIONARY 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 but shall not be less than one hundred percent (100%) 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 Seven
and the documents evidencing the option, be payable in one or more of the forms
specified below:
(i) cash or check made payable to the Corporation,
(ii) 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
(iii) 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 to (a) a
Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be
withheld by the Corporation by reason of such exercise and (b) the
Corporation to deliver the certificates for the purchased shares directly
to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. Exercise and Term of Options. Each option shall be exercisable
----------------------------
at such time or times, during such period and for such number of shares as shall
be determined by the Plan Administrator and set forth in the documents
evidencing the option. However, no option shall have a term in excess of ten
(10) years measured from the option grant date.
6.
<PAGE>
C. Effect of Termination of Service.
--------------------------------
1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such
period of time thereafter as shall be determined by the Plan Administrator
and set forth in the documents evidencing the option, but no such option
shall be exercisable after the expiration of the option term.
(ii) Any option held by the Optionee at the time of death and
exercisable in whole or in part at that time may be subsequently exercised
by the personal representative of the Optionee's estate or by the person or
persons to whom the option is transferred pursuant to the Optionee's will
or the laws of inheritance or by the Optionee's designated beneficiary or
beneficiaries of that option.
(iii) Should the Optionee's Service be terminated for
Misconduct or should the Optionee otherwise engage in Misconduct while
holding one or more outstanding options under this Article Two, then all
those options shall terminate immediately and cease to be outstanding.
(iv) During the applicable post-Service exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Service, terminate and cease
to be outstanding to the extent the option is not otherwise at that time
exercisable for vested shares.
2. The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:
(i) extend the period of time for which the option is to
remain exercisable following the Optionee's cessation of Service from the
limited exercise 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 had the
Optionee continued in Service.
7.
<PAGE>
D. Stockholder Rights. The holder of an option shall have no
------------------
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. Repurchase Rights. The Plan Administrator shall have the
-----------------
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.
F. Limited Transferability of Options. During the lifetime of the
----------------------------------
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or the laws of inheritance
following the Optionee's death. However, a Non-Statutory Option may be assigned
in whole or in part during the Optionee's lifetime to one or more members of the
Optionee's family or to a trust established exclusively for one or more such
family members or to Optionee's former spouse, to the extent such assignment is
in connection with the Optionee's estate plan or pursuant to a domestic
relations order. The assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for the option immediately prior to such assignment and shall be
set forth in such documents issued to the assignee as the Plan Administrator may
deem appropriate. Notwithstanding the foregoing, the Optionee may also designate
one or more persons as the beneficiary or beneficiaries of his or her
outstanding options under this Article Two, and those options shall, in
accordance with such designation, automatically be transferred to such
beneficiary or beneficiaries upon the Optionee's death while holding those
options. Such beneficiary or beneficiaries shall take the transferred options
subject to all the terms and conditions of the applicable agreement evidencing
each such transferred option, including (without limitation) the limited time
period during which the option may be exercised following the Optionee's death.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Seven shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options
when issued under the Plan shall not be subject to the terms of this Section II.
---
A. Eligibility. Incentive Options may only be granted to Employees.
-----------
B. 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 calendar year shall
not exceed the sum of One Hundred Thousand Dollars ($100,000).
8.
<PAGE>
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.
C. 10% Stockholder. If any Employee to whom an Incentive Option is
---------------
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each outstanding option
shall automatically accelerate so that each such option shall, immediately prior
to the effective date of the Corporate Transaction, become exercisable for all
the shares of Common Stock at the time subject to such option and may be
exercised for any or all of those shares as fully vested shares of Common Stock.
However, an outstanding option shall not become exercisable on such an
accelerated basis if and to the extent: (i) such option is, in connection with
the Corporate Transaction, to be assumed by the 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 at the time of the
Corporate Transaction on any shares for which the option is not otherwise at
that time exercisable and provides for subsequent payout in accordance with the
same exercise/vesting schedule applicable to those 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 automatically terminate,
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction, except to
the extent: (i) those repurchase rights are to be assigned to the successor
corporation (or parent thereof) in connection with such Corporate Transaction or
(ii) such accelerated vesting is precluded by other limitations imposed by the
Plan Administrator at the time the repurchase right is issued.
C. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments to reflect such Corporate Transaction shall also be made
to (i) the exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities shall remain
- --------
the same, (ii) the maximum number and/or class of securities available for
issuance over the remaining term of the Plan and
9.
<PAGE>
(iii) the maximum number and/or class of securities for which any one person may
be granted stock options, separately exercisable stock appreciation rights and
direct stock issuances under the Plan per calendar year and (iv) the maximum
number and/or class of securities by which the share reserve is to increase
automatically each calendar year. To the extent the actual holders of the
Corporation's outstanding Common Stock receive cash consideration for their
Common Stock in consummation of the Corporate Transaction, the successor
corporation may, in connection with the assumption of the outstanding options
under this Plan, substitute one or more shares of its own common stock with a
fair market value equivalent to the cash consideration paid per share of Common
Stock in such Corporate Transaction.
E. The Plan Administrator shall have the discretionary authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall, immediately prior to the effect date of
such Corporate Transaction, become exercisable for all the shares of Common
Stock at the time subject to those options and may be exercised for any or all
of those shares as fully vested shares of Common Stock, whether or not those
options are to be assumed in the Corporate Transaction. In addition, the Plan
Administrator shall have the discretionary authority to structure one or more of
the Corporation's repurchase rights under the Discretionary Option Grant Program
so that those rights shall not be assignable in connection with such Corporate
Transaction and shall accordingly terminate upon the consummation of such
Corporate Transaction, and the shares subject to those terminated rights shall
thereupon vest in full.
F. The Plan Administrator shall have full power and authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall become exercisable for all the shares of
Common Stock at the time subject to those options in the event the Optionee's
Service is subsequently terminated 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 options are assumed
and do not otherwise accelerate. In addition, the Plan Administrator may
structure one or more of the Corporation's repurchase rights so that those
rights shall immediately terminate with respect to any shares held by the
Optionee at the time of his or her Involuntary Termination, and the shares
subject to those terminated repurchase rights shall accordingly vest in full at
that time.
G. The Plan Administrator shall have the discretionary authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall, immediately prior to the effect date of a
Change in Control, become exercisable for all the shares of Common Stock at the
time subject to those options and may be exercised for any or all of those
shares as fully vested shares of Common Stock. In addition, the Plan
Administrator shall have the discretionary authority to structure one or more of
the Corporation's repurchase rights under the Discretionary Option Grant Program
so that those rights shall terminate automatically upon the consummation of such
Change in Control, and the shares subject to those terminated rights shall
thereupon vest in full. Alternatively, the Plan Administrator may condition the
automatic acceleration of one or more outstanding options under the
Discretionary Option Grant Program and the termination of one or more of the
10.
<PAGE>
Corporation's outstanding repurchase rights under such program upon the
subsequent termination of the Optionee's Service by reason of an Involuntary
Termination within a designated period (not to exceed eighteen (18) months)
following the effective date of such Change in Control.
H. The portion of any Incentive Option accelerated in connection with
a Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
($100,000) limitation is not exceeded. To the extent such dollar limitation is
exceeded, the accelerated portion of such option shall be exercisable as a
Nonstatutory Option under the Federal tax laws.
I. The outstanding options 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 Discretionary Option
Grant Program (including outstanding options incorporated from the Predecessor
Plan) and to grant in substitution new options covering the same or different
number of shares of Common Stock but with an exercise price per share based on
the Fair Market Value per share of Common Stock on the new grant date.
V. STOCK APPRECIATION RIGHTS
A. The Plan Administrator shall have full power and authority to
grant to selected Optionees tandem stock appreciation rights and/or limited
stock appreciation rights.
B. The following terms shall govern the grant and exercise of tandem
stock appreciation rights:
(i) One or more Optionees may be granted the right, exercisable
upon such terms as the Plan Administrator may establish, to elect between
the exercise of the underlying option for shares of Common Stock and the
surrender of that option in exchange for a distribution from the
Corporation in an amount equal to the excess of (a) the Fair Market Value
(on the option surrender date) of the number of shares in which the
Optionee is at the time vested under the surrendered option (or surrendered
portion thereof) over (b) the aggregate exercise price payable for such
shares.
(ii) No such option surrender shall be effective unless it is
approved by the Plan Administrator, either at the time of the actual option
surrender or at any earlier time. If the surrender is so approved, then the
distribution to which the Optionee shall be entitled may be made in shares
of Common Stock valued at Fair Market Value on the option surrender date,
in cash, or partly in shares and partly in cash, as the Plan Administrator
shall in its sole discretion deem appropriate.
11.
<PAGE>
(iii) If the surrender of an option is not approved by the Plan
Administrator, then the Optionee shall retain whatever rights the Optionee
had under the surrendered option (or surrendered portion thereof) on the
option surrender date and may exercise such rights at any time prior to the
later of (a) five (5) business days after the receipt of the rejection
-----
notice or (b) the last day on which the option is otherwise exercisable in
accordance with the terms of the documents evidencing such option, but in
no event may such rights be exercised more than ten (10) years after the
option grant date.
C. The following terms shall govern the grant and exercise of limited
stock appreciation rights:
(i) One or more Section 16 Insiders may be granted limited stock
appreciation rights with respect to their outstanding options.
(ii) Upon the occurrence of a Hostile Take-Over, each individual
holding one or more options with such a limited stock appreciation right
shall have the unconditional right (exercisable for a thirty (30)-day
period following such Hostile Take-Over) to surrender each such option to
the Corporation. In return for the surrendered option, the Optionee shall
receive a cash distribution from the Corporation in an amount equal to the
excess of (A) the Take-Over Price of the shares of Common Stock at the time
subject to such option (whether or not the Optionee is otherwise vested in
those shares) over (B) the aggregate exercise price payable for those
shares. Such cash distribution shall be paid within five (5) days following
the option surrender date.
(iii) At the time such limited stock appreciation right is
granted, the Plan Administrator shall pre-approve any subsequent exercise
of that right in accordance with the terms of this Paragraph C.
Accordingly, no further approval of the Plan Administrator or the Board
shall be required at the time of the actual option surrender and cash
distribution.
12.
<PAGE>
ARTICLE THREE
SALARY INVESTMENT OPTION GRANT PROGRAM
--------------------------------------
I. OPTION GRANTS
The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years (if any) for which the Salary Investment
Option Grant Program is to be in effect and to select the Section 16 Insiders
and other highly compensated Employees eligible to participate in the Salary
Investment Option Grant Program for such calendar year or years. Each selected
individual who elects to participate in the Salary Investment Option Grant
Program must, prior to the start of each calendar year of participation, file
with the Plan Administrator (or its designate) an irrevocable authorization
directing the Corporation to reduce his or her base salary for that calendar
year by an amount not less than Ten Thousand Dollars ($10,000.00) nor more than
Fifty Thousand Dollars ($50,000.00). Each individual who files such a timely
authorization shall automatically be granted an option under the Salary
Investment Grant Program on the first trading day in January of the calendar
year for which the salary reduction is to be in effect.
II. OPTION TERMS
Each option shall be a Non-Statutory Option 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.
A. Exercise Price.
--------------
1. The exercise price per share shall be thirty-three and one-
third percent (33-1/3%) 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 be payable in one or more of the alternative forms
authorized under the Discretionary Option Grant Program. Except to the extent
the sale and remittance procedure specified thereunder is utilized, payment of
the exercise price for the purchased shares must be made on the Exercise Date.
B. Number of Option Shares. The number of shares of Common Stock
-----------------------
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A / (B x 66-2/3%), where
X is the number of option shares,
13.
<PAGE>
A is the dollar amount of the reduction in the Optionee's base
salary for the calendar year to be in effect pursuant to this program,
and
B is the Fair Market Value per share of Common Stock on the
option grant date.
C. Exercise and Term of Options. The option shall become exercisable
----------------------------
in a series of twelve (12) successive equal monthly installments upon the
Optionee's completion of each calendar month of Service in the calendar year for
which the salary reduction is in effect. Each option shall have a maximum term
of ten (10) years measured from the option grant date.
D. Effect of Termination of Service. Should the Optionee cease
--------------------------------
Service for any reason while holding one or more options under this Article
Three, then each such option shall remain exercisable, for any or all of the
shares for which the option is exercisable at the time of such cessation of
Service, until the earlier of (i) the expiration of the ten (10)-year option
-------
term or (ii) the expiration of the three (3)-year period measured from the date
of such cessation of Service. Should the Optionee die while holding one or more
options under this Article Three, then each such option may be exercised, for
any or all of the shares for which the option is exercisable at the time of the
Optionee's cessation of Service (less any shares subsequently purchased by
Optionee prior to death), by the personal representative of the Optionee's
estate or by the person or persons to whom the option is transferred pursuant to
the Optionee's will or the laws of inheritance or by the designated beneficiary
or beneficiaries of the option. Such right of exercise shall lapse, and the
option shall terminate, upon the earlier of (i) the expiration of the ten (10)-
-------
year option term or (ii) the three (3)-year period measured from the date of the
Optionee's cessation of Service. However, the option shall, immediately upon the
Optionee's cessation of Service for any reason, terminate and cease to remain
outstanding with respect to any and all shares of Common Stock for which the
option is not otherwise at that time exercisable.
III. CORPORATE TRANSACTION/ CHANGE IN CONTROL/ HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction while the Optionee
remains in Service, each outstanding option held by such Optionee under this
Salary Investment Option Grant Program shall automatically accelerate so that
each such option shall, immediately prior to the effective date of the Corporate
Transaction, become exercisable for all the shares of Common Stock at the time
subject to such option and may be exercised for any or all of those shares as
fully-vested shares of Common Stock. Each such outstanding option shall
terminate immediately following the Corporate Transaction, except to the extent
assumed by the successor corporation (or parent thereof) in such Corporate
Transaction. Any option so assumed and shall remain exercisable for the fully-
vested shares until the earlier of (i) the expiration of the ten (10)-year
-------
option term or (ii) the expiration of the three (3)-year period measured from
the date of the Optionee's cessation of Service.
B. In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Salary
Investment Option Grant Program shall automatically accelerate so that each such
option shall immediately become exercisable for all the shares of Common Stock
at the time subject to such option and may be
14.
<PAGE>
exercised for any or all of those shares as fully-vested shares of Common Stock.
The option shall remain so exercisable until the earliest to occur of (i) the
--------
expiration of the ten (10)-year option term, (ii) the expiration of the three
(3)-year period measured from the date of the Optionee's cessation of Service,
(iii) the termination of the option in connection with a Corporate Transaction
or (iv) the surrender of the option in connection with a Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Salary Investment Option Grant
Program. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Take-Over Price of
the shares of Common Stock at the time subject to the surrendered option
(whether or not the option is otherwise at the time exercisable for those
shares) over (ii) the aggregate exercise price payable for such shares. Such
cash distribution shall be paid within five (5) days following the surrender of
the option to the Corporation. The Primary Committee shall, at the time the
option with such limited stock appreciation right is granted under the Salary
Investment Option Grant Program, pre-approve any subsequent exercise of that
right in accordance with the terms of this Paragraph C. Accordingly, no further
approval of the Primary Committee or the Board shall be required at the time of
the actual option surrender and cash distribution.
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 the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
--------
payable for such securities shall remain the same. To the extent the actual
holders of the Corporation's outstanding Common Stock receive cash consideration
for their Common Stock in consummation of the Corporate Transaction, the
successor corporation may, in connection with the assumption of the outstanding
options under this Plan, substitute one or more shares of its own common stock
with a fair market value equivalent to the cash consideration paid per share of
Common Stock in such Corporate Transaction.
E. The grant of options under the Salary Investment Option Grant
Program 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. REMAINING TERMS
The remaining terms of each option granted under the Salary Investment
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
15.
<PAGE>
ARTICLE FOUR
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. Shares of Common Stock may also be
issued under the Stock Issuance Program pursuant to share right awards which
entitle the recipients to receive those shares upon the attainment of designated
performance goals.
A. Purchase Price.
--------------
1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the issuance date.
2. Subject to the provisions of Section I of Article Seven,
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. The elements of the vesting schedule applicable to any unvested
shares of Common Stock issued under the Stock Issuance Program shall be
determined by the Plan Administrator and incorporated into the Stock Issuance
Agreement. Shares of Common Stock may also be issued under the Stock Issuance
Program pursuant to share right awards which entitle the recipients to receive
those shares upon the attainment of designated performance goals.
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
16.
<PAGE>
other change affecting the outstanding Common Stock as a class without the
Corporation's receipt of consideration shall be issued subject to (i) the same
vesting requirements applicable to the Participant's unvested shares of Common
Stock and (ii) such escrow arrangements as the Plan Administrator shall deem
appropriate.
3. The Participant shall have full stockholder rights with
respect to any shares of Common Stock issued to the Participant under the Stock
Issuance Program, whether or not the Participant's interest in those shares is
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further stockholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for consideration paid in cash or cash equivalent (including the
Participant's purchase-money indebtedness), the Corporation shall repay to the
Participant the cash consideration paid for the surrendered shares and shall
cancel the unpaid principal balance of any outstanding purchase-money note of
the Participant attributable to the surrendered shares.
5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock which
would otherwise occur upon the cessation of the Participant's Service or the
non-attainment of the performance objectives applicable to those 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.
6. Outstanding share right awards under the Stock Issuance
Program shall automatically terminate, and no shares of Common Stock shall
actually be issued in satisfaction of those awards, if the performance goals
established for such awards are not attained. The Plan Administrator, however,
shall have the discretionary authority to issue shares of Common Stock under one
or more outstanding share right awards as to which the designated performance
goals have not been attained.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. All of the Corporation's outstanding repurchase rights under the
Stock Issuance Program shall terminate automatically, and all the shares of
Common Stock subject to those terminated rights shall immediately vest in full,
in the event of any Corporate Transaction, except to the extent (i) those
repurchase rights are to be assigned to the successor corporation (or parent
thereof) in connection with such Corporate Transaction or (ii) such accelerated
vesting is precluded by other limitations imposed in the Stock Issuance
Agreement.
17.
<PAGE>
B. The Plan Administrator shall have the discretionary authority to
structure one or more of the Corporation's repurchase rights under the Stock
Issuance Program so that those rights shall automatically terminate in whole or
in part, 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).
C. The Plan Administrator shall also have the discretionary authority
to structure one or more of the Corporation's repurchase rights under the Stock
Issuance Program so that those rights shall automatically terminate in whole or
in part, 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 Change
in Control.
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.
18.
<PAGE>
ARTICLE FIVE
AUTOMATIC OPTION GRANT PROGRAM
------------------------------
I. OPTION TERMS
A. Grant Dates. Option grants shall be made on the dates specified
-----------
below:
1. Each individual who is first elected or appointed as a non-
employee Board member at any time on or after the Underwriting Date shall
automatically be granted, on the date of such initial election or appointment, a
Non-Statutory Option to purchase 20,000 shares of Common Stock, provided that
individual has not previously been in the employ of the Corporation or any
Parent or Subsidiary.
2. On the date of each Annual Stockholders Meeting held after the
Underwriting Date, each individual who is to continue to serve as an Eligible
Director, whether or not that individual is standing for re-election to the
Board at that particular Annual Meeting, shall automatically be granted a Non-
Statutory Option to purchase 5,000 shares of Common Stock, provided such
individual has served as a non-employee Board member for at least six (6)
months. There shall be no limit on the number of such 5,000-share option grants
any one Eligible Director may receive over his or her period of Board service,
and non-employee Board members who have previously been in the employ of the
Corporation (or any Parent or Subsidiary) or who have otherwise received one or
more stock option grants from the Corporation prior to the Underwriting Date
shall be eligible to receive one or more such annual option grants over their
period of continued Board service.
B. Exercise Price.
--------------
1. The exercise price per share shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the option
grant date.
2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
C. Option Term. Each option shall have a term of ten (10) years
-----------
measured from the option grant date.
D. Exercise and Vesting of Options. Each option shall be immediately
-------------------------------
exercisable for any or all of the option shares. However, any unvested shares
purchased under the option shall be subject to repurchase by the Corporation, at
the exercise price paid per share, upon the Optionee's cessation of Board
service prior to vesting in those shares. The shares subject to each initial
20,000-share grant shall vest, and the Corporation's repurchase right shall
19.
<PAGE>
lapse, in a series of eight (8) successive equal semi-annual installments upon
the Optionee's completion of each six (6)-month period of service as a Board
member over the forty eight (48)-month period measured from the option grant
date. The shares subject to each annual 5,000-share option grant shall be fully
vested as of the grant date.
E. Limited Transferability of Options. Each option under this
----------------------------------
Article Five may be assigned in whole or in part during the Optionee's lifetime
to one or more members of the Optionee's family or to a trust established
exclusively for one or more such family members or to Optionee's former spouse,
to the extent such assignment is in connection with the Optionee's estate plan
or pursuant to domestic relations order. The assigned portion may only be
exercised by the person or persons who acquire a proprietary interest in the
option pursuant to the assignment. The terms applicable to the assigned portion
shall be the same as those in effect for the option immediately prior to such
assignment and shall be set forth in such documents issued to the assignee as
the Plan Administrator may deem appropriate. The Optionee may also designate one
or more persons as the beneficiary or beneficiaries of his or her outstanding
options under this Article Five, and those options shall, in accordance with
such designation, automatically be transferred to such beneficiary or
beneficiaries upon the Optionee's death while holding those options. Such
beneficiary or beneficiaries shall take the transferred options subject to all
the terms and conditions of the applicable agreement evidencing each such
transferred option, including (without limitation) the limited time period
during which the option may be exercised following the Optionee's death.
F. Termination of Board Service. The following provisions shall
----------------------------
govern the exercise of any options held by the Optionee at the time the Optionee
ceases to serve as a Board member:
(i) The Optionee (or, in the event of Optionee's death, the
personal representative of the Optionee's estate or the person or persons
to whom the option is transferred pursuant to the Optionee's will or the
laws of inheritance or the designated beneficiary or beneficiaries of such
option) shall have a twelve (12)-month period following the date of such
cessation of Board service in which to exercise each such option.
(ii) During the twelve (12)-month exercise period, the option may
not be exercised in the aggregate for more than the number of vested shares
of Common Stock for which the option is exercisable at the time of the
Optionee's cessation of Board service.
(iii) Should the Optionee cease to serve as a Board member by
reason of death or Permanent Disability, then all shares at the time
subject to the option shall immediately vest so that such option may,
during the twelve (12)-month exercise period following such cessation of
Board service, be exercised for all or any portion of those shares as
fully-vested shares of Common Stock.
20.
<PAGE>
(iv) In no event shall the option remain exercisable after the
expiration of the option term. Upon the expiration of the twelve (12)-month
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 Board service for any reason
other than death or Permanent Disability, terminate and cease to be
outstanding to the extent the option is not otherwise at that time
exercisable for vested shares.
II. CORPORATE TRANSACTION/ CHANGE IN CONTROL/ HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Corporate Transaction, become exercisable for
all the option shares as fully-vested shares of Common Stock and may be
exercised for any or all of those vested shares. Immediately following the
consummation of the Corporate Transaction, each automatic option grant shall
terminate and cease to be outstanding, except to the extent assumed by the
successor corporation (or parent thereof).
B. In connection with any Change in Control, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Change in Control, become exercisable for all
the option shares as fully-vested shares of Common Stock and may be exercised
for any or all of those vested shares. Each such option shall remain exercisable
for such fully-vested option shares until the expiration or sooner termination
of the option term or the surrender of the option in connection with a Hostile
Take-Over.
21.
<PAGE>
C. All outstanding repurchase rights shall automatically terminate,
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction or Change in
Control.
D. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding automatic option grants. The Optionee shall in return be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Take-Over Price of the shares of Common Stock at the time
subject to each surrendered option (whether or not the Optionee is otherwise at
the time vested in those shares) over (ii) the aggregate exercise price payable
for such shares. Such cash distribution shall be paid within five (5) days
following the surrender of the option to the Corporation. No approval or consent
of the Board or any Plan Administrator shall be required at the time of the
actual option surrender and cash distribution.
E. 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 the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
--------
payable for such securities shall remain the same. To the extent the actual
holders of the Corporation's outstanding Common Stock receive cash consideration
for their Common Stock in consummation of the Corporate Transaction, the
successor corporation may, in connection with the assumption of the outstanding
options under this Plan, substitute one or more shares of its own common stock
with a fair market value equivalent to the cash consideration paid per share of
Common Stock in such Corporate Transaction.
F. The grant of options under the Automatic Option Grant Program
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.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic Option
Grant Program shall be the same as the terms in effect for option grants made
under the Discretionary Option Grant Program.
22.
<PAGE>
ARTICLE SIX
DIRECTOR FEE OPTION GRANT PROGRAM
---------------------------------
I. OPTION GRANTS
The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years for which the Director Fee Option Grant
Program is to be in effect. For each such calendar year the program is in
effect, each non-employee Board member may irrevocably elect to apply all or any
portion of the annual retainer fee otherwise payable in cash for his or her
service on the Board for that year to the acquisition of a special option grant
under this Director Fee Option Grant Program. Such election must be filed with
the Corporation's Chief Financial Officer prior to first day of the calendar
year for which the annual retainer fee which is the subject of that election is
otherwise payable. Each non-employee Board member who files such a timely
election shall automatically be granted an option under this Director Fee Option
Grant Program on the first trading day in January in the calendar year for which
the annual retainer fee which is the subject of that election would otherwise be
payable in cash.
II. OPTION TERMS
Each option shall be a Non-Statutory Option governed by the terms and
conditions specified below.
A. Exercise Price.
--------------
1. The exercise price per share shall be thirty-three and one-
third percent (33-1/3%) 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 be payable in one or more of the alternative forms
authorized under the Discretionary Option Grant Program. Except to the extent
the sale and remittance procedure specified thereunder is utilized, payment of
the exercise price for the purchased shares must be made on the Exercise Date.
B. Number of Option Shares. The number of shares of Common Stock
-----------------------
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A / (B x 66-2/3%), where
X is the number of option shares,
A is the portion of the annual retainer fee subject to the non-
employee Board member's election, and
23.
<PAGE>
B is the Fair Market Value per share of Common Stock on the
option grant date.
C. Exercise and Term of Options. The option shall become exercisable
----------------------------
in a series of twelve (12) equal monthly installments upon the Optionee's
completion of each calendar month of Board service during the calendar year for
which the retainer fee election is in effect. Each option shall have a maximum
term of ten (10) years measured from the option grant date.
D. Limited Transferability of Options. Each option under this
----------------------------------
Article Six may be assigned in whole or in part during the Optionee's lifetime
to one or more members of the Optionee's family or to a trust established
exclusively for one or more such family members or to Optionee's former spouse,
to the extent such assignment is in connection with Optionee's estate plan or
pursuant to a domestic relations order. The assigned portion may only be
exercised by the person or persons who acquire a proprietary interest in the
option pursuant to the assignment. The terms applicable to the assigned portion
shall be the same as those in effect for the option immediately prior to such
assignment and shall be set forth in such documents issued to the assignee as
the Plan Administrator may deem appropriate. The Optionee may also designate one
or more persons as the beneficiary or beneficiaries of his or her outstanding
options under this Article Six, and those options shall, in accordance with such
designation, automatically be transferred to such beneficiary or beneficiaries
upon the Optionee's death while holding those options. Such beneficiary or
beneficiaries shall take the transferred options subject to all the terms and
conditions of the applicable agreement evidencing each such transferred option,
including (without limitation) the limited time period during which the option
may be exercised following the Optionee's death.
E. Termination of Board Service. Should the Optionee cease Board
----------------------------
service for any reason (other than death or Permanent Disability) while holding
one or more options under this Director Fee Option Grant Program, then each such
option shall remain exercisable, for any or all of the shares for which the
option is exercisable at the time of such cessation of Board service, until the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the
- -------
expiration of the three (3)-year period measured from the date of such cessation
of Board service. However, each option held by the Optionee under this Director
Fee Option Grant Program at the time of his or her cessation of Board service
shall immediately terminate and cease to remain outstanding with respect to any
and all shares of Common Stock for which the option is not otherwise at that
time exercisable.
F. Death or Permanent Disability. Should the Optionee's service as
-----------------------------
a Board member cease by reason of death or Permanent Disability, then each
option held by such Optionee under this Director Fee Option Grant Program shall
immediately become exercisable for all the shares of Common Stock at the time
subject to that option, and the option may be exercised for any or all of those
shares as fully-vested shares until the earlier of (i) the expiration of the ten
-------
(10)-year option term or (ii) the expiration of the three (3)-year period
measured from the date of such cessation of Board service. In the event of the
Optionee's death while holding such option, the option may be exercised by the
personal representative of the Optionee's estate or by the person or persons to
whom the option is transferred pursuant to the Optionee's will or the laws of
inheritance or by the designated beneficiary or beneficiaries of such option.
24.
<PAGE>
Should the Optionee die after cessation of Board service but while
holding one or more options under this Director Fee Option Grant Program, then
each such option may be exercised, for any or all of the shares for which the
option is exercisable at the time of the Optionee's cessation of Board service
(less any shares subsequently purchased by Optionee prior to death), by the
personal representative of the Optionee's estate or by the person or persons to
whom the option is transferred pursuant to the Optionee's will or the laws of
inheritance or by the designated beneficiary or beneficiaries of such option.
Such right of exercise shall lapse, and the option shall terminate, upon the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the three
- -------
(3)-year period measured from the date of the Optionee's cessation of Board
service.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction while the Optionee
remains a Board member, each outstanding option held by such Optionee under this
Director Fee Option Grant Program shall automatically accelerate so that each
such option shall, immediately prior to the effective date of the Corporate
Transaction, become exercisable for all the shares of Common Stock at the time
subject to such option and may be exercised for any or all of those shares as
fully-vested shares of Common Stock. Each such outstanding option shall
terminate immediately following the Corporate Transaction, except to the extent
assumed by the successor corporation (or parent thereof) in such Corporate
Transaction. Any option so assumed and shall remain exercisable for the fully-
vested shares until the earlier of (i) the expiration of the ten (10)-year
-------
option term or (ii) the expiration of the three (3)-year period measured from
the date of the Optionee's cessation of Board service.
B. In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Director Fee
Option Grant Program shall automatically accelerate so that each such option
shall immediately become exercisable for all the shares of Common Stock at the
time subject to such option and may be exercised for any or all of those shares
as fully-vested shares of Common Stock. The option shall remain so exercisable
until the earliest to occur of (i) the expiration of the ten (10)-year option
--------
term, (ii) the expiration of the three (3)-year period measured from the date of
the Optionee's cessation of Board service, (iii) the termination of the option
in connection with a Corporate Transaction or (iv) the surrender of the option
in connection with a Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Director Fee Option Grant
Program. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Take-Over Price of
the shares of Common Stock at the time subject to each surrendered option
(whether or not the option is otherwise at the time exercisable for those
shares) over (ii) the aggregate exercise price payable for such shares. Such
cash distribution shall be paid within five (5) days following the surrender of
the option to the Corporation. No approval or consent of the Board or any Plan
Administrator shall be required at the time of the actual option surrender and
cash distribution.
25.
<PAGE>
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 the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
--------
payable for such securities shall remain the same. To the extent the actual
holders of the Corporation's outstanding Common Stock receive cash consideration
for their Common Stock in consummation of the Corporate Transaction, the
successor corporation may, in connection with the assumption of the outstanding
options under this Plan, substitute one or more shares of its own common stock
with a fair market value equivalent to the cash consideration paid per share of
Common Stock in such Corporate Transaction.
E. The grant of options under the Director Fee Option Grant Program
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. REMAINING TERMS
The remaining terms of each option granted under this Director Fee
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
26.
<PAGE>
ARTICLE SEVEN
MISCELLANEOUS
-------------
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest
rate and the terms of repayment) shall be established by the Plan Administrator
in its sole discretion. In no event may 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 (less the par value of
such 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. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or the issuance or vesting of such shares under the
Plan shall be subject to the satisfaction of all applicable Federal, state and
local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan (other than the options granted or the shares issued under the Automatic
Option Grant or Director Fee Option Grant Program) with the right to use shares
of Common Stock in satisfaction of all or part of the Withholding Taxes to which
such holders may become subject in connection with the exercise of their options
or the vesting of their shares. Such right may be provided to any such holder in
either or both of the following formats:
Stock Withholding: The election to have the Corporation withhold,
-----------------
from the shares of Common Stock otherwise issuable upon the exercise of such
Non-Statutory Option or the vesting of such shares, a portion of those shares
with an aggregate Fair Market Value equal to the percentage of the Withholding
Taxes (not to exceed one hundred percent (100%)) designated by the holder.
Stock Delivery: The election to deliver to the Corporation, at
--------------
the time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Withholding
Taxes) with an aggregate Fair Market Value equal to the percentage of the
Withholding Taxes (not to exceed one hundred percent (100%)) designated by the
holder.
27.
<PAGE>
III. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective immediately on the Plan Effective
Date. However, the Salary Investment Option Grant Program and the Director Fee
Option Grant Program shall not be implemented until such time as the Primary
Committee may deem appropriate. Options may be granted under the Discretionary
Option Grant at any time on or after the Plan Effective Date, and the initial
option grants under the Automatic Option Grant Program shall also be made on the
Plan Effective Date to any non-employee Board members eligible for such grants
at that time. However, no options granted under the Plan may be exercised, and
no shares shall be issued under the Plan, until the Plan is approved by the
Corporation's stockholders. If such stockholder approval is not obtained within
twelve (12) months after the Plan Effective Date, then all options previously
granted under this Plan shall terminate and cease to be outstanding, and no
further options shall be granted and no shares shall be issued under the Plan.
B. The Plan shall serve as the successor to the Predecessor Plan, and
no further option grants or direct stock issuances shall be made under the
Predecessor Plan after the Plan Effective Date. All options outstanding under
the Predecessor Plan on the Plan Effective Date shall be incorporated into the
Plan at that time and shall be treated as outstanding options under the Plan.
However, each outstanding option so incorporated shall continue to be governed
solely by the terms of the documents evidencing such option, and no provision of
the Plan shall be deemed to affect or otherwise modify the rights or obligations
of the holders of such incorporated options with respect to their acquisition of
shares of Common Stock.
C. One or more provisions of the Plan, including (without limitation)
the option/vesting acceleration provisions of Article Two relating to Corporate
Transactions and Changes in Control, may, in the Plan Administrator's
discretion, be extended to one or more options incorporated from the Predecessor
Plan which do not otherwise contain such provisions.
D. The Plan shall terminate upon the earliest to occur of (i) June
--------
30, 2009, (ii) the date on which all shares available for issuance under the
Plan shall have been issued as fully-vested shares or (iii) the termination of
all outstanding options in connection with a Corporate Transaction. Should the
Plan terminate on June 30, 2009, then all option grants and unvested stock
issuances outstanding at that time shall continue to have force and effect in
accordance with the provisions of the documents evidencing such grants or
issuances.
IV. 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
stock options or unvested stock issuances at the time outstanding under the Plan
unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.
28.
<PAGE>
B. Options to purchase shares of Common Stock may be granted under
the Discretionary Option Grant and Salary Investment Option Grant Programs and
shares of Common Stock may be issued under the Stock Issuance Program that are
in each instance in excess of the number of shares then available for issuance
under the Plan, provided any excess shares actually issued under those programs
shall be held in escrow until there is obtained stockholder approval of an
amendment sufficiently increasing the number of shares of Common Stock available
for issuance under the Plan. If such stockholder approval is not obtained within
twelve (12) months after the date the first such excess 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.
V. 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.
VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock option
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any granted option or (ii) under the Stock Issuance Program shall be
subject to the Corporation's procurement of all approvals and permits required
by regulatory authorities having jurisdiction over the Plan, the stock options
granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
VII. NO EMPLOYMENT/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.
29.
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. Automatic Option Grant Program shall mean the automatic option
------------------------------
grant program in effect under Article Five of the Plan.
B. Board shall mean the Corporation's Board of Directors.
-----
C. Change in Control shall mean a change in ownership or control of
-----------------
the Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's stockholders, or
(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have been
Board members continuously since the beginning of such period or (B) have
been elected or nominated for election as Board members during such period
by at least a majority of the Board members described in clause (A) who
were still in office at the time the Board approved such election or
nomination.
D. Code shall mean the Internal Revenue Code of 1986, as amended.
----
E. Common Stock shall mean the Corporation's common stock.
------------
F. Corporate Transaction shall mean either of the following
---------------------
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
<PAGE>
G. Corporation shall mean Kana Communications, Inc., a Delaware
-----------
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Kana Communications, Inc. which shall by appropriate
action adopt the Plan.
H. Director Fee Option Grant Program shall mean the special stock
---------------------------------
option grant in effect for non-employee Board members under Article Six of the
Plan.
I. Discretionary Option Grant Program shall mean the discretionary
----------------------------------
option grant program in effect under Article Two of the Plan.
J. Eligible Director shall mean a non-employee Board member eligible
-----------------
to participate in the Automatic Option Grant Program or the Director Fee Option
Grant Program in accordance with the eligibility provisions of Articles One,
Five and Six.
K. 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.
L. Exercise Date shall mean the date on which the Corporation shall
-------------
have received written notice of the option exercise.
M. Fair Market Value per share of Common Stock on any relevant date
-----------------
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market. 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) For purposes of any option grants made on the Underwriting
Date, the Fair Market Value shall be deemed to be equal to the price per
share at which the Common Stock is to be sold in the initial public
offering pursuant to the Underwriting Agreement.
A-2.
<PAGE>
N. Hostile Take-Over shall mean the acquisition, directly or
-----------------
indirectly, by any person or related group of persons (other than the
Corporation or a person that directly or indirectly controls, is controlled by,
or is under common control with, the Corporation) of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly to
the Corporation's stockholders which the Board does not recommend such
stockholders to accept.
O. Incentive Option shall mean an option which satisfies the
----------------
requirements of Code Section 422.
P. 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 duties and responsibilities or the level of management to which
he or she reports, (B) a reduction in his or her level of compensation
(including base salary, fringe benefits and percentage target bonus 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 by the Corporation without the
individual's consent.
Q. Misconduct shall mean the commission of any act of fraud,
----------
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing definition
shall not be deemed to be inclusive of all the acts or 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).
R. 1934 Act shall mean the Securities Exchange Act of 1934, as
--------
amended.
S. Non-Statutory Option shall mean an option not intended to satisfy
--------------------
the requirements of Code Section 422.
T. Optionee shall mean any person to whom an option is granted under
--------
the Discretionary Option Grant, Salary Investment Option Grant, Automatic Option
Grant or Director Fee Option Grant Program.
A-3.
<PAGE>
U. Parent shall mean any corporation (other than the Corporation) in
------
an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
V. Participant shall mean any person who is issued shares of Common
-----------
Stock under the Stock Issuance Program.
W. Permanent Disability or Permanently Disabled shall mean the
--------------------------------------------
inability of the Optionee or the Participant to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more. However, solely for purposes of the Automatic Option Grant
and Director Fee Option Grant Programs, Permanent Disability or Permanently
Disabled shall mean the inability of the non-employee Board member to perform
his or her usual duties as a Board member by reason of any medically
determinable physical or mental impairment expected to result in death or to be
of continuous duration of twelve (12) months or more.
X. Plan shall mean the Corporation's 1999 Stock Incentive Plan, as
----
set forth in this document.
Y. Plan Administrator shall mean the particular entity, whether the
------------------
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.
Z. Plan Effective Date shall mean the date the Plan shall become
-------------------
effective and shall be coincident with the Underwriting Date.
AA. Predecessor Plan shall mean the Corporation's 1998 Stock
----------------
Incentive Plan in effect immediately prior to the Plan Effective Date hereunder.
BB. Primary Committee shall mean the committee of two (2) or more
-----------------
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders and to administer the Salary Investment Option Grant Program solely
with respect to the selection of the eligible individuals who may participate in
such program.
CC. Salary Investment Option Grant Program shall mean the salary
--------------------------------------
investment option grant program in effect under Article Three of the Plan.
DD. Secondary Committee shall mean a committee of one or more Board
-------------------
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.
A-4.
<PAGE>
EE. Section 16 Insider shall mean an officer or director of the
------------------
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
FF. Service shall mean the performance of services for the
-------
Corporation (or any Parent or Subsidiary) by a person in the capacity of an
Employee, a non-employee member of the board of directors or a consultant or
independent advisor, except to the extent otherwise specifically provided in the
documents evidencing the option grant or stock issuance.
GG. Stock Exchange shall mean either the American Stock Exchange or
--------------
the New York Stock Exchange.
HH. 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.
II. Stock Issuance Program shall mean the stock issuance program in
----------------------
effect under Article Four of the Plan.
JJ. 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.
KK. Take-Over Price shall mean the greater of (i) the Fair Market
--------------- -------
Value per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.
LL. 10% Stockholder shall mean the owner of stock (as determined
---------------
under Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
MM. Underwriting Agreement shall mean the agreement between the
----------------------
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
NN. Underwriting Date shall mean the date on which the Underwriting
-----------------
Agreement is executed and priced in connection with an initial public offering
of the Common Stock.
OO. Withholding Taxes shall mean the Federal, state and local income
-----------------
and employment withholding taxes to which the holder of Non-Statutory Options or
unvested shares of Common Stock may become subject in connection with the
exercise of those options or the vesting of those shares.
A-5.
<PAGE>
EXHIBIT 10.3
KANA COMMUNICATIONS, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
---------------------------------
I. PURPOSE OF THE PLAN
This Employee Stock Purchase Plan is intended to promote the interests
of Kana Communications, Inc., a Delaware corporation, by providing eligible
employees with the opportunity to acquire a proprietary interest in the
Corporation through participation in a payroll deduction based employee stock
purchase plan designed to qualify under Section 423 of the Code.
Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
II. ADMINISTRATION OF THE PLAN
The Plan Administrator shall have full authority to interpret and
construe any provision of the Plan and to adopt such rules and regulations for
administering the Plan as it may deem necessary in order to comply with the
requirements of Code Section 423. Decisions of the Plan Administrator shall be
final and binding on all parties having an interest in the Plan.
III. STOCK SUBJECT TO PLAN
A. The stock purchasable under the Plan shall be shares of authorized but
unissued or reacquired Common Stock, including shares of Common Stock purchased
on the open market. The number of shares of Common Stock initially reserved for
issuance over the term of the Plan shall be limited to Three Hundred Sixty-Seven
Thousand Five Hundred (367,500) shares.
B. The number of shares of Common Stock available for issuance under the
Plan shall automatically increase on the first trading day of January each
calendar year during the term of the Plan, beginning with calendar year 2000, by
an amount equal to three-fourths of one percent (0.75%) of the total number of
shares of Common Stock outstanding on the last trading day in December of the
immediately preceding calendar year, but in no event shall any such annual
increase exceed Two Hundred Fifty Thousand (250,000) shares.
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 class of securities issuable under the Plan,
(ii) the maximum number and class of securities purchasable per Participant on
any one Purchase Date, (iii) the maximum number and class of securities
purchasable in total by all Participants on any one Purchase Date, (iv) the
maximum
<PAGE>
number and/or class of securities by which the share reserve is to increase
automatically each calendar year pursuant to the provisions of Section III.B of'
this Article One and (v) the number and class of securities and the price per
share in effect under each outstanding purchase right in order to prevent the
dilution or enlargement of benefits thereunder.
IV. OFFERING PERIODS
A. Shares of Common Stock shall be offered for purchase under the Plan
through a series of successive offering periods until such time as (i) the
maximum number of shares of Common Stock available for issuance under the Plan
shall have been purchased or (ii) the Plan shall have been sooner terminated.
B. Each offering period shall be of such duration (not to exceed
twenty-four (24) months) as determined by the Plan Administrator prior to the
start date of such offering period. However, the initial offering period shall
commence at the Effective Time and terminate on the last business day in October
2001. The next offering period shall commence on the first business day in
November 2001, and subsequent offering periods shall commence as designated by
the Plan Administrator.
C. Each offering period shall be comprised of a series of one or more
successive Purchase Intervals. Purchase Intervals shall run from the first
business day in May to the last business day in October each year and from the
first business day in November each year to the last business day in April in
the following year. However, the first Purchase Interval in effect under the
initial offering period shall commence at the Effective Time and terminate on
the last business day in April 2000.
D. Should the Fair Market Value per share of Common Stock on any
Purchase Date within an offering period be less than the Fair Market Value per
share of Common Stock on the start date of that offering period, then that
offering period shall automatically terminate immediately after the purchase of
shares of Common Stock on such Purchase Date, and a new offering period shall
commence on the next business day following such Purchase Date. The new offering
period shall have a duration of twenty (24) months, unless a shorter duration is
established by the Plan Administrator within five (5) business days following
the start date of that offering period.
V. ELIGIBILITY
A. Each individual who is an Eligible Employee on the start date of any
offering period under the Plan may enter that offering period on such start date
or on any subsequent Semi-Annual Entry Date within that offering period,
provided he or she remains an Eligible Employee.
B. Each individual who first becomes an Eligible Employee after the
start date of an offering period may enter that offering period on any
subsequent Semi-Annual Entry Date within that offering period on which he or she
is an Eligible Employee.
2.
<PAGE>
C. The date an individual enters an offering period shall be designated
his or her Entry Date for purposes of that offering period.
D. To participate in the Plan for a particular offering period, the
Eligible Employee must complete the enrollment forms prescribed by the Plan
Administrator (including a stock purchase agreement and a payroll deduction
authorization) and file such forms with the Plan Administrator (or its
designate) on or before his or her scheduled Entry Date.
VI. PAYROLL DEDUCTIONS
A. The payroll deduction authorized by the Participant for purposes
of acquiring shares of Common Stock during an offering period may be any
multiple of one percent (1%) of the Cash Earnings paid to the Participant during
each Purchase Interval within that offering period, up to a maximum of fifteen
percent (15%). The deduction rate so authorized shall continue in effect
throughout the offering period, except to the extent such rate is changed in
accordance with the following guidelines:
(i) The Participant may, at any time during the offering
period, reduce his or her rate of payroll deduction to become effective as
soon as possible after filing the appropriate form with the Plan
Administrator. The Participant may not, however, effect more than one (1)
such reduction per Purchase Interval.
(ii) The Participant may, prior to the commencement of any
new Purchase Interval within the offering period, increase the rate of his
or her payroll deduction by filing the appropriate form with the Plan
Administrator. The new rate (which may not exceed the fifteen percent (15%)
maximum) shall become effective on the start date of the first Purchase
Interval following the filing of such form.
B. Payroll deductions shall begin on the first pay day administratively
feasible following the Participant's Entry Date into the offering period and
shall (unless sooner terminated by the Participant) continue through the pay day
ending with or immediately prior to the last day of that offering period. The
amounts so collected shall be credited to the Participant's book account under
the Plan, but no interest shall be paid on the balance from time to time
outstanding in such account. The amounts collected from the Participant shall
not be required to be held in any segregated account or trust fund and may be
commingled with the general assets of the Corporation and used for general
corporate purposes.
C. Payroll deductions shall automatically cease upon the termination of
the Participant's purchase right in accordance with the provisions of the Plan.
D. The Participant's acquisition of Common Stock under the Plan on any
Purchase Date shall neither limit nor require the Participant's acquisition of
Common Stock on any subsequent Purchase Date, whether within the same or a
different offering period.
3.
<PAGE>
VII. PURCHASE RIGHTS
A. Grant of Purchase Rights. A Participant shall be granted a separate
------------------------
purchase right for each offering period in which he or she participates. The
purchase right shall be granted on the Participant's Entry Date into the
offering period and shall provide the Participant with the right to purchase
shares of Common Stock, in a series of successive installments over the
remainder of such offering period, upon the terms set forth below. The
Participant shall execute a stock purchase agreement embodying such terms and
such other provisions (not inconsistent with the Plan) as the Plan Administrator
may deem advisable.
Under no circumstances shall purchase rights be granted under the Plan to
any Eligible Employee if such individual would, immediately after the grant, own
(within the meaning of Code Section 424(d)) or hold outstanding options or other
rights to purchase, stock possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of the Corporation or any
Corporate Affiliate.
B. Exercise of the Purchase Right. Each purchase right shall be
------------------------------
automatically exercised in installments on each successive Purchase Date within
the offering period, and shares of Common Stock shall accordingly be purchased
on behalf of each Participant on each such Purchase Date. The purchase shall be
effected by applying the Participant's payroll deductions for the Purchase
Interval ending on such Purchase Date to the purchase of whole shares of Common
Stock at the purchase price in effect for the Participant for that Purchase
Date.
C. Purchase Price. The purchase price per share at which Common Stock
--------------
will be purchased on the Participant's behalf on each Purchase Date within the
offering period shall be equal to eighty-five percent (85%) of the lower of (i)
the Fair Market Value per share of Common Stock on the Participant's Entry Date
into that offering period or (ii) the Fair Market Value per share of Common
Stock on that Purchase Date.
D. Number of Purchasable Shares. The number of shares of Common Stock
----------------------------
purchasable by a Participant on each Purchase Date during the offering period
shall be the number of whole shares obtained by dividing the amount collected
from the Participant through payroll deductions during the Purchase Interval
ending with that Purchase Date by the purchase price in effect for the
Participant for that Purchase Date. However, the maximum number of shares of
Common Stock purchasable per Participant on any one Purchase Date shall not
exceed 750 shares, subject to periodic adjustments in the event of certain
changes in the Corporation's capitalization. In addition, the maximum number of
shares of Common Stock purchasable in total by all Participants on any one
Purchase Date shall not exceed 75,000 shares, subject to periodic adjustments in
the event of certain changes in the Corporation's capitalization. However, the
Plan Administrator shall have the discretionary authority, exercisable prior to
the start of any offering period under the Plan, to increase or decrease the
limitations to be in effect for the number of shares purchasable per Participant
and in total by all Participants on each Purchase Date during that offering
period.
4.
<PAGE>
E. Excess Payroll Deductions. Any payroll deductions not applied to the
-------------------------
purchase of shares of Common Stock on any Purchase Date because they are not
sufficient to purchase a whole share of Common Stock shall be held for the
purchase of Common Stock on the next Purchase Date. However, any payroll
deductions not applied to the purchase of Common Stock by reason of the
limitation on the maximum number of shares purchasable per Participant or in
total by all Participants on the Purchase Date shall be promptly refunded.
F. Termination of Purchase Right. The following provisions shall
-----------------------------
govern the termination of outstanding purchase rights:
(i) A Participant may, at any time prior to the next
scheduled Purchase Date in the offering period, terminate his or her
outstanding purchase right by filing the appropriate form with the Plan
Administrator (or its designate), and no further payroll deductions shall be
collected from the Participant with respect to the terminated purchase
right. Any payroll deductions collected during the Purchase Interval in
which such termination occurs shall, at the Participant's election, be
immediately refunded or held for the purchase of shares on the next Purchase
Date. If no such election is made at the time such purchase right is
terminated, then the payroll deductions collected with respect to the
terminated right shall be refunded as soon as possible.
(ii) The termination of such purchase right shall be
irrevocable, and the Participant may not subsequently rejoin the offering
period for which the terminated purchase right was granted. In order to
resume participation in any subsequent offering period, such individual must
re-enroll in the Plan (by making a timely filing of the prescribed
enrollment forms) on or before his or her scheduled Entry Date into that
offering period.
(iii) Should the Participant cease to remain an Eligible
Employee for any reason (including death, disability or change in status)
while his or her purchase right remains outstanding, then that purchase
right shall immediately terminate, and all of the Participant's payroll
deductions for the Purchase Interval in which the purchase right so
terminates shall be immediately refunded. However, should the Participant
cease to remain in active service by reason of an approved unpaid leave of
absence, then the Participant shall have the right, exercisable up until the
last business day of the Purchase Interval in which such leave commences, to
(a) withdraw all the payroll deductions collected to date on his or her
behalf for that Purchase Interval or (b) have such funds held for the
purchase of shares on his or her behalf on the next scheduled Purchase Date.
In no event, however, shall any further payroll deductions be collected on
the Participant's behalf during such leave. Upon the Participant's return to
active service (x) within ninety (90) days following the commencement of
such leave or (y) prior to the expiration of any longer period for which
such Participant's right to reemployment with the Corporation is guaranteed
by statute or contract, his or her payroll deductions under the Plan shall
automatically resume at the rate in
5.
<PAGE>
effect at the time the leave began, unless the Participant withdraws from
the Plan prior to his or her return. An individual who returns to active
employment following a leave of absence which exceeds in duration the
applicable (x) or (y) time period will be treated as a new Employee for
purposes of subsequent participation in the Plan and must accordingly re-
enroll in the Plan (by making a timely filing of the prescribed enrollment
forms) on or before his or her scheduled Entry Date into the offering
period.
G. Change in Control. Each outstanding purchase right shall
-----------------
automatically be exercised, immediately prior to the effective date of any
Change in Control, by applying the payroll deductions of each Participant for
the Purchase Interval in which such Change in Control occurs to the purchase of
whole shares of Common Stock at a purchase price per share equal to eighty-five
percent (85%) of the lower of (i) the Fair Market Value per share of Common
Stock on the Participant's Entry Date into the offering period in which such
Change in Control occurs or (ii) the Fair Market Value per share of Common Stock
immediately prior to the effective date of such Change in Control. However, the
applicable limitation on the number of shares of Common Stock purchasable per
Participant shall continue to apply to any such purchase, but not the limitation
applicable to the maximum number of shares of Common Stock purchasable in total
by all Participants on any one Purchase Date.
The Corporation shall use its best efforts to provide at least ten
(10)-days prior written notice of the occurrence of any Change in Control, and
Participants shall, following the receipt of such notice, have the right to
terminate their outstanding purchase rights prior to the effective date of the
Change in Control.
H. Proration of Purchase Rights. Should the total number of shares of
----------------------------
Common Stock to be purchased pursuant to outstanding purchase rights on any
particular date exceed the number of shares then available for issuance under
the Plan, the Plan Administrator shall make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll
deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock pro-rated to such individual, shall
be refunded.
I. Assignability. The purchase right shall be exercisable only by the
-------------
Participant and shall not be assignable or transferable by the Participant.
J. Stockholder Rights. A Participant shall have no stockholder rights
------------------
with respect to the shares subject to his or her outstanding purchase right
until the shares are purchased on the Participant's behalf in accordance with
the provisions of the Plan and the Participant has become a holder of record of
the purchased shares.
VIII. ACCRUAL LIMITATIONS
A. No Participant shall be entitled to accrue rights to acquire Common
Stock pursuant to any purchase right outstanding under this Plan if and to the
extent such accrual, when aggregated with (i) rights to purchase Common Stock
accrued under any other purchase right granted under this Plan and (ii) similar
rights accrued under other employee stock purchase plans
6.
<PAGE>
(within the meaning of Code Section 423)) of the Corporation or any Corporate
Affiliate, would otherwise permit such Participant to purchase more than Twenty-
Five Thousand Dollars ($25,000.00) worth of stock of the Corporation or any
Corporate Affiliate (determined on the basis of the Fair Market Value per share
on the date or dates such rights are granted) for each calendar year such rights
are at any time outstanding.
B. For purposes of applying such accrual limitations to the purchase
rights granted under the Plan, the following provisions shall be in effect:
(i) The right to acquire Common Stock under each
outstanding purchase right shall accrue in a series of installments on each
successive Purchase Date during the offering period on which such right
remains outstanding.
(ii) No right to acquire Common Stock under any outstanding
purchase right shall accrue to the extent the Participant has already
accrued in the same calendar year the right to acquire Common Stock under
one or more other purchase rights at a rate equal to Twenty-Five Thousand
Dollars ($25,000.00) worth of Common Stock (determined on the basis of the
Fair Market Value per share on the date or dates of grant) for each calendar
year such rights were at any time outstanding.
C. If by reason of such accrual limitations, any purchase right of a
Participant does not accrue for a particular Purchase Interval, then the payroll
deductions which the Participant made during that Purchase Interval with respect
to such purchase right shall be promptly refunded.
D. In the event there is any conflict between the provisions of this
Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article shall be controlling.
IX. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan was adopted by the Board on July 7, 1999 and shall become
effective at the Effective Time, provided no purchase rights granted under the
Plan shall be exercised, and no shares of Common Stock shall be issued
hereunder, until (i) the Plan shall have been approved by the stockholders of
the Corporation and (ii) the Corporation shall have complied with all applicable
requirements of the 1933 Act (including the registration of the shares of Common
Stock issuable under the Plan on a Form S-8 registration statement filed with
the Securities and Exchange Commission), all applicable listing requirements of
any stock exchange (or the Nasdaq National Market, if applicable) on which the
Common Stock is listed for trading and all other applicable requirements
established by law or regulation. In the event such stockholder approval is not
obtained, or such compliance is not effected, within twelve (12) months after
the date on which the Plan is adopted by the Board, the Plan shall terminate and
have no further force or effect, and all sums collected from Participants during
the initial offering period hereunder shall be refunded.
7.
<PAGE>
B. Unless sooner terminated by the Board, the Plan shall terminate upon
the earliest of (i) the last business day in October 2009, (ii) the date on
which all shares available for issuance under the Plan shall have been sold
pursuant to purchase rights exercised under the Plan or (iii) the date on which
all purchase rights are exercised in connection with a Change in Control. No
further purchase rights shall be granted or exercised, and no further payroll
deductions shall be collected, under the Plan following such termination.
X. AMENDMENT OF THE PLAN
A. The Board may alter, amend, suspend or terminate the Plan at any time
to become effective immediately following the close of any Purchase Interval.
However, the Plan may be amended or terminated immediately upon Board action, if
and to the extent necessary to assure that the Corporation will not recognize,
for financial reporting purposes, any compensation expense in connection with
the shares of Common Stock offered for purchase under the Plan, should the
financial accounting rules applicable to the Plan at the Effective Time be
subsequently revised so as to require the Corporation to recognize compensation
expense in the absence of such amendment or termination.
B. In no event may the Board effect any of the following amendments or
revisions to the Plan without the approval of the Corporation's stockholders:
(i) increase the number of shares of Common Stock issuable under the Plan,
except for permissible adjustments in the event of certain changes in the
Corporation's capitalization, (ii) alter the purchase price formula so as to
reduce the purchase price payable for the shares of Common Stock purchasable
under the Plan or (iii) modify the eligibility requirements for participation in
the Plan.
XI. GENERAL PROVISIONS
A. All costs and expenses incurred in the administration of the Plan
shall be paid by the Corporation; however, each Plan Participant shall bear all
costs and expenses incurred by such individual in the sale or other disposition
of any shares purchased under the Plan.
B. Nothing in the Plan shall confer upon the Participant any right to
continue in the employ of the Corporation or any Corporate Affiliate for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Corporate Affiliate employing such person)
or of the Participant, which rights are hereby expressly reserved by each, to
terminate such person's employment at any time for any reason, with or without
cause.
C. The provisions of the Plan shall be governed by the laws of the State
of California without resort to that State's conflict-of-laws rules.
8.
<PAGE>
Schedule A
Corporations Participating in
Employee Stock Purchase Plan
As of the Effective Time
------------------------
Kana Communications, Inc.
<PAGE>
APPENDIX
--------
The following definitions shall be in effect under the Plan:
A. Board shall mean the Corporation's Board of Directors.
-----
C. Cash Earnings shall mean the (i) regular base salary paid to a
-------------
Participant by one or more Participating Companies during such individual's
period of participation in one or more offering periods under the Plan plus (ii)
all overtime payments, bonuses, commissions, profit-sharing distributions and
other incentive-type payments received during such period. Such Cash Earnings
shall be calculated before deduction of (A) any income or employment tax
withholdings or (B) any contributions made by the Participant to any Code
Section 401(k) salary deferral plan or Code Section 125 cafeteria benefit
program now or hereafter established by the Corporation or any Corporate
Affiliate. However, Cash Earnings shall not include any contributions made on
the Participant's behalf by the Corporation or any Corporate Affiliate to any
employee benefit or welfare plan now or hereafter established (other than Code
Section 401(k) or Code Section 125 contributions deducted from such Cash
Earnings).
B. Change in Control shall mean a change in ownership of the Corporation
-----------------
pursuant to any of the following transactions:
(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 assets of the Corporation in complete liquidation
or dissolution of the Corporation, or
(iii) the acquisition, directly or indirectly, by a person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by or is under common control
with the Corporation) of beneficial ownership (within the meaning of Rule
13d-3 of the 1934 Act) of securities possessing more than fifty percent
(50%) of the total combined voting power of the Corporation's outstanding
securities pursuant to a tender or exchange offer made directly to the
Corporation's stockholders.
C. Code shall mean the Internal Revenue Code of 1986, as amended.
----
D. Common Stock shall mean the Corporation's common stock.
------------
E. Corporate Affiliate shall mean any parent or subsidiary
-------------------
corporation of the Corporation (as determined in accordance with Code Section
424), whether now existing or subsequently established.
A-1
<PAGE>
F. Corporation shall mean Kana Communications, Inc., a Delaware
-----------
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Kana Communications, Inc. which shall by appropriate
action adopt the Plan.
H. Effective Time shall mean the time at which the Underwriting
--------------
Agreement is executed and the Common Stock priced for the initial public
offering of such Common Stock. Any Corporate Affiliate which becomes a
Participating Corporation after such Effective Time shall designate a subsequent
Effective Time with respect to its employee-Participants.
I. Eligible Employee shall mean any person who is employed by a
-----------------
Participating Corporation on a basis under which he or she is regularly expected
to render more than twenty (20) hours of service per week for more than five (5)
months per calendar year for earnings considered wages under Code Section 3401
(a).
J. Entry Date shall mean the date an Eligible Employee first
----------
commences participation in the offering period in effect under the Plan. The
earliest Entry Date under the Plan shall be the Effective Time.
K. Fair Market Value per share of Common Stock on any relevant date
-----------------
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq National
Market, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question, as such price is reported by
the National Association of Securities Dealers on the Nasdaq National
Market. 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) For purposes of the initial offering period which begins at the
Effective Time, the Fair Market Value shall be deemed to be equal to the
price per share at which the Common Stock is sold in the initial public
offering pursuant to the Underwriting Agreement.
L. 1933 Act shall mean the Securities Act of 1933, as amended.
--------
M. Participant shall mean any Eligible Employee of a Participating
-----------
Corporation who is actively participating in the Plan.
A-2.
<PAGE>
N. Participating Corporation shall mean the Corporation and such
-------------------------
Corporate Affiliate or Affiliates as may be authorized from time to time by the
Board to extend the benefits of the Plan to their Eligible Employees. The
Participating Corporations in the Plan are listed in attached Schedule A.
0. Plan shall mean the Corporation's 1999 Employee Stock Purchase
----
Plan, as set forth in this document.
P. Plan Administrator shall mean the committee of two (2) or more
------------------
Board members appointed by the Board to administer the Plan.
Q. Purchase Date shall mean the last business day of each Purchase
-------------
Interval. The initial Purchase Date shall be April 28, 2000.
R. Purchase Interval shall mean each successive six (6)-month period
-----------------
within the offering period at the end of which there shall be purchased shares
of Common Stock on behalf of each Participant.
S. Semi-Annual Entry Date shall mean the first business day in May
----------------------
and November each year on which an Eligible Employee may first enter an offering
period.
T. Stock Exchange shall mean either the American Stock Exchange or
--------------
the New York Stock Exchange.
U. Underwriting Agreement shall mean the agreement between the
----------------------
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
A-3.
<PAGE>
EXHIBIT 10.4
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is entered into as of the
___ day of ______, 1999 by and between Kana Communications, Inc., a Delaware
corporation (the "Company") and the indemnitees listed on the signature pages
hereto (each an "Indemnitee" and collectively, the "Indemnitees").
RECITALS
A. The Company and the Indemnitees recognize the continued difficulty in
obtaining liability insurance for its directors, officers, employees,
controlling persons, agents and fiduciaries, the significant increases in the
cost of such insurance and the general reductions in the coverage of such
insurance.
B. The Company and the Indemnitees further recognize the substantial
increase in corporate litigation in general, subjecting directors, officers,
employees, controlling persons, agents and fiduciaries to expensive litigation
risks at the same time as the availability and coverage of liability insurance
has been severely limited.
C. The Indemnitees do not regard the current protection available as
adequate under the present circumstances, and the Indemnitees and other
directors, officers, employees, controlling persons, agents and fiduciaries of
the Company may not be willing to serve in such capacities without additional
protection.
D. The Company (i) desires to attract and retain the involvement of highly
qualified groups, such as the Indemnitees, to serve the Company and, in part, to
induce each Indemnitee to be involved with the Company and (ii) wishes to
provide for the indemnification and advancing of expenses to each Indemnitee to
the maximum extent permitted by law.
E. In view of the considerations set forth above, the Company desires that
each Indemnitee be indemnified by the Company as set forth herein.
NOW, THEREFORE, the Company and each Indemnitee hereby agrees as
follows:
1. Indemnification.
---------------
a. Indemnification of Expenses. The Company shall indemnify
---------------------------
and hold harmless each Indemnitee (including its respective directors, officers,
partners, employees, agents and spouses) and each person who controls any of
them or who may be liable within the meaning of Section 15 of the Securities Act
of 1933, as amended (the "Securities Act"), or Section 20 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") to the fullest extent
permitted by law if such Indemnitee was or is or becomes a party to or witness
or other participant in, or is threatened to be made a party to or witness or
other participant in, or is threatened to be made a party to or witness or other
participant in, any threatened, pending or completed action, suit, proceeding or
alternative dispute resolution mechanism, or any hearing,
<PAGE>
inquiry or investigation that such Indemnitee believes might lead to the
institution of any such action, suit, proceeding or alternative dispute
resolution mechanism, whether civil, criminal, administrative, investigative or
other (hereinafter a "Claim") by reason of (or arising in part out of) any event
or occurrence related to the fact that Indemnitee is or was a director, officer,
employee, controlling person, agent or fiduciary of the Company, or any
subsidiary of the Company, or is or was serving at the request of the Company as
a director, officer, employee, controlling person, agent or fiduciary of another
corporation, partnership, joint venture, trust or other enterprise, or by reason
of any action or inaction on the part of such Indemnitee while serving in such
capacity including, without limitation, any and all losses, claims, damages,
expenses and liabilities, joint or several (including any investigation, legal
and other expenses incurred in connection with, and any amount paid in
settlement of, any action, suit, proceeding or any claim asserted) under the
Securities Act, the Exchange Act or other federal or state statutory law or
regulation, at common law or otherwise, which relate directly or indirectly to
the registration, purchase, sale or ownership of any securities of the Company
or to any fiduciary obligation owed with respect thereto (hereinafter an
"Indemnification Event") against any and all expenses (including attorneys' fees
and all other costs, expenses and obligations incurred in connection with
investigating, defending a witness in or participating in (including on appeal),
or preparing to defend, be a witness in or participate in, any such action,
suit, proceeding, alternative dispute resolution mechanism, hearing, inquiry or
investigation), judgments, fines, penalties and amounts paid in settlement (if
such settlement is approved in advance by the Company, which approval shall not
be unreasonably withheld) of such Claim and any federal, state, local or foreign
taxes imposed on Indemnitee as a result of the actual or deemed receipt of any
payments under this Agreement (collectively, hereinafter "Expenses"), including
all interest, assessments and other charges paid or payable in connection with
or in respect of such Expenses. Such payment of Expenses shall be made by the
Company as soon as practicable but in any event no later than five days after
written demand by the Indemnitee therefor is presented to the Company.
b. Reviewing Party. Notwithstanding the foregoing, (i) the
---------------
obligations of the Company under Section 1(a) shall be subject to the condition
that the Reviewing Party (as described in Section 10(e) hereof) shall not have
determined (in a written opinion, in any case in which the Independent Legal
Counsel referred to in Section 10(d) hereof is involved) that Indemnitee would
not be permitted to be indemnified under applicable law, and (ii) each
Indemnitee acknowledges and agrees that the obligation of the Company to make an
advance payment of Expenses to Indemnitee pursuant to Section 2(a) (an "Expense
Advance") shall be subject to the condition that, if, when and to the extent
that the Reviewing Party determines that Indemnitee would not be permitted to be
so indemnified under applicable law, the Company shall be entitled to be
reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all
such amounts theretofore paid; provided, however, that if Indemnitee has
commenced or thereafter commences legal proceedings in a court of competent
jurisdiction to secure a determination that Indemnitee should be indemnified
under applicable law, any determination made by the Reviewing Party that
Indemnitee would not be permitted to be indemnified under applicable law shall
not be binding and Indemnitee shall not be required to reimburse the Company for
any Expense Advance until a final judicial determination is made with respect
thereto (as to which all rights of appeal therefrom have been exhausted or
lapsed). Indemnitee's obligation to reimburse the Company for any Expense
Advance shall be unsecured and no interest shall be charged thereon. If there
has not been a Change in Control (as defined in
2
<PAGE>
Section 10(c) hereof), the Reviewing Party shall be selected by the Board of
Directors, and if there has been such a Change in Control (other than a Change
in Control which has been approved by a majority of the Company's Board of
Directors who were directors immediately prior to such Change in Control), the
Reviewing Party shall be the Independent Legal Counsel referred to in Section
10(d) hereof. If there has been no determination by the Reviewing Party or if
the Reviewing Party determines that Indemnitee substantively would not be
permitted to be indemnified in whole or in part under applicable law, Indemnitee
shall have the right to commence litigation seeking an initial determination by
the court or challenging any such determination by the Reviewing Party or any
aspect thereof, including the legal or factual bases therefor, and the Company
hereby consents to service of process and to appear in any such proceeding. Any
determination by the Reviewing Party otherwise shall be conclusive and binding
on the Company and Indemnitee.
c. Contribution. If the indemnification provided for in
------------
Section 1(a) above for any reason is held by a court of competent jurisdiction
to be unavailable to an Indemnitee in respect of any losses, claims, damages,
expenses or liabilities referred to therein, then the Company, in lieu of
indemnifying such Indemnitee thereunder, shall contribute to the amount paid or
payable by such Indemnitee as a result of such losses, claims, damages, expenses
or liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company and the Indemnitees, or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company and the
Indemnitees in connection with the action or inaction which resulted in such
losses, claims, damages, expenses or liabilities, as well as any other relevant
equitable considerations. In connection with the registration of the Company's
securities, the relative benefits received by the Company and the Indemnitees
shall be deemed to be in the same respective proportions that the net proceeds
from the offering (before deducting expenses) received by the Company and the
Indemnitees, in each case as set forth in the table on the cover page of the
applicable prospectus, bear to the aggregate public offering price of the
securities so offered. The relative fault of the Company and the Indemnitees
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or the
Indemnitees and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The Company and the Indemnitees agree that it would not be just and
equitable if contribution pursuant to this Section 1(c) were determined by pro
rata or per capita allocation or by any other method of allocation which does
not take account of the equitable considerations referred to in the immediately
preceding paragraph. In connection with the registration of the Company's
securities, in no event shall an Indemnitee be required to contribute any amount
under this Section 1(c) in excess of the lesser of (i) that proportion of the
total of such losses, claims, damages or liabilities which are indemnified
against, equal to the proportion of the total securities sold under such
registration statement which is being sold by such Indemnitee or (ii) the
proceeds received by such Indemnitee from its sale of securities under such
registration statement. No person found guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not found guilty of such fraudulent
misrepresentation.
3
<PAGE>
d. Survival Regardless of Investigation. The indemnification
------------------------------------
and contribution provided for in this Section 1 will remain in full force and
effect regardless of any investigation made by or on behalf of the Indemnitees
or any officer, director, employee, agent or controlling person of the
Indemnitees.
e. Change in Control. The Company agrees that if there is a
-----------------
Change in Control of the Company (other than a Change in Control which has been
approved by a majority of the Company's Board of Directors who were directors
immediately prior to such Change in Control) then, with respect to all matters
thereafter arising concerning the rights of Indemnitees to payments of Expenses
under this Agreement or any other agreement or under the Company's Certificate
of Incorporation or Bylaws as now or hereafter in effect, Independent Legal
Counsel (as defined in Section 10(d) hereof) shall be selected by the
Indemnitees and approved by the Company (which approval shall not be
unreasonably withheld). Such counsel, among other things, shall render its
written opinion to the Company and Indemnitees as to whether and to what extent
Indemnitees would be permitted to be indemnified under applicable law. The
Company agrees to abide by such opinion and to pay the reasonable fees of the
Independent Legal Counsel referred to above and to fully indemnify such counsel
against any and all expenses (including attorneys' fees), claims, liabilities
and damages arising out of or relating to this Agreement or its engagement
pursuant hereto.
f. Mandatory Payment of Expenses. Notwithstanding any other
-----------------------------
provision of this Agreement, to the extent that Indemnitees have been successful
on the merits or otherwise, including, without limitation, the dismissal of an
action without prejudice, in the defense of any action, suit, proceeding,
inquiry or investigation referred to in Section 1(a) hereof or in the defense of
any claim, issue or matter therein, each Indemnitee shall be indemnified against
all Expenses incurred by such Indemnitee in connection herewith.
2. Expenses; Indemnification Procedure.
-----------------------------------
a. Advancement of Expenses. The Company shall advance all
-----------------------
Expenses incurred by Indemnitees. The advances to be made hereunder shall be
paid by the Company to Indemnitees as soon as practicable but in any event no
later than five days after written demand by such Indemnitees therefor to the
Company.
b. Notice/Cooperation by Indemnitees. Indemnitees shall give
---------------------------------
the Company notice in writing as soon as practicable of any Claim made against
Indemnitees for which indemnification will or could be sought under this
Agreement. Notice to the Company shall be directed to the Chief Executive
Officer of the Company at the Company's address (or such other address as the
Company shall designate in writing to Indemnitees).
c. No Presumptions; Burden of Proof. For purposes of this
--------------------------------
Agreement, the termination of any Claim by judgment, order, settlement (whether
with or without court approval) or conviction, or upon a plea of nolo
contendere, or its equivalent, shall not create a presumption that Indemnitees
did not meet any particular standard of conduct or have any particular belief or
that a court has determined that indemnification is not permitted by applicable
law. In addition, neither the failure of the Reviewing Party to have made a
determination as to whether Indemnitee has met any particular standard of
conduct or had any
4
<PAGE>
particular belief, nor an actual determination by the Reviewing Party that
Indemnitee has not met such standard of conduct or did not have such belief,
prior to the commencement of legal proceedings by Indemnitee to secure a
judicial determination that Indemnitee should be indemnified under applicable
law, shall be a defense to Indemnitee's claim or create a presumption that
Indemnitee has not met any particular standard of conduct or did not have any
particular belief. In connection with any determination by the Reviewing Party
or otherwise as to whether Indemnitee is entitled to be indemnified hereunder,
the burden of proof shall be on the Company to establish that Indemnitee is not
so entitled.
d. Notice to Insurers. If, at the time of the receipt by the
------------------
Company of a notice of a Claim pursuant to Section 2(b) hereof, the Company has
liability insurance in effect which may cover such Claim, the Company shall give
prompt notice of the commencement of such Claim to the insurers in accordance
with the procedures set forth in each of the policies. The Company shall
thereafter take all necessary or desirable action to cause such insurers to pay,
on behalf of Indemnitees, all amounts payable as a result of such action, suit,
proceeding, inquiry or investigation in accordance with the terms of such
policies.
e. Selection of Counsel. In the event the Company shall be
--------------------
obligated hereunder to pay the Expenses of any Claim, the Company shall be
entitled to assume the defense of such Claim, with counsel approved by the
applicable Indemnitee, upon the delivery to such Indemnitee of written notice of
its election to do so. After delivery of such notice, approval of such counsel
by the Indemnitee and the retention of such counsel by the Company, the Company
will not be liable to such Indemnitee under this Agreement for any fees of
counsel subsequently incurred by such Indemnitee with respect to the same Claim;
provided that, (i) the Indemnitee shall have the right to employ such
Indemnitee's counsel in any such Claim at the Indemnitee's expense and (ii) if
(A) the employment of counsel by the Indemnitee has been previously authorized
by the Company, (B) such Indemnitee shall have reasonably concluded that there
is a conflict of interest between the Company and such Indemnitee in the conduct
of any such defense, or (C) the Company shall not continue to retain such
counsel to defend such Claim, then the fees and expenses of the Indemnitee's
counsel shall be at the expense of the Company. The Company shall have the right
to conduct such defense as it sees fit in its sole discretion, including the
right to settle any claim against any Indemnitee without the consent of such
Indemnitee.
3. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
a. Scope. The Company hereby agrees to indemnify Indemnitees
-----
to the fullest extent permitted by law, even if such indemnification is not
specifically authorized by the other provisions of this Agreement, the Company's
Certificate of Incorporation, the Company's Bylaws or by statute. In the event
of any change after the date of this Agreement in any applicable law, statute or
rule which expands the right of a Delaware corporation to indemnify a member of
its Board of Directors or an officer, employee, controlling person, agent or
fiduciary, it is the intent of the parties hereto that Indemnitees shall enjoy
by this Agreement the greater benefits afforded by such change. In the event of
any change in any applicable law, statute or rule which narrows the right of a
Delaware corporation to indemnify a member of its Board of Directors or an
officer, employee, agent or fiduciary, such change, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement, shall
have no
5
<PAGE>
effect on this Agreement or the parties' rights and obligations hereunder except
as set forth in Section 8(a) hereof.
b. Nonexclusivity. The indemnification provided by this
--------------
Agreement shall be in addition to any rights to which Indemnitees may be
entitled under the Company's Certificate of Incorporation, its Bylaws, any
agreement, any vote of stockholders or disinterested directors, the General
Corporation Law of the State of Delaware, or otherwise. The indemnification
provided under this Agreement shall continue as to each Indemnitee for any
action such Indemnitee took or did not take while serving in an indemnified
capacity even though the Indemnitee may have ceased to serve in such capacity.
4. No Duplication of Payments. The Company shall not be liable
--------------------------
under this Agreement to make any payment in connection with any Claim made
against any Indemnitee to the extent such Indemnitee has otherwise actually
received payment (under any insurance policy, Certificate of Incorporation,
Bylaw or otherwise) of the amounts otherwise indemnifiable hereunder.
5. Partial Indemnification. If any Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for any portion of
Expenses incurred in connection with any Claim, but not, however, for all of the
total amount thereof, the Company shall nevertheless indemnify Indemnitee for
the portion of such Expenses to which such Indemnitee is entitled.
6. Mutual Acknowledgement. The Company and each Indemnitee
----------------------
acknowledge that in certain instances, Federal law or applicable public policy
may prohibit the Company from indemnifying its directors, officers, employees,
controlling persons, agents or fiduciaries under this Agreement or otherwise.
Each Indemnitee understands and acknowledges that the Company has undertaken or
may be required in the future to undertake with the Securities and Exchange
Commission to submit the question of indemnification to a court in certain
circumstances for a determination of the Company's rights under public policy to
indemnify the Indemnitees.
7. Liability Insurance. To the extent the Company maintains
-------------------
liability insurance applicable to directors, officers, employees, control
persons, agents or fiduciaries, each of the Indemnitees shall be covered by such
policies in such a manner as to provide Indemnitees the same rights and benefits
as are accorded to the most favorably insured of the Company's directors, if
such Indemnitee is a director, or of the Company's officers, if such Indemnitee
is not a director of the Company but is an officer; or of the Company's key
employees, controlling persons, agents or fiduciaries, if such Indemnitee is not
an officer or director but is a key employee, agent, control person, or
fiduciary.
8. Exceptions. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
a. Claims Initiated by Indemnitee. To indemnify or advance
------------------------------
expenses to any Indemnitee with respect to Claims initiated or brought
voluntarily by such Indemnitee and not by way of defense, except (i) with
respect to actions or proceedings to
6
<PAGE>
establish or enforce a right to indemnify under this Agreement or any other
agreement or insurance policy or under the Company's Certificate of
Incorporation or Bylaws now or hereafter in effect relating to Claims for
Indemnifiable Events, (ii) in specific cases if the Board of Directors has
approved the initiation or bringing of such Claim, or (iii) as otherwise
required under Section 145 of the Delaware General Corporation Law, regardless
of whether such Indemnitee ultimately is determined to be entitled to such
indemnification, advance expense payment or insurance recovery, as the case may
be; or
b. Claims Under Section 16(b). To indemnify any Indemnitee for
--------------------------
expenses and the payment of profits arising from the purchase and sale by such
Indemnitee of securities in violation of Section 16(b) of the Exchange Act or
any similar successor statute; or
c. Claims Excluded Under Section 145 of the Delaware General
---------------------------------------------------------
Corporation Law. To indemnify any Indemnitee if (i) he did not act in good
- ---------------
faith and in a manner reasonably believed to be in or not opposed to the best
interests of the Company, or (ii) with respect to any criminal action or
proceeding, the Indemnitee had reasonable cause to believe his conduct was
unlawful, or (iii) the Indemnitee shall have been adjudged to be liable to the
Company unless and only to the extent the court in which such action was brought
shall permit indemnification as provided in Section 145(b) of the Delaware
General Corporation Law.
9. Period of Limitations. No legal action shall be brought and no
---------------------
cause of action shall be asserted by or in the right of the Company against any
Indemnitee or any Indemnitee's estate, spouse, heirs, executors or personal or
legal representatives after the expiration of five years from the date of
accrual of such cause of action, and any claim or cause of action of the Company
shall be extinguished and deemed released unless asserted by the timely filing
of a legal action within such five-year period; provided, however, that if any
shorter period of limitations is otherwise applicable to any such cause of
action, such shorter period shall govern.
10. Construction of Certain Phrases.
-------------------------------
a. For purposes of this Agreement, references to the "Company"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, employees,
agents or fiduciaries, so that if Indemnitee is or was a director, officer,
employee, agent, control person, or fiduciary of such constituent corporation,
or is or was serving at the request of such constituent corporation as a
director, officer, employee, control person, agent or fiduciary of another
corporation, partnership, joint venture, employee benefit plan, trust or other
enterprise, each Indemnitee shall stand in the same position under the
provisions of this Agreement with respect to the resulting or surviving
corporation as each Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
b. For purposes of this Agreement, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on any Indemnitee with respect to an employee
benefit plan; and references to "serving at the request of the Company" shall
include any service as a director, officer, employee, agent
7
<PAGE>
or fiduciary of the Company which imposes duties on, or involves services by,
such director, officer, employee, agent or fiduciary with respect to an employee
benefit plan, its participants or its beneficiaries; and if any Indemnitee acted
in good faith and in a manner such Indemnitee reasonably believed to be in the
interest of the participants and beneficiaries of an employee benefit plan, such
Indemnitee shall be deemed to have acted in a manner "not opposed to the best
interests of the Company" as referred to in this Agreement.
c. For purposes of this Agreement a "Change in Control" shall
be deemed to have occurred if (i) any "person" (as such term is used in Sections
13(d)(3) and 14(d)(2) of the Exchange Act), other than a trustee or other
fiduciary holding securities under an employee benefit plan of the Company or a
corporation owned directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company,
(A) who is or becomes the beneficial owner, directly or indirectly, of
securities of the Company representing 10% or more of the combined voting power
of the Company's then outstanding Voting Securities, increases his beneficial
ownership of such securities by 5% or more over the percentage so owned by such
person, or (B) becomes the "beneficial owner" (as defined in Rule 13d-3 under
said Exchange Act), directly or indirectly, of securities of the Company
representing more than 20% of the total voting power represented by the
Company's then outstanding Voting Securities, (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Company and any new director whose election by the
Board of Directors or nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds of the directors then still in office
who either were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason to
constitute a majority thereof, or (iii) the stockholders of the Company approve
a merger or consolidation of the Company with any other corporation other than a
merger or consolidation which would result in the Voting Securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into Voting Securities of the
surviving entity) at least 80% of the total voting power represented by the
Voting Securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the stockholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of (in one transaction or a series of
transactions) all or substantially all of the Company's assets.
d. For purposes of this Agreement, "Independent Legal Counsel"
shall mean an attorney or firm of attorneys, selected in accordance with the
provisions of Section 2(e) hereof, who shall not have otherwise performed
services for the Company or any Indemnitee within the last three years (other
than with respect to matters concerning the right of any Indemnitee under this
Agreement, or of other indemnitees under similar indemnity agreements).
e. For purposes of this Agreement, a "Reviewing Party" shall
mean any appropriate person or body consisting of a member or members of the
Company's Board of Directors or any other person or body appointed by the Board
of Directors who is not a party to the particular Claim for which Indemnitees
are seeking indemnification, or Independent Legal Counsel.
8
<PAGE>
f. For purposes of this Agreement, "Voting Securities" shall
mean any securities of the Company that vote generally in the election of
directors.
11. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.
12. Binding Effect; Successors and Assigns. This Agreement shall be
--------------------------------------
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, assigns, including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of the Company, spouses, heirs,
and personal and legal representatives. The Company shall require and cause any
successor (whether direct or indirect by purchase, merger, consolidation or
otherwise) to all, substantially all, or a substantial part, of the business
and/or assets of the Company, by written agreement in form and substance
satisfactory to each Indemnitee, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform if no such succession had taken place. This Agreement shall
continue in effect with respect to Claims relating to Indemnifiable Events
regardless of whether any Indemnitee continues to serve as a director, officer,
employee, agent, controlling person, or fiduciary of the Company or of any other
enterprise, including subsidiaries of the Company, at the Company's request.
13. Attorneys' Fees. In the event that any action is instituted by an
---------------
Indemnitee under this Agreement or under any liability insurance policies
maintained by the Company to enforce or interpret any of the terms hereof or
thereof, any Indemnitee shall be entitled to be paid all Expenses incurred by
such Indemnitee with respect to such action, regardless of whether such
Indemnitee is ultimately successful in such action, and shall be entitled to the
advancement of Expenses with respect to such action, unless, as a part of such
action, a court of competent jurisdiction over such action determines that each
of the material assertions made by such Indemnitee as a basis for such action
was not made in good faith or was frivolous. In the event of an action
instituted by or in the name of the Company under this Agreement to enforce or
interpret any of the terms of this Agreement, the Indemnitee shall be entitled
to be paid all Expenses incurred by such Indemnitee in defense of such action
(including costs and expenses incurred with respect to Indemnitee counterclaims
and cross-claims made in such action), and shall be entitled to the advancement
of Expenses with respect to such action, unless, as a part of such action, a
court having jurisdiction over such action determines that each of such
Indemnitee's material defenses to such action was made in bad faith or was
frivolous.
14. Notice. All notices and other communications required or
------
permitted hereunder shall be in writing, shall be effective when given, and
shall in any event be deemed to be given (a) five (5) days after deposit with
the U.S. Postal Service or other applicable postal service, if delivered by
first class mail, postage prepaid, (b) upon delivery, if delivered by hand, (c)
one business day after the business day of deposit with Federal Express or
similar overnight courier, freight prepaid, or (d) one day after the business
day of delivery by facsimile transmission, if deliverable by facsimile
transmission, with copy by first class mail, postage prepaid, and shall be
addressed if to Indemnitees, at each Indemnitee's address as set forth beneath
the Indemnitees' signatures to this Agreement and if to the Company at the
address of its
9
<PAGE>
principal corporate offices (attention: Secretary) or at such other address as
such party may designate by ten days' advance written notice to the other party
hereto.
15. Consent to Jurisdiction. The Company and each Indemnitee each
-----------------------
hereby irrevocably consents to the jurisdiction of the courts of the State of
Delaware for all purposes in connection with any action or proceeding which
arises out of or relates to this Agreement and agree that any action instituted
under this Agreement shall be commenced, prosecuted and continued only in the
Court of Chancery of the State of Delaware in and for New Castle County, which
shall be the exclusive and only proper forum for adjudicating such a claim.
16. Severability. The provisions of this Agreement shall be
------------
severable in the event that any of the provisions hereof (including any
provision within a single section, paragraph or sentence) are held by a court of
competent jurisdiction to be invalid, void or otherwise unenforceable, and the
remaining provisions shall remain enforceable to the fullest extent permitted by
law. Furthermore, to the fullest extent possible, the provisions of this
Agreement (including, without limitations, each portion of this Agreement
containing any provision held to be invalid, void or otherwise unenforceable,
that is not itself invalid, void or unenforceable) shall be construed so as to
give effect to the intent manifested by the provision held invalid, illegal or
unenforceable.
17. Choice of Law. This Agreement shall be governed by and its
-------------
provisions construed and enforced in accordance with the laws of the State of
Delaware, as applied to contracts between Delaware residents, entered into and
to be performed entirely within the State of Delaware, without regard to the
conflict of laws principles thereof.
18. 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.
19. Amendment and Termination. No amendment, modification,
-------------------------
termination or cancellation of this Agreement shall be effective unless it is in
writing signed by all parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provisions
hereof (whether or not similar) nor shall such waiver constitute a continuing
waiver.
20. Integration and Entire Agreement. This Agreement sets forth the
--------------------------------
entire understanding between the parties hereto and supersedes and merges all
previous written and oral negotiations, commitments, understandings and
agreements relating to the subject matter hereof between the parties hereto.
21. No Construction as Employment Agreement. Nothing contained in
---------------------------------------
this Agreement shall be construed as giving any Indemnitee any right to be
retained in the employ of the Company or any of its subsidiaries.
22. Corporate Authority. The Board of Directors of the Company and
-------------------
its stockholders have approved the terms of this Agreement.
10
<PAGE>
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:________________________________
INDEMNITEES:
__________________________________
__________________________________
__________________________________
__________________________________
__________________________________
__________________________________
11
<PAGE>
Exhibit 10.6
[LETTERHEAD OF SILICON VALLEY BANK INTERNATIONAL DIVISION]
ADVICE OF AMENDMENT / NO. 1
LETTER OF CREDIT NO. SVB99IS1510
This number must be mentioned on all drafts & correspondence
DATE: July 9, 1999
AMOUNT: USD 1,400,000.00
EXPIRY DATE: July 8, 2000
LOCATION: AT OUR COUNTER IN SANTA CLARA
BENEFICIARY: CHESTNUT BAY LLC
C/O THE NICHOLSON COMPANY
75 CRISTICH LANE
CAMPBELL, CA 95008
APPLICANT: KANA COMMUNICATIONS, INC.
87 ENCINA AVENUE
PALO ALTO, CA 94301
DEAR SIR/MADAM:
WE HAVE BEEN REQUESTED TO AMEND THE ABOVE REFERENCED LETTER OF CREDIT AS
FOLLOWS:
- THE APPLICANT IS RESPONSIBLE FOR ANY COST IN TRANSFERRING THE LETTER OF
CREDIT TO A NEW BENEFICIARY.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
THIS CREDIT IS SUBJECT TO THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY
CREDITS (1993 REVISION), INTERNATIONAL CHAMBER OF COMMERCE PUBLICATION 500.
/s/ George Disho /s/ John DosSantos
---------------- ------------------
AUTHORIZED SIGNATURE AUTHORIZED SIGNATURE
<PAGE>
[LETTERHEAD OF SILICON VALLEY BANK INTERNATIONAL DIVISION]
IRREVOCABLE STANDBY LETTER OF CREDIT NO.SVB99IS1510
DATE: July 8, 1999
BENEFICIARY: CHESTNUT BAY LLC
C/O THE NICHOLSON COMPANY
75 CRISTICH LANE
CAMPBELL, CA 95008
APPLICANT: KANA COMMUNICATIONS, INC.
87 ENCINA AVENUE
PALO ALTO, CA 94301
AMOUNT: USD 1,400,000.00
(ONE MILLION FOUR HUNDRED THOUSAND AND 00/100 USDLRS)
EXPIRY DATE: July 8, 2000
LOCATION: AT OUR COUNTER IN SANTA CLARA
DEAR SIR/MAM:
WE HERE BY ESTABLISH OUR IRREVOCABLE STANDBY LETTER OF CREDIT NO.SVB99IS1510 IN
YOUR FAVOR. AVAILABLE BY PAYMENT WITH SILICON VALLEY BANK, 3003 TASMAN DRIVE,
SANTA CLARA, CA 95054, ATTN: INT'L DEPT. OF BENEFICIARY'S DRAFT AT SIGHT DRAWN
ON US, AND ACCOMAPNIED BY THE FOLLOWING DOCUMENTS.
1. THE ORIGINAL OF THIS LETTER OF CREDIT AND ALL AMENDMENTS IF ANY.
2. A SIGNED AND DATED CERTIFICATION FROM THE BENEFICIARY STATING EITHER OF
THE FOLLOWING:
(a). "AN EVENT OF DEFAULT (AS DEFINED IN THE LEASE) HAS OCCURRED BY KANA
COMMUNICATIONS, INC., AS TENANT UNDER THAT CERTAIN LEASE AGREEMENTS
DATED JUNE 18, 1999 BETWEEN TENANT AND CHESTNUT BAY LLC, AS
BENEFICIARY AS LANDLORD FOR SPACE LOCATED IN THE PROPERTY COMMONLY
KNOWN AS THE WOODSIDE TECHNOLOGY CENTER. FURTHERMORE THIS IS TO
CERTIFY THAT; (I) LANDLORD HAS GIVEN WRITTEN NOTICE TO TENANT TO CURE
THE DEFAULT AND SUCH DEFAULT HAS NOT BEEN CURED UP TO THIS DATE OF
DRAWING UNDER THIS LETTER OF CREDIT AND ALL APPLICABLE CURE PERIOD
(IF ANY) HAS EXPIRED; AND (II) THE TERMS AND CONDITIONS OF THE LEASE
AUTHORIZE TO NOW DRAW DOWN ON THE LETTER OF CREDIT."
-OR-
(b). "WITHIN THIRTY (30) DAYS PRIOR TO EXPIRY DATE OF THIS LETTER OF CREDIT
BENEFICIARY HAS NOT RECEIVED AN EXTENSION AT LEAST FOR ONE YEAR TO
THE EXISTING LETTER OF CREDIT OR A REPLACEMENT LETTER OF CREDIT
SATISFACTORY TO THE BENEFICIARY."
- PAGE 1 of 2 -
<PAGE>
[LETTERHEAD OF SILICON VALLEY BANK INTERNATIONAL DIVISION]
IRREVOCABLE STANDBY LETTER OF CREDIT NO.SVB99IS1510
DATE: July 8, 1999
ADDITIONAL CONDITION:
1- PARTIAL DRAWINGS ARE PERMITTED.
2- THIS LETTER OF CREDIT IS TRANSFERABLE AND MAY ONLY BE TRANSFERRED IN ITS
ENTIRETY BY THE ISSUING BANK ONLY UPON OUR RECEIPT OF THE ATTACHED EXHIBIT
"A" (TRANSFER NOW) DULY COMPLETED AND EXECUTED BY THE BENEFICIARY AND
ACCOMPANIED BY THE ORIGINAL LETTER OF CREDIT AND ALL AMENDMENTS IF ANY
TOGETHER WITH OUR TRANSFER FEES (I.E. 1/10 OF 1 PER CENT MINUMUM USD
250.00).
ALL DOCUMENTS INCLUDING DRAFT(S) MUST INDICATE THE NUMBER AND DATE OF THIS
CREDIT.
EACH DRAFT PRESENTED HEREUNDER MUST BE ACCOMPANIED BY THIS ORIGINAL LETTER OF
CREDIT FOR OUT ENDORSEMENT THEREON OF THE AMOUNT OF SUCH DRAFT(S).
DOCUMENTS MUST BE SENT TO US VIA OVERNIGHT COURIER (I.E. FEDERAL EXPRESS, UPS,
DHL OR ANY OTHER EXPRESS COURIER) AT OUR ADDRESS: SILICON VALLEY BANK, 3003
TASMAN DRIVE, SANTA CLARA, CA 95054
ATTN: INTERNATIONAL DIVISION
WE HEREBY ENGAGE WITH DRAWERS AND/OR BONAFIDE HOLDERS THAT DRAFT(S) DRAWN UNDER
AND NEGOTIATED IN CONFORMANCE WITH THE TERMS AND CONDITIONS OF THE SUBJECT
CREDIT WILL BE DULY HONORED ON PRESENTATION.
THIS CREDIT IS SUBJECT TO THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY
CREDITS (1993 REVISION), INTERNATIONAL CHAMBER OF COMMERCE PUBLICATION 500.
/s/ George Disho /s/ John DosSantos
---------------- ------------------
AUTHORIZED SIGNATURE AUTHORIZED SIGNATURE
- PAGE 2 OF 2 -
<PAGE>
[LETTERHEAD OF SILICON VALLEY BANK INTERNATIONAL DIVISION]
EXHIBIT "A"
DATE:
TO: SILICON VALLEY BANK
3003 TASMAN DRIVE RE: STANDBY LETTER OF CREDIT
SANTA CLARA. CA 95054 NO. ISSUED BY
ATTN: INTERNATIONAL DIVISION. SILICON VALLEY BANK, SANTA CLARA
STANDBY LETTERS OF CREDIT L/C AMOUNT.
GENTLEMEN:
FOR VALUE RECEIVED, THE UNDERSIGNED BENEFICIARY HEREBY IRREVOCABLY TRANSFERS TO:
(NAME OF TRANSFEREE)
(ADDRESS)
ALL RIGHTS OF THE UNDERSIGNED BENEFICIARY TO DRAW UNDER THE ABOVE LETTER OF
CREDIT UP TO ITS AVAILABLE AMOUNT AS SHOWN ABOVE AS OF THE DATE OF THIS
TRANSFER.
BY THIS TRANSFER, ALL RIGHTS OF THE UNDERSIGNED BENEFICIARY IN SUCH LETTER OF
CREDIT ARE TRANSFERRED TO THE TRANSFEREE. TRANSFEREE SHALL HAVE THE SOLE RIGHTS
AS BENEFICIARY THEREOF, INCLUDING SOLE RIGHTS RELATING TO ANY AMENDMENTS,
WHETHER INCREASES OR EXTENSIONS OR OTHER AMENDMENTS, AND WHETHER NOW EXISTING OR
HEREAFTER MADE. ALL AMENDMENTS ARE TO BE ADVISED DIRECT TO THE TRANSFEREE
WITHOUT NECESSITY OF ANY CONSENT OF OR NOTICE TO THE UNDERSIGNED BENEFICIARY.
THE ORIGINAL OF SUCH LETTER OF CREDIT IS RETURNED HEREWITH, AND WE ASK YOU TO
ENDORSE THE TRANSFER ON THE REVERSE THEREOF, AND FORWARD IT DIRECT TO THE
TRANSFEREE WITH YOUR CUSTOMARY NOTICE OF TRANSFER.
SINCERELY,
________________________
(BENEFICIARY'S NAME)
________________________
SIGNATURE OF BENEFICIARY
SIGNATURE AUTHENTICATED
________________________
(NAME OF BANK.)
________________________
AUTHORIZED SIGNATURE
<PAGE>
EXHIBIT 10.8
CHESTNUT BAY LLC,
a California limited liability company
Landlord
and
KANA COMMUNICATIONS, INC.,
a California corporation
Tenant
- --------------------------------------------------------------------------------
OFFICE / R&D LEASE
- --------------------------------------------------------------------------------
Dated
June 18, 1999
<PAGE>
OFFICE / R&D LEASE
Table of Contents
Summary of Terms
Recitals
Section 1. Lease of Premises
Section 2. Term of Lease
Section 3. Intentionally Deleted
Section 4. Possession; Delay in Delivery of Possession
Section 5. Rent
Section 6. Use
Section 7. Utilities
Section 8. Taxes
Section 9. Condition of Premises
Section 10. Repairs and Maintenance
Section 11. Alterations
Section 12. Entry
Section 13. Surrender of Premises; Holding Over
Section 14. Indemnity
Section 15. Insurance
Section 16. Trade Fixtures
Section 17. Communications Cables
Section 18. Signs
Section 19. Damage and Destruction
Section 20. Condemnation
Section 21. Assignment and Subletting
Section 22. Default
Section 23. Remedies
Section 24. Late Charge
Section 25. Default Interest
Section 26. Waiver
Section 27. Estoppel Certificates
Section 28. Attorney Fees
Section 29. Security for Tenant's Obligations
Section 30. Authority
Section 31. Notices
Section 32. Heirs and Successors
Section 33. Partial Invalidity
Section 34. Entire Agreement
Section 35. Time of Essence
Section 36. Amounts Deemed Rent
Section 37. Amendments
Section 38. Subordination, Nondisturbance and Attornment
Section 39. Merger
i
<PAGE>
Section 40. Right of Relocation (Intentionally Deleted)
Section 41. Options to Extend Term
Section 42. Determination of Monthly Rent for Extension Term
Section 43. Improvements
Section 44. Environmental Provisions
Section 45. Publicity
Section 46. Easements
Section 47. Covenants and Conditions
Section 48. Recordation
Section 49. Intentionally Deleted
Section 50. Security Measures
Section 51. Brokers
Section 52. Liability of Landlord
Section 53. Parking
Section 54 Offer
Section 55. Governing Law
Schedule of Exhibits
Exhibit A. Legal Description of Property
Exhibit B. Description of Premises
Exhibit C. Work Letter Agreement
Exhibit D. Commencement Date Memorandum
Exhibit E. Operating Expense Exclusions
Exhibit I. Environmental Documents
Exhibit S Subordination, Attornment and Non-Disturbance Agreement
ii
<PAGE>
SUMMARY OF TERMS
Date: June 18, 1999
Landlord: Chestnut Bay LLC, a California limited liability company
Tenant: Kana Communications, Inc., a California corporation
Guarantor: N/A
Premises: The two story office, research and development building located at 740
Bay Road, Redwood City, the floor plans for which are shown in attached Exhibit
B.
Rentable Area of Premises: approximately 60,985 rentable square feet
Section 2. Estimated Commencement Date ("Estimated Commencement Date"): October
1, 1999
Section 2. Lease Term: Seven (7) years
Section 5. Monthly Rent:
- --------------------------------------------------------------------------------
Lease Months Monthly Base Rent
1-12 $158,561
13-24 $164,111
25-36 $169,855
37-48 $175,799
49-60 $181,952
60-72 $188,321
72-84 $194,912
- --------------------------------------------------------------------------------
Section 5. Advance Rent: $158,561
Section 29. Letter of Credit Security: $1,400,000, subject to reduction pursuant
to the provisions of Section 29(b) below
Section 29. Security Deposit: $158,561
Section 31. Tenant's Address for Notices:
- --------------------------------------------------------------------------------
Prior to the Commencement Date: After the Commencement Date:
Kana Communications, Inc. Kana Communications, Inc.
87 Encina Ave 740 Bay Road
Palo Alto, Ca 94301 Redwood City, California
Att. Mark Gainey Att. Mark Gainey
- --------------------------------------------------------------------------------
iii
<PAGE>
Section 31. Landlord's Address for Notices:
- --------------------------------------------------------------------------------
With copy to:
Chestnut Bay LLC
c/o The Nicholson Company Mackenzie & Albritton
75 Cristich Lane One Post Street, Suite 500
Campbell, California San Francisco, CA 94104
Attn: Mike Newbro Attn: Paul Albritton, Esq.
- --------------------------------------------------------------------------------
Section 51. Broker: CB Richard Ellis, Inc., exclusively representing Landlord
("Landlord Broker") and Colliers International exclusively representing Tenant
("Tenant Broker").
Section 54. Parking Spaces: 201 non-exclusive spaces
The foregoing Summary of Terms is made primarily for the benefit of Landlord and
is not a part of this Lease. In the event of any conflict between any
information shown on this Summary and the Lease, the latter shall control.
iv
<PAGE>
OFFICE/RESEARCH & DEVELOPMENT LEASE
THIS OFFICE/R&D LEASE (Lease) is entered into as of June 18, 1999 by and between
CHESTNUT BAY LLC, a California limited liability company (Landlord) and Kana
Communications, Inc., a Delaware corporation (Tenant).
RECITALS
A. Landlord is owner of that certain two story building consisting of
approximately 60,985 rentable square feet and improvements (collectively, the
"Building") located at 740 Bay Road, Redwood City, California, in the County of
San Mateo (the "Property") as more particularly described in Exhibit A attached
hereto and incorporated herein.
B. Tenant desires to lease from Landlord and Landlord desires to lease to
Tenant the Building, the floor plans for which are shown on Exhibit B attached
hereto and incorporated herein (the "Premises"), which Premises constitute
approximately Sixty Thousand Nine Hundred Eighty-five (60,985) rentable square
feet.
C. Landlord desires to lease to Tenant and Tenant desires to lease from
Landlord the Premises on the terms and conditions contained in this Lease.
NOW THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties agree as follows:
Section 1. Lease of Premises. Landlord leases to Tenant and Tenant leases from
Landlord the Premises on the terms and conditions contained in this Lease.
Section 2. Term.
(a) Commencement Date. The Term of this Lease will commence ("Commencement
Date") on the earliest of the following dates:
(i) the date on which Tenant takes possession of all or a portion of the
Premises for the conduct of Tenant's business therein;
(ii) the date on which the Premises would have been Ready for Occupancy
(defined in Exhibit C) but for Tenant Delays (defined in Exhibit C); or
(iii) the date on which the Improvements (defined in Exhibit C) are Ready for
Occupancy.
The Term of the Lease will continue for the period of time specified as the Term
or until this Lease is terminated as otherwise provided for in the Lease.
(b) Commencement Date Memorandum. Following the Commencement Date, Tenant shall
execute and deliver to Landlord a memorandum of the Commencement Date in the
form of attached Exhibit D ("Commencement Date Memorandum"). The Commencement
Date Memorandum must acknowledge: (i) the Commencement Date; and (ii) Tenant's
acceptance of the Premises.
Section 3. Intentionally Deleted.
Section 4. Possession; Delay in Delivery of Possession.
(a) Subject to Landlord's Contractor's warranties set forth in Section 4.04 of
Exhibit C, the completion of Punch List Items as set forth therein and the
correction of any latent defects identified by Tenant in writing within the
first twelve (12) months following the substantial completion thereof by
Landlord's Contractor (not the result of Tenant Alterations or Tenant's
Architect's design defects), as of the Commencement Date, Tenant shall accept
possession of the Premises in its existing as is condition, including, but not
limited to, all patent and latent defects and subject to all applicable laws,
ordinances, and regulations governing and
1
<PAGE>
regulating the use of the Property and/or the Premises and any recorded
covenants, conditions, restrictions, easements, licenses, or right of ways.
(b) If Landlord, for any mason whatsoever, cannot deliver possession of the
Premises to Tenant on or before the Estimated Commencement Date as it may be
extended by any Unavoidable Delays and Tenant Delays (defined in Exhibit C) this
Lease shall not be void or voidable and no obligation of Tenant shall be
affected thereby, and neither Landlord nor Landlord's agents shall be liable to
Tenant for any loss or damage resulting therefrom.
Section 5. Rent.
(a) Tenant agrees to pay monthly rent ("Monthly Rent") during the Lease Term in
the amounts set forth in the Summary of Terms. Rent shall be payable without
deduction, offset, abatement, prior notice or demand, except as may otherwise
provided herein.
(b) The Monthly Rent shall be payable in advance on the first day of each month
at Landlord's address as provided herein or at such other address that Landlord
may from time to time designate by written notice to Tenant. In the event that
the Term commences on a date other than the first day of a calendar month, then
on the date of commencement of the Term, Tenant shall pay to Landlord as Monthly
Rent for the period from such date of commencement to the first day of the next
succeeding calendar month that proportion of the first month's Monthly Rent due
hereunder which the number of days between such date of commencement and the
first day of the next succeeding calendar month bears to thirty (30). In the
event that the Term for any reason ends on a date other than the last day of a
calendar month, then on the first day of the last partial calendar month of such
term, Tenant shall pay to Landlord as Monthly Rent for the period from said
first day of said last partial calendar month to and including the last day of
the Term that proportion of that Monthly Rent then due hereunder which the
number of days between said first day of said last partial calendar month and
the last day of the term hereof bears to thirty (30).
(c) Upon execution of this Lease, Tenant shall pay One Hundred Fifty Eight
Thousand Five Hundred Sixty-one Dollars ($158,561), which amount shall be
applied toward the first payment of Monthly Rent due hereunder.
(d) Intentionally Deleted.
(e) In addition to Monthly Rent, Tenant shall pay to Landlord as additional
rent, which shall be solely calculated and determined by Landlord, the
following:
(i) Taxes relating to the Property as set forth in Section 8 hereof;
(ii) Insurance premiums relating to the Property, as set forth in Section 15
hereof;
(iii) All maintenance, repair and replacement expenses relating to the Property
as set forth in Section 10 hereof and any deductibles or uninsured restoration
costs incurred under Section 19 hereof (provided if any such cost is based in
part on property unrelated to the Premises (including adjacent real property
owned by Landlord) then only that part of such cost that is fairly allocable to
the Premises shall be included in operating expenses);
(iv) Any other operating expenses incurred by Landlord in the operation of the
Property including Landlord's management fee subject to the limitations set
forth in Exhibit E;
(v) All charges, costs, expenses, and other amounts which Tenant is required
to pay hereunder, together with all interest, late charges, penalties, costs and
expenses, including, without limitation, reasonable attorneys fees, legal and
accounting expenses, collection costs, and court costs, that may accrue thereto
or be incurred in the event of Tenant's default, refusal, or failure to pay such
amounts, and all damages, costs, and expenses, including, but not limited to,
reasonable attorneys fees, which Landlord may incur by reason of any default by
Tenant or failure on Tenant's part to comply with the terms of this Lease.
Amounts due from Tenant pursuant to Subsections 5(e)(i-v) above are collectively
referred to herein as the Operating Expenses.
2
<PAGE>
(f) The Operating Expenses shall be paid as follows. Prior to the commencement
of each year of the Term or as soon thereafter as practicable, Landlord shall
give Tenant notice of its estimate of the Operating Expenses for the ensuing
year of the Term. On or before the first day of each month during the ensuing
year of the Term, Tenant shall pay to Landlord 1/12 of such estimated amount,
provided that if such a notice is not given prior to the commencement of the
ensuing year of the Term, Tenant shall continue to pay on the basis of the prior
year's estimate until the month after such notice is given. If at any time or
times it appears to Landlord that the actual Operating Expenses for the current
year of the Term will vary from its estimate by more than five percent (5%),
Landlord may, by notice to Tenant, revise its estimate for such year, and
subsequent monthly payments by Tenant for such year shall be based on such
revised estimate. Landlord's estimate of Operating Expenses for the first
partial year of the Lease Term is Twenty Thousand Eighty Four Dollars ($20,125)
per month.
(g) Within ninety (90) days after the close of each calendar year of the Term
or as soon after such 90-day period as practicable, Landlord shall deliver to
Tenant (i) a statement of the Operating Expenses for such calendar year showing
in reasonable detail the actual Operating Expenses incurred by Landlord,
certified by Landlord, which certified statement shall be final and binding upon
Landlord and Tenant, subject only to Tenant's Section 5(h) review, and (ii) a
statement of the payments made by Tenant under Section 5(f) above for such year.
If on the basis of such statements Tenant owes an amount that is less than the
estimated Operating Expenses for such year previously made by Tenant, Landlord
at its election shall either promptly refund the amount of the overpayment to
Tenant or credit such excess against Tenant's subsequent obligations to
Estimated Operating Expenses, provided that if such excess is discovered upon
the expiration of the Lease Term, it shall be paid over to Tenant within thirty
(30) days of discovery thereof by Landlord. If on the basis of such statements
Tenant owes an amount that is more than the estimated Operating Expenses for
such year previously made by Tenant, Tenant shall pay the deficiency to Landlord
within thirty (30) days after delivery of such statements.
(h) If Tenant disputes the amount of Additional Rent stated in the statement,
Tenant may designate, within ninety (90) days after receipt of that statement,
an independent certified public accountant reasonably approved by Landlord to
audit Landlord's records. Tenant is not entitled to request that audit however,
if Tenant is then in monetary default under this Lease beyond any applicable
notice and cure period. The accountant must be a member of a nationally
recognized accounting firm and must not charge a fee based on the amount of
Additional Rent that the accountant is able to save Tenant by the audit. Tenant
must give reasonable notice to Landlord of the request for audit and the audit
must be conducted in Landlord's offices at a reasonable time or times. The
operating expenses shall be appropriately adjusted on the basis of such audit
following certification by Tenant's accountant. If Tenant discovers an excess of
five percent (5%) or greater in the Operating Expenses charged to Tenant, then
in addition to such discrepancy amount Landlord shall pay the cost of Tenant's
accountant's review.
(i) At Landlord's election, Tenant shall pay to Landlord, within thirty (30)
days after receipt of invoice(s) therefore, any present Operating Expense
incurred by Landlord. If Tenant shall fail to pay any additional rent in
accordance with the terms hereof, Landlord shall have all the rights and
remedies with respect thereto as Landlord has for nonpayment of Monthly Rent.
Section 6. Use.
(a) Tenant will occupy and use the Premises for administrative offices,
corporate sales (including customer seminars), research and development and
related legal uses to the extent permitted under applicable zoning laws and for
no other use. Tenant agrees not to use the Premises for any immoral or unlawful
purpose. Tenant agrees that the Premises shall not in any case at any time be
used for a day care facility, a school, a hospital, a medical center, a
residence, the wholesale manufacture, processing, or distribution of food, food
products, or food ingredients or a playground.
(b) Tenant shall not commit any acts on the Premises, nor use the Premises in
any manner that will increase the existing rates for or cause the cancellation
of any fire, liability, or other insurance policy insuring or hereinafter
insuring the Premises or the improvements on the Premises. Tenant shall, at
Tenant's sole cost and expense, comply with all requirements of Landlord's
insurance carriers that are necessary for the
3
<PAGE>
continued maintenance at reasonable rates of fire and liability insurance
policies on the Premises and the improvements on the Premises. However, if such
compliance would result in capital repairs or improvements to the Property,
Landlord shall have the right to effect such compliance and Tenant shall pay to
Landlord the cost of such improvement amortized over the useful life of such
repair or improvement as reasonably determined by Landlord, (which, in any case,
shall not exceed the remainder of the Term for any repair to improvements unique
to Tenant).
(c) Tenant shall not use the Premises for any unlawful purpose, nor shall
Tenant cause, maintain or permit any nuisance, either private or public, in, on
or about the Premises. No sale by auction shall be permitted on the Premises.
Tenant shall not place any loads upon the floors, walls or ceiling which might
endanger or damage the structure; shall not place or spill, nor suffer to be
released or spilled, any harmful substances or Hazardous Materials (defined
herein) in the drainage system of the Building, nor on the Premises, the
Building, or the Property; and shall not overload any electrical, mechanical,
plumbing, sprinkler, or other systems. No waste materials or refuse shall be
permitted to remain on any part of the Premises or outside of the Building in
which the Premises are a part, except in trash container(s) placed inside
exterior enclosures approved by Landlord for that purpose, or inside of the
Building proper where designated by Landlord. No materials, supplies, equipment,
finished products or semi-finished products, raw materials or articles of any
nature shall be stored or permitted to remain on the roof (other than air
conditioning units and antenna installations approved by Landlord) nor outside
the Premises. Tenant shall not place anything or allow anything to be placed
near any window or door which may appear unsightly from outside the Premises. No
loudspeaker or other device, system or apparatus which can be heard outside the
Premises shall be used in or at the Premises. Tenant shall not commit or suffer
to be committed any waste in or upon the Premises. Tenant covenants and agrees
Tenant shall not be entitled to any reduction of rent hereunder nor shall
Landlord have any liability to Tenant because of diminution of right, air or
view by any structure which may be hereafter erected (whether or not by
Landlord), by the use of the Building by other occupants, or by the use of
neighboring buildings or areas by others. Tenant shall comply with any covenant,
condition or restriction affecting the Premises, which covenant, condition or
restriction is of record as of the date of this Lease or, as to covenants,
conditions or restrictions not of record as of the date of this Lease, only such
covenants, conditions or restrictions which do not materially and adversely
affect the Tenant's occupancy or use of the Premises. The provisions of this
Section are for the benefit of Landlord only and shall not be construed to be
for the benefit of any other person, or occupant of the Premises.
(d) Except as otherwise provided in Section 6(e) and following Tenant's
acceptance of delivery of the Premises under Exhibit C, Tenant shall,
thereafter, at Tenant's sole cost, promptly comply with all laws, statutes,
ordinances, roles, regulations, orders, recorded covenants and restrictions, and
requirements of all municipal, state, and federal authorities now or later in
force, including, but not limited to, all provisions of the Americans with
Disabilities Act (the ADA), all seismic and other earthquake protection measures
being required by any governmental entity with regard to the Premises, any
requirements of Title 24 of the California Code of Regulations, the requirements
of any board of fire underwriters or other similar body now or in the future
constituted, and the direction or occupancy certificate issued by public
officers (collectively, the Legal Requirements), insofar as they relate to the
condition, use, or occupancy of the Premises, the construction of any
Alterations (as hereinafter defined). If Tenant's compliance with Legal
Requirements results in capital repairs or improvements to the Property,
Landlord shall effect such compliance and Tenant shall pay to Landlord the cost
of such improvement. The judgment of any court of competent jurisdiction or the
admission of Tenant in any action or proceeding against Tenant that Tenant has
violated any Legal Requirement in the condition, use, or occupancy of the
Premises, will be conclusive of that fact as between Landlord and Tenant.
Notwithstanding anything to the contrary herein, in no event shall Tenant be
required to perform or pay for alterations to the Base Building Improvements
that are of a capital or structural nature and are required by Legal
Requirements in effect prior to the Commencement Date unless such changes are
required either because of alterations voluntarily made to the Premises by
Tenant or due to Tenant's particular use of the Premises (as opposed to
industrial uses generally).
(e) Except in such circumstances where Tenant's compliance with Legal
Requirements arises in connection with Tenant's special use of the Premises, the
correction or remediation of a violation arising out of or in connection with
the construction of Alterations done by or on behalf of Tenant or which
violation arises out
4
<PAGE>
of or results from the actions of Tenant or any of Tenant's contractors,
employees, licensees, invitees, or agents, Landlord shall be responsible for
compliance with Legal Requirements to the extent that such compliance requires
physical modifications to the foundation, roof, or structural walls of the
Building.
Section 7. Utilities. Tenant shall pay promptly (as the same becomes due)
directly to the entity or authority providing and/or billing the same (or
reimburse the entity paying for the same, as the case may be), all charges for
water, gas, electricity, telephone, telex and other electronic communication
service, sewer service, waste and refuse collection, and any other utilities,
materials, or services furnished directly or indirectly to, for the benefit of,
and/or used by Tenant on or about the Premises during the Term, including,
without limitation, any charges imposed after the Term commences. In the event
such charges also apply jointly to other tenant(s) of Landlord where there is a
common meter or common usage with other tenant(s), such charges shall be
allocated to the Premises by square footage as reasonably calculated and
determined solely by Landlord. In no event shall Landlord be liable for
billings, payment, advancement of money for payment, or reimbursement to others
for or with respect to any of the above services, materials, or charges, and
Tenant shall not be entitled to any abatement or reduction of Rent nor any
rights of constructive eviction or termination by reason of any interruption or
failure of utilities, material, or services to the Premises during the Term,
except and to the extent that such interruption or failure of utilities,
material, or services to the Premises exceeds seven consecutive days and results
from the active negligence or willful misconduct of Landlord or any of
Landlord's constituent members, partners, agents, or employees.
Section 8. Taxes.
(a) Tenant shall, as additional rent, reimburse Landlord for all Taxes (as
hereinafter defined) and increases in Taxes which result from reassessment of
the Property due to changes in ownership thereof during the Term or which result
from the reassessment of the Property due to the improvement thereof subsequent
to the Commencement Date, and all installments of assessments that are due or
become due from and after the Delivery Date and on or prior to the expiration or
sooner termination of this Lease. As used herein the term Taxes shall mean and
include (i) all taxes, assessments, levies, and other charges of any kind or
nature whatsoever, general and special, foreseen and unforeseen (including,
without limitation, all installments of principal and interest required to pay
any general or special assessments of public improvements, and any increases
resulting from reassessments caused by any change in ownership of the Premises
or otherwise) now or hereafter imposed by any governmental or quasi-governmental
authority or special district having the direct or indirect power to tax or levy
assessments, which are levied or assessed against, or with respect to the value,
occupancy, or use of: all or any portion of the Property (as now constructed or
as may at any time hereafter be constructed, altered, or otherwise changed) or
Landlord's interest therein; any improvements located within the Premises
(regardless of ownership); the fixtures, equipment and other property of
Landlord, real or personal, that are an integral part of and located in the
Premises; and landscaping areas, walkways, Parking Lot (defined herein), parking
areas, public utilities, or energy within the Premises; (ii) all charges,
levies, or fees imposed by reason of environmental regulation or other
governmental control of the Premises, provided however that Taxes shall not
include any charges, levies, or fees imposed by reason of the Existing
Environmental Conditions (defined herein); (iii) any and all permit, inspection,
and license fees and other public charges of whatever nature that are assessed
against the Property or arise because of the occupancy, use, or possession of
the Property (including, but not limited to transit charges, traffic impact
fees, housing fund assessments, open space charges, childcare fees, school fees,
or any taxes on, or which shall be measured by, any rents or rental income,
taxes on personal property, whether of Landlord (if used for the maintenance or
operation of the Building) or Tenant); and (iv) all costs and fees (including
reasonable attorney fees) incurred by Landlord or Tenant in reasonably
contesting any Tax and in negotiation with public authorities as to any Tax. If
at any time during the Term, the taxation or assessment of the Premises
prevailing as of the Commencement Date shall be altered so that in lieu of or in
addition to any Tax described above there shall be levied, assessed, or imposed
(whether by reason of a change in the method of taxation or assessment, creation
of a new tax or charge, or any other cause) an alternate or additional tax or
charge: (v) on the value, use, or occupancy of the Premises or Landlord's
interest therein; (w) on or measured by the gross receipts, income, or rentals
from the Premises; (x) on Landlord's business of leasing the Premises; (y) based
on vehicular ownership, parking, employment, production, or the like; or (z)
computed in any manner with respect to the operation of the Premises, then any
such tax or charge, however, designated, shall be included within the meaning of
the term Taxes for purposes of this Lease. If any Tax is based in part on
property or rents unrelated to the Premises (including adjacent real property
owned by Landlord) then only that part of such Tax that is fairly allocable to
the
5
<PAGE>
Premises shall be included within the meaning of the term Taxes. Notwithstanding
the foregoing, the term Taxes shall not include and Tenant shall not be
responsible for any taxes in the nature of estate, inheritance, transfer, gift,
or franchise taxes of Landlord or the federal or state net income tax imposed on
Landlord's income from all sources.
(b) Tenant shall pay directly to the public authorities charged with the
collection on or before the last day on which payment may be made without
penalty or interest, as additional rent, all taxes, permit, inspection, and
license fees, and other public charges of whatever nature that are assessed
against personal property or trade fixtures owned by Tenant or others and/or
placed by Tenant in or about the Premises, and any interest or penalties
applicable thereto (if any) for non-payment or late payments, arising subsequent
to the Commencement Date, and all installments of assessments that are due or
become due from and after the Commencement Date and on or prior to the
expiration or sooner termination of this Lease.
(c) All Taxes levied on the Premises for the tax year in which the Commencement
Date falls shall be appropriately prorated between Landlord and Tenant, so that
Tenant's obligation will reflect the portion of that tax year after the
Commencement Date. Taxes levied on the Premises for the tax year in which the
Termination Date occurs shall be similarly prorated between Landlord and Tenant
to reflect the period of Tenant's possession of the Premises during that tax
year.
(d) If Tenant has not paid any Tax required by this Lease to be paid by Tenant
before its delinquency, or if a Tax is contested by Tenant and that Tax has not
been paid within thirty (30) days after a final determination of the validity,
legality, or amount of the Tax, then Landlord may, but shall not be required to,
pay and discharge the Tax. If a Tax is paid by Landlord, the amount of that
payment shall be due and payable to Landlord by Tenant with the next succeeding
rental installment, and shall bear interest at the lesser of ten percent (10%)
per annum or the highest rate allowed by law from the date of the payment by
Landlord until repayment by Tenant.
(e) If any assessments for local improvements become a lien after the
Commencement Date, Tenant shall pay only the installments of the assessments
that become due and payable during the Term.
Section 9. Condition of Premises.
(a) Subject to Landlord's Contractor's warranties set forth in Section 4.04 of
Exhibit C, latent defects identified by Tenant as provided in Section 4(a) and
the completion of Punch List Items as set forth in Exhibit C, Tenant accepts the
Premises, the Building and Improvements included in the Premises in their
condition as of the Commencement Date and, except as otherwise may be set forth
herein, without representation or warranty by Landlord as to the condition of
such Premises or as to the use of occupancy which may be made thereof.
(b) Landlord represents, warrants and covenants that as of the date hereof it
has good and marketable title to the Premises in fee simple and that the same is
subject to no leases, tenancies, encumbrances, liens, defects in title or
restrictions on the transfer of all or a part thereof that would materially and
adversely affect Tenant's use or possession of the Premises. Landlord further
covenants that there are no restrictive covenants which will prevent the Tenant
from conducting the principally permitted business for the Premises under this
Lease.
Section 10. Repairs and Maintenance.
(a) Tenant shall, at Tenant's sole expense, keep and maintain the Premises,
including, without limitation, interior walls, roof membrane, heating,
ventilation and air conditioning systems, operating systems, fire sprinklers,
alarms, all windows (interior and exterior), window frames, plate glass and
glazing, truck doors, plumbing systems (such as water and drain lines, sinks,
toilets, faucets, drains, showers, and water fountains), electrical systems
(such as panels, conduits, outlets, and lighting fixtures, including lamps,
bulbs, tubes, and ballasts), heating and air conditioning systems (such as
compressors, fans, air handlers, ducts, mixing boxes, thermostats, time clocks,
supply and return grills), interior surfaces of the Premises, store fronts, down
mechanisms, latches, locks, skylights (if any), fire extinguishing systems and
equipment, and all other interior improvements of any nature whatsoever, that
are part of the Premises. However, in no
6
<PAGE>
event shall Tenant's obligation to repair under this subsection extend to: (i)
damage and repairs covered under any insurance policy carried by Landlord in
connection with the Building; (ii) damage caused by any defects in the design,
construction or materials of the Base Building Improvements, or construction of
the Tenant Improvements in the Premises by Landlord's Contractor and covered
under any warranties of Landlord's contractors; (iii) damage caused in whole or
in part by the sole gross negligence or willful misconduct of Landlord or
Landlord's agents, employees, invitees or licensees (provided Tenant shall
contribute to the cost of any such repair the amount of any insurance proceeds
received by Tenant for such damage from insurance proceeds carried pursuant to
the terms of this Lease); or (iv) damage by fire and other casualties, or acts
of governmental authorities, or acts of God and the elements except as provided
in Section 19 and 20 herein, respectively. Tenant will keep such items in good,
clean and first-class condition and repair, including, without limitation,
through a janitorial service contract approved by Landlord, and by replacing
such items as needed, and deliver to Landlord physical possession of the
Premises at the termination of this Lease or any sooner expiration thereof, in
good condition and repair, reasonable wear and tear excepted. All repairs and
replacements required of Tenant shall be promptly made with new materials of
like kind and quality. If the work affects the structural elements of the
Premises or if the estimated cost of any item of repair or replacement is in
excess of Ten Thousand Dollars ($10,000), Tenant shall first obtain Landlord's
written approval of the scope of the work, the plans for the work, the materials
to be used, and the contractor hired to perform the work, which approval shall
not be unreasonably withheld or delayed. At Landlord's election, such
maintenance responsibilities and charges shall be performed by Landlord and
Tenant shall reimburse Landlord as additional rent the cost of such maintenance
responsibilities and charges. If any of the above maintenance responsibilities
jointly apply to Tenant and other tenant(s) of Landlord where there is common
usage with other tenant(s) such additional rent shall be allocated to the
Premises by square footage or other equitable basis as calculated and determined
by Landlord.
(b) At Landlord's election, Tenant shall maintain a service contract for the
maintenance of all heating, air conditioning, and ventilation equipment
servicing the Premises with a licensed repair and maintenance contractor
approved by Landlord, which approval shall not be unreasonably withheld or
delayed. The contract should provide for periodic inspections and servicing of
the heating, air conditioning, and ventilation equipment at least once every
ninety (90) days during the term of the Lease.
(c) If at any time during the Term, including renewals or extensions thereof,
Tenant fails to maintain the Premises beyond any applicable notice and cure
period, make any repairs or replacements as required by this Section, or
maintain service contracts required by this Section, Landlord shall have the
right to, but shall not be required to, enter the Premises and perform the
maintenance or make the repairs or replacements or enter into appropriate
service contracts, as the case may be. Any sums expended by Landlord in so
doing, together with interest at the lesser of ten percent (10%) per annum or
the highest rate allowed by law, shall be deemed additional rent and shall be
immediately due from Tenant on demand of Landlord.
(d) Tenant waives the provisions of Civil Code 1941 and 1942 and any other law
that would require Landlord to maintain the Premises in a tenantable condition
or would provide Tenant with the right to make repairs and deduct the cost of
those repairs from the rent.
(e) Landlord shall maintain the building foundation, the exterior wall
structure, and the roof structure of the Premises, load-bearing portions of
interior walls of the Building, (excluding wall coverings, painting, glass, and
doors). Except as set forth in Exhibit C, Landlord will not be required to make
any, and Tenant shall be responsible for the cost of, any repair resulting from:
any Alteration or modification to the Building or to mechanical equipment within
the Building performed by, for, or because of Tenant or to special equipment or
systems installed by, for, or because of Tenant; the installation, use, or
operation of Tenant's property, fixtures, and equipment; the moving of Tenant's
property in or out of the Building or in and about the Premises; Tenant's use or
occupancy of the Premises in violation of Section 6 of this Lease or in the
manner not contemplated by the parties at the time of the execution of this
Lease; the acts or omissions of Tenant and Tenant's employees, agents, invitees,
subtenants, licensees, or contractors (provided Landlord shall contribute to the
cost of any such repair the amount of any insurance proceeds received by
Landlord for such damage from insurance proceeds carded pursuant to the terms of
this Lease); fire and other casualty, except
7
<PAGE>
as provided by Section 19 of this Lease; or condemnation, except as provided in
Section 20 of this Lease. Landlord shall have no obligation to make repairs
under this Section until thirty (30) days after receipt of written notice from
Tenant of the need for repairs after which Landlord shall diligently prosecute
such repairs to completion. Tenant waives any right to repair at the expense of
Landlord under any applicable governmental laws, ordinances, statutes, orders,
or regulations now or later in effect.
(f) Landlord shall keep and maintain the areas exterior of the Building and all
grounds and landscaping, sidewalks and the Parking Lot (defined herein) in good
condition, and repair, including adjacent real property owned by Landlord
(collectively, Exterior Maintenance). To the extent not included in Operating
Expenses, upon Landlord's election, within ten (10) days after receipt of an
invoice from Landlord, Tenant shall, as additional rent, reimburse Landlord for
all extraordinary costs incurred by Landlord in such Exterior Maintenance which
repair or maintenance arises out of or results from the actions of Tenant or any
of Tenant's contractors, employees, licensees, invitees, or agents.
Section 11. Alterations.
(a) Tenant shall not make or allow any alterations, additions, or improvements
to the Premises or any part of the Premises (collectively, Alterations), without
Landlord's prior consent, which shall not be unreasonably withheld. Consent,
however, may be conditioned on the receipt by, and approval of, Landlord of a
set of plans and specifications for the alterations no later than ten (10)
business days prior to the scheduled construction of the alterations as well as
the use by Tenant of a contractor or contractors approved by Landlord, which
approval shall not be unreasonably withheld or delayed. Notwithstanding the
foregoing, Landlord's consent shall not be required for any Alterations which do
not affect the Building structure, Building systems, or penetrate the floor or
ceiling of the Premises and which cost less than Twenty Thousand Dollars
($20,000) annually, provided each such Alteration is otherwise made in
compliance with the terms of this Lease. Landlord may withhold approval of any
contractor which does not meet the qualifications requirements of any Landlord
lender; including the requirement that such contractor employ union labor in
accordance with the Labor Covenant (contained in Exhibit S). The installation of
furnishings, fixtures, equipment, or decorative improvements, none of which
shall affect operating systems or the structure of the Premises shall not
constitute Alterations. All Alterations and any furnishings, fixtures,
equipment, or decorative improvements remaining on the Premises after the
termination or earlier expiration of this Lease shall immediately become
Landlord's property and, at the termination or earlier expiration of this Lease,
shall remain on the Premises without compensation to Tenant. Provided Landlord
identifies such Alterations for possible removal at the time of Landlord's
initial approval for installation, and further provided Landlord subsequently
elects by notice to Tenant to have Tenant remove same at the end of the Term,
then Tenant shall cause such removal and/or restoration to be done at Tenant's
sole cost and expense and Tenant shall restore the portions of the Premises
subject to such removal to the condition of as of the Commencement Date of this
Lease. If Landlord requires Tenant to remove any Alterations and any
furnishings, fixtures, equipment, or decorative improvements and Tenant fails to
cause such removal and/or restoration on or prior to the termination or other
earlier expiration of this Lease, such failure shall be deemed a holdover under
Section 13(b) of this Lease, and in addition to any other damages owing Landlord
under this Section, Tenant shall owe Holdover Rent (as hereinafter defined) for
each and every day of such failure. All improvements, additions, alterations,
and repairs and the removal and restoration thereof, if required under this
Lease, shall be performed in accordance with all applicable laws and at Tenant's
sole expense. Tenant will indemnify and defend Landlord for all liens, claims,
or damages caused by remodeling, improvements, additions, alterations, and
repairs and the removal and restoration thereof, if required under this Lease.
The foregoing notwithstanding, nothing in this Section 11 shall require Tenant
to remove the initial Tenant Improvements installed by Landlord in accordance
with the Approved Tenant Improvement Drawings as set forth in Exhibit C.
(b) Before any contract or subcontract is let or other agreement executed for
the performance of any service, or the furnishing of any materials, and before
any work of any kind or nature is commenced on the construction of Alterations
the total cost for which will exceed One Hundred Thousand Dollars ($100,000)
8
<PAGE>
per completed project, Tenant shall procure and deliver to Landlord a completion
bond and a payment bond, both in form and substance satisfactory to Landlord,
issued by reputable surety corporations or bonding corporations qualified to do
business in California, guaranteeing or otherwise assuring Landlord that the
construction of the Alterations will proceed to completion with due diligence,
that the reconstruction, when completed, will be fully paid for, and that the
Premises will remain free of all mechanics', laborers' or materialmen's liens or
claimed liens on account of any services or materials furnished or labor or work
performed in connection with the construction of the Alterations.
(c) At least five (5) business days before any construction commences or
materials are delivered for any alterations that Tenant is making to the
Premises, whether or not Landlord's consent is required, Tenant shall give
written notice to Landlord as to when the construction is to commence or the
materials are to be delivered. Landlord shall then have the right to post and
maintain on the Premises any notices that are required to protect Landlord and
Landlord's interest in the Premises from any liens for work and labor performed
or materials furnished in making the alterations. It shall be Tenant's duty to
keep the Premises free and clear of all liens, claims, and demands for work
performed, materials furnished, or operations conducted on the Premises by or on
behalf of Tenant. In the event that Tenant fails to provide Landlord with the
notice required by this Section 11 (c), Landlord shall have the right to cause
the cessation of such construction and shall have the further right to file
notices of cessation and/or completion, so as to allow the Premises to be
protected from mechanics' liens.
(d) Tenant will not at any time permit any mechanics', laborers', or
materialmen's liens to stand against the Premises for any labor or material
furnished to Tenant or claimed to have been furnished to Tenant or Tenant's
agents, contractors, or subtenant's, in connection with work of any character
performed or claimed to have been performed on the Premises by or at the
direction or sufferance of Tenant. Tenant shall have the right to contest the
validity or amount of any lien or claimed lien, upon giving to Landlord a bond
assuring that the lien or claimed lien will be paid, when and to the extent that
the lien is finally determined to be valid and owing. On final determination of
the lien or claim of lien, Tenant will immediately pay any final judgment
rendered, with all property costs and charges, and shall have the lien released
or judgment satisfied at Tenant's sole expense. If, within ten (10) days of the
filing of any such lien, Tenant fails to pay or provide to Landlord a bond
assuring that the lien or claimed lien will be paid, Landlord shall have the
right, upon five (5) days' written notice to Tenant, to pay or bond over such
lien, and take such actions as are necessary to have the lien released and
prevent a judgment against the Premises or Property, and the amount paid by
Landlord shall be immediately due and payable to Landlord, and shall bear
interest at the lesser of ten percent (10%) per annum or the highest rate
allowed by law from the date of payment by Landlord until repayment by Tenant.
Section 12. Entry.
(a) Landlord and its agents may enter the Premises at any reasonable time upon
reasonable advance notice to Tenant, or immediately in the case of an emergency,
for the purpose of (i) inspecting the Premises; (ii) posting notices of
nonresponsibility; (iii) supplying any service to be provided by Landlord to
Tenant; (iv) showing the Premises to prospective purchasers, mortgagees, or
during the last six months of the term to prospective tenant's; (v) making
necessary alterations, additions, or repairs as required by this Lease or to
otherwise perform Landlord's duties under this Lease; (vi) determining whether
Tenant is complying with the terms of this Lease; (vii) performing Tenant's
obligations when Tenant has failed to do so after written notice from Landlord,
if required by the terms of this Lease; (viii) placing on the Premises ordinary
for sale signs or, during the last six (6) months of the Term, for lease signs;
(ix) doing of other lawful acts that may be necessary to protect Landlord's
interest in the Premises under this Lease; and (x) responding to an emergency.
Landlord shall conduct all of Landlord's activities on the Premises in a manner
intended to cause the least possible interference with Tenant and Tenant's use
of the Premises.
(b) Landlord shall have the right to use any means Landlord deems necessary and
proper to enter the Premises in an emergency. Any entry into the Premises
obtained by Landlord in accordance with this Section shall not be a forcible or
unlawful entry into, or a detainer of, the Premises, or an eviction, actual or
constructive, of Tenant from the Premises, nor shall such entry give rise to a
claim for rent abatement.
9
<PAGE>
Section 13. Surrender of Premises; Holding Over.
(a) Tenant agrees on the last day of the Term, or on the sooner termination of
this Lease, to surrender the Premises, together with all alterations, additions,
and improvements which may have been made in, to, or on the Premises (except
moveable trade fixtures installed at the expense of Tenant and subject to
Landlord's election under Section 11 (a), if any), promptly and peaceably to
Landlord in good condition and repair (normal wear and tear excepted). If the
Lease expires upon the expiration of the initial Lease Term (without exercise of
any extension options) Tenant's surrender obligation shall include, without
limitation: all interior walls freshly painted or cleaned so that they appear
freshly painted; all tile floors cleaned and waxed; all carpets cleaned and
shampooed; all broken, marred, stained or non-conforming acoustical ceiling
tiles replaced; all windows washed inside; the air conditioning and heating
systems serviced by a reputable and licensed service firm, left in good
operating condition and repair as so certified to by such firm; the plumbing,
electrical, and lighting systems left in good order and repair, including
replacement of any burned out, discolored, or broken light bulbs, ballasts, or
lenses. If Tenant fails to surrender the Premises at the end of the Term or
other sooner termination of this Lease, then Tenant shall indemnify Landlord
against loss or liability resulting from the delay by Tenant in so surrendering
the Premises, including, without limitation, any claims made by any succeeding
tenant founded on such delay. No act of conduct of Landlord, whether consisting
of the acceptance of the keys to the Premises, or otherwise, shall be deemed to
be or constitute an acceptance of the surrender of the Premises by Tenant prior
to the expiration of the Term hereof, and acceptance by Landlord of surrender by
Tenant shall only flow from and must be evidenced by a written acknowledgment of
acceptance of surrender signed by Landlord. The voluntary or other surrender of
this Lease or the Premises by Tenant or a mutual cancellation of this Lease
shall not work as a merger and, at the option of Landlord, shall either
terminate all existing subleases or operate as an assignment or attornment to
Landlord of such subleases as Landlord may elect to retain. After the expiration
or earlier termination of this Lease, Tenant shall execute, acknowledge, and
deliver to Landlord, within ten (10) days after written demand from Landlord to
Tenant, any quitclaim deed or other document required by any reputable title
company, licensed to operation in the State of California, to remove the cloud
or encumbrance created by this Lease from the real property containing the
Premises.
(b) At the end of the Term, or any extension, should Tenant hold over for any
reason, it is agreed that in the absence of a written agreement to the contrary,
that tenancy shall be at sufferance only and not a renewal of this Lease, nor an
extension for any further term. Tenant shall pay, for each month or portion
thereof of such holdover, Monthly Rent in an amount equal to one hundred fifty
percent (150%) of the Monthly Rent payable for the month immediately prior to
the end of the Term or any extension thereof thereafter (Holdover Rent) and such
tenancy shall be subject to every other term, covenant, and condition in this
Lease that is consistent with and not contrary to a tenancy at sufferance.
Section 14. Indemnity.
(a) Except to the extent caused by Landlord's active negligence or willful
misconduct, Tenant agrees to indemnify, defend, and hold Landlord, and
Landlord's employees, agents, constituent parties, members, shareholders,
directors, lenders, affiliates and contractors harmless from all liability,
penalties, losses, damages, costs, expenses, causes of action, claims, or
judgments, including, but not limited to, attorney fees and costs, arising by
reason of any death, bodily injury, personal injury, or property damage
resulting from: (i) any cause occurring in or about or resulting from an
occurrence in or about the Premises during the Term, (ii) act, work, or things
done or permitted to be done or otherwise suffered, or any omission to act, in
or about the Premises by Tenant or by any of Tenant's agents, subtenants,
officers, directors, employees, contractors, licensees, or invitees, (iii) the
negligence or willful misconduct of Tenant or Tenant's agents, subtenants,
employees, invitees, licensees, contractors, and subcontractors, wherever it
occurs, or (iv) an Event of Default by Tenant. The provisions of this Section
14(a) shall survive the expiration or sooner termination of this Lease.
(b) Except as otherwise provided in this Lease, Landlord shall not be liable to
Tenant, nor shall Tenant be entitled to terminate this Lease or to any abatement
of rent for any damage to Tenant's property or any injury to Tenant or any of
Tenant's employees, agents, or invitees, or loss to Tenant's business arising
out of any cause, other than Landlord's active gross negligence or willful
misconduct, including, but not limited to, (i) the failure, interruption, or
installation of any heating, air conditioning, or ventilation equipment; (ii)
the
10
<PAGE>
failure, interruption, or installation of any fire sprinklers or alarms; (iii)
the loss or interruption of any utility service; (iv) the failure to furnish or
delay in furnishing any utilities or services; (v) the limitation, curtailment,
rationing, or restriction on the use of water or electricity, gas or any other
form of utility; (vi) vandalism, malicious mischief, or forcible entry by
unauthorized persons or the criminal act of any person; or (vii) seepage,
flooding, or other penetration of water into any portion of the Premises. The
provisions of this Section 14(b) shall survive the expiration or sooner
termination of this Lease. Notwithstanding anything herein to the contrary,
Tenant shall not be deemed in any way to have waived any claims against Landlord
based on the active gross negligence or willful misconduct of Landlord or
Landlord's agents, employees or contractors.
Section 15. Insurance.
(a) Landlord agrees at all times during the Term and during any extension
thereof, to purchase and keep in force policy(ies) of insurance coveting: (i)
loss or damage to the Premises by reason of fire (extended coverage), flood,
systems breakdown and those perils included within the classification of all
risks insurance (with sprinkler damage and other appropriate endorsements),
which insurance shall be in the amount of the full replacement value of the
Premises as determined by insurance company appraisers or Landlord's insurance
agent; (ii) Landlord's liability insurance; and (iii) rental income insurance in
the amount of one hundred (100%) percent of up to twelve (12) months' Monthly
Rent (plus sums paid during such period as additional rent), and (iv) such other
coverages as Landlord deems in Landlord's reasonable discretion to be customary
and necessary for the Building, including earthquake coverage or as may be
required by Landlord's lender having a first lien on the Premises. Such coverage
shall exclude routine maintenance and repairs and incidental damage or
destruction caused by accidents or vandalism for which Tenant is responsible
under this Lease. Tenant agrees to pay Landlord as additional rent in accordance
with Section 5(e) of this Lease Tenant's proportionate share of the cost of such
insurance coverage which shall be allocated during the Term to the Premises by
building square footage or other equitable basis as calculated and reasonably
determined by Landlord. If the cost of such insurance is based in part on
property unrelated to the Premises (including adjacent real property owned by
Landlord) then only that part of such insurance premium that is fairly allocable
to the Premises shall be included in Tenant's Operating Expenses. If such
insurance cost is increased due to Tenant's particular use of the Premises, then
Tenant agrees to pay to Landlord the full cost of such increase. Tenant shall
have no interest in nor any right to the proceeds of any insurance procured by
Landlord for or with respect to the Premises, except for amounts specifically
designated by the carrier as compensation for (i) tenant Alterations installed
and paid for by Tenant; (ii) Tenant's furniture, fixtures, and equipment; or
(iii) Tenant's moving or relocation costs.
(b) At all times during the Lease Term and during any holdover period, Tenant,
at its sole expense, shall procure and maintain the following types of
insurance:
(i) General Liability and Workers' Compensation Insurance. Tenant shall, at
Tenant's expense, obtain and keep in force during the Term of this Lease a
policy of workers' compensation insurance and a policy of commercial general
liability insurance with Broad Form Liability, and cross-liability endorsements,
insuring Landlord and Tenant against any liability arising out of the use or
occupancy of the Premises and all areas appurtenant thereto, including parking
areas. Such insurance shall be in an amount satisfactory to Landlord of not less
than $3,000,000 per occurrence and $3,000,000 annually in the aggregate for all
claims. Such policy shall insure performance by Tenant of the indemnity
provisions of Section 14 hereof.
(ii) Insurance for Tenant's Personal Property, Fixtures and Equipment. Tenant
shall, at Tenant's expense, obtain and keep in force during the Term of this
Lease an all risk insurance policy with a sprinkler damage endorsement for
Tenant's personal property, inventory, alterations, fixtures, equipment, plate
glass, and any Tenant non-standard leasehold improvements located on the
Premises, in an amount not less than one hundred percent (100%) of their actual
replacement value, providing coverage for risk of direct physical loss or
damage, including sprinkler leakage, vandalism, and malicious mischief. The
proceeds of such insurance, so long as this Lease remains in effect, shall be
used to repair or replace the personal property, inventory, Alterations,
fixtures, equipment, and leasehold improvements so insured. Provided such
proceeds are applied as set forth in this Section 15(b)(ii), any insurance
proceeds received by Tenant under such policy shall be the sole property of
Tenant, and Landlord shall have no rights thereto.
11
<PAGE>
(c) Each policy of insurance required to be carried by Tenant or Landlord shall
be issued by a responsible insurance company authorized to do business in
California with an A.M. Best rating of at least A-, or a higher rating if
required by a lender having the first lien on the Premises, and shall be issued
in the names of Landlord, Tenant, and any beneficiary under any deed of trust
coveting the Premises, if required by the deed of trust, as their respective
interests may appear. Tenant shall deliver a certificate for each insurance
policy to Landlord with all relevant endorsements prior to Tenant occupancy of
the Premises. Landlord shall deliver a certificate for each insurance policy to
Tenant with all relevant endorsements upon written request. Each policy of
insurance shall be primary and noncontributory with any policies carried by
Landlord, to the extent obtainable, shall provide that any loss shall be payable
notwithstanding any act or negligence of Landlord or any of Landlord's agents,
employees, or contractors that might otherwise result in forfeiture of
insurance, shall contain a cross liability endorsement, and shall contain a
severability clause. Each insurance policy shall provide that a thirty (30) day
notice of cancellation and of any material modification of coverage shall be
given to all named insureds. The insurance coverage required under this Section
may be carried under a blanket policy insuring other locations, provided that
the Premises covered by this Lease are specifically identified as included under
that policy. Tenant agrees that upon the failure to insure as provided in this
Lease, or to pay the premiums in the insurance, Landlord may contract for the
insurance and pay the premiums, and all sums expended by Landlord for the
insurance shall be considered additional rent under this Lease and shall be
immediately repayable by Tenant.
(d) At all times during the Term and any extensions or renewals, Tenant agrees
to keep and maintain, or cause Tenant's agents, subtenants, contractors, or
subcontractors to keep and maintain, workmen's compensation insurance and other
forms of insurance as may from time to time be required by law or may otherwise
be necessary to protect Landlord and the Premises from claims of any person who
may at any time work on the Premises, whether as a servant, agent, or employee
of Tenant or otherwise. This insurance shall be maintained at the expense of
Tenant or Tenant's agents, subtenants, contractors, or subcontractors and not at
the expense of Landlord.
(e) Landlord agrees that it will tender and turn over to Tenant or to Tenant's
insurers the defense of any claims, demands, or suits instituted, made, or
brought against Landlord or against Landlord and Tenant jointly, within the
scope of this Section 15. However, Landlord shall have the right to approve the
selection of legal counsel, to the extent that selection is within Tenant's
control, which approval shall not be unreasonably withheld or delayed.
(f) The parties hereto release each other, and their respective agents and
employees, from any liability for injury to any person or damage to property
that is caused by or results from any risk insured against under any valid and
collectible insurance policy carried by either of the parties which contains a
waiver of subrogation by the insurer and is in force at the time of such injury
or damage. However, neither party shall be released from any such liability to
the extent any damages resulting from such injury or damage are not covered by
the recovery obtained by the damaged party from such insurance. This release
shall be in effect only so long as the applicable insurance policy contains a
clause to the effect that this release shall not affect the right of the insured
to recover under such policy. Each party shall cause each insurance policy
obtained by it to provide that the insurer waives all right of recovery by way
of subrogation against the other party and its agents and employees in
connection with any injury or damage covered by such policy.
Section 16. Trade Fixtures.
(a) Tenant shall have the right, at any time and from time to time during the
Term and any renewals or extensions, at Tenant's sole cost and expense, to
install and affix on the Premises items for use in Tenant's trade or business,
which Tenant, in Tenant's sole discretion, deems advisable (collectively, Trade
Fixtures). Trade Fixtures installed in the Premises by Tenant shall always
remain the property of Tenant and may be removed at the expiration of the Term
or any extension, provided that any damage to the Premises caused by the removal
of the Trade Fixtures shall be repaired by Tenant, and further provided that
Landlord shall have the right to keep any Trade Fixtures or to require Tenant to
remove any Trade Fixtures that Tenant might otherwise elect to abandon. Tenant
shall not in any case remove as Trade Fixtures or otherwise, any equipment which
includes any integral portion of the Building mechanical, electrical or plumbing
systems.
12
<PAGE>
(b) Any Trade Fixtures that are not removed from the Premises by Tenant within
thirty (30) days after the Termination Date shall be deemed abandoned by Tenant
and shall automatically become the property of Landlord as owner of the real
property to which they are affixed.
Section 17. Communications Cables.
Regardless of any provisions of this Lease to the contrary, Landlord and Tenant
agree as follows:
(a) Cabling and Equipment. Tenant will be responsible, at Tenant's sole cost,
for the installation, maintenance, and repair of all telecommunication cabling,
wiring, and risers running throughout the Premises, together with all of
Tenant's telephones, telecopiers, computers, telephone switching, telephone
panels, and related equipment. Tenant agrees to install, maintain, and repair
the telecommunication cabling, wiring, and risers running throughout the
Premises in a good and proper manner.
(b) Right of Entry. In addition to Landlord's other rights of entry under this
Lease, Landlord may enter the Premises after advance reasonable notice to
inspect the telecommunication cabling, wiring, and risers to assure that the
installation, maintenance, and repair are being performed in a good and proper
manner.
(c) Designated Provider. Tenant has informed Landlord that Tenant plans to
utilize its own personnel in the installation, maintenance, and repair of the
telecommunication cabling, wiring, and risers within the Premises. Tenant
represents, warrants, and covenants that such personnel are and at all times
shall be qualified to conduct such installation, maintenance, and repair of the
telecommunication cabling, wiring, and risers. In the event that Landlord in its
reasonable opinion determines that the installation, maintenance, and repair of
the telecommunication cabling, wiring, and risers by Tenant's personnel creates
a significant risk of adversely effecting the telecommunication cabling, wiring,
and risers running through the portion of the Building not occupied by Tenant,
Landlord may require and Tenant agrees to have the installation, maintenance,
and repair of the telecommunication cabling, wiring, and risers done by an
independent contractor approved by Landlord.
(d) Indemnity. Tenant agrees to indemnify, release, defend, and hold Landlord
harmless against any damages, claims, or other liability resulting from Tenant's
installation, repair, or maintenance of the telecommunication cabling, wiring,
and risers, including, but not limited to, the costs of repair.
(e) Release. Tenant releases Landlord from all losses, claims, injuries,
damages, or other liability, including, but not limited to, consequential
damages, whether to persons or property and no matter how caused, in any way
connected with the interruption of telecommunications services due to the
failure of any telecommunications cabling, wiring, or risers. Tenant expressly
waives the right to claim that any interruption constitutes grounds for a claim
of abatement of rent, of constructive eviction, or for termination of the Lease.
Section 18. Signs.
Tenant shall comply with any criteria as to signs in both applicable ordinances
and in any covenants, conditions, and restrictions recorded prior to the date of
this Lease. Subject thereto, Tenant may erect and maintain on the Premises and
the Building a sign advertising Tenant's logo, subject to Landlord's reasonable
approval, and Tenant shall have the shared right of identification on the
project directory, both as a Tenant Cost (as defined in Exhibit C), and
utilizing no more than the available Building signage under local ordinances.
Furthermore, Tenant shall not place any decoration, lettering, or advertising
matter on the glass of any exterior window of the Premises without the prior
written approval of Landlord, which approval shall not be unreasonably withheld.
If Tenant maintains any sign, awning, canopy, marquee, decoration, or
advertising matter in accordance with the terms of this Section, Tenant shall
maintain it in good appearance and repair at all times during this Lease. At the
Termination Date, any of the items mentioned in this Section that are not
removed from the Premises by Tenant may, without damage or liability, be removed
and destroyed by Landlord and Tenant shall be liable to Landlord for the cost of
such removal and destruction.
Section 19. Damage and Destruction.
13
<PAGE>
(a) If, during the Term, the Premises or other improvements located thereon or
therein are damaged or destroyed, whether partially or entirely, from any
insured casualty, Landlord shall, within one hundred twenty (120) days after the
discovery of such damage or destruction, commence to restore the Premises to
substantially the same condition as prior to such casualty and, subject to the
availability of necessary governmental permits to complete such restoration,
prosecute same to diligent completion within two hundred seventy (270) days
after Landlord commences to restore the Premises. Landlord's obligation shall
not include repair or replacement of Tenant's equipment, furnishings, fixtures,
personal property or nonstandard tenant improvements. Damage to or destruction
of any portion of the building, fixtures, or other improvements on the Premises
by fire, the elements, or any other cause shall not terminate this Lease or
entitle Tenant to surrender the Premises or otherwise affect the respective
obligations of the parties, any present or future law to the contrary
notwithstanding. If the existing laws do not permit the Premises to be restored
to substantially the same condition as they were in immediately before such
casualty and Landlord will be unable to get a variance to such laws to permit
the commencement of restoration of the Premises within the 120 day period, then
Landlord shall so advise Tenant of such fact within forty-five (45) days of
Landlord's discovery of the damage or destruction, and thereafter either party
may terminate this Lease by giving written notice to the other party within
thirty (30) days after the delivery of such notice, in which event this Lease
shall terminate as of the date of such termination notice. Notwithstanding the
foregoing, in the event that Landlord decides under this Section 19(a) or under
Section 19(b) within forty-five (45) days following the discovery of such damage
or destruction, to demolish the Premises rather than rebuild it, Landlord shall
notify Tenant in writing within such 45-day period of such election, in which
event the Lease will terminate as of the date of such notice to Tenant. In the
event Landlord fails to complete restoration of the Premises as provided in
Sections 19(a) or 19(b) within the 270 day period specified, Tenant may
terminate this Lease by giving written notice to the Landlord within thirty (30)
days after the expiration of such 270 day period, in which event this Lease
shall terminate as of the date of such notice.
(b) If the Premises are damaged or destroyed in whole or in part by any
uninsured or under insured casualty, Landlord may within one hundred twenty
(120) days following the date of discovery of damage: (i) commence to restore
the Premises to substantially the same condition as they were in immediately
before the destruction and, subject to the availability of necessary
governmental permits to complete such restoration, prosecute the same diligently
to completion within two hundred seventy (270) days after Landlord commences to
restore the Premise, in which event this Lease shall continue in full force and
effect; or (ii) within forty-five (45) days following the discovery of such
damage or destruction, Landlord may elect not to so restore the Premises. In
either event, Landlord shall give Tenant written notice of its intention within
forty-five (45) days following such casualty.
(c) If any casualty occurs to the Premises during the last six (6) months of
the initial Term or within the last six (6) months of any extension thereof so
that Tenant's use or occupancy of the Premises is materially impaired, either
party shall have the right to terminate this Lease within thirty (30) days
following such casualty.
(d) In the event that a casualty not caused by Tenant or any of Tenant's
employees, agents, contractors, officers, directors, invitees, or licensees,
results in the material impairment of Tenant's use or occupancy of the Premises
and this Lease is not terminated in accordance with the terms of this Section
19, the Monthly Rent otherwise payable by Tenant shall be abated from the date
of such casualty until the Premises are substantially completed, based on the
extent to which Tenant's use or occupancy of the Premises is materially impaired
by such casualty. Except for the abatement of Monthly Rent, all other
obligations of Tenant under this Lease shall remain in full force and effect and
Tenant shall have no claim against Landlord for any loss suffered by Tenant due
to such casualty or any restoration or repair work undertaken as herein
provided.
(e) The provisions of California Civil Code 1932(2) and 1933(4), and any
similar or successor statutes are hereby waived by Tenant and shall be
inapplicable with respect to any damage or destruction of the Premises, such
sections providing that a lease terminates on the destruction of the Premises
unless otherwise agreed between the parties to the contrary. The foregoing
notwithstanding, any rights of Landlord's lender having a first lien on the
Premises to any insurance proceeds referenced above shall supercede the use of
such proceeds and Landlord's repair obligations as set forth in this Section 19.
14
<PAGE>
Section 20. Condemnation.
(a) If, during the Term or any renewal or extension, the whole of the Premises
shall be taken pursuant to any condemnation proceeding, this Lease shall
terminate as of 12:01 a.m. of the date that actual physical possession of the
Premises is taken, and after that, both Landlord and Tenant shall be released
from all obligations under this Lease.
(b) If, during the Term or any renewal or extension, only a part of the
Premises is taken pursuant to any condemnation proceeding and the remaining
portion is not suitable or adequate for the purposes for which Tenant was using
the Premises prior to the taking, or if the Premises should become unsuitable or
inadequate for those purposes by reason of the taking of any other property
adjacent to or over the Premises pursuant to any condemnation proceeding, or if
by reason of any law or ordinance the use of the Premises for the purposes
specified in this Lease shall become unlawful, then and after the taking or
after the occurrence of other described events, Tenant shall have the option to
terminate, and the option can be exercised only after the taking or after the
occurrence of other described events by Tenant giving ten (10) days' written
notice to Landlord, and Monthly Rent shall be paid only to the time when Tenant
surrenders possession of the Premises. Without limiting the generality of the
previous provision, it is agreed that in the event of a partial taking of the
Premises pursuant to any condemnation proceeding, if the number of square feet
of floor area in the portion remaining after the taking is less than fifty
percent (50%) of the number of square feet of floor area at the commencement of
the Term, Tenant shall, after the taking, have the option to terminate this
Lease on ten (10) days' written notice to Landlord, and Monthly Rent shall be
paid only to the time when Tenant surrenders possession of the Premises.
(c) If only a part of the Premises is taken pursuant to any condemnation
proceeding under circumstances that Tenant does not have the option to terminate
this Lease as provided in this Section, or having the option to terminate,
Tenant elects not to terminate, then Landlord shall at Landlord's expense
promptly proceed to restore the remainder of the Premises to a self-contained
architectural unit, and the Monthly Rent payable shall be reduced effective the
date of the taking to an amount that shall be in the same proportion to Monthly
Rent payable prior to the taking, as the number of square feet of floor area
remaining after the taking bears to the number of square feet of floor area
immediately prior to the taking.
(d) If the whole or any part of the Premises are taken pursuant to any
condemnation proceeding, then Landlord shall be entitled to the entirety of any
condemnation award except that portion specifically allocable by the condemning
authority, if any, to (i) tenant Alterations installed and paid for by Tenant;
(ii) Tenant's furniture, fixtures, and equipment; or (iii) Tenant's moving or
relocation costs. The foregoing notwithstanding, any rights of Landlord's lender
having a first lien on the Premises to any condemnation award referenced above
shall supercede the use of such proceeds and any rights to that award, if any,
granted under this Section 20.
Section 21. Assignment and Subletting.
(a) Tenant shall not assign or hypothecate this Lease or any interest herein
(by operation of law or otherwise), shall not sublet the Premises or any part
thereof, or permit the use of the Premises by any party other than Tenant, shall
not mortgage or encumber the Lease (or otherwise use the Lease as a security
device) in any manner and shall not materially amend or modify an assignment,
sublease, or other Transfer that has been previously approved by Landlord (each
an Transfer) without the prior written consent of Landlord which shall not be
unreasonably withheld or delayed. If Tenant is a corporation, a partnership, or
a limited liability company, the transfer (as a consequence of a single
transaction or any number of separate transactions) of fifty percent (50%) or
more of the beneficial ownership interest of the voting stock of Tenant issued
and outstanding as of the date hereof or partnership interests in Tenant, or
ownership interests in Tenant, as the case may be, shall constitute a Transfer
hereunder for which such consent is required. Any of the foregoing acts without
such consent shall be void, and, at the option of Landlord, shall terminate this
Lease. Notwithstanding anything to the contrary contained in this Section,
provided the use of the Premises does not change and Tenant fully complies with
the remaining provisions of this Section, including but not limited to
subsection (f) below, Tenant may Transfer this Lease without first obtaining
Landlord's consent (a Permitted Transfer) to a corporation, limited liability
company, or other entity which results from a merger, consolidation,
reorganization, or asset sale with Tenant in which the surviving entity (A)
acquires substantially all of the assets of Tenant as a going concern, (B)
assumed, or is deemed by law to be liable
15
<PAGE>
for, all of the liabilities of Tenant, and (C) has after such merger,
consolidation, reorganization, or asset sale a net worth not less than the
greater of Tenant's net worth as of the date of this Lease or Tenant's net worth
immediately preceding such merger, consolidation, or other reorganization.
(b) In the event that Tenant should desire to Transfer this Lease, Tenant shall
provide Landlord with written notice of such desire at least forty-five (45)
days in advance of the effective date of such Transfer. Such notice shall
include (i) the name and legal composition of the proposed sublessee or
assignee; (ii) the nature of business to be conducted by the proposed sublessee
or assignee in the Premises; (iii) the terms and conditions of the proposed
Transfer; (iv) a current financial statement of the proposed sublessee or
assignee, financial statements of proposed sublessee or assignee coveting the
preceding three (3) years, if they exist, and, if available, an audited
financial statement of the proposed sublessee or assignee for a period ending
not more than one (1) year prior to the proposed effective date of the Transfer,
all of which are to be prepared in accordance with generally accepted accounting
principles; (v) a statement of all consideration to be given on account of the
Transfer; (vi) any other reasonable information that Landlord requests
reasonably required to evaluate the ability of the transferee to comply with the
terms this Lease; and a processing fee of Five Hundred Dollars ($500). At any
time within thirty (30) days following receipt of Tenant's notice, Landlord may
by written notice to Tenant elect to (i) in Landlord's sole and absolute
discretion, if the requested Transfer is for fifty percent (50%) or more of the
rentable square footage of the Premises for the majority of the remainder of the
Lease Term, terminate this Lease as to the space affected as of the effective
date of the proposed Transfer; (ii) consent to the proposed subletting of the
Premises or assignment of this Lease; or (iii) disapprove of the proposed
Transfer. In the event Landlord elects to terminate this Lease as to the space
affected, Landlord and Tenant shall enter into an amendment of this Lease
reflecting the reduction in Premises and which proportionately reduces the
Monthly Rent, Additional Rent, Security Deposit, Letter of Credit amount,
Parking spaces and any other right or obligation hereunder affected by the
reduction in square footage of the Premises. If Landlord does not elect to
terminate this Lease, however, Landlord shall not unreasonably withhold its
consent to a proposed Transfer if Tenant is not in default under this Lease at
the time Tenant requests such consent. Without limiting other situations in
which it may be reasonable for Landlord to withhold its consent to any proposed
assignment or sublease, Landlord and Tenant agree that it shall be reasonable
for Landlord to withhold its consent in any one or more of the following
situations: (i) if, in Landlord's reasonable judgment, the net worth of the
proposed subtenant or assignee is insufficient to adequately perform the
financial obligations of Tenant under this Lease; (ii) in Landlord's reasonable
judgment, the business history and reputation in the community of the proposed
subtenant or assignee does not meet the standards applied by Landlord; (iii)
provided Landlord is offering relatively equivalent space elsewhere in the
Building or in the buildings located on Landlord's property contiguous to the
Property and either, the proposed subtenant or assignee shall be a then existing
tenant of Landlord in the Building or in buildings on Landlord's property
contiguous to the Property, or a prospective tenant of Landlord with whom
Landlord has received or delivered a written proposal within the last three (3)
months; (iv) the use proposed by the proposed subtenant or assignee will violate
any lease or agreement to which Landlord is a party or introduce undesirable
Hazardous Materials to the Property; (v) the proposed subtenant or assignee does
not meet the qualifications applied by Landlord' s lender having a first lien on
the Premises; (vi) or the proposed subtenant or assignee is a governmental
agency, maintains the power of eminent domain or is exempt from the payment of
ad valorem or other taxes which would prohibit Landlord form collecting any
amounts otherwise payable under this Lease; (vi) the Guarantor (if any) refuses
to affirm the Guaranty for the tenancy of the proposed subtenant or assignee. In
any event, Landlord shall be entitled to exercise its right of termination in
lieu of consenting to a transfer, as set forth above.
(c) Landlord and Tenant agree that fifty percent (50%) of any rent or other
consideration received or to be received by or on behalf of or for the benefit
of Tenant as a result of any Transfer, in excess of the aggregate of (i) the
Monthly Rent which Tenant is obligated to pay Landlord under this Lease
(prorated to reflect obligations allocable to that portion of the Premises
subject to such sublease) (ii) the unamortized portion of any leasing
commissions paid by Tenant in connection with the entry by it into the Transfer
prorated and amortized over the remaining months of the Lease Term and (iii) the
unamortized portion of any Tenant Cost over the Allowance for construction of
the Improvements prorated and amortized over. the remaining months of the Term,
shall be payable to Landlord as additional rent under this Lease without
affecting or reducing any other obligation of Tenant hereunder. Landlord's share
of such excess rent or other consideration shall be paid monthly by the
subtenant or assignee directly to Landlord at the same time as such rent or
other consideration is payable to Tenant.
16
<PAGE>
(d) Regardless of Landlord's consent, no Transfer shall release Tenant of
Tenant's obligation or alter the primary liability of Tenant for rent and
performance of all other obligations to be performed by Tenant hereunder.
Acceptance of rent by Landlord from any other person shall not be deemed to be a
waiver by Landlord of any provision hereof. Consent to one assignment or
subletting shall not be deemed consent to any subsequent or further Transfers.
In the event of default by any assignee or successor of Tenant in performing any
of the terms hereof, Landlord may proceed directly against Tenant without the
necessity of exhausting remedies against said assignee or successor. Landlord
may consent to subsequent Transfers of this Lease or amendments or modifications
to this Lease with assignees of Tenant, without notifying Tenant, or any
successor of Tenant, and without obtaining its or their consent thereto and such
action shall not relieve Tenant or any successor of Tenant of liability under
this Lease.
(e) Tenant shall pay to Landlord, as an additional rent, all out of pocket and
actual costs and reasonable attorney fees incurred by Landlord (or imposed on
Landlord by its lender having a first lien on the Premises) in connection with
the evaluation, processing, or documentation of any requested Transfer, whether
or not Landlord's consent is granted; provided that Tenant shall not be
obligated to pay such costs and fees for any portion of the Premises recaptured
by Landlord. Landlord's costs shall include the cost of any review or
investigation performed by Landlord or on behalf of Landlord of: (i) any
Hazardous Materials used, stored, released, or disposed of by the proposed
subtenant or assignee, or (ii) violations of any Environmental Law by the Tenant
or the proposed subtenant or assignee.
(f) In order for any Transfer to be binding on Landlord, including any Permitted
Transfer, Tenant shall deliver to Landlord, promptly after execution thereof an
executed copy of such sublease or assignment whereby the sublessee or assignee
shall expressly assume the obligations of Tenant under this Lease. Any Transfer
approved by Landlord shall not be effective until Tenant has delivered to
Landlord an executed counterpart of the document evidencing the Transfer in form
and substance reasonably satisfactory to Landlord.
(g) Any attempted Transfer without Landlord's consent shall constitute an Event
of Default. Landlord's consent to any one Transfer shall not constitute a waiver
of the provision of Section 21 as to any subsequent Transfer or a consent to any
subsequent Transfer. Tenant hereby waives any right to terminate this Lease from
the failure of Landlord to provide reasonable consent to any proposed subtenant
or assignee under any applicable governmental laws, ordinances, statutes,
orders, or regulations now or later in effect, waives any and all actual,
consequential or punitive damages resulting from any such failure and agrees
that Tenant's sole remedy in such event of such failure shall be the remedy of
specific performance.
Section 22. Default.
Any of the following events or occurrences shall constitute a material breach of
this Lease by Tenant and, after the expiration of any applicable grace period,
shall constitute an event of default (each an Event of Default):
(a) The failure by Tenant to pay any amount in full when it is due under the
Lease;
(b) The failure by Tenant to perform any obligation under this Lease, which by
its nature Tenant has no capacity to cure;
(c) The failure by Tenant to perform any other obligation under this Lease, if
the failure has continued for a period of ten (10) days after Landlord demands
in writing that Tenant cure the failure. If, however, by its nature the failure
cannot be cured within ten (10) days, Tenant may have a longer period as is
necessary to cure the failure, but this is conditioned on Tenant's promptly
commencing to cure within the ten (10) day period and thereafter completing the
cure within sixty (60) days after Landlord demands in writing that Tenant cure
the failure. Tenant shall indemnify and defend Landlord against any liability,
claim, damage, loss, or penalty that may be threatened or may in fact arise from
that failure during the period the failure is uncured;
(d) Any of the following: a general assignment by Tenant for the benefit of
Tenant's creditors; any voluntary filing, petition, or application by Tenant
under any law relating to insolvency or bankruptcy, whether for a declaration of
bankruptcy, a reorganization, an arrangement, or otherwise; the abandonment,
vacation, or
17
<PAGE>
surrender of the Premises by Tenant without Landlord's prior written consent; or
the dispossession of Tenant from the Premises (other than by Landlord) by
process of law or otherwise;
(e) Any of the following: the appointment of a trustee or receiver to take
possession of all or substantially all of Tenant's assets or the attachment,
execution or other judicial seizure of all or substantially all of Tenant's
assets located at the Premises or of Tenant's interest in this Lease, unless the
appointment or attachment, execution, or seizure is discharged within sixty (60)
days; or the involuntary filing against Tenant, or any general partner of Tenant
if Tenant is a partnership, of a petition to have Tenant, or any partner of
Tenant if Tenant is a partnership, declared bankrupt or for reorganization or
arrangement of Tenant under any law relating to insolvency or bankruptcy, unless
the petition is dismissed within sixty (60) days; or
(f) Tenant's failure to timely provide a requested Estoppel Certificate pursuant
to Section 27 or Subordination, Attornment and Non-Disturbance agreement under
Section 38.
Section 23. Remedies.
Upon the occurrence of an Event of Default, Landlord, in addition to any other
rights or remedies available to Landlord at law or in equity, shall have the
right to:
(a) Terminate this Lease and all rights of Tenant under this Lease by giving
Tenant written notice that this Lease is terminated, in which case Landlord may
recover from Tenant the aggregate sum of:
(i) the worth at the time of award of any unpaid rent that had been earned at
the time of termination;
(ii) the worth at the time of award of the amount by which (A) the unpaid rent
that would have been earned after termination until the time of the award
exceeds (B) the amount of the rental loss, if any, as Tenant affirmatively
proves could have been reasonably avoided;
(iii) the worth at the time of award of the amount by which (A) the unpaid rent
for the balance of the term after the time of the award exceeds (B) the amount
of rental loss, if any, as Tenant affirmatively proves could be reasonably
avoided;
(iv) any other amount necessary to compensate Landlord for all the detriment
caused by Tenant's failure to perform Tenant's obligations or that, in the
ordinary course of things; would be likely to result from Tenant's failure,
including, without limitation, the costs and expenses incurred by Landlord for:
(A) retaking possession of the Premises;
(B) cleaning and making repairs and alterations (including installation of
standard leasehold improvements for the uses permitted under this Lease, whether
or not the same shall be funded by a reduction of rent, direct payment, or
otherwise) necessary to return the Premises to good condition and preparing the
Premises for reletting, with any tenant improvements necessary to prepare the
Premises for reletting being amortized over the life of such improvements and
charged to Tenant based on the then remainder of the Term hereof;
(C) removing, transporting, and storing any of Tenant's property left at the
Premises (although Landlord shall have no obligation to remove, transport, or
store any of the said property);
(D) reletting the Premises, including, without limitation, brokerage
commissions, advertising costs, and attorney fees;
(E) attorney fees, expert witness fees and court costs in terminating this Lease
and enforcing Landlord's rights thereunder;
(F) any unamortized real estate brokerage commissions paid in connection with
this Lease; and
(G) costs of carrying the Premises, such as repairs, maintenance, taxes,
insurance premiums, utilities, and security precautions, if any; and
(v) all other amounts in addition to or in lieu of those previously set out as
may be permitted from time to time by applicable California law.
18
<PAGE>
As used in clauses (i) and (ii) of Section 23(a), the worth at the time of award
is computed by allowing interest at the rate of ten percent (10%) per annum. As
used in clause (iii) of Section 23(a), the worth at the time of award is
computed by discounting that amount at the discount rate of the Federal Reserve
Bank of San Francisco at the time of award, plus one percent (1%). As used in
this Section, the term rent shall include Monthly Rent and any other payments
required by Tenant under this Lease.
(b) Continue this Lease pursuant to the remedy described in California Civil
Code Section 1951.4 (Lessor may continue lease in effect after lessee's breach
and abandonment and recover rent as it becomes due if lessee has rights to
sublet or assign subject only to reasonable limitations). In such event Landlord
may without terminating this Lease,
(i) recover all rent and other amounts payable as they become due; or
(ii) relet the Premises or any part on behalf of Tenant on terms and at the rent
that Landlord may deem advisable, all with the right to make alterations and
repairs to the Premises, at Tenant's cost, and apply the proceeds of reletting
to the rent and other amounts payable by Tenant. To the extent that the rent and
other amounts payable by Tenant under this Lease exceed the amount of the
proceeds from reletting, the Landlord may recover the excess from Tenant as and
when due.
(c) Re-enter the Premises, with or without terminating this Lease, and to remove
all persons and property from the Premises. Landlord may store the property
removed from the Premises in a public warehouse or elsewhere at the expense and
for the account of Tenant.
(d) None of the following remedial actions, alone or in combination, shall be
construed as an election by Landlord to terminate this Lease unless Landlord has
in fact given Tenant written notice that this Lease is terminated or unless a
court of competent jurisdiction decrees termination of this Lease: any act by
Landlord to maintain or preserve the Premises; any efforts by Landlord to relet
the Premises; any re-entry, repossession, or reletting of the Premises; or any
re-entry, repossession, or reletting of the Premises by Landlord pursuant to
this Section. If Landlord takes any of the previous remedial actions without
terminating this Lease, Landlord may nevertheless at any later time terminate
this Lease by written notice to Tenant.
(e) If Landlord relets the Premises, Landlord shall apply the revenue from the
reletting as follows: first, to the payment of any indebtedness other than rent
due from Tenant to Landlord; second, to the payment of any cost of reletting,
including, without limitation, finder's fees and leasing commissions; third, to
the payment of the cost of any maintenance and repairs to the Premises; and
fourth, to the payment of rent and other amounts due and unpaid under this
Lease. Landlord shall hold and apply the residue, if any, to payment of future
amounts payable under this Lease as the same may become due, and shall be
entitled to retain the eventual balance with no liability to Tenant. If the
revenue from reletting during any month, after application pursuant to the
previous provisions, is less than the sum of (i) Landlord's expenditures for the
Premises during that month and (ii) the amounts due from Tenant during that
month, Tenant shall pay the deficiency to Landlord immediately upon demand.
(f) After the occurrence of an Event of Default, Landlord, in addition to or in
lieu of exercising other remedies, may, but without any obligation to do so,
cure the breach underlying the Event of Default for the account and at the
expense of Tenant. However, Landlord shall by prior notice first allow Tenant a
reasonable opportunity to cure, except in cases of emergency, where Landlord may
proceed without prior notice to Tenant. Tenant shall, upon demand, immediately
reimburse Landlord for all costs, including costs of settlements, defense, court
costs, and attorney fees, that Landlord may incur in the course of any cure.
(g) No security or guaranty for the performance of Tenant's obligations that
Landlord may now or later hold shall in any way constitute a bar or defense to
any action initiated by Landlord for unlawful detainer or for the recovery of
the Premises, for enforcement of any obligation of Tenant, or for the recovery
of damages caused by a breach of this Lease by Tenant or by an Event of Default.
(h) Except where this is inconsistent with or contrary to any provisions of this
Lease, no right or remedy conferred on or reserved to either party is intended
to be exclusive of any other right or remedy, or any right or remedy given or
now or later existing at law or in equity or by statute. Except to the extent
that either
19
<PAGE>
party may have otherwise agreed in writing, no waiver by a party of any
violation or nonperformance by the other party of any obligations, agreements,
or covenants under this Lease shall be deemed to be a waiver of any subsequent
violation or nonperformance of the same or any other covenant, agreement, or
obligation, nor shall any forbearance by either party to exercise a remedy for
any violation or nonperformance by the other party be deemed a waiver by that
party of the rights or remedies with respect to that violation or
nonperformance.
Section 24. Late Charge.
Tenant acknowledges that Tenant's failure to pay any installment of Rent, or any
other amounts due under this Lease as and when due may cause Landlord to incur
costs not contemplated by Landlord when entering into this Lease, the exact
nature and amount of which would be extremely difficult and impracticable to
ascertain. Such costs include, without limitation, processing and accounting
charges, and late charges that may be imposed on Landlord by the terms of any
encumbrance and note secured by any encumbrance covering the Premises,
extraordinary interest charges, penalties, collection costs, attorney and
accountant fees, and the like. Accordingly, if any installment of Rent, or any
other amount due under the Lease is not received by Landlord as and when due,
then Tenant shall pay to Landlord an amount equal to five percent (5%) of the
past due amount, which the parties agree represents a fair and reasonable
estimate of the costs incurred by Landlord as a result of the late payment by
Tenant (the Late Charge).
Section 25. Default Interest.
All Rent and other amounts payable by Tenant to Landlord hereunder, if not
received by Landlord within thirty (30) days when and as due, shall bear
interest from the due date until paid at the lesser of ten percent (10%) per
annum or the highest rate allowed by law. Interest due pursuant to this Section
shall be in addition to and not in lieu of late fees owing under Section 24
hereof. Acceptance of any late charge or interest payment shall not constitute a
waiver of Tenant's default with respect to the overdue amount, nor prevent
Landlord from exercising any of the other rights and remedies available to
Landlord under this Lease, at law, or in equity.
Section 26. Waiver.
Any express or implied waiver of a breach of any term of this Lease shall not
constitute a waiver of any further breach of the same or other term of this
Lease; and the acceptance of rent shall not constitute a waiver of any breach of
any term of this Lease, except as to the payment of rent accepted.
Section 27. Estoppel Certificates.
At any time, with at least ten (10) business days' prior notice by Landlord,
Tenant shall execute, acknowledge, and deliver to Landlord a certificate, in the
form prescribed by Landlord, certifying:
(a) the Commencement Date, the occupancy date, and the Term;
(b) the amount of the Monthly Rent;
(c) the dates to which rent and other charges have been paid;
(d) that this Lease is unmodified and in full force or, if there have been
modifications, that this Lease is in full force, as modified, and stating the
date and nature of each modification;
(e) that no notice has been received by Tenant of any default by Tenant that has
not been cured, except, if any exist, those defaults shall be specified in the
certificate, and Tenant shall certify that no event has occurred that, but for
the expiration of the applicable time period or the giving of notice, or both,
would constitute an Event of Default under this Lease (to the extent that none
exist);
(f) that no default of Landlord is claimed by Tenant, except, if any, those
defaults shall be specified in the certificate; and
(g) other matters as may be reasonably requested by Landlord.
Any certificate may be relied on by prospective purchasers, mortgagees, or
beneficiaries under any deed of trust on the Premises or any part of it.
Tenant's failure to execute and deliver a completed Estoppel Certificate within
ten (10) business days of Landlord's request therefore shall constitute an Event
of Default hereunder.
20
<PAGE>
Section 28. Attorney Fees. If as a result of any breach or default or alleged
breach or alleged default on the part of Tenant under this Lease, Landlord uses
the services of an attorney in order to secure compliance with this Lease,
Tenant shall reimburse Landlord upon demand as additional rent for any and all
attorney fees and expenses incurred by Landlord, whether or not formal legal
proceedings are instituted, unless such breach or default or alleged breach or
alleged default results in a judgment in favor of Tenant. If any action at law
or in equity or any other proceeding is brought to recover any rent or other
sums under this Lease, or for or on account of any breach or alleged breach of
or to enforce or interpret any of the covenants, terms, 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 part of prevailing
party's costs its actual attorney fees and other costs incurred in that action
or proceeding, including, but not limited to, expert expenses, in addition to
any other relief to which they may be entitled. The prevailing party shall
include, without limitation, (a) a party who dismisses an action in exchange for
sums allegedly due; (b) the party who receives performance from the other party
of an alleged breach of covenant or a desired remedy where that is substantially
equal to the relief sought in an action; or (c) the party determined to be the
prevailing party by a court of law. In addition, if either party to this Lease
becomes a party to or is involved in any way in any action concerning this Lease
or the Premises by reason in whole or in part of any act, neglect, fault, or
omission of any duty by the other party, its employees or contractors, the party
subjected to said involvement shall be entitled to reimbursement for any and all
reasonable attorney fees and costs.
Section 29. Security for Tenant's Performance.
(a) Security Deposit. Tenant agrees that, on or before the execution of this
Lease, Tenant shall deposit with Landlord the amount of One Hundred Fifty Eight
Thousand Five Hundred Sixty-one Dollars ($158,561), which amount shall be held
by Landlord as security for the full and faithful performance of all of Tenant's
covenants and obligations under this Lease (as the same may be further increased
pursuant to Section 29(b) hereof), (the Security Deposit), it being expressly
understood and agreed that the Security Deposit is not an advance rental deposit
or a measure of the Landlord's damages in case of Tenant's default. Upon the
occurrence of any default by Tenant hereunder, Landlord may (but shall not be
required to), from time to time and without prejudice to any other remedy
provided by this Lease or by law, use the Security Deposit to the extent
necessary to make good any arrears of rent or other payments or liability caused
by such default or to compensate Landlord for any other loss, damage, liability,
or expense which Landlord may suffer by reason of Tenant's default. Tenant shall
within ten (10) days after written demand therefor pay to Landlord the amount
that was applied in order to restore the Security Deposit to the amount held by
Landlord prior to the application (as such amount may be increased by Section
29(b) below). Tenant's failure to so restore the Security Deposit shall
constitute an event of default under this Lease on the part of Tenant. Although
the Security Deposit shall be deemed the property of Landlord, if Tenant fully
and faithfully performs and observes every provision of this Lease to be
performed and observed by Tenant, the Security Deposit, or any then unused
balance thereof, shall be returned to Tenant (or at Landlord's option, to the
last assignee of Tenant's interest hereunder) within thirty (30) days after the
expiration of the Term and after Tenant has vacated and surrendered the Premises
in accordance with the terms hereof. Tenant shall not have the right to apply
this Security Deposit or any part thereof toward the payment of any Rent or sums
due hereunder. In the event of termination of Landlord's interest in this Lease,
Landlord shall transfer the unused balance of said Deposit to Landlord's
successor-in-interest whereupon Tenant hereby agrees to release Landlord from
liability for the return of such Deposit provided such successor-in-interest
agrees to return the Security Deposit to Tenant in accordance with the terms
hereof. Landlord shall not be required to keep the Security Deposit separate
from the general accounts of Landlord nor pay Tenant any interest thereon.
(b) Letter of Credit. Tenant agrees that, on or before the execution of this
Lease, Tenant shall deposit with Landlord, and maintain throughout the Lease
Term (except as provided below) a One Million Four Hundred Thousand Dollar
($1,400,000) irrevocable letter of credit in form and substance and issued by a
bank reasonably acceptable to Landlord and Landlord's lender and naming Landlord
(and, if required, Landlord's lender holding the first lien against the
Property) as beneficiary (the "Letter of Credit"). The Letter of Credit will
secure the full and faithful performance of each provision of this Lease to be
performed by Tenant. If
21
<PAGE>
Tenant fails to perform any of Tenant's obligations under this Lease, Landlord
shall have the absolute right to draw down the full amount of the Letter of
Credit on Landlord's sworn statement of any Tenant Event of Default. The draw
down shall be added to and increase the amount of the Security Deposit retained
by Landlord and thereafter required under Section 29(a) above. If Landlord does
apply the Security Deposit, as increased by the Letter of Credit amount, Tenant
must within ten (10) business days written demand replenish the Security Deposit
to the combined sum of the amount of the Letter of Credit and the Security
Deposit as required under 29(a). The face amount of the letter of credit may be
reduced once in any calendar year by Three Hundred Fifty Thousand Dollars
($350,000) upon Tenant's written request, provided such request confirms to
Landlord, with such evidence as Landlord may reasonably require, that: (i) The
Letter of Credit is in full force and effect and has not been drawn upon by
Landlord; (ii) No Event of Default has occurred under the Lease nor has there
occurred any event or omission which with the passage of time would constitute
an Event of Default; and (iii) that either (a) Tenant has experienced a minimum
of two (2) consecutive quarters during the calendar year of the request in which
the Net Income (defined herein) per quarter exceeds the annual rent due
hereunder or (b) following the fourth anniversary of the Commencement Date, the
request includes audited financials of Tenant certifying Tenant's average Cash
balance for the proceeding fiscal quarter of no less than Twenty Million Dollars
($20,000,000). As used in this Section Net Income shall mean the gross revenues
and income of Tenant, exclusive of any extraordinary gains or losses or any
gains or losses from the sale or disposition of assets other than in the
ordinary course of business, less the aggregate for Tenant during such period
of: (a) operating expenses, (b) taxes, (c) depreciation and amortization of
payments and (d) any other items that are treated as expenses under GAAP, all
determined in accordance with GAAP consistently applied on a consolidated basis,
after eliminating all inter-company items. As used in this Section, "Cash" shall
mean Tenant's liquid cash assets as reduced by Tenant's short term credit
obligations and determined in accordance with GAAP consistently applied.
Section 30. Authority. If Tenant is a corporation, trust, limited liability
company, or general or limited partnership, all individuals executing this Lease
on behalf of that entity represent that they are authorized to execute and
deliver this Lease on behalf of that entity. If Tenant is a corporation, limited
liability company, trust, or partnership, Tenant shall, prior to the execution
of this Lease, deliver to Landlord evidence of that authority and evidence of
due formation, all satisfactory to Landlord. If Tenant is a partnership, Tenant
shall furnish Landlord with a copy of Tenant's partnership agreement and with a
certificate from Tenant's attorney, stating that the partnership agreement
constitutes a correct copy of the existing partnership agreement of Tenant.
Tenant agrees that it shall in a timely manner obtain all corporate and other
approvals necessary to allow it to execute this Lease and carry out Tenant's
obligations hereunder. The individuals executing this Lease on behalf of
Landlord represent that they are authorized to execute and deliver this Lease on
behalf of Landlord.
Section 31. Notices. Except as otherwise expressly provided by law, all notices
or other communications required or permitted by this Lease or by law to be
served on or given to either party to this Lease by the other party shall be in
writing and shall be deemed served when personally delivered to the party to
whom they are directed, or in lieu of the personal service, three days following
deposit in the United States Mail, certified or registered mail, return receipt
requested, postage prepaid, addressed as set forth above in the Summary of
Terms. Either party, Tenant or Landlord, may change the address for the purpose
of this Section by giving written notice of the change to the other party in the
manner provided in this Section.
Section 32. Heirs and Successors. This Lease shall be binding on and shall inure
to the benefit of the heirs, executors, administrators, successors, and assigns
of Landlord and Tenant.
Section 33. Partial Invalidity. Should any provision of this Lease be held by a
court of competent jurisdiction to be either invalid or unenforceable, the
remaining provisions of this Lease shall remain in effect, unimpaired by the
holding.
Section 34. Entire Agreement. This instrument constitutes the sole agreement
between Landlord and Tenant respecting the Premises, the leasing of the Premises
to Tenant, and the specified lease term, and correctly sets forth the
obligations of Landlord and Tenant. Any agreement or representations respecting
the Premises or their leasing by Landlord to Tenant not expressly set forth in
this instrument are void.
Section 35. Time of Essence. Time is of the essence in this Lease.
22
<PAGE>
Section 36. Amounts Deemed Rent. All monetary obligations of Tenant to Landlord
under the Lease, including, but not limited to, the Monthly Rent and any amounts
deemed additional rent hereunder shall be deemed rent.
Section 37. Amendments. This Lease may be modified only in writing and only if
signed by the parties at the time of the modification.
Section 38. Subordination, Nondisturbance and Attornment.
(a) This Lease and the rights of Tenant hereunder are subject and subordinate to
any ground or underlying lease and the lien of the holder of or beneficiary
under a mortgage or deed of trust which now or in the future encumbers the
Premises and to any and all advances made thereunder, and interest thereon, and
all modifications, renewals, supplements, consolidations, and replacements
thereof. Upon execution of this Lease, as a pre-condition to Landlord's
execution of this Lease, Tenant shall execute the Subordination, Attornment and
Non-Disturbance Agreement in favor of Landlord's lender having a first lien on
the Premises attached as Exhibit S. As a pre-condition, for the benefit of
Tenant, to Landlord's delivery and the effectiveness of this Lease, Landlord
shall cause the Subordination, Attornment and Non-Disturbance Agreement attached
as Exhibit S to be executed by Landlord's lender named therein.
(b) Tenant agrees that any ground or underlying lessor or lender may at its
option, unilaterally elect to subordinate in whole or in part, such ground or
underlying lease or the lien of such mortgage or deed of trust to this Lease.
With at least ten (10) business days' prior notice by Landlord Tenant agrees to
execute, acknowledge, and deliver to Landlord upon demand any and all
instruments required by Landlord or any such ground or underlying lessor or
lender evidencing the subordination, attornment or priority of this Lease, as
the case may be, provided such instrument contains the standard non-disturbance
and attornment provisions acknowledging Tenant's interest in this Lease
customarily provided by such lessor or lender. Tenant's failure to so execute,
acknowledge, and deliver such instruments within ten (10) business days after
written request therefor shall constitute an Event of Default hereunder.
(c) Tenant agrees that this Lease and the rights of Tenant hereunder shall be
subject and subordinate to any agreement(s) placed upon the Property and the
real property owned by Landlord and adjacent to the Property and any amendments,
additions or supplements thereto, which provides for reciprocal easements and/or
covenants, conditions and restrictions pertaining to the common areas located on
the Property and the adjacent real property, which agreements shall not
materially interfere with Tenant's rights under this Lease or with Tenant's
access to the Premises (collectively "READ. If a conflict between any such REA
and this Lease occurs, the provisions of the REA shall prevail provided that the
REA is recorded in the Official Records of the County of San Mateo and is
binding upon any such adjacent real property as well as the Property.
Section 39. Merger. The voluntary or other surrender of this Lease by Tenant, or
a mutual cancellation of the Lease, or a termination by Landlord shall not work
a merger, and shall, at the option of Landlord, terminate all or any existing
subtenancies or may, at the option of Landlord, operate as an assignment to a
Landlord of any of the subtenancies.
Section 40. Right of Relocation. (Intentionally Deleted)
Section 41. Options To Extend Term.
(a) Tenant shall have two (2) options (the Extension Option(s)) to extend the
Term for three (3) years each ("Option Period") for the entire Premises by
giving Landlord prior written notice of Tenant's election to exercise this
option not less than twelve (12) months before the expiration of the Term as the
same may have been extended. However, if there exists an uncured default on
Tenant's part either at the time of the exercise of any Extension Option or at
the time that any Option Period would commence, Landlord may cancel Tenant's
exercise of such Extension Option, in which case the Extension Option shall be
of no further force or effect and all subsequent Extension Options shall be
deemed canceled. Each Extension Option shall be on all the same terms of this
Lease provided that the Monthly Rent for each such Option Period shall be
increased in accordance with Section 42 of this Lease.
23
<PAGE>
(b) The Extension Option is personal to the named tenant herein and any Transfer
of such tenant's interest in the Lease (other than a Permitted Transfer),
whether or not consented to by Landlord, shall cause such Extension Option to
terminate and be of no further force or effect.
Section 42. Determination of Monthly Rent for Extension Option. For purposes of
Section 41 (a), Monthly Rent shall be determined as follows:
(a) Parties shall have until the later to occur of (i) thirty (30) days from the
receipt by Landlord of Tenant's notice electing to exercise an Extension Option,
or (ii) eleven (11) months prior to the expiration of the initial Lease Term (or
an Option Period as the case may be) to agree on the Monthly Rent for the
upcoming Option Period which shall in any case be no less than the previous
Monthly Rental due for the last year of the expiring Lease Term (or Option
Period as the case may be). If the parties agree on the Monthly Rent for the
upcoming Option Period, by such date, they shall immediately execute an
amendment to this Lease stating the Monthly Rent for the Option Period and
memorializing the extension of the Term in accordance with Section 41 hereof.
(b) If the parties are unable to agree upon the Monthly Rent for either Option
Period in accordance with Section 42(a), then within fourteen (14) days after
the parties fail to agree on the Monthly Rent for that Option Period, each party
at its cost and by giving notice to the other party, shall appoint a real estate
appraiser with at least five (5) years full time MAI appraisal experience in San
Mateo County, to determine the Monthly Rent for the Option Period, and shall
deliver to said appraiser as well as the other party, such party's proposal for
the Monthly Rent for the Option Period. If a party does not appoint an appraiser
within said fourteen (14) day period and the other party has given notice of the
name of its appraiser, the single appraiser appointed shall be the sole
appraiser and shall determine the Monthly Rent for that Option Period. If an
appraiser is appointed by each of the parties as provided in this section, they
shall meet promptly and attempt to set the Monthly Rent for that Option Period,
by agreeing on which party's proposal most closely reflects the Fair Market
Rental Value of the Premises for the Option Period. If they are unable to agree
within thirty (30) days after the second appraiser has been appointed, the two
appraisers shall within ten (10) days following the end of such thirty-day
period chose a third appraiser or if the two appraisers cannot agree on a third
appraiser within such ten-day period, either of the parties to this Lease, by
giving ten (10) days notice to the other party, can apply to the then Presiding
Judge of the San Mateo County Superior Court for the appointment of a third
appraiser who meets the qualifications stated in this section. The third
appraiser, however, shall be a person who has not previously acted in any
capacity for either party during the prior three years. Within thirty (30) days
after the selection of the third appraiser, a majority of the appraisers shall
determine which party's proposal more closely reflects the Fair Market Rental
Value of the Premises for that Option Period. The party whose proposal is not
selected shall bear the cost of appointing the third appraiser together with
such third appraiser's fee. As used herein, Fair Market Rental Value shall mean
the then prevailing annual rental rate per square foot of rentable area for
office space in comparable buildings and with comparable tenant improvements,
and comparable amenities (including parking without charge), in the mid- San
Francisco peninsula, San Marco County area, for the renewal of tenant designed
premises which have been recently improved for tenant occupancy similar to the
Premises, comparable in area and location to the space for which such rental
rate is being determined (to the extent that quoted rental rates vary with
regard to location), being leased for a duration comparable to the term for
which such space is being leased and taking into consideration rental
concessions and abatements, tenant improvement allowances, and renewal
commissions, if any, being offered by Landlord, the present condition of the
space, operating expenses and taxes, other adjustments to basic rent and other
comparable factors to lease renewal, but excluding any adjustments for brokerage
commissions, pre-occupancy construction period rent allowances, moving
allowances or other concessions offered in the market for new space leases.
(c) After the appraisers determine which party's proposal more closely reflects
the Fair Market Rental Value of the Premises for the Option Period, the
appraisers shall immediately notify the parties and the parties of their
findings and the parties shall immediately execute an amendment to this Lease
stating the Monthly Rent for that Option Period, which in any case shall be no
less than the previous Monthly Rental due for the last year of the expiring
Lease Term, and which amendment shall memorialize the extension of the Term in
accordance with Section 41 hereof.
24
<PAGE>
Section 43. Improvements. Prior to the Commencement Date, Landlord shall provide
to Tenant, at Landlord's cost, a completed building shell as more particularly
shown in attached Exhibit C-1 (the "Base Building Improvements"). Pursuant to
Exhibit C hereto, Landlord shall construct Tenant Improvements (as defined in
Exhibit C) for the Premises at Tenant's cost which may be reimbursed by the
Allowance (defined herein). Landlord shall contribute a tenant improvement
allowance (the "Allowance") to construct such Tenant Improvements in the amount
of $2,317,430 to be applied toward all expenses associated with the
construction, space planning, engineering, construction drawings, construction
management, signage and other necessary permits associated with the Tenant
Improvements. Under no circumstances shall the Allowance be used for Tenant's
due diligence review of the Premises (or this Lease) nor the design, acquisition
or planning costs of Tenant's personal property, furniture, trade fixtures or
equipment.
Section 44. Environmental Provisions.
(a) Definitions. As used in this Section, the following terms have the following
definitions:
"Access Agreement" means that Access Agreement dated as of April 29, 1997
between R&H and Landlord, a copy of which is attached hereto as Exhibit I-2
"Agencies" means any federal, state, or local governmental authorities,
agencies, or other administrative bodies with jurisdiction over Landlord, Tenant
or the Premises or the Property.
"Costs" shall have the same definition as the word "Costs" as set forth in
Section 9.1 (a) of the R&H Indemnity (defined herein).
"Environmental Documents" means the studies, tests and reports listed in Exhibit
I.
"Environmental Laws" means any federal, state, or local environmental, health,
or safety-related laws, regulations, standards, court decisions, ordinances,
roles, codes, orders, decrees, directives, guidelines, permits, or permit
conditions, currently existing and as amended, enacted, issued, or adopted in
the furore that are or become applicable to Tenant or the Premises.
"Existing Environmental Conditions" means the presence of Hazardous Materials
at, on, in, under or from the Property (including in soil, surface, or
groundwater) on or before the date on which this Lease is signed, including
without limitation the conditions disclosed in the reports set forth in the
Environmental Documents.
"Hazardous Materials" shall have the same definition as the word term "Hazardous
Materials" as set forth in Section 9.1 (b) of the R&H Indemnity.
"Remediation Order" means California Regional Water Quality Control Board
("CRWQCB") Order No. 93-004 and any amendments thereto.
"Remediation Work" means all environmental activities necessary in order for R&H
(or any other responsible party other than Tenant) to comply with the
Remediation Order and any subsequent order of any governmental agency respecting
the Existing Environmental Conditions which may include the removal of
contaminated soil, groundwater and installation, operation, maintenance, repair,
replacement and removal of wells, pumps, pipes, tanks and related facilities and
equipment for testing and monitoring environmental contamination and effecting
the correction, reduction or elimination of environmental contamination.
"R&H" means Rohm & Haas Company, prior owner of the Property and responsible
party for the Remediation Work and R&H Indemnity.
"R&H Indemnity" means that certain assignable indemnification by R&H of Landlord
with respect to Existing Environmental Conditions as set forth in Article IX of
that certain Purchase and Sale Agreement executed between Landlord and R&H and
dated February 10, 1997 (the "Purchase and Sale Agreement") a redacted copy of
which is attached hereto and incorporated herein as Exhibit I-1. Landlord
represents that, to the best of Landlord's knowledge, the R&H Indemnity is in
full force and effect.
25
<PAGE>
"Tenant's Parties" means Tenant's employees, agents, customers, visitors,
invitees, licensees, contractors, designees, or subtenants.
(b) Disclosure, Remediation and Indemnification Regarding Existing Conditions.
(i) Environmental Disclosure. In accordance with Section 25359.7 of the
California Health and Safety Code, Landlord hereby gives notice to Tenant (i)
that releases of Hazardous Materials have come to be located on or beneath the
Property and (ii) of the matters set forth in the Environmental Documents.
(ii) Ongoing Remediation. Tenant acknowledges that the Remediation Work is
being conducted on the Property and Landlord represents, warrants, and agrees
that the Remediation Work will be conducted at no direct cost to Tenant during
the Lease Term, and that no part of the direct or indirect costs of such
Remediation Work shall be reimbursed by Tenant to Landlord or any other person
under this Lease or otherwise. All parties conducting the Remediation Work shall
have the right to use the Property for the purposes of performing the
Remediation Work pursuant to the terms and conditions of the Purchase and Sale
Agreement and the Access Agreement until the Remediation Work has been
completed. Tenant shall not interfere with the conduct of the Remediation Work
in a manner that is contrary to the rights of R&H under the Purchase and Sale
Agreement and the Access Agreement.
(iii) Assignment of R&H Indemnification. Pursuant to Section 9.2(b)
thereto, Landlord hereby irrevocably assigns to Tenant, without in any way
limiting the indemnity as it applies to Landlord and the Landlord Indemnitees,
on a non-exclusive basis to the fullest extent possible, all rights provided
under the R&H Indemnity, it being the intention of the parties that Tenant shall
have rights to enforce the R&H Indemnity obligations as if Tenant were a direct
party to the R&H Indemnity, provided, however, that in no event shall Tenant
have any direct or indirect obligation or responsibility arising under or with
respect to the R&H Indemnity or any agreement of which it is a part or to which
it relates.
(iv) Asbestos. Landlord represents that to the best of Landlord's
knowledge, there was no asbestos used in construction of the Base Building
Improvements and if asbestos is discovered in the Base Building Improvements,
absent any Alterations conducted by Tenant to introduce asbestos to the
Building, Landlord will be responsible for its removal in accordance with
applicable laws and regulations at Landlord's sole cost and expense
(c) Environmental Compliance.
(i) Tenant and Tenant's Parties will not, at any time during the Term, cause any
Hazardous Materials to be brought upon, stored, manufactured, generated,
blended, handled, recycled, treated, disposed, or used on, under, or about the
Premises, the Building, or the Project for any purpose, except as specifically
approved in writing by Landlord ("Permitted Hazardous Materials"), as amended
from time to time. A copy of the Permitted Hazardous Materials as of the date of
this Lease is attached as Exhibit I-3. Any material change to the Permitted
Hazardous Materials must be approved in advance in writing by Landlord, whose
approval will not be unreasonably withheld, but may be conditioned upon Tenant
providing additional security, guarantees, insurance, containment improvements
and/or confirmation of the filing of any required or recommended permits or
plans with applicable government authorities and compliance with any
requirements contained therein. The foregoing notwithstanding, Tenant may
handle, store, use or dispose of products containing small quantities of
Hazardous Materials, (exclusive of the Prohibited Known Contaminants defined
herein) which products are of a type customarily found in offices and houses
(such as aerosol cans containing insecticides, toner for copiers, paints, paint
remover, and the like) on the Premises provided that Tenant shall handle, store,
use and dispose of any such Hazardous Materials in a safe and lawful manner and
shall not allow such Hazardous Materials to contaminate the Premises, the
Building, the Property or the environment.
(ii) Tenant and Tenant's Parties will not, at any time during the Term, cause
any Prohibited Known Contaminants listed in the Schedule of Prohibited Known
Contaminants to be brought upon, stored, manufactured, generated, blended,
handled, recycled, treated, disposed, or used on, under, or about the Premises
or the Property for any purpose. A copy of the Prohibited Known Contaminants is
attached as Exhibit I-3.
26
<PAGE>
(iii) No asbestos-containing materials will be manufactured or installed for any
purposes on or as part of the Premises, whether as part of Tenant's or Tenant's
Parties' business operations or as tenant improvements, unless specifically
identified on Exhibit H and approved in advance in writing by Landlord, whose
approval will not be unreasonably withheld.
(iv) Tenant shall not violate any Environmental Laws in Tenant's operation and
maintenance of the Premises.
(v) Neither Tenant nor any of Tenant's Parties will install or use any
underground storage tanks on the Premises.
(d) Landlord's Right of Entry and Testing. Landlord and Landlord's
representatives have the right, but not the obligation, at any reasonable time,
upon reasonable advance notice (which notice shall include the nature of the
activities to be performed and the estimated cost thereof which may be the
responsibility of Tenant as provided below), to enter onto and to inspect the
Premises and to conduct reasonable testing, monitoring, sampling, digging,
drilling, and analysis to determine if Hazardous Materials are present on,
under, or about the Premises and to review and copy any documents, materials,
data, inventories or notices or correspondence to or from private parties or
governmental authorities directly related to the possible release of Hazardous
Materials in, on or from the Premises (collectively, "Inspection"). If the
Inspection indicates the presence of any environmental condition that occurred
during the Term as a result of Tenant's or Tenant's Parties' activities in
connection with the Premises, Tenant will reimburse Landlord for the cost of
conducting the tests upon reasonably detailed and advance invoices. Landlord
shall conduct all of Landlord's activities on the Premises in a manner designed
to cause the least possible interruption to Tenant and Tenant's use of the
Premises.
(e) Notification.
(i) To the extent Tenant has knowledge thereof, Tenant must give immediate
written notice to Landlord of:
(A) any enforcement, remediation, or other regulatory action or order, taken or
threatened, by any Agency regarding, or in connection with, the presence,
release, or threat of release of any Hazardous Material on, under, about, or
from the Premises resulting from Tenant's use of the Premises;
(B) all demands or claims made or threatened by any third party against Tenant
or Tenant's Parties or the Premises relating to any liability, loss, damage, or
injury resulting from the presence, release, or threat of release of any
Hazardous Materials on, under, about, or from the Premises or otherwise
resulting from Tenant's use of the Premises;
(C) any significant spill, release, or discharge of a Hazardous Material on,
under, about, or from the Premises, including, without limitation, any spill,
release, or discharge required to be reported to any Agency under applicable
Environmental Laws; and
(D) all incidents or matters where Tenant and Tenant's Parties are required to
give notice to any Agency pursuant to applicable Environmental Laws.
(F) copies of all Hazardous Materials Business Plans, Hazardous Waste Management
Plans, Chemical Hygiene Plans and any and all other plans or reports, and any
and all required periodic or special updates to such reports, which Tenant is
required to file with governmental agencies regulating Tenant's use of Hazardous
Materials on the Premises.
(ii) Tenant must promptly provide to Landlord copies of all materials, reports,
technical data, Agency inspection reports, notices and correspondence, and other
information or documents relating to incidents or matters subject to
notification under Section 44(g)(i). Also, Tenant must promptly furnish to
Landlord copies of all permits, approvals, and registrations Tenant receives or
submits with respect to Tenant's operations on the Premises, including, without
limitation, installation permits, and closure permits.
27
<PAGE>
(f) Remediation.
(i) If any Hazardous Materials are released or found on, under, or about the
Premises in violation of any Environmental Laws arising out of Tenant's or
Tenant's Parties' activities, in connection with the Premises, Tenant must
promptly take all actions, at Tenant's sole expense, necessary to investigate
and remediate the release or presence of such Hazardous Materials on, under, or
about the Premises in accordance with Environmental Laws and the requirements of
all Agencies. However, unless an emergency situation exists that requires
immediate action, Landlord's written approval of these actions will first be
obtained, and the approval will not be unreasonably withheld. Landlord's right
of prior approval of these actions includes, but is not limited to, the
selection of any environmental consultant to perform work on or related to the
Premises, the scope of work, and sampling activities to be performed by the
consultant before the report is final. Tenant will provide Landlord with at
least three (3) business days' advance notice of any sampling, and upon request
of Landlord, will split samples with Landlord. Tenant will also promptly provide
Landlord with the results of any test, investigation, or inquiry conducted by or
on behalf of Tenant or Tenant's Parties in connection with the presence or
suspected presence of Hazardous Materials on, under, about, or from the
Premises. Tenant must notify Landlord in advance and give Landlord the right to
participate in any oral or written communications with regulatory agencies
concerning environmental conditions on or arising from the Premises. Landlord
has the right, but not the obligation, to assume control of any required
remediation on the Premises at Tenant's expense if Tenant fails to notify
Landlord and obtain Landlord's approvals as required under Section 44(h). Upon
Landlord's reasonable request following Tenant's completion of any remediation
of the Premises, Tenant shall deliver to Landlord a letter from the applicable
Agency stating that the remediation was undertaken in accordance with all
applicable Environmental Laws and that any residual contamination remaining
after the remediation does not pose a threat to human health or the environment.
(ii) If Tenant or Tenant's Parties have caused a release of Hazardous Materials
that results in or threatens to result in Hazardous Materials becoming present
on, under, or about the Premises, threatens public health or safety or the
environment, or is in noncompliance with any applicable Environmental Laws or
requirements of Section 44, Landlord may demand that Tenant promptly take action
in accordance with Section 44(h)(i). If Tenant does not respond within forty-
five (45) days (unless there is an emergency, in which case Tenant must respond
as soon as practicable, but not less than three (3) days), Landlord has the
right, but not the obligation, to enter onto the Premises and take all actions
reasonably necessary to investigate and fully remediate the release or
noncompliance at Tenant's sole expense (provided Tenant shall seek reimbursement
under the R&H Indemnity or contribution from any other potentially responsible
party) which sums will be immediately due and payable upon receipt of an invoice
and will constitute additional rent under this Lease.
(g) Tenant's Indemnification of Landlord. Tenant will indemnify, protect,
defend, and hold harmless Landlord and Landlord's partners, members, directors,
officers, employees, shareholders, lenders, agents, contractors, and each of
their respective successors and assigns (individually and collectively "Landlord
Indemnitees") from all claims, judgments, causes of action, damages, penalties,
fines, taxes, costs, liabilities, losses, and expenses arising as a result of or
in connection with Tenant's or Tenant's Parties' breach of any prohibition or
provision of Section 44, or the presence of any Hazardous Materials on or under
the Premises during the Term or any Hazardous Materials that migrate from the
Premises to other properties, as a result of Tenant's or Tenant's Parties'
activities on or in connection with the Premises. This obligation by Tenant to
indemnify, protect, defend, and hold harmless Landlord Indemnitees includes,
without limitation, costs and expenses incurred for or in connection with any
investigation, cleanup, remediation, monitoring, removal, restoration, or
closure work required by the Agencies because of any Hazardous Materials present
on, under, or about the Premises as a result of Tenant's or Tenant's Parties'
activities; the costs and expenses of restoring, replacing, or acquiring the
equivalent of damaged natural resources if required under any Environmental Law;
all foreseeable consequential damages; all reasonable damages for the loss or
restriction on use of rentable or usable space or of any amenity of the
Premises; all reasonable sums paid in settlement of claims; reasonable attorney
fees; litigation, arbitration, and administrative proceeding costs; and
reasonable expert, consultant, and laboratory fees. Neither the written consent
of Landlord to the presence of Hazardous Materials on or under the Premises, nor
the strict compliance by Tenant with all Environmental Laws, will excuse Tenant
from the indemnification obligation. This indemnity will survive the expiration
or termination of this Lease. Further, if Landlord detects a deficiency in
Tenant's performance under this indemnity and Tenant fails to correct the
deficiency within thirty (30) business days after receipt of written notice from
Landlord, Landlord has the right to join and participate in any legal
proceedings or actions affecting the Premises that are initiated in connection
with any Environmental Laws. However, if the
28
<PAGE>
correction of the deficiency takes longer than thirty (30) business days,
Landlord may join and participate if Tenant fails to commence corrective action
within the thirty (30) business day period and after that diligently proceeds to
correct the deficiency.
Section 45. Publicity. Tenant on behalf of itself and its agents and
representatives expressly agrees that it is not authorized to announce this
Lease or the terms and conditions contained therein to any third party without
the prior written consent of Landlord.
Section 46. Easements. Landlord reserves the right to grant easements, rights,
and dedications that Landlord deems necessary or desirable, and to record parcel
maps and restrictions, so long as these easements, rights, dedications, maps,
and restrictions do not unreasonably interfere with Tenant's use or occupancy of
the Premises. Tenant agrees to sign any of these documents immediately upon
request of Landlord.
Section 47. Covenants and Conditions. Each term of this Lease performable by
Tenant shall be deemed both a covenant and a condition.
Section 48. Recordation. Upon request, Tenant shall execute, acknowledge, and
record a memorandum of this Lease in form and substance reasonably satisfactory
to Landlord.
Section 49. Intentionally Deleted.
Section 50. Security Measures. Tenant acknowledges that Landlord shall have no
obligation to provide any guard service or other security measures to the
Premises, and Tenant assumes all responsibility for the protection of Tenant,
Tenant's agents, subtenants, employees, invitees, and customers, and the
property of Tenant and of Tenant's agents, subtenants, employees, invitees, and
customers from acts of third parties.
Section 51. Brokers. Landlord and Tenant represent and warrants to each other
that no real estate broker, agent, or finder negotiated or was instrumental in
negotiating or representing Tenant in the negotiation of this Lease or the
consummation hereof except for the Landlord's Broker and Tenant's Broker.
Landlord shall be responsible for the payment of the commission or fee, if any,
owed to Tenant's Broker pursuant to a separate fee agreement between Landlord's
Broker and Tenant's Broker. Tenant shall pay the commission or fee of any
broker, agent, or finder acting for Tenant or claiming any commissions or fees
on the basis of contacts or dealings with Tenant other than Tenant's Broker and
Tenant shall indemnify and hold Landlord harmless from and against any claims
made by any such broker, agent, or finder of Tenant and any and all costs and
damages suffered by Landlord as a consequence thereof, including without
limitation attorney fees. Landlord shall indemnify and hold Tenant harmless from
and against any claims made by any broker, agent, or finder acting for Landlord
or claiming any commissions or fees on the basis of contacts or dealings solely
with Landlord and any and all costs and damages suffered by Tenant as a
consequence thereof, including without limitation attorney fees.
Section 52. Liability of Landlord.
(a) Limitation of Landlord Liability. Any liability of Landlord to Tenant under
this Lease (including all persons and entities that comprise Landlord, and any
successor landlord) and any recourse by Tenant against Landlord shall be limited
to the equity interest of Landlord and Landlord's successors in interest in and
to the Building and Property. On behalf of itself and all persons claiming by,
through, or under Tenant, Tenant expressly waives and releases Landlord from any
personal liability for breach of this Lease. Notwithstanding any other provision
of this Lease, Landlord shall not be liable for any consequential damages of any
kind (including lost economic opportunities, lost profits, lost proceeds and
similar types of damages), nor shall Landlord be liable for loss of or damage to
artwork, currency, jewelry, unique or valuable documents, securities,
instruments, electronics or other valuables, or for other property not in the
nature of ordinary fixtures, furnishings and equipment used in general
administrative and office activities and functions, which may result from any
default of the Lease by the Landlord or any action, omission, negligence or
misconduct of the Landlord in connection with the Property. Whenever in this
Lease Tenant (a) releases Landlord from any claim or liability, (b) waives or
limits any right of Tenant to assert any claim against Landlord or to seek
recourse against any property of landlord or (c) agrees to indemnify Landlord
against any matters, the relevant release, waiver, limitation or indemnity shall
run in favor of and apply to Landlord, its agents, its lenders, the constituent
partners, members, shareholders or other owners of Landlord
29
<PAGE>
or its agents, and the directors, officers, and employees of Landlord and its
agents and each such constituent partner, member, shareholder or other owner.
(b) Sale by Landlord. In the event of a sale or conveyance of the Building by
any owner of the reversion then constituting Landlord, provided such transferor
effectively assumes the obligations of Landlord under this Lease, the transferor
shall thereby be released from any further liability upon any of the terms,
covenants or conditions (express or implied) herein contained in favor of
Tenant, and in such event, insofar as such transferor is concerned, Tenant
agrees to look solely to the successor in interest of such transferor in and to
the Building and this Lease. Tenant agrees to attorn to the successor in
interest of such transferor. If Tenant provides Landlord with security for
Tenant's performance of its obligations hereunder, and Landlord transfers, or
provides a credit with respect to, such security to the grantee or transferee,
of Landlord's interest in the Property, Landlord shall be released from any
further responsibility or liability for such security.
Section 53. Parking. Tenant shall have the right to the non-exclusive use of Two
Hundred and one (201) parking spaces in the parking lot outside of the Building
and located on the Property ("Parking Lot"). There shall be no parking rental
charged Tenant during the Lease Term, nor any Option Period (except to the
extent included in the calculation of Monthly Rent under Section 42). The use of
such spaces shall be for the parking of motor vehicles used by Tenant, its
officers, employees and customers only, and shall be subject to all reasonable,
uniform and non-discriminatory applicable laws and the rules and regulations
adopted by Landlord from time to time for the use of the Parking Lot. Parking
spaces may not be assigned or transferred separate and apart from this Lease,
and upon expiration or earlier termination of this Lease, Tenant's rights with
respect to all leased parking spaces shall immediately terminate. Tenant and its
agents, employees, contractors, invitees or licensees shall not unreasonably
interfere with the rights of Landlord or others entitled to similar use of the
Parking Lot. The Parking Lot shall be subject to the reasonable control and
management of Landlord, who may, from time to time, establish, modify and
enforce reasonable, uniform and non-discriminatory rules and regulations with
respect thereto. Landlord reserves the right to change, reconfigure, or
rearrange the parking areas to reconstruct or repair any portion thereof and to
restrict the use of any parking areas and do such other acts in and to such
areas as Landlord deems necessary or desirable without such actions being deemed
an eviction of Tenant or a disturbance of Tenant's use of the Premise and
without Landlord being deemed in default hereunder; provided that Landlord shall
use commercially reasonable efforts to minimize (to the extent consistent with
applicable laws) the extent and duration of any resulting interference with
Tenant's parking rights. Landlord may in its sole discretion, convert the
Parking Lot to a reserved and/or controlled Parking Lot, or operate the Parking
Lot (or a portion thereof) as a tandem, attendant assisted and/or valet parking
facility. If parking places are not assigned pursuant to the terms of this
Lease, Landlord reserves the right at any time to assign parking spaces in a
reasonable manner, and Tenant shall thereafter be responsible to insure that its
employees park in the designed areas. Tenant shall, if requested by Landlord,
comply with all reasonable parking practices and otherwise furnish Landlord with
such information as Landlord reasonably requests. Landlord shall not be liable
for any damage of any nature to, or any theft of, vehicles or contents thereof,
in or about the Parking Lot. At Landlord's request, Tenant shall cause its
employees and agents using Tenant's parking spaces to execute an agreement
confirming the foregoing.
Section 54. Offer. Preparation of this Lease by Landlord or Landlord's agent and
submission to Tenant shall not be deemed an offer to lease. This Lease shall
become binding on Landlord and Tenant only when fully executed by Landlord and
Tenant, and the Subordination, Attornment and Non-Disturbance Agreement attached
as Exhibit S has been executed by Landlord's lender and delivered to Landlord,
evidencing lender's consent to this Lease.
30
<PAGE>
Section 55. Governing Law. This Lease shall be governed by and construed in
accordance with California law.
IN WITNESS WHEREOF, the parties have executed this Lease as of the date first
above written.
LANDLORD: Chestnut Bay, LLC, a California limited liability company
/s/ Michael Newbro
- ------------------------------
Michael Newbro, President
TENANT: Kana Communications, a California corporation
/s/ Mark Gainey
- ------------------------------
Mark Gainey, President
31
<PAGE>
EXHIBIT 10.11
[LOGO] Silicon Valley Bank
QuickStart Loan and Security Agreement
Borrower: Connectify, Inc. Address: One Waters Park Avenue
Date: November 6, 1998 Suite 200
San Mateo, CA 94403
SILICON'S OFFER TO EXTEND FINANCING ON THE TERMS SET FORTH HEREIN SHALL EXPIRE
IF THIS AGREEMENT IS NOT EXECUTED BY BORROWER AND RETURNED TO SILICON
WITHIN 30 DAYS OF THE ABOVE DATE.
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between
SILICON VALLEY BANK ("Silicon"), whose address is 3003 Tasman Drive, Santa
Clara, California 95054 and the borrower named above (jointly and severally, the
"Borrower"), whose chief executive office is located at the above address
("Borrower's Address").
1. Loans. Silicon will make loans to Borrower (the "Loans") in amounts
determined by Silicon in its reasonable business judgment up to the amount (the
"Credit Limit") shown on the Schedule to this Agreement (the "Schedule"),
provided no Event of Default and no event which, with notice or passage of time
or both, would constitute an Event of Default has occurred. All Loans and other
monetary Obligations will bear interest at the rate shown on the Schedule.
Interest will be payable monthly, on the date shown on the monthly billing from
Silicon. Silicon may, in its discretion, charge interest to Borrower's deposit
accounts maintained with Silicon.
2. Security Interest. As security for all present and future indebtedness,
guarantees, liabilities, and other obligations, of Borrower to Silicon
(collectively, the "Obligations"), Borrower hereby grants Silicon a continuing
security interest in all of Borrower's interest in the following types of
property, whether now owned or hereafter acquired, and wherever located
(collectively, the "Collateral"): All "accounts," "general intangibles,"
"contract rights," "chattel paper," documents," "letters of credit,"
"instruments," "deposit accounts," "inventory," "farm products," investment
property," "fixtures" and "equipment," as such terms are defined in Division 9
of the California Uniform Commercial Code in effect on the date hereof, and all
products, proceeds and insurance proceeds of the foregoing. Notwithstanding the
foregoing, the Collateral shall not be deemed to include any copyrights,
trademarks and patents or other intellectual property of the Borrower
(collectively "IP"); provided, that the Borrower shall not pledge or otherwise
grant a security interest in the IP to any third party.
3. Representations And Agreements Of Borrower. Borrower represents to Silicon as
follows, and Borrower agrees that the following representations will continue to
be true, and that Borrower will comply with all of the following agreements
throughout the term of this Agreement:
3.1 Corporate Existence and Authority. Borrower, if a corporation, is and will
continue to be, duly authorized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation. The execution, delivery and
performance by Borrower of this Agreement, and all other documents contemplated
hereby have been duly and validly authorized, and do not violate any law or any
provision of, and are not grounds for acceleration under, any agreement or
instrument which is binding upon Borrower.
3.2 Name; Places of Business. The name of Borrower set forth in this Agreement
is its correct name. Borrower shall give Silicon 15 days' prior written notice
before changing its name. The address set forth in the heading to this Agreement
is Borrower's chief executive office. In addition, Borrower has places of
business and Collateral is located only at the locations set forth on the
Schedule. Borrower will give Silicon at least 15 days prior written notice
before changing its chief executive office or locating the Collateral at any
other location.
3.3 Collateral Silicon has and will at all times continue to have a first-
priority perfected security interest in all of the Collateral other than
specific equipment. Borrower will immediately advise Silicon in writing of any
material loss or damage to the Collateral.
3.4 Financial Condition and Statements. All financial statements now or in the
future delivered to Silicon have been, and will be, prepared in conformity with
generally accepted accounting principles. Since the last date covered by any
such statement, there has been no material adverse change in the financial
condition or business of Borrower. Borrower will provide Silicon: (i) within 30
days after the end of each month, a monthly financial statement prepared by
Borrower, and such other information as Silicon shall reasonably request; (ii)
within 120 days following the end of Borrower's fiscal year, beginning with
Borrower's fiscal year end 1999, complete audited annual financial statements,
certified by independent certified public accountants acceptable to Silicon and
accompanied by the unqualified report thereon by said independent certified
public accountants; and (iii) other financial information reasonably requested
by Silicon from time to time.
3.5 Taxes; Compliance with Law. Borrower has filed, and will file, when due,
all tax returns and reports required by applicable law, and Borrower has paid,
and will pay, when due, all taxes, assessments, deposits and contributions now
or in the future owed by Borrower. Borrower has complied, and will comply, in
all material respects, with all applicable laws, rules and regulations.
3.6 Insurance. Borrower shall at all times insure all of the tangible personal
property Collateral and carry such other business insurance as is customary in
Borrower's industry.
3.7 Access to Collateral and Books and Records. At reasonable times, on one
business day notice, Silicon, or its
-1-
<PAGE>
agents, shall have the right to inspect the Collateral, and the right to audit
and copy Borrower's books and records.
3.8 Operating Accounts. Borrower shall maintain its primary operating accounts
with Bank.
3.9 Additional Agreements. Borrower shall not, without Silicon's prior written
consent, do any of the following: (i) enter into any transaction outside the
ordinary course of business except for the sale of capital stock to venture
investors, provided that Borrower promptly delivers written notification to
Silicon of any such sale; (ii) sell or transfer any Collateral, except in the
ordinary course of business; (iii) pay or declare any dividends on Borrower's
stock (except for dividends payable solely in stock of Borrower); or (iv)
redeem, retire, purchase or otherwise acquire, directly or indirectly, any of
Borrower's stock other than the repurchase of up to five percent (5%) of
Borrower's then issued stock in any fiscal year from Borrower's employees or
directors pursuant to written agreement with Borrower.
4. Term. This Agreement shall continue in effect until the maturity date set
forth on the Schedule (the "Maturity Date"). This Agreement may be terminated,
without penalty, prior to the Maturity Date as follows: (i) by Borrower,
effective three business days after written notice of termination is given to
Silicon; or (ii) by Silicon at any time after the occurrence of an Event of
Default, without notice, effective immediately. On the Maturity Date or on any
earlier effective date of termination, Borrower shall pay all Obligations in
full, whether or not such Obligations are otherwise then due and payable. No
termination shall in any way affect or impair any security interest or other
right or remedy of Silicon, nor shall any such termination relieve Borrower of
any Obligation to Silicon, until all of the Obligations have been paid and
performed in full.
5. Events of Default and Remedies. The occurrence of any of the following events
shall constitute an "Event of Default" under this Agreement: (a) Any
representation, statement, report or certificate given to Silicon by Borrower or
any of its officers, employees or agents, now or in the future, is untrue or
misleading in a material respect; or (b) Borrower fails to pay when due any Loan
or any interest thereon or any other monetary Obligation; or (c) the total
Obligations outstanding at any time exceed the Credit Limit; or (d) Borrower
fails to perform any other non-monetary Obligation, which failure is not cured
within 5 business days after the date due; or (e) Dissolution, termination of
existence, insolvency or business failure of Borrower; or appointment of a
receiver, trustee or custodian, for all or any part of the property of,
assignment for the benefit of creditors by, or the commencement of any
proceeding by or against Borrower under any reorganization, bankruptcy,
insolvency, arrangement, readjustment of debt, dissolution or liquidation law or
statute of any jurisdiction, now or in the future in effect; or (f) a material
adverse change in the business, operations, or financial or other condition of
Borrower. If an Event of Default occurs, Silicon, shall have the right to
accelerate and declare all of the Obligations to be immediately due and payable,
increase the interest rate by an additional four percent per annum, and exercise
all rights and remedies accorded it by applicable law.
6. General. If any provision of this Agreement is held to be unenforceable, the
reminder of this Agreement shall still continue in full force and effect. This
Agreement and any other written agreements, documents and instruments executed
in connection herewith are the complete agreement between Borrower and Silicon
and supersede all prior and contemporaneous negotiations and oral
representations and agreements, all of which are merged and integrated in this
Agreement. There are no oral understandings, representations or agreements
between the parties which are not in this Agreement or in other written
agreements signed by the parties in connection this Agreement. The failure of
Silicon at any time to require Borrower to comply strictly with any of the
provisions of this Agreement shall not waive Silicon's right later to demand and
receive strict compliance. Any waiver of a default shall not waive any other
default. None of the provisions of this Agreement may be waived except by a
specific written waiver signed by an officer of Silicon and delivered to
Borrower. The provisions of this Agreement may not be amended, except in a
writing signed by Borrower and Silicon. Borrower shall reimburse Silicon for all
reasonable attorneys' fees and all other reasonable costs incurred by Silicon,
in connection with this Agreement (whether or not a lawsuit is filed). If
Silicon or Borrower files any lawsuit against the other predicated on a breach
of this Agreement, the prevailing party shall be entitled to recover its
reasonable costs and attorneys' fees from the non-prevailing party. Borrower may
not assign any rights under this Agreement without Silicon's prior written
consent. This Agreement shall be governed by the laws of the State of
California.
7. Mutual Waiver of Jury Trial. BORROWER AND SILICON EACH HEREBY WAIVE THE RIGHT
TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN
ANY WAY RELATING TO, THIS AGREEMENT OR ANY CONDUCT, ACT OR OMISSION OF SILICON
OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR
AFFILIATES.
Borrower:
CONNECTIFY, INC.
By /s/ JOSEPH G. ANSANELLI
-----------------------------
President or Vice President
Silicon:
SILICON VALLEY BANK
By /s/ JOHN D. CHINA
----------------------------
Title Vice President
<PAGE>
[LOGO] Silicon Valley Bank
Schedule to
QuickStart Loan and Security Agreement (Two Tranche Equipment Advances)
BORROWER: Connectify, Inc. DATE: November 6, 1998
This Schedule is an integral part of the Loan and Security Agreement
between Silicon Valley Bank, a California chartered bank ("Silicon") and the
above-named borrower ("Borrower") of even date.
Credit Limit (Equipment), (Section 1),
Tranche 1: $1,000,000.00 (such amount to be funded under the aggregate
Credit Limit). Tranche 1 Equipment Advances will be made only on or
prior to June 30, 1999 (the "Tranche 1 Last Advance Date") and only
for the purpose of purchasing equipment reasonably acceptable to
Silicon. Borrower must provide invoices for the equipment to
Silicon on or before the Tranche 1 Last Advance Date.
Tranche 2 The difference between the Credit Limit and the aggregate amount
of Tranche 1 Equipment Advances, if any, outstanding on the Tranche
I Last Advance Date (such amount to be funded under the aggregate
Credit Limit). Tranche 2 Equipment Advances will be made only
between July 1, 1999 and on or prior to December 31, 1999 (the
"Tranche 2 Last Advance Date") and only for the purpose of
purchasing equipment reasonably acceptable to Silicon. Borrower
must provide invoices for the equipment to Silicon on or before the
Tranche 2 Last Advance Date.
The purpose of the Equipment Advances shall include but not be
limited to Borrower's purchase of computers, hardware, software,
furniture and fixtures, but shall exclude taxes, shipping and
installation expenses. Equipment Advances may only be used to
finance equipment purchased on or after January 1, 1998.
Interest Rate
(Section 1): A rate equal to the "Prime Rate" in effect from time to time per
annum. Interest shall be calculated on the basis of a 360-day year
for the actual number of days elapsed. "Prime Rate" means the rate
announced from time to time by Silicon as its "prime rate." It is a
base rate upon which other rates charged by Silicon are based, and
it is not necessarily the best rate available at Silicon. The
interest rate applicable to the Obligations shall change on each
date there is a change in the Prime Rate.
Maturity Date, (Section 4)
Tranche 1: After the Tranche 1 Last Advance Date, the unpaid principal
balance of the Tranche 1 Equipment Advances shall be repaid in 36
equal monthly installments of principal plus interest commencing on
July 31, 1999 and continuing on the same day of each month
thereafter until the entire unpaid principal balance and all
accrued unpaid interest of the Tranche 1 Equipment Advances have
been paid (subject to Silicon's right to accelerate the Tranche I
Equipment Advances on an Event of Default).
Tranche 2 After the Tranche 2 Last Advance Date, the unpaid principal
balance of the Tranche 2 Equipment Advances shall be repaid in 36
equal monthly installments of principal
<PAGE>
plus interest commencing on January 31, 2000 and continuing on the same day of
each month thereafter until the entire unpaid principal balance and all accrued
unpaid interest of the Tranche 2 Equipment Advances have been paid (subject to
Silicon's right to accelerate the Tranche 2 Equipment Advances on an Event of
Default).
Borrower: Silicon:
CONNECTIFY, INC. SILICON VALLEY BANK
By /s/ JOSEPH G. ANSANELLI By /s/ JOHN D. CHINA
---------------------------- ------------------------
President or Vice President Title Vice President
<PAGE>
[LOGO] Silicon Valley Bank
Schedule to
QuickStart Loan and Security Agreement (Master)
BORROWER: Connectify, Inc.
DATE: November 6, 1998
This Schedule is an integral part of the Loan and Security Agreement
between Silicon Valley Bank ("Silicon") and the above-named borrower
("Borrower") of even date.
Credit Limit (Aggregate)
(Section 1): $1,000,000.00 (includes, without limitation, Equipment
Advances, Letters of Credit, and the Merchant Services and
Business Visa Reserve, if any)
Interest Rate (Section 1): A rate equal to the "Prime Rate" in effect from time
to time per annum. Interest shall be calculated on the basis of a
360-day year for the actual number of days elapsed. "Prime Rate"
means the rate announced from time to time by Silicon as its "prime
rate;" it is a base rate upon which other rates charged by Silicon
are based, and it is not necessarily the best rate available at
Silicon. The interest rate applicable to the Obligations shall
change on each date there is a change in the Prime Rate.
Maturity Date (Section 4): June 30, 2000
Other Locations and Addresses
(Section 3.2): ________________________
Other Agreements: Borrower also agrees as follows:
1. Loan Fee. Borrower shall concurrently pay Silicon a non-
refundable Loan Fee in the amount of $0.00
2. Banking Relationship. Borrower shall at all times
maintain its primary banking relationship with Silicon.
Borrower: Silicon:
CONNECTIFY, INC. SILICON VALLEY BANK
By /s/ JOSEPH G. ANSANELLI By /s/ JOHN D. CHINA
--------------------------- -------------------------------
President or Vice President Title Vice President
<PAGE>
[LOGO] Silicon Valley Bank
Schedule to QuickStart Loan and Security Agreement (Letters of Credit Sublimit)
BORROWER: Connectify, Inc. DATE: November 6, 1998
This Schedule is an integral part of the Loan and Security Agreement
between Silicon Valley Bank ("Silicon") and the above-named borrower
("Borrower") dated November 6, 1998.
Letters of Credit
Sublimit (Section 1): The aggregate Credit Limit shall be reduced by an amount
equal to the sum of the face amounts of all outstanding letters
of credit (including drawn but unreimbursed letters of credit).
Silicon agrees to issue or cause to be issued letters of credit
for the account of Borrower, provided that the face amount of
outstanding letters of credit (including drawn but unreimbursed
letters of credit) shall not in any case exceed Two Hundred Fifty
and 00/100 Dollars ($250,000.00). Each such Letter of Credit
shall have an expiry date no later than one hundred eighty (180)
days after the Maturity Date of the Credit Limit (Aggregate)
provided that Borrower's Letter of Credit reimbursement
obligation shall be secured by cash on terms acceptable to
Silicon at any time after the Maturity Date if the term of the
Agreement is not extended by Silicon. All such letters of credit
shall be, in form and substance, acceptable to Silicon in its
sole discretion and shall be subject to the terms and conditions
of Silicon's form of application and letter of credit agreement.
Borrower shall indemnify, defend and hold Silicon harmless from
any loss, cost, expense or liability, including, without
limitation, reasonable attorneys' fees, arising out of or in
connection with any letters of credit.
Borrower may request that Silicon issue a letter of credit
payable in a currency other than United States Dollars. If a
demand for payment is made under any such letter of credit,
Silicon shall treat such demand as an Advance to Borrower of the
equivalent of the amount thereof (plus cable charges) in United
States currency at the then prevailing rate of exchange in San
Francisco, California, for sales of that other currency for cable
transfer to the country of which it is the currency.
Upon the issuance of any letter of credit payable in a currency
other than United States Dollars, Silicon shall create a reserve
(the "Letter of Credit Reserve") under the aggregate Credit Limit
for letters of credit against fluctuations in currency exchange
rates, in an amount equal to ten percent (10%) of the face amount
of such letter of credit. The amount of such reserve may be
amended by Silicon from time to time to account for fluctuations
in the exchange rate. The availability of funds under the Credit
Limit shall be reduced by the amount of such reserve for so long
as such letter of credit remains outstanding.
Borrower: Silicon:
CONNECTIFY, INC. SILICON VALLEY BANK
By /s/ JOSEPH G. ANSANELLI By /s/ JOHN D. CHINA
------------------------------- ----------------------------
President or Vice President Title Vice President
<PAGE>
[LOGO] Silicon Valley Bank
Certified Resolution
Borrower: Connectify, Inc., a corporation organized under the laws of the
State of Delaware
Date: November 6,1998
I, the undersigned, corporate officer of the above-named borrower, a
corporation organized under the laws of the state set forth above, do hereby
certify that the following is a full, true and correct copy of resolutions duly
and regularly adopted by the Board of Directors of said corporation as required
by law, and by the by-laws of said corporation, and that said resolutions are
still in full force and effect and have not been in any way modified, repealed,
rescinded, amended or revoked.
RESOLVED, that this corporation borrow from Silicon Valley Bank "Silicon"), from
time to time, such sum or sums of money as, in the judgment of the officer or
officers authorized hereby, this corporation may require.
RESOLVED FURTHER, that any officer of this corporation be, and he or she is
hereby authorized, in the name of this corporation, to execute and deliver to
Silicon the loan agreements, security agreements, notes, financing statements,
and other documents and instruments providing for such loans and evidencing or
securing such loans, and said authorized officers are authorized from time to
time to execute renewals, extensions and/or amendments of said loan agreements,
security agreements, and other documents and instruments.
RESOLVED FURTHER, that said authorized officers be and they are hereby
authorized, as security for any and all indebtedness of this corporation to
Silicon, whether arising pursuant to this resolution or otherwise, to grant, to
Silicon, or deed in trust for its benefit, any property of any and every kind,
belonging to this corporation, including, but not limited to, any and all real
property, accounts, inventory, equipment, general intangibles, instruments,
documents, chattel paper, notes, money, deposit accounts, furniture, fixtures,
goods, and other property of every kind, and to execute and deliver to Silicon
any and all pledge agreements, mortgages, deeds of trust, financing statements,
security agreements and other agreements, which said instruments and the note or
notes and other instruments referred to in the preceding paragraph may contain
such provisions, covenants, recitals and agreements as Silicon may require, and
said authorized officers may approve, and the execution thereof by said
authorized officers shall be conclusive evidence of such approval.
RESOLVED FURTHER, that said authorized officers be and they are hereby
authorized to issue warrants to purchase this corporation's capital stock, for
such class, series and number, and on such terms, as said officers shall deem
appropriate
RESOLVED FURTHER, that Silicon may conclusively rely on a certified copy of
these resolutions and a certificate of the corporate officer of this corporation
as to the officers of this corporation and their offices and signatures, and
continue to conclusively rely on such certified copy of these resolutions and
said certificate for all past, present and future transactions until written
notice of any change hereto or thereto is given to Silicon by this corporation
by certified mail, return receipt requested.
The undersigned further hereby certifies that the following persons are the duly
elected and acting officers of the corporation named above as borrower and that
the following are their actual signatures:
NAMES OFFICE(S) ACTUAL SIGNATURES
- ----- --------- -----------------
JOSEPH G. ANSANELLI President & CEO /s/ JOSEPH G. ANSANELLI
- ------------------- --------------- -----------------------
- ------------------- --------------- -----------------------
- ------------------- --------------- -----------------------
IN WITNESS WHEREOF, I have hereunto set my hand as such corporate officer on the
date set forth above.
By /s/
------------------------
Its
------------------------
<PAGE>
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
QUICKSTART
WARRANT TO PURCHASE STOCK
Corporation: Connectify, Inc.
Number of Shares: Warrant Coverage is equal to 3% (see below)
Class of Stock: Series A Preferred
Initial Exercise Price: $0.52
Issue Date: November 6, 1998
Expiration Date: Subject to Section 4.8
THIS WARRANT CERTIFIES THAT, for the agreed upon value of $1.00 and for
other good and valuable consideration, SILICON VALLEY BANK ("Holder") is
entitled to purchase the number of fully paid and nonassessable shares of the
class of securities (the "Shares") of the corporation (the "Company") at the
initial exercise price per Share (the "Warrant Price") all as set forth above
and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions
and upon the terms and conditions set forth in this Warrant. Holder shall only
be entitled to the Shares in the event that at any time after December 31, 1999
and during the remaining term of the QuickStart Agreement, Company's Remaining
Months Liquidity is less than three (3) months.
"Remaining Months Liquidity" is cash on hand (and cash equivalents) plus 50% of
Company's net accounts receivable, divided by Cash Burn. If cash (and cash
equivalents) increases from the prior period, "Cash Burn" is cash (prior period)
minus cash (current period) plus increases/less decreases in short and long term
borrowings plus increases/less decreases in stock, paid-in capital and
subordinated debt. If cash (and cash equivalents) decreases from prior period,
"Cash Burn" is cash (prior period) less (current period) minus increases/plus
decreases in short and long term borrowings minus increases/plus decreases in
stock, paid-in capital and subordinated debt.
"Warrant Coverage" means (a) three percent (3%) of the highest amount of
principal outstanding under the Schedule to QuickStart Loan and Security
Agreement (Master) pursuant to the QuickStart Loan and Security Agreement of
even date herewith, by and between Company and Holder ("QuickStart Agreement"),
minus (b) all Equipment Advances (as defined therein), divided by (c) Initial
Exercise Price. For purposes of the foregoing, Letters of Credit and Business
Credit Card (as defined in the QuickStart Agreement outstandings shall not be
considered advances under the Credit Limit.
ARTICLE 1. EXERCISE.
--------
1.1 Method of Exercise. Holder may exercise this Warrant by
------------------
delivering a duly executed Notice of Exercise in substantially the form attached
as Appendix 1 to the principal office of the Company. Unless Holder is
exercising the conversion right set forth in Section 1.2, Holder shall also
deliver to the Company a cheek for the aggregate Warrant Price for the Shares
being purchased.
<PAGE>
1.2 Conversion Right. In lieu of exercising this Warrant as specified
----------------
in Section 1.1, Holder may from time to time convert this Warrant, in whole or
in part, into a number of Shares determined by dividing (a) the aggregate fair
market value of the Shares or other securities otherwise issuable upon exercise
of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair
market value of one Share. The fair market value of the Shares shall be
determined pursuant to Section 1.4.
1.3 Intentionally Omitted
---------------------
1.4 Fair Market Value. If the Shares are traded in a public market,
-----------------
the fair market value of the Shares shall be the closing price of the Shares (or
the closing price of the Company's stock into which the Shares are convertible)
reported for the business day immediately before Holder delivers its Notice of
Exercise to the Company. If the Shares are not traded in a public market, the
Board of Directors of the Company shall determine fair market value in its
reasonable good faith judgment.
1.5 Delivery of Certificate and New Warrant. Promptly after Holder
---------------------------------------
exercises or converts this Warrant, the Company shall deliver to Holder
certificates for the Shares acquired and, if this Warrant has not been fully
exercised or converted and has not expired, a new Warrant representing the
Shares not so acquired.
1.6 Replacement of Warrants. On receipt of evidence reasonably
-----------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the ease of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and mount to the Company or,
in the case of mutilation, on surrender and cancellation of this Warrant, the
Company at its expense shall execute and deliver, in lieu of this Warrant, a new
warrant of like tenor.
1.7 Repurchase on Sale, Merger, or Consolidation of the Company.
------------------------------------------------------------
1.7.1. "Acquisition". For the purpose of this Warrant,
-------------
"Acquisition" means any sale, license, or other disposition of all or
substantially all of the assets of the Company, or any reorganization,
consolidation, or merger of the Company where the holders of the Company's
securities before the transaction beneficially own less than 50% of the
outstanding voting securities of the surviving entity after the transaction.
1.7.2. Assumption of Warrant. Upon the closing of any
---------------------
Acquisition the successor entity may, at its option, assume the obligations of
this Warrant, and this Warrant shall be exercisable for the same securities,
cash, and property as would be payable for the Shares issuable upon exercise of
the unexercised portion of this Warrant as if such Shares were outstanding on
the record date for the Acquisition and subsequent closing. The Warrant Price
shall be adjusted accordingly. If the successor entity does not assume the
obligations of the Company under this Warrant, then this Warrant shall be deemed
to have been automatically converted pursuant to Section 1.2 and thereafter
Holder shall participate in the Acquisition as a holder of the Shares (or other
securities issuable upon exercise of this Warrant) on the same terms as other
holders of the same class of securities of the Company.
ARTICLE 2. ADJUSTMENTS TO THE SHARES.
-------------------------
2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a
----------------------------
dividend on its common stock (or the Shares if the Shares are securities other
than common stock) payable in common stock, or other securities, subdivides the
outstanding common stock into a greater amount of common stock, or, if the
Shares are securities other than common stock, subdivides the Shares in a
transaction that
2
<PAGE>
increases the amount of common stock into which the Shares are convertible, then
upon exercise of this Warrant, for each Share acquired, Holder shall receive,
without cost to Holder, the total number and kind of securities to which Holder
would have been entitled had Holder owned the Shares of record as of the date
the dividend or subdivision occurred.
2.2 Reclassification, Exchange or Substitution. Upon any
------------------------------------------
reclassification, exchange, substitution, or other event that results in a
change of the number and/or class of the securities issuable upon exercise or
conversion of this Warrant, Holder shall be entitled to receive, upon exercise
or conversion of this Warrant, the number and kind of securities and property
that Holder would have received for the Shares if this Warrant had been
exercised immediately before such reclassification, exchange, substitution, or
other event. Such an event shall include any automatic conversion of the
outstanding or issuable securities of the Company of the same class or series as
the Shares to common stock pursuant to the terms of the Company's Articles of
Incorporation upon the closing of a registered public offering of the Company's
common stock. The Company or its successor shall promptly issue to Holder a new
Warrant for such new securities or other property. The new Warrant shall provide
for adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Article 2 including, without limitation,
adjustments to the Warrant Price and to the number of securities or property
issuable upon exercise of the new Warrant. The provisions of this Section 2.2
shall similarly apply to successive reclassifications, exchanges, substitutions,
or other events.
2.3 Adjustments for Combinations, Etc. If the outstanding Shares are
---------------------------------
combined or consolidated, by reclassification or otherwise, into a lesser number
of shares, the Warrant Price shall be proportionately increased.
2.4 Adjustments for Diluting Issuances. The Warrant Price and the
----------------------------------
number of Shares issuable upon exercise of this Warrant or, if the Shares are
Preferred Stock, the number of shares of common stock issuable upon conversion
of the Shares, shall be subject to adjustment, from time to time in the manner
set forth in the Company's Articles of Incorporation, as amended from time to
time.
2.5 No Impairment. The Company shall not, by amendment of its
-------------
Articles of Incorporation or through a reorganization, transfer of assets,
consolidation, merger, dissolution, issue, or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed under this Warrant by the Company, but
shall at all times in good faith assist in carrying out of all the provisions of
this Article 2 and in taking all such action as may be necessary or appropriate
to protect Holder's rights under this Article against impairment. If the Company
takes any action affecting the Shares or its common stock other than as
described above that adversely affects Holder's rights under this Warrant, the
Warrant Price shall be adjusted downward and the number of Shares issuable upon
exercise of this Warrant shall be adjusted upward in such a manner that the
aggregate Warrant Price of this Warrant is unchanged.
2.6 Fractional Shares. No fractional Shares shall be issuable upon
-----------------
exercise or conversion of the Warrant and the number of Shares to be issued
shall be rounded down to the nearest whole Share. If a fractional share interest
arises upon any exercise or conversion of the Warrant, the Company shall
eliminate such fractional share interest by paying Holder amount computed by
multiplying the fractional interest by the fair market value of a full Share.
2.7 Certificate as to Adjustments. Upon each adjustment of the
-----------------------------
Warrant Price, the Company at its expense shall promptly compute such
adjustment, and furnish Holder with a certificate of its Chief Financial Officer
setting forth such adjustment and the facts upon which such adjustment is
3
<PAGE>
based. The Company shall, upon written request, furnish Holder a certificate
setting forth the Warrant Price in effect upon the date thereof and the series
of adjustments leading to such Warrant Price.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.
--------------------------------------------
3.1 Representations and Warranties. The Company hereby represents and
------------------------------
warrants to the Holder as follows:
(a) The initial Warrant Price referenced on the first page of
this Warrant is not greater than the fair market value of the Shares as of the
date of this Warrant.
(b) All Shares which may be issued upon the exercise of the
purchase right represented by this Warrant, and all securities, if any, issuable
upon conversion of the Shares, shall, upon issuance, be duly authorized, validly
issued, fully paid and nonassessable, and free of any liens and encumbrances
except for restrictions on transfer provided for herein or under applicable
federal and state securities laws.
3.2 Notice of Certain Events. If the Company proposes at any time (a)
------------------------
to declare any dividend or distribution upon its common stock, whether in cash,
property, stock, or other securities and whether or not a regular cash dividend;
(b) to offer for subscription pro rata to the holders of any class or series of
its stock any additional shares of stock of any class or series or other rights;
(c) to effect any reclassification or recapitalization of common stock; (d).to
merge or consolidate with or into any other corporation, or sell, lease,
license, or convey all or substantially all of its assets, or to liquidate,
dissolve or wind up; or (e) offer holders of registration rights the opportunity
to participate in an underwritten public offering of the company's securities
for cash, then, in connection with each such event, the Company shall give
Holder (1) at least 10 days prior written notice of the date on which a record
will be taken for such dividend, distribution, or subscription rights (and
specifying the date on which the holders of common stock will be entitled
thereto) or for determining rights to vote, if any, in respect of the matters
referred to in (e) and (d) above; (2) in the case of the matters referred to in
(c) and (d) above at least 10 days prior written notice of the date when the
same will take place (.and specifying the date on which the holders of common
stock will be entitled to exchange their common stock for securities or other
property deliverable upon the occurrence of such event); and (3) in the case of
the matter referred to in (e) above, the same notice as is given to the holders
of such registration rights.
3.3 Information Rights. So long as the Holder holds this Warrant
------------------
and/or any of the Shares, the Company shall deliver to the Holder promptly upon
Holder's reasonable request, copies of all notices or other written
communications to the shareholders of the Company, the annual audited financial
statements of the Company certified by independent public accountants of
recognized standing and the Company's quarterly, unaudited financial statements.
ARTICLE 4. MISCELLANEOUS.
-------------
4.1 Term; Notice of Expiration. This Warrant is exercisable, in whole
--------------------------
or in part, at any time and from time to time on or before the Expiration Date
set forth above.
4.2 Legends. This Warrant and the Shares (and the securities
-------
issuable, directly or indirectly, upon conversion of the Shares, if any) shall
be imprinted with a legend in substantially the following form:
4
<PAGE>
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN
EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS
COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
4.3 Compliance with Securities Laws on Transfer. This Warrant and the
-------------------------------------------
Shares issuable upon exercise this Warrant (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) may not be
transferred or assigned in whole or in part without compliance with applicable
federal and state securities laws by the transferor and the transferee
(including, without limitation, the delivery of investment representation
letters and legal opinions reasonably satisfactory to the Company, as reasonably
requested by the Company). The Company shall not require Holder to provide an
opinion of counsel if the transfer is to an affiliate of Holder or if there is
no material question as to the availability of current information as referenced
in Rule 144(c), Holder represents that it has complied with Rule 144(d) and (e)
in reasonable detail, the selling broker represents that it has complied with
Rule 144(f), and the Company is provided with a copy of Holder s notice of
proposed sale.
4.4 Transfer Procedure. Subject to the provisions of Section 4.3
------------------
Holder may transfer all or part of this Warrant or the Shares issuable upon
exercise of this Warrant (or the securities issuable, directly or indirectly,
upon conversion of the Shares, if any) by giving the Company notice of the
portion of the Warrant being transferred setting forth the name, address and
taxpayer identification number of the transferee and surrendering this Warrant
to the Company for reissuance to the transferee(s) (and Holder if applicable);
provided, however, that Holder may transfer all or part of this Warrant to
- -------- -------
Silicon Valley Bancshares, The Silicon Valley Bank Foundation, and any other
affiliate of Holder at any time without notice to the Company. The terms and
conditions of this Warrant shall inure to the benefit of, and be binding upon,
the Company and the holders hereof and their respective permitted successors and
assigns. Unless the Company is filing financial information with the SEC
pursuant to the Securities Exchange Act of 1934, the Company shall have the
right to refuse to transfer any portion of this Warrant to any party who
directly competes with the Company.
4.5 Notices. All notices and other communications from the Company to
-------
the Holder, or vice versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Company or the
Holder, as the case may be, in writing by the Company or the Holder from time to
time. The Company shall sent all notices to Holder to the following address:
Treasury Department
Silicon Valley Bank
3003 Tasman Drive NC821
Santa Clara, CA 95054
4.6 Waiver. This Warrant and any term hereof may be changed, waived,
------
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
4.7 Attorneys' Fees. In the event of any dispute between the parties
---------------
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorneys' fees.
5
<PAGE>
4.8 Termination. This warrant shall terminate upon the earliest
-----------
occurrence of any of the following events: (i) five (5) years from the date of
this Warrant; (ii) the closing of an initial public offering ("IPO") in which
the Company's stock is sold for at least 3 times the Initial Exercise Price;
(iii) at such date following an IPO (after notice from the Company to Holder) as
the Company's stock Wades in excess of 3 times the Initial Exercise Price for
over 30 consecutive days; or (iv) the closing of a sale or merger of the
Company; provided, however, if the events described in subsections' (ii), (iii)
or (iv) occur, Company agrees to provide Holder with at least 30 days' advance
written notice of the event in order that Holder may exercise the warrant.
4.9 Governing Law. This Warrant shall be governed by and construed in
-------------
accordance with the laws of the State of California, without giving effect to
its principles regarding conflicts of law.
CONNECTIFY, INC.
By: /s/ JOSEPH G. ANSANELLI
-----------------------------------
Name: President
-----------------------------------
(Print)
Title: Chairman of the Board, President or
Vice President
By: /s/ GREGORY L. GRETSEL
-----------------------------------
Name: Gregory L. Gretsel
-----------------------------------
(Print)
Title: Chief Financial Officer, Secretary,
Assistant Treasurer or Assistant
Secretary
6
<PAGE>
APPENDIX 1
NOTICE OF EXERCISE
------------------
1. The undersigned hereby elects to purchase shares of the
-----
Common/Series Preferred [strike one] Stock of
--------- -----------------
pursuant to the terms of the attached Warrant, and tenders herewith payment of
the purchase price of such shares in full.
1. The undersigned hereby elects to convert the attached Warrant into
Shares/cash [strike one] in the manner specified in the Warrant. This conversion
is exercised with respect to of the Shares covered by the
---------------
Warrant.
[Strike paragraph that does not apply.]
2. Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name as is specified below:
--------------------------------
(Name)
--------------------------------
--------------------------------
(Address)
3. The undersigned represents it is acquiring the shares solely for its
own account and not as a nominee for any other party and not with a view toward
the resale or distribution thereof except in compliance with applicable
securities laws.
-------------------------------------
(Signature)
- ----------------
(Date)
1
<PAGE>
NEGATIVE PLEDGE AGREEMENT
This Negative Pledge Agreement is made as of November 6, 1998, by and
between Connectify, Inc. ("Borrower") and Silicon Valley Bank ("Silicon").
In connection with, among other documents, the QuickStart Loan and Security
Agreement (the "Loan Documents") being concurrently executed herewith between
Borrower and Silicon, Borrower agrees as follows, for as long as the Loan
Documents are in effect:
1. Borrower shall not sell, transfer, assign, mortgage, pledge, lease, grant a
security interest in, or encumber any of Borrower's intellectual property,
including, without limitation, the following:
a. Any and all copyright rights, copyright applications, copyright
registrations and like protections in each work or authorship and
derivative work thereof, whether published or unpublished and whether
or not the same also constitutes a trade secret, now or hereafter
existing, created, acquired or held;
b. All mask works or similar rights available for the protection of
semiconductor chips, now owned or hereafter acquired;
c. Any and all trade secrets, and any and all intellectual property rights
in computer software and computer software products now or hereafter
existing, created, acquired or held;
d. Any and all design rights which may be available to Borrower now or
hereafter existing, created, acquired or held;
e. All patents, patent applications and like protections including,
without limitation, improvements, divisions, continuations, renewals,
reissues, extensions and continuations-in-part of the same, including
without limitation the patents and patent applications;
f. Any trademark and servicemark rights, whether registered or not,
applications to register and registrations of the same and like
protections, and the entire goodwill of the business of Borrower
connected with and symbolized by such trademarks, including without
limitation;
g. Any and all claims for damages by way of past, present and future
infringements of any of the rights included above, with the right, but
not the obligation, to sue for and collect such damages for said use or
infringement of the intellectual property rights identified above;
h. All licenses or other rights to use any of the Copyrights, Patents,
Trademarks or Mask Works, and all license fees and royalties arising
from such use to the extent permitted by such license or rights; and
<PAGE>
i. All amendments, extensions, renewals and extensions of any of the
Copyrights, Trademarks, Patents, or Mask Works; and
j. All proceeds and products of the foregoing, including without
limitation all payments under insurance or any indemnity or warranty
payable in respect of any of the foregoing.
The provisions of this Paragraph 1 shall not apply to Borrower's grant
of license rights in the ordinary course of Borrower's business to clients,
customers, partners and other third parties
2. It shall be an event of default under the Loan Documents between Borrower
and Silicon if there is a breach of any term of this Negative Pledge
Agreement.
3. Capitalized terms used but not otherwise defined herein shall have the same
meaning as in the Loan Documents.
BORROWER:
CONNECTIFY INC.
By: /s/ Joseph G. Ansanelli
-----------------------
Name: Joseph G. Ansanelli
-----------------------
Title: President
-----------------------
SILICON:
SILICON VALLEY BANK
By: /s/ John China
-----------------------
Name: Vice President
-----------------------
Title: John D. China
-----------------------
<PAGE>
FINANCING STATEMENT -- FOLLOW INSTRUCTIONS CAREFULLY
<TABLE>
<CAPTION>
This Financing Statement is presented for filing pursuant to the Uniform Commercial Code and will remain effective, with certain
exceptions, for 5 years from date of filing.
- -----------------------------------------------------------------------------------------------
A. NAME & TEL. # OF CONTACT AT FILER (optional) B. FILING OFFICE ACCT. # (optional)
- -----------------------------------------------------------------------------------------------
<S> <C>
C. RETURN COPY TO: (Name and Mailing Address)
SILICON VALLEY BANK
3003 TASMAN DRIVE
SANTA CLARA, CA 95054
- -----------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
D. OPTIONAL DESIGNATION (if applicable): [ ] LESSOR/LESSEE [ ] CONSIGNOR/CONSIGNEE [ ] NON-UCC FILING
====================================================================================================================================
1. DEBTOR'S EXACT FULL LEGAL NAME - Insert only one debtor name (1a or 1b)
---------------------------------------------------------------------------------------------------------------------------------
1a. ENTITY'S NAME
CONNECTIFY, INC.
OR ---------------------------------------------------------------------------------------------------------------------------------
1b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX
---------------------------------------------------------------------------------------------------------------------------------
1c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE
One Waters Park Avenue, Suite 200 San Mateo CA USA 94403
- ------------------------------------------------------------------------------------------------------------------------------------
1d. S.S. OR TAX I.D.# OPTIONAL 1e. TYPE OF ENTITY 1f. ENTITY'S STATE 1g. ENTITY'S ORGANIZATIONAL I.D.#, if any
ADD'NL INFO RE OR COUNTRY OF
ENTITY DEBTOR ORGANIZATION [ ] NONE
====================================================================================================================================
2. ADDITIONAL DEBTOR'S EXACT FULL LEGAL NAME - Insert only one debtor name (2a or 2b)
- ------------------------------------------------------------------------------------------------------------------------------------
2a. ENTITY'S NAME
OR ------------------------------------------------------------------------------------------------------------------------------
2b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX
- ------------------------------------------------------------------------------------------------------------------------------------
2c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE
- ------------------------------------------------------------------------------------------------------------------------------------
2d. S.S. OR TAX I.D.# OPTIONAL 2e. TYPE OF ENTITY 2f. ENTITY'S STATE 2g. ENTITY'S ORGANIZATIONAL I.D.#, if any
ADD'NL INFO RE OR COUNTRY OF
ENTITY DEBTOR ORGANIZATION [ ] NONE
====================================================================================================================================
3. SECURED PARTY'S (ORIGINAL S/P or ITS TOTAL ASSIGNEE) EXACT FULL LEGAL NAME - Insert only one secured party name (3a or 3b)
------------------------------------------------------------------------------------------------------------------------------
3a. ENTITY'S NAME
SILICON VALLEY BANK
OR ------------------------------------------------------------------------------------------------------------------------------
3b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX
- ------------------------------------------------------------------------------------------------------------------------------------
3c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE
3003 Tasman Drive Santa Clara CA USA 95054
====================================================================================================================================
4. This FINANCING STATEMENT covers the following types or items of property:
SEE EXHIBIT "A" ATTACHED HERETO AND MADE A PART HEREOF
====================================================================================================================================
5. CHECK This FINANCING STATEMENT is signed by the Secured Party instead of the Debtor to perfect a security interest
BOX [_] (a) in collateral already subject to a security interest in another jurisdiction when it was brought into
(if applicable) this state, or when the debtor's location was changed to this state, or (b) in accordance with other
statutory provisions [additional data may be required]
====================================================================================================================================
6. REQUIRED SIGNATURE(S)
/s/ Joseph G. Ansanelli CONNECTIFY, INC.
- ------------------------------------------------------------------------------------------------------------------------------------
7. If filed in Florida (check one)
[ ] Documentary [ ] Documentary stamp
stamp fax paid fax not applicable
====================================================================================================================================
8. [ ] This FINANCING STATEMENT is to be filed (for record)
(or recorded) in the REAL ESTATE RECORDS
Attach Addendum (if applicable)
- ------------------------------------------------------------------------------------------------------------------------------------
9. Check to REQUEST SEARCH CERTIFICATE(S) on Debtor(s)
[ADDITIONAL FEE]
(optional) [ ] All Debtors [ ] Debtor 1 [ ] Debtor 2
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
(4) DEBTOR COPY NATIONAL FINANCING STATEMENT (FORM UCC1) (TRANS) (REV. 12/18/95) Available from
West Coast Financial Printing
(800) 427-8980
</TABLE>
<PAGE>
EXHIBIT "A" TO UCC-1 FINANCING STATEMENT
DEBTOR: CONNECTIFY, INC.
SECURED PARTY: SILICON VALLEY BANK
Debtor hereby grants Secured Party a security interest in all of the
following, whether now owned or hereafter acquired, and wherever located, as
collateral for the payment and performance of all present and future
indebtedness, liabilities, guarantees and obligations of Debtor to Secured
Party: All "accounts," "general intangibles," "contract rights, ""chattel
paper," "documents," "letters of credit," "instruments," "deposit accounts,"
"inventory," "farm products," "fixtures," "investment property," and
"equipment," as such terms are defined in Division 9 of the California Uniform
Commercial Code in effect on the date hereof, and all products, proceeds and
insurance proceeds of any or all of the foregoing. Notwithstanding the
foregoing, the Collateral shall not be deemed to include any copy rights,
patents, trademarks or other intellectual property of the Debtor (collectively
"IP"); provided, that the Debtor shall not pledge or otherwise grant a security
interest in the IP to any third party.
Debtor Initial here: /s/ JA
<PAGE>
EXHIBIT 21.1
List of Subsidiaries for Kana Communications, Inc.
--------------------------------------------------
(1) Kana Communications Europe LTD, a corporation formed under the laws of
England.
(2) Connectify, Inc., a Delaware corporation.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Kana Communications, Inc.:
We consent to the use of our form of reports included herein and to the
references to our firm under the headings "Supplemental Selected Consolidated
Financial Data," "Change in Accountants," and "Experts" in the prospectus.
/s/ KPMG LLP
Mountain View, California
August 13, 1999
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated May 19, 1999 except for Note 8 for which the date is August
13, 1999 relating to the financial statements of Connectify, Inc., which appear
in such Registration Statement. We also consent to the reference to us under
the heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
San Jose, California
August 16, 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> 12-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 JUN-30-1999
<CASH> 12,955 5,798
<SECURITIES> 160 2,251
<RECEIVABLES> 877 1,675
<ALLOWANCES> 60 266
<INVENTORY> 0 0
<CURRENT-ASSETS> 14,073 10,193
<PP&E> 1,301 2,476
<DEPRECIATION> 260 530
<TOTAL-ASSETS> 15,275 12,325
<CURRENT-LIABILITIES> 1,849 5,364
<BONDS> 0 0
0 0
19 19
<COMMON> 13 15
<OTHER-SE> 13,034 6,289
<TOTAL-LIABILITY-AND-EQUITY> 15,275 12,325
<SALES> 1,793 2,795
<TOTAL-REVENUES> 2,049 3,578
<CGS> 54 72
<TOTAL-COSTS> 573 1,213
<OTHER-EXPENSES> 9,040 12,326
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 36 27
<INCOME-PRETAX> (7,378) (9,854)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (7,378) (9,854)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,378) (9,854)
<EPS-BASIC> (1.72) (1.25)
<EPS-DILUTED> (1.72) (1.25)
</TABLE>
