<PAGE>
As filed with the Securities and Exchange Commission on March 14, 2000
Registration No. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM S-4
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 of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code) Identification Number)
</TABLE>
740 Bay Road, Redwood City, California 94063, (650) 298-9280
(Address, including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
--------------
Michael J. McCloskey, Chief Executive Officer
Kana Communications, Inc.
740 Bay Road, Redwood City, California 94063, (650) 298-9280
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
--------------
Copies to:
<TABLE>
<S> <C>
Rod J. Howard, Esq. John M. Hession, Esq.
Warren T. Lazarow, Esq. Brian D. Goldstein, Esq.
David A. Makarechian, Esq. Kristie P. Hathaway, Esq.
Stephen B. Sonne, Esq. Tracey R. Greenwald, Esq.
Megan R. Comport, Esq. Testa, Hurwitz & Thibeault, LLP
Richard A. McCarthy, Esq. 125 High Street
Brobeck, Phleger & Harrison LLP Boston, Massachusetts 02110
Two Embarcadero Place, 2200 Geng Road (617) 248-7000
Palo Alto, California 94303
(650) 424-0160
</TABLE>
--------------
Approximate date of commencement of proposed sale to the public: At the
effective time of the merger of a wholly-owned subsidiary of the Registrant
with and into Silknet Software, Inc., which shall occur as soon as practicable
after the effective date of this Registration Statement and the satisfaction
or waiver of all conditions to the closing of such merger.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, 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. [_]
--------------
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Title of Each Class of Amount to Proposed Maximum Proposed Maximum Amount of
Securities to be be Offering Price Aggregate Offering Registration
Registered Registered(1) Per Share Price(2) Fee
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.001 per share....... 33,090,590 N/A $4,515,071,385.00 $1,191,978.85
</TABLE>
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(1) Based upon the maximum number of shares of the Registrant's common stock
expected to be issued in connection with the merger, calculated as the
product of (a) 19,934,090, the aggregate number of shares of Silknet
Software, Inc. common stock outstanding on February 3, 2000 and shares
issuable pursuant to outstanding options and warrants prior to the date
the merger is expected to be consummated and (b) an exchange ratio of 1.66
shares of the Registrant's common stock for each share of Silknet common
stock.
(2) Estimated solely for purposes of calculating the registration fee required
by Section 6(b) of the Securities Act and calculated pursuant to Rule
457(f)(1) under the Securities Act. Pursuant to Rule 457(f)(1) under the
Securities Act, the proposed maximum aggregate offering price of the
Registrant's common stock was calculated as the average of the reported
high and low per share prices of Silknet common stock on March 7, 2000
multiplied by the total number of shares of Silknet common stock expected
to be exchanged for the shares of the Registrant's common stock registered
hereunder.
--------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment that specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to such Section
8(a), may determine.
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<PAGE>
[KANA COMMUNICATIONS, INC. LETTERHEAD]
March , 2000
Dear Kana Communications, Inc. Stockholders:
I am writing to you today about the proposed merger of Silknet Software,
Inc. and a wholly-owned subsidiary of Kana Communications, Inc. This merger
will create a combined company that will be one of the largest to develop,
market and support customer communication software products and services for
e-Businesses.
In the merger, Silknet will become a wholly-owned subsidiary of Kana, and
each share of Silknet common stock will be exchanged for 1.66 shares of the
common stock, par value $0.001 per share, of Kana Communications, Inc. Kana
common stock is traded on the Nasdaq National Market under the symbol "KANA."
We expect to issue approximately 28.5 million shares of our common stock and
to assume 4.58 million common stock options and warrants in the merger. The
merger is described more fully in the accompanying joint proxy
statement/prospectus.
You will be asked to vote upon the issuance of shares of Kana common stock
pursuant to the merger agreement by and among Kana, Silknet and Pistol
Acquisition Corp., a wholly-owned subsidiary of Kana, at a special meeting of
Kana stockholders to be held on April , 2000 at 10:00 a.m., local time, at
the offices of Brobeck, Phleger & Harrison LLP at Two Embarcadero Place, 2200
Geng Road, Palo Alto, California 94303. For the merger to go forward, the
holders of a majority of the outstanding shares of Kana common stock must
approve the issuance of these shares. At the special meeting, you will also be
asked to consider and vote upon two additional proposals. The first additional
proposal is to increase the number of Kana's authorized common shares in
Kana's amended and restated certificate of incorporation. The second
additional proposal is to amend Kana's 1999 Stock Incentive Plan to:
. increase the number of shares of common stock available for issuance
under the 1999 plan by an additional 10,000,000 shares;
. allow option grants and direct stock issuances to be made under the 1999
plan at an exercise or issue price below the fair market value of the
shares on the date of grant or issue; and
. increase the limitation on the maximum number of shares by which the
share reserve under the 1999 plan is to increase each year pursuant to
the automatic share increase provisions of such plan.
The proposal to increase the authorized common shares requires the
approval of the holders of a majority of the outstanding shares of Kana common
stock. The proposal to amend the 1999 plan requires the approval of a majority
of the Kana shares present or represented at the special meeting and entitled
to vote on such proposal. Only stockholders who hold shares of Kana common
stock at the close of business on March 21, 2000 will be entitled to vote at
the special meeting.
All share numbers in the proposals reflect the stock dividend of one share
of Kana common stock per share of Kana common stock outstanding, which was
paid on February 22, 2000.
We are very excited by the opportunities we envision for the combined
company. Your board of directors has determined that the merger and the
issuance of Kana common stock in the merger are fair to and in the best
interests of Kana and its stockholders, and unanimously recommends that you
approve the issuance of the shares of Kana common stock in connection with the
merger. Your board of directors has obtained an opinion from Kana's
<PAGE>
financial advisor, Goldman, Sachs & Co., to the effect that, at the date of
such opinion and based upon and subject to a number of qualifications,
assumptions and limitations, the exchange ratio of 1.66 shares of Kana common
stock for each outstanding share of Silknet common stock to be received by the
Silknet stockholders is fair to Kana from a financial point of view. Holders of
Kana common stock are urged to, and should read such opinion in its entirety.
Your board of directors has also determined that the increase in the number
of authorized shares under Kana's Amended and Restated Certificate of
Incorporation, and the proposal to amend the 1999 plan, are also in the best
interest of Kana and its stockholders, and unanimously recommends that you
approve these proposals.
The accompanying joint proxy statement/prospectus provides detailed
information about the two companies and the merger. Please give all of this
information your careful attention. In particular, you should carefully
consider the discussion in the section entitled "Risk Factors" beginning on
page 14 of the joint proxy statement/prospectus.
Your vote is very important regardless of the number of shares you own. To
vote your shares, you may use the enclosed proxy card, grant your proxy by
telephone or the Internet or attend the special stockholders meeting. To
approve the issuance of shares of Kana common stock pursuant to the merger
agreement, you MUST vote "FOR" the proposal by following the instructions
stated on the enclosed proxy card. We urge you to vote FOR this proposal, a
necessary step in the merger of Kana and Silknet. In addition, to approve the
other proposals submitted for your approval, you must vote "FOR" those
proposals by following the instructions stated on the enclosed proxy card, and
we encourage you to do so.
Sincerely,
Michael J. McCloskey
Chief Executive Officer and Director
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of this transaction or the securities of
Kana to be issued in the merger, or determined if this joint proxy
statement/prospectus is accurate or complete. Any representation to the
contrary is a criminal offense.
This joint proxy statement/prospectus is dated March , 2000, and was
first mailed to Kana stockholders on or about March , 2000.
2
<PAGE>
KANA COMMUNICATIONS, INC.
740 Bay Road
Redwood City, CA 94063
(650) 298-9282
---------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To be held on April , 2000
---------------
We will hold a special meeting of stockholders of Kana Communications, Inc.
at 10:00 a.m., local time, on April , 2000 at the offices of Brobeck, Phleger
& Harrison LLP at Two Embarcadero Place, 2200 Geng Road, Palo Alto, California
94303.
1.To consider and vote upon a proposal to approve the issuance of shares
of common stock, par value $0.001 per share, of Kana pursuant to the
Agreement and Plan of Reorganization dated as of February 6, 2000 by and
among Kana, Silknet Software, Inc. and Pistol Acquisition Corp., a wholly-
owned subsidiary of Kana, under which Silknet will become a wholly-owned
subsidiary of Kana;
2.To consider and vote upon a proposal to amend our amended and restated
certificate of incorporation to increase the number of authorized shares of
common stock from 100,000,000 common shares to 1,000,000,000 common shares;
3.To approve an amendment to the Kana 1999 Stock Incentive Plan which
will:
. increase the number of shares of Kana common stock available for
issuance under the 1999 plan by an additional 10,000,000 shares,
. allow option grants and direct stock issuances to be made under the
1999 plan at an exercise or issue price below the fair market value
of the shares on the date of grant or issuance; and
. increase the limitation on the maximum number of shares by which
the share reserve under the 1999 Plan is to increase each year
pursuant to the automatic share increase provisions of the plan
from 4,000,000 shares to 6,000,000 shares.
4.To transact such other business as may properly come before the
special meeting or any adjournment or postponement thereof.
All share numbers in the proposals reflect the stock dividend of one share
of Kana common stock per share of Kana common stock outstanding, which was paid
on February 22, 2000.
Your board of directors has determined that the merger and the issuance of
shares of Kana common stock in the merger, are fair to and in the best
interests of Kana and Kana's stockholders, and unanimously recommends that you
vote to approve the issuance of Kana common stock. Your board of directors has
also determined that the increase in the number of shares of authorized common
stock is in the best interests of Kana and Kana's stockholders and unanimously
recommends that you vote in favor of this proposal. In addition, your board of
directors has determined that the proposed amendment to the 1999 plan is in the
best interests of Kana and Kana's stockholders and unanimously recommends that
you vote in favor of this proposal.
We describe the merger, the proposed amendment to our amended and restated
certificate of Incorporation and the proposed amendment to the 1999 plan more
fully in the accompanying joint proxy statement/prospectus, which we urge you
to read.
Only Kana stockholders of record at the close of business on March 21, 2000
are entitled to notice of and to vote at the special meeting or any adjournment
or postponement.
Your vote is important. To assure that your shares are represented at the
special meeting, you are urged to complete, date and sign the enclosed proxy
and mail it promptly in the postage-paid envelope
<PAGE>
provided, or call the toll-free telephone number or use the Internet by
following the instructions included with your proxy card, whether or not you
plan to attend the special meeting in person. You may revoke your proxy in the
manner described in the accompanying joint proxy statement/prospectus at any
time before it has been voted at the special meeting. You may vote in person at
the special meeting even if you have returned a proxy.
By Order of the Board of Directors
Secretary
Redwood City, California
March , 2000
<PAGE>
[SILKNET LETTERHEAD]
March , 2000
Dear Silknet Software, Inc. Stockholders:
I am writing to you today about our proposed merger with Kana
Communications, Inc. This merger will create a combined company that will be
one of the largest to develop, market and support customer communication
software products and services for e-Businesses.
In the merger, each share of Silknet common stock will be exchanged for
1.66 shares of Kana common stock. Kana expects to issue approximately 28.5
million shares of common stock and to assume 4.58 million common stock options
and warrants in the merger. Kana common stock is traded on the Nasdaq National
Market under the trading symbol "KANA," and closed at $ per share on
, 2000. The merger is described more fully in the accompanying
joint proxy statement/prospectus.
You will be asked to vote upon the merger agreement at a special meeting of
Silknet stockholders to be held on April , 2000 at 10:00 a.m., local time, at
the offices of Testa, Hurwitz & Thibeault, LLP, 125 High Street, High Street
Tower, 20th Floor, Boston, Massachusetts 02110. For the merger to be approved,
the holders of a majority of the outstanding shares of Silknet common stock
must adopt the merger agreement. Only stockholders who hold shares of Silknet
common stock at the close of business on March 21, 2000 will be entitled to
vote at the special meeting.
We are very excited by the opportunities we envision for the combined
company. Your board of directors has determined that the merger agreement and
the merger are advisable and fair to and in the best interests of Silknet and
you, and unanimously recommends that you adopt the merger agreement. Your board
of directors has obtained an opinion from its independent financial advisor,
Credit Suisse First Boston Corporation, to the effect that, as of the date of
such opinion and based upon and subject to a number of qualifications,
assumptions and limitations, the exchange ratio is fair to Silknet's
stockholders, other than Kana, from a financial point of view.
The accompanying joint proxy statement/prospectus provides detailed
information about Kana and the merger. Please give all of this information your
careful attention. In particular, you should carefully consider the discussion
in the section entitled "Risk Factors" on page 14 of the joint proxy
statement/prospectus.
<PAGE>
Your vote is very important regardless of the number of shares you own. To
vote your shares, you may use the enclosed proxy card, grant your proxy by
telephone or the Internet or attend the special stockholders meeting. To adopt
the merger agreement, you MUST vote "FOR" the proposal by following the
instructions stated on the enclosed proxy card. If you do not vote at all, it
will, in effect, count as a vote against the merger. We urge you to vote FOR
this proposal, a necessary step in the merger of Silknet and Kana.
Sincerely,
James C. Wood
President and Chief Executive
Officer
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of this transaction or the securities of
Kana to be issued in the merger, or determined if this joint proxy
statement/prospectus is accurate or complete. Any representation to the
contrary is a criminal offense.
This joint proxy statement/prospectus is dated March , 2000, and was first
mailed to Silknet stockholders on or about March , 2000.
2
<PAGE>
SILKNET SOFTWARE, INC.
50 Phillippe Cote Street
Manchester, NH 03101
(603) 625-0070
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To be held on April , 2000
----------------
We will hold a special meeting of stockholders of Silknet Software, Inc. at
10:00 a.m., local time, on April , 2000 in order:
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Reorganization dated as of February 6, 2000 by and
among Kana Communications, Inc., Silknet Software, Inc. and Pistol
Acquisition Corp., a wholly-owned subsidiary of Kana, under which Silknet
will become a wholly-owned subsidiary of Kana, and each outstanding share
of Silknet common stock will be converted into the right to receive 1.66
shares of Kana common stock; and
2. To transact such other business as may properly come before the
special meeting or any adjournment or postponement thereof.
Your board of directors has determined that the merger agreement and the
merger are advisable and fair to and in the best interests of Silknet and its
stockholders, and unanimously recommends that you vote to adopt the merger
agreement and approve the merger.
We describe the merger more fully in the accompanying joint proxy
statement/prospectus, which we urge you to read.
Only Silknet stockholders of record at the close of business on March 21,
2000 are entitled to notice of and to vote at the special meeting or any
adjournment or postponement.
Your vote is important. To assure that your shares are represented at the
special meeting, you are urged to complete, date and sign the enclosed proxy
and mail it promptly in the postage-paid envelope provided, or call the toll-
free number or use the Internet by following the instructions enclosed with
your proxy, whether or not you plan to attend the special meeting in person.
You may revoke your proxy in the manner described in the accompanying joint
proxy statement/prospectus at any time before it has been voted at the special
meeting. You may vote in person at the special meeting even if you have
returned a proxy.
By Order of the Board of Directors
Secretary
Manchester, New Hampshire
March , 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER....................................
SUMMARY................................................................... 1
SUMMARY HISTORICAL FINANCIAL INFORMATION.................................. 9
SUMMARY UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION... 12
RISK FACTORS.............................................................. 14
Risks Related to the Merger............................................. 14
Risks Related to Kana................................................... 18
Risks Related to Silknet................................................ 31
KANA SPECIAL MEETING...................................................... 38
General................................................................. 38
Date, Time and Place.................................................... 38
Matters to be Considered at the Special Meeting......................... 38
Record Date............................................................. 38
Voting of Proxies....................................................... 38
Votes Required.......................................................... 39
Quorum; Abstentions and Broker Non-Votes................................ 39
SILKNET SPECIAL MEETING................................................... 41
General................................................................. 41
Date, Time and Place.................................................... 41
Matters to be Considered at the Special Meeting......................... 41
Record Date............................................................. 41
Voting of Proxies....................................................... 41
Votes Required.......................................................... 42
Quorum; Abstentions and Broker Non-Votes................................ 42
THE MERGER................................................................ 44
Background of the Merger................................................ 44
Recommendation of the Kana Board of Directors and Kana's Reasons for the
Merger................................................................. 46
Opinion of Kana's Financial Advisor..................................... 48
Recommendation of the Silknet Board of Directors and Silknet's Reasons
for the Merger......................................................... 53
Opinion of Silknet's Financial Advisor.................................. 54
Interests of Silknet's Management in the Merger and Potential Conflicts
of Interest............................................................ 60
The Merger.............................................................. 61
Closing................................................................. 61
Conversion of Silknet Stock in the Merger............................... 61
Silknet Stock Options and Warrants...................................... 61
The Exchange Agent...................................................... 62
Exchange of Silknet Stock Certificates for Kana Stock Certificates...... 62
Transfer of Ownership; Distributions with Respect to Unexchanged
Shares................................................................. 62
Representations and Warranties.......................................... 62
Silknet's and Kana's Conduct of Business Before Completion of the
Merger................................................................. 64
No Solicitation of Transactions......................................... 66
Conditions to Completing the Merger..................................... 67
</TABLE>
i
<PAGE>
TABLE OF CONTENTS--(Continued)
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Page
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<S> <C>
Extension, Waiver and Amendment of the Merger Agreement................. 68
Termination of the Merger Agreement..................................... 68
Payment of Fees and Expenses............................................ 69
Material Federal Income Tax Considerations.............................. 70
Accounting Treatment.................................................... 71
Stockholders' Dissenters' Rights of Appraisal........................... 71
Director and Officer Indemnification and Insurance...................... 71
Voting Agreements....................................................... 72
Stock Option Agreements................................................. 72
Stand-Off Agreements.................................................... 73
Listing of Kana Common Stock to be Issued in the Merger................. 73
Restrictions on Sale of Shares By Affiliates of Kana and Silknet........ 73
Management Following the Merger......................................... 73
Operations Following the Merger......................................... 73
KANA AND SILKNET--UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED).............................................................. 74
DESCRIPTION OF CAPITAL STOCK AND COMPARISON OF STOCKHOLDER RIGHTS......... 79
Description of Kana Capital Stock....................................... 79
Comparison of Rights of Kana Stockholders and Silknet Stockholders...... 81
OTHER KANA PROPOSALS...................................................... 84
MARKET PRICE INFORMATION.................................................. 96
INFORMATION ABOUT KANA.................................................... 97
Overview................................................................ 97
Industry Background..................................................... 98
The Kana Solution....................................................... 99
The Kana Strategy....................................................... 101
Products and Services................................................... 102
Technology.............................................................. 104
Sales and Marketing..................................................... 105
Strategic Relationships................................................. 107
Customers............................................................... 108
Research and Development................................................ 108
Competition............................................................. 109
Intellectual Property................................................... 109
Employees............................................................... 110
Facilities.............................................................. 111
Legal Proceedings....................................................... 111
Management.............................................................. 112
Executive Officers and Directors........................................ 112
Board of Directors and Committees....................................... 116
Compensation Committee Interlocks and Insider Participation............. 116
Director Compensation................................................... 116
Executive Compensation.................................................. 117
Employment Arrangements, Termination of Employment Arrangements and
Change in Control Arrangements......................................... 120
Certain Transactions Of Kana............................................ 123
Principal Stockholders of Kana.......................................... 124
Stock Transfer Agent and Registrar...................................... 126
Selected Consolidated Financial Data.................................... 127
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS--(Continued)
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Page
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<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF KANA................................................... 129
Overview............................................................... 129
Kana Quarterly Results of Operations................................... 132
Results of Operations.................................................. 133
Liquidity and Capital Resources........................................ 137
Year 2000 Readiness Disclosure......................................... 138
Quantitative And Qualitative Disclosures About Market Risk............. 140
Recent Accounting Pronouncements....................................... 140
INFORMATION ABOUT SILKNET................................................ 142
Business of Silknet.................................................... 142
Industry Background.................................................... 142
The Silknet Solution................................................... 143
The Silknet Strategy................................................... 143
Products............................................................... 144
Technology and Product Development..................................... 150
Customers.............................................................. 151
Support and Professional Services...................................... 151
Sales and Marketing.................................................... 151
Competition............................................................ 152
Research and Development............................................... 153
Intellectual Property and Proprietary Rights........................... 154
Employees.............................................................. 155
Facilities............................................................. 155
Legal Proceedings...................................................... 155
Management Of Silknet.................................................. 156
Directors, Executive Officers and Other Key Employees.................. 156
Committees of the Board of Directors................................... 157
Director Compensation.................................................. 158
Executive Compensation................................................. 158
Option Grants in Last Fiscal Year...................................... 159
Employment Arrangements................................................ 160
Stock Plans............................................................ 160
Certain Transactions of Silknet........................................ 163
Principal Stockholders of Silknet...................................... 166
Limitation of Liability................................................ 167
Stock Transfer Agent and Registrar..................................... 167
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF SILKNET................................................ 168
Overview............................................................... 168
Results of Operations.................................................. 169
Liquidity and Capital Resources........................................ 177
Year 2000 Readiness Disclosure......................................... 178
Recently Issued Accounting Pronouncements.............................. 178
EXPERTS.................................................................. 179
LEGAL MATTERS............................................................ 179
WHERE YOU CAN FIND MORE INFORMATION...................................... 180
INDEX TO FINANCIAL STATEMENTS............................................ F-1
</TABLE>
iii
<PAGE>
TABLE OF CONTENTS--(Continued)
<TABLE>
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<C> <S> <C>
APPENDICES
APPENDIX I -- Agreement and Plan of Merger and Reorganization I-1
APPENDIX II -- Form of Kana Stock Voting Agreement II-1
APPENDIX III -- Form of Silknet Stock Voting Agreement III-1
APPENDIX IV -- Form of Kana Stock Option Agreement IV-1
APPENDIX V -- Form of Silknet Stock Option Agreement V-1
APPENDIX VI -- Opinion of Goldman, Sachs & Co., financial advisor
to Kana Communications, Inc. VI-1
APPENDIX VII -- Opinion of Credit Suisse First Boston, financial
advisor to Silknet Software, Inc. VII-1
APPENDIX VIII -- Form of Kana Proxy Card VIII-1
APPENDIX IX -- Form of Silknet Proxy Card IX-1
APPENDIX X -- Amended and Restated 1999 Stock Incentive Plan of
Kana Communications, Inc. X-1
</TABLE>
iv
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: What will Silknet stockholders receive in the merger?
A: If the merger is completed, Silknet stockholders will receive 1.66 shares of
Kana common stock for each share of Silknet common stock they own.
Q: When do you expect to complete the merger?
A: We are working to complete the merger in the spring of 2000. Because the
merger is subject to various conditions, however, we cannot predict the
exact timing.
Q: Should Silknet stockholders send in their stock certificates now?
A: No. After we complete the merger, Kana will send instructions to Silknet
stockholders explaining how to exchange their shares of Silknet common stock
for the appropriate number of shares of Kana common stock.
Q: Should Kana stockholders send in their stock certificates?
A: No. Kana stockholders will continue to own their shares of Kana common stock
after the merger and should continue to hold their stock certificates.
Q: How do I vote?
A: Mail your signed proxy card in the enclosed return envelope or grant your
proxy by telephone or the Internet as soon as possible so that your shares
may be represented at the special stockholders meeting. You may also attend
the meeting in person instead of submitting a proxy. If your shares are held
in "street name" by your broker, your broker will vote your shares only if
you provide instructions on how to vote. You should follow the directions
provided by your broker regarding how to instruct your broker to vote your
shares.
Q: Can I change my vote after mailing my proxy?
A: Yes. You may change your vote by delivering a signed notice of revocation or
a later-dated, signed proxy card to the corporate secretary of Kana or
Silknet, as applicable, before the applicable stockholder meeting, or by
attending the stockholder meeting and voting in person.
Q: Who can I call with questions?
A: If you are a Kana stockholder with questions about the merger, please call
Kana Investor Relations at (650) 298-9282.
If you are a Silknet stockholder with questions about the merger, please
call Silknet Investor Relations at (603) 625-0070.
<PAGE>
SUMMARY
The following summary highlights selected information from this joint proxy
statement/ prospectus and may not contain all of the information that is
important to you. You should carefully read this entire joint proxy
statement/prospectus, including the appendices, and the other documents we
refer to for a more complete understanding of the merger.
The Companies
KANA COMMUNICATIONS, INC.
740 Bay Road
Redwood City, CA 94063
(650) 298-9282
Kana develops, markets and supports customer communication software
products and services for e-Businesses. Kana defines e-Businesses as companies
that leverage the reach and efficiency of the Internet to enhance their
competitive market position, from Internet start-ups to the largest 2,000
companies in the world. Kana's 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. Kana offers products on both a licensed and a
hosted basis. Kana's customers include both pure Internet companies and
traditional companies seeking to exploit the potential of the Internet.
Kana's objective is to become the leading provider of online customer
communication software products and services for e-Businesses. To achieve this
objective, Kana intends to expand its products to enter new markets, increase
its global distribution capabilities and partnerships, expand Kana On-Line, its
hosted application service, and continue to emphasize customer satisfaction.
The following is a list of some of Kana's current customers. These
customers represented approximately 13.2% of Kana's aggregate revenue in fiscal
years 1998 and 1999:
. American Airlines . etoys
. Ameritrade . Gap
. barnesandnoble.com . Kodak
. Chase Manhattan Bank . Paine Webber
. eBay . Telstra
SILKNET SOFTWARE, INC.
50 Phillippe Cote Street
Manchester, NH 03101
(603) 625-0070
Silknet provides electronic customer relationship management software, or
eCRM software, that allows companies to offer marketing, sales, e-commerce and
support services through a single Web site interface personalized for
individual customers. Silknet's products enable a company to deliver these
services to its customers over the Web through customer self-service, assisted
service or immediate, direct collaboration among that company and its
customers, partners, employees and suppliers. These users can choose from a
variety of communications media, such as the Web, e-mail
1
<PAGE>
and the telephone, to do business with that company. Silknet's software can
capture and consolidate data derived from all of these sources and distribute
it throughout a company and to its partners to provide a single view of the
customer's interaction with that company.
As Web technology becomes widely adopted, the challenge for business
conducted over the Internet is to provide not only e-commerce, but also high
quality Web-based marketing, sales and service functions. One of the major
concerns specific to online retailers is their relative ineffectiveness in
selling to prospective customers, or converting initial customer inquiries to
actual sales. Online stores need to incorporate the most effective sales
practices of their offline counterparts. As customers increasingly turn to the
Web, businesses are making considerable investments to handle the growing
volume of online customer interactions and to integrate these interactions with
their existing infrastructure. Businesses are seeking solutions such as
Silknet's products to coordinate and improve online and offline marketing,
sales, e-commerce and customer support services.
The following is a list of some of Silknet's current customers. These
customers represented approximately 63% of Silknet's aggregate revenue in
fiscal years 1998 and 1999:
<TABLE>
<S> <C>
. 3Com . KPMG LLP
. Bank of America . Microsoft
. Bell Advanced Communications . Office Depot
. Beyond.com . priceline.com, Incorporated
. Cigna . Provident Bank
. cozone.com . Sprint PCS
. e*Trade . toysmart.com
. Inacom
</TABLE>
The Merger (See page 44)
Kana and Silknet have entered into a merger agreement that provides for the
merger of Silknet and a newly formed, wholly-owned subsidiary of Kana. As a
result, Silknet will become a wholly-owned subsidiary of Kana. Stockholders of
Silknet will become stockholders of Kana as a result of the merger, and each
share of Silknet common stock will be exchanged for 1.66 shares of Kana common
stock. We urge you to read the merger agreement, which is included as Appendix
I, carefully and in its entirety.
Stockholder Approvals (See pages 38 and 41)
Kana Stockholders
For the merger to proceed, the holders of a majority of the shares of Kana
common stock entitled to vote and that are present or represented by proxy at
the special meeting of Kana's stockholders must approve the issuance of Kana
common stock in the merger. Pursuant to separate voting agreements in the form
of Appendix II hereto, Kana's directors, executive officers and their
affiliates who owned beneficially approximately 52.1% of Kana's common stock
outstanding as of February 3, 2000 have agreed to vote all of their shares of
Kana common stock for approval of the Kana voting proposal. As a result of
these voting agreements, the required Kana stockholder
2
<PAGE>
approval for the issuance of Kana common stock in connection with the merger is
assured. In addition, Kana stockholders will be asked at the special meeting to
approve:
. an amendment to Kana's amended and restated certificate of incorporation
to increase the number of authorized shares of Kana common stock from
100,000,000 to 1,000,000,000; and
. an amendment to the Kana 1999 Stock Incentive Plan which will:
. increase the number of shares of Kana common stock available for
issuance under the 1999 plan by an additional 10,000,000 shares;
. allow option grants and direct stock issuances to be made under the
1999 plan at an exercise or issue price below the fair market value of
the shares on the date of grant or issuance; and
. increase the limitation on the maximum number of shares by which the
share reserve under the 1999 plan is to increase each year pursuant to
the automatic share increase provisions of the plan from 4,000,000
shares to 6,000,000 shares.
For the amendment to Kana's certificate of incorporation to take effect,
holders of a majority of Kana's outstanding common stock must approve the
amendment. For the amendment to the Kana 1999 Stock Incentive Plan to take
effect, the holders of a majority of Kana's outstanding common stock entitled
to vote and that are present or represented by proxy at the special meeting
must approve the amendment. Kana stockholders are entitled to cast one vote per
share of Kana common stock owned at the close of business on March 21, 2000.
Silknet Stockholders
For the merger to proceed, the holders of a majority of the outstanding
shares of Silknet common stock must adopt the merger agreement. Silknet
stockholders are entitled to cast one vote per share of Silknet common stock
owned at the close of business on March 21, 2000. Under separate voting
agreements in the form attached as Appendix III hereto, Silknet's directors,
officers and their affiliates owning beneficially approximately 42.6% of
Silknet's common stock outstanding as of February 3, 2000 (excluding any shares
issuable upon the exercise of options or warrants) have agreed to vote all of
their shares of Silknet common stock for adoption of the merger agreement.
Stock Option Agreements (See page 72)
Kana
As an inducement to Kana to enter into the merger agreement, Silknet
granted Kana the right, under certain circumstances, to purchase a number of
shares of newly-issued Silknet common stock equal to 19.9% of Silknet's issued
and outstanding shares of common stock as of the date of exercise of the
option. The stock option becomes exercisable upon the occurrence of an exercise
event and the satisfaction of a number of conditions. The exercise price of the
option is $214.87 per share, payable in cash. Kana has the right to require
Silknet to repurchase all or part of the option on the Silknet shares at a
price higher than the option exercise price. See "The Merger--Stock Option
Agreements."
Silknet
As an inducement to Silknet to enter into the merger agreement, Kana
granted Silknet the right, under certain circumstances, to purchase a number of
shares of newly-issued Kana common stock equal to 9.9% of Kana's issued and
outstanding shares of common stock as of the date of exercise of the option.
The option becomes exercisable upon the occurrence of an exercise event and the
satisfaction of a number of conditions. The exercise price of the option is
$129.44 per share payable in cash. Silknet has the right to require Kana to
repurchase all or part of the option or the Kana shares at a price that may be
higher than the option exercise price. See "The Merger--Stock Option
Agreements."
3
<PAGE>
Recommendations of the Boards of Directors (See pages 46 and 53)
The Silknet and Kana boards of directors have determined that the merger is
in the best interests of their respective stockholders. The Silknet board
unanimously recommends that Silknet stockholders vote FOR adoption of the
merger agreement, and the Kana board unanimously recommends that Kana
stockholders vote FOR issuing the shares of Kana common stock in connection
with the merger, the increase in Kana's authorized shares of common stock and
the amendment to Kana's 1999 plan.
Opinions of Financial Advisors (See pages 48 and 54)
In deciding to approve the merger, each of the Silknet and Kana boards of
directors considered opinions from their financial advisors, among various
other factors described below in "The Merger--Recommendation of the Kana Board
of Directors and Kana's Reasons for the Merger," and "The Merger--
Recommendation of the Silknet Board of Directors and Silknet's Reasons for the
Merger."
On February 6, 2000, Goldman, Sachs & Co., Kana's financial advisor,
delivered its oral opinion to the Kana board that, as of that date, the
exchange ratio was fair from a financial point of view to Kana. Goldman, Sachs
& Co. subsequently confirmed its oral opinion by delivery of its written
opinion dated February 6, 2000. The full text of the written opinion of
Goldman, Sachs & Co., which sets forth the assumptions made, matters considered
and limitations on the review undertaken in connection with the opinion, is
attached as Appendix VI. You should read this opinion in its entirety. Goldman,
Sachs & Co.'s opinion is directed to the Kana board of directors and addresses
only the fairness of the exchange ratio pursuant to the merger agreement from a
financial point of view to Kana as of the date of the opinion, and does not
constitute a recommendation to any stockholder as to how stockholders should
vote on any matter relating to the merger.
On February 6, 2000, Silknet's financial advisor, Credit Suisse First
Boston Corporation, delivered its oral opinion to the Silknet board of
directors that, as of that date, the exchange ratio was fair to Silknet's
stockholders, other than Kana, from a financial point of view. Credit Suisse
First Boston subsequently confirmed its oral opinion by delivery of its written
opinion dated February 6, 2000. The full text of Credit Suisse First Boston's
written opinion is attached as Appendix VII. We encourage you to read this
opinion carefully in its entirety for a description of the procedures followed,
assumptions made, matters considered and limitations on the review undertaken.
Credit Suisse First Boston's opinion is directed to the Silknet board of
directors and does not constitute a recommendation to any stockholder as to how
stockholders should vote on any matter relating to the merger.
Interests of Silknet's Management in the Merger and Potential Conflicts of
Interest (See page 60)
When considering the recommendation of the Silknet board, you should be
aware that some directors and officers of Silknet have the following interests
in the merger that are different from, or in addition to, yours:
. The executive officers of Silknet have outstanding stock options to
purchase an aggregate of 535,650 shares of Silknet common stock. Upon
completion of the merger, vesting of the options held by these executive
officers will accelerate by one year, and the options will become
exercisable with respect to these newly vested shares.
. Each non-employee member of the Silknet board of directors holds an
outstanding option to purchase 10,000 shares of Silknet common stock.
Each such option will vest in full at the closing of the merger.
4
<PAGE>
. In addition, the executive officers of Silknet have employment agreements
under which they will be entitled to twelve months of salary continuation
payments and accelerated vesting of their outstanding options, including
the Silknet options assumed by Kana in the merger, in the event they are
not offered employment by Kana in a comparable position and at a
comparable salary or their employment is terminated by Kana without just
cause within 12 months after the merger. Mr. Wood, Silknet's Chief
Executive Officer, has agreed to an amendment to his Silknet employment
agreement which provides that the completion of the merger with Kana will
not entitle him to any salary continuation payments or accelerated
vesting of his option shares under his employment agreement.
. Kana has agreed to cause the surviving corporation in the merger to
indemnify each present and former Silknet officer and director against
liabilities arising out of such person's service as an officer or
director. The surviving corporation in the merger will maintain officers'
and directors' liability insurance to cover any such liabilities for the
next six years.
. Kana has agreed that James C. Wood, Chief Executive Officer of Silknet,
will join Kana's board of directors following the merger.
As a result, these directors and officers may be more likely to recommend
adoption of the merger agreement than Silknet stockholders generally. See "The
Merger--Interests of Silknet's Management in the Merger and Potential Conflicts
of Interest."
Conditions to Completing the Merger (See page 67)
Whether Kana and Silknet complete the merger depends on a number of
conditions in addition to Kana stockholders' approval of the issuance of Kana
common stock and Silknet stockholders' adoption of the merger agreement. Either
Kana or Silknet may choose to complete the merger even though one or more of
these conditions has not been satisfied, as long as the law allows them to do
so. Kana and Silknet cannot be certain when, or if, the conditions to the
merger will be satisfied or waived, or that the merger will be completed. The
following conditions, among others, must be satisfied or waived before the
merger can be completed:
. the shares of Kana common stock to be issued in exchange for Silknet
common stock must be registered with the SEC under the Securities Act,
the registration statement must be effective and the registration
statement must not be the subject of any "stop order" or proceedings
seeking a "stop order";
. the representations and warranties of Kana and Silknet in the merger
agreement must have been materially true and correct at the date the
merger agreement was signed and must be materially true and correct at
the time of the merger;
. Kana and Silknet must perform and comply in all material respects with
their respective covenants and agreements in the merger agreement;
. no event, change, condition or effect that is materially adverse to
either company and its subsidiaries, taken as a whole, can occur; and
. the shares of Kana common stock to be issued in the merger must be
authorized for listing on the Nasdaq National Market.
Termination of the Merger Agreement (See page 68)
Kana and Silknet can agree at any time prior to completing the merger to
terminate the merger agreement. Also, either of Kana or Silknet can decide,
without the other's consent, to terminate the merger agreement if the merger
has not been completed on or before July 31, 2000, or if the other company has
breached the merger agreement, or for other reasons.
5
<PAGE>
Termination Fee and Expenses (See page 69)
Silknet and Kana have each agreed to pay the other company a termination
fee of $148,300,000 if the merger agreement terminates under the circumstances
that are described on page 68 under "The Merger--Payment of Fees and Expenses."
If the termination fee is not promptly paid by the responsible company and, in
order to obtain this payment, the other company sues and wins a judgment or
settlement for this fee, the responsible company must also pay the other
company's costs and expenses (including attorneys' fees and expenses) in
connection with the lawsuit plus interest.
No Solicitation of Transactions (See page 66)
Subject to limited exceptions, the merger agreement prohibits each company
from soliciting or participating in discussions with third parties about
alternative transactions that may prevent the merger. In addition, each company
must provide the other company with information concerning any alternative
transactions. Each company must also give five business days' notice before it
can terminate the merger agreement to enter into an alternative transaction.
The restrictions, however, do not prohibit the boards from taking actions
necessary to fulfill their fiduciary duties.
Governmental Approvals and Regulatory Requirements
Other than compliance with federal and state securities laws applicable to
the issuance of Kana common stock in the merger and compliance with the
Delaware General Corporation Law, the merger is not subject to federal or state
regulatory requirements or governmental approval.
United States Federal Income Tax Consequences of the Merger (See page 70)
The merger has been structured as a tax-free reorganization for United
States federal income tax purposes. If the merger qualifies as a tax-free
reorganization, Silknet stockholders generally will not recognize gain or loss
for United States federal income tax purposes in the merger. As a condition to
completion of the merger, Silknet and Kana must each obtain a legal opinion
from outside counsel that the merger constitutes a tax-free reorganization
within the meaning of the Internal Revenue Code.
Anticipated Accounting Treatment of the Merger (See page 71)
The merger will be treated as a purchase for accounting and financial
reporting purposes, which means that Silknet will be treated as a separate
entity for periods prior to the closing, and thereafter as a wholly-owned
subsidiary of Kana. In addition, Kana estimates that it will record on its
balance sheet goodwill and identifiable intangible assets of approximately $3.9
billion, which will be amortized over a three-year period following the merger.
Restrictions on the Ability to Sell Kana Stock (See page 73)
All shares of Kana common stock that Silknet stockholders receive in
connection with the merger will be freely transferable unless the holder is
considered an "affiliate" of either Kana or Silknet for purposes of the
Securities Act. Shares of Kana common stock held by these affiliates may be
sold only pursuant to an effective registration statement or an exemption from
registration under the Securities Act.
6
<PAGE>
Dissenters' Appraisal Rights
Under Delaware law, neither Kana nor Silknet stockholders are entitled to
dissenters' rights of appraisal in connection with the merger.
Other Kana Proposals (see page 84)
Kana is also presenting proposals to its stockholders at the Kana special
meeting to approve:
. an amendment to Kana's amended and restated certificate of incorporation
to increase the number of authorized shares of Kana common stock from
100,000,000 to 1,000,000,000; and
. to approve an amendment to the Kana 1999 Stock Incentive Plan which will:
. increase the number of shares of Kana common stock available for
issuance under the 1999 plan by an additional 10,000,000 shares;
. allow option grants and direct stock issuances to be made under the
1999 plan at an exercise or issue price below the fair market value
of the shares on the date of grant or issuance; and
. increase the limitation on the maximum number of shares by which the
share reserve under the 1999 plan is to increase each year pursuant
to the automatic share increase provisions of plan from 4,000,000
shares to 6,000,000 shares.
Approval of the proposal to increase the number of authorized common shares
requires the favorable vote of a majority of the outstanding Kana shares.
Approval of the proposal to amend the 1999 plan requires the favorable vote of
a majority of the Kana shares present or represented at the Special Meeting and
entitled to vote on such proposal.
The Kana board of directors unanimously recommends that Kana stockholders
vote to approve the foregoing proposals.
Trademarks
Kana(R) is a registered trademark, and KANA COMMUNICATIONS and Design(TM)
and the Kana logo are trademarks of Kana Communications, Inc.
Silknet has applied for federal registration of the trademarks "Silknet"
and "Silknet" combined with the Silknet logo.
This joint proxy statement/prospectus contains other trade names,
trademarks and service marks of Kana, Silknet and of other companies.
Dividend Information
Neither Kana nor Silknet has ever paid any cash dividends on its stock, and
Kana anticipates that, following the merger, it will continue to retain any
earnings for the foreseeable future for use in the operation of its business.
On January 10, 2000, Kana declared a stock dividend of one share of common
stock per share of common stock outstanding, which was paid on February 22,
2000.
Kana Two-for-One Stock Split
Unless expressly indicated to the contrary, all references to a specific
number of shares of Kana common stock, the price of a share of Kana common
stock, or ratios involving either a number of shares or a price per share of
Kana common stock give effect to the two-for-one stock split by Kana on
February 22, 2000 effected by means of a stock dividend of one share of Kana
common stock per share of Kana common stock then outstanding.
7
<PAGE>
Forward-Looking Statements in this Joint Proxy Statement/Prospectus
This joint proxy statement/prospectus contains forward-looking statements
within the "safe harbor" provisions of the Private Securities Litigation Reform
Act of 1995 with respect to Kana's and Silknet's financial condition, results
of operations and business and the expected impact of the merger on Kana's
financial performance. Words such as "anticipates," "expects," "intends,"
"plans," "believes," "seeks," "estimates" and similar expressions indicate
forward-looking statements. These forward-looking statements are not guarantees
of future performance and are subject to risks and uncertainties that could
cause actual results to differ materially from the results contemplated by the
forward-looking statements. In evaluating the merger, you should carefully
consider the discussion of risks and uncertainties in the section entitled
"Risk Factors" beginning on page 14. You are cautioned not to place undue
reliance on these forward looking statements, which reflect the views of Kana's
or Silknet's management only as of the date of this prospectus. We undertake no
obligation to update these statements or publicly release the results of any
revisions to the forward-looking statements that we may make to reflect events
or circumstances after the date of this prospectus or to reflect the occurrence
of unanticipated events.
8
<PAGE>
SUMMARY HISTORICAL FINANCIAL INFORMATION
The following tables show summary consolidated financial results actually
achieved by Kana and Silknet.
Kana had no significant operations until 1997. Kana derived its historical
information from the audited consolidated financial statements of Kana as of
December 31, 1997, 1998, and 1999 and for each of the years then ended. Kana's
audited consolidated financial statements as of December 31, 1998 and 1999 and
for each of the years in the three-year period ended December 31, 1999 are
included elsewhere in this joint proxy statement/prospectus. This information
should be read in conjunction with the historical consolidated financial
statements of Kana and related notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Kana."
The summary financial data set forth below for Silknet should be read in
conjunction with Silknet's consolidated financial statements and notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations of Silknet," appearing elsewhere in this joint proxy
statement/prospectus. Silknet's statement of operations data for the years
ended June 30, 1997, 1998 and 1999 and balance sheet data as of June 30, 1998
and 1999 are derived from, and are qualified by reference to, audited
consolidated financial statements included elsewhere in this joint proxy
statement/prospectus. Silknet's statement of operations data for the six months
ended December 31, 1998 and 1999 and the balance sheet data as of December 31,
1999 are derived from Silknet's unaudited financial statements appearing
elsewhere in this prospectus. Silknet's statement of operations data for the
year ended June 30, 1996 and the balance sheet data as of June 30, 1997 are
derived from, and are qualified by reference to, audited consolidated financial
statements not included in this prospectus. The statement of operations data
for the period from March 6, 1995, Silknet's date of inception, to June 30,
1995 and the balance sheet data as of June 30, 1995 and 1996 are derived from
unaudited consolidated financial statements not included in this prospectus.
The unaudited consolidated financial statements have been prepared on the same
basis as the audited consolidated financial statements and, in the opinion of
Silknet's management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the information set
forth therein.
The summary historical financial information for both Kana and Silknet
reflects the effects of recent acquisitions and non-recurring charges. These
historical results are not necessarily indicative of the results to be expected
for any future period.
9
<PAGE>
KANA SUMMARY HISTORICAL FINANCIAL INFORMATION
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1997 1998 1999
------- -------- ---------
<S> <C> <C> <C>
Historical Consolidated Statement of Operations
Data:
Total revenues.................................. $ 617 $ 2,347 $ 14,064
Gross profit.................................... 364 1,627 7,183
Amortization of deferred stock-based
compensation................................... 113 1,456 80,476
Acquisition related costs....................... -- -- 5,635
Operating loss.................................. (1,610) (12,828) (117,999)
Net loss........................................ (1,553) (12,601) (118,743)
Basic and diluted net loss per share............ $ (0.38) $ (2.02) $ (4.61)
Shared used in per share computations........... 4,152 6,258 25,772
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
----------------------
1997 1998 1999
------ ------- -------
<S> <C> <C> <C>
Historical Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments....... $5,594 $14,035 $54,862
Working capital......................................... 5,364 11,833 40,236
Total assets............................................ 6,158 16,876 70,229
Notes payable, less current portion..................... 51 726 412
Total stockholders' equity.............................. $5,684 $12,951 $48,500
</TABLE>
10
<PAGE>
SILKNET SUMMARY HISTORICAL FINANCIAL INFORMATION
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Period from Six-months
March 6, 1995 ended December
(inception) Year ended June 30, 31,
to June 30, ---------------------------------- ----------------
1995 1996 1997 1998 1999 1998 1999
------------- ------ ------- ------- -------- ------- -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Historical Consolidated
Statement of Operations
Data:
Total revenue........... $ -- $ 266 $ 194 $ 3,727 $ 14,030 $ 5,548 $14,048
Total cost of revenue... -- 141 341 1,386 3,741 1,702 3,770
Gross margin............ -- 125 (147) 2,341 10,289 3,846 10,278
Total operating
expenses............... 61 583 2,653 8,958 21,790 8,439 18,964
Operating loss.......... (61) (458) (2,800) (6,617) (11,501) (4,593) (8,686)
Net loss................ (61) (465) (2,859) (6,496) (10,820) (4,414) (7,307)
Net loss attributable to
common stockholders.... $ (61) $ (465) $(3,049) $(7,399) $(12,607) $(5,327) $(7,307)
Basic and diluted net
loss per share......... $(0.02) $(0.18) $ (1.13) $ (2.57) $ (2.44) $ (1.68) $ (0.45)
Shares used in computing
basic and diluted net
loss per share......... 2,478 2,551 2,697 2,875 5,176 3,172 16,354
</TABLE>
<TABLE>
<CAPTION>
As of
June 30, As of June 30, As of
------------- ------------------------ December 31,
1995 1996 1997 1998 1999 1999
----- ------ ------ ------- ------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Historical Consolidated
Balance Sheet Data:
Cash and cash
equivalents............. $ 17 $ 40 $4,795 $10,651 $57,565 $48,211
Working capital
(deficit)............... (28) (102) 4,188 10,036 53,877 45,047
Total assets............. 64 170 5,453 13,763 65,021 61,480
Notes payable............ -- -- 319 608 359 156
Total convertible
preferred stock......... -- -- 7,432 19,107 -- --
Total stockholders'
equity (deficit)........ 19 (34) (2,845) (8,140) 56,433 50,497
</TABLE>
11
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION
The following tables show summary financial results as if Kana and Silknet
had been combined as of January 1, 1999.
The summary pro forma combined financial information is derived from the
unaudited pro forma combined condensed financial statements, which give effect
to the merger as a purchase and should be read in conjunction with such
unaudited pro forma combined financial statements and the notes thereto
included in this joint proxy statement/prospectus. Silknet's fiscal year ends
on June 30. For purposes of the pro forma data, Kana's consolidated statement
of operations for the year ended December 31, 1999 has been combined with
Silknet's consolidated statement of operations for the twelve-month period
ended December 31, 1999 and Kana's consolidated balance sheet as of December
31, 1999 has been combined with Silknet's consolidated balance sheet as of
December 31, 1999.
The unaudited pro forma combined financial information is based on
estimates and assumptions, which are preliminary and have been made solely for
purposes of developing such pro forma information. The pro forma information is
presented for illustrative purposes only and is not necessarily indicative of
the operating results or financial position that would have occurred if the
merger had been consummated at January 1, 1999, nor is it necessarily
indicative of future operating results or financial position.
The unaudited pro forma combined financial information should be read in
conjunction with the historical consolidated financial statements of Kana and
Silknet and related notes thereto, "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Kana" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Silknet."
12
<PAGE>
SELECTED PRO FORMA COMBINED FINANCIAL INFORMATION
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended
December 31,
1999
------------
<S> <C>
Pro Forma Combined Condensed Statement of Operations Data:
Total revenues.................................................... $ 36,594
Gross profit...................................................... 23,918
Amortization of goodwill and identifiable intangibles............. 1,309,091
Amortization of deferred stock-based compensation................. 80,773
Acquisition-related costs......................................... 6,296
Operating loss.................................................... (1,442,683)
Net loss.......................................................... (1,441,547)
Basic and diluted net loss per share.............................. $ (31.76)
Shares used in per share computations............................. 45,392
Equivalent basic and diluted net loss per Silknet share........... $ (52.72)
<CAPTION>
As of
December 31,
1999
------------
<S> <C>
Pro Forma Combined Condensed Balance Sheet Data:
Cash, cash equivalents and short-term investments................. $ 103,073
Working capital................................................... 66,383
Goodwill and identifiable intangibles............................. 3,927,274
Total assets...................................................... 4,058,983
Notes payable, less current portion............................... 435
Total stockholders' equity........................................ 4,007,371
<CAPTION>
As of
December 31,
1999
------------
<S> <C>
Pro Forma Book Value Per Share:
Historical Kana................................................... $ 0.80
Historical Silknet................................................ 2.95
Combined Pro Forma Per Kana Share................................. 44.96
Equivalent Combined Pro Forma Per Silknet Share................... 74.63
</TABLE>
To assist you in understanding the table above, the following methods were
used:
. The equivalent pro forma combined net loss per Silknet share amount is
calculated by multiplying the pro forma combined share amounts by the
exchange ratio of 1.66 shares of Kana common stock for each share of
Silknet common stock.
. The historical book value per share is computed by dividing
stockholders' equity by the number of shares of common stock outstanding
at December 31, 1999. The pro forma combined book value per share is
computed by dividing pro forma stockholders' equity by the pro forma
number shares of Kana common stock outstanding as of December 31, 1999
assuming the merger had occurred as of December 31, 1999. The pro forma
equivalent combined book value per Silknet share is calculated by
multiplying the pro forma combined book value per Kana share by the
exchange ratio of 1.66 shares of Kana common stock for each share of
Silknet common stock.
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RISK FACTORS
By voting to adopt the merger agreement, Silknet stockholders will be
choosing to invest in Kana common stock. An investment in Kana common stock
involves a high degree of risk. In addition to the other information contained
in this joint proxy statement/prospectus, you should carefully consider the
following risk factors in deciding whether to vote for the merger. If any of
the following risks actually occur, the business and prospects of Silknet or
Kana may be seriously harmed. In such case, the trading price of Kana common
stock would decline, and you may lose all or part of your investment.
Risks Related to the Merger
Silknet stockholders will receive a fixed number of shares of Kana common stock
despite changes in market value of Silknet common stock or Kana common stock,
and the dollar value of Kana common stock received in the merger may increase
or decrease after Silknet stockholders submit their proxies
Upon the merger's completion, each share of Silknet common stock will be
exchanged for 1.66 shares of Kana common stock. There will be no adjustment for
changes in the market price of either Silknet common stock or Kana common
stock. In addition, neither Silknet nor Kana may terminate the merger agreement
or "walk away" from the merger or resolicit the vote of its stockholders solely
because of changes in the market price of Kana common stock. Accordingly, the
dollar value of Kana common stock that Silknet stockholders will receive upon
the merger's completion will depend on the market value of Kana common stock
when the merger is completed and may decrease from the date you submit your
proxy. The share price of Kana common stock is by nature subject to the general
price fluctuations in the market for publicly traded equity securities and has
experienced significant volatility. We urge you to obtain recent market
quotations for Kana common stock and Silknet common stock. Kana cannot predict
or give any assurances as to the market price of Kana common stock at any time
before or after the completion of the merger.
Kana and Silknet may not achieve the benefits they expect from the merger
Kana and Silknet entered into the merger agreement with the expectation
that the merger will result in significant benefits. Achieving the benefits of
the merger depends on the timely, efficient and successful execution of a
number of post-merger events. Key events include:
. integrating the operations and personnel of the two companies;
. offering the existing products and services of each company to the other
company's customers; and
. developing new products and services that use the assets of both
companies.
Kana and Silknet will need to overcome significant issues, however, in
order to realize any benefits or synergies from the merger. The successful
execution of these post-merger events will involve considerable risk and may
not be successful.
Operations and personnel. Silknet provides electronic customer relationship
management software, or eCRM software, that allows companies to offer
marketing, sales, e-commerce and support services through a single Web site
interface personalized for individual customers. Kana develops, markets and
supports customer communication software products and services for
e-Businesses, and has very limited experience in Silknet's business.
Furthermore, Silknet's principal offices are located in Manchester, New
Hampshire, while Kana's principal offices are located in Redwood City,
California. There are currently no plans to relocate either of these principal
offices. For the merger to be successful, Kana must successfully integrate
Silknet's operations and personnel with Kana's operations and personnel, which
will be particularly difficult due to the bi-coastal locations. Failure to
complete the integration successfully could result in the loss of key personnel
and customers.
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Products and Services. Each company initially intends to offer its
respective products and services to the customers of the other company. There
can be no assurance that either company's customers will have any interest in
the other company's products and services. The failure of such cross-marketing
efforts would diminish the synergies expected to be realized by this merger.
In addition, Kana intends after the merger to develop new products and
services that combine the assets of both Kana and Silknet. To date, the
companies have not thoroughly investigated the obstacles, technological,
market-driven or otherwise, to developing and marketing these new products and
services in a timely and efficient way. There can be no assurance that Kana
will be able to overcome these obstacles, or that there will be a market for
new products and services developed by Kana after the merger.
In general, neither company can offer any assurances that they can be
successfully integrated or that the anticipated benefits of the merger can be
realized. The failure to do so could have a material adverse effect on the
combined company's business, financial condition and operating results or could
result in the loss of key personnel. In addition, the attention and effort
devoted to the integration of the two companies will significantly divert
management's attention from other important issues, and could seriously harm
the combined company.
The merger could adversely affect combined financial results
If the benefits of the merger do not exceed the costs associated with the
merger, including any dilution to Kana's stockholders resulting from the
issuance of shares in connection with the merger, Kana's financial results,
including earnings per share, could be adversely affected. In addition, Kana
expects to record goodwill and intangible assets of approximately $3.9 billion,
which will be amortized over a period of three years.
The market price of Kana common stock may decline as a result of the merger
The market price of Kana common stock may decline as a result of the merger
if:
. the integration of Kana and Silknet is unsuccessful;
. Kana does not achieve the perceived benefits of the merger as rapidly or
to the extent anticipated by financial or industry analysts or
investors; or
. the effect of the merger on Kana's financial results is not consistent
with the expectations of financial or industry analysts or investors.
The market price of the Kana common stock could also decline as a result of
factors related to the merger which may currently be unforeseen. A decline in
the market price of the Kana common stock could materially and adversely affect
Kana's operating results.
Silknet's officers and directors have conflicts of interest that may influence
them to recommend the adoption of the merger agreement
The directors and officers of Silknet participate in arrangements and have
continuing indemnification against liabilities that provide them with interests
in the merger that are different from, or in addition to, yours, including the
following:
. The executive officers of Silknet have outstanding stock options to
purchase an aggregate of 535,650 shares of Silknet common stock. Upon
the completion of the merger, vesting of the options held by such
executive officers will accelerate by one year, and all of these options
will become fully exercisable with respect to these newly vested shares.
. Each non-employee member of the Silknet board of directors holds an
outstanding option to purchase 10,000 shares of Silknet common stock.
Each such option will vest in full at the closing of the merger.
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. In addition, the executive officers of Silknet have employment
agreements under which they will be entitled to twelve months of salary
continuation payments and accelerated vesting of their outstanding
options, including the Silknet options assumed by Kana in the merger, in
the event they are not offered employment by Kana in a comparable
position and at a comparable salary or their employment is terminated by
Kana without just cause within 12 months after the merger. Mr. Wood,
Silknet's Chief Executive Officer, has agreed to an amendment to his
Silknet employment agreement which provides that the completion of the
merger with Kana will not entitle him to any salary continuation
payments or accelerated vesting of his option shares under his
employment agreement.
. Kana has agreed to cause the surviving corporation in the merger to
indemnify each present and former Silknet officer and director against
liabilities arising out of such person's services as an officer or
director. Kana will cause the surviving corporation to maintain
officers' and directors' liability insurance to cover any such
liabilities for the next six years.
. Kana has agreed that James C. Wood, Chief Executive Officer of Silknet,
will be elected to Kana's board of directors following the merger.
For the above reasons, the directors and officers of Silknet could be more
likely to vote to adopt the merger agreement than if they did not hold these
interests. Silknet stockholders should consider whether these interests may
have influenced these directors and officers to support or recommend adoption
of the merger agreement.
Failure to complete the merger could negatively impact Silknet's stock price
and future business and operations
If the merger is not completed for any reason, Silknet may be subject to a
number of material risks, including the following:
. Silknet may be required under limited circumstances to pay Kana a
termination fee of up to $148,300,000 and reimburse Kana for expenses
incurred to collect that fee;
. the price of Silknet common stock may decline to the extent that the
current market price of Silknet common stock reflects a market
assumption that the merger will be completed; and
. costs incurred by Silknet related to the merger, such as legal and
accounting fees and a portion of financial advisor fees, must be paid
even if the merger is not completed.
In addition, Silknet customers, in response to the announcement of the
merger, may delay or defer decisions concerning Silknet. Silknet derives a
significant portion of its software license revenue each quarter from a small
number of relatively large orders. Any delay or deferral in those decisions by
Silknet customers could have a material adverse effect on Silknet's business,
regardless of whether the merger is ultimately completed. Similarly, current
and prospective Silknet employees may experience uncertainty about their future
roles with Kana until Kana's strategies with regard to Silknet are announced or
executed. This may adversely affect Silknet's ability to attract and retain key
management, sales, marketing and technical personnel.
Further, if the merger is terminated and Silknet's board of directors
determines to seek another merger or business combination, there can be no
assurance that it will be able to find a partner willing to pay an equivalent
or more attractive price than the price to be paid in the merger. In addition,
while the merger agreement is in effect and subject to very narrowly defined
exceptions, Silknet is prohibited from soliciting, initiating or encouraging or
entering into certain extraordinary transactions, such as a merger, sale of
assets or other business combination, with any party other than Kana. These
factors could also adversely affect Silknet's stock price.
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The merger may go forward even though material adverse changes result from the
announcement of the merger, industry-wide changes and other causes.
In general, either party can refuse to complete the merger if there is a
material adverse change affecting the other party between now and the closing.
But certain types of changes will not prevent the merger from going forward,
even if they would have a material adverse effect on Kana or Silknet. Industry-
wide changes, changes affecting the economy as a whole, and changes resulting
from the announcement of the merger will not allow either party to walk away
from the merger.
If adverse changes occur but Kana and Silknet must still complete the
merger, Kana's stock price may suffer. This in turn may reduce the value of the
merger to Kana and Silknet stockholders. While Kana and Silknet might seek to
renegotiate the merger in these circumstances, there can be no assurance that
Kana and Silknet would in fact do so or that Kana and Silknet would be
successful.
After completion of the merger, Kana will compete against both Kana's and
Silknet's current competitors, and may face competition from additional
companies.
After the merger, the level of competition encountered by the combined
companies of Kana and Silknet may increase. As Kana and Silknet combine and
enhance their product lines to offer a more comprehensive e-Business software
solution, they will increasingly compete with traditional providers of customer
management and communications solutions such as Clarify Inc., Cisco Systems,
Inc., Siebel Systems, Inc., and Vantive Corporation. The combined product line
may not be sufficient to successfully compete with the product offerings
available from these companies, which could slow the growth of the combined
company and harm its business.
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Risks Related to Kana
Because Kana has a limited operating history, there is limited information upon
which you can evaluate Kana's business
Kana is still in the early stages of its development, and Kana's limited
operating history makes it difficult to evaluate Kana's business and prospects.
Kana was incorporated in July 1996 and first recorded revenue in February 1998.
Thus, Kana has a limited operating history upon which you can evaluate its
business and prospects. In addition, Kana's operating results include the
results of operations of Connectify, Inc., netDialog, Inc. and Business
Evolution, Inc., three companies acquired by Kana and accounted for as poolings
of interests. Due to Kana's limited operating history, it is difficult or
impossible to predict future results of operations. For example, Kana cannot
forecast operating expenses based on its historical results because they are
limited, and Kana is required to forecast expenses in part on future revenue
projections. Moreover, due to Kana's limited operating history, any evaluation
of its 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 Kana's ability to:
. attract more customers;
. implement its sales, marketing and after-sales service initiatives, both
domestically and internationally;
. execute its product development activities;
. anticipate and adapt to the changing Internet market;
. attract, retain and motivate qualified personnel;
. respond to actions taken by its competitors;
. continue to build an infrastructure to effectively manage growth and
handle any future increased usage; and
. integrate acquired businesses, technologies, products and services.
If Kana is unsuccessful in addressing these risks or in executing its
business strategy, its business, results of operations and financial condition
would be materially and adversely affected.
Kana's quarterly revenues and operating results may fluctuate in future periods
and Kana may fail to meet expectations, which may cause the price of Kana's
common stock to decline
Kana's quarterly revenues and operating results are difficult to predict
and may fluctuate significantly from quarter to quarter particularly because
Kana's products and services are relatively new and Kana's prospects uncertain.
If quarterly revenues or operating results fall below the expectations of
investors or public market analysts, the price of Kana's common stock could
decline substantially. Factors that might cause quarterly fluctuations in
Kana's 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 Kana's products and
services;
. costs associated with integrating Kana's recent acquisitions, and costs
associated with any future acquisitions;
. the timing of new releases of Kana's products;
. the discretionary nature of Kana's customers' purchasing and budgetary
cycles;
. changes in Kana's pricing policies or those of Kana's competitors;
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. the timing of execution of large contracts that materially affect Kana's
operating results;
. the mix of sales channels through which Kana's products and services are
sold;
. the mix of Kana's domestic and international sales;
. costs related to the customization of Kana's products;
. Kana's ability to expand its operations, and the amount and timing of
expenditures related to this expansion; and
. global economic conditions, as well as those specific to large
enterprises with high e-mail volume.
Kana also often offers volume-based pricing, which may affect operating
margins. Most of Kana's expenses, such as employee compensation and rent, are
relatively fixed in the short term. Moreover, Kana's expense levels are based,
in part, on its expectations regarding future revenue levels. As a result, if
total revenues for a particular quarter are below expectations, Kana could not
proportionately reduce operating expenses for that quarter. Therefore, this
revenue shortfall would have a disproportionate effect on Kana's expected
operating results for that quarter. In addition, because Kana's service revenue
is largely correlated with its license revenue, a decline in license revenue
could also cause a decline in service revenue in the same quarter or in
subsequent quarters.
Due to the foregoing factors, Kana believes that quarter-to-quarter
comparisons of its operating results are not a good indication of its future
performance. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations of Kana".
Kana has a history of losses and may not be profitable in the future, which may
reduce the trading price of Kana common stock
Since Kana began operations in 1997, it has incurred substantial operating
losses in every quarter. As a result of accumulated operating losses, at
December 31, 1999, Kana had an accumulated deficit of approximately $133
million. For the twelve months ended December 31, 1999, Kana had a net loss of
approximately $119 million, or 844% of revenues for that period. Since
inception, Kana has funded its business primarily through selling its stock,
not from cash generated by its business. Kana's growth in recent periods has
been from a limited base of customers, and Kana may not be able to sustain
these growth rates. Kana expects to continue to increase its operating
expenses. As a result, Kana expects to continue to experience losses and
negative cash flows, even if sales of its products and services continue to
grow, and Kana may not generate sufficient revenues to achieve profitability in
the future.
In addition, as a result of its mergers with Connectify, netDialog and
Business Evolution, Kana expects that its losses will increase even more
significantly because of additional costs and expenses related to:
. an increase in the number of employees;
. an increase in research and development activities;
. an increase in sales and marketing activities; and
. assimilation of operations and personnel.
If Kana does achieve profitability, it may not be able to sustain or
increase any profitability on a quarterly or annual basis in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Kana".
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Kana faces substantial competition and may not be able to compete effectively
The market for Kana's products and services is intensely competitive,
evolving and subject to rapid technological change. Kana expects the intensity
of competition to increase in the future. Increased competition may result in
price reductions, reduced gross margins and loss of market share.
Kana currently faces competition for its products from systems designed by
in-house and third-party development efforts. Kana expects that these systems
will continue to be a principal source of competition for the foreseeable
future. Kana's competitors include a number of companies offering one or more
products for the e-Business communications market, some of which compete
directly with Kana's products. For example, Kana's competitors include
companies providing stand-alone point solutions, including Annuncio, Inc.,
AskJeeves, Inc., Brightware, Inc., Digital Impact, Inc., eGain Communications
Corp., Inference Corp., Marketfirst, Inc., Live Person, Inc., Mustang Software,
Inc., Responsys.com and Servicesoft, Inc. In addition, Kana may compete with
companies providing customer management and communications solutions, such as
Broadbase, Inc., Clarify Inc. (which was recently acquired by Northern
Telecom), E.piphany, Inc., Genesys Telecommunications Laboratories, Inc. (which
was recently acquired by Alcatel), Cisco Systems, Inc., Lucent Technologies,
Inc., Message Media, Inc., Oracle Corporation, Pivotal Corporation, Siebel
Systems, Inc., Silknet Software, Inc. (if the merger is not completed) and
Vantive Corporation (which was recently acquired by PeopleSoft, Inc.).
Furthermore, Kana may face increased competition should it expand its product
line, through acquisition of complementary businesses or otherwise.
Many of Kana's 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 Kana
has. In addition, many of Kana's competitors have well-established
relationships with Kana's current and potential customers and have extensive
knowledge of Kana's industry. Kana may lose potential customers to competitors
for various reasons, including the ability or willingness of competitors to
offer lower prices and other incentives that Kana cannot match. Accordingly, it
is possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. Kana also expects that competition
will increase as a result of recently-announced industry consolidations, as
well as future consolidations.
Kana may not be able to compete successfully against current and future
competitors, and competitive pressures may seriously harm its business. See
"Information About Kana--Competition".
Kana's failure to consummate its expected sales in any given quarter could
dramatically harm its operating results because of the large size of typical
orders
Kana's sales cycle is subject to a number of significant risks, including
customers' budgetary constraints and internal acceptance reviews, over which
Kana has little or no control. Consequently, if sales expected from a specific
customer in a particular quarter are not realized in that quarter, Kana is
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.
Kana may not be able to forecast its revenues accurately because its products
have a long and variable sales cycle
The long sales cycle for Kana's products may cause license revenue and
operating results to vary significantly from period to period. To date, the
sales cycle for Kana's products has taken three to 12 months in the United
States and longer in foreign countries. Kana's sales cycle has required
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pre-purchase evaluation by a significant number of individuals in its
customers' organizations. Along with third parties that often jointly market
Kana's software with Kana, Kana invests significant amounts of time and
resources educating and providing information to prospective customers
regarding the use and benefits of Kana's products. Many of Kana's customers
evaluate Kana's 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 Kana's products.
Kana's stock price may be highly volatile and could drop, particularly because
its business depends on the Internet
The trading price of Kana's common stock has in the past and is expected to
continue in the future to fluctuate widely as a result of a number of factors,
many of which are outside Kana's 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 Kana common
stock.
Difficulties in implementing Kana's products could harm Kana's revenues and
margins
Forecasting Kana's revenues depends upon the timing of implementation of
its products. This implementation typically involves working with sophisticated
software, computing and communications systems. If Kana experiences
difficulties with implementation or does not meet project milestones in a
timely manner, Kana could be obligated to devote more customer support,
engineering and other resources to a particular project. Some customers may
also require Kana to develop customized features or capabilities. If new or
existing customers have difficulty deploying Kana's products or require
significant amounts of Kana's professional services support or customized
features, Kana's revenue recognition could be further delayed and Kana's costs
could increase, causing increased variability in Kana's operating results.
Kana's business depends on the acceptance of its products and services, and it
is uncertain whether the market will accept Kana's products and services
Of Kana's total revenue of $14 million for the twelve months ended December
31, 1999, $10.5 million was derived from licenses of products and $3.5 million
from related services. Kana is not certain that its target customers will
widely adopt and deploy its products and services. Kana's future financial
performance will depend on the successful development, introduction and
customer acceptance of new and enhanced versions of Kana's products and
services. In the future, Kana may not be successful in marketing its products
and services or any new or enhanced products.
Kana may be unable to hire and retain the skilled personnel necessary to
develop its engineering, professional services and support capabilities in
order to continue to grow
Kana intends to increase its sales, marketing, engineering, professional
services and product management personnel over the next 12 months. Competition
for these individuals is intense, and Kana may not be able to attract,
assimilate or retain highly qualified personnel in the future. Kana's business
cannot continue to grow if it cannot attract qualified personnel. Kana's
failure to attract and retain the highly trained personnel that are integral to
its product development and professional services group, which is the group
responsible for implementation and customization of, and technical support for,
Kana's products and services, may limit the rate at which Kana can develop and
install new products or product enhancements, which would harm its business.
Kana will need to
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increase its staff to support new customers and the expanding needs of its
existing customers, without compromising the quality of Kana's customer
service. Since Kana's inception, a number of employees have left or have been
terminated, and Kana expects to lose more employees in the future. Hiring
qualified professional services personnel, as well as sales, marketing,
administrative and research and development personnel, is very competitive in
Kana's 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. Kana faces greater difficulty attracting these personnel with
equity incentives as a public company than it did as a privately held company.
See "Information About Kana--Employees".
Kana may face difficulties in hiring and retaining qualified sales personnel to
sell its products and services, which could harm Kana's ability to increase its
revenues in the future
Kana's financial success depends to a large degree on the ability of its
direct sales force to increase sales to a level required to adequately fund
marketing and product development activities. Therefore, Kana's ability to
increase revenues in the future depends considerably upon its 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 Kana's sales force.
Kana's business will be harmed if it fails 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 Kana anticipates. See
"Information About Kana--Employees".
Loss of Kana's Chief Executive Officer or any of Kana's executive officers
could harm Kana's business
Kana's future success depends to a significant degree on the skills,
experience and efforts of Kana's senior management. In particular, Kana depends
upon the continued services of Michael J. McCloskey, its Chief Executive
Officer. The loss of the services of Mr. McCloskey or any of Kana's executive
officers could harm Kana's business and operations. In addition, Kana has not
obtained life insurance benefiting Kana on any of its key employees or entered
into employment agreements with its key employees. If any of Kana's key
employees left or was seriously injured and unable to work and Kana was unable
to find a qualified replacement, Kana's business could be harmed.
A failure to manage Kana's internal operating and financial functions could
lead to inefficiencies in conducting its business and subject Kana to increased
expenses
Kana's ability to offer its products and services successfully in a rapidly
evolving market requires an effective planning and management process. Kana has
limited experience in managing rapid growth. Kana is experiencing a period of
growth that is placing a significant strain on its managerial, financial and
personnel resources. Kana's business will suffer if this growth continues and
Kana fails to manage it successfully. On December 31, 1999, Kana had a total of
363 full-time employees compared to 109 on December 31, 1998. Kana expects to
continue to hire new employees at a rapid pace. For example, Kana added 182
employees between July 1, 1999 and December 31, 1999, which number excludes 118
new employees who joined Kana as a result of the Connectify, netDialog and
Business Evolution mergers. Completion of the merger with Silknet is expected
to result in approximately 300 new employees joining Kana. Moreover, Kana will
need to assimilate substantially all of these companies' operations into its
operations. The rate of Kana's recent growth has made management of that growth
more difficult. Any additional growth will further strain Kana's management,
financial, personnel, internal training and other resources. To manage any
future growth effectively, Kana must improve its 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 Kana's products, Kana's ability to respond to its customers and
retain key personnel, and Kana's business in general.
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The integration of Kana's new Vice President of Human Resources, Vice President
for Kana On-Line, Vice President of eBusiness Services and Vice President of
Realtime into its management team may interfere with its operations
Kana has recently hired a number of new officers, including a Vice
President of Human Resources, Vice President for Kana On-Line, Vice President
of eBusiness Services and Vice President of Realtime, each of whom has been
with Kana for less than six months. Completion of the merger with Silknet is
expected to result in additional officers joining Kana's management team. To
integrate into Kana, these individuals must spend a significant amount of time
learning Kana's 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 Kana's ongoing
operations.
Kana has completed three mergers in the past eight months, and those mergers
may result in disruptions to its business and management due to difficulties in
assimilating personnel and operations
Kana may not realize the benefits from the significant mergers it has
completed. In August 1999, Kana acquired Connectify, and in December 1999, Kana
acquired netDialog and Business Evolution. Kana may not be able to successfully
assimilate the additional personnel, operations, acquired technology and
products into its business. In particular, Kana will need to assimilate and
retain key professional services, engineering and marketing personnel. This is
particularly difficult with Business Evolution, since it is located on the east
coast and Kana is headquartered on the west coast. Key personnel from the
acquired companies have in certain instances decided, and they may in the
future decide, that they do not want to work for Kana. In addition, products of
these companies will have to be integrated into Kana's products, and it is
uncertain whether Kana may accomplish this easily or at all. These difficulties
could disrupt Kana's ongoing business, distract management and employees or
increase expenses. Acquisitions are inherently risky and Kana may also face
unexpected costs, which may adversely affect operating results in any quarter.
If Kana acquires additional companies, products or technologies, it may face
risks similar to those faced in its other mergers
If Kana is presented with appropriate opportunities, Kana intends to make
other investments in complementary companies, products or technologies. Kana
may not realize the anticipated benefits of any other acquisition or
investment. If Kana acquires another company, it will likely face the same
risks, uncertainties and disruptions as discussed above with respect to its
other mergers. Furthermore, Kana 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 Kana or Kana's existing stockholders. In
addition, Kana's 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 Kana's sales and damage its reputation
To be competitive, Kana 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 Kana's business.
If Kana experiences product delays in the future, it may face:
. customer dissatisfaction;
. cancellation of orders and license agreements;
. negative publicity;
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. loss of revenues;
. slower market acceptance; and
. legal action by customers.
In the future, Kana's efforts to remedy this situation may not be
successful and Kana 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 Kana's competitors. If
Kana were to lose market share as a result of lapses in its product management,
Kana's business would suffer.
Technical problems with either Kana's internal or outsourced computer and
communications systems could interrupt Kana's Kana On-Line service
The success of the Kana On-Line service depends on the efficient and
uninterrupted operation of its 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. Kana has entered into an Internet-hosting agreement
with Exodus Communications, Inc. to maintain all of the Kana On-Line servers at
Exodus' data center in Santa Clara, California. Kana's operations depend on
Exodus' ability to protect its and Kana's systems in Exodus' data center
against damage or interruption. Exodus does not guarantee that Kana's Internet
access will be uninterrupted, error-free or secure. Kana has no formal disaster
recovery plan in the event of damage or interruption, and its insurance
policies may not adequately compensate Kana for any losses that it may incur.
Any system failure that causes an interruption in Kana's service or a decrease
in responsiveness could harm Kana's relationships with customers and result in
reduced revenues. See "Information About Kana--Products and Services--Kana On-
Line".
If Kana fails to build skills necessary to sell its Kana On-Line service, Kana
will lose revenue opportunities and its sales will suffer
The skills necessary to market and sell Kana On-Line are different from
those relating to Kana's software products. Kana licenses its software products
for a fixed fee based on the number of concurrent users and the optional
applications purchased. Kana licenses Kana On-Line based on a fixed fee for
installation, configuration and training, and a variable monthly component
depending on actual customer usage. Kana's sales force sells both Kana's
software products and Kana On-Line. Because different skills are necessary to
sell Kana On-Line as compared to selling software products, Kana's sales and
marketing groups may not be able to maintain or increase the level of sales of
either Kana On-Line or Kana's software products.
Kana's pending patents may never be issued and, even if issued, may provide
little protection
Kana's success and ability to compete depend to a significant degree upon
the protection of its software and other proprietary technology rights. Kana
regards the protection of patentable inventions as important to its future
opportunities. Kana currently has seven U.S. patent applications pending
relating to its software. However, none of Kana's technology is patented
outside of the United States, although Kana has filed three international
patent applications corresponding to three of Kana's U.S. patent applications.
It is possible that:
. Kana's pending patent applications may not result in the issuance of
patents;
. any patents issued may not be broad enough to protect Kana's proprietary
rights;
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. any issued patent could be successfully challenged by one or more third
parties, which could result in Kana's 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 Kana's products or design around any of Kana's
patents; and
. effective patent protection may not be available in every country in
which Kana does business.
See "Information About Kana--Intellectual Property".
Kana relies upon trademarks, copyrights and trade secrets to protect its
proprietary rights, which may not be sufficient to protect its intellectual
property
Kana also relies 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 its proprietary rights. In
the United States, Kana currently has a registered trademark, "Kana", and
seven pending trademark applications, including trademark applications for its
logo and "KANA COMMUNICATIONS and Design". Although none of its trademarks is
registered outside of the United States, Kana has trademark applications
pending in Australia, Canada, the European Union, India, Japan, South Korea
and Taiwan. Moreover, despite the precautions that Kana has taken:
. laws and contractual restrictions may not be sufficient to prevent
misappropriation of its 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 Kana's marks;
and
. policing unauthorized use of Kana's products and trademarks is
difficult, expensive and time-consuming, and Kana may be unable to
determine the extent of this unauthorized use.
Also, the laws of other countries in which Kana markets its products may
offer little or no effective protection of Kana's proprietary technology.
Reverse engineering, unauthorized copying or other misappropriation of Kana's
proprietary technology could enable third parties to benefit from Kana's
technology without paying Kana for it, which would significantly harm Kana's
business. See "Information About Kana--Intellectual Property".
Kana may become involved in litigation over proprietary rights, which could be
costly and time consuming, and Genesys Telecommunications Laboratories, Inc.
has filed an infringement suit against Kana
Substantial litigation regarding intellectual property rights exists in
Kana's industry. Kana expects that software in its 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 upon which Kana's products or technology infringe. Any of
these third parties might make a claim of infringement against Kana. Many of
Kana's software license agreements require Kana to indemnify its customers
from any claim or finding of intellectual property infringement. Any
litigation, brought by Kana 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 Kana is accused of infringement
might cause product shipment delays, require Kana to develop non-infringing
technology or require Kana to enter into
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royalty or license agreements, which might not be available on acceptable
terms, or at all. If a successful claim of infringement were made against Kana
and it could not develop non-infringing technology or license the infringed or
similar technology on a timely and cost-effective basis, Kana's business could
be significantly harmed. See "Information About Kana--Intellectual Property".
On October 8, 1999, Genesys Telecommunications Laboratories, Inc. filed a
complaint against Kana in the United States District Court for the District of
Delaware. Genesys alleges that Kana's Customer Messaging System 3.0 infringes
one or more claims of a Genesys patent. Genesys is seeking relief in the forms
of an injunction, damages, punitive damages, attorneys' fees, costs and pre-
and post-judgment interest. The litigation is currently in its early stages and
Kana has not received material information or documentation. Kana intends to
fight this claim vigorously and does not expect it to materially impact its
results from operations. Kana is not currently a party to any other material
legal proceedings.
Kana may face higher costs and lost sales if its software contains errors
Kana faces the possibility of higher costs as a result of the complexity of
its products and the potential for undetected errors. Due to the mission-
critical nature of Kana's products and services, undetected errors are of
particular concern. Kana has only a few "beta" customers that test new features
and functionality of its software before Kana makes these features and
functionalities generally available to its customers. If Kana's software
contains undetected errors or Kana fails to meet customers' expectations in a
timely manner, Kana 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 its reputation;
. increased service and warranty costs;
. legal actions by customers; and
. increased insurance costs.
Kana may face liability claims that could result in unexpected costs and damage
to its reputation
Kana's licenses with customers generally contain provisions designed to
limit Kana's exposure to potential product liability claims, such as
disclaimers of warranties and limitations on liability for special,
consequential and incidental damages. In addition, Kana's license agreements
generally cap the amounts recoverable for damages to the amounts paid by the
licensee to Kana for the product or service giving rise to the damages.
However, these contractual limitations on liability may not be enforceable and
Kana may be subject to claims based on errors in its software or mistakes in
performing its services including claims relating to damages to its customers'
internal systems. A product liability claim, whether or not successful, could
harm Kana's business by increasing its costs, damaging its reputation and
distracting its management.
Kana intends to expand its international operations, which could divert
management attention and present financial issues
Kana's international operations are located in the United Kingdom,
Australia, Holland and Germany and, to date, have been limited. Kana plans to
expand its existing international operations
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and establish additional facilities in other parts of the world. Kana may face
difficulties in accomplishing this expansion, including finding adequate
staffing and management resources for its international operations. The
expansion of Kana's existing international operations and entry into additional
international markets will require significant management attention and
financial resources. In addition, in order to expand its international sales
operations, Kana will need to, among other things:
. expand its international sales channel management and support
organizations;
. customize its products for local markets; and
. develop relationships with international service providers and
additional distributors and system integrators.
Kana's investments in establishing facilities in other countries may not
produce desired levels of revenues. Even if Kana is able to expand its
international operations successfully, Kana may not be able to maintain or
increase international market demand for its products. In addition, Kana has
only licensed its products internationally since January 1999 and has limited
experience in developing localized versions of its software and marketing and
distributing them internationally. Localizing Kana's products may take longer
than Kana anticipates due to difficulties in translation and delays Kana may
experience in recruiting and training international staff.
Kana's growth could be limited if it fails to execute its plan to expand
internationally
For the twelve month periods ended December 31, 1999 and December 31, 1998,
Kana derived approximately 10% and 0%, respectively, of its total revenues from
sales outside North America. Kana has established offices in the United
Kingdom, Australia and Germany. As of December 31, 1999 Kana had 7 sales
persons in its international offices. As a result, Kana faces risks from doing
business on an international basis, any of which could impair its internal
revenues. Kana could, in the future, encounter greater difficulty in accounts
receivable collection, longer sales cycles and collection periods or seasonal
reductions in business activity. In addition, Kana's international operations
could cause its average tax rate to increase. Any of these events could harm
Kana's international sales and results of operations.
International laws and regulations may expose Kana to potential costs and
litigation
Kana's international operations will increase its exposure to international
laws and regulations. If Kana cannot comply with foreign laws and regulations,
which are often complex and subject to variation and unexpected changes, it
could incur unexpected costs and potential litigation. For example, the
governments of foreign countries might attempt to regulate Kana's products and
services or levy sales or other taxes relating to Kana's activities. In
addition, foreign countries may impose tariffs, duties, price controls or other
restrictions on foreign currencies or trade barriers, any of which could make
it more difficult for Kana to conduct its business. The European Union has
enacted its own privacy regulations that may result in limits on the collection
and use of certain user information, which, if applied to the sale of Kana's
products and services, could negatively impact Kana's results of operations.
Kana may suffer foreign exchange rate losses
Kana's international revenues are denominated in local currency. Therefore,
a weakening of other currencies versus the U.S. dollar could make Kana's
products less competitive in foreign markets. Kana does not currently engage in
currency hedging activities. Kana has not yet but may in the future experience
foreign currency translation losses, especially to the extent that it does not
engage in hedging.
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Kana's prospects for obtaining additional financing, if required, are uncertain
and failure to obtain needed financing could affect its ability to pursue
future growth
Kana may need to raise additional funds to develop or enhance its products
or services, to fund expansion, to respond to competitive pressures or to
acquire complementary products, businesses or technologies. Kana does not have
a long enough operating history to know with certainty whether its existing
cash and expected revenues will be sufficient to finance its anticipated
growth. Additional financing may not be available on terms that are acceptable
to Kana. If Kana raises additional funds through the issuance of equity or
convertible debt securities, the percentage ownership of its stockholders would
be reduced and these securities might have rights, preferences and privileges
senior to those of Kana's current stockholders. If adequate funds are not
available on acceptable terms, Kana's ability to fund its expansion, take
advantage of unanticipated opportunities, develop or enhance products or
services, or otherwise respond to competitive pressures would be significantly
limited.
Kana's executive officers and directors can exercise significant influence over
stockholder voting matters
After the merger, Kana's executive officers and directors, and their
affiliates will together control approximately 37% of Kana's outstanding common
stock. As a result, these stockholders, if they act together, will have a
significant impact on all matters requiring approval of Kana's stockholders,
including the election of directors and significant corporate transactions.
This concentration of ownership may delay, prevent or deter a change in control
of Kana, could deprive Kana's 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 Kana common stock.
Kana has adopted anti-takeover defenses that could delay or prevent an
acquisition of Kana
Kana's board of directors has 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 has 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 Kana 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 Kana's outstanding voting stock. Kana currently
has no plans to issue preferred stock.
Kana's 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, Kana's board of directors is divided into three classes,
only one of which is elected each year. Directors are 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 and Comparison of Stockholder Rights--Description
of Kana Capital Stock".
Kana's failure to manage multiple technologies and technological change could
harm its future product demand
Future versions of hardware and software platforms embodying new
technologies and the emergence of new industry standards could render Kana's
products obsolete. The market for e-Business customer communication software is
characterized by:
. rapid technological change;
. frequent new product introductions;
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. changes in customer requirements; and
. evolving industry standards.
Kana's products are designed to work on a variety of hardware and software
platforms used by Kana's customers. However, Kana's software may not operate
correctly on evolving versions of hardware and software platforms, programming
languages, database environments and other systems that its customers use. For
example, the server component of the current version of Kana's products runs on
the Windows NT operating system from Microsoft, and Kana must develop products
and services that are compatible with UNIX and other operating systems to meet
the demands of its customers. If Kana cannot successfully develop these
products in response to customer demands, Kana's business could suffer. Also,
Kana must constantly modify and improve its 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 Kana's
business. If Kana fails to modify or improve its products in response to
evolving industry standards, its products could rapidly become obsolete, which
would harm its business.
If Kana fails to respond to changing customer preferences in its market, demand
for its products and Kana's ability to enhance its revenues will suffer
Kana must continually improve the performance, features and reliability of
its products, particularly in response to competitive offerings. Kana's success
depends, in part, on Kana's ability to enhance its existing software and to
develop new services, functionality and technology that address the
increasingly sophisticated and varied needs of Kana's prospective customers. If
Kana does not properly identify the feature preferences of prospective
customers, or if Kana fails to deliver features that meet the requirements of
these customers, Kana's ability to market its products successfully and to
increase its 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 media of
communication, demand for Kana's products and services will decline
Kana sells its products and services primarily to organizations that
receive large volumes of e-mail and Web-based communications. Many of Kana's
customers have business models that are based on the continued growth of the
Internet. Consequently, Kana's future revenues and profits, if any,
substantially depend upon the continued acceptance and use of the Internet and
e-mail, which are evolving as media of communication. Rapid growth in the use
of e-mail is a recent phenomenon and may not continue. 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 Kana's 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 media of communication, Kana's business will suffer.
Future regulation of the Internet may slow its growth, resulting in decreased
demand for Kana's 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
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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 Kana's 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,
particularly as it relates to online communication, could decrease demand for
Kana's products and services and increase Kana's costs of doing business, or
otherwise harm its business. Kana's costs could increase and its 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 its
business, or the application of existing laws and regulations to the Internet
and other online services.
Year 2000 issues could continue to present technological risks, could cause
disruption to Kana's business and could harm sales of its 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 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 Kana's material systems, Kana's customers' material systems
or the Internet to be Year 2000 compliant would have material adverse
consequences for Kana. Kana is unable to predict to what extent its business
may be affected if its software, the systems that operate in conjunction with
its software or its internal systems experience a material failure due to
residual Year 2000 problems. Residual Year 2000 issues may disrupt Kana's
operations, subject Kana to liabilities and costs and lower net income. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Kana--Year 2000 Readiness Disclosure".
Kana's security could be breached, which could damage its reputation and deter
customers from using its services
Kana must protect its computer systems and network from physical break-ins,
security breaches and other disruptive problems caused by the Internet or other
users. Computer break-ins could jeopardize the security of information stored
in and transmitted through Kana's computer systems and network, which could
adversely affect Kana's ability to retain or attract customers, damage Kana's
reputation and subject Kana to litigation. Kana has in the past, and could in
the future, be subject to denial of service, vandalism and other attacks on its
systems by Internet hackers. Although Kana intends to continue to implement
security technology and establish operational procedures to prevent break-ins,
damage and failures, these security measures may fail. Kana's insurance
coverage in certain circumstances may be insufficient to cover issues that may
result from such events.
Future sales of stock could affect Kana's stock price
If Kana's stockholders sell substantial amounts of Kana common stock,
including shares issued upon the exercise of outstanding options and warrants,
in the public market, the market price of Kana common stock could fall. These
sales also might make it more difficult for Kana to sell equity or equity-
related securities in the future at a time and price that Kana deems
appropriate.
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Risks Related to Silknet
Silknet's limited operating history may impede your ability to value Silknet's
business and its future prospects
Your evaluation of Silknet's business will be more difficult because of
Silknet's limited operating history. Silknet commenced operations in March 1995
and recorded its first license revenue upon delivery of Silknet eService in a
trial version to customers in January 1997. Accordingly, it is difficult to
evaluate Silknet's business and prospects. In addition, because Silknet is in
an early stage of development in a new and rapidly evolving market, Silknet's
prospects are difficult to predict and may change rapidly and without warning.
Silknet has incurred substantial operating losses and may not be profitable in
the future
Since Silknet began operations, Silknet has incurred substantial operating
losses in every fiscal period. Silknet cannot be certain if or when it will
become profitable. Failure to achieve profitability within the timeframe
expected by investors may adversely affect the market price of Silknet's common
stock. As a result of accumulated operating losses, at December 31, 1999,
Silknet had an accumulated deficit of $28 million. Silknet has generated
relatively small amounts of revenue, while increasing expenditures in all
areas, particularly in research and development and sales and marketing, in
order to execute Silknet's business plan. Although Silknet has experienced
revenue growth in recent periods, the growth has been from a limited base of
historical revenue, and it is unlikely that such growth rates are sustainable
over the long-term.
Silknet's quarterly operating results may fluctuate because Silknet depends on
a small number of large orders
Silknet derives a significant portion of its software license revenue in
each quarter from a small number of relatively large orders. Silknet's
operating results for a particular fiscal period could be materially adversely
affected if it is unable to complete one or more substantial license sales
planned for that period. In each of the last eight quarters, Silknet had at
least one customer that accounted for more than 17% of total revenue in that
quarter. In addition, the purchase and implementation of Silknet's products
typically involve a significant cost to Silknet's customers, including the
purchase of related hardware and software, as well as training and integration
costs. These implementations also include substantial commitment of resources
by Silknet's customers or their consultants over an extended period of time. As
a result, Silknet's sales cycle is relatively long.
In addition, Silknet's services revenue, which is largely correlated with
its license revenue, has fluctuated and may fluctuate in the future due to
significant consulting and implementation services performed in a quarter.
Investors should not expect a commensurate increase in services revenue between
future quarters. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Silknet."
Disappointing quarterly revenue or operating results could cause the price of
Silknet's common stock to fall
Silknet's quarterly revenue and operating results are difficult to predict
and may fluctuate significantly from quarter to quarter. If Silknet's quarterly
revenue or operating results fall below the expectations of investors or
securities analysts, the price of Silknet's common stock could fall
substantially.
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Silknet's quarterly revenue may fluctuate as a result of a variety of
factors, including the following:
. the market for interactive, Web-based electronic business solutions is
in an early stage of development and it is therefore difficult to
accurately predict customer demand; and
. the sales cycle for Silknet's products and services varies substantially
from customer to customer, and Silknet expects the sales cycle to be
long. As a result, Silknet has difficulty determining whether and when
it will receive license revenue from a particular customer.
In addition, because Silknet's revenue from implementation, maintenance and
training services is largely correlated with Silknet's license revenue, a
decline in license revenue could also cause a decline in Silknet's services
revenue in the same quarter or in subsequent quarters.
Most of Silknet's expenses, such as employee compensation and rent, are
relatively fixed in the short term. Moreover, Silknet's expense levels are
based, in part, on its expectations regarding future revenue levels. As a
result, if revenue for a particular quarter is below its expectations, Silknet
could not proportionately reduce operating expenses for that quarter, and
therefore this revenue shortfall would have a disproportionate effect on
Silknet's expected operating results for that quarter.
Silknet's business will be adversely affected if Web-based electronic business
solutions are not widely adopted
Silknet's products address a new and emerging market for Web-based,
interactive electronic business solutions. Therefore, Silknet's future success
depends substantially upon the widespread adoption of the Web as a primary
medium for commerce and business applications. The failure of this market to
develop, or a delay in the development of this market, would have a material
adverse effect on Silknet's business, financial condition and operating
results. The Web has experienced, and is expected to continue to experience,
significant user and traffic growth, which has, at times, caused user
frustration with slow access and download times. The Web infrastructure may not
be able to support the demands placed on it by the continued growth upon which
Silknet's success depends. Moreover, critical issues concerning the commercial
use of the Web, such as security, reliability, cost, accessibility and quality
of service, remain unresolved and may negatively affect the growth of Web use
or the attractiveness of commerce and business communication over the Web. In
addition, the Web could lose its viability due to delays in the development or
adoption of new standards and protocols to handle increased activity or due to
increased government regulation and taxation of Internet commerce.
Intense competition from other technology companies may adversely affect
Silknet's financial condition and operating results
The market for interactive, Web-based electronic business solutions is
intensely competitive. If Silknet is unable to compete effectively, its
business, financial condition and operating results would be materially
adversely affected. Many of Silknet's current and potential competitors have
longer operating histories, greater name recognition and substantially greater
financial, technical, marketing, management, service, support and other
resources than Silknet does. Therefore, they may be able to respond more
quickly than Silknet can to new or changing opportunities, technologies,
standards or customer requirements.
In addition, Silknet expects that new competitors will enter the market
with competing products as the size and visibility of the market opportunity
increases. Silknet also expects that competition will increase as a result of
software industry consolidations and formations of alliances among industry
participants. Increased competition could result in pricing pressures, reduced
margins or the failure of
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Silknet's products to achieve or maintain market acceptance. See "Information
About Silknet-- Competition."
Silknet may not be able to develop new products or enhance existing products on
a timely basis
To be competitive, Silknet must develop and introduce on a timely basis new
products and product enhancements which meet the needs of companies seeking to
deploy and manage electronic business applications over the Web. Silknet has in
the past failed to ship certain new products or product enhancements by
Silknet's planned shipment date. If Silknet fails to develop and introduce new
products and enhancements successfully and on a timely basis, it could have a
material adverse effect on Silknet's business, operating results and financial
condition.
Failure to expand Silknet's relationships with systems integrators and
consulting firms would impede acceptance of Silknet's products and growth of
Silknet's revenue
To increase Silknet's revenue and implementation capabilities, Silknet must
develop and expand relationships with systems integrators and consulting firms.
A failure to do so could have a material adverse effect on Silknet's business,
operating results and financial condition. Silknet relies on systems
integrators and consulting firms to recommend its products to their clients and
to install and support Silknet's products for their clients. Systems
integrators and consulting firms may develop, market or recommend software
applications that compete with Silknet's products. Moreover, if these firms
fail to implement Silknet's products successfully for their clients, Silknet
may not have the resources to implement its products on the schedule required
by the client, which could have a material adverse effect on Silknet's
business, operating results and financial condition.
Silknet's failure to expand its direct sales force and third-party distribution
channels would impede Silknet's revenue growth and financial condition
To increase its revenue, Silknet must increase the size of its direct sales
force and the number of Silknet's indirect marketing and distribution partners,
including software and hardware vendors and resellers. A failure to do so could
have a material adverse effect on Silknet's business, operating results and
financial condition. There is intense competition for sales personnel in
Silknet's business, and Silknet may not be successful in attracting,
integrating, motivating or retaining new personnel for these positions.
Silknet's existing or future marketing and distribution partners may choose to
devote greater resources to marketing and supporting the products of
competitors.
Silknet's failure to operate its professional services organization at a profit
would adversely affect its financial condition
Silknet's failure to operate its professional services organization at a
profit could have a material adverse effect on its business, operating results
and financial condition. To gain initial acceptance of its products by
customers in its targeted industries, Silknet assists customers with the
implementation of Silknet's products, sometimes at a loss. Silknet cannot be
certain that Silknet's professional services organization will sustain
profitability.
Silknet's failure to manage properly its rapid growth could strain its
resources and adversely affect its business
Silknet's failure to manage properly its rapid growth could have a material
adverse effect on the quality of Silknet's products, Silknet's ability to
retain key personnel and Silknet's business, operating results and financial
condition. Silknet's revenue increased 139.8% in the quarter ended December 31,
1999 from the same period the year earlier. From January 1, 1999 to December
31,
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1999, the number of Silknet's employees increased from 116 to 241. The rapid
rate of Silknet's recent growth has made management of that growth more
difficult. Additional growth may further strain Silknet's management, financial
and other resources. To manage future growth effectively Silknet must maintain
and enhance its financial and accounting systems and controls, integrate new
personnel and manage expanded operations.
Silknet may be unable to successfully integrate the business and products of
InSite Marketing Technology with Silknet's business
In October 1999, Silknet acquired InSite Marketing Technology, Inc. There
can be no assurance that Silknet can successfully integrate the acquired
businesses, personnel, products or technologies of InSite. Silknet's
integration of the InSite business may cause a diversion of management time and
reallocation of resources. There can be no assurance that the InSite
personalization technology can be successfully integrated with Silknet's
product offerings and distribution infrastructure, or that significant product
research and development, and development expenses, will not be required to
fully integrate InSite's products with those of Silknet. There can be no
assurances that revenue, if any, from the InSite products or the combined
Silknet/InSite products will exceed operating expenses, that Silknet can be
successful in reducing expenses to achieve profitability, or that customers
will continue to support Silknet's new product initiatives following the
integration.
Silknet's failure to expand and manage its international operations would
adversely affect its revenue growth and financial condition
Silknet expects international revenue to account for a significant
percentage of total revenue in the future and Silknet believes that it must
continue to expand its international sales activities in order to be
successful. Silknet's failure to expand its international sales could have a
material adverse effect on its business, operating results and financial
condition. Silknet's plans to expand internationally may be adversely affected
by a number of risks, including:
. expenses associated with customizing products for foreign countries;
. challenges inherent in managing geographically dispersed operations;
. protectionist laws and business practices that favor local competitors;
. dependence on local vendors;
. multiple, conflicting and changing governmental laws and regulations;
and
. foreign currency exchange rate fluctuations.
Silknet's international sales growth will be limited if it is unable to:
. establish additional foreign operations;
. expand international sales channel management and support organizations;
. hire additional personnel;
. customize products for local markets;
. develop relationships with international service providers; or
. establish relationships with additional distributors and systems
integrators.
Silknet may be unable to hire and retain the skilled personnel it needs to
succeed
Qualified personnel are in great demand throughout the software industry.
The demand for qualified personnel is particularly acute in the New England
area, due to the large number of
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software companies and the low unemployment in the region. Silknet's success
depends in large part upon its ability to attract, train, motivate and retain
highly skilled employees, particularly marketing personnel, software engineers
and other senior personnel. If Silknet is unable to attract and retain the
highly-trained technical personnel that are integral to its product
development, the rate at which Silknet can develop new products or product
enhancements could be limited. In addition, if Silknet is unable to attract and
retain professional services support personnel, its ability to install products
at customer sites could be limited.
Silknet may be unable to protect its proprietary technology rights
Silknet's success depends to a significant degree upon the protection of
its software and other proprietary technology rights. Silknet relies on trade
secret, copyright and trademark laws and confidentiality agreements with
employees and third parties, all of which offer only limited protection.
Moreover, the laws of other countries in which Silknet markets its products may
afford little or no effective protection of Silknet's proprietary technology.
The reverse engineering, unauthorized copying or other misappropriation of
Silknet's proprietary technology could enable third parties to benefit from
Silknet's technology without paying for it. This could have a material adverse
effect on Silknet's business, operating results and financial condition. If
Silknet resorts to legal proceedings to enforce its intellectual property
rights, the proceedings could be burdensome and expensive and could involve a
high degree of risk. Further, terms such as eBusiness, eCommerce and eService
are becoming widely used and descriptive. As a result, Silknet does not expect
to be able to prevent third parties from using these names for competing
products. See "Information About Silknet--Intellectual Property and Proprietary
Rights."
Claims by other companies that Silknet's products infringe their copyrights or
patents could adversely affect Silknet's financial condition
If any of its products violate third party proprietary rights, Silknet may
be required to reengineer its products or seek to obtain licenses from third
parties to continue offering its products without substantial reengineering.
Any efforts to reengineer Silknet's products or obtain licenses from third
parties may not be successful and, in any case, would substantially increase
Silknet's costs and have a material adverse effect on Silknet's business,
operating results and financial condition. Silknet does not conduct
comprehensive patent searches to determine whether the technology used in its
products infringes patents held by third parties. In addition, product
development is inherently uncertain in a rapidly evolving technological
environment in which there may be numerous patent applications pending, many of
which are confidential when filed, with regard to similar technologies. See
"Information About Silknet--Intellectual Property and Proprietary Rights."
Silknet's use of the "Silknet" and "eBusiness" trademarks may infringe the
trademark rights of other companies
Silknet's use of "eBusiness," as well as the use of other marks, may result
in costly litigation, divert management's attention and resources, cause
product shipment delays or require Silknet to pay damages and/or to enter into
royalty or license agreements to continue to use a product name. Silknet may be
required to stop using the name "eBusiness" or other names currently used for
its products. Any of these events could have a material adverse effect on
Silknet's business, operating results and financial condition.
Silknet has applied for registration of some of its trademarks in the
United States, Canada and the European Community, Singapore, Australia, China,
Estonia, Iceland, Indonesia, South Korea, Latvia, Lithuania, New Zealand,
Norway, Poland, and South Africa. Most of these applications have not been
approved. Silknet's applications for the registration of "Silknet" and
"Silknet" combined with
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the Silknet logo have received preliminary refusals in Canada because another
company filed an earlier application for the use of "Silk" in connection with
Internet information resource services.
Other companies have filed trademark applications for marks similar to the
names of Silknet's products. For example, IBM has filed several U.S. trademark
applications for marks incorporating the term "e-business." Silknet's use of
"Silknet eBusiness System" could infringe the rights of IBM and other companies
using marks that contain the term "eBusiness." See "Information About Silknet--
Intellectual Property and Proprietary Rights."
Silknet may lose access to third-party technology used in its products
Silknet incorporates into its products technology licensed from third
parties, such as Microsoft Corporation. The loss of access to this technology
could result in delays in the development and introduction of new products or
enhancements until equivalent or replacement technology could be accessed, if
available, or developed internally, if feasible. These delays could have a
material adverse effect on Silknet's business, operating results and financial
condition. It is possible that technology from others will not be available to
Silknet on commercially reasonable terms, if at all.
Silknet's business could be adversely affected if its products fail to perform
properly
Software products as complex as Silknet's may contain undetected errors, or
bugs, which result in product failures, or otherwise fail to perform in
accordance with customer expectations. Silknet's products may be particularly
susceptible to bugs or performance degradation because of the emerging nature
of Web technologies and the stress that may be placed on Silknet's products by
the full deployment of Silknet's products over the Web to thousands of end-
users. Product performance problems could result in loss of or delay in
revenue, loss of market share, failure to achieve market acceptance, diversion
of development resources or injury to Silknet's reputation, any of which could
have a material adverse effect on Silknet's business, operating results and
financial condition. Prior to November 1998, Silknet warranted some of its
products for five years, providing customers a right to refund a portion of the
license fee if Silknet is unable to correct an error in the product. To date,
no customer has requested a refund under the warranty provisions. However, if
Silknet is required to refund significant portions of license fees, Silknet's
business, operating results and financial condition could be materially
adversely affected.
Silknet could incur substantial costs as a result of product liability claims
relating to its customers' critical business operations
Silknet's products are critical to the operations of its customers'
businesses. If one of Silknet's products fails, a customer may assert a claim
for substantial damages against Silknet, regardless of Silknet's responsibility
for such failure. Product liability claims could require Silknet to spend
significant time and money in litigation or to pay significant damages.
Although Silknet maintains general liability insurance, including coverage for
errors and omissions, there can be no assurance that such coverage will
continue to be available on reasonable terms or will be available in amounts
sufficient to cover one or more large claims, or that the insurer will not
disclaim coverage as to any future claim.
Silknet may be affected by unexpected Year 2000 technology problems
Many existing computer systems and software products do not properly
recognize dates after December 31, 1999. This Year 2000 problem could result in
miscalculations, data corruption, system failures or disruptions of operations.
Silknet is subject to potential Year 2000 problems affecting its products, its
customers' systems, its internal systems and the systems of its vendors, any of
which could have a material adverse effect on Silknet's business, operating
results and financial condition.
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Changing purchasing patterns of customers impacted by Year 2000 issues may
result in reduced resources available for purchases of interactive electronic
business solutions. In addition, there can be no assurance that Year 2000
errors or defects will not be discovered in Silknet's internal software systems
and, if such errors or defects are discovered, there can be no assurance that
the costs of making such systems Year 2000 compliant will not be material.
Year 2000 errors or defects in the internal systems maintained by Silknet's
vendors could require Silknet to incur significant unanticipated expenses to
remedy any problems or replace affected vendors. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations of Silknet--Year
2000 Readiness Disclosure."
Silknet's common stock is particularly subject to volatility because of the
industry in which Silknet operates
The market prices of Silknet's common stock and common stock of other
technology companies, particularly Web-related companies, have been volatile,
and have experienced fluctuations that have often been unrelated or
disproportionate to the operating performance of these companies. These broad
market fluctuations could adversely affect the market price of Silknet's common
stock.
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KANA SPECIAL MEETING
General
Kana is furnishing this joint proxy statement/prospectus to holders of Kana
common stock in connection with the solicitation of proxies by the Kana board
of directors for use at the special meeting of stockholders of Kana to be held
on April , 2000, and any adjournment or postponement thereof.
This joint proxy statement/prospectus is first being furnished to Kana
stockholders on or about March , 2000.
Date, Time and Place
The special meeting will be held on April , 2000 at 10:00 a.m., local
time, at the offices of Brobeck, Phleger & Harrison LLP at Two Embarcadero
Place, 2200 Geng Road, Palo Alto, California 94303.
.
Matters to be Considered at the Special Meeting
At the special meeting and any adjournment or postponement of the special
meeting, Kana stockholders will be asked:
. to approve the issuance of Kana common stock to Silknet stockholders as
contemplated by the merger agreement;
. to approve an amendment to Kana's amended and restated certificate of
incorporation to increase the number of authorized shares of common
stock from 100,000,000 common shares to 1,000,000,000 common shares;
. to approve an amendment to the Kana 1999 Stock Incentive Plan which will
(i) increase the number of shares of Kana common stock available for
issuance under the 1999 plan by an additional 10,000,000 shares, (ii)
allow option grants and direct stock issuances to be made under the 1999
plan at an exercise or issue price below the fair market value of the
shares on the date of grant or issuance and (iii) increase the
limitation on the maximum number of shares by which the share reserve
under the 1999 Plan is to increase each year pursuant to the automatic
share increase provisions of the plan from 4,000,000 shares to 6,000,000
shares; and
. to transact such other business as may properly come before the special
meeting.
All share numbers in this joint proxy statement/prospectus reflect the
stock dividend of one share of Kana common stock per share of Kana common stock
outstanding, which was paid on February 22, 2000.
Record Date
Kana's board has fixed the close of business on March 21, 2000, as the
record date for determination of Kana stockholders entitled to notice of and to
vote at the special meeting.
Voting of Proxies
Kana requests that its stockholders complete, date and sign the
accompanying proxy and promptly return it in the accompanying envelope or
otherwise mail it to Kana. Brokers holding shares in "street name" may vote the
shares only if the stockholder provides instructions on how to vote.
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Brokers will provide directions on how to instruct the broker to vote the
shares. All properly executed proxies that Kana receives prior to the vote at
the special meeting, and that are not revoked, will be voted in accordance with
the instructions indicated on the proxies or, if no direction is indicated, to
approve the issuance of shares of Kana as contemplated by the merger agreement.
Kana's board does not currently intend to bring any other business before the
special meeting and, so far as Kana's board knows, no other matters are to be
brought before the special meeting. If other business properly comes before the
special meeting, the proxies will vote in accordance with their own judgment.
Stockholders may revoke their proxies at any time prior to its use:
. by delivering to the Secretary of Kana a signed notice of revocation or
a later-dated, signed proxy; or
. by attending the special meeting and voting in person.
Attendance at the special meeting does not in itself constitute the
revocation of a proxy.
Votes Required
As of the close of business on March 21, 2000, there were
shares of Kana common stock outstanding and entitled to vote. For the amendment
to Kana's amended and restated certificate of incorporation to increase the
number of authorized Kana common shares from 100,000,000 to 1,000,000,000 to
take effect, holders of a majority of Kana's outstanding common stock must
approve the amendment. The issuance of Kana common stock in the merger and the
amendment to the 1999 plan each require the approval of the holders of a
majority of the shares of Kana common stock entitled to vote and that are
present or represented by proxy at the Kana meeting. Kana stockholders have one
vote per share of Kana common stock owned on the record date.
As of March 1, 2000, directors and executive officers of Kana and their
affiliates beneficially owned an aggregate of 29,983,648 shares of Kana common
stock (excluding any shares issuable upon the exercise of options) or
approximately 49.3% of the shares of Kana common stock outstanding on such
date. Kana's directors and executive officers, and their affiliates, have
indicated their intention to vote their shares of Kana common stock in favor of
the issuance of the Kana common stock in connection with the merger. Pursuant
to separate voting agreements in the form attached hereto as Appendix II, Kana
stockholders who beneficially owned approximately 52.1% of Kana's common stock
outstanding as of February 3, 2000 have agreed to vote all of their shares of
Kana common stock for approval of the issuance of Kana common stock in the
merger. As a result of these voting agreements, the required approval by Kana's
stockholders of the issuance of Kana common stock in the merger is assured. As
of February 3, 2000, directors and executive officers of Silknet owned no
shares of Kana common stock.
Quorum; Abstentions and Broker Non-Votes
The required quorum for the transaction of business at the special meeting
is holders, present or by proxy, of a majority of the shares of Kana common
stock issued and outstanding on the record date. Abstentions and broker non-
votes each will be included in determining the number of shares present and
voting at the meeting for the purpose of determining the presence of a quorum.
Brokers holding shares for beneficial owners cannot vote on the actions
proposed in this joint proxy statement/prospectus without the owners' specific
instructions. Accordingly, Kana stockholders are urged to return the enclosed
proxy card marked to indicate their vote. Broker non-votes will not be included
in vote totals and will have no effect on the outcome of the votes on the
issuance of the shares in the merger. Abstentions, however, will have the same
effect as a vote against issuing the shares in the merger.
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Solicitation of Proxies and Expenses
Kana has retained the services of ChaseMellon Consulting Services, LLC to
assist in the solicitation of proxies from Kana stockholders. The fees to be
paid to the firm by Kana for these services are not expected to exceed $7,000
plus reasonable out-of-pocket expenses. Kana and Silknet will each bear its own
expenses in connection with the solicitation of proxies for its special meeting
of stockholders, except that each will pay one-half of all printing and filing
costs and expenses incurred in connection with the registration statement and
this joint proxy statement/prospectus.
In addition to solicitation by mail, the directors, officers and employees
of Kana may solicit proxies from Kana stockholders by telephone, facsimile or
in person. Brokerage houses, nominees, fiduciaries and other custodians will be
requested to forward soliciting materials to beneficial owners and will be
reimbursed for their reasonable expenses incurred in sending proxy materials to
beneficial owners.
Board Recommendations
The Kana board has determined that the merger and issuance of Kana common
stock in the merger are fair to, and in the best interests of, Kana and its
stockholders. Accordingly, the board unanimously has approved the merger
agreement and unanimously recommends that stockholders vote "FOR" approval of
the issuance of shares of Kana common stock as contemplated by the merger
agreement.
The Kana board has also determined that the increase in the number of
authorized shares under Kana's Amended and Restated Certificate of
Incorporation, and the proposal to amend Kana's 1999 stock incentive plan, are
also in the best interest of Kana and its stockholders. The Kana board
unanimously recommends that Kana stockholders vote "FOR" approval of these
proposals.
The matters to be considered at the special meeting are of great importance
to Kana stockholders. Accordingly, Kana stockholders are urged to read and
carefully consider the information presented in this joint proxy
statement/prospectus, and to complete, date, sign and promptly return the
enclosed proxy in the enclosed postage-paid envelope.
Kana stockholders should not send any stock certificates with their proxy
cards.
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SILKNET SPECIAL MEETING
General
Silknet is furnishing this joint proxy statement/prospectus to holders of
Silknet common stock in connection with the solicitation of proxies by the
Silknet board of directors for use at the special meeting of stockholders of
Silknet to be held on April , 2000, and any adjournment or postponement
thereof.
This joint proxy statement/prospectus is first being furnished to
stockholders of Silknet on or about March , 2000. This joint proxy
statement/prospectus is also furnished to Silknet stockholders as a prospectus
in connection with the issuance by Kana of shares of Kana common stock as
contemplated by the merger agreement.
Date, Time and Place
The special meeting will be held on April , 2000 at 10:00 a.m., local
time, at the offices of Testa, Hurwitz & Thibeault, LLP, 125 High Street, High
Street Tower, 20th Floor, Boston, Massachusetts 02110.
Matters to be Considered at the Special Meeting
At the Silknet special meeting and any adjournment or postponement of the
special meeting, Silknet stockholders will be asked:
. to consider and vote upon the adoption of the merger agreement under
which Silknet will become a wholly-owned subsidiary of Kana and each
outstanding share of Silknet common stock will be converted into the
right to receive 1.66 shares of Kana common stock; and
. to transact such other business as may properly come before the special
meeting.
Record Date
Silknet's board has fixed the close of business on March 21, 2000, as the
record date for determination of Silknet stockholders entitled to notice of and
to vote at the special meeting.
Voting of Proxies
Silknet requests that its stockholders complete, date and sign the
accompanying proxy and promptly return it in the accompanying envelope or
otherwise mail it to Silknet, or otherwise provide their proxy by telephone or
the Internet. Brokers holding shares in "street name" may vote the shares only
if the stockholder provides instructions on how to vote. Brokers will provide
directions on how to instruct the broker to vote the shares. All properly
executed proxies that Silknet receives prior to the vote at the special
meeting, and that are not revoked, will be voted in accordance with the
instructions indicated on the proxies or, if no direction is indicated, to
adopt the merger agreement. Silknet's board does not currently intend to bring
any other business before the special meeting and, so far as Silknet's board
knows, no other matters are to be brought before the special meeting. If other
business properly comes before the special meeting, the proxies will vote in
accordance with their own judgment.
Stockholders may revoke their proxies at any time prior to its use:
. by delivering to the Secretary of Silknet a signed notice of revocation
or a later-dated, signed proxy; or
. by attending the special meeting and voting in person.
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Attendance at the special meeting does not in itself constitute the
revocation of a proxy.
Votes Required
As of the close of business on March 21, 2000, there were
shares of Silknet common stock outstanding and entitled to vote. The holders of
a majority of the outstanding shares of Silknet common stock entitled to vote
thereon must adopt the merger agreement. Silknet stockholders have one vote per
share of Silknet common stock owned on the record date.
As of February 3, 2000, directors and executive officers of Silknet and
their affiliates beneficially owned an aggregate of 7,299,021 shares of Silknet
common stock (excluding any shares issuable upon the exercise of options or
warrants) or approximately 42.5% of the shares of Silknet common stock
outstanding on such date. The directors and executive officers of Silknet have
indicated their intention to vote their shares of Silknet common stock in favor
of adoption of the merger agreement. Under separate voting agreements in the
form attached hereto as Appendix III, Silknet's directors, executive officers
and certain other officers, and their affiliates beneficially owning
approximately 42.6% of Silknet's common stock outstanding as of February 3,
2000 (excluding any shares issuable upon the exercise of options or warrants)
have agreed to vote all of their shares of Silknet common stock for adoption of
the merger agreement. As of February 3, 2000, no director or executive officer
of Kana owned any shares of Silknet common stock. See "The Merger--Interests of
Silknet's Management in the Merger and Potential Conflicts of Interest."
Quorum; Abstentions and Broker Non-Votes
The required quorum for the transaction of business at the special meeting
is holders, present or by proxy, of a majority of the shares of Silknet common
stock issued and outstanding on the record date. Abstentions and broker non-
votes each will be included in determining the number of shares present and
voting at the meeting for the purpose of determining the presence of a quorum.
Because adoption of the merger agreement requires the affirmative vote of a
majority of the outstanding shares of Silknet common stock entitled to vote,
abstentions and broker non-votes will have the same effect as votes against the
adoption of the merger agreement and consummation of the merger. In addition,
the failure of a Silknet stockholder to return a proxy or vote in person will
have the effect of a vote against the adoption of the merger agreement. Brokers
holding shares for beneficial owners cannot vote on the actions proposed in
this joint proxy statement/prospectus without the owners' specific
instructions. Accordingly, Silknet stockholders are urged to return the
enclosed proxy card marked to indicate their vote.
Solicitation of Proxies and Expenses
Silknet has retained the services of to assist in
the solicitation of proxies from Silknet stockholders. The fees to be paid to
the firm by Silknet for these services are not expected to exceed $ plus
reasonable out-of-pocket expenses. Silknet will bear its own expenses in
connection with the solicitation of proxies for its special meeting of
stockholders, except that Kana and Silknet each will pay one-half of all
printing and filing costs and expenses incurred in connection with the
registration statement and this joint proxy statement/prospectus.
In addition to solicitation by mail, the directors, officers and employees
of Silknet may solicit proxies from stockholders by telephone, facsimile or in
person. Brokerage houses, nominees, fiduciaries and other custodians will be
requested to forward soliciting materials to beneficial owners and will be
reimbursed for their reasonable expenses incurred in sending proxy materials to
beneficial owners.
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Board Recommendations
The Silknet board has determined that the merger agreement and the merger
are advisable and fair to and in the best interests of Silknet and its
stockholders. Accordingly, the Silknet board unanimously has approved the
merger agreement and unanimously recommends that stockholders vote "FOR"
adoption of the merger agreement. In considering such recommendation, Silknet
stockholders should be aware that some Silknet directors and officers have
interests in the merger that are different from, or in addition to, those of
Silknet stockholders, and that Kana has agreed to provide indemnification
arrangements to directors and officers of Silknet. See "The Merger--Interests
of Silknet's Management in the Merger and Potential Conflicts of Interest."
The matters to be considered at the special meeting are of great importance
to the stockholders of Silknet. Accordingly, Silknet stockholders are urged to
read and carefully consider the information presented in this joint proxy
statement/prospectus, and to complete, date, sign and promptly return the
enclosed proxy in the enclosed postage-paid envelope.
Silknet's stockholders should not send any stock certificates with their
proxy cards. A transmittal form with instructions for the surrender of Silknet
common stock certificates will be mailed to Silknet stockholders promptly after
completion of the merger. For more information regarding the procedures for
exchanging Silknet stock certificates for Kana stock certificates, see "The
Merger--Exchange of Silknet Stock Certificates for Kana Stock Certificates."
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THE MERGER
This section of the joint proxy statement/prospectus describes material
aspects of the proposed merger, including the merger agreement which is
attached as Appendix I and incorporated herein by reference. While Kana and
Silknet believe that the description covers the material terms of the merger
and the related transactions, this summary may not contain all of the
information that is important to Kana stockholders and Silknet stockholders.
Stockholders should read the entire merger agreement and the other documents
referred to carefully and in their entirety for a more complete understanding
of the merger.
Background of the Merger
As a regular part of their business plans Kana and Silknet have from time
to time each considered opportunities for expanding and strengthening their
technology, products, research and development capabilities and distribution
channels, including strategic acquisitions, business combinations, investments,
licensing and development agreements and joint ventures.
During the first week of January 2000, Michael J. McCloskey, chief
executive officer of Kana, first contacted James C. Wood, chief executive
officer of Silknet, to discuss the relative businesses of Kana and Silknet and
to determine whether Silknet would be interested in a business combination with
Kana. Over the next several days, Mr. McCloskey and Mr. Wood engaged in
preliminary discussions regarding the nature of a possible business combination
between Kana and Silknet and the potential of the combined enterprise.
On January 12, 2000, Mr. McCloskey, Mark S. Gainey, president of Kana, and
representatives of Goldman, Sachs & Co. met to discuss Kana's industry and
competitive situation, as well as the advisability of pursuing strategic
business combinations.
On January 17, 2000, the Silknet board authorized the engagement of Credit
Suisse First Boston to act as Silknet's financial advisor in connection with
the proposed merger with Kana. In addition, Mr. McCloskey and Mr. Wood met at
Kana's offices to further explore a potential strategic transaction.
On January 18, 2000, Mr. McCloskey, Mr. Gainey and Mr. Wood met at Kana's
offices and discussed the synergies between the companies and the benefits of
combining the companies.
Mr. McCloskey informed Kana's board of directors, at a regularly scheduled
meeting of the board held on January 19, 2000, that Kana was evaluating various
strategic transactions including a potential business combination with Silknet.
Kana's board authorized Mr. McCloskey to continue evaluating various strategic
transactions, including further discussions with Mr. Wood. Representatives of
Kana's outside legal counsel, Brobeck, Phleger & Harrison LLP, attended the
meeting.
On January 19, 2000, representatives of Goldman Sachs, on behalf of Kana,
and representatives of Credit Suisse First Boston, on behalf of Silknet, held a
conference telephone call and discussed valuation. During the week of January
20, Mr. McCloskey and Mr. Wood communicated at various times regarding their
different valuation expectations, and, on January 29, Mr. McCloskey presented
Mr. Wood with a proposed exchange ratio of 1.66 shares of Kana common stock per
share of Silknet common stock.
On January 22 and 23, Mr. McCloskey met with the Silknet management team at
the Manchester offices of Silknet to discuss a possible business combination.
Various members of Silknet's management team then met with Mr. McCloskey
individually to discuss synergies associated with the combination.
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Working with Goldman Sachs, Brobeck, Phleger & Harrison LLP, and certain
members of the Kana management team, Mr. McCloskey developed a term sheet
outlining the principal terms of a proposed merger of the two companies as well
as a non-disclosure agreement and an exclusivity arrangement. These documents
were presented to Mr. Wood on January 29, 2000.
On January 30, 2000, the Silknet board held a special meeting to discuss
several strategic alternatives, including the pursuit of a secondary public
offering and possible strategic business combinations, including with Kana.
Representatives of Credit Suisse First Boston, Silknet's financial advisor, and
Testa, Hurwitz & Thibeault, LLP, Silknet's outside legal counsel, presented
material at the meeting. The Silknet board reviewed competitive situations
within the eCRM industry and reviewed the relative strengths and weaknesses of
competitors within Silknet's industry. The Silknet board decided to continue
discussions with Kana about a possible transaction.
On February 1, 2000, Kana and Silknet entered into a non-disclosure
agreement as well as an exclusivity arrangement whereby Silknet would not
negotiate a similar transaction with a third party for a period of two weeks.
On February 2, 2000, the Silknet board held a special meeting to review the
status of discussions with Kana. The Silknet board reviewed and ratified the
exclusivity arrangement whereby Silknet would not negotiate a similar
transaction with a third party for two weeks. The Silknet board also reviewed
the proposed transaction terms under discussion by the parties.
In the period between February 3 and February 4, 2000, a series of meetings
were held at Goldman Sachs' offices in Menlo Park, California, between
marketing, operations, and technical executives of both companies for the
purpose of conducting due diligence.
On the morning of February 4, 2000, a draft merger agreement and other
draft transaction documents were distributed by Brobeck, Phleger & Harrison
LLP.
On February 4, 2000, the Silknet board held a special meeting to review the
status of negotiations with Kana and related due diligence reviews held by
Kana. The Silknet board discussed the merits of a potential strategic business
combination with Kana, including the synergies that could be achieved in a
combination of Kana and Silknet products and services, management and sales
organizations.
On the morning of February 5, 2000, an informal conference call among
members of Kana's board of directors was conducted to update board members on
the status of negotiations.
On February 5, 2000, Testa, Hurwitz & Thibeault, LLP provided its initial
comments on the draft merger agreement previously distributed by Brobeck,
Phleger & Harrison LLP. Also on February 5, 2000 Brobeck, Phleger & Harrison
LLP distributed preliminary drafts of the ancillary agreements to the merger
agreement. Between February 5, 20000 through the evening of February 6, 2000,
representatives of Brobeck, Phleger & Harrison LLP and Testa, Hurwitz &
Thibeault, LLP participated in a series of negotiations on the terms of the
merger agreement and the other agreements by teleconference. These negotiations
covered all aspects of the transaction, including, among other things, the
representations and warranties made by the parties, the restrictions on the
conduct of their business, the terms of the non-solicitation covenants, the
termination sections, the provisions regarding payment of the termination fees
and the consequences of termination, the operation of the stock option
agreement, the delivery and terms of the voting agreements and the delivery and
terms of the market stand-off agreements.
Also on February 5, 2000, the Silknet board held a special meeting to
review initial drafts of the merger agreement, voting agreement and Silknet
stock option agreement. Representatives of Credit Suisse First Boston and
Testa, Hurwitz & Thibeault, LLP also attended and presented materials to
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<PAGE>
the Silknet board. Testa, Hurwitz & Thibeault, LLP informed the Silknet board
of its legal duties and responsibilities in connection with considering the
merger, and reviewed the principal terms of the merger agreement and related
agreements. The Silknet board reviewed the status of the negotiations, the
proposed exchange ratio, the principal issues in the proposed transaction, the
financial performance of both companies, treatment of Silknet employees
following the proposed transaction, partial acceleration of Silknet stock
options, management of the combined companies, and industry competition.
Representatives of Credit Suisse First Boston presented an overview and
analysis of the financial terms of the proposed transaction and discussed,
among other things, the financial performance of Silknet and Kana. The Silknet
board also reviewed the merger consideration and exchange ratio, termination
fees, the opportunity to entertain alternative proposals, and termination
rights. The Silknet board decided to continue negotiations with Kana.
On February 6, 2000, Kana's board of directors met to review and approve
the terms of the merger. Representatives of Goldman Sachs and Brobeck, Phleger
& Harrison LLP also attended. Goldman Sachs delivered its oral opinion to
Kana's board that, as of such date, the exchange ratio of 1.66 shares of Kana
common stock to be exchanged for each share of SIlknet common stock pursuant to
the merger was fair to Kana from a financial point of view. Brobeck, Phleger &
Harrison LLP informed Kana's board of its legal duties and responsibilities in
connection with considering the merger, and reviewed the principal terms of the
merger agreement, the stock option agreements and related agreements. After
discussion, Kana's board unanimously approved the terms of the merger and stock
option agreements and authorized Mr. McCloskey to execute, on behalf of Kana,
the merger agreement and the stock option agreements.
On February 6, 2000, the Silknet board held a special meeting to review
revised drafts of the merger agreement and related agreements. Representatives
of Credit Suisse First Boston and Testa, Hurwitz & Thibeault, LLP, were
present. Testa, Hurwitz & Thibeault, LLP had a discussion with the Silknet
board regarding the board's legal duties and responsibilities in connection
with considering the merger, and again reviewed the principal terms of the
revised merger agreement and related agreements. The Silknet board reviewed and
discussed the principal issues in the proposed transaction and the proposed
exchange ratio and merger consideration, termination fees, termination rights,
and Silknet's ability to consider alternative proposals. Credit Suisse First
Boston delivered its oral opinion, subsequently confirmed in writing, that, as
of that date, the exchange ratio was fair to the stockholders of Silknet, other
than Kana, from a financial point of view. After discussion, Silknet's board
unanimously approved the terms of the merger agreement and the stock option
agreements (subject to negotiation of final details) and authorized Mr. Wood to
negotiate and execute, on behalf of Silknet, the merger agreement and the stock
option agreements, once the final form of the Silknet stock option agreement
was completed.
On February 6, 2000, Kana and Silknet entered into the merger agreement and
the stock option agreements. Also on February 6, 2000, some stockholders of
Kana entered into voting agreements with Silknet and some stockholders of
Silknet entered into voting agreements with Kana, and agreed to vote their
shares in favor of the transaction. On February 7, 2000, the Silknet board met
early in the morning to review and ratify the final form of the Silknet stock
option agreement. On February 7, 2000, Kana and Silknet issued a joint press
release announcing the signing of the merger agreement.
Recommendation of the Kana Board of Directors and Kana's Reasons for the Merger
The board of directors of Kana unanimously concluded that the merger and
the issuance of Kana common stock in the merger are in the best interests of
Kana and its stockholders, and determined to recommend that the stockholders
approve the issuance of Kana common stock in the merger. This decision was
based upon several potential benefits of the merger that Kana's board
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<PAGE>
believes will contribute to the success of the combined company. These
potential benefits from combining Silknet with Kana include:
. expanding Kana's technology leadership by providing a web-architected e-
business platform and a comprehensive suite of customer-facing
applications;
. the combination of products that could provide the platform for linking
business-to-consumer and business-to-business functions within an e-
Business;
. the complementary nature of each company's product offerings as an
extension of the offerings of the other company;
. increased distribution channels for Kana's products and services through
Silknet's portfolio of partners;
. increased distribution channels for Silknet's products and services
through Kana's base of customers;
. increased product diversification and penetration of each company's
customer base;
. Silknet's position in its market;
. similarities in corporate culture;
. the opportunity for expanded research and development of the combined
product offerings, including potential new product offerings; and
. an increase in the size of Kana's market.
Kana's board reviewed a number of factors in evaluating the merger,
including, but not limited to, the following:
. information concerning Silknet's business, financial performance and
condition, operations, technology and management;
. information concerning the financial condition, results of operations
and businesses of Kana and Silknet before and after giving effect to the
merger;
. current financial market conditions and historical market prices,
volatility and trading information with respect to Kana common stock and
Silknet common stock;
. the consideration Kana will issue in the merger in light of comparable
merger transactions;
. the belief that the terms of the merger agreement and related agreements
are reasonable;
. the impact of the merger on the customers and employees of Kana and the
combined company;
. Kana's management's view as to the integration of Silknet;
. results of the due diligence investigation conducted by Kana's
management, accountants, financial advisors and legal counsel; and
. the analyses and presentations prepared by Goldman Sachs, and Goldman
Sachs' written opinion (the full text of which is attached as Appendix
VI to this joint proxy statement/prospectus) to the effect that, as of
February 6, 2000, and subject to a number of qualifications, assumptions
and limitations set forth in its opinion, the exchange ratio was fair
from a financial point of view to Kana.
Kana's board also considered the terms of the merger agreement regarding
Kana's rights and limits on its ability to consider and negotiate other
strategic transaction proposals, as well as the possible effects of the
provisions regarding termination fees and the stock option agreement. In
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<PAGE>
addition, it was noted to Kana's board that the merger is expected to be a tax-
free transaction and accounted for as a purchase, meaning that significant
goodwill and intangible assets are expected to be created on the books of the
combined company as a result of the merger.
The Kana board also identified and considered a number of potentially
negative factors in its deliberations concerning the merger, including the
following:
. the risk that the potential benefits of the merger may not be realized;
. the risk that the merger may not be consummated, notwithstanding the
voting agreements obtained from holders representing beneficial
ownership (excluding any shares issuable upon the exercise of options or
warrants) of approximately 42.6% of Silknet's common stock and holders
of 52.1% of Kana's common stock as of February 3, 2000;
. the risk of management and employee disruption associated with the
merger, including the risk that despite the efforts of the combined
company, key technical, sales and management personnel might not remain
employed by the combined company;
. the challenges of integrating Kana's operations in California with
Silknet's operations in New Hampshire and the related challenges of
conducting operations in both California and New Hampshire; and
. other applicable risks described in this joint proxy
statement/prospectus under "Risk Factors."
Kana's board concluded, however, that, on balance, the merger's potential
benefits to Kana and its stockholders outweighed the associated risks. This
discussion of the information and factors considered by Kana's board is not
exhaustive. In view of the variety of factors considered in connection with its
evaluation of the merger, Kana's board did not find it practicable to, and did
not quantify or otherwise assign relative weight to, the specific factors
considered in reaching its determination.
FOR THE REASONS DISCUSSED ABOVE, KANA'S BOARD OF DIRECTORS UNANIMOUSLY HAS
DETERMINED THE MERGER AND THE ISSUANCE OF KANA COMMON STOCK IN THE MERGER TO BE
FAIR TO AND IN THE BEST INTERESTS OF KANA AND ITS STOCKHOLDERS. IN CONNECTION
WITH THE MERGER, KANA'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT KANA
STOCKHOLDERS VOTE FOR APPROVAL OF THE ISSUANCE OF SHARES OF KANA COMMON STOCK
AS CONTEMPLATED BY THE MERGER AGREEMENT.
Opinion of Kana's Financial Advisor
This discussion of the opinion of Goldman, Sachs & Co., Kana's financial
advisor and the supporting share information have been adjusted to reflect the
stock dividend paid by Kana on February 22, 2000.
On February 6, 2000 Goldman, Sachs & Co. delivered its oral opinion,
confirmed in writing, to Kana's board of directors that, as of such date, the
exchange ratio of 0.83 (which equals 1.66 shares on a post stock dividend
basis) of a share of Kana's common stock to be exchanged for each share of
Silknet's common stock pursuant to the merger, is fair from a financial point
of view to Kana.
The full text of the written opinion of Goldman Sachs, dated February 6,
2000, which sets forth, among other things, assumptions made, matters
considered and limitations on the review undertaken in connection with the
opinion, is attached hereto as Appendix VI and is incorporated herein by
reference. Holders of Kana common stock are urged to, and should, read such
opinion in its entirety. Goldman Sachs' opinion is directed to Kana's board of
directors and addresses only the fairness of the exchange ratio pursuant to the
merger agreement from a financial point of view to Kana as of the date of the
opinion, and does not constitute a recommendation to any
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<PAGE>
stockholder as to how to vote with respect to the issuance of Kana common stock
in the merger. The summary of the Goldman Sachs opinion in this joint proxy
statement/prospectus is qualified in its entirety by reference to the full text
of the Goldman Sachs opinion.
In connection with rendering the opinion, Goldman Sachs reviewed, among
other things:
. the merger agreement;
. the Registration Statement on Form S-1, including the prospectus
contained therein dated September 21, 1999, relating to the initial
public offering of Kana Common Stock;
. the Registration Statement on Form S-1, including the prospectus
contained therein dated May 4, 1999, relating to the initial public
offering of Silknet Common Stock;
. the Annual Report to Stockholders and Annual Report on Form 10-K of
Silknet for the fiscal year ended June 30, 1999;
. interim reports to stockholders and Quarterly Reports on Form 10-Q of
Kana and Silknet;
. certain other communications from Kana and Silknet to their respective
stockholders; and
. internal financial analyses for Silknet and Kana provided for the use of
Goldman Sachs by management of Kana.
Goldman Sachs also held discussions with members of the senior management
of Kana and Silknet regarding their assessment of the strategic rationale for,
and the potential benefits of, the transaction contemplated by the merger
agreement and the past and current business operations, financial condition and
future prospects of their respective companies. In addition, Goldman Sachs:
. reviewed the reported price and trading activity for Kana common stock
and Silknet common stock, which like many Internet-related stocks have
been and are likely to continue to be subject to significant short-term
price and trading volatility;
. compared financial and stock market information for Kana and Silknet
with similar information for other comparable companies the securities
of which are publicly traded; and
. reviewed the financial terms of recent business combinations in the
software industry specifically and in other industries generally and
performed such other studies and analyses as Goldman Sachs considered
appropriate.
Goldman Sachs relied upon the accuracy and completeness of all of the
financial and other information discussed with, or reviewed by Goldman Sachs
and assumed the accuracy and completeness for purposes of rendering its
opinion. In that regard, Goldman Sachs assumed with Kana's consent that the
internal financial analyses for Silknet and Kana provided by the management of
Kana were reasonably prepared on a basis reflecting the best currently
available judgments and estimates of Kana. In addition, Goldman Sachs did not
make an independent evaluation or appraisal of the assets and liabilities of
Kana or Silknet or any of their subsidiaries and was not furnished with any
evaluation or appraisal. Goldman Sachs' opinion is provided for the information
and assistance of the Board of Directors of Kana in connection with its
consideration of the transaction contemplated by the merger agreement and the
opinion does not constitute a recommendation as to how shareholders should vote
with respect to the merger.
The following is a summary of the material financial analyses used by
Goldman Sachs in connection with providing its opinion to Kana's board of
directors on February 6, 2000.
The following summaries of financial analyses include information presented
in tabular format. You should read these tables together with the text of each
summary.
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<PAGE>
Historical Exchange Ratio Analysis. Goldman Sachs calculated the ratio of
the historical daily exchange ratios of Kana common stock to Silknet common
stock based on the closing prices of Kana common stock and Silknet common stock
for the five day, ten day, twenty day, thirty day, sixty day, periods ended
February 4, 2000 and since the date of the initial public offering of Kana
common stock . The results are shown in the following table:
<TABLE>
<CAPTION>
Premium represented
Average by an exchange
Period exchange ratio ratio of 0.83
------ -------------- -------------------
<S> <C> <C>
Current (as of 2/4/00)................... 1.0700x 55.1%
From Kana's IPO.......................... 1.5108x 9.9%
60 days ended 2/4/00..................... 1.2826x 29.4%
30 days ended 2/4/00..................... 1.3720x 21.0%
20 days ended 2/4/00..................... 1.3416x 23.7%
10 days ended 2/4/00..................... 1.2230x 35.7%
5 days ended 2/4/00...................... 1.1332x 46.5%
</TABLE>
Contribution Analysis. Goldman Sachs calculated the respective percentage
contribution by Silknet and Kana to the combined company assuming Kana's
calendar year 2000 and 2001 estimated revenue and calendar 2000 and 2001
estimated gross profit on a pro forma basis using the internal financials and
forecasts as provided by Kana management. The contribution analysis did not
take into account any synergies that may result from the merger. Goldman Sachs
compared this contribution analysis with the pro forma ownership of the
combined company immediately following the merger, assuming a 1.66 exchange
ratio, Kana's and Silknet's stock prices on February 4, 2000, and the treasury
stock method to calculate the 64.260 million fully diluted shares of common
stock that were held by Kana stockholders and the 19.718 million fully diluted
shares of common stock that were held by Silknet stockholders prior to the
merger in order to determine the percentages of the combined company that will
be owned immediately following consummation of the merger by stockholders of
Silknet and Kana, respectively. The results of such analysis are summarized
below:
<TABLE>
<CAPTION>
%
Contribution
-------------
Silknet Kana
------- -----
<S> <C> <C> <C>
Estimated Revenue........................................... 2000 50.3% 49.7%
2001 44.3% 55.7%
Estimated Gross Profit...................................... 2000 54.6% 45.4%
2001 44.6% 55.4%
</TABLE>
<TABLE>
<CAPTION>
Exchange
Ratio Silknet Kana
-------- ------- -----
<S> <C> <C> <C>
Pro Forma Ownership (as of 2/4/00)....................... 1.6600x 33.7% 66.3%
</TABLE>
Pro Forma Merger Analysis. Goldman Sachs performed a pro forma merger
analysis, assuming projections for Kana and Silknet provided by the management
of Kana, including synergies. Such analysis is summarized in the table below:
<TABLE>
<S> <C>
Exchange Ratio........................................................ 1.6600x
Implied Silknet Price Per Share....................................... $ 214.87
Premium to Market Price............................................... 55.1%
Fully Diluted Equity Market Value ($ in millions)..................... $ 4,237
Implied CY2000 Revenue Multiple....................................... 95.6x
Implied CY2001 Revenue Multiple....................................... 59.2x
Kana Shares Issued (millions)......................................... 32.73
Pro Forma Shares Outstanding (Fully Diluted).......................... 96.992
Pro Forma Silknet Ownership........................................... 33.7%
</TABLE>
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<TABLE>
<CAPTION>
Stand Pro Forma Accretion/(Dilution)
Alone (Combined at an exchange ratio
(Kana) Company) of 1.66
-------- --------- --------------------
<S> <C> <C> <C> <C>
Estimated Pro Forma Revenue Per
Share
Accretion/(Dilution)........... 2000 $ 0.6805 $1.2650 85.9%
2001 $ 1.400 $2.5385 81.4%
Estimated Pro Forma Earnings Per
Share
Accretion/(Dilution)........... 2000 $(0.7235) $(0.530) NM
2001 $(0.2325) $ 0.078 NM
</TABLE>
This pro forma merger analysis also calculated that the estimated pro forma
revenue multiples that the combined company would need to trade at to maintain
Kana's closing stock price on February 4, 2000, assuming an exchange ratio of
1.66, would be 102.3X for 2000 and 51.0X for 2001. These ratios compare to
estimated stand alone Kana revenue multiples of 190.2X for 2000 and 92.5X for
2001.
Comparison of Selected Public Market Software Companies. Goldman Sachs
compiled and reviewed selected financial information and calculated certain
ratios and public market multiples for the publicly traded software companies
listed below:
. Art Technology Group
. Aspect Communications
. Critical Path
. Broadbase Software
. BroadVision
. eGain Communications
. E.piphany
. Portal Software
. Quintus Corp.
. Vignette
The multiples and ratios were calculated using the closing price for the common
stock of each of the selected companies on February 4, 2000 and were based on
published equity research and most recent publicly available information. In
addition, the fully diluted market capitalization of Kana includes Kana common
stock issued in the acquisitions of Business Evolution and netDialog and the
fully diluted market capitalization includes Silknet common stock issued for
the acquisition of InSite. The results of such analysis are summarized in the
table below:
<TABLE>
<CAPTION>
Range of
Revenue Multiples: multiples Mean Median Silknet Kana
- ------------------ ------------ ----- ------ ------- ------
<S> <C> <C> <C> <C> <C>
Calendar Year 2000 Estimated......... 4.5x--110.5x 67.2x 73.7x 61.3x 190.3x
Calendar Year 2001 Estimated......... 3.6x-- 70.0x 31.8x 38.7x 38.0x 92.4x
<CAPTION>
Mean Median Silknet Kana
----- ------ ------- ------
<S> <C> <C> <C> <C> <C>
99-00 Annual Growth Rate............. 127% 71% 110% 258%
<CAPTION>
Silknet Kana
------- ------
<S> <C> <C> <C> <C> <C>
Fully Diluted Market Capitalization
($ in millions)..................... $2,714 $8,318
</TABLE>
Comparable Transactions. Goldman Sachs analyzed certain information
relating to the proposed transaction in relation to certain publicly available
information for 55 transactions. The following table presents the range and the
median premiums over the market (based on recent stock
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prices prior to the announcement) and the premium over the acquired party's 52-
week high prior to the announcement:
<TABLE>
<CAPTION>
Comparable Transactions
----------------------------
Range Median
--------------- ------------
<S> <C> <C>
Premium over the market.......................... (2.7)-196.2% 26.8%
Premium over 52-week high........................ (50)- 35.3% 3.8%
</TABLE>
Other Considerations
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, may create an incomplete view of the processes
underlying Goldman Sachs' opinion. In arriving at its fairness determination,
Goldman Sachs considered the results of all such analyses. No company or
transaction used in the above analyses as a comparison is directly comparable
to Kana or Silknet or the merger.
The analyses were prepared solely for purposes of Goldman Sachs providing
its opinion to Kana's board of directors as to the fairness to Kana from a
financial point of view of the exchange ratio and do not purport to be
appraisals or necessarily reflect the prices at which the business or
securities actually may be sold. Analyses based upon forecasts of future
results are not necessarily indicative of actual future results, which may be
significantly more or less favorable than suggested by such analyses. Because
such analyses are inherently subject to uncertainty, being based upon numerous
factors or events beyond the control of the parties or their respective
advisors, none of Kana, Silknet, Goldman Sachs or any other person assumes
responsibility if future results are materially different from those forecast.
As described above, Goldman Sachs' opinion to Kana's board of directors was one
of many factors taken into consideration by Kana's board of directors in making
its determination to approve and adopt the merger agreement. The foregoing
summary describes material analyses used by Goldman Sachs in connection with
providing its opinion to Kana's board of directors on February 6, 2000, but
does not purport to be a complete description of the analysis performed by
Goldman Sachs in connection with such opinion and is qualified by reference to
the written opinion of Goldman Sachs set forth in Appendix VI.
Goldman Sachs, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements,
and valuations for estate, corporate an other purposes. Kana selected Goldman
Sachs as its financial advisor because it is a nationally recognized investment
banking firm that has substantial experience in transactions similar to the
merger.
Goldman Sachs is familiar with Kana having provided certain investment
banking services to Kana from time to time, including having acted as a
managing underwriter of an initial public offering of 3,300,000 Kana shares in
September 1999 and having acted as its financial advisor in connection with,
and having participated in certain of the negotiations leading to, the merger
agreement.
Goldman Sachs provides a full range of financial advisory and securities
services and, in the course of its normal trading activities, may from time to
time effect transactions in and hold securities, including derivative
securities, of Kana for its own account and for the accountants of customers.
As of February 6, 2000, entities affiliated with the Goldman Sachs Group L.P.,
which is the General Partner of Goldman, Sachs & Co., accumulated a long
position of 477,874 shares of Silknet common stock.
Pursuant to a letter agreement dated February 6, 2000, Kana engaged Goldman
Sachs to act as its financial advisor in connection with a potential
transaction involving Silknet. Under the terms of
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the agreement, Goldman Sachs will receive a customary fee, a substantial
portion of which is contingent on the closing of the merger. Kana has also
agreed to reimburse Goldman Sachs for its reasonable out-of-pocket expenses,
including attorney's fees and disbursements plus any sales, use or similar
taxes, and to indemnify Goldman Sachs against certain liabilities, including,
to the extent permitted, liabilities under federal securities laws.
Recommendation of the Silknet Board of Directors and Silknet's Reasons for the
Merger
The board of directors of Silknet unanimously concluded that the merger
agreement and the merger are fair to and in the best interests of Silknet and
its stockholders, and determined to recommend that the stockholders adopt the
merger agreement. This decision was based upon several potential benefits of
the merger that Silknet's board believes will contribute to the success of the
combined company compared to Silknet continuing to operate as an independent
business. In addition to the potential benefits described under "Recommendation
of the Kana Board of Directors and Kana's Reasons for the Merger," the Silknet
board believes that additional reasons the merger will be beneficial to Silknet
and its stockholders include the following:
. Silknet believes that important advantages will accrue to the leader of
the eCRM software market. To achieve this position, Silknet believes a
company needs to grow rapidly. Kana's larger market capitalization,
broad suite of products and services, and revenue growth will provide
Silknet with additional resources to grow more rapidly than Silknet can
grow as an independent company. The leader in the eCRM market will be in
a stronger position to compete effectively and increase stockholder
value.
. Management of Silknet believes that it will be able to leverage Kana's
existing customer base to sell Silknet products and services. Kana's
customers, having adopted Kana products and services to manage online
customer communications, may seek the broad eCRM software solutions
provided by Silknet's products and services. Silknet believes it will be
better able to sell its products and services to Kana's customers and
prospects as part of a combined entity than it could as an independent
company.
. Silknet believes that the common stock of the combined entity may be a
more valuable currency to finance future acquisitions at a faster pace
and at a less dilutive price than Silknet could do with its stock alone.
Silknet's board reviewed a number of factors in evaluating the merger,
including, but not limited to, the following:
. information concerning Kana's business, financial performance and
condition, operations and management;
. information concerning the financial condition, results of operations
and businesses of Kana and Silknet before and after giving effect to the
merger;
. current financial market conditions and historical market prices,
volatility and trading information with respect to Kana common stock and
Silknet common stock;
. the consideration Kana will issue in the merger in light of comparable
merger transactions;
. the belief that the terms of the merger agreement and related agreements
are reasonable;
. the impact of the merger on the customers and employees of Silknet and
the combined company;
. results of the due diligence investigation conducted by Silknet's
management, accountants, financial advisors and legal counsel; and
. the analyses and presentations prepared by Credit Suisse First Boston
and Credit Suisse First Boston's written opinion (the full text of which
is attached as Appendix VII to this joint
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proxy statement/prospectus) to the effect that, as of February 6, 2000,
and based upon and subject to the qualifications, assumptions and
limitations set forth in its opinion, the exchange ratio was fair to
Silknet's stockholders, other than Kana, from a financial point of view.
Silknet's board also considered the terms of the merger agreement regarding
Silknet's rights and limits on its ability to consider and negotiate other
transaction proposals, as well as the possible effects of the provisions
regarding termination fees and the stock option agreement. In addition, it was
noted to Silknet's board that the merger is expected to be a tax-free
transaction and accounted for as a purchase, which means that significant
goodwill and intangible assets are expected to be created on the books of the
combined company as a result of the merger.
The Silknet board also identified and considered a number of potentially
negative factors in its deliberations concerning the merger including the
following:
. the risk that the potential benefits of the merger may not be realized;
. the risk that the merger may not be consummated, notwithstanding the
voting agreements obtained from holders representing beneficial
ownership (excluding any shares issuable upon the exercise of options or
warrants) of approximately 42.6% of Silknet's common stock and holders
of 52.1% of Kana's common stock as of February 3, 2000;
. the risk of management and employee disruption associated with the
merger, including the risk that despite the efforts of the combined
company, key technical, sales and management personnel might not remain
employed by the combined company;
. the challenges of integrating Kana's operations in California with
Silknet's operations in New Hampshire and the related challenges of
conducting operations in both California and New Hampshire; and
. other applicable risks described in this joint proxy
statement/prospectus under "Risk Factors."
Silknet's board concluded, however, that these risks could be managed or
mitigated and that on balance, the merger's potential benefits to Silknet and
its stockholders outweighed the associated risks. This discussion of the
information and factors considered by Silknet's board is not exhaustive. In
view of the variety of factors considered in connection with its evaluation of
the merger, Silknet's board did not find it practicable to, and did not
quantify or otherwise assign relative weight to, the specific factors
considered in reaching its determination.
FOR THE REASONS DISCUSSED ABOVE, SILKNET'S BOARD OF DIRECTORS UNANIMOUSLY
HAS APPROVED THE MERGER AGREEMENT AND THE MERGER AND HAS DETERMINED THAT THE
MERGER AGREEMENT AND THE MERGER ARE ADVISABLE AND FAIR TO AND IN THE BEST
INTERESTS OF SILKNET AND ITS STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT
SILKNET STOCKHOLDERS VOTE FOR ADOPTION OF THE MERGER AGREEMENT.
Opinion of Silknet's Financial Advisor
This discussion of the opinion of Credit Suisse First Boston, Silknet's
financial advisor, and the supporting share information have been adjusted to
reflect the stock dividend paid by Kana on February 22, 2000.
Silknet retained Credit Suisse First Boston to act as its exclusive
financial advisor in connection with the merger. Credit Suisse First Boston was
selected by the Silknet board of directors to act as Silknet's financial
advisor based on Credit Suisse First Boston's qualifications, expertise and
reputation, as well as Credit Suisse First Boston's investment banking
relationship and familiarity with
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Silknet. On February 6, 2000, the Silknet board of directors met to review the
proposed merger with Kana and the final terms of the merger agreement. During
this meeting Credit Suisse First Boston rendered its oral opinion, subsequently
confirmed in writing, that, as of February 6, 2000, based upon and subject to
the various considerations set forth in the Credit Suisse First Boston opinion,
the exchange ratio was fair to Silknet's stockholders, other than Kana, from a
financial point of view.
The full text of the Credit Suisse First Boston opinion sets forth, among
other things, assumptions made, procedures followed, matters considered and
limitations set on the scope of the review undertaken by Credit Suisse First
Boston in rendering its opinion. The full text of the opinion is attached as
Appendix VII to this proxy statement/prospectus and is incorporated by
reference in its entirety. Silknet stockholders are urged to, and should, read
the Credit Suisse First Boston opinion carefully and in its entirety. The
Credit Suisse First Boston opinion addresses only the fairness of the exchange
ratio to Silknet's stockholders, other than Kana, from a financial point of
view as of the date of the Credit Suisse First Boston opinion, and does not
constitute a recommendation to any stockholder as to how such stockholder
should vote at the Silknet or Kana special meeting. The summary of the Credit
Suisse First Boston opinion in this joint proxy statement/prospectus is
qualified in its entirety by reference to the full text of the Credit Suisse
First Boston opinion.
In connection with its opinion, Credit Suisse First Boston, among other
things:
. reviewed publicly available business and financial information relating
to Silknet and Kana, as well as the merger agreement;
. reviewed other information, including financial forecasts, provided to
Credit Suisse First Boston by Silknet, and met with the management of
each of Silknet and Kana to discuss the business and prospects of
Silknet and Kana;
. considered financial and stock market data of Silknet and Kana and
compared that data with similar data for other publicly held companies
in businesses Credit Suisse First Boston deemed similar to those of
Silknet and Kana;
. considered, to the extent publicly available, the financial terms of
other business combinations and other transactions which have recently
been effected; and
. considered other information, financial studies, analyses and
investigations and financial, economic and market criteria which Credit
Suisse First Boston deemed relevant.
In connection with its review, Credit Suisse First Boston did not assume
any responsibility for independent verification of any of the foregoing
information and relied on its being complete and accurate in all material
respects. With respect to the financial information relating to Silknet and
Kana, Credit Suisse First Boston has been advised, and has assumed, that such
information reflects reasonable estimates and judgments as to the future
financial performance of Silknet and Kana. Silknet also has informed Credit
Suisse First Boston, and Credit Suisse First Boston has assumed, that the
merger will be treated as a tax-free reorganization for federal income tax
purposes. In addition, Credit Suisse First Boston was not requested to make,
and did not make, an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of Silknet or Kana, nor was Credit Suisse
First Boston furnished with any evaluations or appraisals. The Credit Suisse
First Boston opinion was necessarily based upon financial, economic, market and
other conditions as they existed and could be evaluated on February 6, 2000.
Credit Suisse First Boston did not express any opinion as to what the value of
the Kana common stock actually will be when issued to Silknet's stockholders
pursuant to the merger or as to the prices at which such Kana common stock will
trade subsequent to merger. Credit Suisse First Boston was not requested to,
and did not, solicit third party indications of interest in acquiring all or
any part of Silknet.
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In preparing the Credit Suisse First Boston opinion, Credit Suisse First
Boston performed a variety of financial and comparative analyses. The
preparation of a fairness opinion is a complex process and is not necessarily
susceptible to partial analysis or summary description. Credit Suisse First
Boston believes that its analyses must be considered as a whole and that
selecting portions of its analyses and of the factors considered by it, without
considering all analyses and factors, could create a misleading view of the
processes underlying the Credit Suisse First Boston opinion. No company or
transaction used in the analyses performed by Credit Suisse First Boston as a
comparison is identical to Silknet, Kana or the contemplated merger. In
addition, Credit Suisse First Boston may have given various analyses more or
less weight than other analyses, and may have deemed various assumptions more
or less probable than other assumptions, so that the range of valuation
resulting from any particular analysis described below should not be taken to
be Credit Suisse First Boston's view of the actual value of Silknet or Kana. In
performing its analyses, Credit Suisse First Boston made numerous assumptions
with respect to industry performance, general business and economic conditions
and other matters, many of which are beyond the control of Silknet or Kana. The
analyses performed by Credit Suisse First Boston are not necessarily indicative
of actual values or actual future results, which may be significantly more or
less favorable than suggested by such analyses. In addition, analyses relating
to the value of businesses or assets do not purport to be appraisals or to
necessarily reflect the prices at which businesses or assets may actually be
sold. The analyses performed were prepared solely as part of Credit Suisse
First Boston's analysis of the fairness to Silknet from a financial point of
the exchange ratio and were provided to the Silknet board of directors in
connection with the delivery of the Credit Suisse First Boston opinion.
The following is a summary of the material financial analyses performed by
Credit Suisse First Boston in connection with the preparation of its opinion,
and reviewed with the Silknet board of directors at its meeting held on
February 6, 2000. Certain of the summaries of those financial analyses include
information presented in tabular format. In order to understand fully the
material financial analyses used by Credit Suisse First Boston, the tables
should be read together with the text of each summary. The tables alone do not
constitute a complete description of the material financial analyses.
Historical Stock Price Analysis. Credit Suisse First Boston analyzed the
closing prices of Kana common stock from September 22, 1999 through February 4,
2000. Credit Suisse First Boston noted that the high closing price for Kana
common stock during such period was $129.57 on January 27, 2000, and the low
closing price for Kana common stock during such period was $23.25 on September
29, 1999.
Credit Suisse First Boston also analyzed the closing prices of Silknet
common stock from May 5, 1999 through February 4, 2000. Credit Suisse First
Boston noted that the high closing price for Silknet common stock during such
period was $168.00 on January 27, 2000, and the low closing price for Silknet
common stock during such period was $23.19 on May 10, 1999.
Comparative Stock Price Performance. Credit Suisse First Boston reviewed
the recent stock price performance of Silknet and compared such performance
with selected companies in the eBusiness applications software industry listed
below and with the Nasdaq composite index over the period from May 5, 1999
through February 4, 2000. The results of this analysis were as follows:
<TABLE>
<CAPTION>
Increase / (Decrease) in
Market Price per Share
From May 5, 1999 to
Company or Index February 4, 2000
---------------- ------------------------
<S> <C>
Silknet............................................ 294 %
Kana............................................... 403 %
BroadVision, Inc................................... 712 %
Calico Commerce, Inc............................... (38)%
E.piphany, Inc..................................... 230 %
Vignette Corporation............................... 414 %
Nasdaq Composite Index............................. 67 %
</TABLE>
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Exchange Ratio Analysis. Credit Suisse First Boston reviewed the average of
the ratios of the closing price of Kana common stock to the closing price of
Silknet common stock observed on each trading day over various periods ending
on February 4, 2000 and computed the premium represented by the exchange ratio
when compared to these average exchange ratios. The following table sets forth
the average exchange ratios over the various periods covered and the premium
represented by the exchange ratio when compared to the average exchange ratios
over various periods:
<TABLE>
<CAPTION>
Premium
Represented
by the
Exchange Ratio
Period Ending Average Exchange Versus Average
February 4, 2000 Ratios Exchange Ratios
---------------- ---------------- ---------------
<S> <C> <C>
1 trading day.............................. 1.070x 55.1%
10 trading days............................. 1.224x 35.7%
30 trading days............................. 1.372x 21.0%
45 trading days............................. 1.311x 26.7%
60 trading days............................. 1.300x 27.7%
90 trading days............................. 1.494x 11.1%
Period Average.............................. 1.520x 9.2%
</TABLE>
Peer Group Comparison. Credit Suisse First Boston compared equity market
capitalization and aggregate market capitalization as a multiple of revenues
for each of Silknet and Kana with corresponding information for the following
companies in the eBusiness applications software industry:
<TABLE>
<S> <C>
ECommerce Enabling Traditional CRM
------------------ ---------------
. Art Technology Group, Inc. . Aspect Communications Corp.
. BroadVision, Inc. . ONYX Software Corporation
. Calico Commerce, Inc. . Pivotal Corporation
. eGain Communications Corporation . Remedy Corporation
. Interworld Corporation . Siebel Systems, Inc.
. Net Perceptions, Inc.
. Vignette Corporation
eAnalytics Content Management
---------- ------------------
. Broadbase Software, Inc. . Interwoven, Inc.
. MicroStrategy Incorporated . Vignette Corporation
. E.piphany, Inc.
. Exchange Applications Inc.
</TABLE>
For the groups of companies, the mean of the group is shown. The multiples
are based on a compilation of publicly available information and consensus
forecasts by securities research analysts. In addition Credit Suisse First
Boston compared the aggregate market capitalization as a multiple of revenues
implied by the exchange ratio to the corresponding information for the same
group of companies. The analysis is based upon the closing stock prices for all
of the companies as of February 4, 2000. In particular, such comparison showed:
<TABLE>
<CAPTION>
Aggregate Value/
Projected Revenue
for Calendar Year
------------------
Company or Group of Companies 2000 2001
----------------------------- --------- --------
<S> <C> <C>
Multiples implied by the exchange ratio................... 97.2x 58.6x
Silknet................................................... 61.9x 37.3x
Kana...................................................... 187.9x 89.9x
eCommerce Enabling........................................ 49.2x 26.9x
eAnalytics................................................ 44.6x 24.4x
Content Management........................................ 74.5x 43.3x
Traditional CRM........................................... 13.9x 9.9x
</TABLE>
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Precedent Transactions Analysis. Credit Suisse First Boston reviewed 146
precedent stock-for-stock technology transactions since March 2, 1990 and 62
precedent stock-for-stock technology transactions since March 12, 1992 in which
the target shareholders' pro forma ownership was greater than 20% (referred to
as the precedent transactions) and compared certain publicly available
financial statistics for the precedent transactions to the comparable financial
statistics for the merger. Credit Suisse First Boston computed the median
premium/(discount) represented by the exchange ratios of the precedent
transactions over various periods prior to the announcement of each precedent
transaction. Credit Suisse First Boston also calculated the implied exchange
ratio that resulted from applying the average premium/(discount) in the
precedent transactions to the average of the closing prices of the Kana and
Silknet common stock over the comparable periods and compared these implied
exchange ratios to the exchange ratio in the merger. The following table sets
forth the results of such analysis:
<TABLE>
<CAPTION>
146 Precedent Transactions
-----------------------------------------------------------------------------
Premium/(Discount)
Represented by the
Implied Exchange Ratio in the
Period ended Median Exchange Merger to the Implied
February 4, 2000 Premium Ratio Exchange Ratio
---------------- ------- -------- ---------------------
<S> <C> <C> <C>
1 trading day........................ 27.7% 1.366x 21.5 %
10 trading days....................... 32.7% 1.624x 2.2 %
30 trading days....................... 34.0% 1.839x (9.7)%
60 trading days....................... 33.1% 1.730x (4.0)%
90 trading days....................... 28.7% 1.922x (13.6)%
Average............................... 30.8% 1.690x (1.8)%
<CAPTION>
62 Precedent Transactions with Target Pro Forma Ownership Greater than 20%
-----------------------------------------------------------------------------
Premium/(Discount)
Represented by the
Implied Exchange Ratio in the
Period ended Median Exchange Merger to the Implied
February 4, 2000 Premium Ratio Exchange Ratio
---------------- ------- -------- ---------------------
<S> <C> <C> <C>
1 trading day........................ 26.4% 1.352x 22.8 %
10 trading days....................... 28.7% 1.575x 5.4 %
30 trading days....................... 32.9% 1.823x (9.0)%
60 trading days....................... 31.5% 1.710x (2.9)%
90 trading days....................... 26.5% 1.889x (12.1)%
Average............................... 29.8% 1.677x (1.0)%
</TABLE>
No transaction utilized as a comparison in the precedent transactions
analysis is identical to the merger. In evaluating the merger, Credit Suisse
First Boston made judgments and assumptions with regard to industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of Silknet and Kana, such
as the impact of competition on the businesses of Silknet and Kana and the
industry generally, industry growth and the absence of any adverse material
change in the financial condition and prospects of Silknet, Kana or the
industry or in the financial markets in general. Mathematical analysis, such as
determining the average or median, is not in itself a meaningful method of
using precedent transaction data.
Contribution Analysis. Credit Suisse First Boston analyzed the relative
contributions of Silknet and Kana to the revenues and the gross profits for the
actual financial results for the last quarter annualized and calendar year 1999
and the projected financial results for calendar years 2000 and 2001. These
financial projections were based on estimates published by research analysts
with respect to Silknet and Kana. Credit Suisse First Boston then analyzed the
pro forma ownership of the combined company implied by Silknet's relative
contribution and the exchange ratio implied by
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<PAGE>
that pro forma ownership. The following table sets forth the results of Credit
Suisse First Boston's analysis:
<TABLE>
<CAPTION>
Silknet Implied
Implied Exchange
Ownership Ratio
--------- --------
<S> <C> <C>
Revenue
Last quarter annualized................................. 55.1% 4.020x
1999.................................................... 62.2% 5.387x
2000.................................................... 49.5% 3.212x
2001.................................................... 43.8% 2.554x
Calendar Year Gross Profit
Last quarter annualized................................. 63.8% 5.776x
1999.................................................... 68.9% 7.265x
2000.................................................... 53.3% 3.748x
2001.................................................... 43.9% 2.569x
</TABLE>
Pro Forma Financial Impact Analysis. Credit Suisse First Boston analyzed
pro forma effects of the merger, including, among other things, the impact of
the merger on the estimated revenue per share as reported in calendar year 2000
and 2001 based on estimates published by research analysts with respect to
Silknet and Kana. The following table sets forth, based on those financial
estimates, the resulting percentage accretion to Kana's estimated revenue per
share for calendar years 2000 and 2001:
<TABLE>
<CAPTION>
Calendar Year Accretion
------------- ---------
<S> <C>
2000............................................................. 31.4%
2001............................................................. 18.0%
</TABLE>
Credit Suisse First Boston computed a potential future trading range for
the Kana common stock assuming that the merger is completed and based on
various revenue multiples and the pro forma revenues of the combined company
for calendar years 2000 and 2001. To sustain the market price of Kana common
stock as of February 4, 2000, Credit Suisse First Boston noted that the
combined company would have to trade at revenue multiples of greater than 143.0
times calendar year 2000 pro forma revenues and 76.2 times calendar year 2001
pro forma revenues.
As described above, the Credit Suisse First Boston opinion and presentation
to the Silknet board of directors was one of many factors taken into
consideration by the Silknet board of directors in making its determination to
recommend the merger agreement and the transactions contemplated thereby.
Consequently, the analyses described above should not be viewed as
determinative of the opinion of the Silknet board of directors or the
management of Silknet with respect to the value of Silknet or Kana or whether
the Silknet board of directors would have been willing to agree to a different
exchange ratio.
The Silknet board of directors retained Credit Suisse First Boston to act
as its financial advisor in connection with the transaction. Credit Suisse
First Boston was selected by the Silknet board of directors based on Credit
Suisse First Boston's qualifications, expertise and reputation, as well as its
familiarity with Silknet. Credit Suisse First Boston is an internationally
recognized investment banking and advisory firm. Credit Suisse First Boston, as
part of its investment banking business, is continuously engaged in the
valuation of businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. In the past, Credit Suisse First
Boston and its affiliates have performed investment banking services for
Silknet, including acting as lead underwriter in Silknet's initial public
offering, and have received customary fees for these services. In the ordinary
course of its business, Credit Suisse First Boston and its
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<PAGE>
affiliates may actively trade the debt and equity securities of Silknet and
Kana for their own accounts and for the accounts of their customers and,
accordingly, may at any time hold a long or short position in these securities.
Under an engagement letter dated January 17, 2000, Silknet engaged Credit
Suisse First Boston to provide financial advisory services to the Silknet board
of directors in connection with the transaction, including, among other things,
rendering its opinion and making the presentation referred to above. Under the
terms of the engagement letter, Silknet has agreed to pay Credit Suisse First
Boston a customary fee in connection therewith, a substantial portion of which
will be paid upon the consummation of the merger. In addition, Silknet has
agreed to reimburse Credit Suisse First Boston for its out-of-pocket expenses,
including attorney's fees, incurred in connection with its engagement and to
indemnify Credit Suisse First Boston and related persons against liabilities
and expenses arising out of or in conjunction with its rendering of services
under its engagement, including, to the extent permitted, liabilities arising
under the federal securities laws.
Interests of Silknet's Management in the Merger and Potential Conflicts of
Interest
Upon consummation of the merger, it is anticipated that the directors and
executive officers of Silknet and their affiliates will beneficially own
approximately 12 percent of the then outstanding shares of Kana common stock,
calculated on the basis set forth under the heading "Principal Stockholders of
Silknet".
The executive officers of Silknet have outstanding stock options to
purchase an aggregate of 535,650 shares of Silknet common stock. Upon
completion of the merger, vesting and exerciseability of the options held by
these executive officers will accelerate by one year, and the options will
become exercisable with respect to these newly vested shares.
The following non-employee members of the Silknet board of directors each
hold an outstanding option to purchase 10,000 shares of Silknet common stock:
Messrs. Bradley, Chua, Fung, Goldfarb and Urban. Each of those options will
vest in full at the closing of the merger.
In addition, the executive officers of Silknet, including James C. Wood,
Nigel K. Donovan and Patrick J. Scannell, Jr., have employment agreements under
which they will be entitled to twelve months of salary continuation payments
and accelerated vesting of their outstanding options, including the Silknet
options assumed by Kana in the merger, in the event they are not offered
employment by Kana in a comparable position and at a comparable salary, or
their employment is terminated by Kana without just cause within 12 months
after the merger. Mr. Wood, Silknet's Chief Executive Officer, has agreed to an
amendment to his employment agreement which provides that the completion of the
merger with Kana will not entitle him to any salary continuation payments or
accelerated vesting of his option shares under his employment agreement.
The acceleration of the vesting of options upon execution of the merger
agreement for certain employees of Silknet may result in "excess parachute
payments" as defined in Section 280G of the Internal Revenue Code. Excess
parachute payments are not deductible in accordance with Section 280G. As a
result, Kana will not be entitled to a tax deduction for the amounts determined
to be excess parachute payments.
See "Silknet Stock Options and Warrants" for a description of the
outstanding Silknet stock options and warrants that will become stock options
and warrants to purchase Kana common stock upon consummation of the merger.
The merger agreement provides that James C. Wood, Silknet's President and
Chief Executive Officer, will be elected to Kana's board of directors, and will
be entitled to serve for one year from the effective time of the merger and
thereafter until his successor shall be duly elected and qualified.
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Kana has agreed to indemnify present and former officers and directors of
Silknet against any costs or expenses, judgments, fines, losses, claims,
damages or liabilities arising out of or pertaining to matters relating to
their service as such an officer or director existing or occurring at or prior
to the effective time (including, without limitation, the transactions
contemplated by the merger agreement) whether asserted or claimed prior to, at
or after the effective time, to the fullest extent that Silknet would have been
permitted under applicable law and its charter documents. The merger agreement
provides that all rights to indemnification for present and former officers and
directors of Silknet shall survive the merger and continue in full force and
effect for a period of not less than six years from the effective time. Kana
also has agreed to maintain insurance for Silknet's directors and officers
equivalent to Silknet's current directors' and officers' liability insurance
for not less than six years after the effective time, subject to limitations.
As a result of the foregoing, the directors and executive officers of
Silknet may be more likely to approve the merger than Silknet stockholders
generally.
The Merger
Pistol Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of Kana, will merge with and into Silknet following:
. the adoption of the merger agreement by the Silknet stockholders;
. the approval of the issuance of Kana common stock in the merger by the
Kana stockholders; and
. the satisfaction or waiver of the other conditions to the merger.
Silknet will be the surviving corporation and become a wholly-owned
subsidiary of Kana following the merger.
Closing
At the closing of the merger, the parties will cause the merger to become
effective by filing a certificate of merger with the Secretary of State of the
State of Delaware. Kana and Silknet are working toward completing the merger
promptly and hope to complete the merger by the spring of 2000. Because the
merger is subject to a number of conditions, however, we cannot predict the
exact timing.
Conversion of Silknet Stock in the Merger
At the effective time, each outstanding share of Silknet common stock will
automatically be converted into the right to receive 1.66 shares of Kana common
stock. The number of shares of Kana common stock issuable in the merger will be
proportionately adjusted as appropriate for any stock split, stock dividend or
similar event with respect to Silknet common stock or Kana common stock
effected between the date of this joint proxy statement/prospectus and the
completion of the merger.
Silknet Stock Options and Warrants
Immediately prior to the effective time of the merger, the vesting schedule
of any unvested shares of Silknet common stock will accelerate by a period of
one year. At the effective time, each option to purchase shares of Silknet
common stock issued under Insite's 1997 Stock Option Plan and Silknet's 1995
Employee Stock Option Plan, 1999 Stock Option and Incentive Plan, 1999 Non-
Employee Director Stock Option Plan, and 1999 Employee Stock Purchase Plan, and
all other
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options to purchase Silknet's common stock and warrants outstanding as of the
effective time will be assumed by Kana, regardless of whether the options and
warrants are then exercisable, and converted into options and warrants to
purchase Kana common stock. Each assumed Silknet stock option and warrant will
constitute an option or warrant to acquire, on the same terms and conditions
that were applicable to the option or warrant immediately prior to the
effective time, that number of shares of Kana common stock equal to the number
of shares of Silknet common stock purchasable pursuant to such option or
warrant multiplied by 1.66 (rounded down to the nearest whole number), at a
price per share (rounded upward to the nearest whole cent) equal to the
aggregate exercise price for the shares of Silknet common stock purchasable
pursuant to such Silknet stock option or warrant immediately prior to the
effective time divided by the number of full shares of Kana common stock deemed
purchasable pursuant to such Silknet stock option or warrant in accordance with
the foregoing.
The parties intend for the Silknet stock options assumed by Kana to qualify
as incentive stock options to the extent the stock options qualified as
incentive stock options prior to the effective time.
The Exchange Agent
As of the effective time, Kana is required to deposit with a bank or trust
company certificates representing the shares of Kana common stock to be
exchanged for shares of Silknet common stock and cash to pay for any dividends
or distributions that holders of Silknet common stock may be entitled to
receive under the merger agreement.
Exchange of Silknet Stock Certificates for Kana Stock Certificates
Promptly after the effective time, the exchange agent will mail to Silknet
stockholders a letter of transmittal and instructions for surrendering their
Silknet stock certificates in exchange for Kana stock certificates.
Silknet stockholders should not submit their stock certificates for
exchange until they have received the letter of transmittal and instructions
referred to above.
Transfer of Ownership; Distributions with Respect to Unexchanged Shares
Kana will issue a Kana stock certificate in a name other than the name
registered for the surrendered Silknet stock certificate only if the exchange
agent is given all documents required
. to show and effect the unrecorded transfer of ownership; and
. to show that any applicable stock transfer taxes have been paid.
Silknet stockholders are not entitled to receive any dividends or other
distributions on Kana common stock with a record date after the merger is
completed until they have surrendered their Silknet stock certificates in
exchange for Kana stock certificates.
If there is any dividend or other distribution on Kana common stock with a
record date after the merger, former Silknet stockholders will receive, only
following surrender of their Silknet stock certificates, the dividend or other
distribution payable with respect to the whole shares of Kana common stock
issued in exchange for their Silknet stock certificates.
Representations and Warranties
Kana and Silknet each made representations and warranties in the merger
agreement about their authority to enter into the merger agreement and to
consummate the merger and the other
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transactions contemplated by the merger agreement and about aspects of their
business, assets, financial condition, structure and other facts pertinent to
the merger.
Silknet's representations and warranties addressed, among other things,
the following topics:
. Silknet's organization, qualification to do business and good standing;
. Silknet's capitalization;
. the effect of the merger agreement and the merger on obligations of
Silknet;
. governmental consents and approvals in connection with the merger;
. Silknet's filings and reports with the Securities and Exchange
Commission;
. Silknet's financial statements;
. absence of undisclosed liabilities;
. changes in Silknet's business since February 6, 2000;
. matters relating to Silknet's employees;
. Silknet's material contracts and obligations;
. litigation involving Silknet;
. environmental laws that apply to Silknet;
. tax matters regarding the merger;
. intellectual property used or owned by Silknet;
. Silknet's insurance;
. Silknet's affiliates;
. absence of existing discussions with respect to an alternative takeover
proposal;
. absence of interested party transactions;
. the registration statement and joint proxy statement/prospectus; and
. restrictions on Silknet's business.
Kana made representations addressing the following topics:
. Kana's organization, qualification to do business and good standing;
. Kana's capitalization;
. the effect of the merger agreement and the merger on obligations of
Kana;
. inapplicability of governmental consents and approvals in connection
with the merger;
. changes in Kana's business since February 6, 2000;
. Kana's filings and reports with the Securities and Exchange Commission;
. Kana's financial statements;
. litigation involving Kana;
. absence of undisclosed liabilities;
. tax matters regarding the merger;
. the registration statement and joint proxy statement/prospectus; and
. intellectual property used or owned by Kana.
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The representations and warranties in the merger agreement are extensive
and not easily summarized. Stockholders are urged to read carefully the
articles in the merger agreement entitled "Representations and Warranties of
Silknet" and "Representations and Warranties of Kana."
Silknet's and Kana's Conduct of Business Before Completion of the Merger
Silknet has agreed that, until the completion of the merger or unless Kana
consents in writing, Silknet and its subsidiaries will conduct their businesses
in the ordinary course of business consistent with past practices and shall use
reasonable efforts:
. to keep available the services of their current officers, significant
employees and consultants; and
. to preserve their relationships with customers, suppliers, distributors
and other persons with which they have business relations in order to
preserve substantially intact their business organization.
Silknet has also agreed that Silknet and its subsidiaries will not, until
the completion of the merger or unless Kana consents in writing, engage in any
of the following:
. modification of exercisability of any stock options or authorization of
cash payments in exchange for stock options except as otherwise
required under any stock plan;
. declaration, setting aside or issuance of dividends or other
distributions;
. material modification of any Silknet intellectual property rights
except in the ordinary course of business consistent with past
practices;
. issuance, sale, pledge or encumbrance of shares of Silknet capital
stock or securities convertible into Silknet capital stock, except for
limited issuances of securities in connection with stock option grants
consistent with past practices to existing and newly hired employees,
subject to limitations, or the exercise of outstanding stock options
under Silknet's stock option plans;
. acquisition of interests in other entities;
. disposition of any material properties or assets other than performing
transactions in connection with existing contracts or providing
products and services in the ordinary course of business or consistent
with past practice;
. increase of compensation payable to directors, officers, consultants or
employees, except with respect to employees who are not officers and in
accordance with past practices;
. granting of any additional severance arrangements or entering into of
any additional agreements with any employees or officers;
. entering into any collective bargaining agreement;
. modification of Silknet's certificate of incorporation or bylaws;
. entering into or material amendment of any license agreement or other
material marketing, manufacturing or other rights agreements;
. modification or termination of material contracts, except in the
ordinary course of business;
. waiver or release of any material right or claim, except in the
ordinary course of business;
. initiation of litigation or arbitration;
. incurrence of any indebtedness in excess of $10,000,000;
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. making of new capital expenditures, or entering into any agreements
providing for payments which, individually, are in excess of $1,000,000
or, in the aggregate, are in excess of $5,000,000;
. making of material tax elections or settlements or compromises of any
material tax liability;
. payment of indebtedness other than in the ordinary course consistent
with past practice; and
. taking or agreeing to take any of the actions described above.
Kana has agreed that, until the completion of the merger or unless Silknet
consents in writing, Kana and its subsidiaries will conduct their businesses in
the ordinary course of business consistent with past practices and shall use
reasonable efforts:
. to keep available the services of their current officers, significant
employees and consultants; and
. to preserve their relationships with customers, suppliers, distributors
and other persons with which they have business relations in order to
preserve substantially intact their business organization.
Kana has also agreed that Kana and its subsidiaries will not, until the
completion of the merger or unless Silknet consents in writing, engage in any
of the following:
. modification of exercisability of any stock options or authorization of
cash payments in exchange for stock options except as otherwise
required under any stock plan;
. declaration, setting aside or issuance of dividends or other
distributions;
. disposition of any material properties or assets, except for
transactions in the ordinary course of business;
. material modification of any Kana intellectual property rights except
in the ordinary course of business consistent with past practices;
. entering into or material amendment of any OEM agreement or other
material marketing, manufacturing or other rights agreements;
. modification or termination of material contracts, except in the
ordinary course of business;
. waiver or release of any material right or claim, except in the
ordinary course of business;
. initiation of litigation or arbitration; and
. taking or agreeing to take any of the actions described above.
Each of Silknet and Kana has also agreed:
. to notify the other promptly of certain events;
. to provide reasonable access to the other to its facilities and
records;
. to make all necessary filings and obtain any consents and approvals as
may be required in connection with the merger agreement and the merger;
and
. to provide the other copies of its filings with the Securities Exchange
Commission.
The agreements related to the conduct of each of Silknet's and Kana's
businesses in the merger agreement are complicated and not easily summarized.
Stockholders are urged to carefully read the article in the merger agreement
entitled "Conduct of Business."
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No Solicitation of Transactions
Until the merger is completed or the merger agreement is terminated, each
party has agreed not to take any of the following actions, directly or
indirectly:
. solicit, initiate, encourage or agree to any inquiry or proposal
constituting a "Silknet Takeover Proposal" or a "Kana Takeover
Proposal," as applicable, by a third party;
. negotiate with any person, or disclose any information, with respect to
a "Silknet Takeover Proposal" or a "Kana Takeover Proposal," as
applicable;
. authorize, approve or recommend "Silknet Takeover Proposal" or a "Kana
Takeover Proposal," as applicable," or
. enter into any letter of intent or similar document providing for
"Silknet Takeover Proposal" or a "Kana Takeover Proposal," as
applicable.
A "Silknet Takeover Proposal" is an offer or proposal for, or an
indication of interest in:
. a merger, consolidation or similar transaction involving Silknet;
. a sale or other disposition of all or substantially all of Silknet's
assets, or of any asset the absence of which would materially diminish
the value of the merger to Kana;
. the acquisition of 20% or more of Silknet's outstanding capital stock;
or
. any transaction inconsistent with consummation of the merger.
A "Kana Takeover Proposal" is an offer or proposal for, or an indication of
interest in:
. a merger, consolidation or similar transaction involving a change in
control of Kana;
. a sale or other disposition of all or substantially all of Kana's
assets;
. acquisition of a majority of Kana's outstanding capital stock; or
. any other transaction inconsistent with consummation of the merger
which offer, proposal or indication of interest is conditioned on the
termination by Kana of the merger agreement or rejection by Kana's stockholders
of the proposal to be voted by them to approve the issuance of shares of Kana
common stock in the merger.
The Silknet and Kana boards are not prohibited, however, from complying
with the rules of the Exchange Act with respect to a tender or exchange offer.
In addition, each company may provide information in connection with and
negotiate a takeover proposal, if, among other things:
. neither the company nor its representatives violated the merger
agreement with respect to the takeover proposal;
. the board of directors determines in good faith, after considering the
advice of an investment bank of nationally recognized reputation, that
the takeover proposal is substantially more favorable to the company
and its stockholders than the merger, taking into account the
anticipated long-term strategic benefits of the merger to the company's
stockholders;
. the board of directors concludes in good faith, after consultation with
the company's outside legal counsel, that failure to take such action
would be inconsistent with the fiduciary obligations of the board to
the company's stockholders under applicable law; and
. the company gives the other party written notice of the identity of the
person making the takeover proposal, the terms of the proposal and the
company's intention to respond to the proposal prior to responding.
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Conditions to Completing the Merger
Kana's and Silknet's respective obligations to complete the merger and the
related transactions are subject to adoption of the merger agreement by
Silknet's stockholders and the approval of the issuance of Kana common stock in
the merger by Kana's stockholders, as well as the prior satisfaction or waiver
(if permitted by applicable law) of each of the following conditions before
completion of the merger:
. the registration statement relating to the issuance of shares of Kana
common stock as contemplated by the merger agreement must be declared
effective by the SEC and must not be the subject of any stop order or
proceedings seeking a stop order;
. no order, statute, writ, injunction or decree prohibits or prevents
completion of the merger;
. all consents, approvals and authorization legally required to
consummate the merger must have been obtained from all governmental
entities, except where no material adverse effect could reasonably be
expected to occur; and
. the shares of Kana common stock to be issued in connection with the
merger must be approved for listing with the Nasdaq National Market.
Kana's obligations to complete the merger and the other transactions
contemplated by the merger agreement are subject to the satisfaction or waiver
of each of the following additional conditions before completion of the merger:
. Silknet's representations and warranties must be true and correct in
all material respects when made and as of the completion of the merger,
and Kana shall have received from Silknet an officer's certificate to
that effect;
. Silknet must have performed or complied in all material respects with
all of its covenants in the merger agreement, and Kana shall have
received from Silknet an officer's certificate to that effect;
. each officer and director of and each affiliate controlled by Silknet
must have entered into agreements not to transfer their shares of Kana
common stock for 90 days after the merger;
. Kana must have obtained the opinion of its counsel to the effect that
the merger will constitute a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code; and
. no change in or effect on the business of Silknet exists that is or is
reasonably likely to be materially adverse to the business, assets,
liabilities, financial condition or results of operations of Silknet.
Silknet's obligations to complete the merger and the other transactions
contemplated by the merger agreement are subject to the satisfaction or waiver
of each of the following additional conditions before completion of the merger:
. Kana's representations and warranties must be true and correct in all
material respects when made and as of the completion of the merger, and
Silknet shall have received from Kana an officer's certificate to that
effect;
. Kana must have performed or complied in all material respects with all
of its covenants in the merger agreement, and Silknet shall have
received from Kana an officer's certificate to that effect;
. each officer and director of and each affiliate controlled by Kana must
have entered into stand-off agreements not to transfer their shares of
Kana common stock for 90 days after the merger;
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. Kana must have amended its investors' rights agreement so as to provide
registration rights for the shares of Kana common stock to be received
by Silknet stockholders with registration rights with respect to their
shares of Silknet common stock;
. Silknet must have obtained the opinion of its counsel to the effect
that the merger will constitute a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code; and
. no change in or effect on the business of Kana and its subsidiaries
exists that is or is reasonably likely to be materially adverse to the
business, assets, liabilities, financial condition or results of
operations of Kana and its subsidiaries, taken as a whole.
Extension, Waiver and Amendment of the Merger Agreement
Prior to the consummation of the merger, Kana and Silknet may amend the
merger agreement. Either Kana or Silknet may, in writing, extend the other's
time for or waive compliance with the performance of any of the obligations or
other acts under the merger agreement, waive any inaccuracies in the other's
representations and warranties and waive compliance by the other with any of
the agreements or conditions contained in the merger agreement.
Termination of the Merger Agreement
The merger agreement may be terminated under limited circumstances at any
time before the completion of the merger, as summarized below:
. the merger agreement may be terminated by mutual consent of Kana and
Silknet; or
. the merger agreement may also be terminated by either Kana or Silknet
if the conditions to completion of the merger would not be satisfied
because of a breach of a representation, warranty, covenant or
agreement of the other party, and the breaching party does not cure the
breach within twenty business days.
In addition, the merger agreement may be terminated by either Kana or
Silknet under any of the following circumstances:
. if the merger is not completed, without the fault of the terminating
party, by July 31, 2000;
. if a final court order prohibiting the merger is issued and is not
appealable;
. if the Kana stockholders do not approve the issuance of Kana common
stock at the Kana special meeting; or
. if the Silknet stockholders do not adopt the merger agreement at the
Silknet special meeting.
Furthermore, the merger agreement may be terminated by Kana:
. if Silknet's board withdraws or modifies in a manner adverse to Kana
its recommendation as to the merger agreement or the merger;
. if, with respect to a "Silknet Takeover Proposal" as described in more
detail in "The Merger--No Solicitation of Transactions" on page 65,
Silknet's board recommends an alternative takeover proposal to its
stockholders;
. if Silknet or its representatives participate in discussions or
negotiations regarding a "Silknet Takeover Proposal" in material
violation of the merger agreement; or
. if presented with an unsolicited, superior offer by a third party.
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Finally, the merger agreement may be terminated by Silknet if any of the
following occurs:
. if Kana's board withdraws or modifies in a manner adverse to Silknet
its recommendation as to the merger agreement or the merger;
. if, with respect to a "Kana Takeover Proposal" relating to Kana as
described in more detail in "The Merger--No Solicitation of
Transactions" on page 65, Kana's board recommends an alternative
takeover proposal to its stockholders;
. if Kana or its representatives participate in discussions or
negotiations regarding a "Kana Takeover Proposal" in material violation
of the merger agreement; or
. if presented with an unsolicited, superior offer by a third party.
Payment of Fees and Expenses
Whether or not the merger is consummated, all costs and expenses incurred
in connection with the merger agreement and the merger will be paid by the
party incurring the expense, except that expenses incurred in connection with
printing, filing and mailing the joint proxy statement/prospectus and the
registration statement shall be shared equally.
Silknet has agreed to pay Kana a cash termination fee of $148,300,000 if
Silknet terminates the merger agreement as a result of a "Silknet Takeover
Proposal" it deems to be a superior offer and five business days have passed
since Kana's receipt of written notice:
. that the board of directors is prepared to accept the "Silknet
Takeover Proposal"; and
. specifying the material terms and conditions of the "Silknet
Takeover Proposal" and identifying the persons proposing the
"Silknet Takeover Proposal".
In addition, Silknet has agreed to pay Kana a cash termination fee of
$40,000,000 upon termination of the merger agreement and $108,300,000 upon
consummation of a "Silknet Takeover Proposal" prior to the first anniversary of
the termination of the merger agreement in the following circumstances:
. Kana terminates the merger agreement as a result of Silknet board's
withdrawing, modifying or changing its recommendation in favor of the
merger in a manner adverse to Kana;
. Kana terminates the merger agreement as a result of Silknet's board's
recommendation of a "Silknet Takeover Proposal";
. Kana terminates the merger agreement as a result of Silknet or any of
its representatives taking any action to solicit a "Silknet Takeover
Proposal";
. after a "Silknet Takeover Proposal" has been made, Kana terminates the
merger agreement as a result of a breach by Silknet of a
representation, warranty, covenant or agreement which causes conditions
precedent to closing not to be satisfied that remain uncured for 20
business days; or
. after a "Silknet Takeover Proposal" has been made, either Kana or
Silknet terminates the merger agreement because Silknet's stockholders
failed to adopt the merger agreement or because the merger is not
completed by July 31, 2000.
Kana has agreed to pay Silknet a cash termination fee of $148,300,000 if
Kana terminates the merger agreement as a result of a "Kana Takeover Proposal"
it deems to be a superior offer and five business days have passed since
Silknet's receipt of written notice:
. that the board of directors is prepared to accept the "Kana
Takeover Proposal"; and
. specifying the material terms and conditions of the "Kana Takeover
Proposal" and identifying the persons proposing the "Kana Takeover
Proposal."
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In addition, Kana has agreed to pay Silknet a cash termination fee of
$40,000,000 upon termination of the merger agreement and $108,300,000 upon
consummation of a "Kana Takeover Proposal" prior to the first anniversary of
termination of the merger agreement in the following circumstances:
. Silknet terminates the merger agreement as a result of Kana board's
withdrawing, modifying or changing its recommendation in favor of the
merger in a manner adverse to Silknet;
. Silknet terminates the merger agreement as a result of Kana's board's
recommendation of a "Kana Takeover Proposal";
. Silknet terminates the merger agreement as a result of Kana or any of
its representatives taking any action to solicit a "Kana Takeover
Proposal";
. after a "Kana Takeover Proposal" has been made, Silknet terminates the
merger agreement as a result of an intentional breach by Kana of a
representation, warranty, covenant or agreement which causes conditions
precedent to closing not to be satisfied that remain uncured for 20
business days; or
. after a "Kana Takeover Proposal" has been made, either Silknet or Kana
terminates the merger agreement because Kana's stockholders failed to
approve the issuance of Kana common stock contemplated by the merger
agreement or because the merger is not completed by July 31, 2000.
Material Federal Income Tax Considerations
The following discussion describes the material federal income tax
considerations relevant to the exchange of shares of Silknet common stock for
Kana common stock in connection with the merger that are generally applicable
to holders of Silknet common stock. This discussion is based on currently
existing provisions of the Internal Revenue Code, existing and proposed
treasury regulations thereunder and current administrative rulings and court
decisions, all of which are subject to change. Any such change, which may or
may not be retroactive, could alter the tax consequences to Silknet
stockholders as described herein.
Silknet stockholders should be aware that this discussion does not deal
with all federal income tax considerations that may be relevant to particular
Silknet stockholders in light of their particular circumstances, such as
stockholders who:
. are dealers in securities;
. are subject to the alternative minimum tax provisions of the Internal
Revenue Code;
. are foreign persons;
. do not hold their Silknet common stock as capital assets; or
. acquired their shares in connection with stock option or stock purchase
plans or in other compensatory transactions.
In addition, the following discussion does not address the tax consequences
of the merger under foreign, state or local tax laws, the tax consequences of
transactions effectuated prior or subsequent to, or concurrently with, the
merger (whether or not any such transactions are undertaken in connection with
the merger), including without limitation any transaction in which shares of
Silknet common stock are acquired or shares of Kana common stock are disposed
of, the tax consequences of the assumption by Kana of Silknet stock options or
the tax consequences of the receipt of rights to acquire Kana common stock, or
the tax consequences under Sections 280G and 4999 of the Internal Revenue Code.
Accordingly, Silknet stockholders are urged to consult their own tax advisors
as to the specific tax consequences to them of the merger, including the
applicable federal, state, local and foreign tax consequences.
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The merger is intended to constitute a reorganization within the meaning of
the Internal Revenue Code. If the merger does qualify as a reorganization,
then, subject to the limitations and qualifications referred to herein, the
merger will generally result in the following federal income tax consequences
to Silknet stockholders:
. No gain or loss will be recognized by holders of Silknet common stock
solely because of their receipt of Kana common stock in exchange for
Silknet common stock in the merger.
. The aggregate tax basis of the Kana common stock received by Silknet
stockholders in the merger, including the tax basis attributable to
fractional shares for which cash will be received, will be the same as
the aggregate tax basis of the Silknet common stock surrendered in
exchange therefor.
. The holding period of the Kana common stock received by each Silknet
stockholder in the merger will include the period for which the Silknet
common stock surrendered in exchange therefor was considered to be
held, provided that the Silknet common stock so surrendered is held as
a capital asset at the time of the merger.
. Holders of Silknet common stock who receive cash in lieu of a
fractional share of Kana common stock will be treated as having
received the fractional share and immediately after having received
cash from Kana in redemption of the fractional share. Silknet
stockholders generally will recognize gain or loss in connection with
the redemption equal to the difference between the amount of cash
received and the tax basis attributable to the redeemed fractional
share of Kana common stock.
The parties are not requesting and will not request a ruling from the
Internal Revenue Service as to the tax consequences of the merger. It is a
condition to completion of the merger that Silknet obtain an opinion from
Testa, Hurwitz & Thibeault, LLP and that Kana obtain an opinion from Brobeck,
Phleger & Harrison LLP to the effect that the merger will constitute a
reorganization within the meaning of the Internal Revenue Code. Silknet
stockholders should be aware that these tax opinions do not bind the Internal
Revenue Service and the Internal Revenue Service is therefore not precluded
from successfully asserting a contrary opinion. These tax opinions will be
subject to certain assumptions and qualifications, including but not limited to
the truth and accuracy of certain representations made by Silknet and Kana.
A successful IRS challenge to the reorganization status of the merger would
result in Silknet stockholders recognizing taxable gain or loss with respect to
each share of Silknet common stock surrendered equal to the difference between
each stockholder's basis in such share and the fair market value, as of the
effective time, of the Kana common stock received in exchange therefor. In such
event, a stockholder's aggregate basis in the Kana common stock so received
would equal its fair market value as of the closing date of the merger, and the
stockholder's holding period for such stock would begin the day after the
merger.
Accounting Treatment
Kana intends to account for the merger as a purchase for accounting and
financial reporting purposes, which means that Silknet will be treated as a
separate entity for periods prior to the closing, and thereafter as a wholly-
owned subsidiary of Kana.
Stockholders' Dissenters' Rights of Appraisal
Under Delaware law, neither Kana nor Silknet stockholders are entitled to
dissenters' rights of appraisal in connection with the merger.
Director and Officer Indemnification and Insurance
The merger agreement provides that, after the completion of the merger, all
rights of indemnification, advancement of expenses, exculpation, limitation of
liability and similar rights existing
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in favor of present and former officers, directors, employees and agents of
Silknet shall survive the merger and shall continue for six years from the
effective time. The merger agreement also provides that, for six years after
the completion of the merger, Kana will maintain directors' and officers'
liability insurance at least at the level currently maintained by Silknet,
provided that Kana is not required to pay premiums in excess of 200% of the
annual amount Silknet currently pays for such insurance.
Voting Agreements
In connection with the merger, the officers, directors and their affiliates
have entered into voting agreements with Kana or Silknet, as the case may be.
The terms of the voting agreements provide that the stockholders will vote all
shares of Kana or Silknet common stock beneficially owned by them, subject to
certain exceptions, or any new shares of Kana or Silknet stock they may
acquire, in favor of the adoption of the merger agreement, and the transactions
contemplated thereby, or the issuance of Kana common stock in the merger, as
the case may be. In connection with the voting agreements, each of the
stockholders has executed an irrevocable proxy to vote their shares in favor of
the adoption of the merger agreement, and the transactions contemplated
thereby, or the issuance of Kana common stock in the merger, as the case may
be. As of February 3, 2000, the Silknet stockholders who entered into voting
agreements collectively had beneficial ownership of approximately 7,798,592
shares of Silknet common stock (excluding shares issuable upon the exercise of
options or warrants) which represented approximately 42.6% of the outstanding
Silknet common stock. As of February 3, 2000, the Kana stockholders who entered
into the stockholder agreement collectively had beneficial ownership of
approximately 31,642,908 shares of Kana common stock which represented
approximately 52.1% of the outstanding Kana common stock. None of the
stockholders who are parties to the voting agreement was paid additional
consideration for entering into a voting agreement.
Stock Option Agreements
Kana
Silknet entered into a stock option agreement with Kana dated as of
February 6, 2000 under which Silknet granted Kana the right, under limited
circumstances, to purchase a number of shares of newly-issued Silknet common
stock equal to 19.9% of Silknet's issued and outstanding shares of common stock
as of the date of the exercise of the option. Granting of the stock option is
likely to be considered a change in an equity interest under applicable
accounting rules, and may have the impact of preventing Silknet from entering
into an agreement with a third party to be acquired in a pooling transaction,
in the immediate future. The Silknet stock option agreement is subject to a
number of conditions and only becomes exercisable in connection with Silknet
receiving a proposal for an alternative transaction to the merger from a third
party. When exercisable, the option granted under the Silknet stock option
agreement may be exercised by delivery of the exercise price of $214.87 per
share in cash. Kana has the right to require SIlknet to repurchase all or part
of the option or the Silknet shares at a price that may be higher than the
option exercise price. In no event is more than $148,300,000 in cash and stock
payable by Silknet under the merger agreement and the stock option agreement.
In general, the maximum net proceeds that may be retained by Kana from
termination or post-termination fees payable under the merger agreement and the
exercise of the stock option and the sale of the stock received upon exercise
of the stock option is $188,300,000.
Silknet
Kana entered into a stock option agreement with Silknet dated as of
February 6, 2000 under which Kana granted Silknet the right, under limited
circumstances, to purchase a number of shares of newly-issued Kana common stock
equal to 9.9% of Kana's issued and outstanding shares of common stock as of the
date of the exercise of the option. The Kana stock option is subject to a
number of conditions and only becomes exercisable in connection with Kana
receiving a proposal
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from a third party to enter into a transaction which is conditioned on
terminating the merger agreement. When exercisable, the option granted under
the Kana stock option agreement may be exercised by delivery of the exercise
price of $129.44 per share in cash. Silknet has the right to require Kana to
repurchase all or part of the option of the Kana shares at a price that may be
higher than the option exercise price. In no event is more than $148,300,000 in
cash and stock payable by Kana under the merger agreement and the Kana stock
option agreement. In general, the maximum net proceeds that may be retained by
Silknet from termination or post-termination fees payable under the merger
agreement, the exercise of the stock option and the sale of the stock received
upon exercise of the stock option is $188,300,000.
Stand-Off Agreements
Each executive officer and director of Silknet and Kana and each affiliate
controlled by Silknet and Kana has entered into an agreement under which that
person has agreed not to sell, transfer, pledge, hypothecate, grant an option
with respect to or otherwise dispose of any shares of Kana common stock held or
later acquired by that person for a period ending 90 days after the closing
date. Kana may, in its sole discretion and at any time without notice, release
all or any portion of the securities subject to the stand-off agreements.
Listing of Kana Common Stock to be Issued in the Merger
The approval for quotation on the Nasdaq National Market of the shares of
Kana common stock to be issued in the merger is a condition to the consummation
of the merger.
Restrictions on Sale of Shares By Affiliates of Kana and Silknet
The shares of Kana common stock to be issued in connection with the merger
will be registered under the Securities Act and will be freely transferable
under the Securities Act, except for shares of Kana common stock issued to any
person who is deemed to be an affiliate of either Kana or Silknet at the time
of the special meetings. Persons who may be deemed to be affiliates include
individuals or entities that control, are controlled by, or are under common
control with either Kana or Silknet and may include some of the officers,
directors, or principal stockholders of Kana or Silknet. Affiliates may not
sell their shares of Kana common stock acquired in connection with the merger
except pursuant to:
. an effective registration statement under the Securities Act covering
the resale of those shares;
. an exemption afforded by Rule 145 under the Securities Act; or
. another applicable exemption under the Securities Act.
Kana's registration statement on Form S-4, of which this joint proxy
statement/prospectus forms a part, does not cover the resale of shares of Kana
common stock to be received by affiliates in the merger.
Management Following the Merger
Upon completion of the merger, the directors and officers of Pistol
Acquisition Corp. will become the new directors and officers of Silknet. Mark
S. Gainey and Michael J. McCloskey are the current directors and officers of
Pistol Acquisition Corp.
Operations Following the Merger
Following the merger, Silknet will operate as a wholly-owned subsidiary of
Kana. Upon consummation of the merger, it is anticipated that the members of
Silknet's board will be Michael J. McCloskey and Mark S. Gainey. The
stockholders of Silknet will become stockholders of Kana, and their rights as
stockholders will be governed by Kana's certificate of incorporation, Kana's
bylaws and the laws of the State of Delaware. Kana shall increase the size of
its board to nine and elect James C. Wood to Kana's board.
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KANA AND SILKNET
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
have been prepared to give effect to the merger of Kana and Silknet using the
purchase method of accounting.
The unaudited pro forma combined condensed balance sheet gives effect to
the merger as if it had occurred on December 31, 1999, and combines the
consolidated balance sheet of Kana and the consolidated balance sheet of
Silknet as of December 31, 1999. Silknet's fiscal year ends on June 30.
Accordingly, for purposes of the pro forma data, Kana's consolidated statement
of operations for the year ended December 31, 1999 has been combined with
Silknet's unaudited condensed consolidated statement of operations for the
twelve-month period ended December 31, 1999 as if the merger had occurred on
January 1, 1999.
Such unaudited pro forma combined condensed financial information is
presented for illustrative purposes only and is not necessarily indicative of
the financial position or results of operations that would have actually been
reported had the merger occurred at the beginning of the period presented, nor
is it necessarily indicative of future financial position or results of
operations. Kana expects to incur acquisition-related costs of approximately
$20.7 million in connection with the merger. This is an estimate and is subject
to change. There can be no assurance that Kana will not incur additional
charges to reflect costs associated with the merger or that management will be
successful in its efforts to integrate the operations of the two companies. In
addition, Kana expects to record goodwill and identifiable intangible assets of
approximately $3.9 billion, which will be amortized over a period of three
years.
These unaudited pro-forma combined condensed financial statements are based
upon the respective historical consolidated financial statements of Kana and
Silknet. The unaudited pro forma combined condensed financial information
should be read in conjunction with the historical consolidated financial
statements of Kana and Silknet and related notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Kana" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Silknet."
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<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Pro Forma
--------------------------
Kana Silknet Adjustments Combined
--------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents.... $ 18,695 $ 48,211 $ $ 66,906
Short-term investments....... 36,167 -- 36,167
Accounts receivable, net..... 4,655 6,707 11,362
Prepaid expenses and other
current assets.............. 2,036 1,089 3,125
--------- -------- ---------- ----------
Total current assets....... 61,553 56,007 -- 117,560
Property and equipment, net.... 8,360 3,825 12,185
Goodwill and identifiable
intangibles................... -- -- 3,927,274 3,927,274
Other assets................... 316 1,648 1,964
--------- -------- ---------- ----------
Total assets............... $ 70,229 $ 61,480 $3,926,702 $4,058,983
========= ======== ========== ==========
Liabilities and Stockholders'
Equity
Current liabilities
Current portion of notes
payable..................... $ 4,224 $ 133 $ $ 4,357
Accounts payable............. 2,766 870 3,636
Accrued commissions.......... 1,984 630 2,614
Accrued payroll.............. 1,639 2,590 4,229
Other accrued liabilities.... 1,303 3,659 4,962
Accrued acquisition related
costs....................... 3,148 -- 20,700 (b) 23,848
Deferred revenue............. 6,253 3,078 (1,800)(c) 7,531
--------- -------- ---------- ----------
Total current liabilities.. 21,317 10,960 18,900 51,177
Notes payable, less current
portion....................... 412 23 435
--------- -------- ---------- ----------
Total liabilities.......... 21,729 10,983 18,900 51,612
--------- -------- ---------- ----------
Stockholders' equity
Convertible preferred stock.. -- -- --
Common stock................. 30 171 (142)(d) 59
Additional paid-in capital... 202,504 78,929 3,886,813 (e) 4,168,246
Deferred stock-based
compensation................ (14,962) (572) 572 (f) (14,962)
Notes receivable from
stockholders................ (6,380) -- (6,380)
Accumulated other
comprehensive loss.......... (75) (22) 22 (g) (75)
Accumulated deficit.......... (132,617) (28,009) 21,109 (h) (139,517)
--------- -------- ---------- ----------
Total stockholder's
equity.................... 48,500 50,497 3,907,802 4,007,371
--------- -------- ---------- ----------
Total liabilities and
stockholders' equity...... $ 70,229 $ 61,480 $3,926,702 $4,058,983
========= ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of theunaudited pro forma combined
condensed financial statements.
75
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma
------------------------
Kana Silknet Adjustments Combined
--------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
License...................... $ 10,536 $ 15,731 $ $ 26,267
Service...................... 3,528 6,799 10,327
--------- -------- ---------- -----------
Total revenues............. 14,064 22,530 -- 36,594
--------- -------- ---------- -----------
Cost of revenues:
License...................... 271 366 637
Service...................... 6,610 5,429 12,039
--------- -------- ---------- -----------
Total cost of revenues..... 6,881 5,795 -- 12,676
--------- -------- ---------- -----------
Gross profit................... 7,183 16,735 -- 23,918
--------- -------- ---------- -----------
Operating expenses:
Sales and marketing.......... 21,199 14,987 36,186
Research and development..... 12,854 10,927 23,781
General and administrative... 5,018 5,457 10,475
Amortization of goodwill and
identifiable intangibles.... -- -- 1,309,091 1,309,091
Amortization of stock-based
compensation................ 80,476 297 80,773
Acquisition related costs.... 5,635 661 6,296
--------- -------- ---------- -----------
Total operating expenses... 125,182 32,329 1,309,091 1,466,601
--------- -------- ---------- -----------
Operating loss................. (117,999) (15,594) (1,309,091) (1,442,683)
Other income (expense), net.... (744) 1,880 1,136
--------- -------- ---------- -----------
Net loss................... $(118,743) $(13,714) (1,309,091) $(1,441,547)
========= ======== ========== ===========
Basic and diluted net loss per
share......................... $ (4.61) $ (1.16) $ (31.76)
========= ======== ===========
Shares used in computing basic
and diluted net loss per share
amounts....................... 25,772 11,819 45,392
========= ======== ===========
</TABLE>
The accompanying notes are an integral part of theunaudited pro forma combined
condensed financial statements.
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<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(1) Description of Transaction
On February 6, 2000, Kana and Silknet entered into a merger agreement
whereby each outstanding share of Silknet common stock will be converted into
1.66 shares of Kana common stock. Each outstanding option and warrant to
purchase shares of Silknet common stock will be assumed using the 1.66 ratio.
Completion of the merger is conditioned upon the affirmative vote of both
companies' stockholders, among other conditions. Using Silknet shares
outstanding as of February 3, 2000, Kana would issue approximately 28,510,000
shares of Kana common stock and reserve approximately 4,580,000 shares of
common stock to assume Silknet's outstanding options and warrants to purchase
common stock in connection with the merger agreement. The actual number of
shares of Kana common stock to be issued will be determined on the effective
date of the merger based on the number of shares of Silknet common stock
actually outstanding on such date.
Kana is expected to account for the merger as a purchase. As a result, Kana
will record on its balance sheet the fair market value of Silknet's assets and
liabilities, acquisition-related costs of $20.7 million, and identifiable
intangibles and goodwill of approximately $3.9 billion. After the merger,
intangible assets and goodwill will represent approximately 97% of Kana's pro
forma total assets. Kana will amortize the intangible assets and goodwill
acquired in connection with the merger over a three-year period, resulting in
an approximate $1.3 billion charge per year that will negatively affect Kana's
results of operations during this period.
(2) Preliminary Purchase Price
The accompanying unaudited pro forma condensed combined financial
statements reflect an estimated purchase price of approximately $4.0 billion,
measured as the average fair market value of Kana's outstanding common stock
from February 3, to February 9, 2000, two trading days before and after the
merger agreement was announced, plus the value of the options and warrants of
Silknet assumed by Kana in the merger, and other costs directly related to the
merger as follows (in thousands):
<TABLE>
<S> <C>
Fair market value of Kana's common stock......................... $3,442,897
Fair market value of Silknet options and warrants assumed........ 522,874
Acquisition-related costs........................................ 20,700
----------
Total.......................................................... $3,986,471
==========
</TABLE>
The final purchase price is dependent on the actual number of shares of
Silknet common stock exchanged and options and warrants assumed and will be
determined on the date of the completion of the merger.
For purposes of the unaudited pro forma combined condensed financial
statements, the carrying value of the assets and liabilities, other than
deferred revenue, of Silknet approximated their preliminary estimated fair
values based upon available information. The value of the identified
intangibles, including in-process research and development, and goodwill is
based on a preliminary independent valuation. Although Kana does not expect the
final valuation of the net assets and identifiable intangibles to be acquired
to result in values that are significantly different from estimates included in
the unaudited pro forma combined condensed balance sheet, these estimates are
subject to change.
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<PAGE>
(3) Pro Forma Adjustments
Balance Sheet:
The accompanying unaudited pro forma combined condensed balance sheet
assumes the merger was completed on December 31, 1999 and reflects the
following pro forma adjustments (in thousands):
<TABLE>
<S> <C> <C>
(a) Record value of goodwill and identifiable intangibles... $3,927,274
(b) Accrue for acquisition-related costs.................... 20,700
(c) Adjust Silknet's deferred revenue to fair value......... (1,800)
(d) Record par value of Kana common stock issued.. 29
Eliminate par value of Silknet's common
stock............................................ (171)
---------
Total................................................... (142)
(e) Record fair value of Kana common stock issued
and Silknet options and warrants assumed....... 3,965,742
Eliminate Silknet additional paid-in capital.. (78,929)
---------
Total................................................... 3,886,813
(f) Eliminate Silknet's deferred stock-based compensation... 572
(g) Eliminate Silknet's accumulated other comprehensive
loss.................................................... 22
(h) Record charge related to write-off of in-
process research and development............... (6,900)
Eliminate Silknet's accumulated deficit....... 28,009
---------
Total................................................... 21,109
</TABLE>
Statement of Operations:
The accompanying unaudited pro forma combined condensed statement of
operations has been prepared as if the merger was completed as of January 1,
1999 and reflects the amortization of goodwill and other identifiable
intangibles resulting from the purchase price allocation. The allocation of the
purchase price is preliminary and amounts are subject to adjustment based on
the final independent valuation of Silknet's assets. Goodwill is being
amortized over three years.
The accompanying unaudited pro forma combined condensed statement of
operations excludes the anticipated nonrecurring charge of approximately $6.9
million for in-process research and development expected to result from the
merger of Kana and Silknet.
(4) Unaudited Pro Forma Combined Earnings Per Common Share Data
The unaudited pro forma net loss per share, basic and diluted, was computed
by dividing the pro forma net loss by the weighted average number of shares of
Kana common stock outstanding after the consummation the merger, assuming an
exchange ratio of 1.66 shares of Kana common stock for each share of Silknet
common stock.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK AND COMPARISON OF STOCKHOLDER RIGHTS
When Kana and Silknet complete the merger, Silknet stockholders will become
Kana stockholders.
The following is a description of the Kana common stock to be issued in the
merger and a summary of the significant differences between the rights of
holders of Kana common stock and Silknet common stock.
Description of Kana Capital Stock
Kana's authorized capital stock consists of 100,000,000 shares of common
stock, par value $.001 per share, which will be increased to 1,000,000,000
shares if the proposal to that effect is approved at Kana's special meeting,
and 5,000,000 shares of preferred stock, par value $.001 per share.
This summary is subject to, and qualified in its entirety by, the
provisions of Kana's amended and restated certificate of incorporation where
such rights are set forth in full, and the provisions of applicable law.
Common Stock. As of February 3, 2000, there were approximately 60,782,710
shares of common stock outstanding held of record by approximately 224
stockholders. The holders of common stock are entitled to one vote for each
share held of record on all matters submitted to a vote of the holders of
common stock. Subject to preferences applicable to any then outstanding
preferred stock, holders of common stock are entitled to share ratably in all
assets remaining after payment of its liabilities and the liquidation
preference of any preferred stock. Holders of common stock have no preemptive
or subscription rights, and there are no redemption or conversion rights with
respect to such shares. All outstanding shares of common stock are fully paid
and non-assessable.
Preferred Stock. Kana's board of directors has the authority to issue
preferred stock in one or more series and to fix the number of shares
constituting any such series and the preferences, limitations and relative
rights, including dividend rights, dividend rate, voting rights, terms of
redemption, redemption price or prices, conversion rights and liquidation
preferences of the shares constituting any series, without any further vote or
action by its stockholders. The issuance of preferred stock by Kana's board of
directors could adversely affect the rights of holders of common stock.
The potential issuance of preferred stock may have the effect of delaying
or preventing a change in control of Kana, may discourage bids for Kana's
common stock at a premium over the market price of the common stock and may
adversely affect the market price of, and the voting and other rights of the
holders of, common stock. Immediately after the completion of the merger, there
will be no shares of preferred stock outstanding and Kana has no current plans
to issue shares of preferred stock.
Warrants. As of February 3, 2000, Kana had outstanding warrants to purchase
an aggregate of approximately 3,958 shares of its common stock. Warrants for
1,976 shares expire on June 25, 2004 and have an exercise price equal to $1.81.
The exercise price of these warrants is subject to certain adjustments upon
future issuances of common stock or rights to acquire common stock at a price
less than the applicable exercise price. The warrants for the remaining shares
have an average exercise price of $1.81 and expire on September 1, 2004. The
exercise price of all warrants is subject to customary adjustments on stock
splits, stock dividends, any merger or acquisition involving Kana and similar
transactions, such as to permit the holders of warrants to receive upon
exercise of the warrants that which they would have received had they exercised
the warrants immediately prior to any such transaction.
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<PAGE>
Options. As of February 3, 2000, Kana had outstanding options for
approximately 4,695,156 shares of common stock at a weighted average exercise
price of $25.89.
Registration Rights of Certain Holders. In connection with its acquisition
of Connectify, Kana has agreed to register shares of Kana's common stock issued
in the acquisition under certain circumstances. This registration right is
subject to certain limitations, including the right of the underwriters of an
offering subject to the registration to limit the number of such shares
included in the registration. In connection with Kana's acquisition of Business
Evolution and netDialog in December 1999, Kana agreed to file a registration
statement covering the resale of the shares issued in those acquisitions by
August 13, 2000.
Effect of Delaware Anti-takeover Statute. Kana is subject to Section 203 of
the Delaware General Corporation law, as amended, which prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such
stockholder became an interested stockholder, unless:
. prior to such date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned by persons who are
directors and also officers and by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
. on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines business combinations to include:
. any merger or consolidation involving the corporation and any interested
stockholder;
. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
. any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested
stockholder;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series
of the corporation beneficially owned by the interested stockholder; or
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
Certificate of Incorporation and Bylaw Provisions. Kana's certificate of
incorporation and bylaws include provisions that may have the effect of
discouraging, delaying or preventing a change
80
<PAGE>
in control of Kana or an unsolicited acquisition proposal that a stockholder
might consider favorable, including a proposal that might result in the payment
of a premium over the market price for the shares held by stockholders. See
"Comparison of Rights of Kana Stockholders and Silknet Stockholders"
immediately below.
Comparison of Rights of Kana Stockholders and Silknet Stockholders
The rights of holders of Kana common stock are governed by Delaware law,
Kana's certificate of incorporation and Kana's bylaws, while the rights of
Silknet's stockholders are governed by Delaware law, Silknet's certificate of
incorporation and Silknet's bylaws. In most respects, the rights of Silknet's
stockholders are similar to those of Kana stockholders. The following
discussion summarizes the significant differences between the companies'
charter documents. This summary is not a complete discussion of, and is
qualified by reference to, Kana's certificate of incorporation, Kana's bylaws,
Silknet's certificate of incorporation, Silknet's bylaws, and Delaware law.
Capital Stock. Silknet's certificate of incorporation provides that
Silknet's authorized capital stock consists of 50,000,000 shares of common
stock, $.01 par value, and 15,000,000 shares of preferred stock, $.01 par
value. Kana's authorized capital stock consists of 100,000,000 shares of common
stock, par value $.001 per share, which will be increased to 1,000,000,000
shares if the proposal to that effect is approved at Kana's special meeting,
and 5,000,000 shares of preferred stock, par value $.001 per share.
Classified Board. Kana's certificate of incorporation provides that the
Kana board of directors be divided into three classes with staggered three-year
terms. As a result, only one of the three classes of Kana's board of directors
will be elected each year. The classification of the Kana board has the effect
of requiring at least two annual stockholder meetings, instead of one, to
replace a majority of the members of the board of directors. The Silknet
certificate of incorporation does not provide for a classified board.
Directors. Kana's certificate of incorporation provides that the size of
Kana's board of directors shall be determined by resolution of the board of
directors, and currently consists of eight members. Subject to the rights of
the holders of any series of preferred stock then outstanding, board vacancies
resulting from any increase in the authorized number of directors or any
vacancies in the board resulting from death, resignation, removal or other
cause may be filled by the affirmative vote of a majority of the directors then
in office.
Silknet's bylaws provide that the size of Silknet's board of directors
shall be determined by resolution of the board of directors, however, there
must be at least three members on the Silknet board of directors. Silknet's
current board consists of six directors. Vacancies and newly created
directorships resulting from any increase in the authorized number of directors
may be filled by a majority of the directors then in office, though less than a
quorum, or by a sole remaining director. These provisions prevent a stockholder
from enlarging the board of directors and filling the new directorships with
such stockholder's own nominees without the approval of the Silknet board of
directors.
Directors' Committees. Kana's bylaws provide that the board of directors
may by the vote of a majority of the board of directors designate one or more
committees of the board, each comprised of one or more members of the Kana
board. To the extent provided in a resolution of Kana's board of directors,
these committees may exercise all the powers and authority of the board of
directors in the management of Kana, including, if the resolution expressly
provides, the declaration of a dividend or the issuance of stock, except that
no committee may:
. amend Kana's certificate of incorporation or bylaws;
81
<PAGE>
. adopt an agreement of merger or consolidation;
. recommend the sale, lease or exchange of all or substantially all of
Kana's assets; or
. recommend dissolution or revocation of a dissolution of Kana.
The Silknet bylaws, as amended, provide that a majority of the board of
directors may designate one or more committees of the board. To the extent
provided in a resolution of the Silknet board of directors, any committees of
the Silknet board of directors may exercise all the powers and authority of the
board in the management of the business and affairs of Silknet except that no
committee may:
. adopt, amend or repeal Silknet's bylaws, as amended, or any one of them;
or
. approve or adopt, or recommend to Silknet's stockholders any action or
matter expressly required by law to be submitted to the stockholders for
approval.
Supermajority Voting. Kana's certificate of incorporation requires the
approval of the holders of 66 2/3% of the outstanding voting stock of Kana to
effect certain amendments to the certificate of incorporation with respect to:
. the vote necessary to amend Kana's bylaws or certificate of
incorporation;
. the size, classification and method of election of the board of
directors;
. the conduct of stockholders' meetings and stockholder action by written
consent; and
. indemnification of directors, officers and others.
In addition, Kana's certificate of incorporation provides that directors
are removable by the vote of the holders of 66 2/3% of Kana's outstanding
voting capital stock. Kana's bylaws may be amended by the majority vote of the
board of directors or by the vote of the holders of 66 2/3% of Kana's
outstanding voting capital stock.
Silknet's certificate of incorporation requires the approval of the holders
of 75% of the outstanding voting stock of Silknet to amend or repeal, or to
adopt any provision inconsistent with, the certificate of incorporation with
respect to the rights, powers and privileges of the respective classes of
capital stock of Silknet.
Silknet's bylaws, as amended, require the approval of 75% of the
outstanding voting stock of Silknet to effect certain amendments to the bylaws,
with respect to the conduct of stockholders' meetings and stockholder action by
written consent.
Special Meeting of Stockholders. Kana's certificate of incorporation
provides that special meetings of stockholders of Kana may only be called by
Kana's board of directors. This provision prevents Kana stockholders from
initiating or effecting any action by calling a meeting of the stockholders.
Silknet's bylaws provide that special meetings of stockholders of Silknet
may only be called by the chairman of the board of directors, if any, a
majority of the board of directors, or Silknet's chief executive officer.
No Stockholder Action by Written Consent. Kana's certificate of
incorporation provides that Kana's stockholders may take action only at an
annual or special meeting of stockholders of Kana and shall have no right to
take any action by written consent without a meeting. Silknet's certificate of
incorporation and bylaws similarly provide that stockholder action may only be
taken at a duly called annual or special meeting of stockholders and may not be
taken by written consent. These provisions, taken together, prevent
stockholders from forcing consideration by the stockholders of stockholder
proposals over the opposition of the board of directors, except at an annual
meeting.
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<PAGE>
Notice Procedures. Kana's bylaws establish advance notice procedures with
respect to all stockholder proposals to be brought before meetings of
stockholders of Kana, including proposals relating to the nomination of
candidates for election as directors, the removal of directors and amendments
to Kana's certificate of incorporation or bylaws. These procedures provide that
such notice must contain the consent of any nominee for election to the board
of directors as well as certain information with respect to such nominee, a
brief description of and reasons for any business desired to be brought before
a meeting, the ownership interest of the proposing stockholder, and certain
other information. Generally, to be timely, notice must be received by Kana's
secretary not less than 120 days prior to the meeting.
Silknet's bylaws establish an advance notice procedure for stockholders to
make nominations of candidates for election as director, or to bring other
business before an annual meeting of Silknet's stockholders. Under the notice
procedure, Silknet must receive notice of stockholder nominations or proposals
to be made at an annual or special meeting in lieu of an annual meeting not
less than 120 days nor more than 150 days prior to the first anniversary of the
date of the proxy statement delivered to the stockholders in connection with
the preceding year's annual meeting. However, if the number of directors to be
elected to the board of directors is increased and Silknet fails to make a
public announcement naming all of the nominees for director or specifying the
size of the increased board of directors at least 70 days prior to the first
anniversary of the preceding year's annual meeting, then notice must be
received not later than the 10th day following the earlier of the day such
notice was mailed or the day such public disclosure was made. The notice will
be timely only with respect to any director nominees for any position caused by
the increase in the board of directors. Notice of stockholder nominations or
proposals to be made at a special meeting called by the board of directors for
the purpose of electing one or more directors, other than a special meeting in
lieu of an annual meeting, must be received not earlier than the 90th day prior
to such special meeting nor later than the close of business on the 60th day
prior to such special meeting or the 10th day following the earlier of the day
such notice was mailed or the day such public disclosure was made. This notice
procedure affords the board of directors an opportunity to consider the
qualifications of proposed director nominees or the merit of stockholder
proposals, and, to the extent deemed appropriate by the board of directors, to
inform stockholders about such matters. The notice procedure also provides a
more orderly procedure for conducting annual meetings of stockholders.
Silknet's bylaws, as amended, do not give the board of directors any power to
approve or disapprove stockholder nominations for the election of directors or
proposals for action. However, the notice procedure may prevent a contest for
the election of directors or the consideration of stockholder proposals. This
could deter a third party from conducting a solicitation of proxies to elect
its own slate of directors or to approve its own proposal if the proper advance
notice procedures are not followed, without regard to whether consideration of
such nominees or proposals might be harmful or beneficial to Silknet and its
stockholders.
Limitations of Liability of Directors. Kana's certificate of incorporation
eliminates, to the maximum extent allowed by the Delaware General Corporation
Law, a director's 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.
Silknet's certificate of incorporation similarly limits the liability of
Silknet's directors.
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<PAGE>
OTHER KANA PROPOSALS
Proposal to Increase Number of Authorized Shares
Kana's board of directors has approved an amendment to Kana's certificate
of incorporation to increase the number of authorized shares of common stock
from 100,000,000 to 1,000,000,000. Kana's board of directors is submitting this
amendment for stockholder approval at the Kana special meeting.
Upon the completion of the merger, Kana estimates that it will have
approximately 105,882,789 shares of common stock outstanding or reserved for
issuance. Kana's board of directors has determined that it is advisable and
necessary to increase the number of authorized shares of common stock in order
to provide Kana with sufficient shares to complete the exchange of Kana shares
for the outstanding shares of Silknet common stock in connection with the
merger and to maintain a reserve of shares sufficient to cover shares issuable
under Kana's stock plans. In addition, although Kana has no specific plans to
use the additional authorized shares of common stock, Kana's board of directors
believes that it is prudent to increase the number of authorized shares of
common stock to the proposed level in order to provide for a reserve of shares
available for issuance in connection with possible future actions. These
actions could include equity financings, business acquisitions, corporate
mergers, establishing strategic relationships with corporate partners, funding
employee benefit plans, stock splits or stock dividends, and other general
corporate purposes. However, having these additional authorized shares of
common stock available for issuance would allow the board of directors to issue
shares in the future without the delay and expense associated with seeking
shareholder approval at that time, except as required by the Nasdaq National
Market. Eliminating the delays and expense occasioned by the necessity of
obtaining stockholder approval will better enable Kana, among other things, to
engage in financing transactions and acquisitions as well as to take advantage
of changing market and financial conditions on a more competitive basis, as
determined by Kana's board of directors.
The additional shares of common stock to be authorized by adoption of the
proposed amendment would have rights identical to the currently outstanding
shares of common stock. Adoption of the proposed amendment and the future
issuance of shares of common stock would not affect the rights of the holders
of currently outstanding shares of common stock, except for effects incidental
to increases in the number of outstanding shares of common stock at the time of
any such issuances. Any future issuance of shares of common stock will be
subject to the rights of the holders of any outstanding shares of any preferred
stock which Kana may issue in the future.
Approval of this proposal requires the affirmative vote of the holders of a
majority of the outstanding shares of Kana common stock.
The Kana board of directors unanimously recommends that Kana stockholders
vote "FOR" this proposal.
Proposal to Amend Kana's 1999 Stock Incentive Plan
The Kana stockholders are being asked to approve an amendment to the 1999
Stock Incentive Plan which will (i) increase the number of shares of Kana
common stock available for issuance under the 1999 plan by an additional
10,000,000 shares, (ii) provide our compensation committee with the authority
as the plan administrator to grant options and make direct stock issuances
under the 1999 Plan with an exercise or issue price per share below the fair
market value per share of our common stock on the date of grant or issuance and
(iii) increase the limitation on the maximum number of shares by which the
share reserve under the 1999 plan is to increase each year pursuant to the
automatic share increase provisions of the plan from 4,000,000 shares to
6,000,000 shares.
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The increase to the share reserve and the size of the annual automatic
increase to that reserve will allow us to continue to utilize equity incentives
to attract and retain the services of key individuals essential to our long-
term growth and financial success. Equity incentives play a significant role in
our efforts to remain competitive in the market for talented individuals, and
we rely on such incentives as means to attract and retain highly qualified
individuals in the positions vital to our success. The ability of our
compensation committee to make below-market option grants will provide us with
additional flexibility in designing competitive equity compensation packages to
attract new executives and employees.
The following is a summary of the principal features of the 1999 plan, as
most recently amended. Any stockholder who wishes to obtain a copy of the
actual plan document may do so upon written request to us at our offices at 740
Bay Road, Redwood City, California 94063. The 1999 plan serves as the successor
to our 1997 Stock Option/Stock Issuance Plan which terminated in connection
with the initial public offering of our common stock on September 21, 1999. All
outstanding options under the 1997 plan at the time of such termination were
transferred to the 1999 plan.
Equity Incentive Programs
The 1999 plan consists of five separate equity incentive programs: (i) the
discretionary option grant program, (ii) the stock issuance program, (iii) the
salary investment option grant program, (iv) the automatic option grant program
for non-employee board members and (v) the director fee option grant program.
The principal features of each program are described below. The compensation
committee of our board of directors will have the exclusive authority to
administer the discretionary option grant and stock issuance programs with
respect to option grants and stock issuances made to our executive officers and
non-employee board members and will also have the authority to make option
grants and stock issuances under those programs to all other eligible
individuals. However, our board of directors may at any time appoint a
secondary committee of one or more board members to have separate but
concurrent authority with the compensation committee to make option grants and
stock issuances under those two programs to individuals other than executive
officers and non-employee board members. The compensation committee will also
have complete discretion to select the individuals who are to participate in
the salary investment option grant program, but all grants made to the selected
individuals will be governed by the express terms of that program.
The term plan administrator, as used in this summary, will mean our
compensation committee and any secondary committee, to the extent each such
entity is acting within the scope of its administrative authority under the
1999 plan. However, neither the compensation committee nor any secondary
committee will exercise any administrative discretion under the automatic
option grant or director fee option grant program. All grants under those
programs will be made in strict compliance with the express provisions of such
programs.
Share Reserve
At present, 21,983,100 shares of our common stock are reserved for issuance
over the term of the 1999 plan. Such share reserve consists of (i) the
9,400,000 shares initially reserved for issuance under the 1999 plan (including
the shares of our common stock subject to the outstanding options under the
predecessor 1997 plan which have been transferred to the 1999 plan) plus (ii)
the additional 2,583,100 shares added to the reserve plan on January 3, 2000
pursuant to the automatic share increase provisions of the 1999 plan plus (iii)
the 10,000,000-share increase which forms part of this proposal to Kana's
stockholders.
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The number of shares of our common stock available for issuance under the
1999 plan will automatically increase on the first trading day of January each
calendar year, beginning with calendar year 2000, by an amount equal to 4.25%
of the total number of shares of our outstanding common stock on the last
trading day in December of the immediately preceding calendar year, but in no
event will any such annual increase exceed 6,000,000 shares. Should the
stockholders not approve this proposal, then the limit on such annual increase
will remain at 4,000,000 shares.
No participant in the 1999 plan may receive option grants, separately
exercisable stock appreciation rights or direct stock issuances for more than
2,000,000 shares of our common stock in total per calendar year, subject to
adjustment for subsequent stock splits, stock dividends and similar
transactions. Stockholder approval of this proposal will also constitute
approval of that 2,000,000-share limitation for purposes of Internal Revenue
Code Section 162(m).
The shares of common stock issuable under the 1999 plan may be drawn from
shares of Kana's authorized but unissued common stock or from shares of Kana's
common stock which it acquires, including shares purchased on the open market.
Shares subject to any outstanding options under the 1999 plan (including
options transferred from the 1997 plan) which expire or otherwise terminate
prior to exercise will be available for subsequent issuance. Unvested shares
issued under the 1999 plan and subsequently purchased by Kana, at the option
exercise or direct issue price paid per share, pursuant to Kana's purchase
rights under the 1999 plan will be added back to the number of shares reserved
for issuance under the 1999 plan and will accordingly be available for
subsequent issuance. However, any shares subject to stock appreciation rights
exercised under the 1999 plan will not be available for reissuance.
Eligibility
Officers and employees, non-employee board members and independent
consultants in Kana's service or in the service of any parent and subsidiary
companies (whether now existing or subsequently established) will be eligible
to participate in the discretionary option grant and stock issuance programs.
Kana's executive officers and other highly paid employees will also be eligible
to participate in the salary investment option grant program. Participation in
the automatic option grant and director fee option grant programs will be
limited to the non-employee members of Kana's board of directors.
As of March 1, 2000, approximately 650 employees, including thirteen (13)
executive officers and six (6) non-employee board members, were eligible to
participate in the discretionary option grant and stock issuance programs. The
thirteen (13) executive officers were also eligible to participate in the
salary investment option grant program, and the six (6) non-employee board
members were also eligible to participate in the automatic option grant and
director fee option grant programs.
Valuation
The fair market value per share of Kana's common stock on any relevant date
under the 1999 plan will be deemed to be equal to the closing selling price per
share on that date on the Nasdaq National Market. On March 1, 2000, the fair
market value per share of Kana's common stock determined on such basis was
$145.0625.
Discretionary Option Grant Program
The plan administrator will have complete discretion under the
discretionary option grant program to determine which eligible individuals are
to receive option grants, the time or times when
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those grants are to be made, the number of shares subject to each such grant,
the status of any granted option as either an incentive stock option or a non-
statutory option under the federal tax laws, the vesting schedule (if any) to
be in effect for the option grant and the maximum term for which any granted
option is to remain outstanding.
Each granted option will have an exercise price per share determined by the
plan administrator, and that price may be set at a dollar amount less than,
equal to or greater than the fair market value of the option shares on the
grant date. Prior to the amendment which is the subject of this proposal, all
options had to have an exercise price not less than the fair market value of
the option shares on the grant date.
No granted option may have a term in excess of ten years. The shares
subject to each option will generally vest in one or more installments over a
specified period of service measured from the grant date. However, one or more
options may be structured so that they will be immediately exercisable for any
or all of the option shares. The shares acquired under such immediately
exercisable options will be subject to repurchase by us, at the exercise price
paid per share, if the optionee ceases service prior to vesting in those
shares.
Upon cessation of service, the optionee will have a limited period of time
in which to exercise his or her outstanding options to the extent exercisable
for vested shares. The plan administrator will have complete discretion to
extend the period following the optionee's cessation of service during which
his or her outstanding options may be exercised and/or to accelerate the
exercisability or vesting of such options in whole or in part. Such discretion
may be exercised at any time while the options remain outstanding, whether
before or after the optionee's actual cessation of service.
The plan administrator is authorized to issue tandem stock appreciation
rights under the discretionary option grant program which will provide the
holders with the right to surrender their options to us for an appreciation
distribution. The amount of the distribution payable by us will be equal to the
excess of (a) the fair market value of the vested shares of our common stock
subject to the surrendered option over (b) the aggregate exercise price payable
for those shares. Such appreciation distribution may, at the discretion of the
plan administrator, be made in cash or in shares of our common stock.
The plan administrator will also have the authority to effect the
cancellation of outstanding options under the discretionary option grant
program (including options transferred from the 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.
Salary Investment Option Grant Program
Our compensation committee will have complete discretion in implementing
the salary investment option grant program for one or more calendar years and
in selecting the executive officers and other eligible individuals who are to
participate in the program for those years. As a condition to such
participation, each selected individual must, prior to the start of the
calendar year of participation, file with the compensation committee an
irrevocable authorization directing us to reduce his or her base salary for the
upcoming calendar year by a specified dollar amount not less than $10,000 nor
more than $50,000 and to apply that amount to the acquisition of a special
option grant under the program.
Each selected individual who files such a timely election will
automatically be granted a non-statutory option on the first trading day in
January of the calendar year for which that salary reduction is to be in
effect. Stockholder approval of this proposal will also constitute pre-approval
of each option granted under the salary investment option grant program and the
subsequent exercise of that option in accordance with the terms of the program
summarized below.
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The number of shares subject to each such option will be 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, and the exercise price will be
equal to one-third of the fair market value of the option shares on the grant
date. As a result, the total spread on the option shares at the time of grant
(the fair market value of the option shares on the grant date less the
aggregate exercise price payable for those shares) will be equal to the amount
by which the optionee's salary is to be reduced for the calendar year. In
effect, the salary reduction serves as a prepayment, as of the time of the
option grant, of two-thirds of the then current market price of the shares of
common stock subject to the option.
The option will become exercisable in a series of twelve equal monthly
installments upon the optionee's completion of each month of service in the
calendar year for which the salary reduction is in effect and will become
immediately exercisable for all the option shares on an accelerated basis
should Kana experience certain changes in ownership or control. Each option
will remain exercisable for any vested shares until the earlier of (i) the
expiration of the ten-year option term or (ii) the end of the three-year period
measured from the date of the optionee's cessation of service.
Stock Issuance Program
Shares may be issued under the stock issuance program at a price per share
determined by the plan administrator, and such price may be less than, equal to
or greater than the fair market value of the shares at the time of issuance.
The issue price may be paid in cash or through a full-recourse promissory note.
Shares may also be issued as a bonus for past services without any cash outlay
required of the recipient. Shares may also be issued under the program pursuant
to share right awards which entitle the recipients to receive those shares upon
the attainment of designated performance goals. The plan administrator will
have complete discretion under the program to determine which eligible
individuals are to receive such stock issuances or share right awards, the time
or times when those issuances or awards are to be made, the number of shares
subject to each such issuance or award, the consideration (if any) to be paid
for the issued shares and the vesting schedule to be in effect for the stock
issuance or share rights award.
The issued shares may be fully and immediately vested upon issuance or may
vest upon the completion of a designated service period or the attainment of
pre-established performance goals. The plan administrator will, however, have
the discretionary authority at any time to accelerate the vesting of any and
all unvested shares outstanding under the stock issuance program.
Outstanding share right awards under the program will automatically
terminate, and no shares will actually be issued in satisfaction of those
awards, if the performance goals established for such awards are not attained.
The plan administrator, however, will have the discretionary authority to issue
shares of Kana's common stock in satisfaction of one or more outstanding share
right awards as to which the designated performance goals are not attained.
Automatic Option Grant Program
Under the automatic option grant program, eligible non-employee members of
Kana's board of directors will receive a series of option grants over their
period of board service. Each new non-employee board member will, at the time
of his or her initial election or appointment to the board, receive an option
grant for 40,000 shares of Kana's common stock, provided such individual has
not previously been in Kana's employ. On the date of each annual stockholders
meeting, each individual who is to continue to serve as a non-employee board
member will automatically be granted an option to purchase 10,000 shares of
Kana's common stock, provided he or she has served as a non-employee board
member for at least six months.
There will be no limit on the number of such 10,000-share annual option
grants any one eligible non-employee board member may receive over his or her
period of continued board service, and
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non-employee board members who have previously been in Kana's employ will be
eligible to receive one or more such annual option grants over their period of
board service.
Stockholder approval of this proposal will also constitute pre-approval of
each option granted under the automatic option grant program on or after the
date of the special meeting and the subsequent exercise of each such option in
accordance with the terms of the program summarized below.
Each automatic grant will have an exercise price per share equal to the
fair market value per share of Kana's common stock on the grant date and will
have a maximum term of 10 years, subject to earlier termination following the
optionee's cessation of board service. Each automatic option will be
immediately exercisable for all of the option shares. However, any unvested
shares purchased under such option will be subject to repurchase by Kana, at
the exercise price paid per share, should the optionee cease board service
prior to vesting in those shares. The shares subject to each initial 40,000-
share automatic option grant will vest in a series of 8 successive equal semi-
annual installments upon the optionee's completion of each 6-month period of
board service over the 48-month period measured from the grant date. However,
the shares subject to each such initial option grant will immediately vest in
full upon certain changes in control or ownership or upon the optionee's death
or disability while a board member. The shares subject to each annual 10,000-
share automatic grant will be fully vested at the time of the option grant.
Following the optionee's cessation of board service for any reason, each
automatic option grant will remain exercisable for a 12-month period and may be
exercised during that time for any or all shares in which the optionee is
vested at the time of such cessation of board service.
Director Fee Option Grant Program
The plan administrator will have complete discretion in implementing the
director fee option grant program for one or more calendar years. If the
program is implemented, each non-employee board member may elect, prior to the
start of each calendar year, to apply all or any portion of any annual retainer
fee otherwise payable in cash for his or her period of service on the board for
that year to the acquisition of a below-market option grant. The option grant
will be a nonstatutory option and will automatically be made on the first
trading day in January in the calendar year for which an election is in effect.
The option will have a maximum term of 10 years measured from the grant date
and an exercise price per share equal to one-third of the fair market value of
the option shares on such date. The number of shares subject to each option
will be determined by dividing the amount of the retainer fee applied to the
acquisition of that option by two-thirds of the fair market value per share of
Kana's common stock on the grant date. As a result, the total spread on the
option (the fair market value of the option shares on the grant date less the
aggregate exercise price payable for those shares) will be equal to the portion
of the retainer fee applied to the acquisition of the option.
Stockholder approval of this proposal will also constitute pre-approval of
each option granted under the director fee option grant program and the
subsequent exercise of the option in accordance with the terms of the program
summarized below.
The option will become exercisable in a series of 12 successive equal
monthly installments upon the optionee's completion of each month of board
service in the calendar year for which the director fee election is in effect,
subject to full and immediate acceleration upon certain changes in control or
ownership or upon the optionee's death or disability while a board member. Each
option granted under the program will remain exercisable for vested shares
until the earlier of the expiration of the ten-year option term or the
expiration of the three-year period measured from the date of the optionee's
cessation of board service.
Limited Stock Appreciation Rights
Limited stock appreciation rights may be granted under the discretionary
option grant program to one or more of Kana's officers or non-employee board
members as part of their option grants, and
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each option granted under the salary investment option grant, automatic option
grant and director fee option grant program will automatically include such a
limited stock appreciation right. Upon the successful completion of a hostile
tender offer for more than 50% of Kana's outstanding voting securities or a
change in a majority of Kana's board of directors as a result of one or more
contested elections for board membership, each outstanding option with a
limited stock appreciation right may be surrendered to Kana in return for a
cash distribution. The amount of the distribution per surrendered option share
will be equal to the excess of (i) the fair market value per share at the time
the option is surrendered or, if greater, the tender offer price paid per share
in the hostile take-over over (ii) the exercise price payable per share under
the surrendered option.
Stockholder approval of this proposal will also constitute pre-approval of
each limited stock appreciation right granted under the salary investment
option grant, automatic option grant or director fee option grant program on or
after the date of the special meeting and the subsequent exercise of that right
in accordance with the foregoing terms.
Predecessor Plan
All outstanding options under the predecessor 1997 plan which were
transferred to the 1999 plan will continue to be governed by the terms of the
agreements evidencing those options, and no provision of the 1999 plan will
affect or otherwise modify the rights or obligations of the holders of the
transferred options with respect to their acquisition of our common stock.
However, the plan administrator has complete discretion to extend one or more
provisions of the 1999 plan to the transferred options, to the extent those
options do not otherwise contain such provisions.
Stock Awards
The table below shows, as to Kana's Chief Executive Officer, Kana's four
other most highly compensated executive officers (with base salary and bonus
for the 1999 fiscal year in excess of $100,000) and the other individuals and
groups indicated, the number of shares of common stock subject to option grants
made under the 1999 plan from September 21, 1999, the effective date of the
1999 plan, through March 1, 2000, together with the weighted average exercise
price payable per share. Kana has not made any direct stock issuances to date
under the 1999 plan.
OPTION TRANSACTIONS
<TABLE>
<CAPTION>
Number of Shares Weighted Average
Underlying Exercise Price
Name and Position Options Granted (#) per Share ($)
----------------- ------------------- ----------------
<S> <C> <C>
Michael J. McCloskey, Chief Executive
Officer................................. -- $ --
Mark S. Gainey, President................ -- $ --
Joseph D. McCarthy, Vice President,
Finance and Operations.................. -- $ --
Paul R. Holland, Vice President,
Worldwide Sales......................... 150,000 $129.6875
William R. Phelps, Vice President,
Professional Services................... 150,000 $129.6875
All current executive officers as a group
(13).................................... 1,250,000 $129.6875
David Beirne, Director................... -- $ --
Robert W. Frick, Director................ -- $ --
Eric A. Hahn, Director................... -- $ --
Charles A. Holloway, Ph.D., Director..... 60,000 $ 7.50
Steven T. Jurvetson, Director............ -- $ --
Ariel Poler, Director.................... -- $ --
All current non-employee directors as a
group (6 persons)....................... 60,000 $ 7.50
All employees, including current officers
who are not executive officers, as a
group................................... 6,652,174 $ 93.1031
</TABLE>
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As of March 1, 2000, 6,507,174 shares of Kana's common stock were subject
to outstanding options under the 1999 plan, none of these shares have been
issued under the 1999 plan, and 15,475,926 shares remained available for future
issuance, assuming stockholder approval of the 10,000,000 share increase which
forms part of this proposal.
New Plan Benefits
No options have been granted to date under the 1999 plan on the basis of
the share increase which forms part of this proposal.
Special Stock Option Plan
Kana's Special Stock Option Plan was implemented by the board of directors
in December 1999, and 1,000,000 shares of Kana's common stock have been
reserved for issuance under this plan. The shares will be made available from
Kana's authorized but unissued shares of common stock or from any common stock
we repurchase. Participation in the special plan is limited to (i) officers who
receive their option grant under the plan in connection with their commencement
of employment with Kana, whether as a result of Kana's acquisition of their
former employer or by reason of their initial hire, and (ii) employees who are
neither officer nor directors at the time of the option grant. All options
granted under the special plan will be non-statutory options under the federal
tax laws and will not have a term in excess of ten years. Kana's compensation
committee will serve as the plan administrator and will have the discretion to
grant options under the special plan with an exercise price less than, equal to
or greater than the fair market value of the option shares on the grant date.
The remaining terms and provisions of the special plan are substantially the
same as those in effect for the discretionary option grant program of Kana's
1999 plan. As of March 1, 2000, options for 738,264 shares of Kana's common
stock were outstanding under the special plan with a weighted average exercise
price of $15 per share, no options had been exercised, and 261,736 shares
remained available for future option grant.
General Provisions
Acceleration
In the event Kana should undergo a change in control, each outstanding
option under the discretionary option grant program will automatically
accelerate in full, unless assumed or otherwise continued in effect by the
successor corporation or replaced with a cash incentive program which preserves
the spread existing on the unvested option shares (the excess of the fair
market value of those shares over the option exercise price payable for such
shares) and provides for subsequent payout in accordance with the same vesting
schedule in effect for those option shares. In addition, all unvested shares
outstanding under the discretionary option grant and stock issuance programs
will immediately vest, except to the extent Kana's repurchase rights with
respect to those shares are to be assigned to the successor corporation or
otherwise continued in effect. The plan administrator will have complete
discretion to grant one or more options under the discretionary option grant
program which will become exercisable for all the option shares in the event
the optionee's service with Kana or the successor entity is terminated
(actually or constructively) within a designated period following a change in
control transaction in which those options are assumed or otherwise continued
in effect. The vesting of outstanding shares under the stock issuance program
may also be structured to accelerate upon similar terms and conditions.
The plan administrator will have the discretion to structure one or more
option grants under the discretionary option grant program so that those
options will vest immediately vest upon a change in control, whether or not the
options are to be assumed or otherwise continued in effect. The plan
administrator may also structure stock issuances under the stock issuance
program so that those
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issuances will immediately vest upon a change in control. The shares subject to
each option under the salary investment option grant, automatic option grant
and director fee option grant programs will immediately vest upon any change in
control transaction.
A change in control will be deemed to occur in the event (i) Kana is
acquired by merger or asset sale, (ii) there is a successful tender offer for
more than 50% of Kana's outstanding voting stock or (iii) there is a change in
the majority of the board effected through one or more contested elections for
board membership.
Currently outstanding options under the 1999 Plan contain a special
acceleration provision pursuant to which 25% of the unvested shares purchased
or purchasable under each such option will immediately vest in the event Kana
is acquired by a merger or asset sale and the optionee is not offered
employment with the successor entity.
The acceleration of vesting in the event of such a change in control may be
seen as an anti-takeover provision and may have the effect of discouraging a
merger proposal, a takeover attempt or other efforts to gain control of Kana.
Stockholder Rights and Option Transferability
No optionee will have any stockholder rights with respect to the option
shares until the optionee has exercised the option and paid the exercise price
for the purchased shares. Options are not assignable or transferable other than
by will or the laws of inheritance following optionee's death, and during the
optionee's lifetime, the option may only be exercised by the optionee. However,
non-statutory options may be transferred or assigned during optionee's lifetime
to one or more members of the optionee's family or to a trust established for
one or more such family members or to the optionee's former spouse, to the
extent such transfer is in connection with the optionee's estate or pursuant to
a domestic relations order.
Changes in Capitalization
In the event any change is made to the outstanding shares of Kana's common
stock by reason of any recapitalization, stock dividend, stock split,
combination of shares, exchange of shares or other change in corporate
structure effected without Kana's receipt of consideration, appropriate
adjustments will be made to (i) the maximum number and/or class of securities
issuable under the 1999 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 1999
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, (v) the number and/or class of securities and the exercise price per
share in effect under each outstanding option transferred from the 1997 plan to
the 1999 plan and (vi) the maximum number and/or class of securities by which
the share reserve under the 1999 plan is to increase automatically each year.
Such adjustments will be designed to preclude any dilution or enlargement of
benefits under the 1999 plan or the outstanding options thereunder.
Financial Assistance
The plan administrator may institute a loan program to assist one or more
participants in financing the exercise of outstanding options under the
discretionary option grant program or the purchase of shares under the stock
issuance program through full-recourse interest-bearing promissory notes.
However, the maximum amount of financing provided any participant may not
exceed the cash consideration payable for the issued shares plus all applicable
taxes incurred in connection with the acquisition of those shares.
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Special Tax Election
The plan administrator may provide one or more holders of options or
unvested share issuances under the 1999 plan with the right to have Kana
withhold a portion of the shares otherwise issuable to these individuals in
satisfaction of the withholding taxes to which these individuals become subject
in connection with the exercise of those options or the vesting of those
shares. Alternatively, the plan administrator may allow these individuals to
deliver previously acquired shares of common stock in payment of the
withholding tax liability.
Amendment and Termination
The board may amend or modify the 1999 plan at any time, subject to any
required stockholder approval pursuant to applicable laws and regulations.
Unless sooner terminated by the board, the 1999 plan will terminate on the
earliest of (i) June 30, 2009, (ii) the date on which all shares available for
issuance under the 1999 plan have been issued as fully-vested shares or (iii)
the termination of all outstanding options in connection with changes in
control or ownership.
Federal Income Tax Consequences
Option Grants
Options granted under the 1999 plan may be either incentive stock options
which satisfy the requirements of Section 422 of the Internal Revenue Code or
non-statutory options which are not intended to meet such requirements. The
Federal income tax treatment for the two types of options differs as follows:
Incentive Options. No taxable income is recognized by the optionee at the
time of the option grant, and no taxable income is generally recognized at the
time the option is exercised. The optionee will, however, recognize taxable
income in the year in which the purchased shares are sold or otherwise made the
subject of a taxable disposition. For Federal tax purposes, dispositions are
divided into two categories: (i) qualifying and (ii) disqualifying. A
qualifying disposition occurs if the sale or other disposition is made more
than two (2) years after the date the option for the shares involved in such
sale or disposition is granted and more than one (1) year after the date the
option is exercised for those shares. If the sale or disposition occurs before
these two periods are satisfied, then a disqualifying disposition will result.
Upon a qualifying disposition, the optionee will recognize long-term
capital gain in an amount equal to the excess of (i) the amount realized upon
the sale or other disposition of the purchased shares over (ii) the exercise
price paid for the shares. If there is a disqualifying disposition of the
shares, then the excess of (i) the fair market value of those shares on the
exercise date over (ii) the exercise price paid for the shares will be taxable
as ordinary income to the optionee. Any additional gain or loss recognized upon
the disposition will be recognized as a capital gain or loss by the optionee.
If the optionee makes a disqualifying disposition of the purchased shares,
then Kana will be entitled to an income tax deduction, for the taxable year in
which such disposition occurs, equal to the excess of (i) the fair market value
of such shares on the option exercise date over (ii) the exercise price paid
for the shares. If the optionee makes a qualifying disposition, then Kana will
not be entitled to any income tax deduction.
Non-Statutory Options. No taxable income is recognized by an optionee upon
the grant of a non-statutory option. The optionee will in general recognize
ordinary income, in the year in which the option is exercised, equal to the
excess of the fair market value of the purchased shares on the exercise date
over the exercise price paid for the shares, and the optionee will be required
to satisfy the tax withholding requirements applicable to such income.
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If the shares acquired upon exercise of the non-statutory option are
unvested and subject to repurchase by us in the event of the optionee's
termination of service prior to vesting in those shares, then the optionee will
not recognize any taxable income at the time of exercise but will have to
report as ordinary income, as and when our repurchase right lapses, an amount
equal to the excess of (i) the fair market value of the shares on the date the
repurchase right lapses over (ii) the exercise price paid for the shares. The
optionee may, however, elect under Section 83(b) of the Internal Revenue Code
to include as ordinary income in the year of exercise of the option an amount
equal to the excess of (i) the fair market value of the purchased shares on the
exercise date over (ii) the exercise price paid for such shares. If the Section
83(b) election is made, the optionee will not recognize any additional income
as and when the repurchase right lapses.
Kana will be entitled to an income tax deduction equal to the amount of
ordinary income recognized by the optionee with respect to the exercised non-
statutory option. The deduction will in general be allowed for Kana's taxable
year in which ordinary income is recognized by the optionee.
Stock Appreciation Rights
No taxable income is recognized upon receipt of a stock appreciation right.
The holder will recognize ordinary income, in the year in which the stock
appreciation right is exercised, in an amount equal to the excess of the fair
market value of the underlying shares of common stock on the exercise date over
the base price in effect for the exercised right, and the holder will be
required to satisfy the tax withholding requirements applicable to such income.
Kana will be entitled to an income tax deduction equal to the amount of
ordinary income recognized by the holder in connection with the exercise of the
stock appreciation right. The deduction will be allowed for Kana's taxable year
in which ordinary income is recognized.
Direct Stock Issuances
The tax principles applicable to direct stock issuances under the 1999 plan
will be substantially the same as those summarized above for the exercise of
non-statutory option grants.
Deductibility of Executive Compensation
Kana anticipates that any compensation deemed paid by it in connection with
the disqualifying disposition of incentive stock option shares or the exercise
of non-statutory options with exercise prices equal to the fair market value of
the option shares on the grant date will qualify as performance-based
compensation for purposes of Code Section 162(m) and will not have to be taken
into account for purposes of the $1 million limitation per covered individual
on the deductibility of the compensation paid to certain of Kana's executive
officers. Accordingly, all compensation deemed paid with respect to those
options will remain deductible by us without limitation under Code Section
162(m). However, any compensation deemed paid by Kana in connection with the
exercise of options granted to those executive officers with a below-market
exercise price will not qualify as performance-based compensation and will be
subject to the $1 million per person limitation on the deductibility of the
compensation paid to those officers.
Accounting Treatment
Option grants under the discretionary option grant and automatic option
grant programs with exercise prices equal to the fair market value of the
option shares on the grant date will not result in any direct charge to Kana's
reported earnings. However, the fair value of those options is required to be
disclosed in the notes to Kana's financial statements, and Kana must also
disclose, in footnotes to its financial statements, the pro-forma impact those
options would have upon its reported earnings
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were the fair value of those options at the time of grant treated as a
compensation expense. In addition, the number of outstanding options may be a
factor in determining Kana's earnings per share on a fully-diluted basis.
Option grants or stock issuances made under the 1999 plan with exercise or
issue prices less than the fair market value of the shares on the grant or
issue date will result in compensation expense to Kana in an amount equal to
the excess of the fair market value over the exercise or issue price. The
expense must be amortized against Kana's earnings over the period that the
option shares or issued shares are to vest. Option grants made to non-employee
consultants (but not non-employee board members) will result in a direct charge
to Kana's reported earnings based upon the fair value of the option measured
initially as of the grant date and then subsequently on the vesting date of
each installment of the underlying option shares. The charge will accordingly
include the appreciation in the value of the option shares over the period
between the grant date of the option and the vesting date of each installment
of the option shares.
On March 31, 1999, the Financial Accounting Standards Board issued an
Exposure Draft of a proposed interpretation of APB Opinion No. 25, "Accounting
for Stock Issued to Employees." Under the proposed interpretation, as modified
on August 11, 1999, any options which are repriced after December 15, 1998 will
also trigger a direct charge to Kana's reported earnings measured by the
appreciation in the value of the underlying shares between the grant of the
repriced option (or, if later, the effective date of the final interpretation)
and the date the repriced option is exercised for those shares.
Should one or more individuals be granted tandem stock appreciation rights
under the 1999 plan, then these rights would result in a compensation expense
to be charged against Kana's reported earnings. Accordingly, at the end of each
fiscal quarter, the amount (if any) by which the fair market value of the
shares of common stock subject to these outstanding stock appreciation rights
has increased from the prior quarter-end would be accrued as compensation
expense, to the extent the fair market value is in excess of the aggregate
exercise price in effect for those rights.
Vote Required
The affirmative vote of at least a majority of the shares of common stock
present in person or by proxy at the special meeting and entitled to vote is
required for approval of the amendment to the 1999 plan. Should such
stockholder approval not be obtained, then the 10,000,000-share increase to the
share reserve under the 1999 plan will not be implemented, and option grants
and direct stock issuances with exercise or issue prices below the fair market
value of Kana's shares on the grant or issue date will not be permitted. In
addition, the limit on the number of shares by which the share reserve is to
increase each year will not be increased from 4,000,000 shares to 6,000,000
shares in the absence of such stockholder approval. The 1999 plan will,
however, continue in effect, and option grants and direct stock issuances may
continue to be made under the 1999 plan until all the shares of common stock
available for issuance under the 1999 plan, as in effect prior to the share
increases which are the subject of this proposal, have been issued pursuant to
option grants and direct stock issuances.
Recommendation of the Board of Directors
KANA'S BOARD OF DIRECTORS DEEMS THIS PROPOSAL TO BE IN THE BEST INTERESTS
OF THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS A VOTE "FOR" APPROVAL OF
SUCH PROPOSAL.
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MARKET PRICE INFORMATION
Kana Market Price Data
Kana's common stock has traded on the Nasdaq National Market under the
symbol "KANA" since September 22, 1999. The following table sets forth the high
and low sales prices reported on the Nasdaq National Market for Kana common
stock for the periods indicated.
<TABLE>
<CAPTION>
High Low
------- ------
<S> <C> <C>
Fiscal Year Ended December 31, 1999
Third Quarter (commencing on September 22, 1999)............ $ 26.13 $22.78
Fourth Quarter.............................................. 122.50 24.03
Fiscal Year Ending December 31, 2000
First Quarter (through February 4, 2000).................... 142.38 76.75
</TABLE>
Silknet Market Price Data
Silknet's common stock has traded on the Nasdaq National Market under the
symbol "SILK" since May 5, 1999. The following table sets forth the high and
low sales prices reported on the Nasdaq National Market for Silknet common
stock for the periods indicated.
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
Fiscal Year Ended June 30, 1999
Fourth Quarter (from May 5, 1999)............................. $ 52.38 $ 15.63
Fiscal Year Ending June 30, 2000
First Quarter 1999............................................ 52.50 21.63
Second Quarter 1999........................................... 177.94 44.63
Third Quarter (through February 4, 2000)...................... 177.00 104.63
</TABLE>
Recent Closing Prices
On February 4, 2000, the last trading day before announcement of the
proposed merger, the closing price per share of Kana common stock on the Nasdaq
National Market was $129.44, and the closing price per share of Silknet common
stock on the Nasdaq National Market was $138.50. On January 31, 2000, five
business days before announcement of the proposed merger, the closing price per
share of Kana common stock on the Nasdaq National Market was $124.97 and the
closing price per share of Silknet common stock on the Nasdaq National Market
was $147.63. On March 9, 2000, the latest practicable trading day before the
printing of this joint proxy statement/prospectus, the closing prices per share
of Kana common stock and Silknet common stock on the Nasdaq National Market
were $169.63 and $275.86, respectively.
Because the market price of Kana common stock is subject to fluctuation,
the market value of the shares of Kana common stock that holders of Silknet
common stock will receive in the merger may increase or decrease prior to and
following the merger. Stockholders are urged to obtain current market
quotations for Kana common stock and Silknet common stock. No assurance can be
given as to the future prices or markets for Kana common stock or Silknet
common stock.
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INFORMATION ABOUT KANA
The following section contains forward-looking statements which involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including those set forth in "Risk Factors" and elsewhere in this joint proxy
statement/prospectus.
Overview
Kana develops, markets and supports customer communication software
products and services for e-Businesses. Kana defines e-Businesses as companies
that leverage the reach and efficiency of the Internet to enhance their
competitive market position, from Internet start-ups to the largest 2,000
companies in the world, commonly known as the "Global 2000". Kana's 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
Kana's 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, Kana enables e-Businesses to enhance customer relationships,
generate additional revenue opportunities and reduce the cost of online
communications.
Kana's software, which consists of applications built upon Kana's
technology platform, is designed with a web-based architecture. By web-based,
Kana means that its software design is based on the unique characteristics of
the Internet and uses industry standards, such as the Java programming
language, Hypertext Mark-up Language (HTML), and Extensible Mark-up Language
(XML). This web-based architecture allows Kana's products to facilitate
scaleability and the integration of Kana's platform with other e-Business and
legacy systems. By integrating with databases and other enterprise systems,
Kana's technology platform functions as the online customer communications
infrastructure for e-Businesses.
Kana offers its products on both a license and a hosted basis. Kana also
offers implementation, customization and maintenance services to support its
customers. Kana On-Line, Kana's 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.
On December 3, 1999, Kana closed a merger with Business Evolution pursuant
to which Business Evolution became Kana's wholly-owned subsidiary. Business
Evolution develops, markets and supports real-time and e-mail based customer
communications software for e-Businesses. Business Evolution's software enables
e-Businesses to communicate with potential and existing customers through e-
mail and real-time world wide web based applications. By using Business
Evolution's software, e-businesses can enhance customer relationships and
minimize lost sales. Business Evolution was based in Princeton, New Jersey, and
had 66 employees at the time of the merger.
On December 3, 1999, Kana closed a merger with netDialog pursuant to which
netDialog became Kana's wholly-owned subsidiary. netDialog develops, markets
and supports internet based
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self-service customer communications software for e-Businesses. netDialog's
software enables e-Businesses to assemble customer experience to better
communicate with potential and existing customers through world wide web based
applications. By using netDialog's software, e-businesses can enhance customer
relationships and minimize lost sales. netDialog was based in San Mateo,
California, and had 45 employees at the time of the merger.
Kana's objective is to become the leading provider of online customer
communication software products and services for e-Businesses. To achieve its
objective, Kana intends to expand its products to enter new markets, increase
its global distribution capabilities and alliances, leverage its hosted
application service and continue to emphasize customer advocacy and
satisfaction.
Kana's customers range from Global 2000 companies pursuing an e-Business
strategy to rapidly growing Internet companies. As of December 31, 1999, each
of more than 35 customers had ordered at least $110,000 of Kana's products and
services, including:
<TABLE>
<S> <C> <C>
. eBay Inc. . Ameritrade . Telstra
. eToys Inc. . Kodak . Paine Webber
. Chase Manhattan Bank . Gap
. American Airlines . barnesandnoble.com
</TABLE>
No customer accounted for 10% or more of Kana's total revenues in 1998 or
1999.
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
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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.
Kana believes that in order for companies to compete effectively in today's
rapidly changing e-Business environment, it must differentiate itself 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.
The Kana Solution
Kana's 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 On-Line, Kana's web-based service, offers the Kana solution on a
hosted basis.
Kana believes its products and services provide the following business
benefits:
Increased Revenue Opportunities. Kana's 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:
. proactively market and sell existing products and services in a
targeted, individualized fashion using outbound messaging campaigns;
. sell additional products and services, such as product upgrades, during
the response process; 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. Kana's 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. Kana believes 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. Kana's products and
services reduce the operating and information technology costs of e-Businesses
by increasing the efficiency
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and effectiveness of online customer communications. For instance, an e-
Business using Kana's 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.
Kana's products use a combination of automation, business process and
artificial intelligence workflow and advanced messaging analysis technologies
to allow e-Businesses to deliver information and respond to customer messages
rapidly and accurately, which can increase the effectiveness of messages
delivered, decrease the number of repeat inquiries received and increase the
efficiency of users. Kana's 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, Kana's hosted web-based service, Kana On-Line, allows e-Businesses to
utilize a customized Kana product while minimizing information technology
infrastructure costs.
In addition to these business benefits, Kana's products and services differ
from those of Kana's competitors, and as a result of the following Kana
believes they enable it to deliver superior value to e-Businesses:
Advanced Architecture. Kana's software features a scaleable, web-based
architecture that incorporates industry standards.
. Web-Based. Kana's software is based upon a web-based architecture that
supports multiple hardware and software platforms and browser-based
interfaces. Kana's software runs on multiple hardware platforms
simultaneously in order to enhance scaleability. In addition, Kana's
software is readily deployable and performs in demanding operating
environments.
. Scaleable. Kana's architecture scales to accommodate large numbers of
transactions and concurrent users. For example, by deploying Kana's
advanced message classification technologies, e-Businesses can more
effectively categorize customer messages, automate responses and
increase message volume. Kana's architecture also scales to accommodate
new functionalities and applications that may be required by e-
Businesses.
. Open and Standards-Based. Kana's software supports open industry
standards such as the Java programming language, Hypertext Mark-up
Language (HTML) 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. Kana's software is designed to optimize
workflow, information and communications associated with online customer
communications. Kana's software can be configured to trigger not only a
message delivery and response but also other actions within an
organization. For example, Kana's 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.
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. Enhanced Productivity. Kana's 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. Kana's software also
provides one-click access to customer histories and all previous
communications so that users can accurately target customers and 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. Kana's 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,
understanding customer interests and responses, 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. Kana's software enables e-Businesses to
classify and respond to customer messages rapidly and accurately with
the desired level of human intervention. Kana is developing advanced
message classification technologies that significantly increase the
efficiency of the message management process. e-Businesses experiencing
a high volume of inbound messages can choose the level of automation
appropriate for their needs, including routing a message to a particular
queue or user for response, categorizing a message for a fully automated
response or allowing the creation of a fully personalized response to
the inquiry.
The Kana Strategy
Kana's objective is to become the leading provider of mission-critical
online customer communication software products and services for e-Businesses.
The key elements of Kana's strategy include:
Extend Market Leadership Position. Kana's objective is to extend its
position as a leader in the e-Business software market for managing online
customer communications by leveraging its suite of software applications and
establishing itself as the solution of choice. Kana intends to take advantage
of its technological leadership, strategic customer base and distribution
capabilities to extend its current position as a market leader. Moreover, Kana
believes that, by broadening its platform and suite of applications, it can
expand its market opportunities and solidify its position as a leading provider
of comprehensive e-Business products and services.
Expand Kana's Suite of Products to Enter New Markets. Kana intends to
expand its suite of products to include additional e-commerce and content
management applications in order to enter new markets. In developing these
applications, Kana is working with its customers to identify the strategic and
functional needs of e-Businesses that operate in the rapidly changing Internet
environment. Kana's focus is to develop applications that address those needs
and integrate them seamlessly with its existing platform to help e-Businesses
establish broader and deeper customer relationships. Kana believes these
applications will be integrated to merge e-commerce transactions with customer
communications to create further revenue opportunities.
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Increase Distribution Capabilities. Kana intends to broaden and increase
its distribution capabilities worldwide by combining the efforts of its direct
sales force and its alliances with leading e-Business service and
infrastructure providers. Kana's sales alliances are reseller arrangements or
cooperative sales agreements with larger companies, such as MCI Worldcom, Inc.,
Davox, Inc. and Convergys Corporation. By expanding existing alliances and
aggressively developing new ones, Kana can leverage others' sales, marketing
and deployment capabilities to help establish Kana as a worldwide provider of
e-Business products and services to manage online customer communications.
Establish Technology Leadership with Open, Scaleable Web-based
Architecture. Kana's 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, Kana has designed its products to be highly scaleable, easily
customizable and readily able to integrate with existing enterprise
applications and systems. Because Kana's web-based architecture is based on
industry standards such as Java, HTML and XML, e-Businesses and third parties
are able to develop and deploy new applications on top of the Kana platform.
Kana intends to continue to develop and enhance its 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. Kana offers Kana On-Line,
Kana's 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
On-Line allows Kana to manage important customer data and monitor real-time,
hands-on customer feedback on Kana's software. Kana intends to continue
developing this service because this service allows Kana to target additional
markets that are complementary to Kana's software-based solution, provides it
with recurring revenue streams and may, in the future, allow it to enter into
new business opportunities. To date, revenues received from Kana On-Line have
not been material. Although Kana intends to develop and support this service,
as a result of many factors, including the relative success of sales of Kana's
products and Kana's services, Kana cannot accurately predict when revenues from
Kana On-Line will become material.
Emphasize Customer Advocacy and Satisfaction. Kana believes that delivering
complete customer satisfaction is vital to growing Kana's business. Kana's
emphasis on customer advocacy and satisfaction has provided it with a strong
base of referenceable customers. This strategy provides many benefits,
including potentially shortened sales cycles, incremental sales opportunities
to Kana's installed-base of customers and new and improved products resulting
from customer feedback. Kana intends to remain focused on providing the highest
level of satisfaction to its customers and to continue to design its solutions
to address their online customer communications needs. In addition, Kana
intends to continue to build its 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
Kana's 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, which
includes Kana Conduits. The suite of software applications consists of Kana
Connect, Kana Notify, Kana Realtime, Kana Assist, Kana Classify and Kana
Response. License fees for Kana's software are typically based on the number of
customer profiles processed by the software or the number of users authorized
to access Kana's software at any given time, and is also dependent upon the
specific application licensed.
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Kana Core Technology. The Kana Core Technology has a number of
capabilities, including message delivery, enterprise integration, queue
management, collaboration, personalization, automation, message transport and
performance management. The Kana Core Technology uses an open, scaleable, web-
based architecture and serves as the foundation for the suite of Kana
applications. Kana Conduits, also part of the Kana Core Technology, allows e-
Businesses to integrate the Kana platform with other enterprise applications
such as telephony customer relationship management systems and e-commerce
infrastructure. This integration is designed to allow applications to exchange
information so that e-Businesses can communicate with their customers more
efficiently and consistently.
Kana Connect. Kana Connect is Kana's electronic direct marketing
application that enables e-Businesses to proactively deliver individually
targeted messages to increase the lifetime value of customers. The application
enables marketers to profile, target and engage customers in one-to-one
conversations through permission-based, e-mail communication.
Kana Notify. Kana Notify is Kana's automated communications application
that extends the customer retail experience by automating, customizing and
managing transaction-related communications such as order status and receipts,
and helps to reduce customer service inquiries by sending proactive messages.
Kana Realtime. Kana Realtime is an e-commerce application that enables
companies to engage in one-to-one realtime communications with customers to
generate higher sales conversions. The solution's live two-way web-based
dialogue between the company and customer provides immediate online sales
assistance to help companies turn browsers into buyers, reduce shopping cart
abandonment, cross-sell and up-sell during the sales cycle, and reduce sales
service costs.
Kana Assist. Kana Assist is an online self-service application that
improves the customer experience by delivering context-sensitive answers to
customer questions directly on the web site--allowing customers to quickly and
conveniently obtain answers to their questions without the intervention of a
customer service representative.
Kana Classify. Kana Classify is Kana's 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 Response. Kana Response is Kana's 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 On-Line
Kana On-Line is a web-based application service that offers the Kana
software on a hosted basis. Kana On-Line provides e-Businesses with access to a
customized version of Kana's software without the need to purchase, install or
maintain their own server or database infrastructure. With Kana On-Line, 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 On-Line is pre-installed
and managed at Exodus Communications, Inc., a leading provider of Internet
server hosting and management solutions. Kana believes that Exodus is equipped
to provide the security, reliability and performance required for hosting
Kana's solution through its nationwide network operating centers and high-speed
wide area network backbone.
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Kana On-Line 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 Kana hosts the back-end infrastructure
for Kana On-Line, e-Businesses keep IT administration and overhead costs
low while achieving the benefits of the Kana software.
. Scalability. Kana On-Line is scaleable and, because of the Kana On-Line
fee structure, an e-Business' costs will increase only as its usage
increases.
. Reliability and Security. A team of dedicated professionals monitors and
maintains the customer business applications in a secure environment.
Kana actively works to promote the security of e-Business data and the
reliability of the Kana On-Line service.
. 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
On-Line representative works with the e-Business to ensure that the
system is configured to meet its specific needs.
. Easy Migration. Because Kana offers both a hosted and licensed version
of the Kana software, e-Businesses can start by using Kana's hosted
applications and convert to a premise license without disruption of
their service or additional training for system users.
Professional Services
Kana's professional services group consists of consulting services,
customer advocacy, technical support and education services.
Consulting Services. Kana's consulting services group provides a wide range
of business and technical expertise to support Kana's customers and partners
during the implementation of solutions. This group brings deep functional and
industry knowledge to the market as well as the technical capabilities to
deliver premium consulting services for Kana's customers and partners.
Customer Advocacy. Kana's customer advocacy group ensures ongoing customer
satisfaction with the Kana solution. This includes providing experienced
account planning to develop a long-term relationship and ensure business needs
are being met as Kana's customers evolve and grow. The group develops a
satisfaction plan with Kana's customers to ensure the successful delivery of
services and resources.
Technical Support. Kana's technical support group provides global support
for Kana's customers through a number of channels, including phone and e-mail,
as well as access to the Kana Support website.
Education Services. Kana's education services group delivers a full set of
training programs for Kana's customers and partners, including a comprehensive
set of learning tracks for end users, business consultants, and developers
through instructor-led, web-based, and onsite delivery. The group also provides
up-to-date information to Kana's customers and partners through monthly
newsletters, website FAQ's, and regional user groups.
Technology
Kana's software incorporates industry standards, such as Java, HTML and
XML, in order to facilitate customization and to enable efficient development
cycles. The Kana software offers both web- and Windows-based interfaces.
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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);
. HTML;
. XML;
. standard relational databases from Oracle and Microsoft;
. JSP (Java Server Pages); 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
Kana's 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, mail delivery,
tracking and data layers.
Advanced Message Classification Technologies
Kana has focused its 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
Kana's 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 Kana's software without any programming or advanced technical
capability.
Sales and Marketing
Sales
Kana's sales strategy is to pursue targeted accounts through a combination
of its direct sales force and its strategic alliances. To date, Kana has
targeted its sales efforts at the e-Business
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divisions of Global 2000 companies and at rapidly growing Internet companies.
Kana maintains direct sales personnel domestically in Arizona, California,
Colorado, Connecticut, Florida, Georgia, Illinois, Maryland, Massachusetts,
Michigan, New Jersey, New York, Texas, Virginia, Washington and Washington
D.C., and internationally in the United Kingdom, Germany and Australia. The
direct sales force is organized into regional teams, which include both sales
representatives and systems engineers. As of December 31, 1999, Kana employed
in its sales force 23 persons in its offices in the United Kingdom and Germany
and three persons in its office in Australia. Kana's office in the United
Kingdom is primarily responsible for sales in Europe generally, Kana's office
in Germany is primarily responsible for sales in Germany and Austria, and
Kana's office in Australia is primarily responsible for sales in Australia and
Asia. Sales managers currently based in the United States handle other
international sales and report to Kana's Vice President, International. Kana's
direct sales force is complemented by telemarketing representatives based at
Kana's headquarters in Redwood City, California.
Kana complements its direct sales force with a series of reseller and sales
alliances, such as those with MCI WorldCom, Inc., Davox, Inc. and Convergys
Corporation. Through these alliances Kana is able to leverage additional sales,
marketing and deployment capabilities. In the future, Kana intends to expand
its distribution capabilities by increasing the size of its direct sales force,
establishing additional sales offices both domestically and internationally and
broadening its alliance activities. As of December 31, 1999, 93 of Kana's
employees were engaged in sales activities. See "Information About Kana--
Strategic Relationships".
Kana's total revenues derived from sources outside of the United States for
fiscal year 1999 were $1,384,901. Prior to 1999, Kana did not derive revenues
from sources outside of the United States.
Marketing
Kana's marketing programs are targeted at e-Businesses and are currently
focused on educating its target market, generating new sales opportunities and
creating awareness for Kana's e-Business customer communications software. Kana
conducts marketing programs worldwide to educate its target market. In
addition, Kana engages in a variety of marketing activities, including:
. conducting seminars;
. hosting regular customer events;
. participating in industry and technology-related conferences and trade
shows;
. establishing and maintaining close relationships with recognized
industry analysts;
. conducting electronic and traditional direct mailings and ongoing public
relations campaigns;
. managing and maintaining Kana's web site;
. conducting market research; and
. creating and placing advertisements.
Kana's marketing organization also serves an integral role in acquiring,
organizing and prioritizing industry and customer feedback in order to help
provide product direction to its development organizations. Kana has a detailed
product management process that surveys customer and market needs to predict
and prioritize future customer requirements. Kana also focuses 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 Kana's presence in the
marketplace. Kana intends to continue to pursue these alliances in the future.
As of December 31, 1999, 32 of Kana's employees were engaged in marketing
activities.
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Strategic Relationships
Kana has three types of strategic relationships: service relationships,
marketing relationships and reseller and strategic sales relationships, that
are designed to leverage Kana's services, software development and sales
capabilities. These relationships are formal or informal agreements with third
parties, and they are typically not exclusive and for a short term. However,
Kana views these relationships as critical to Kana's success in providing
enterprise-wide e-Business communication software products and services.
Service Relationships. Kana collaborates with systems integrators such as
Andersen Consulting and Scient Corporation. These collaborations occur on a
project by project basis, and no formal agreements or commitments exist
regarding Kana's relationships with these systems integrators. These systems
integrators are highly trained in Kana's software, and on a project by project
basis provide integration and implementation services.
Marketing Relationships. Kana has established a series of relationships
with marketing partners across a variety of industries, including providers of
customer relationship management software, sales force automation software,
telephony systems and IT hardware, that allow it to provide a comprehensive
solution to e-Businesses. Kana's marketing relationships are typically
contained in a written agreement, but these agreements generally may be
terminated at any time by either party and do not contain penalties for
nonperformance.
Reseller and Strategic Sales Relationships. Kana complements its direct
sales force with a series of reseller and strategic sales relationships in
targeted industries such as telecommunications. Kana's agreements with these
companies are typically in the form of value-added reseller agreements.
In the future, Kana intends to establish additional strategic relationships
to broaden its product offerings by addressing multiple channels of online
communications and enhancing its distribution channels.
Many of the companies with which Kana has struck relationships also work
with competing software companies, and Kana's success will depend on their
willingness and ability to devote sufficient resources and efforts to its
products and services. Kana's 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, Kana can provide
no guarantee that any of these parties will continue their relationship with
it.
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Customers
Kana's customers range from Global 2000 companies pursuing an e-Business
strategy to rapidly growing Internet companies. As of December 31, 1999, Kana
had licensed its solution to more than 300 customers in a variety of industries
worldwide. The following is a list of customers that Kana believes are
representative of its overall customer base:
<TABLE>
<CAPTION>
Internet Services Financial e-Tailing
<C> <C> <S>
City Index Ameritrade barnesandnoble.com
eBay CBOE CDNOW
eFax.com Datek Cendant
Excite@Home Dime Savings Bank Drugstore.com
iVendor Dow Jones eToys
iVillage Financial Engines Furniture.com
JFAX.com Wit Capital Insweb
Lycos Reel.com
priceline.com Tickets.com
The Motley Fool
The Street.com
<CAPTION>
Travel Communications Other
<C> <C> <S>
American Airlines Ameritech Coleman
Canadian Airlines AT&T Estee Lauder
Mapquest.com Convergys Ford Motor Company
NorthKanast Davox General Motors
SKanadish Railroads NTL Hewlett-Packard
Travelocity (Sabre) Sprynet (Mindspring) Microsoft
Stream International Shell International
Telstra The Gap
US Kanast Williams-Sonoma
</TABLE>
No customer accounted for 10% or more of Kana's total revenues for 1999.
Although a substantial portion of Kana's 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, Kana
does not depend on any ongoing commitments from its large customers.
Research and Development
Kana believes that strong product development capabilities are essential to
its strategy of enhancing its core technology, developing additional
applications incorporating that technology and maintaining the competitiveness
of its product and service offerings. Kana has 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, Kana has recruited key engineers and software
developers with experience in the customer communications and internetworking
markets and has complemented these individuals by hiring senior management with
experience in enterprise application development, sales and deployment.
Kana's research and development expenses totaled approximately $2.8 million
for the year ended December 31, 1998 and $12.9 million for the year ended
December 31, 1999. As of December 31, 1999, 115 of Kana's employees were
engaged in research and development activities. Kana's success depends, in
part, on its ability to enhance its existing customer interactions solutions
and to develop new services, functionality and technology that address the
increasingly sophisticated and varied needs of its
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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 Kana's competitors. If Kana were to lose market share as
a result of lapses in its product management, its business would suffer.
Competition
The market for Kana's products and services is intensely competitive,
evolving and subject to rapid technological change. Kana expects the intensity
of competition to increase in the future. Kana currently faces competition for
its products from systems designed by in-house and third-party development
efforts. Kana expects that these systems will continue to be a principal source
of competition for the foreseeable future. Kana's competitors include a number
of companies offering one or more products for the e-Business customer
communication market, some of which compete directly with Kana's products. For
example, Kana's competitors include companies providing stand-alone point
solutions, including Annuncio, Inc., AskJeeves, Inc., Brightware, Inc., Digital
Impact, Inc., eGain Communications Corp., Inference Corporation, Marketfirst,
Inc., LivePerson, Inc., Mustang Software, Inc., Responsys.com. and Servicesoft,
Inc. In addition, Kana may compete with companies providing customer management
and communications solutions, such as Broadbase, Inc., Cisco Systems, Inc.,
Clarify Inc., (which has agreed to be acquired by Northern Telecom) E.piphany,
Inc., Genesys Telecommunications Laboratories, Inc., (which has agreed to be
acquired by Alcatel) Lucent Technologies, Inc., Message Media, Inc., Oracle
Corporation, Pivotal Corporation, Siebel Systems, Inc., Silknet Software, Inc.
(if the merger is not completed) and Vantive Corporation (which has agreed to
be acquired by PeopleSoft, Inc.). Furthermore, Kana may face increased
competition should it expand its product line, through acquisition of
complementary businesses or otherwise.
Kana believes that the principal competitive factors affecting its 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 Kana
believes that its solution currently competes favorably with respect to these
factors, Kana's market is relatively new and is evolving rapidly. Kana may not
be able to maintain its competitive position against current and potential
competitors, especially those with significantly greater financial, marketing,
service, support, technical and other resources.
Many of Kana's 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 does
Kana. In addition, many of Kana's competitors have well-established
relationships with Kana's current and potential customers and have extensive
knowledge of Kana's industry. It is possible that new competitors or alliances
among competitors may emerge and rapidly acquire significant market share. Kana
also expects that competition will increase as a result of industry
consolidations. See "Risk Factors--Risks Related to Kana--Kana faces
substantial competition and may not be able to compete effectively".
Intellectual Property
Kana relies upon a combination of patent, copyright, trade secret and
trademark laws to protect its intellectual property. Kana currently has seven
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;
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. 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;
. A customer communications software product for network based customer
service that provides differing levels of customer response;
. A method of using XML to distribute data between applications; and
. A customer communications software product for providing live support
over the world-wide web.
These patents, if allowed, will cover a material portion of Kana's products
and services. Kana has also filed international patent applications
corresponding to three of Kana's U.S. applications.
In addition, Kana has one U.S. trademark registration and seven pending
U.S. trademark registrations as well as pending trademark registrations in
Australia, Canada, the European Union, India, Japan, South Korea and Taiwan.
Although Kana relies on patent, copyright, trade secret and trademark law to
protect its technology, Kana believes that factors such as the technological
and creative skills of its personnel, new product developments, frequent
product enhancements and reliable product maintenance are more essential to
establishing and maintaining a technology leadership position. Kana can give no
assurance that others will not develop technologies that are similar or
superior to its technology.
Kana generally enters into confidentiality or license agreements with its
employees, consultants and alliance partners, and generally controls access to
and distribution of its software, documentation and other proprietary
information. Despite Kana's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use Kana's
products or technology or to develop products with the same functionality as
its products. Policing unauthorized use of Kana's products is difficult, and
Kana cannot be certain that the steps it has taken will prevent
misappropriation of its 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 Kana's license agreements require Kana to place
the source code for its 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. Kana's software products may be increasingly subject to
third-party infringement claims as the number of competitors in its industry
segment grows and the functionality of products in different industry segments
overlaps. Some of Kana's 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 Kana's products and technology. See "Information About Kana--Legal
Proceedings".
Employees
As of December 31, 1999, Kana had 363 full-time employees, 71 of whom were
in Kana's professional services group, 125 in sales and marketing, 115 in
research and development, and 52 in finance, administration and operations.
Kana added 182 employees between July 1, 1999 and December 31, 1999, which
number does not include 118 new employees resulting from the Business
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Evolution and netDialog mergers. Kana's future performance depends in
significant part upon the continued service of Kana's 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 Kana's key employees could harm its business.
Kana's future success also depends on its 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 Kana is headquartered. Due to the limited number of people
available with the necessary technical skills and understanding of the
Internet, Kana can give no assurance that it can retain or attract key
personnel in the future. None of Kana's employees is represented by a labor
union. Kana has not experienced any work stoppages and considers its relations
with its employees to be good. See "Risk Factors--Risks Related to Kana--Kana
may be unable to hire and retain the skilled personnel necessary to develop its
engineering, professional services and support capabilities in order to
continue to grow" and "--Kana may face difficulties in hiring and retaining
qualified sales personnel to sell its products and services, which could harm
Kana's ability to increase its revenues in the future".
Facilities
Kana's corporate offices are located in Redwood City, California, where
Kana leases approximately 60,861 square feet under a lease that expires in
October 2006. As of December 31, 1999, the annual base rent for this facility
was approximately $1.9 million. In addition, Kana leases facilities and offices
domestically in Westport, Connecticut; Chicago, Illinois and Richardson, Texas;
and internationally in the United Kingdom, Germany and Australia. The terms of
these leases expire beginning in August 2000, and automatically renew unless
earlier terminated. Kana believes that its corporate office space in Redwood
City will not be sufficient to meet its needs through the next 12 months. For
that reason, on February 11, 2000, Kana entered into an agreement to lease
approximately 62,500 additional square feet in Redwood City, California under a
lease that expires in December, 2010. The annual base rent for this facility
for the first year is approximately $2.4 million. 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
On October 8, 1999, Genesys Telecommunications Laboratories, Inc. filed a
complaint against Kana in the United States District Court for the District of
Delaware. Genesys alleges that Kana's Customer Messaging System 3.0 infringes
one or more claims of a Genesys patent. Genesys is seeking relief in the forms
of an injunction, damages, punitive damages, attorneys' fees, costs and pre-
and post-judgment interest. The litigation is currently in its early stages and
Kana has not received material information or documentation. Kana intends to
fight this claim vigorously and does not expect it to impact results. Kana is
not currently a party to any other material legal proceedings. See "Risk
Factors--Risks Related to Kana--Kana may become involved in litigation over
proprietary rights, which could be costly and time consuming, and Genesys
Telecommunications Laboratories, Inc. has filed an infringement suit against
Kana".
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MANAGEMENT
Executive Officers and Directors
The following table sets forth information regarding the executive officers
and directors of Kana as of February 29, 2000:
<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..... 30 Vice President, Marketing
Timothy E. Campbell..... 38 Vice President and General Manager, Kana On-Line
Ian P. Cavanagh......... 34 Vice President, Business Development
Alexander E. Evans...... 42 Vice President, International
Paul R. Holland......... 39 Vice President, Worldwide Sales
Pallipuram V. Kannan.... 32 Vice President, RealTime
Joseph D. McCarthy...... 35 Vice President, Finance and Operations
William R. Phelps....... 38 Vice President, Professional Services
Toya A. Rico............ 40 Vice President, Human Resources
Donald R. Whitt......... 42 Vice President, eBusiness Services
Michael R. Wolfe........ 31 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.
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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.
Timothy E. Campbell. Mr. Campbell joined Kana as Vice President and General
Manager of Kana On-Line in December 1999 in connection with our acquisition of
netDialog, Inc., where he had been employed as Vice President of Client
Services and Chief Services Officer since February 1999. From May 1997 to
February 1999, Mr. Campbell served as Senior Vice President of Consulting,
Americas for Baan Company, an enterprise software company. From September 1995
to February 1997, Mr. Campbell was Vice President of client services at Aurum
Software Inc. Prior to joining Aurum, Mr. Campbell had been with Electronic
Data Systems, Inc. since 1988 where he had been involved in systems
integration, MIS, and consulting.
Ian P. 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. 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 his employment by Digital
Equipment, Mr. Evans worked in various technical and project roles involving
material requirement planning, process control and automated manufacturing
systems at Dupont, Inc., Mars Electronics Ltd. & Metal Box PLC. Mr. Evans holds
a degree in Electronics from John Moore University, England.
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.
Pallipuram V. Kannan. Mr. Kannan joined Kana as Vice President, RealTime in
December 1999 in connection with our acquisition of Business Evolution, Inc.
Mr. Kannan co-founded Business Evolution in July 1995 and served as its
President and Chief Executive Officer. From 1991 to June
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1995, Mr. Kannan worked as a consultant in various project management roles at
Oracle and IBM. Mr. Kannan is a Chartered Accountant in India and holds post-
graduate degrees in Accounting and Finance.
Joseph D. McCarthy. Mr. McCarthy joined Kana in March 1998 as Director of
Finance and Operations and served as Vice President, Finance and Operations
from April 1999 to December 1999, and has served as Vice President, Finance
since December 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 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.
Toya A. Rico. Ms. Rico joined Kana in January 2000 as Vice President, Human
Resources. Prior to joining Kana, from October 1996 through May 1999, Ms. Rico
served as Director, Human Resources at Adaptec, Inc., a bandwidth management
company. From May 1988 through September 1996, Ms. Rico served in a variety of
human resources management positions at 3Com Corporation, a computer networking
company. Ms. Rico holds a B.A. in Communications from California State
University, San Francisco.
Donald R. Whitt. Mr. Whitt joined Kana as Vice President, eBusiness
Services in December 1999 in connection with our acquisition of netDialog, Inc.
From May 1999 to December 1999 Mr. Whitt served as Vice President, eBusiness
Services at netDialog. From May 1998 to April 1999, Mr. Whitt served as
Director of Product Development Services at netDialog. From July 1997 to May
1998, Mr. Whitt was an independent web development consultant. From November
1994 to June 1997, Mr. Whitt served as Director of Technical Operations for
America Online. Mr. Whitt holds a B.A. in philosophy from California State
University, Chico.
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.
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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 six private
companies. Mr. Frick holds a B.S. in Civil Engineering and an M.B.A. from
Washington University in St. Louis, Missouri.
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
several private companies. Dr. Holloway holds a B.S. in Electrical Engineering
from the University of California at Berkeley and an M.S. in Nuclear
Engineering and Ph.D. in Business Administration from the University of
California, Los Angeles.
Steven T. Jurvetson. Mr. Jurvetson has served as a director of Kana since
April 1997. Mr. Jurvetson has been a Managing Director of Draper Fisher
Jurvetson, a venture capital firm, since June 1995. Prior to joining Draper
Fisher Jurvetson, from July 1990 to September 1993, 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.
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Board of Directors and Committees
Kana currently has authorized eight directors. The board consists 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. Upon completion of the
merger, Kana will increase the size of its board to nine directors. James C.
Wood will be appointed to fill the new seat on Kana's board of directors until
his successor is duly elected and qualified. Mr. Wood will be a Class III
director and his term will expire in 2002. Kana's 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 1999, Kana's compensation committee consisted of Messrs. Beirne and
Hahn. Neither Mr. Beirne nor Mr. Hahn was an employee of Kana or its
subsidiaries during 1999 or at any time prior to 1999. None of Kana's 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 Kana's
board of directors or compensation committee.
Director Compensation
Kana currently does not compensate any non-employee member of the board.
Directors who are also employees of Kana do not receive additional compensation
for serving as directors.
Non-employee directors are eligible to receive discretionary option grants
and stock issuances under the 1999 Stock Incentive Plan. In addition, under the
1999 Stock Incentive Plan, each new non-employee director will receive an
automatic option grant for 40,000 shares upon his or her initial appointment or
election to the board, and continuing non-employee directors will receive an
automatic option grant for 10,000 shares on the date of each annual meeting of
stockholders.
In August 1999, Kana granted an option to purchase 66,666 shares of common
stock to Mr. Frick at an exercise price of $4.50 per share under its 1997 Stock
Option/Stock Issuance Plan. The option was fully vested and immediately
exercisable on the grant date. Mr. Frick exercised this option in full in
September 1999. Mr. Frick delivered a full-recourse promissory note in the
amount of $300,000 to Kana in full payment of the purchase price. The note
bears interest at a rate of 6.0% per annum, compounded annually, and is payable
in a lump sum on September 18, 2004.
In September 1999, Kana granted an option to purchase 60,000 shares of
common stock to Dr. Holloway at an exercise price of $7.50 per share under the
Discretionary Grant program of its
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1999 Stock Incentive Plan. The option may be exercised for unvested shares,
subject to Kana's right to repurchase those shares at the exercise price paid
per share if Dr. Holloway leaves the Board before the shares vest. Twenty-five
percent of the option shares will vest upon Dr. Holloway's completion of one
year of service measured from September 20, 1999, and the balance of the option
shares will vest in a series of 36 equal monthly installments upon his
completion of each additional month of service thereafter. All unvested shares
will immediately vest upon a merger or asset sale, the successful completion of
a hostile tender offer for more than 50% of Kana's outstanding voting
securities, or a change in the majority of the board through one or more
contested elections for board membership.
Executive Compensation
Summary Compensation Table
The following table sets forth information concerning compensation earned
for the year ended December 31, 1999, by the two individuals who served as
Kana's Chief Executive Officer during the 1999 fiscal year and each of the four
other most highly compensated executive officers whose salary and bonus for the
1999 fiscal year exceeded $100,000, for services rendered in all capacities to
Kana and its subsidiaries for the fiscal years ended December 31, 1998, and
1999. The listed individuals are referred to hereafter as the "Named Executive
Officers." No other executive officers who otherwise would have been includable
in this table on the basis of salary and bonus earned during 1999 have been
excluded because they terminated employment or changed their executive status
during the year.
The salary figures include amounts the employees put into Kana's tax-
qualified plan pursuant to Section 401(k) of the Internal Revenue Code.
However, compensation in the form of perquisites and other personal benefits
that constituted less than 10% of the total annual salary and bonus of each of
the Named Executive Officers in fiscal 1999 is excluded. The option grants
reflected in the table below were made under Kana's 1997 Stock Option/Stock
Issuance Plan.
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
------------
Annual
Compensation Securities
Year ------------------ Underlying
Name and Principal Position Ended Salary($) Bonus($) Options (#)
--------------------------- ----- --------- -------- ------------
<S> <C> <C> <C> <C>
Michael J. McCloskey(1).................. 1999 81,250 -- 1,866,666
Chief Executive Officer and Director
Mark S. Gainey(2)........................ 1999 122,500 -- --
President and Chairman of the Board of
Directors 1998 72,500 -- --
Joseph D. McCarthy(3).................... 1999 143,308 -- 100,000
Vice President, Finance and Operations 1998 92,917 -- 213,332
Paul R. Holland(4)....................... 1999 75,000 721,600 --
Vice President, Worldwide Sales 1998 75,000 139,022 --
William R. Phelps(5)..................... 1999 130,000 56,000 413,332
Vice President, Professional Services 1998 8,917 -- --
Michael R. Wolfe(6)...................... 1999 135,000 -- 100,000
Vice President, Engineering 1998 103,333 -- --
</TABLE>
- --------
(1) Mr. McCloskey joined Kana and became chief executive officer in June 1999.
His annualized salary for 1999 was $150,000. As of December 31, 1999, Mr.
McCloskey held 1,306,666 unvested shares acquired upon the exercise of the
1,866,666-share option granted him in June 1999. The shares will vest in a
series of 42 successive equal monthly upon his completion of each month of
service over the 42-month period measured from December 20, 1999. The year-
end market value of those shares, less the consideration he paid for them,
was $133,492,265.
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(2) Mr. Gainey served as President, Chief Executive Officer, and Chairman of
the Board of Directors of Kana until June 17, 1999, when Mr. McCloskey
became CEO. Mr. Gainey remains as President and Chairman. As of December
31, 1999, Mr. Gainey held 625,000 unvested shares of common stock acquired
pursuant to a Restricted Stock Purchase Agreement dated April 7, 1997. The
shares will vest in a series of 6 successive equal monthly upon his
completion of each month of service over the 6-month period measured from
December 5, 1999. The year-end market value of those shares, less the
consideration he paid for them, was $64,012,500.
(3) Mr. McCarthy joined Kana in March 1998. As of December 31, 1999, he held
220,000 unvested shares of common stock acquired in connection with option
exercises. 120,000 of the shares will vest in a series of 27 successive
equal monthly installments upon his completion of each month of service
over the 27-month period measured from December 23, 1999. The remaining
100,000 shares will vest as follows: 25% upon his continuation in service
through June 16, 2000, and the balance in a series of 36 successive equal
monthly installments upon his completion of each additional month of
service thereafter. The aggregate year-end market value of those shares,
less the consideration he paid for them, was $22,511,750.
(4) As of December 31, 1999, Mr. Holland held 133,332 unvested shares of Kana
common stock acquired in connection with option exercises. As a result of
transfers made by Mr. Holland, the following entity also held unvested
shares originally issued to him in connection with his option exercises:
The Holland/Yates Family Trust dated July 23, 1999, 272,374 shares. The
unvested shares held by Mr. Holland and his transferees will vest in a
series of 23 successive equal monthly upon his completion of each month of
service over the 23-month period measured from January 1, 2000. The
aggregate year-end market value of these shares (less the consideration
paid by Mr. Holland for them) was $41,569,652.
(5) Mr. Phelps joined Kana in December 1998. As of December 31, 1999, Mr.
Phelps held 321,666 unvested shares of common stock acquired in connection
with option exercises. 275,000 of the shares will vest in a series of 36
successive equal monthly installments upon his completion of each month of
service over the 36-month period measured from December 7, 1999. The
remaining 46,666 shares will vest as follows: 25% upon his continuation in
service through June 16, 2000, and the balance in a series of 36 successive
equal monthly installments upon his completion of each additional month of
service thereafter. The aggregate year-end market value of those shares,
less the consideration he paid for those shares, was $32,907,578.
(6) As of December 31, 1999, Mr. Wolfe held 265,278 unvested shares of common
stock acquired in connection with option exercises. 165,278 of the shares
will vest in a series of 17 successive equal monthly installments upon his
completion of each month of service over the 17-month period measured from
December 19, 1999. The remaining 100,000 shares will vest as follows: 25%
upon his continuation in service through August 18, 2000, and the balance
in a series of 36 successive equal monthly installments upon his completion
of each additional month of service thereafter. The aggregate year-end
market value of those shares, less the consideration he paid for them, was
$16,938,516.
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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 1999. Kana granted options
to purchase up to a total of 8,760,866 shares to employees during the year, and
the table's percentage column shows how much of that total was granted to the
Named Executive Officers. No stock appreciation rights were granted to the
Named Executive Officers during 1999.
The table includes the potential realizable value over the 10-year term of
the options, based on assumed rates of stock price appreciation of 5% and 10%,
compounded annually. The potential realizable value is calculated based on the
initial public offering price of the common stock, assuming that price
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. The 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.
The option grants to the Named Executive Officers were made under Kana's
1997 Stock Option/Stock Issuance Plan. The exercise price for each option grant
is equal to the fair market value of Kana's common stock on the grant, as
determined in good faith by the board of directors. All options were
immediately exercisable in full, but Kana can buy back any shares purchased
under those options, at the exercise price paid per share, to the extent the
shares are not vested when the officer leaves Kana. Kana's repurchase rights
will lapse on an accelerated basis under certain conditions in conjunction with
a change of control. See "Information About Kana--Employment Arrangements,
Termination of Employment Arrangements and Change in Control Arrangements."
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Percent Annual Rates of Stock
of Price Appreciation
Number of Total for Option Term at
Securities Options Exercise Initial Public
Underlying Granted Price Offering Price(1)
Options in Per Expiration ---------------------
Name Granted (#) 1999 Share Date 5% 10%
- ---- ----------- ------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael J. McCloskey.... 1,866,666 21.31% $0.3375 6/16/09 22,169,850 35,677,715
Mark S. Gainey.......... -- -- -- -- -- --
Joseph McCarthy......... 100,000 1.14% 0.3375 6/16/09 1,187,671 1,911,307
Paul R. Holland......... -- -- -- -- --
William R. Phelps....... 366,666 4.19% 0.175 12/06/08 4,415,286 7,068,612
46,666 0.53% 0.3375 6/16/09 554,239 891,930
Michael R. Wolfe........ 100,000 1.14% 4.50 8/17/09 771,671 1,495,307
</TABLE>
- --------
(1) The 5% and 10% values are based upon the $15.00 price per share at which
the common stock was sold in the initial public offering on September 21,
2000.
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OPTION EXERCISES IN LAST FISCAL YEAR
The following table sets forth the number of shares the Named Executive
Officers purchased in connection with option exercises during the 1999 fiscal
year and the value they realized on those exercises. None of these Named
Executive Officers held any unexercised options at the end of the 1999 fiscal
year. None of them exercised any stock appreciation rights during 1999, and
none held any stock appreciation rights at the end of the year.
The value realized is based on the fair market value of Kana's common stock
on the date of exercise, minus the exercise price payable for the shares. The
fair market value was determined in good faith by the board of directors for
exercises before September 21, 1999, and was based on Kana's closing price on
the exercise date for exercises on or after September 21, 1999. The exercise
price for each grant equaled the fair market value on the date of exercise, so
the Named Executive Officers who exercised did not realize any value on the
exercises.
<TABLE>
<CAPTION>
# of Securities
Underlying Unexercised Value of Unexercised In-
Number of Options/ SARs at Fiscal the-Money Options/SARs
Shares Year End at Fiscal Year End
Acquired on Value ------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael McCloskey....... 1,866,666 0 -- -- -- --
Mark S. Gainey.......... -- -- -- -- -- --
Joseph D. McCarthy...... 100,000 0 -- -- -- --
Paul R. Holland......... -- -- -- -- -- --
William R. Phelps....... 366,666 0 -- -- -- --
46,666 0 -- -- -- --
Michael R. Wolfe........ 100,000 0 -- -- -- --
</TABLE>
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 106,666 shares of common stock and entered into a stock
purchase agreement for the purchase of those shares. To the extent the shares
are unvested at the time of his termination of service, Kana will have the
right to repurchase those shares at the exercise price paid per share. Under
the stock purchase agreement, if Kana is acquired by merger or asset sale,
Kana's right to repurchase 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 June 1998, Mr. Poler, one of Kana's directors, exercised options to
purchase a total of 333,332 shares of common stock and entered into a stock
purchase agreement for the purchase of those shares. To the extent the shares
are unvested at the time of his termination of service, Kana will have the
right to repurchase those shares at the exercise price paid per share. Under
the stock purchase agreement, if Kana is acquired by merger or asset sale,
Kana's right to repurchase 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, 5,000,000 shares of common stock at a purchase price of
$0.01 per share. To the extent the shares are unvested at the time of his
termination of service, Kana will have the right to repurchase those shares at
the original purchase price paid per share The repurchase right lapses in a
series of equal monthly installments over a four-year period measured from June
4, 1996. If Kana is acquired by merger or asset sale and Mr. Gainey is not
offered employment or is terminated without cause within three months after the
transaction, his shares will vest in full and no longer be subject to
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repurchase. If Kana is acquired by merger or asset sale and Mr. Gainey is
terminated without cause more than three months after the transaction, or if he
is terminated without cause not in connection with any merger or asset sale,
then 50% of his unvested shares will vest and no longer be subject to
repurchase.
In April 1998, Mr. Holland, Kana's Vice President, Worldwide Sales,
exercised an option to purchase 811,410 shares of common stock and entered into
a stock purchase agreement for the purchase of those shares. To the extent the
shares are unvested at the time of his termination of service, Kana will have
the right to repurchase those shares at the exercise price paid per share.
Under the stock purchase agreement, upon an acquisition of Kana by merger or
asset sale, Kana's right to repurchase 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 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 213,332 shares of common stock and entered into
a stock purchase agreement for the purchase of those shares. To the extent the
shares are unvested at the time of his termination of service, Kana will have
the right to repurchase those shares at the exercise price paid per share.
Under the stock purchase agreement, upon an acquisition of Kana by merger or
asset sale, Kana's right to repurchase 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, 50% of the unvested shares will vest and no longer be subject
to repurchase.
In July 1998, Mr. Hahn, one of Kana's directors, exercised an option to
purchase 150,066 shares of common stock and entered into a stock purchase
agreement for the purchase of those shares. To the extent the shares are
unvested at the time of his termination of service, Kana will have the right to
repurchase those shares at the exercise price paid per share. Under the stock
purchase agreement, if Kana is acquired by merger or asset sale, Kana's right
to repurchase 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 53,332
shares of common stock and entered into a stock purchase agreement for the
purchase of those shares. To the extent the shares are unvested at the time of
his termination of service, Kana will have the right to repurchase those shares
at the exercise price paid per share. 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, 25% of the unvested
shares will vest and no longer be subject to repurchase.
In February and June 1999, Mr. Phelps, Kana's Vice President, Professional
Services, exercised an option to purchase a total of 413,332 shares of common
stock and entered into a stock purchase agreement for the purchase of those
shares. To the extent the shares are unvested at the time of his termination of
service, Kana will have the right to repurchase those shares at the exercise
price paid per share. Under the stock purchase agreement, upon an acquisition
of Kana by merger or asset sale, Kana's right to repurchase 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, 25% of the unvested shares will vest and no
longer be subject to repurchase.
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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 1,866,666 shares of common
stock, which Mr. McCloskey exercised in June 1999. 1,493,334 of the shares are
subject to a right of repurchase granted to Kana which will allow Kana to
repurchase those shares at the option exercise price paid per share, to the
extent those shares are unvested at the time of his termination of service.
Under the stock purchase agreement and the terms of Mr. McCloskey's employment
arrangement, the unvested shares will vest in a series of 48 successive equal
monthly upon his completion of each month of service over the 48-month period
measured from June, 17, 1999. However, all or part of the shares will vest on
an accelerated basis, following a change of control of Kana, 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 62,224 shares of common stock per month;
. if Mr. McCloskey is offered full-time employment with the successor
corporation as set forth in the second and third points above and he
does not accept the position, his shares of common stock will be subject
to immediate repurchase; and
. if Mr. McCloskey is terminated without cause by the successor
corporation following the change in control, all of his then unvested
shares of common stock will accelerate and vest in full.
Also in June 1999, Mr. McCarthy exercised an option to purchase 100,000
shares of common stock and entered into a stock purchase agreement for the
purchase of those shares. To the extent the shares are unvested at the time of
his termination of service, Kana will have the right to repurchase those shares
at the exercise price paid per share. Under the stock purchase agreement, upon
an acquisition of Kana by merger or asset sale, Kana's right to repurchase 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, 25% of the unvested shares will
vest and no longer be subject to repurchase.
In August 1999, Kana granted an option to purchase 66,666 fully vested
shares of common stock to Mr. Frick at an exercise price of $4.50 per share,
which he exercised in full in September 1999.
In August 1999, Kana granted an option to purchase 100,000 shares of common
stock at $4.50 per share to Mr. Wolfe, which Mr. Wolfe exercised in September
1999. To the extent the purchased shares are unvested at the time of his
termination of service, Kana will have the right to repurchase those shares at
the exercise price paid per share. Under the stock purchase agreement, upon an
acquisition of Kana by merger or asset sale, Kana's right to repurchase 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. Wolfe is not
offered employment by the successor entity, 25% of the unvested shares will
vest and no longer be subject to repurchase.
122
<PAGE>
Generally, Kana's option grants to employees, other than those under the
1999 Special Stock Option Plan, provide that if Kana is acquired by merger or
asset sale and the employee is not offered employment by the successor entity,
then 25% of any unvested shares held by that individual will vest and no longer
be subject to repurchase.
Certain Transactions Of Kana
Sales of Securities. In July 1999, Kana sold to various investors,
including entities affiliated with Draper Fisher Jurvetson and entities
affiliated with Benchmark Capital, a total of 838,466 shares of Series D
preferred stock for total consideration of $10,200,004.
On August 13, 1999, Kana closed a merger with Connectify pursuant to which
Connectify became a wholly-owned subsidiary of Kana. In connection with the
merger, Kana issued approximately 6,982,000 shares of its common stock in
exchange for all outstanding shares of Connectify capital stock and reserved
416,690 shares of common stock for issuance upon the exercise of Connectify
options and warrants Kana assumed in connection with the merger.
On December 3, 1999, Kana closed a merger with Business Evolution pursuant
to which Business Evolution became Kana's wholly-owned subsidiary. In
connection with the acquisition of Business Evolution, approximately 1,935,206
shares of Kana common stock, valued at approximately $140 million, were issued
or reserved for issuance for all outstanding shares, warrants and options of
Business Evolution.
On December 3, 1999, Kana closed a merger with netDialog, pursuant to which
netDialog became Kana's wholly-owned subsidiary. In connection with the
acquisition of netDialog, approximately 1,244,062 shares of Kana common stock,
valued at approximately $90 million, were issued or reserved for issuance for
all outstanding shares, warrants, convertible notes and options of netDialog.
Loans to and Other Arrangements with Officers and Directors. In connection
with the option exercises described under "Information About Kana--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%, except
in the case of Robert W. Frick and Michael R. Wolfe whose notes bear interest
at an annual rate of 6.0%, in amounts and with the balances indicated:
<TABLE>
<CAPTION>
Original Amount of Amount Outstanding at
Promissory Note December 31, 1999
------------------ ---------------------
<S> <C> <C>
Officer or Director
Michael J. McCloskey................... $630,000.00 $600,052.83
Robert W. Frick........................ 299,997.00 310,541.89
William R. Phelps...................... 79,000.00 83,674.13
Ian P. Cavanagh........................ 900,000.00 930,046.84
Michael R. Wolfe....................... 458,000.00 --
Joseph G. Ansanelli.................... 85,000.00 87,737.80
</TABLE>
Kana has entered into an employment arrangement with Michael J. McCloskey,
its Chief Executive Officer. See "Information About Kana--Employment
Arrangements, Termination of Employment Arrangements and Change in Control
Arrangements".
Kana has granted options to its executive officers and directors. See
"Information About Kana--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
123
<PAGE>
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 "Description of Capital Stock and Comparison of Stockholder
Rights--Comparison of Rights of Kana Stockholders and Silknet Stockholders--
Limitations of Liability of Directors".
Principal Stockholders of Kana
The table below sets forth information regarding the beneficial ownership
of Kana's common stock as of March 10, 2000, 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
60,809,098 shares of common stock outstanding as of March 10, 2000, as adjusted
to include all options exercisable within 60 days of March 10, 2000 held by the
particular stockholder and that are included in the first column.
In addition, because of its option to purchase a number of shares of Kana
common stock equal to 9.9% of Kana's outstanding common stock at the time of
exercise, Silknet may be deemed to be the beneficial owner of 6,017,488 shares
of Kana common stock assuming the option was exercised on March 10, 2000.
Unless otherwise indicated, the principal address of each of the
stockholders below is c/o Kana Communications, Inc., 740 Bay Road, Redwood
City, CA 94063. 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
Number of Beneficially Owned
Shares ------------------------------------
Name and Address of Beneficially
Beneficial Owner Owned Prior to the Merger After the Merger
------------------- ------------ ------------------- ----------------
<S> <C> <C> <C>
Entities affiliated with
Draper Fisher
Jurvetson(1)............... 8,044,794 13.2% 9.0%
Entities affiliated with
Benchmark Capital
Partners L.P.(2)........... 8,624,254 14.2 9.7
Mark S. Gainey(3)........... 4,752,000 7.8 5.3
Michael J. McCloskey(4)..... 1,866,666 3.1 2.1
Paul R. Holland(5).......... 811,410 1.3 *
William R. Phelps(6)........ 413,334 * *
Joseph D. McCarthy(7)....... 313,334 * *
Michael R. Wolfe............ 628,732 1.0 *
Steven T. Jurvetson(1)...... 8,044,794 13.2 9.0
David M. Beirne(2).......... 8,624,254 14.2 9.7
Eric A. Hahn(8)............. 433,898 * *
Ariel Poler(9).............. 321,332 * *
Dr. Charles A.
Holloway(10)............... 219,998 * *
Robert W. Frick............. 146,312 * *
James C. Wood(11)........... -- -- 2.9
All directors and executive
officers as a group
(20 persons)............... 29,983,648 49.3 33.6
</TABLE>
- --------
*Less than one percent.
124
<PAGE>
(1) Principal address is 400 Seaport Court, Suite 250, Redwood City, CA 94063.
Includes 7,481,660 shares of common stock held by Draper Fisher Associates
Fund IV, L.P. and 563,134 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.
(2) Principal address is 2480 Sand Hill Road, Suite 200, Menlo Park, CA 94025.
Represents 7,566,694 shares of common stock held by Benchmark Capital
Partners, L.P., and 1,057,558 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) Represents shares of common stock held by the Mark and Elisabeth Gainey
Family Trust. Includes 937,500 shares of common stock subject to Kana's
right of repurchase. This repurchase right lapses with respect to 104,166
shares per month.
(4) Includes 1,462,224 shares of common stock subject to Kana's right of
repurchase. This repurchase right lapses with respect to 31,108 shares per
month.
(5) Includes 26,666 shares of common stock held by The Paul Holland Grantor
Retained Annuity Trust, 26,666 shares of common stock held by The Linda
Yates Holland Grantor Retained Annuity Trust, 53,332 shares of common
stock held by the Yates/Holland 1999 Irrevocable Trust, 571,410 shares of
common stock held by The Yates/Holland Family Trust and 133,332 shares of
common stock held by Paul Holland and Linda Yates as community property.
Includes 456,420 shares of common stock subject to Kana's right of
repurchase. This repurchase right lapses with respect to 16,902 shares per
month.
(6) Includes 26,666 shares of common stock held by The William Phelps Grantor
Retained Annuity Trust, 26,666 shares of common stock held by The Margaret
Phelps Grantor Retained Annuity Trust and 360,000 shares of common stock
held by The Phelps Family Trust. Includes 366,666 shares of common stock
subject to Kana's right of repurchase. This repurchase right lapses with
respect to 91,666 in December 1999 and 7,638 shares per month. Also
includes 26,666 shares of common stock subject to Kana's right of
repurchase, which lapses with respect to 11,666 shares in June 2000 and
972 shares per month thereafter.
(7) Includes 33,332 shares of common stock held by The Joseph McCarthy Grantor
Retained Annuity Trust, 33,332 shares of common stock held by Siobhan
Lawlor Grantor Retained Annuity Trust. Includes 133,334 shares of common
stock subject to Kana's right of repurchase. This repurchase right lapses
with respect to 4,444 shares per month. Also includes 100,000 shares of
common stock subject to Kana's right of repurchase, which lapses with
respect to 25,000 shares in June 2000 and 2,084 shares per month
thereafter.
(8) Includes 100,042 shares of common stock subject to Kana's right of
repurchase. This repurchase right lapses with respect to 3,128 shares per
month.
(9) Includes 6,666 shares of common stock held by Alejandro W. Poler and 3,332
shares of common stock held by Noel Poler.
(10) Includes 19,259 shares of common stock subject to Kana's right of
repurchase. This repurchase right lapses with respect to 1,481 shares per
month. Also includes 55,000 shares of common stock subject to Kana's right
of repurchase which lapses with respect to 1,250 shares per month.
(11) Nominated to be appointed to Kana's board of directors upon completion of
the merger. Principal address is c/o Silknet Software, Inc., 50 Philippe
Cote Street, Manchester, NH 03101. Upon completion of the merger and
exchange of his Silknet common stock for shares of Kana common stock, Mr.
Wood will own 2,567,430 shares of Kana Common Stock.
125
<PAGE>
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is ChaseMellon
Stockholder Services, L.L.C. Its address is 85 Challenger Road, Ridgefield
Park, New Jersey 07660, and its telephone number is 1-800-356-2017.
126
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations of Kana" and the consolidated financial statements of
Kana Communications, Inc. and the notes to consolidated financial statements
included elsewhere in this prospectus.
The consolidated statement of operations data for each of the years in the
three-year period ended December 31, 1999, and the consolidated balance sheet
data at December 31, 1998 and 1999 are derived from our consolidated financial
statements. These consolidated financial statements have been audited by KPMG
LLP, independent auditors, and are included elsewhere in this prospectus. The
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 Consolidated Financial Statements for a
detailed explanation of the determination of the shares used to compute actual
basic and diluted net loss per share. 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 of Kana".
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1997 1998 1999
------------- ------------- --------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues:
License........................ $ -- $ 2,014 $ 10,536
Service........................ 617 333 3,528
------------ ------------- --------------
Total revenues............... 617 2,347 14,064
------------ ------------- --------------
Cost of revenues:
License........................ 54 271
Service........................ 253 666 6,610
------------ ------------- --------------
Total cost of revenues........... 253 720 6,881
------------ ------------- --------------
Gross profit..................... 364 1,627 7,183
Operating expenses:
Sales and marketing............ 512 5,504 21,199
Research and development....... 971 5,669 12,854
General and administrative..... 378 1,826 5,018
Amortization of stock-based
compensation.................. 113 1,456 80,476
Acquisition related costs...... -- -- 5,635
------------ ------------- --------------
Total operating expenses..... 1,974 14,455 125,182
------------ ------------- --------------
Operating loss................... (1,610) (12,828) (117,999)
Other income (expense), net...... 57 227 (744)
------------ ------------- --------------
Net loss..................... $ (1,553) $ (12,601) $ (118,743)
============ ============= ==============
Basic and diluted net loss per
share........................... $ (0.37) $ (2.01) $ (4.61)
============ ============= ==============
Shares used in computing basic
and diluted net loss per share
amounts......................... 4,152 6,258 25,772
============ ============= ==============
</TABLE>
127
<PAGE>
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998 1999
------ ------- -------
(in thousands)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments....... $5,594 $14,035 $54,862
Working capital......................................... 5,364 11,833 40,236
Total assets............................................ 6,158 16,876 70,229
Notes payable, less current portion..................... 51 726 412
Total stockholders' equity.............................. $5,684 $12,951 $48,500
</TABLE>
128
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF KANA
The following discussion of the Financial Condition and Results of
Operations of Kana contains forward-looking statements within the meaning of
Section 27a of the Securities Act of 1993 and Section 21e of the Securities
Exchange Act of 1934. Kana's actual results and timing of certain events could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including, but not limited to, those set forth
under "Risk Factors" and elsewhere in this Joint Proxy Statement/Prospectus.
Overview
Kana was incorporated in July 1996 in California and was reincorporated in
Delaware in September 1999. Kana had no significant operations until 1997.
Through January 1998, Kana was a development stage enterprise and had no
revenues. Kana's operating activities during this period related primarily to
conducting research, developing its initial products, raising capital and
building its sales and marketing organization. In February 1998, Kana released
the first commercially available version of the Kana platform. To date, Kana
has derived substantially all of its revenues from licensing its software and
related services, and Kana has sold its products worldwide primarily through
its direct sales force.
On August 13, 1999, Kana closed a merger with Connectify, Inc. pursuant to
which Connectify became a wholly-owned subsidiary of Kana. 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 was based in San Mateo,
California, and had 31 employees as of the merger.
In connection with the merger, Kana issued approximately 6,982,000 shares
of our common stock in exchange for all outstanding shares of Connectify
capital stock and reserved 416,690 shares of common stock for issuance upon the
exercise of Connectify options and warrants Kana assumed in connection with the
merger. The merger was accounted for as a pooling of interests.
On December 3, 1999, Kana closed a merger with Business Evolution, Inc.
pursuant to which Business Evolution became Kana's wholly-owned subsidiary.
Business Evolution is a leading provider of customer assistance support
software that helps companies prioritize customer queries by urgency, and send
responses through delayed or real-time channels. Business Evolution's offering,
now called Kana Realtime, lets e-businesses engage their customers in a live
two-way dialog while they are browsing a web site, helping them close more
business and increase customer loyalty. Business Evolution is based in
Princeton, New Jersey, and had 66 employees as of the merger.
In connection with the acquisition of Business Evolution, 1,935,206 shares
of Kana common stock, were issued or reserved for issuance for all outstanding
shares, warrants and options of Business Evolution. This transaction was
accounted for as a pooling of interests.
On December 3, 1999, Kana closed a merger with netDialog, pursuant to which
netDialog became Kana's wholly-owned subsidiary. netDialog provides context-
sensitive, self-service customer service software. The company's online self-
service solution, now called Kana Assist, turns e-business web sites into
knowledge bases by delivering predictive and proactive answers to customer
questions directly on the web site. In addition to building customer loyalty by
enabling e-business customers to conveniently and quickly obtain answers to
their questions, it also allows e-businesses to reduce customer support costs
by helping customers directly on the web site without the intervention of a
customer service representative. netDialog was based in San Mateo, California,
and had 45 employees as of the merger.
129
<PAGE>
In connection with the acquisition of netDialog, 1,244,062 shares of Kana
common stock, were issued or reserved for issuance for all outstanding shares,
warrants, convertible notes and options of netDialog. This transaction was
accounted for as a pooling of interests.
On February 6, 2000, Kana and Silknet entered into a merger agreement
whereby Kana will issue approximately 28.5 million shares of common stock in
exchange for all of the outstanding shares of Silknet common stock and assume
Silknet options and warrants to purchase approximately 4.58 million shares of
Kana common stock. The proposed merger will be accounted for as a purchase and
is subject to shareholder approval by both companies. As a result of the merger
with Silknet, Kana expects to incur acquisition-related costs of approximately
$20.7 million which will be included in the estimated purchase price of
Silknet. This is an estimate and is subject to change. There can be no
assurance that Kana will not incur additional charges to reflect costs
associated with the merger and integration of the operations of the two
companies. In addition, Kana estimates that it will record goodwill and
intangible assets of approximately $3.9 billion, which will be amortized over a
period of three years.
Kana derives its 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, acceptance has occurred, 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.
Kana's cost of license revenue includes royalties due to a third party for
technology integrated into some of Kana's products, the cost of product
documentation, the cost of the media used to deliver Kana's 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 Kana's customers.
Kana's operating expenses are classified into three general categories:
sales and marketing, research and development, and general and administrative.
Kana classifies 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.
Kana allocates the total costs for information services and facilities to
each functional area that uses the information services and facilities based on
its relative headcount. These allocated costs include rent and other facility-
related costs for the corporate office, communication charges and depreciation
expense for furniture and equipment.
In connection with the granting of stock options to its employees, Kana
recorded deferred stock-based compensation totaling approximately $97.0 million
through December 31, 1999. This amount represents the total difference between
the exercise prices of stock options and the deemed fair value of the
underlying common stock for accounting purposes on the date these stock options
were granted. This amount is included as a component of stockholders' equity
and is being amortized on an accelerated basis by charges to operations over
the vesting period of the options, consistent with the method described in
Financial Accounting Standards Board (FASB) Interpretation No. 28. Kana
130
<PAGE>
recorded approximately $93.2 million of deferred stock-based compensation for
the year ended December 31, 1999, approximately $3.0 million of deferred stock-
based compensation for the year ended December 31, 1998, and approximately
$890,000 of deferred stock-based compensation for the year ended December 31,
1997. The amortization of deferred stock-based compensation is classified as a
separate component of operating expenses in Kana's consolidated statements of
operations.
Since the beginning of 1997, Kana has incurred substantial costs to develop
its products and to recruit, train and compensate personnel for its
engineering, sales, marketing, client services and administration departments.
As a result, Kana has incurred substantial losses since inception and, for the
year ended December 31, 1999, incurred a net loss of $118.7 million. As of
December 31, 1999, Kana had an accumulated deficit of $132.6 million. Kana
believes its future success is contingent upon providing superior customer
service, increasing its customer base and developing its products. Kana intends
to invest heavily in sales, marketing, research and development, client
services and infrastructure to support these activities. Kana therefore expects
to continue to incur substantial operating losses for the foreseeable future.
Kana had 337 full-time employees as of December 31, 1999 and intends to
hire a significant number of employees in the future. This expansion places
significant demands on Kana's management and operational resources. To manage
this rapid growth, Kana must invest in and implement scaleable operational
systems, procedures and controls. Kana expect future expansion to continue to
challenge its ability to hire, train, manage and retain employees.
Kana believes that its 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
Kana's. Although Kana has experienced significant revenue growth recently, this
trend may not continue. Furthermore, Kana may not achieve or maintain
profitability in the future.
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<PAGE>
Kana Quarterly Results of Operations
The following tables set forth a summary of our unaudited quarterly
operating results for each of the eight quarters in the period ended December
31, 1999. The information has been derived from Kana's unaudited consolidated
financial statements that, in management's opinion, have been prepared on a
basis consistent with the audited consolidated financial statements contained
elsewhere in this joint proxy statement/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
---------------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- -------- --------- -------- -------- -------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues:
License................ $ 161 $ 464 $ 600 $ 788 $ 1,209 $ 1,821 $ 2,781 $ 4,725
Service................ 25 89 139 80 280 517 998 1,733
------- ------- ------- ------- ------- ------- -------- ---------
Total revenues......... 186 553 739 868 1,489 2,338 3,779 6,458
------- ------- ------- ------- ------- ------- -------- ---------
Cost of revenues:
License................ 4 12 17 21 34 38 52 147
Service................ 36 63 225 342 498 851 2,191 3,070
------- ------- ------- ------- ------- ------- -------- ---------
Total cost of
revenues.............. 40 75 242 363 532 889 2,243 3,217
------- ------- ------- ------- ------- ------- -------- ---------
Gross profit............ 146 478 497 505 957 1,449 1,536 3,241
------- ------- ------- ------- ------- ------- -------- ---------
Operating expenses:
Sales and marketing.... 586 1,218 1,723 1,977 2,479 4,180 5,482 9,058
Research and
development........... 918 1,023 1,787 1,941 2,329 2,732 3,384 4,409
General and
administrative........ 255 443 529 599 725 1,086 1,402 1,805
Amortization of
deferred stock-based
compensation.......... 200 277 405 575 520 2,734 3,377 73,845
Acquisition related
costs................. -- -- -- -- -- -- 910 4,725
------- ------- ------- ------- ------- ------- -------- ---------
Total operating
expenses.............. 1,959 2,961 4,444 5,092 6,053 10,732 14,555 93,842
------- ------- ------- ------- ------- ------- -------- ---------
Operating loss.......... (1,813) (2,483) (3,947) (4,587) (5,096) (9,283) (13,019) (90,601)
Other income, net....... 43 24 51 109 (125) (394) (231) 6
------- ------- ------- ------- ------- ------- -------- ---------
Net loss................ $(1,770) $(2,459) $(3,896) $(4,478) $(5,221) $(9,677) $(13,250) $ (90,595)
======= ======= ======= ======= ======= ======= ======== =========
As a Percentage of Total
Revenues:
Revenues:
License................ 86.6 % 83.9 % 81.2 % 90.8 % 81.2 % 77.9 % 73.6 % 73.2 %
Service................ 13.4 16.1 18.8 9.2 18.8 22.1 26.4 26.8
------- ------- ------- ------- ------- ------- -------- ---------
Total revenues......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------- ------- ------- ------- ------- ------- -------- ---------
Cost of revenues:
License................ 2.2 2.2 2.3 2.4 2.3 1.6 1.4 2.3
Service................ 19.4 11.4 30.4 39.4 33.4 36.4 58.0 47.5
------- ------- ------- ------- ------- ------- -------- ---------
Total cost of
revenues.............. 21.5 13.6 32.7 41.8 35.7 38.0 59.4 49.8
------- ------- ------- ------- ------- ------- -------- ---------
Gross profit............ 78.5 86.4 67.3 58.2 64.3 62.0 40.6 50.2
------- ------- ------- ------- ------- ------- -------- ---------
Operating expenses:
Sales and marketing.... 315.1 220.3 233.2 227.8 166.5 178.8 145.1 140.3
Research and
development........... 493.5 185.0 241.8 223.6 156.4 116.9 89.5 68.3
General and
administrative........ 137.1 80.1 71.6 69.0 48.7 46.4 37.1 27.9
Amortization of
deferred stock-based
compensation.......... 107.5 50.1 54.8 66.2 34.9 116.9 89.4 1,143.45
Acquisition related
costs................. -- -- -- -- -- -- 24.1 73.2
------- ------- ------- ------- ------- ------- -------- ---------
Total operating
expenses.............. 1,053.2 535.4 601.4 586.6 406.5 459.0 385.2 1,453.1
Operating loss.......... (974.7) (449.0) (564.1) (528.5) (342.2) (397.0) (344.5) (1,402.9)
Other income, net....... 23.1 4.3 6.9 12.6 (8.4) (16.9) (6.1) 0.1
------- ------- ------- ------- ------- ------- -------- ---------
Net loss............... (951.6)% (444.7)% (527.2)% (515.9)% (350.6)% (413.9)% (350.6)% (1,402.8)%
======= ======= ======= ======= ======= ======= ======== =========
</TABLE>
132
<PAGE>
The amount and timing of Kana's operating expenses generally will vary from
quarter to quarter depending on Kana's level of actual and anticipated business
activities. Kana's revenues and operating results are difficult to forecast and
will fluctuate, and Kana believes that period-to-period comparisons of Kana's
operating results will not necessarily be meaningful. As a result, you should
not rely upon them as an indication of future performance.
Results of Operations
The following table sets forth the results of operations for the periods
presented expressed as a percentage of total revenues.
<TABLE>
<CAPTION>
Years Ended December
31,
------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Revenues:
License............................................ -- % 85.8 % 74.9 %
Service............................................ 100.0 14.2 25.1
------ ------ ------
Total revenues................................... 100.0 100.0 100.0
------ ------ ------
Cost of revenues:
License............................................ -- 2.3 1.9
Service............................................ 41.0 28.4 47.0
------ ------ ------
Total cost of revenues........................... 41.0 30.7 48.9
------ ------ ------
Gross profit......................................... 59.2 69.3 51.1
Operating expenses:
Sales and marketing................................ 83.0 234.5 150.7
Research and development........................... 157.4 241.6 91.4
General and administrative......................... 61.3 77.8 35.7
Amortization of stock-based compensation........... 18.3 62.0 572.2
Acquisition related costs.......................... -- -- 40.1
------ ------ ------
Total operating expenses......................... 319.9 615.9 890.1
------ ------ ------
Operating loss..................................... 260.9 (546.6) (839.0)
------ ------ ------
Other income, (expense) net.......................... 9.2 9.7 (5.3)
------ ------ ------
Net loss......................................... (251.7)% (536.9)% (844.3)%
====== ====== ======
</TABLE>
Operating Results for the Years Ended December 31, 1997, 1998 and 1999
Revenues
Total revenues increased by 500% from $2.3 million for the year ended
December 31, 1998 to $14.1 million for the year ended December 31, 1999,
primarily as a result of increased license revenue. License revenues increased
by 423% from $2.0 million for the year ended December 31, 1998 to $10.5 million
for 1999. This increase in license revenue was due primarily to increased
market acceptance of Kana's products, expansion of Kana's product line and
increased sales generated by Kana's expanded sales force. Total headcount in
Kana's sales department increased from 20 people at December 31, 1998 to 93
people at December 31, 1999. License revenue represented 86% of total revenues
for the year ended December 31, 1998 and 75% of total revenues for 1999.
Service revenues increased by 960% from $333,000 for the year ended
December 31, 1998 to $3.5 million for 1999. Service revenue increased primarily
due to increased licensing activity, resulting in increased revenue from
maintenance contracts, customer implementations and hosted service. Service
revenue represented 14% of total revenues for the year ended December 31, 1998
and 25% of total revenues for 1999.
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Total revenues increased by 280% from $617,000 for the year ended December
31, 1997 to $2.3 million for 1998, primarily because Kana began recognizing
license revenues in February 1998. No license revenues were recognized in 1997.
License revenue resulted from introduction of our product line and growing
market acceptance of Kana's software products. License revenue represented 86%
of total revenues for the year ended December 31, 1998.
Service revenues decreased by 46% from $617,000 for the year ended December
31, 1997 to $333,000 for 1998. This decrease in service revenues was due
primarily to the reduction of a special consulting project. Service revenue
represented 100% of total revenues for the year ended December 31, 1997 and 14%
of total revenues for the year ended December 31, 1998.
Revenues from international sales for the years ended December 31, 1997,
1998 and 1999 were less than 10% of total revenues.
Cost of Revenues
Total cost of revenues increased by 856% from $720,000 in 1998 to $6.9
million in 1999, primarily due to increased cost of service revenues. Cost of
license revenues increased by 402% from $54,000 in 1998 to $271,000 in 1999
associated with increased license revenues. As a percentage of license
revenues, cost of license revenues was 3% in 1998 and 1999. Cost of license
revenues includes third party software royalties, product packaging,
documentation, production and delivery costs for shipments to customers.
Cost of service revenues consists primarily of personnel, facilities and
system costs incurred in providing customer support and with building Kana's
customer service organization. Cost of service revenues increased by 893% from
$666,000 in 1998 to $6.6 million in 1999. The growth in cost of service
revenues was attributable primarily to an increase in personnel dedicated to
support Kana's growing number of customers and related recruiting and travel
expenses as well as facility expenses and system costs. As a percentage of
service revenues, cost of service revenues was 200% in 1998 and 187% in 1999.
Total cost of revenues increased by 185% from $253,000 in 1997 to $720,000
in 1998, primarily due to increased cost of service revenues. Cost of license
revenues increased from none in 1997 to $54,000 in 1998. The increase in the
cost of license revenue was due primarily to royalties, product documentation
costs and delivery costs for shipments to customers. As a percentage of license
revenues, cost of license revenues was none in 1997 and 3% in 1998.
Cost of service revenues increased by 163% from $253,000 for the year ended
December 31, 1997 to $666,000 in 1998. The growth in cost of service revenues
was attributable primarily to an increase in personnel dedicated to support our
growing number of customers and related facility expenses and system costs.
Kana further expects its cost of service expenses to increase due to its recent
mergers and anticipated growth. As a percent of service revenues, cost of
service revenues was 41% in 1997 and 31% in 1998.
Kana anticipates that the cost of license revenue will increase in absolute
dollars as Kana licenses additional technologies, although cost of license
revenue will vary as a percentage of license revenue from period to period.
Kana anticipates that cost of service revenue will increase in absolute
dollars.
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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 by
285% from $5.5 million for the year ended December 31, 1998 to $21.2 million
for the year ended December 31, 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 including advertising and trade show
participation. As a percentage of total revenues, sales and marketing expenses
were 235% for the year ended December 31, 1998 and 151% for the year ended
December 31, 1999. This decrease in sales and marketing expense as a percent of
total revenues was due primarily to the increase in total revenues over the
period. Kana expects to continue to increase its marketing and promotional
efforts and hire additional sales personnel. Kana further expects its sales and
marketing expenses to increase due to its recent mergers. Accordingly, Kana
anticipates that sales and marketing expenses will increase in absolute
dollars, but will vary as a percentage of total revenues from period to period.
Sales and marketing expenses were $512,000 for the year ended December 31,
1997 and $5.5 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 83% in 1997
and 235% in 1998.
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 by 127% from
$5.7 million for the year ended December 31, 1998 to $12.9 million for the year
ended December 31, 1999. This increase was attributable primarily to the
addition of personnel associated with product development and related benefits
and recruiting costs and related consulting expenses. As a percentage of total
revenues, research and development expenses were 242% for the year ended
December 31, 1998 and 91% for the year ended December 31, 1999. This decrease
in research and development expense as a percent of total revenues was due
primarily to the increase in total revenues over the period. Kana expects to
continue to make substantial investments in research and development and
anticipates 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. Kana further expects its research and development expenses to
increase due to its recent mergers.
Research and development expenses increased by 484% from $971,000 for the
year ended December 31, 1997 to $5.7 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 157% in 1997 and 242% in 1998.
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 by 175% from $1.8 million for the year ended
December 31, 1998 to $5.0 million for the year ended December 31, 1999, due
primarily to increased personnel, consultants, facilities expenses and outside
services necessary to support Kana's growth. As a percentage of total revenues,
general and administrative expenses were 78% for the year ended December 31,
1998 and 36% for 1999. This decrease in general and administrative expenses as
a percent of total revenues from 1998 to 1999 was due primarily to the
proportionately greater increase in total revenues than general and
administrative expenses over the period. Kana expects that general and
administrative expenses will increase in absolute dollars as
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Kana adds personnel and incurs additional costs related to the anticipated
growth of its business and operation as a public company. Kana further expects
its general and administrative expenses to increase due to its recent mergers
and anticipated growth. However, Kana expects that these expenses will vary as
a percentage of total revenues from period to period.
General and administrative expenses increased by 383% from $378,000 for the
year ended December 31, 1997 to $1.8 million for the year ended December 31,
1998. The increase was due primarily to the addition of management and
financial personnel necessary to support Kana's growth. As a percentage of
total revenues, general and administrative expenses were 61% in 1997 and 78% in
1998.
Amortization of stock-based compensation
In connection with the granting of stock options to its employees, Kana
recorded stock-based compensation totaling approximately $97.0 million through
December 31, 1999. This amount represents the total difference between the
exercise prices of stock options and the deemed fair value of the underlying
common stock for accounting purposes on the date these stock options were
granted. This amount is included as a component of stockholders' equity and is
being amortized on an accelerated basis by charges to operations over the
vesting period of the options, consistent with the method described in FASB
Interpretation No. 28.
The amortization of stock-based compensation by operating expense is
detailed as follows (in thousands):
<TABLE>
<CAPTION>
Years ended,
December 31,
-----------------
1997 1998 1999
---- ----- ------
<S> <C> <C> <C>
Cost of service............................................ 13 143 19,752
Sales and marketing........................................ 52 564 34,000
Research and development................................... 31 438 19,864
General and administrative................................. 17 311 6,860
--- ----- ------
Total.................................................... 113 1,456 80,476
=== ===== ======
</TABLE>
Subsequent to the mergers with Business Evolution and netDialog, Kana
granted options to certain employees hired from the acquired companies for an
exercise price below the fair market value of the common stock. These options
immediately vested on the date of grant. The difference between the market
value of the underlying common stock and the exercise price of the options was
recorded as compensation expense in the fourth quarter of 1999 in the amount of
approximately $60.4 million.
Acquisition related costs
In connection with the merger with Connectify, Kana recorded a charge for
merger integration costs of $1.2 million consisting primarily of transaction
fees for attorneys and accountants of approximately $390,000 and employee
severance benefits and facility related costs of $780,000 in 1999. As of
December 31, 1999, Kana had $30,000 remaining in accrued merger expenses, which
Kana expects to pay by the first quarter of the following year.
In connection with the mergers with Business Evolution and netDialog, Kana
recorded a nonrecurring charge for merger integration costs of $4.5 million,
consisting primarily of transaction fees for attorneys and accountants of
approximately $1.5 million, advertising and announcements of $1.7 million
incurred as of December 31, 1999, charges for the elimination of duplicate
facilities of approximately $840,000 and severance costs and certain other
related costs of approximately $433,000. As of December 31, 1999, Kana had
$3,118,000 remaining in accrued acquisition related costs, which Kana expects
to pay during 2000.
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Other Income (Expense)
Other income (expense) consists primarily of interest earned on cash and
short-term investments, offset by interest expense related to warrants issued
to convertible debt holders. Other income (expense) decreased by 272% from
income of $227,000 for the year ended December 31, 1998 to an expense of
$744,000 for 1999. The decrease in other income (expense) was due primarily to
interest expense associated with warrants issued to convertible debt holders
offset by increased interest income earned on higher average cash balances.
Other income, net increased by 298% from $57,000 for the year ended
December 31, 1997 to $227,000 for 1998. The increase was due primarily to an
increase in interest income earned on higher balances of cash and short-term
investments primarily from Kana's Series C preferred stock financing in
September 1998.
Provision for Income Taxes
Kana has incurred operating losses for all periods from inception through
December 31, 1999, and therefore has not recorded a provision for income taxes.
Kana has recorded a valuation allowance for the full amount of its gross
deferred tax assets, as the future realization of the tax benefit is not
currently likely.
As of December 31, 1999, Kana had net operating loss carryforwards for
federal and state tax purposes of approximately $44.0 million and $34.6
million, respectively. These federal and state loss carryforwards are available
to reduce future taxable income. The federal loss carryforwards expire at
various dates into the year 2019. Under the provisions of the Internal Revenue
Code, substantial changes in its ownership may limit the amount of net
operating loss carryforwards that could be utilized annually in the future to
offset taxable income.
Net Loss
Kana's net loss was $1.6 million, $12.6 million and $118.7 million for the
years ended December 31, 1997, 1998 and 1999, respectively. Kana has
experienced substantial increases in its expenditures since its inception
consistent with growth in its operations and personnel. In addition, stock
based compensation charges have contributed to the significant increase in net
loss during 1999. Kana anticipates that its expenditures will continue to
increase in the future. Although its revenue has grown in recent quarters, Kana
cannot be certain that it can sustain this growth or that it will generate
sufficient revenue to attain profitability.
Liquidity and Capital Resources
In September 1999, Kana completed the initial public offering of its common
stock and realized net proceeds from the offering of approximately $51.1
million. Prior to the offering, Kana had financed its operations primarily from
private sales of convertible preferred and common stock totaling $40.8 million
and, to a lesser extent, from bank borrowings and lease financing.
Kana's operating activities excluding amortization of stock-based
compensation used $25.7 million of cash for the year ended December 31, 1999,
which is primarily attributable to net losses experienced during this period as
Kana invested in the development of its products, expanded its sales force and
expanded its infrastructure to support its growth. Kana's operating activities
used $10.1 million of cash for the year ended December 31, 1998, which is
primarily attributable to net losses experienced during this period, excluding
amortization of stock-based compensation.
Kana's investing activities, consisting of purchases of computer equipment,
furniture, fixtures and leasehold improvements to support its growing number of
employees and net purchases of short-term investments, used $44.4 million of
cash for the year ended December 31, 1999. Kana's investing activities used
$1.4 million of cash for the year ended December 31, 1998, which is primarily
due to purchases of computer equipment, furniture, fixtures and leasehold
improvements.
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Kana's financing activities generated $75.0 million in cash for the year
ended December 31, 1999, primarily from the net proceeds of its initial public
offering, net proceeds from private sales of preferred and common stock, and
net proceeds from debt arrangements. Kana's financing activities generated
$20.0 million in cash for the year ended December 31, 1998, primarily from the
net proceeds from private sales of preferred stock.
At December 31, 1999, Kana had cash and cash equivalents aggregating $18.7
million and short-term investments totaling $36.2 million. A portion of Kana's
short-term investments secure three letters of credit totalling $1,806,000,
issued in connection with the lease of its corporate office and two other
offices. Kana has a line of credit totaling $3.0 million, which is secured by
all of Kana's assets, bears interest at the bank's prime rate (8.5% as of
December 31, 1999), and expires on March 2, 2000. Kana's total bank debt was
$1.2 million at December 31, 1999. In October 1999, Kana issued $2.8 million of
subordinated promissory notes which bear an annual interest rate of 10%. These
were paid in the first quarter of 2000.
Kana's capital requirements depend on numerous factors. Kana expects to
devote substantial resources to continue its research and development efforts,
expand its sales, support, marketing and product development organizations,
establish additional facilities worldwide and build the infrastructure
necessary to support its growth. Kana has experienced substantial increases in
its expenditures since its inception consistent with growth in operations and
personnel, and Kana anticipates that its expenditures will continue to increase
in the future. Kana believes that its current cash and projected revenues will
be sufficient to meet its working capital and operating resource expenditure
requirements for at least the next 12 months. However, Kana may need to raise
additional funds in order to fund more rapid expansion, including significant
increases in personnel and office facilities; to develop new or enhance
existing services or products; to respond to competitive pressures; or to
acquire or invest in complementary businesses, technologies, services or
products. Additional funding may not be available on favorable terms 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, other than the merger with Silknet, Kana may, from time to time,
evaluate potential acquisitions of other businesses, products and technologies.
In order to consummate potential acquisitions, Kana may issue additional
securities or need additional equity or debt financing and any financing may be
dilutive to existing investors.
Year 2000 Readiness Disclosure
Year 2000 Compliance
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with these Year 2000 requirements or risk system
failure or miscalculations causing disruptions of normal business activities.
In the fourth quarter of 1998 Kana initiated a Year 2000 compliance
program. The program was directed by Kana's quality assurance group. Kana's
quality assurance group was charged with identifying issues of potential risk
within each department and making the appropriate evaluation, modification,
upgrade or replacement. Members of the quality assurance group have worked with
members of each of Kana's principal internal divisions in the course of
assessing Year 2000 compliance.
Kana has not observed any Year 2000 related problems with Kana's business
or products as of this date. However, computer experts have warned that there
may still be residual consequences of the change in centuries and any Year 2000
difficulties could result in a decrease in sales of Kana's
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products, an increase in allocation of resources to address Year 2000 problems
of Kana's customers without additional revenue commensurate with the dedication
of resources, or an increase in litigation costs relating to losses suffered by
Kana's customers due to Year 2000 problems.
Scope of Year 2000 Assessment
The scope of Kana's Year 2000 compliance program included testing the Kana
platform and the IT and non-IT systems used at Kana's corporate office in
Redwood City, California. Kana's other sales offices use the same third-party
hardware and software systems as those in the Redwood City office. Accordingly,
the quality assurance group determined that it would not conduct an independent
review of those systems. The operational areas under investigation included:
. products;
. software applications;
. facilities;
. suppliers and vendors; and
. computer systems.
Kana has not observed any significant Year 2000 related problems as of this
date.
Budget and Schedule
Kana funded its Year 2000 plan from available cash and has not separately
accounted for these expenses. To date, external expenditures for Year 2000
compliance have totaled less than $20,000. Because Kana's products were
designed to be Year 2000 compliant, most of Kana's expenses have related to,
and are expected to continue to relate to, the operating costs associated with
time spent by employees in the internal evaluation process and Year 2000
compliance matters generally. Kana may experience unanticipated, material
problems and expenses associated with Year 2000 compliance that could harm its
business. Finally, Kana is 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.
Kana has completed the evaluation of its products and its third-party
software systems.
Products
Kana has tested the products shipped to date. Kana's testing determined
that these products are capable of properly distinguishing between 20th and
21st century dates, when configured and used in accordance with the related
documentation, and provided that the underlying operating system of the host
machine and any other software used with these products are also capable of
properly distinguishing between 20th and 21st century dates.
Third-party Hardware and Software Systems and Services
Kana evaluated all of the critical third-party systems and software it uses
in its business. Kana received written statements of Year 2000 compliance from
substantially all of the providers of hardware used in its business. Kana has
identified approximately 20 different software vendors that provide software
products in its business. If any of the compliance statements received from its
third-party software or hardware providers are false, Kana's internal systems
and ability to ship its product would be materially harmed.
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Kana obtained written compliance statements as to Year 2000 compliance from
its hosting service provider and its other third-party service providers,
including Kana's Internet service providers, cellular telephone providers and
all of Kana's utilities. Kana received compliance statements from such entities
without additional expenditures by December 31, 1999.
Contingency Plan
Kana may discover residual Year 2000 compliance problems in its systems
that will require substantial revision. In addition, third-party software,
hardware or services incorporated into Kana's 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 Kana's 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.
Kana did not experience any significant disruptions to its business,
results of operations, or products as a result of the transition from 1999 to
2000. Kana plans to retain its Year 2000 contingency plans in case of any
potential Year 2000 related events that may arise in the first half of 2000,
including any Year 2000 problems encountered by Kana's customers and third-
party providers. Kana believes it has taken the steps necessary to understand
and resolve Year 2000 issues; however, failure to adequately address all known
and unknown Y2K readiness issues could result in, among other things, unforseen
operating expenses and lower net income.
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.
Kana has not observed any significant problems with Year 2000 as of this
date.
Quantitative And Qualitative Disclosures About Market Risk
Kana develops products in the United States and sells these products in
North America, Europe, Asia and Australia. Generally, Kana's sales are made in
local currency. As a result, Kana's financial results could be affected by
factors such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets. Kana does not currently use derivative
instruments to hedge against foreign exchange risk.
Kana's exposure to market rate risk for changes in interest rates relates
primarily to Kana's investment portfolio. Kana's investments consist primarily
of short-term municipals and commercial paper, which have an average fixed
yield rate of 6%. These all mature within six months. Kana does not consider
its cash equivalents to be subject to interest rate risk due to their short
maturities.
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standard
(SFAS) No. 133, Accounting for Derivative and Hedging Activities. 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. Kana 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 Kana beginning January 1, 2001.
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In December 1998, the American Institute of Certified Public Accountants
issued SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with
Respect to Certain Transactions. SOP 98-9 amends SOP 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; 2) vendor-specific evidence of fair value
does not exist for one or more of the delivered elements; and 3) the revenue
recognition criteria of SOP 97-2 are satisfied. SOP 98-9 will be effective
beginning January 1, 2000. Kana believes the adoption of SOP 98-9 will not have
a material effect on its results of operations, financial position or cash
flows.
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INFORMATION ABOUT SILKNET
Business of Silknet
Silknet provides electronic customer relationship management software, or
eCRM software, that allows companies to offer marketing, sales, e-commerce and
support services through a single Web site interface personalized for
individual customers. Silknet's products enable a company to deliver these
services to the company's customers over the Web through customer self-service,
assisted service or immediate, direct collaboration among the company and the
company's customers, partners, employees and suppliers. A company's customers
can choose from a variety of communications media, such as the Web, e-mail and
the telephone, to do business with the company. Silknet's software can capture
and consolidate data derived from all of these sources and distribute it
throughout a company and to the company's partners to provide a single view of
the customer's interaction with that company.
Industry Background
The Web has experienced dramatic growth in recent years, both in the number
of users and as a means of conducting commercial transactions, and is expected
to continue to grow rapidly. According to a report by International Data
Corporation, worldwide electronic commerce, or e-commerce, spending over the
Internet is expected to increase from $37 billion in 1998 to $1.3 trillion in
2003. The growth and accessibility of the Web has created significant new
opportunities for marketing, sales, e-commerce and customer support services
for businesses.
As Web technology becomes widely adopted, the challenge for business
conducted over the Web is to provide not only e-commerce, but also high quality
Web-based marketing, sales and service functions. One of the major concerns
specific to online retailers is their relative ineffectiveness in selling to
prospective customers, or converting initial customer inquiries to actual
sales. According to a Forrester report, a majority of online stores convert
fewer than 2% of site visitors to purchasers. In addition, the report states
that in 1998, 66% of shopping carts, or online order forms, were abandoned
before final purchases were made. Many online stores fail to influence the
initial purchase decision and resolve any doubts that may linger during the
moments before a purchase. Most online stores provide only rudimentary searches
and ineffective menus for shoppers with questions. A personalized, knowledge-
rich and interactive Web site is the key to successfully selling in the Web
marketplace. Online stores need to incorporate the most effective sales
practices of their offline counterparts. These effective sales practices
include the ability to direct the customer to the right product, answer
questions, anticipate potential concerns and respond with targeted answers.
Using these practices, an online store can improve sales by directing a
customer to the right products and services.
Many businesses have experienced success selling over the Web, but have
experienced problems handling the requests of these online customers for Web-
based follow-up service. Customer frustrations are aggravated when telephone
service or in-store representatives have no easy way to access records of
events that occurred over the Web. Such mishandling of customer issues can lead
to costly redundancies in service for the company or customer defections to
competitors.
Businesses have found that self-service and electronic collaboration for
marketing, sales and service not only increase customer satisfaction, but also
provide a cost-effective way to sell products and offer services. The Gartner
Group estimates that by 2001, companies will receive 25% of all customer
contacts and inquiries over the Web through e-mail messages and other Web-based
forms. As customers increasingly turn to the Web, businesses are making
considerable investments to handle the growing volume of online customer
interactions and to integrate these interactions with
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their existing infrastructure. According to a Forrester study, 68% of firms
expect to at least double their spending for Web-based applications over the
next two years and 34% expect to at least quadruple these expenditures over
the same period.
To realize the potential of the Web, companies must be able to offer
marketing, sales, e-commerce and customer support services that provide a
single view of the customer. Electronic business software systems must provide
comprehensive, adaptable and scaleable solutions in a Web-based system
architecture that can be tailored to promote a company's brand and identity.
This architecture must allow a company to coordinate its interactions with
customers by integrating a variety of communications media, such as the Web,
e-mail and the telephone. In addition, it must allow a company to create
customized solutions best suited for that company and its customers. Moreover,
these software systems should capture and consolidate data derived from a
number of sources and enable real-time collaboration and sharing of
information that is accessible throughout an organization and with its
customers, partners, employees and suppliers.
The Silknet Solution
Silknet provides eCRM software that allows companies to offer marketing,
sales, e-commerce and support services through a single, Web site interface
tailored by that company to maximize customer satisfaction. Using Silknet's
products, companies are able to:
. provide customers with a self-service capability to obtain a full range
of personalized services over the Web;
. deliver interactive commerce solutions that not only allow the
electronic sale of products, but also integrate the ongoing support and
service of those products online;
. coordinate interactions with customers by integrating a variety of
communications media, such as the Web, e-mail and the telephone, through
which customers may choose to do business;
. integrate Web operations with other business computing systems, such as
fulfillment, call center, and supply chain systems, to respond to
customer inquiries and provide customer service;
. provide an electronic personal sales assistant with the ability to
identify the buying needs and style of a customer; and
. collaborate with customers, partners, employees and suppliers to solve
customer support problems, share information and conduct e-commerce.
The Silknet Strategy
Silknet's goal is to continue to be a leading supplier of eCRM software
solutions. To achieve this goal, key elements of Silknet's strategy include:
Expand on Relationships with Implementation Partners. Silknet has
established relationships with large, international systems integrators and
consulting firms, such as Andersen Consulting, Cambridge Technology Partners,
Cap Gemini, Computer Sciences Corporation, CGI (formerly known as Deloitte &
Touche Consulting Group/DRT Systems), KPMG LLP and Sapient. These
relationships increase Silknet's capacity to both sell and implement its
products. Systems integrators and consulting firms have a strong influence on
their clients' software purchasing decisions. These firms are seeking
interactive electronic business solutions that allow them to satisfy their
clients' needs more rapidly than they can through custom development. Silknet
believes that building on its established relationships and creating new
relationships with selected partners will enable Silknet to sell additional
products to its existing customer base and gain new customers more rapidly.
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Expand Indirect Distribution Channels. Silknet sells its products primarily
through a direct sales force and through relationships with technology vendors
and resellers. As of December 31, 1999, Silknet had quota-carrying sales
representatives in 16 offices in North America and the United Kingdom. During
calendar 2000, Silknet intends to continue to selectively expand its
international sales efforts by expanding relationships with distribution
partners and resellers. In addition, Silknet intends to focus on expanding and
developing its relationships with leading technology vendors and resellers,
including leading software and hardware vendors that view Silknet's products as
complementary to their own product and service offerings. Silknet believes
these relationships will provide opportunities to gain new customers in
specific markets where additional products or services or specific expertise is
needed.
Continue Technology Leadership. Silknet intends to continue to devote
substantial resources to developing innovative software solutions for eCRM.
Silknet believes that the increasing demands placed on interactive electronic
business solutions will require an application architecture that is adaptable,
secure and reliable. To meet these demands, Silknet has developed a Web-based,
multiple-component architecture that incorporates Dynamic Hypertext Markup
Language, Extensible Markup Language, Java, Javascript, Component Object Model
and other leading Internet technologies. Because Silknet's applications are
based on these common standards, they allow customers to quickly change the way
in which they operate.
Increase Silknet's Suite of eBusiness Solutions. Silknet plans to expand
its suite of products and services that enable companies to engage, integrate
and leverage their customers through self-service, assisted service and
interactive collaboration. Many companies are seeking comprehensive electronic
business solutions that meet a broad range of needs, including providing
marketing, sales, e-commerce and support services to their customers, partners,
employees and suppliers. For example, in December 1999, Silknet commercially
released Silknet eSales, a Web-based sales application that provides a virtual
personal sales assistant to customers. Silknet intends to continue to develop
additional applications and features based on its existing Web-based
architecture. Silknet also intends to commercially release a UNIX version of
Silknet's application server in the first half of calendar 2000.
Products
Silknet provides software that allows companies to offer their business
and/or consumer customers personalized marketing, sales, e-commerce and
customer support services through a single Web site interface tailored by that
company to maximize customer satisfaction. Silknet's products enable a company
to deliver these services to the company's customers over the Web through real-
time collaboration and customer self-service or assisted service. Silknet's
products allow a company to coordinate its interactions with its customers by
integrating a variety of communications media through which the company's
customers may choose to do business with the company, such as the Web, e-mail
and the telephone. Silknet's software can capture and consolidate data derived
from all of these sources and distribute this data throughout a company and to
the company's partners in order to provide a single view of the relationship
between the company and its customers. Silknet's software products include:
<TABLE>
<C> <S>
Silknet eBusiness System A comprehensive set of applications and a
Web-based platform on which company-
specific eCRM applications can be created
and deployed.
Silknet eService A comprehensive customer service
application that enables a company to
provide customer self-service and
collaboration using the Web, e-mail, the
telephone and other messaging media.
</TABLE>
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<TABLE>
<C> <S>
Silknet eSales An application that enables a company to
provide a customer with an electronic, or
virtual, personal sales assistant that is
able to make recommendations and handle
objections for each customer based on
that customers' unique circumstances.
Silknet eCommerce An application to create an electronic
storefront using Microsoft's Site Server
engine that easily integrates with the
Silknet eBusiness System.
Silknet eBusiness Toolkit An application that enables a company to
extend the Silknet eBusiness System
platform by creating customized business
functionality.
</TABLE>
Silknet licenses its products on a per user basis. Silknet typically
charges a company from $500 to $2,500 for every private user, who is typically
an employee of that company, and from $1 to $10 for every anticipated public
user, who is typically a customer of that company. The per user charges
generally increase with the number of applications and functions utilized by a
company. For the fiscal year ended 1999 and the six-months ended December 31,
1999, the average license fee per customer was approximately $472,000 and
$322,000, respectively.
Silknet eBusiness System
The Silknet eBusiness System is both a set of Web-based applications and an
expandable platform for building, deploying and adapting software applications.
This platform can service additional users by adding more hardware, allowing a
company to service a growing customer base. Silknet's platform can also be
tailored and extended to add features and functionality to accommodate and
integrate the way a customer requires services and the way a company does
business as that company's business evolves. During 1999, Silknet expanded
Silknet eBusiness to include some functions and features formerly available in
Silknet eService. The Silknet eBusiness System integrates personalized
interactions, collaborations and transactions over the Web among a company and
that company's customers, partners, employees and suppliers.
With the Silknet eBusiness System, a customer can easily access information
from a company's marketing, sales, customer service, billing, purchasing and
product development departments. By deploying the Silknet eBusiness System, a
company can integrate its customers into an environment where customers can
collaborate directly and immediately with company representatives, suppliers
and partners. This process engages customers in an interactive, personalized
exchange to solve problems. It allows a company to leverage the customer's
individual knowledge to provide a more efficient and effective experience for
both the company and its customers. The Silknet eBusiness System employs an
easy-to-use interface that graphically utilizes windows, screen displays and
icons and features a set of components using Web-based browsers and search
engines that provide access to all Silknet applications and a company's other
Web-based solutions. The product integrates internal and external business
processes operating on both traditional mainframe and distributed, networked
computing systems with Silknet's Web-based infrastructure.
The Silknet eBusiness System includes the following applications and
features:
Personalization
The Personalization feature enables a company to provide a personalized Web
site interface for the customer to interact, collaborate and conduct business
over the Web. Using the Personalization feature, a company can:
.notify customers of product improvements, promotions and case updates,
and tailor information to the end-user's unique preferences;
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. provide customers with a personalized view of all of their activity with
that company, including support requests, credit checking, sales
questions and order tracking; and
. make recommendations based on a customer's demographic profile,
preferences and history of service incidents, inquiries and purchases.
Knowledge Manager
The Knowledge Manager application captures, manages, publishes and
distributes corporate knowledge about a company's products and services. A
company can use this application to organize its corporate knowledge base on a
secure platform that is quickly accessible and easily usable by customers,
partners, employees and suppliers. Knowledge Manager provides companies with a
real-time, interactive environment in which to process and publish solutions to
common customer problems. Features of the Knowledge Manager application
include:
. multimedia platform supporting audio, video, graphics, diagrams, screen
displays and internal and external hyperlinks to the Web;
. the ability to render, publish and index multimedia solutions, in real
time, as a direct result of solving customers' problems or inquiries;
and
. the storage of published solutions as business objects so they can be
combined with other business objects, such as customer profiles and case
histories.
Extranet Workflow
The Extranet Workflow application integrates internal and external business
processes with a Web interface, linking a company's legacy and client/server
systems within departments of a company to each other and to other employees,
customers, partners and suppliers. Once installed on the company's server, this
application allows these parties to participate in a cooperative and efficient
process to better service the customer. Unlike conventional workflow systems,
Extranet Workflow does not require a user agent to be installed on each user's
computer, thereby allowing the workflow system to be accessible to a large user
base. Features of the Extranet Workflow application include:
. a graphical user interface that enables users to establish business
processes within the software;
. automated and/or manual routing of tasks to the most appropriate groups
or individuals, including skills-based or availability-based task
assignment, regardless of the method of communication; and
. notifications of workflow events through e-mail, pager, Web site and
other channels.
Business Rules and Business Events
Combined with Extranet Workflow, the Business Rules and Business Events
features allow a company to modify the Silknet eBusiness System to fit the
company's needs, instead of modifying its business processes to fit the
software. Companies can define, categorize, assign and process business data,
tasks and events related to a specific customer relationship. After defining a
business event, a company can then communicate the appropriate response, or
business rule, to resolve the customer problem or inquiry. The Business Events
feature provides a mechanism for the Silknet eBusiness System to execute a
Business Rule when a customer operation is performed. For example, when a
particular customer request is received, if the system identifies the user as a
very important customer, the person responsible for the task might receive a
page alerting him to address the task.
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The Silknet eBusiness System is shipped to a company with a standard set of
Business Rules and Business Events. A company can customize and define its own
Business Rules and Business Events to the unique character and needs of its
customers and the specialized needs of that company's business processes. Using
the Business Rules and Business Events features, a company can:
. dynamically change business processes based on company or customer data;
. assign workflow tasks to individuals or groups; and
. notify individuals or groups of business events, using the Web, e-mail,
the telephone, a pager or other messaging media.
e-Mail Response Management
The e-Mail Response Management application provides a tracking and routing
system to respond to large volumes of incoming customer e-mail. This
application enables customer service and sales representatives to manage both
e-mail received from, and e-mail sent to, customers. The e-Mail Response
Management application manages the e-mail queuing process by urgency, premium
service, escalation level, the response time guaranteed to the customer or
other customer response attributes. Features of this application include:
. automatic, personalized acknowledgment of e-mail; and
. automatic routing of inquiries and cases received by e-mail to the most
appropriate groups or individuals.
Silknet eService
Introduced as Silknet's first product in July 1997, Silknet eService is a
comprehensive customer service application that enables a company to offer its
customers both self-service and assisted service over the Web. Silknet eService
is a software application built upon the Silknet eBusiness System framework.
Silknet eService includes many of the features and applications contained in
the Silknet eBusiness System, such as Personalization, Knowledge Manager,
Extranet Workflow and Business Rules and Business Events, as well as the
following:
Case Management
The Case Management application enables case creation and resolution,
workload management and user-defined workflows to support a company's internal
customer service process. Customer-specific profiles of cases allow customer
service representatives to view all information related to a specific customer.
With Case Management, cases can be organized by user-defined priorities for
purposes of assignment, workload management and reporting. Customer service
representatives can also vary customer interaction media, such as the Web, e-
mail and the telephone, to match customer response preferences. Features of
this application include:
. automatic display of customer case data on the user interface for
viewing, editing, tracking and routing;
. single-screen displays of a workload summary and real-time selection of
case views from a drop-down menu of choices;
. case creation, organization and resolution, and definition of case views
at the individual or system level;
. Web hyperlinks, images, video, audio, screen displays and other data
files to facilitate customer understanding; and
. case history analysis, assistance and contribution, reassignment and
escalation.
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Web Communications
The Web Communications application enables multimedia collaboration over
the Web. This application allows a company to provide assisted service, in
addition to self-service, to its customers, partners, employees and suppliers.
Features of the Web Communications application include:
. real-time chat and electronic white boards to help solve customer
problems;
. the ability to share graphics, screen displays and diagrams; and
. integration with Microsoft's NetMeeting to allow collaboration and video
conferencing among a company's service representatives and its
customers, partners, employees and suppliers.
Call Center Integration
The Call Center Integration application provides customer service
representatives with a single interface to customer inquiries received over
various media, including the Web, e-mail and the telephone. This application
enables companies to capture and manage information from customer interactions
anywhere within the organization in a centralized case management system.
Customer service representatives can access customer information not only from
the call center, but also from their company's intranet to include data from
multiple departments, and from their company's extranet to include data from
customers, partners, employees and suppliers. The Call Center Integration
application provides:
. high-volume call processing and problem resolution;
. single-screen displays of a customer's profile and case history;
. automatic case routing, queuing and escalation; and
. integration with third-party computer telephony software applications.
Other Features of Silknet eService
Silknet eService also contains the following features that enable customer
self-service:
. InfoPath, a problem resolution tool that utilizes Extensible Markup
Language and Java as software development programming languages to
provide a series of natural language questions that help customers
identify symptoms and narrow the problem;
. a tool that allows customers to search a multimedia knowledge base using
simple English questions or commands; and
. FAQs, a listing of frequently asked questions which offers solutions to
common problems or answers to frequent inquiries and which allows
postings to the Web or intranet that can be linked to the multimedia
platform to provide graphical or audible solutions.
Silknet eSales
Silknet eSales is a Web-based application that provides an electronic, or
virtual, personal sales assistant who helps a customer through the online
purchasing process and builds a higher level of trust and interaction between a
company and its customers. This makes it possible for a company to provide
consultative and expert sales assistance in a manner that can be far more cost-
effective than human-assisted sales.
Silknet e-Sales is based on the Trusted Advisor technology of InSite
Marketing Technology, a company that Silknet acquired in October 1999. This
technology uses demographic and psychographic analyses, microsegmentation, and
probability models to personalize the interaction
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between the virtual sales assistant and each customer. The virtual sales
assistant makes recommendations and handles objections for each customer, based
on that customer's unique circumstances. The virtual assistant can also discuss
products and services with customers, and show customers why specific products
are right for them. The tone, style and content of the virtual sales assistant
is mapped to the personal buying style and knowledge base of the customer,
resulting in a more personalized interchange that is intuitively comfortable
and effective.
Silknet eCommerce
The Silknet eCommerce application combines Silknet eBusiness System and
Microsoft's Site Server engine and enables a company to create and manage an
electronic storefront over the Web. In addition, the Silknet eCommerce
application integrates Silknet eService with third-party e-commerce products,
enabling personalized shopping, service and support through a single Web site
interface for both business to consumer and business to business commerce.
Silknet eCommerce creates a single, unified view of the customer relationship
and transactions across departments, such as marketing, sales, customer
service, billing, purchasing and product development, and also among partners,
employees and suppliers. Silknet eCommerce helps companies and their customers
manage the entire customer relationship, from the initial point of interest to
shopping and buying, support and service, marketing and follow-on purchases.
Site Builder Wizard
Site Builder Wizard is a step-by-step, graphical user interface that
assists a company in creating electronic stores or catalogs quickly and easily.
Site Builder Wizard helps a company establish cross-selling information, price
promotions, stores with multi-level departments, and products with varied
attributes.
Intelligent CrossSell
Intelligent CrossSell is an application that allows a company to run
promotions for products and to create cross-selling opportunities through the
promotions. Intelligent CrossSell uses customer trends and transaction
information to recommend products of interest to other customers. For the
customer, Intelligent CrossSell enables customers to navigate a company's Web
site to discover products of interest to them. For the company, Intelligent
CrossSell increases sales opportunities by efficiently guiding customers to
those products that they are most likely to purchase during their visit.
Buy Now
Buy Now is an online, direct marketing tool that enables a company to
present product information and order forms, and capture customer profile
information within a variety of online contexts, such as an online advertising
banner. A company can customize Buy Now to meet the needs of the company's
online marketing campaign.
Commerce Interchange Pipeline Manager
The Commerce Interchange Pipeline Manager allows a company to automate and
manage electronic inventory and purchasing communications with distributors,
resellers and suppliers. With this feature, different document formats for
purchase orders, invoices, receipts and shipping notices can be managed more
easily for multiple trading partners.
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Extranet Workflow
Used with the Silknet eBusiness System foundation, Microsoft's Site Server
engine can be extended to include Extranet Workflow. With Extranet Workflow,
information or questions regarding orders, and the orders themselves, may be
routed throughout the organization through a workflow determined by the
company. Different workflows can be attributed in real time to different order
situations through the application of Silknet eBusiness's Business Rules
feature.
Silknet eBusiness Toolkit
The Silknet eBusiness Toolkit enables companies to extend the capabilities
of the Silknet eBusiness System platform by creating customized business
functionality.
Technology and Product Development
Silknet is a leader in the delivery of interactive, Web-based electronic
business solutions that use advanced, industry standard Web and distributed
object technologies. Silknet's applications are built on Microsoft Windows
Distributed InterNet Applications architecture, which includes technologies
such as Microsoft's Component Object Model and Microsoft's Transaction Server.
This architecture allows Silknet to provide future upgrades of highly
scaleable, multi-tier business applications for deployment over the Web or any
network, while preserving a company's investment in existing applications and
data.
Silknet's products employ a standards-based, Web architecture. Unlike a
client/server architecture, individual users simply need a browser to perform
any function available in the product. No software needs to be distributed to
any user, either within the organization or to customers, partners, employees
or suppliers, making the software easier to implement, maintain and upgrade
than client/server solutions.
Silknet's component architecture allows a company to distribute application
servers for increased scalability and reliability. Both the customer side of
the application, which operates outside a company's firewall, or electronic
security barrier, and is typically open to the public, and the employee side of
the application, which is typically used within a company behind its firewall
and is closed to public access, operate on both Windows NT and UNIX platforms.
Silknet's application server runs on Windows NT only and uses Microsoft's
Transaction Server and Message Queue. Silknet is currently designing a
UNIX/Enterprise Java version of Silknet's application server. The database
server uses Microsoft's SQL Server on a Windows NT platform or Oracle on a UNIX
platform.
Silknet's products employ a model driven architecture to allow companies to
configure the solution that best fits the unique requirements of their
customers and their business without changing the application's source code.
Business analysts and developers use Silknet's graphical designers to describe
their business data and relationships, process definitions and business rules.
This benefit reduces implementation time and costs, and establishes a clear and
consistent upgrade path for future releases of Silknet software. It also
enables Silknet to maintain and support a single source code base for each
application that addresses the varied needs of these companies.
In July 1999, Silknet released the Silknet eBusiness Toolkit, which
includes SilkDataObjects, that enables companies to create customized business
objects that add company-specific functionality to the Silknet eBusiness System
platform, without the need for specialized programming skills. Companies can
incorporate into the Silknet eBusiness System logic and data from other
software systems, allowing Silknet eBusiness System's applications, such as
Business Rules and Extranet Workflow, to respond automatically to changes in
these other software systems.
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Customers
The following is a partial list of Silknet's customers as of December 31,
1999:
<TABLE>
<S> <C>
3Com Microsoft
Autodesk MyWay.com
Bank of America Office Depot
Bell Advanced Communications PC Connection
Beyond.com Policy Management Systems Corporation
Cigna priceline.com, Incorporated
cozone.com Provident Bank
e*Trade SBC Internet
GEAC Computer Corporation Sitara Networks
Inacom Corp. Sprint PCS
Insurance Holdings of America The Travel Company
KPMG Peat Marwick toysmart.com
MachOne Communications
</TABLE>
Support and Professional Services
Silknet offers a broad range of support and training services to its
customers. Silknet believes that providing a high level of customer service and
technical support is necessary to achieve rapid product implementation,
customer satisfaction and continued revenue growth.
Silknet provides implementation services to assist companies in optimizing
the benefits of Silknet's solutions. In addition, systems integrators and
consulting firms often help companies to implement Silknet's products. As of
December 31, 1999, Silknet had 38 employees dedicated to providing
implementation services. These employees often work closely with the staffs of
third-party systems integrators to train their consultants in the
implementation of Silknet software. A typical implementation engagement lasts
three to six months and involves the planning, configuration, testing and
implementation of the products. These services are generally billed on a per
day basis. Silknet believes that these implementation projects not only help
ensure a company's success with Silknet's products, but also allow Silknet
consultants and systems engineers to gain industry-specific knowledge that can
be leveraged in future projects and products.
Silknet's customers have a choice of support options depending on the level
of service desired. Silknet maintains a technical support hotline staffed by
engineers from 8:00 a.m. to 8:00 p.m., Eastern time, Monday through Friday,
from its corporate headquarters in Manchester, New Hampshire. Silknet uses the
Silknet eService application to track and manage its own customer service
inquiries and to provide 24-hour technical support. Silknet provides training
in the use of its products through classroom instruction at its corporate
headquarters and at other training sites throughout North America and in
Europe. As of December 31, 1999, Silknet had five technical support engineers.
Sales and Marketing
Silknet sells its products primarily through a direct sales force and
through relationships with systems integrators and resellers. The sale of
Silknet's products is often an enterprise-wide decision by prospective
customers. The sales process generally ranges from three to nine months,
depending on the level of education prospective customers need regarding the
use and benefits of Silknet's products. As of December 31, 1999, Silknet's
direct sales organization consisted of 22 employees located in 15 offices
throughout North America and two employees in an office in the United Kingdom.
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In addition, Silknet had ten employees in North America and two employees in
the United Kingdom responsible for demonstrating Silknet's products and
assisting the sales organization.
A key element of Silknet's market penetration strategy is the continued
development of relationships with industry leaders in various complementary
areas. Silknet believes these relationships increase its market exposure and
presence, generate qualified opportunities for Silknet to sell its products and
assist Silknet in implementing its products.
Silknet has established relationships with large, international systems
integrators and consulting firms, such as Andersen Consulting, Cambridge
Technology Partners, Cap Gemini, CGI, KPMG LLP and Sapient. Systems integrators
and consulting firms have a strong influence on software purchasing decisions
within large companies, and they are seeking interactive electronic business
solutions that allow them to satisfy their clients' needs more rapidly than
they can through custom development. Silknet believes that broadening its
relationships with systems integrators and consulting firms will enable Silknet
to sell additional products to its existing customer base and gain new
customers more rapidly.
Silknet also has relationships with software and hardware vendors and
resellers, such as AnswerSoft, Calico Technology, Genesys Telecommunications,
Hewlett-Packard, and NCR, that generally view Silknet's products as
complementary to their product and service offerings. During calendar year
2000, Silknet intends to form additional relationships with leading technology
vendors. These relationships are intended to provide Silknet with opportunities
to penetrate specific markets, where either additional industry-specific
products or services are needed to secure the sale, or expertise in a
particular vertical market is needed to sell effectively. As of December 31,
1999, Silknet had 11 employees devoted to developing corporate partnerships and
strategic alliances.
Silknet's marketing organization utilizes a variety of programs to support
its products. As of December 31, 1999, Silknet's marketing organization
consisted of 21 employees. Silknet's marketing programs include:
. market research and analysis;
. product and strategy updates with industry analysts;
. public relations activities and speaking engagements;
. direct mail and relationship marketing programs;
. telemarketing, seminars and trade shows;
. brochures, data sheets and white papers; and
. Web site marketing.
Competition
The market for Silknet's products is new and rapidly evolving, and is
expected to become increasingly competitive as current competitors expand their
product offerings and new companies enter the market. The principal competitive
factors in the Web-based, interactive electronic business solutions market
include:
. adherence to emerging Web-based technology standards;
. comprehensiveness of applications;
. adaptability, flexibility and scalability;
. real-time, interactive capability with customers, partners, employees
and suppliers;
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. integration with a variety of communications media;
. ease of use;
. ease of implementation;
. customer service and support; and
. price.
Although Silknet believes that it currently competes favorably with respect
to these factors, there can be no assurance that Silknet can maintain its
competitive position against current and potential competitors, especially
those with longer operating histories, greater name recognition and
substantially greater financial, technical, marketing, management, service,
support and other resources.
Silknet currently faces competition primarily from in-house and third-party
custom development efforts. Silknet expects that these solutions will continue
to be a principal source of competition for the foreseeable future.
Silknet's current competitors include a number of companies offering one or
more solutions for the electronic business solutions market, some of which are
directly competitive with Silknet's products. For example, Silknet's
competitors include companies providing e-business and online customer
management solutions, such as BroadVision, Inc., and client/server-based, call-
center customer service solutions, such as Siebel Systems, Inc., Vantive
Corporation, and Clarify, Inc. In addition, Silknet competes with providers of
stand-alone point solutions for e-mail response capabilities, and providers of
solutions for knowledge base applications, such as Primus Knowledge Solutions,
Inc.
Silknet also may face competition from systems integrators and consulting
firms which design and develop custom systems and perform custom integration.
Some of these firms may possess industry-specific expertise or reputations
among potential customers for offering enterprise solutions to electronic
business application needs. These systems integrators and consulting firms can
be resellers of Silknet's products and may engage in joint marketing and sales
efforts with Silknet. Silknet relies upon these firms for recommendations of
Silknet's products during the evaluation stage of the purchase process, as well
as for implementation and customer support services. These systems integrators
and consulting firms may have similar, and often more established,
relationships with Silknet's competitors, and there can be no assurance that
these firms will not develop, market or recommend competing software
applications.
Research and Development
Silknet devotes a substantial portion of its resources to developing new
products and product features, extending and improving its products and
technology, and researching new technological initiatives in the market for
Web-based, interactive electronic business solutions. This new and emerging
market is characterized by rapid technological change, new product
introductions and enhancements, evolving industry standards and rapidly
changing customer requirements. The introduction of products incorporating new
technologies and the emergence of new industry standards could render existing
products obsolete and unmarketable. Silknet's future success will depend in
part on its ability to anticipate changes, enhance its current products,
develop and introduce new products that keep pace with technological
advancements and address the increasingly sophisticated needs of its customers.
As an example of its technology initiatives, Silknet intends to commercially
release a UNIX version of its application server in the first half of calendar
year 2000.
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As of December 31, 1999, Silknet had 100 employees engaged in research and
development activities. Silknet's research and development expenditures for
fiscal year 1999, 1998, 1997 and for the six-months ended December 31, 1999,
were approximately $7.2 million, $2.9 million, $1.0 million and $6.6 million,
respectively. Silknet expects that it will continue to commit significant
resources to research and development in the future. To date, all research and
development expenses have been expensed as incurred. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Silknet."
Intellectual Property and Proprietary Rights
Silknet's success and competitiveness are dependent to a significant degree
on the protection of its proprietary technology. Silknet relies primarily on a
combination of copyrights, trademarks, licenses, trade secret laws and
restrictions on disclosure to protect its intellectual property and proprietary
rights. Silknet also enters into confidentiality agreements with its employees
and consultants, and generally controls access to and distribution of its
documentation and other proprietary information. Despite these precautions,
others may be able to copy or reverse engineer aspects of Silknet's products,
to obtain and use information that Silknet regards as proprietary or to
independently develop similar technology. Any such actions by competitors could
have a material adverse effect on Silknet's business, operating results and
financial condition.
In addition, the laws of some foreign countries do not protect Silknet's
proprietary rights to the same extent as do the laws of the United States, and
effective patent, copyright, trademark and trade secret protection may not be
available in these jurisdictions.
Litigation may be necessary in the future to enforce or defend Silknet's
intellectual property and proprietary rights, to protect Silknet's trade
secrets or to determine the validity and scope of the intellectual property and
proprietary rights of others. This litigation, whether successful or
unsuccessful, could result in substantial costs and diversion of management and
technical resources, either of which could have a material adverse effect on
Silknet's business, operating results and financial condition.
Silknet attempts to avoid infringing known intellectual property and
proprietary rights of third parties in its product development efforts.
However, Silknet has not conducted and will not conduct comprehensive patent
searches to determine whether the technology used in its products infringes
patents held by third parties. In addition, product development is inherently
uncertain in a rapidly evolving technological environment in which there may be
numerous patent applications pending, many of them which are confidential when
filed, with regard to similar technologies. If Silknet was to discover that its
products violated third party proprietary rights, it may be liable for
substantial damages. In addition, Silknet may be required to reengineer its
products or seek to obtain licenses to continue offering such products, and
there can be no assurance that such efforts would be successful.
Silknet is pursuing the registration of some of its trademarks in the
United States and in other countries, although Silknet has not yet secured
registration of most of its marks. Silknet has applications pending for
trademark registrations for "Silknet" and "Silknet" combined with the Silknet
logo in the United States, Canada, the European Union Community, Australia,
China, Estonia, Iceland, Indonesia, South Korea, Latvia, Lithuania, New
Zealand, Norway, Poland, Singapore, and South Africa. Silknet's applications
for the registration of "Silknet" and "Silknet" combined with the Silknet logo
have received preliminary refusals in Canada because another company filed an
earlier application for the use of "Silk" in connection with Internet
information resource services.
Other companies have filed trademark applications for marks similar to the
names of Silknet's products. For example, IBM has filed several U.S. trademark
applications for marks incorporating the
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term "e-business." Silknet's use of Silknet eBusiness System could infringe on
the rights of IBM and other companies using marks that contain the term
"eBusiness." Silknet's use of "eBusiness," as well as the use of other marks,
may result in costly litigation which could divert management's attention and
resources, cause product shipment delays or require Silknet to pay damages
and/or to enter into royalty or license agreements. There can be no assurance
that a license agreement would be available to Silknet on commercially
reasonable terms, if at all, and Silknet may be required to stop using the name
"eBusiness" for its products. Further, because terms such as eBusiness,
eCommerce and eService are becoming widely used and descriptive, Silknet does
not expect to be able to prevent third parties from using these names for
competing products.
Silknet currently licenses technology from third parties that Silknet
incorporates into its products. For example, Silknet licenses Web information
server, transaction server and related technologies from Microsoft. There can
be no assurance that technology from these providers or others will continue to
be available to Silknet on commercially reasonable terms, if at all. The loss
or inability to access such technology could result in delays in development
and introduction of new products or enhancements by Silknet until equivalent or
replacement technology could be accessed, if available, or developed, if
feasible, by Silknet, which could have a material adverse effect on Silknet's
business, operating results and financial condition. Moreover, although Silknet
is generally indemnified against claims that technology licensed from third
parties infringes the intellectual property and proprietary rights of others,
such indemnification is not always available for all types of intellectual
property and proprietary rights and in some cases the scope of such
indemnification is limited. Even if Silknet receives broad indemnification,
third party indemnitors are not always well capitalized and may not be able to
indemnify Silknet in the event of infringement, resulting in substantial
exposure to Silknet. There can be no assurance that infringement or invalidity
claims arising from the incorporation of third party technology, and claims for
indemnification from Silknet customers resulting from these claims, will not be
asserted or prosecuted against Silknet. These claims, even if not meritorious,
could result in the expenditure of significant financial and managerial
resources in addition to potential product redevelopment costs and delays, all
of which could materially adversely affect Silknet's business, operating
results and financial condition.
Employees
As of December 31, 1999, Silknet had a total of 241 employees, 169 of whom
were based at Silknet's headquarters in Manchester, New Hampshire. None of
Silknet's employees are subject to a collective bargaining agreement. Silknet
believes that its employee relations are good.
Facilities
Silknet currently has one lease for approximately 44,092 square feet of
space in an office building in Manchester, New Hampshire, its headquarters.
Under the terms of the lease, Silknet is entitled to occupy an additional
10,347 square feet located in its current office building beginning March 2000,
and an additional 33,655 square feet located in an adjacent office building
beginning May 2000, upon the completion of renovations. The lease expires in
April 2005, and Silknet has an option to extend the lease for two additional
five-year terms. As of December 31, 1999, Silknet also leased office space in
18 other cities for its sales and support personnel. Silknet believes that
these existing facilities are adequate to meet its current, foreseeable
requirements or that suitable additional or substitute space will be available
on commercially reasonable terms.
Legal Proceedings
Silknet is not a party to any material legal proceedings.
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MANAGEMENT OF SILKNET
Directors, Executive Officers and Other Key Employees
The directors and executive officers of Silknet are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
James C. Wood........... 43 Chairman of the Board, President and Chief Executive Officer
Nigel K. Donovan........ 44 Senior Vice President and Chief Operating Officer
Patrick J. Scannell,
Jr..................... 46 Vice President, Chief Financial Officer, Treasurer and Secretary
Guy Bradley(1).......... 36 Director
Joo Hock Chua(1)........ 44 Director
Stanley Fung(2)......... 42 Director
Andrew Goldfarb(2)...... 32 Director
Glen L. Urban........... 58 Director
</TABLE>
- --------
(1)Member of the Silknet compensation committee
(2) Member of the Silknet audit committee
Directors and Executive Officers
James C. Wood founded Silknet and has served as Chairman of the Board,
President and Chief Executive Officer since its inception in March 1995. From
January 1988 until November 1994, he served as President and Chief Executive
Officer of CODA Incorporated, a subsidiary of CODA Limited, a financial
accounting software company. Mr. Wood also served as a Director of CODA Limited
from November 1988 until November 1994.
Nigel K. Donovan has served as Silknet's Senior Vice President and Chief
Operating Officer since February 1999. From November 1995 to February 1999 he
served as Vice President-- Professional Services. From November 1996 to October
1998, he also served as Silknet's Treasurer and from May 1997 to October 1998
as its Chief Financial Officer. In addition, Mr. Donovan served as director
from October 1996 to February 1999. From March 1988 until October 1995, Mr.
Donovan served as Vice President--Professional Services at CODA Incorporated.
Patrick J. Scannell, Jr. has served as Silknet's Chief Financial Officer
and Treasurer since November 1998 and was named Vice President and Secretary in
February 1999. From September 1992 until October 1998, Mr. Scannell served as
Executive Vice President, Chief Financial Officer and Treasurer of Applix,
Inc., a customer interaction software company.
Guy Bradley has served as a director of Silknet since October 1996. Mr.
Bradley has been affiliated with CMG @Ventures since August 1994. He has been a
general partner or managing member of CMG @Ventures since January 1995. He was
Director of International Sales and Marketing for Booklink, Inc., an affiliate
of CMG @Ventures, from August 1994 to December 1994.
Joo Hock Chua has served as a director of Silknet since October 1998. Mr.
Chua has been a Vice President/Assistant General Manager at Vertex Management
(II) Pte Ltd since July 1995, a Senior Manager from July 1991 to June 1995 and
a Manager from June 1988 to June 1991. Mr. Chua is a director of Ultro
Technologies Ltd and ASA Ceramic Ltd, both publicly-listed in Singapore, and
several privately held companies in the United States, Singapore and the
People's Republic of China.
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Stanley Fung has served as a director of Silknet since October 1996. Mr.
Fung has been with Zero Stage Capital since 1992, as Managing Director since
December 1998 and as General Partner from October 1994 to December 1998. Mr.
Fung is a director of RoweCom Inc. and several privately-held companies.
Andrew Goldfarb has served as a director of Silknet since February 1999.
Since March 1997, Mr. Goldfarb has been a Managing Principal at JAFCO America
Ventures, Inc. Mr. Goldfarb was employed by Trans National Group, as Vice
President from August 1996 to March 1997 and as director of Trans National
Ventures, the venture capital division of Trans National Group, from September
1994 to July 1996.
Glen L. Urban has served as a director of Silknet since October 1999. Since
1966, Mr. Urban has been a member of the faculty of the Sloan School of
Management at the Massachusetts Institute of Technology where he served as dean
from July 1993 until July 1998. From January 1997 until October 1999, Mr. Urban
served as a director of InSite Marketing Technology, Inc., a privately held
company which Silknet acquired in October 1999.
Other Key Employees
Eric Carlson has served as Silknet's Vice President and Chief Technology
Officer since February 1999, Chief Technology Officer since September 1996 and
Senior Programmer/Analyst from June 1995 to September 1996. From June 1994 to
June 1995, he served as Client/Server Technology Analyst at PC Connection, a
reseller of personal computer hardware and software.
James P. Davis has served as Silknet's Vice President--Business Development
since January 1997. From June 1990 to December 1996, Mr. Davis held various
senior management positions at CODA Incorporated, including Vice President of
Sales from January 1994 to December 1996 and acting President and Chief
Executive Officer from November 1994 to July 1995.
David B. Fowler has served as Silknet's Vice President--Marketing since
April 1999. From April 1995 to March 1999, Mr. Fowler served as Vice
President--Sales and Marketing for Gradient Technologies, a software company.
From December 1993 to March 1995, Mr. Fowler served as Vice President--Sales
and Marketing for FTP Software.
V. Anthony Giannelli has served as Silknet's Vice President--International
since October 1998, and from February 1998 to October 1998, he served as Vice
President--Marketing. From November 1995 to February 1998, Mr. Giannelli served
as Vice President of Marketing and Business Development of Applix, Inc. From
May 1993 to October 1995, he served as Vice President-- Marketing of Open Data
Corporation, a software company.
Mark H. Green has served as Silknet's Vice President--Sales since October
1997, and from November 1996 to October 1997, he served as Director of Sales.
From June 1996 to November 1996, Mr. Green served as Alliance Manager for i2
Technologies, a software company. From November 1991 to June 1996, Mr. Green
served as a sales representative with CODA Incorporated.
Committees of the Board of Directors
Silknet's compensation committee consists of Messrs. Bradley and Chua. It
reviews and evaluates the salaries and incentive compensation of Silknet's
management and key employees and makes recommendations concerning these matters
to the Silknet board. The compensation committee also administers Silknet's
stock option and stock purchase plans.
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Silknet's audit committee consists of Messrs. Goldfarb and Fung. It reviews
the results and scope of audits and other services provided by Silknet's
independent public accountants and reviews Silknet's system of internal
accounting and financial controls. The audit committee also reviews such other
matters with respect to Silknet's accounting, auditing and financial reporting
practices and procedures as it may find appropriate or may be brought to its
attention.
Director Compensation
Silknet reimburses its non-employee directors for their reasonable out-of-
pocket expenses incurred in attending meetings of the board of directors. No
director who is also an employee of Silknet receives separate compensation for
services rendered as a director. Non-employee directors are also eligible for
participation in the Silknet 1999 Non-Employee Director Stock Option Plan, or
director plan.
On May 5, 1999, Silknet granted to each of Mr. Guy Bradley, Mr. Joo Hock
Chua, Mr. Stanley Fung and Mr. Andrew Goldfarb, all of whom are non-employee
directors of Silknet, an option to purchase 10,000 shares of Silknet common
stock at an exercise price of $15.00 per share under the Silknet director plan.
In addition, in October 1999, Silknet granted to Mr. Glen Urban, a non-employee
director of Silknet, an option to purchase 10,000 shares of Silknet common
stock at an exercise price of $65.50 per share under the Silknet director plan.
These options become exercisable in equal annual installments over three years.
All unvested options will vest in full and become immediately exercisable upon
consummation of the merger with Kana.
See "Information About Silknet--Stock Plans."
Executive Compensation
The following Summary Compensation Table sets forth the total compensation
paid or accrued for the fiscal years ended June 30, 1999, 1998 and 1997 for
Silknet's named executive officers, including Silknet's chief executive officer
and each of the two other most highly compensated executive officers. In the
table below, columns required by the regulations of the Securities and Exchange
Commission have been omitted where no information was required to be disclosed
under those columns.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
----------------------- -------------
Securities
Underlying
Options(1)
Name and Principal Position Year Salary($) Bonus($) (# of Shares)
--------------------------- ---- --------- -------- -------------
<S> <C> <C> <C> <C>
James C. Wood............................. 1999 186,122 100,000 --
Chairman of the Board, President and 1998 140,881 -- --
Chief Executive Officer 1997 139,994 -- --
Nigel K. Donovan.......................... 1999 158,290 100,000 45,000
Senior Vice President and Chief 1998 120,750 -- --
Operating Officer
Patrick J. Scannell, Jr.(2)............... 1999 106,375 100,000 150,000
Vice President, Chief Financial 1998 -- -- --
Officer, Treasurer and Secretary
</TABLE>
- --------
(1) Silknet did not grant any restricted stock awards or stock appreciation
rights or make any long term incentive plan payouts to the named executive
officers during the fiscal years ended June 30, 1999, 1998 and 1997.
(2)Mr. Scannell commenced employment with Silknet in November 1998.
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<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth certain information concerning grants of
stock options to the named executive officers during the fiscal year ended June
30, 1999. Six months after the date of grant, 12.5% of the shares underlying
such options become exercisable. The remaining shares become exercisable in 42
equal monthly installments thereafter. Silknet did not grant any stock
appreciation rights to the named executive officers during the fiscal year
ended June 30, 1999.
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed Annual
Rates of Stock
Number of Percent of Price
Securities Total Options Appreciation for
Underlying Granted to Exercise or Option Term(3)
Options Employee in Base Price Expiration -----------------
Name Granted (#) Fiscal Year ($/Share)(2) Date 5% 10%
---- ----------- ------------- ------------ ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
James C. Wood(1)........ -- -- -- -- -- --
Nigel K. Donovan........ 45,000 3.2% $1.75 8/19/08 $ 49,525 $125,507
Patrick J. Scannell,
Jr. ................... 100,000 7.2% $1.75 11/2/08 $395,113 $732,810
............. 50,000 3.6% $5.50 2/22/09 $321,175 $674,310
</TABLE>
- --------
(1)Silknet did not grant any stock options to Mr. Wood during the fiscal year
ended June 30, 1999.
(2) The exercise price per share of each option was determined by the board of
directors to be equal to the fair market value per share of Silknet's
common stock on the date of grant. These options have a term of ten years
from the date of grant.
(3) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date. These assumptions are not intended to forecast
future appreciation of the price of Silknet's common stock. The potential
realizable value computation does not take into account federal or state
income tax consequences of option exercises or sales of appreciated stock.
This table does not take into account any appreciation in the price of
Silknet's common stock since the date of grant.
Fiscal Year-End Stock Option Values
None of the named executive officers exercised options during the fiscal
year ended June 30, 1999. The following table sets forth certain information
with respect to the value of options held by such officers as of June 30, 1999.
The value of unexercised in-the-money options has been calculated by
determining the difference between the exercise price per share payable upon
exercise of such options and the fair market value of Silknet's common stock as
quoted on the Nasdaq Stock Market on June 30, 1999, and does not reflect
amounts that may be actually received by the named executive officers upon the
exercise of such options.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal Year In-the-Money Options at
End Fiscal Year End($)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
James C. Wood........... -- -- -- --
Nigel K. Donovan........ 411,602 68,048 $14,133,964 $2,277,518
Patrick J. Scannell,
Jr. ................... 14,583 135,417 477,593 4,247,407
</TABLE>
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Employment Arrangements
On April 13, 1999, Silknet entered into an employment agreement and a
noncompetition, confidentiality and inventions agreement with each of its
executive officers. Each employment agreement provides for the payment of
salary and bonus, terminates on June 30, 2001 unless earlier terminated, and
may be extended upon mutual agreement of the parties. In addition, each
employment agreement provides that if the officer is terminated without just
cause, as defined in each employment agreement, the officer will receive a
severance payment equal to twelve months salary. Finally, in the event of an
acquisition, as defined in each employment agreement, if the officer:
. is not offered employment by the acquiring corporation in a comparable
position and at a comparable salary; or
. is terminated at any time for other than just cause within twelve months
following the completion of the acquisition, the officer will receive a
severance payment equal to twelve months salary and all unvested options
held by the officer will accelerate and become immediately exercisable
and will remain exercisable for a period of six months after the date of
termination of employment.
On February 6, 2000, Silknet and Mr. Wood entered into Amendment No. 1 to
Mr. Wood's employment agreement, which provides that the completion of the
merger with Kana will not result in any severance payments to Mr. Wood or any
acceleration of Mr. Wood's outstanding options to purchase Silknet common stock
under the terms of his employment agreement.
On February 6, 2000, Silknet and Mr. Scannell entered into Amendment No. 1
to Mr. Scannell's employment agreement, which provides that the agreement will
terminate on August 5, 2000. On that date, Mr Scannell will be entitled to
receive a severance payment equal to twelve-months salary at the then current
monthly rate payable in the same manner as such salary was payable during Mr.
Scannell's regular term of employment, and all outstanding unvested options
held by him will vest in full and become immediately exercisable and will
remain exercisable for a period of six months after August 5, 2000.
The noncompetition, confidentiality and inventions agreements include
certain restrictive covenants for Silknet's benefit relating to non-disclosure
by the officer of Silknet's confidential business information and its right to
inventions and technical improvements made by the officer. These agreements
also contain a provision prohibiting the officer from soliciting Silknet's
employees or customers for a period of one year after termination of the
officer's employment.
Stock Plans
Employee Stock Option Plan. The 1995 option plan was approved by the board
of directors on August 8, 1995 and was adopted by the stockholders on September
25, 1995. A total of 2,391,900 shares of common stock have been reserved for
issuance under the 1995 option plan. Under the 1995 option plan, Silknet was
authorized to grant options to purchase shares of common stock intended to
qualify as incentive stock options as defined under Section 422 of the Internal
Revenue Code of 1986, as amended, and non-qualified stock options to Silknet's
officers and other employees. Options granted under the 1995 option plan are
exercisable within ten years of the original grant date and become exercisable
pro rata on a monthly basis over a period of four years from the date of grant.
The 1995 option plan provides that upon an acquisition intended to be accounted
for as a pooling-of-interests, the vesting of all options to purchase common
stock will accelerate by a period of one year. In addition, upon the
termination of an employee without cause or for good reason prior to the first
anniversary of the completion of such an acquisition, all options then
outstanding under the 1995 option plan held by that employee will immediately
become exercisable. Finally, on the first year anniversary of the completion of
such an acquisition, all options then outstanding under the 1995 option plan
will immediately become exercisable. In connection with the merger with Kana,
the Silknet board of directors voted to accelerate the vesting schedule of all
outstanding options to purchase Silknet common stock under the 1995 option plan
by a period of one
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year. An option is not transferable by the recipient except by will or by the
laws of descent and distribution. As of February 3, 2000, options to purchase
2,704,850 shares had been granted under the 1995 option plan. Of that amount,
options to purchase 1,325,914 shares of Silknet's common stock remain
outstanding as February 3, 2000 and are exercisable at prices ranging from
$0.02 per share to $46.38 per share. No additional options may be granted under
the 1995 option plan.
1999 Stock Option and Incentive Plan. The 1999 stock plan was approved by
the board of directors and was adopted by the stockholders in February 1999. A
total of 1,854,516 shares of common stock are reserved for issuance under the
1999 stock plan. The 1999 stock plan provides that the number of shares
authorized for issuance will automatically increase by 5% of the outstanding
number of shares of Silknet's common stock on December 31, 2000 and 2001 up to
a maximum of an additional 2,500,000 shares of common stock. Under the terms of
the 1999 stock plan, Silknet is authorized to grant incentive stock options as
defined under the Internal Revenue Code, non-qualified options, stock awards or
opportunities to make direct purchases of common stock to employees, officers,
directors, consultants and advisors of Silknet and its subsidiaries.
The 1999 stock plan is administered by Silknet's compensation committee.
Silknet's compensation committee selects the individuals to whom options will
be granted and determines the option exercise price and other terms of each
award, subject to the provisions of the 1999 stock plan. The 1999 stock plan
provides that upon an acquisition intended to be accounted for as a pooling-of-
interests, the vesting of all options to purchase common stock will accelerate
by a period of one year. In addition, upon the termination of an employee
without cause or for good reason prior to the first anniversary of the
completion of such an acquisition, all options then outstanding under the 1999
stock plan held by that employee will immediately become exercisable. Finally,
on the first year anniversary of the completion of such an acquisition, all
options then outstanding under the 1999 stock plan will immediately become
exercisable. In connection with the merger with Kana, the Silknet board of
directors voted to accelerate the vesting schedule of all outstanding options
to purchase Silknet common stock under the 1999 stock plan by a period of one
year. An option is not transferable by the recipient except by will or by the
laws of descent and distribution, or in the case of non-qualified stock
options, only to the extent set forth in the agreement relating to the non-
qualified stock option or by a valid domestic relations order. No options may
be exercised following termination of employment for cause. The term of the
1999 stock plan is ten years, unless sooner terminated by vote of the board of
directors. As of February 3, 2000, options to purchase 924,823 shares of
Silknet's common stock were outstanding under the 1999 stock plan and options
to purchase 32,782 shares had been exercised.
1999 Non-Employee Director Stock Option Plan. Silknet's 1999 Non-Employee
Director Stock Option Plan, or director plan, was approved by the board of
directors and was adopted by the stockholders in February 1999 and became
effective on May 5, 1999. A total of 350,000 shares of common stock have been
authorized for issuance under the director plan. As of February 3, 2000,
options to purchase 50,000 shares of Silknet's common stock were outstanding
under the director plan, none of which have been exercised.
The director plan is administered by Silknet's compensation committee.
Under the director plan, each non-employee director who was a member of
Silknet's board of directors on May 5, 1999 was automatically granted an
initial option to purchase 10,000 shares of common stock. Directors elected to
the board after May 5, 1999 will receive an initial option grant to purchase
10,000 shares of common stock on the date such director is first elected to the
board of directors. In addition, if a director continues to serve as a member
of the board of directors, such non-employee director will be automatically
granted on the third anniversary of his or her initial option grant date and
each three years thereafter an option to purchase 10,000 shares of common
stock. Provided that the director continues to serve as a member of the board
of directors, one-third of the shares included in each
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grant will become exercisable on each of the first, second and third
anniversaries of the date of grant. If a director fails to attend at least 75%
of the board of directors meetings held in a fiscal year, that director will
forfeit his or her rights with respect to the option installment which vested
on the preceding vesting date, in proportion to the percentage of board of
directors meetings not attended. Under the terms of the director plan, all
outstanding unvested options held by non-employee directors will vest in full
upon completion of the merger with Kana. All options granted under the director
plan will have an exercise price equal to the fair market value of the common
stock on the date of grant and a term of ten years from the date of grant.
Options may not be transferred except by will or by the laws of descent and
distribution or by a domestic relations order. Unexercisable options terminate
when the director ceases to be a director for any reason other than death or
permanent disability. Exercisable options may be exercised at any time during
the option term. In the event that a director dies or is permanently disabled,
any options that are not exercisable will become exercisable and the optionee
or his or her representative, heir or legatee may exercise all options for a
period of three years. The term of the director plan is ten years, unless
sooner terminated by vote of the board of directors.
1999 Employee Stock Purchase Plan. Silknet's 1999 employee stock purchase
plan, or stock purchase plan, was approved by the board of directors and was
adopted by the stockholders in February 1999. The stock purchase plan provides
for the issuance of up to an aggregate of 350,000 shares of common stock to
participating employees. As of February 3, 2000, there were no options to
purchase shares of Silknet's common stock outstanding under the stock purchase
plan and options to purchase 45,607 shares had been exercised.
The stock purchase plan is administered by Silknet's compensation
committee. All employees whose customary employment is more than 20 hours per
week and for more than five months in any calendar year are eligible to
participate in the stock purchase plan. The right to purchase common stock
under the stock purchase plan will be made available through a series of
offerings. On the first day of an offering period, Silknet will grant to each
eligible employee who has elected in writing to participate in the stock
purchase plan an option to purchase shares of Silknet's common stock. The
employee will be required to authorize an amount, between 1% and 10% of the
employee's compensation, to be deducted from the employee's pay during the
offering period. On the last day of the offering period, the employee will be
deemed to have exercised the option, at the option exercise price, to the
extent of accumulated payroll deductions. Under the terms of the stock purchase
plan, the option exercise price is an amount equal to 85% of the fair market
value of one share of Silknet's common stock on either the first or last day of
the offering period, whichever is lower. No employee may be granted an option
that would permit the employee's rights to purchase common stock to accrue in
excess of $25,000 in any calendar year. The first offering period under the
stock purchase plan commenced on May 5, 1999 and continued through January 31,
2000. Thereafter, the offering periods will begin on February 1 and August 1.
Options granted under the stock purchase plan terminate upon an employee's
voluntary withdrawal from the plan at any time or upon termination of
employment.
Outstanding options under the purchase plan will be assumed by Kana at the
closing of the merger and adjusted to reflect the exchange ratio. The assumed
options will be exercised, and the Silknet purchase plan will terminate, on a
final purchase date occurring immediately prior to the start date of the first
offering period under the Kana employee stock purchase plan beginning after the
closing of the merger, at which time eligible Silknet employees may begin
participation in the Kana plan.
InSite Marketing Technology, Inc. 1997 Stock Option Plan. As part of
Silknet's acquisition of InSite Marketing Technology, Inc., Silknet assumed
InSite's obligations under the InSite Marketing Technology, Inc. 1997 Stock
Option Plan, or the InSite option plan. Options to purchase an aggregate of
93,580 shares of Silknet's common stock were exchanged for all of the
outstanding options under
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the InSite option plan. As of February 3, 2000, options to purchase 34,810
shares of Silknet's common stock were outstanding under the InSite option plan
and options to purchase 58,770 shares had been exercised. No additional options
will be granted under the InSite option plan.
The InSite option plan authorized the grant of options to purchase shares
of common stock intended to qualify as incentive stock options as defined under
Section 422 of the Internal Revenue Code, and non-qualified stock options to
the former employees or directors of, or consultants or advisors to, InSite.
Upon Silknet's acquisition of InSite, all outstanding options under the InSite
option plan became fully exercisable. An option is not transferable by the
recipient except by will or by the laws of descent and distribution, or in the
case of non-qualified stock options, only by a valid domestic relations order.
No options may be exercised following termination of employment for cause.
401(k) Plans
Silknet maintains two 401(k) plans qualified under Section 401(k) of the
Internal Revenue Code; one plan is for former InSite employees and the other is
for all other Silknet employees. Under the Silknet and InSite 401(k) plans, a
participant may contribute a maximum of 20% and 15%, respectively, of his or
her pre-tax salary, commissions and bonuses through payroll deductions, up to
the statutorily prescribed annual limit of $10,000 in calendar year 1999. The
percentage elected by more highly compensated participants may be required to
be lower. In addition, at the discretion of the board of directors, Silknet may
make discretionary profit-sharing contributions into the 401(k) plan for all
eligible employees. During the year ended June 30, 1999, Silknet made no
profit-sharing contributions to either 401(k) plan.
Compensation Committee Interlocks and Insider Participation
Messrs. Bradley and Chua, both non-employee directors, comprise the Silknet
compensation committee, which makes recommendations concerning salaries and
incentive compensation for Silknet's employees and consultants and administers
and grants stock options under Silknet's stock plans. None of Silknet's
executive officers has served as a director or member of the compensation
committee of any other entity whose executive officers served as a director or
member of Silknet's compensation committee.
Certain Transactions Of Silknet
Organization of Silknet. In connection with its formation in 1995, Silknet
issued and sold 2,500,000 shares of its common stock for an aggregate of
$80,500 to Silknet's founder, James C. Wood.
Sales of Stock. In July 1995, Silknet sold 50,000 shares of its common
stock for an aggregate of $50,000 to Mr. Nigel K. Donovan, currently Silknet's
Senior Vice President and Chief Operating Officer.
In October 1996, Silknet issued an aggregate of 2,364,584 shares of its
Series A preferred stock at $0.96 per share, for aggregate consideration of
$2,270,000. Of that amount, Silknet issued 1,302,084 shares of Series A
preferred stock to CMG @Ventures II LLC and 1,041,667 shares of Series A
preferred stock to Zero Stage Capital V, L.P. Mr. Guy Bradley, a director of
Silknet, is a managing member of CMG @Ventures II LLC. Mr. Stanley Fung, a
director of Silknet, is a managing partner of Zero Stage Capital V, L.P. All
outstanding shares of Series A preferred stock were converted to common stock
on a one-for-one basis upon the closing of Silknet's initial public offering on
May 10, 1999.
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In June 1997, Silknet issued an aggregate of 2,500,000 shares of its Series
B preferred stock at a price of $2.00 per share, for aggregate consideration of
$5,000,000. Of that amount, Silknet issued 371,700 shares of Series B preferred
stock to CMG @Ventures II LLC, 371,700 shares of Series B preferred stock to
Zero Stage Capital V, L.P., 1,250,000 shares of Series B preferred stock to
BancBoston Ventures Inc., 400,000 shares of Series B preferred stock to Vertex
Investment (II) Ltd. and 100,000 shares of Series B preferred stock to HWH
Investment Pte Ltd. Mr. Joo Hock Chua, a director of Silknet, is Vice
President/Assistant General Manager of Vertex Management (II) Pte Ltd. All
outstanding shares of Series B preferred stock were converted to common stock
on a one-for-one basis upon the closing of Silknet's initial public offering on
May 10, 1999.
In May 1998, Silknet issued an aggregate of 3,081,657 shares of its Series
C preferred stock at a price of $3.498117 per share, for aggregate
consideration of $10,779,990. Of that amount, Silknet issued 857,604 shares of
Series C preferred stock to CMG @Ventures II LLC, 214,401 shares of Series C
preferred stock to Zero Stage Capital V, L.P., 285,868 shares of Series C
preferred stock to BancBoston Ventures Inc., 428,802 shares of Series C
preferred stock to Vertex Technology Fund Pte Ltd. and 571,736 shares of Series
C preferred stock to Intel Corporation. Silknet also issued 28,587 shares of
Series C preferred stock to JAFCO Co., Ltd., 33,632 shares of Series C
preferred stock to JAFCO R-3 Investment Enterprise Partnership, 20,179 shares
of Series C preferred stock to JAFCO JS-3 Investment Enterprise Partnership,
30,269 shares of Series C preferred stock to JAFCO G-6(A) Investment Enterprise
Partnership, 30,269 shares of Series C preferred stock to JAFCO G-6(B)
Investment Enterprise Partnership and 571,736 shares of Series C preferred
stock to U.S. Information Technology No. 2 Investment Enterprise Partnership.
Mr. Andrew Goldfarb, a director of Silknet, is a managing principal of JAFCO
America Ventures, Inc., a co-general partner of U.S. Technology. On June 26,
1998, Silknet issued an additional 7,500 shares of Series C preferred stock to
the Zero Stage Individual Investor Group for aggregate consideration of
$26,236, one of the members of which is Mr. Stanley Fung, a director of
Silknet. All outstanding shares of Series C preferred stock were converted to
common stock on a one-for-one basis upon the closing of Silknet's initial
public offering on May 10, 1999.
On February 26, 1999, Silknet issued an aggregate of 1,205,913 shares of
Series D preferred stock at a price of $7.324109 per share, for aggregate
consideration of $8,832,238. Of that amount, Silknet issued 230,148 shares to
CMG @Ventures II LLC, 157,737 shares to BancBoston Ventures Inc., 12,625 shares
to JAFCO Co., Ltd., 50,498 shares to U.S. Technology, and 157 shares to Stanley
Fung, a director of Silknet. All outstanding shares of Series D preferred stock
were converted to common stock on a one-for-one basis upon the closing of
Silknet's initial public offering on May 10, 1999.
On October 5, 1999, Silknet issued an aggregate of 497,128 shares of its
common stock in exchange for all of the outstanding common stock of InSite
Marketing Technology, Inc.
Issuance of Notes and Warrants. In May 1996, Silknet issued one note in the
principal amount of $125,000 and a warrant to purchase an aggregate of 125,000
shares of its common stock at an exercise price of $1.00 per share to Zero
Stage Capital V, L.P. In July 1996, Silknet issued one note in the principal
amount of $125,000 and an additional warrant to purchase an aggregate of
125,000 shares of its common stock at an exercise price of $1.00 per share to
Zero Stage Capital V, L.P. Each note was exchanged for shares of Series A
preferred stock in October 1996. Each warrant was exchanged for shares of
Silknet's common stock in November 1999.
In June 1997, in connection with the issuance and sale of its Series B
preferred stock, Silknet issued six warrants to purchase an aggregate of
500,000 shares of common stock at an exercise price of $2.20 per share. One
warrant to purchase 250,000 shares of common stock was issued to BancBoston
Ventures Inc., one warrant to purchase 80,000 shares of common stock was issued
to
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Vertex Investment (II) Ltd., one warrant to purchase 20,000 shares of common
stock was issued to HWH Investment Pte Ltd., one warrant to purchase 74,340
shares of common stock was issued to CMG @Ventures II LLC, and one warrant to
purchase 74,340 shares of common stock was issued to Zero Stage Capital V, L.P.
In addition, one warrant to purchase 1,320 shares of common stock was issued to
another investor who purchased Series B preferred stock. This warrant to
purchase 1,320 shares of common stock was exercised in December 1999. In
addition, Zero Stage Capital V, L.P. exercised its warrant in November 1999.
The remaining four warrants may be exercised, in whole or in part, at any time
or from time to time, until June 11, 2003.
Employment Agreements. On April 13, 1999, Silknet entered into an
employment agreement with each of James C. Wood, Silknet's Chairman of the
Board, President and Chief Executive Officer, Nigel K. Donovan, Silknet's
Senior Vice President and Chief Operating Officer, and Patrick J. Scannell,
Jr., Silknet's Vice President, Chief Financial Officer, Treasurer and
Secretary. Each employment agreement provides for the payment of salary and
bonus, terminates on June 30, 2001 unless earlier terminated, and may be
extended upon mutual agreement of the parties. In addition, each employment
agreement provides that if the employee is terminated without just cause, as
defined in each employment agreement, the employee will receive a severance
payment equal to twelve months salary. Finally, in the event of an acquisition,
as defined in each employment agreement, if the employee:
. is not offered employment by the acquiring corporation in a comparable
position and at a comparable salary; or
. is terminated at any time for other than just cause within twelve months
following the completion of the acquisition,
the employee will receive a severance payment equal to twelve months salary and
all unvested options held by the employee will accelerate and become
immediately exercisable and will remain exercisable for a period of six months
following the date of termination.
On February 6, 2000, Silknet and Mr. Wood entered into Amendment No. 1 to
Mr. Wood's employment agreement, which provides that the completion of the
merger with Kana will not result in any severance payments to Mr. Wood or any
acceleration of Mr. Wood's outstanding options to purchase Silknet common stock
under the terms of his employment agreement.
On February 6, 2000, Silknet and Mr. Scannell entered into Amendment No. 1
to Mr. Scannell's employment agreement, which provides that the employment
agreement will terminate on August 5, 2000. On that date, Mr. Scannell will be
entitled to receive a severance payment equal to twelve-months salary at the
then current monthly rate, payable in the same manner as the salary was payable
during Mr. Scannell's regular term of employment, and all outstanding unvested
options held by Mr. Scannell will vest in full and become immediately
exercisable and will remain exercisable for a period of six months after August
5, 2000.
The noncompetition, confidentiality and inventions agreements include
certain restrictive covenants for Silknet's benefit relating to non-disclosure
by the officer of Silknet's confidential business information and Silknet's
right to inventions and technical improvements made by the officer. These
agreements also contain a provision prohibiting the officer from soliciting
Silknet's employees or customers for a period of one year after termination of
the officer's employment.
Silknet believes that all transactions set forth above were made on terms
no less favorable to Silknet than would have been obtained from unaffiliated
third parties. Silknet has adopted a policy whereby all future transactions
between Silknet and its officers, directors and affiliates will be on terms no
less favorable to Silknet than could be obtained from unaffiliated third
parties and will be approved by a majority of the disinterested members of
Silknet's board of directors.
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Principal Stockholders of Silknet
The following table sets forth certain information regarding beneficial
ownership of Silknet common stock as of February 3, 2000, excluding shares of
Silknet common stock which will become exercisable solely as a result of the
merger by:
. each person known to be the beneficial owner of more than 5% of Silknet
common stock;
. each executive officer;
. each of Silknet's directors; and
. all of Silknet's our executive officers and directors as a group.
In addition, because of Kana's option to purchase a number of shares of
Silknet common stock equal to 19.9% of Silknet's outstanding common stock at
the time of exercise, Kana may be deemed to beneficially own 3,417,652 shares
of Silknet common stock assuming the option was exercised on February 3, 2000.
Unless otherwise noted below, the address of each person listed on the
table is c/o Silknet Software, Inc., 50 Phillippe Cote Street, Manchester, New
Hampshire 03101, and each person has sole voting and investment power over the
shares shown as beneficially owned except to the extent authority is shared by
spouses under applicable law and except as set forth in the footnotes to the
table.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. The following are deemed to be beneficially
owned and outstanding for purposes of calculating the number of shares and the
percentage beneficially owned by that person or entity:
. shares of common stock issuable upon the exercise of options which may be
exercised within 60 days after February 3, 2000, or currently exercisable
options; and
. shares of common stock issuable upon the exercise of warrants which may
be exercised within 60 days after February 3, 2000, or currently
exercisable warrants.
However, these shares are not deemed to be beneficially owned and outstanding
for purposes of computing the percentage beneficially owned by any other person
or entity.
<TABLE>
<CAPTION>
Beneficial Beneficial
Ownership of Ownership of Kana
Silknet Shares Shares After the
Before the Merger Merger
----------------- ------------------
Name of Beneficial Owner Number Percent Number Percent
- ------------------------ --------- ------- ---------- -------
<S> <C> <C> <C> <C>
James C. Wood(1).......................... 1,546,645 9.0% 2,567,430 2.9%
Nigel K. Donovan(2)....................... 346,107 2.0% 574,538 *
Patrick J. Scannell, Jr.(3)............... 19,081 * 31,674 *
Guy Bradley(4)............................ 2,771,536 16.1% 4,600,750 5.2%
Stanley Fung(5)........................... 1,669,972 9.7% 2,772,154 3.1%
Joo Hock Chua............................. -- -- -- --
Andrew Goldfarb........................... 900 * 1,494 *
Glen L. Urban............................. 121,016 * 200,886 *
CMG @Ventures II LLC(6)................... 2,761,536 16.1% 4,584,150 5.1%
c/o CMG Information Services, Inc. 100
Brickstone Square, 5th Floor Andover, MA
01810
Zero Stage Capital V, L.P................. 1,667,033 9.7% 2,767,274 3.1%
101 Main Street Kendall Square Cambridge,
MA 02142
BancBoston Ventures Inc.(7)............... 1,527,005 8.9% 2,534,828 2.8%
175 Federal Street 10th Floor Boston, MA
02110
Putnam Investments, Inc.(8)............... 2,273,743 13.2% 3,774,412 4.2%
One Post Office Square Boston, MA 02109
All executive officers and directors as a
group (8 persons)(9)..................... 6,475,257 37.7% 10,748,926 12.0%
</TABLE>
- --------
*Less than 1%.
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<PAGE>
(1) Includes 158,340 shares held in trust for Mr. Wood. Mr. Wood disclaims
beneficial ownership of all such shares, except to the extent of his
pecuniary interest therein. Also includes 3,645 shares issuable in
connection with currently exercisable options.
(2) Includes 320,107 shares issuable in connection with currently exercisable
options.
(3) Includes 19,081 shares issuable in connection with currently exercisable
options.
(4) Includes 2,761,536 shares held by CMG @Ventures II LLC. Also includes
74,340 shares of common stock issuable upon exercise of warrants held by
CMG @Ventures II LLC which are currently exercisable. Mr. Bradley is a
managing member of CMG @Ventures II LLC and may be deemed to share voting
and investment power with respect to all shares held by CMG @Ventures II
LLC. Mr. Bradley disclaims beneficial ownership of such shares, except to
the extent of his pecuniary interest therein.
(5) Includes 1,667,033 shares held by Zero Stage Capital V, L.P. Mr. Fung is a
general partner of Zero Stage Capital Associates, L.P., the general partner
of Zero Stage Capital V, L.P. and may be deemed to share voting and
investment power with respect to all shares held by Zero Stage Capital V,
L.P. Mr. Fung disclaims beneficial ownership of such shares, except to the
extent of his pecuniary interest therein.
(6) Includes 74,340 shares of common stock issuable in connection with
currently exercisable warrants.
(7) Includes 250,000 shares of common stock issuable in connection with
currently exercisable warrants.
(8) Information obtained from Schedule 13G/A filed with the Securities and
Exchange Commission by Putnam Investments, Inc. on February 18, 2000.
Includes 2,058,078 shares beneficially owned by Putnam Investment
Management, Inc., of which 1,117,835 shares are owned by the Putnam OTC &
Emerging Growth Fund, and 235,665 shares beneficially owned by The Putnam
Advisory Company, Inc.
(9) See Notes 1 through 5.
Limitation of Liability
Silknet's certificate of incorporation provides that none of its directors
shall be personally liable to Silknet or to its stockholders for monetary
damages for breach of fiduciary duty as a director, except that the limitation
shall not eliminate or limit liability to the extent that the elimination or
limitation of such liability is not permitted by the Delaware General
Corporation Law.
Silknet's certificate of incorporation further provides for the
indemnification of its directors and officers to the fullest extent permitted
by Section 145 of the Delaware General Corporation Law, including circumstances
in which indemnification is otherwise discretionary. A principal effect of
these provisions is to limit or eliminate the potential liability of Silknet's
directors for monetary damages arising from breaches of their duty of care,
subject to certain exceptions. These provisions may also shield directors from
liability under federal and state securities laws.
Stock Transfer Agent and Registrar
The transfer agent and registrar for Silknet's common stock is American
Stock Transfer & Trust Company.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SILKNET
The following discussion and analysis of Silknet's financial condition and
results of operations should be read in conjunction with "Selected Consolidated
Financial Data" and Silknet's consolidated financial statements and notes
thereto appearing elsewhere in this prospectus. This discussion and analysis
contains forward-looking statements that involve risks and uncertainties.
Silknet's actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including, but not
limited to, those set forth under "Risk Factors--Risks Related to Silknet" and
elsewhere in this prospectus.
Overview
Silknet provides electronic customer relationship management software, or
eCRM software, that allows companies to offer marketing, sales, e-commerce and
support services through a single Web site interface personalized for
individual customers. Silknet's products enable a company to deliver these
services to its customers over the Web through customer self-service, assisted
service or immediate, direct collaboration among that company and its
customers, partners, employees and suppliers. In January 1997, Silknet recorded
its first license revenue upon delivery of the trial version of its initial
product, Silknet eService, to customers. Silknet commercially released Silknet
eService in July 1997, and since that time has introduced Silknet eBusiness,
Silknet eCommerce, Silknet eService, Silknet eSales and Silknet eBusiness
Toolkit.
Since the beginning of fiscal year 1997, Silknet's revenue has been derived
principally from licenses for software products and from professional services
including consulting, training, implementation, technical support and
maintenance. Revenue from sales of licenses to use Silknet's software products
is recognized upon delivery of products to customers, provided no significant
post-delivery obligations or uncertainties remain and collection of the related
receivable is probable. License or services revenue subject to an acceptance
clause is deferred until acceptance is received from the customer. Revenue
under arrangements where multiple products or services are sold together under
one contract is allocated to each element based on its relative fair value,
with these fair values being determined using the price charged when that
element is sold separately. For agreements with specified upgrade rights, the
revenue related to those upgrade rights is deferred until the specified upgrade
is delivered. Revenue for consulting and training services is recognized as
services are provided, and revenue for maintenance and post-contract customer
support services is recognized ratably over the term of the service agreement.
Silknet generates its license revenue through direct sales to its customers
and sales through its relationships with systems integrators and consulting
firms. International revenue generated to date has not been material.
On October 5, 1999, Silknet completed the acquisition of InSite Marketing
Technology, Inc. Silknet issued or reserved for issuance 590,708 shares of its
common stock in exchange for all of the outstanding shares of InSite common
stock and options for the issuance of InSite common stock. The transaction was
accounted for using the pooling of interests method. Silknet's consolidated
financial statements included elsewhere in this prospectus, have been restated
to include the results and balances of InSite for all periods presented.
Silknet has only a limited operating history on which to base an evaluation
of its business and prospects. Silknet's prospects must be considered in light
of the risks and uncertainties encountered by companies in an early stage of
development in new and rapidly evolving markets. To address these risks,
Silknet must, among other things:
. develop new products and product enhancements more rapidly than its
competitors;
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<PAGE>
. attract, integrate, motivate and train qualified personnel;
. successfully implement its sales and marketing strategy; and
. expand relationships with implementation partners and grow its
professional services staff.
There can be no assurance that Silknet will succeed in addressing any or
all of these risks, and the failure to do so would have a material adverse
effect on Silknet's business, operating results and financial condition.
Silknet has experienced substantial net losses since its inception, and as
of December 31, 1999, Silknet had an accumulated deficit of $28 million. These
net losses and accumulated deficit resulted from Silknet's lack of substantial
revenue and the significant costs incurred in the development of its products
and in the establishment of its sales and marketing organization. Silknet
expects to increase its expenditures in all areas in order to execute its
business plan, particularly in research and development and sales and
marketing. The planned increase in sales and marketing expense will primarily
result from the hiring of additional sales force personnel and expansion of
marketing programs.
Although Silknet has experienced revenue growth in recent periods, there
can be no assurance that such growth rates are sustainable, and therefore such
growth rates should not be considered indicative of future operating results.
There can also be no assurance that Silknet will be able to continue to
increase its revenue or attain profitability or, if increases in revenue and
profitability are achieved, that they can be sustained. Silknet believes that
period-to-period comparisons of its historical operating results should not be
relied upon as an indication of future performance.
Results of Operations
The following table sets forth for the periods indicated the percentage of
total revenue of certain line items included in Silknet's statements of
operations.
<TABLE>
<CAPTION>
Six Months
Ended
December
Year Ended June 30, 31,
------------------------- -------------
1997 1998 1999 1998 1999
-------- ------ ----- ----- -----
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
License.......................... 38.7 % 79.9 % 71.6 % 66.5 % 66.7%
Services......................... 61.3 20.1 28.4 33.5 33.3
-------- ------ ----- ----- -----
Total revenue.................. 100.0 100.0 100.0 100.0 100.0
-------- ------ ----- ----- -----
Cost of revenue:
License.......................... 14.9 0.8 2.3 3.3 1.6
Services......................... 160.9 36.3 24.4 27.4 25.2
-------- ------ ----- ----- -----
Total cost of revenue.......... 175.8 37.1 26.7 30.7 26.8
-------- ------ ----- ----- -----
Gross margin..................... (75.8) 62.9 73.3 69.3 73.2
-------- ------ ----- ----- -----
Operating expenses:
Sales and marketing.............. 457.7 128.8 77.8 76.4 59.7
Research and development......... 524.7 76.7 51.2 49.5 46.7
General and administrative....... 385.1 34.9 26.3 26.2 28.6
-------- ------ ----- ----- -----
Total operating expenses....... 1,367.5 240.4 155.3 152.1 135.0
-------- ------ ----- ----- -----
Operating loss................... (1,443.3) (177.5) (82.0) (82.8) (61.8)
Interest income (expense), net... (30.4) 3.2 4.9 3.2 9.8
-------- ------ ----- ----- -----
Net loss......................... (1,473.7)% (174.3)% (77.1)% (79.6)% (52.0)%
======== ====== ===== ===== =====
</TABLE>
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<PAGE>
Six Months Ended December 31, 1999 and 1998
Revenue
Total revenue increased to $14 million, or 153.2%, for the six-month period
ended December 31, 1999 from $5.5 million for the six-month period ended
December 31, 1998.
License Revenue. License revenue increased to $9.4 million, or 154.0%, for
the six-month period ended December 31, 1999 from $3.7 million for the six-
month period ended December 31, 1998. The increase was primarily due to an
increase in the number of licenses sold for Silknet eService, and new products
introduced prior to December 31, 1999. These new products included Silknet
eBusiness and Silknet eCommerce, released in October 1998 and January 1999,
respectively.
Services Revenue. Services revenue increased to $4.7 million, or 151.6%,
for the six-month period ended December 31, 1999 from $1.9 million for the six-
month period ended December 31, 1998. Of this increase, $1.7 million was
attributable to additional training and consulting services sold to both new
and existing customers and $1.1 million was related to maintenance contracts
sold to both new and existing customers. The total number of customers
increased to 70 as of December 31, 1999 from 24 as of December 31, 1998.
Cost of Revenue
Cost of License Revenue. Cost of license revenue includes royalties paid to
third parties under technology license arrangements. Cost of license revenue
increased to $232,000, or 2.5% of license revenue, for the six-month period
ended December 31, 1999 from $183,000, or 5.0% of license revenue, for the six-
month period ended December 31, 1998. The increase in absolute dollars was due
to an increase in licenses sold with royalty obligations to third parties whose
products are incorporated into Silknet's products. Silknet anticipates that the
cost of license revenue will continue to increase in absolute dollars. Cost of
license revenue as a percent of license revenue has varied in the past due to
the timing and volume of product sales and the nature of royalty agreements in
place at the time.
Cost of Services Revenue. Cost of services revenue consists primarily of
employee-related costs and third-party consultant fees incurred to provide
services for consulting projects, post-contract customer support and training.
Cost of services revenue increased to $3.5 million, or 75.6% of services
revenue, for the six-month period ended December 31, 1999 from $1.5 million, or
81.7% of services revenue, for the six-month period ended December 31, 1998.
The dollar increase resulted primarily from the hiring of additional employees
and the use of contractors to support increased customer demand for maintenance
and consulting services. The number of customer services employees increased to
43 as of December 31, 1999 from 18 as of December 31, 1998, and Silknet
anticipates that it will continue to increase the number of customer service
employees in calendar year 2000. The improvement in services gross margin to
24.4% for the six-month period ended December 31, 1999 from a services gross
margin of 18.3% for the six-month period ended December 31, 1998 was primarily
attributable to the substantial growth in consulting and maintenance revenue
from Silknet's larger installed base. The continued improvement in services
gross margin is contingent upon the future demand for the services offered by
Silknet.
Overall gross margins are primarily affected by the mix of license revenue
and services revenue. Silknet historically has realized higher gross margins on
license revenue than on services revenue. Silknet expects its services revenue
to increase as a percentage of total revenue.
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Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
employee salaries, commissions and costs associated with marketing programs,
such as trade shows, marketing campaigns, seminars, public relations and new
product launches. Sales and marketing expenses increased to $8.4 million, or
59.7% of total revenue, for the six-month period ended December 31, 1999 from
$4.2 million, or 76.4% of total revenue, for the six-month period ended
December 31, 1998. The increase was primarily attributable to an increase in
the number of sales and marketing employees to 68 as of December 31, 1999 from
32 as of December 31, 1998. To a lesser extent, the increase was related to an
increase in marketing programs, including trade shows and public relations
related to product launch activities. Sales and marketing expenses may continue
to increase in absolute dollars as Silknet continues to expand its marketing
programs and its sales force to support product launches and international
expansion.
Research and Development. Research and development expenses consist
primarily of employee-related costs and fees for outside consultants and
related costs associated with the development of new products, the enhancement
of existing products, quality assurance, testing and documentation. Research
and development expenses increased to $6.6 million, or 46.7% of total revenue,
for the six-month period ended December 31, 1999 from $2.7 million, or 49.5% of
total revenue, for the six-month period ended December 31, 1998. The increase
primarily resulted from salaries associated with newly hired development
personnel. The number of research and development employees increased to 100 as
of December 31, 1999 from 49 as of December 31, 1998 to support the development
of new products. Silknet anticipates that research and development expenses
will continue to increase in absolute dollars.
General and Administrative. General and administrative expenses consist
primarily of employee salaries and other personnel related costs for executive
and financial personnel, as well as legal, accounting, insurance and other
professional services fees. General and administrative expenses increased to
$4.0 million, or 28.6% of total revenue, for the six-month period ended
December 31, 1999 from $1.5 million, or 26.2% of total revenue, for the six-
month period ended December 31, 1998. Of this increase, $661,000 was due to
one-time costs associated with the acquisition of InSite. Substantially all of
the remaining increase was due to salaries associated with newly hired
personnel and related costs required to manage Silknet's growth and facilities
expansion. The number of general and administrative employees increased to 30
as of December 31, 1999 from 17 as of December 31, 1998. Silknet expects that
its general and administrative expenses will increase in absolute dollars as it
continues to expand its staffing to support expanded operations and facilities
and incur expenses relating to its responsibilities as a public company.
Interest Income (Expense), Net. Interest income, net of interest expense,
increased to $1.4 million or 9.8% of total revenue, for the six-month period
ended December 31, 1999 from $179,000, or 3.2% of total revenue, for the six-
month period ended December 31, 1998. The increase was due to interest income
earned from the investment of net cash proceeds from Silknet's initial public
offering in May 1999.
Provision for Income Taxes. Silknet incurred aggregate operating losses of
$28 million from inception through December 31, 1999. Silknet has recorded a
valuation allowance for the full amount of its net deferred tax assets as the
future realization of the tax benefit is not sufficiently assured.
Net Loss. As a result of the factors discussed above, net loss increased to
$7.3 million for the six-month period ended December 31, 1999 from a net loss
of $4.4 million for the six-month period ended December 31, 1998.
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Years Ended June 30, 1999 and 1998
Revenue
Silknet's total revenue increased to $14 million, or 276.4%, for the year
ended June 30, 1999 from $3.7 million for the year ended June 30, 1998.
License Revenue. License revenue increased to $10.1 million, or 237.6%, for
the year ended June 30, 1999 from $3.0 million for the year ended June 30,
1998. The increase was primarily due to an increase in the number of licenses
sold to new customers of Silknet eService, and other new products introduced
and shipped during the year ended June 30, 1999. These new products included
Silknet eCommerce and Silknet eCommerce Extensions, both released in January
1999, and new versions of Silknet eService and Silknet eBusiness System, which
were released in October 1998. Additionally, during the year, revenue increased
due to an increase in the average selling prices of software licenses resulting
from these broader product offerings.
Services Revenue. Services revenue increased to $4 million, or 430.7%, for
the year ended June 30, 1999 from $750,000 for the year ended June 30, 1998. Of
this increase, $1 million was attributable to a consulting services project
which was completed in March 1999 and $1 million was related to maintenance
contracts sold to Silknet's new customers. The remaining increase was related
to additional training and consulting services sold to both new and existing
customers. The total number of customers increased to 39 as of June 30, 1999
from 17 as of June 30, 1998.
Cost of Revenue
Cost of License Revenue. Cost of license revenue increased to $317,000, or
3.2% of license revenue, for the year ended June 30, 1999 from $32,000, or 1.1%
of license revenue, for the year ended June 30, 1998. The increase was due to
an increase in royalty obligations to third parties whose products are
incorporated into our products.
Cost of Services Revenue. Cost of services revenue increased to $3.4
million, or 86.0% of services revenue, for the year ended June 30, 1999 from
$1.4 million, or 180.5% of services revenue, for the year ended June 30, 1998.
The dollar increase resulted primarily from an increase in the numbers of
services employees to 28 as of June 30, 1999 from 12 as of June 30, 1998, as
well as hiring consultants to supplement Silknet's internal workforce. The
improvement in services gross margin to 14.0% for the year ended June 30, 1999
from a negative margin of 80.5% for the year ended June 30, 1998 was primarily
attributable to the substantial growth in consulting and maintenance revenue
from Silknet's increased installed customer base. Silknet realized negative
margins on services revenue for several quarters prior to the year ended June
30, 1999 as it invested in the consulting organization.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased to $10.9
million, or 77.8% of total revenue, for the year ended June 30, 1999 from $4.8
million, or 128.8% of total revenue, for the year ended June 30, 1998. The
increase was primarily attributable to costs associated with an increase in
direct sales, pre-sales support and marketing employees to 47 as of June 30,
1999 from 25 as of June 30, 1998.
Research and Development. Research and development expenses increased to
$7.2 million, or 51.2% of total revenue, for the year ended June 30, 1999 from
$2.9 million, or 76.7% of total revenue, for the year ended June 30, 1998. The
increase primarily resulted from an increase in the number of research and
development employees to 81 as of June 30, 1999 from 37 as of June 30, 1998 to
support the development of new products.
172
<PAGE>
General and Administrative. General and administrative expenses increased
to $3.7 million, or 26.3% of total revenue, for the year ended June 30, 1999
from $1.3 million, or 34.9% of total revenue, for the year ended June 30, 1998.
Substantially all of the increase was due to salaries associated with an
increase in the number of general and administrative employees to 21 as of
June 30, 1999 from 11 as of June 30, 1998, and the related costs required to
manage Silknet's growth and facilities expansion.
Interest Income (Expense), Net. Interest income, net of interest expense,
increased to $681,000, or 4.9% of total revenue, for the year ended June 30,
1999 from $121,000, or 3.2% of total revenue, for the year ended June 30, 1998.
The increase was due to interest income earned from the investment of net cash
proceeds from Silknet's initial public offering in May 1999.
Net Loss. As a result of the factors discussed above, net loss increased to
$10.8 million for the year ended June 30, 1999 from a net loss of $6.5 million
for the year ended June 30, 1998.
Years Ended June 30, 1998 and 1997
Revenue
Silknet's total revenue increased to $3.7 million for the year ended June
30, 1998 from $194,000 for the year ended June 30, 1997.
License Revenue. License revenue increased to $3.0 million for the year
ended June 30, 1998 from $75,000 for the year ended June 30, 1997. The increase
was primarily due to an increase in the number of licenses sold for Silknet's
first product, Silknet eService, which was commercially released in July 1997,
and new versions of products introduced and shipped during the year ended June
30, 1998.
Service Revenue. Services revenue increased to $750,000 for the year ended
June 30, 1998 from $119,000 for the year ended June 30, 1997. The increase
related primarily due to an increase in maintenance contracts and consulting
services sold to Silknet's new customers. The total number of customers
increased to 17 as of June 30, 1998 from two as of June 30, 1997.
Cost of Revenue
Cost of License Revenue. Cost of license revenue increased to $32,000 or
1.1% of license revenue, for the year ended June 30, 1998 from $29,000, or
38.7% of license revenue, for the year ended June 30, 1997. The improvement in
license gross margin to 98.9% for the year ended June 30, 1998 from 61.3% for
the year ended June 30, 1997 was primarily attributable to increased license
revenue.
Cost of Services Revenue. Cost of services revenue increased to $1.4
million, or 180.5% of services revenue, for the year ended June 30, 1998 from
$312,000, or 262.2% of services revenue, for the year ended June 30, 1997. The
dollar increase resulted primarily from an increase in the numbers of services
employees to 12 as of June 30, 1998 from six as of June 30, 1997, as well as
hiring consultants to supplement Silknet's internal workforce. During the years
ended June 30, 1998 and 1997 Silknet realized negative margins on services
revenue as a result of increasing the number of its services employees.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased to $4.8
million, or 128.8% of total revenue, for the year ended June 30, 1998 from
$888,000, or 457.7% of total revenue, for the
173
<PAGE>
year ended June 30, 1997. The increase was primarily attributable to costs
associated with an increase in direct sales, pre-sales support and marketing
employees to 25 as of June 30, 1998 from 10 as of June 30, 1997. Approximately
$1 million of the remaining increase was related to marketing programs,
including trade shows and seminars related to product launch activity during
the year ended June 30, 1998.
Research and Development. Research and development expenses increased to
$2.9 million, or 76.7% of total revenue, for the year ended June 30, 1998 from
$1 million, or 524.7% of total revenue, for the year ended June 30, 1997. The
increase primarily resulted from an increase in the number of research and
development employees to 37 as of June 30, 1998 from 14 as of June 30, 1997 to
support the development of new products.
General and Administrative. General and administrative expenses increased
to $1.3 million, or 34.9% of total revenue, for the year ended June 30, 1998
from $747,000, or 385.1% of total revenue, for the year ended June 30, 1997.
Substantially all of the increase was due to salaries associated with an
increase in the number of general and administrative employee to 12 as of June
30, 1998 from seven as of June 30, 1997, and the related costs required to
manage Silknet's growth.
Interest Income (Expense), Net. Interest income, net of interest expense,
increased to $121,000, or 3.2% of total revenue, for the year ended June 30,
1998 from a net expense of $59,000, or 30.4% of total revenue, for the year
ended June 30, 1997. The increase was primarily due to an increase in Silknet's
average cash balances resulting from capital financing activities combined with
a decrease in Silknet's debt obligations.
Net Loss. As a result of the factors discussed above, net loss increased to
$6.5 million for the year ended June 30, 1998 from a net loss of $2.9 million
for the year ended June 30, 1997.
174
<PAGE>
Quarterly Results of Operations
The following tables set forth a summary of Silknet's unaudited quarterly
operating results for each of the eight quarters in the period ended December
31, 1999. This information has been derived from unaudited interim financial
statements that, in the opinion of management, have been prepared on a basis
consistent with the 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 Silknet's 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, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
License............... $ 1,218 $ 1,250 $ 1,648 $ 2,040 $ 2,785 $ 3,577 $ 4,217 $ 5,152
Services.............. 275 333 621 1,239 874 1,246 1,967 2,712
------- ------- ------- ------- ------- ------- ------- -------
Total revenue........ 1,493 1,583 2,269 3,279 3,659 4,823 6,184 7,864
------- ------- ------- ------- ------- ------- ------- -------
Cost of revenue:
License............... 13 14 92 91 82 52 70 162
Services.............. 327 453 538 981 749 1,156 1,506 2,032
------- ------- ------- ------- ------- ------- ------- -------
Total cost of
revenue............. 340 467 630 1,072 831 1,208 1,576 2,194
------- ------- ------- ------- ------- ------- ------- -------
Gross margin............ 1,153 1,116 1,639 2,207 2,828 3,615 4,608 5,670
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing... 1,209 1,779 1,895 2,343 2,877 3,806 3,913 4,469
Research and
development.......... 759 973 1,249 1,499 1,728 2,710 3,111 3,452
General and
administrative....... 332 412 693 760 935 1,295 1,770 2,249
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 2,300 3,164 3,837 4,602 5,540 7,811 8,794 10,170
------- ------- ------- ------- ------- ------- ------- -------
Operating loss.......... (1,147) (2,048) (2,198) (2,395) (2,712) (4,196) (4,186) (4,500)
Interest income, net.... -- 59 106 73 84 418 647 732
------- ------- ------- ------- ------- ------- ------- -------
Net loss................ $(1,147) $(1,989) $(2,092) $(2,322) $(2,628) $(3,778) $(3,539) $(3,768)
======= ======= ======= ======= ======= ======= ======= =======
As a Percentage of Total
Revenue:
Revenue:
License............... 81.6 % 79.0 % 72.6 % 62.2 % 76.1 % 74.2 % 68.2 % 65.5 %
Services.............. 18.4 21.0 27.4 37.8 23.9 25.8 31.8 34.5
------- ------- ------- ------- ------- ------- ------- -------
Total revenue........ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------- ------- ------- ------- ------- ------- ------- -------
Cost of revenue:
License............... 0.9 0.9 4.1 2.8 2.2 1.0 1.1 2.1
Services.............. 21.9 28.6 23.7 29.9 20.5 24.0 24.4 25.8
------- ------- ------- ------- ------- ------- ------- -------
Total cost of
revenue............. 22.8 29.5 27.8 32.7 22.7 25.0 25.5 27.9
------- ------- ------- ------- ------- ------- ------- -------
Gross margin............ 77.2 70.5 72.2 67.3 77.3 75.0 74.5 72.1
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing... 81.0 112.4 83.5 71.4 78.6 78.9 63.3 56.8
Research and
development.......... 50.8 61.5 55.0 45.7 47.2 56.2 50.3 43.9
General and
administrative....... 22.2 26.0 30.6 23.2 25.6 26.9 28.6 28.6
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 154.0 199.9 169.1 140.3 151.4 162.0 142.2 129.3
------- ------- ------- ------- ------- ------- ------- -------
Operating loss.......... (76.8) (129.4) (96.9) (73.0) (74.1) (87.0) (67.7) (57.2)
Interest income, net.... -- 3.8 4.7 2.2 2.3 8.7 10.5 9.3
------- ------- ------- ------- ------- ------- ------- -------
Net loss................ (76.8)% (125.6)% (92.2)% (70.8)% (71.8)% (78.3)% (57.2)% (47.9)%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
175
<PAGE>
Silknet has experienced significant fluctuations in revenues, expenses and
results of operations from quarter to quarter, and such fluctuations are likely
to continue. A significant portion of Silknet's revenue has been generated from
a limited number of customers and it is difficult to predict the timing of
future orders and shipment to these and other customers. Silknet anticipates
that its results of operations in any given period will continue to depend to a
significant extent upon sales to a small number of customers.
Silknet has also experienced significant variations in its quarterly gross
margins. These fluctuations were caused by several factors. Silknet's gross
margins for license revenue have varied due to the volume of revenue, the
timing of recognition and the nature of related royalty arrangements. Silknet's
gross margins for services revenue have varied due to the volume of services
revenue, which is related to the changes in the installed customer base, and
the timing and number of additions in professional services personnel and
compensation and related costs.
Silknet's expenditures for research and development have varied from
quarter to quarter primarily as a result of the timing and number of additions
of personnel and related compensation costs. Silknet's sales and marketing and
general and administrative expenses have generally increased on a quarterly
basis primarily as a result of the timing and number of additions in personnel
and compensation and related costs and the timing, number and significance of
specific marketing and sales activities, such as trade shows and other
promotional activities.
In addition, a variety of factors, many of which are outside of Silknet's
control, may affect Silknet's quarterly operating results. These factors
include:
. the evolution of the market for interactive Web-based electronic
business solutions;
. market acceptance of Silknet's products;
. Silknet's success and timing in developing and introducing new products
and enhancements to existing products;
. market acceptance of products developed by competitors;
. changes in pricing policies by Silknet or its competitors;
. length of sales cycle;
. changes in customer buying patterns;
. market entry by new competitors;
. general economic conditions; and
. economic conditions specific to Internet-related industries.
Silknet's limited operating history and the undeveloped nature of the
market for interactive, Web-based electronic business solutions make predicting
future revenue difficult. Silknet's expense levels are based, in part, on its
expectations regarding future revenue increases, and to a large extent such
expenses are fixed, particularly in the short term. There can be no assurance
that Silknet's expectations regarding future revenue are accurate. Moreover,
Silknet may be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall. Accordingly, any significant shortfall of
revenue in relation to its expectations would likely cause significant declines
in its net income for that period.
Due to the foregoing factors, Silknet's operating results are difficult to
forecast. Silknet believes that period-to-period comparisons of its historical
operating results should not be relied upon as an indication of future
performance. Also, Silknet's operating results may fall below its expectations
or the expectations of securities analysts or investors in some future quarter.
In such event, the market price of Silknet's common stock would likely be
materially adversely affected.
176
<PAGE>
Liquidity and Capital Resources
In May 1999, Silknet sold 3,450,000 shares of its common stock through an
initial public offering. Net proceeds from the offering were approximately
$46.8 million after deducting underwriting discounts and commissions and
offering expenses. Prior to Silknet's initial public offering, Silknet had
funded operations primarily through net cash proceeds from private placements
of preferred stock totaling $26.8 million. As of December 31, 1999, Silknet had
cash and cash equivalents totaling $48.2 million.
Cash used for operating activities for the six-month period ended December
31, 1999 was $6.3 million, primarily due to a net loss of $7.3 million and an
increase in accounts receivable, partially offset by increases in accrued
expenses and deferred revenue. Cash used for operating activities for the year
ended June 30, 1999 was $6.9 million, primarily due to a net loss of
$10.8 million and an increase in accounts receivable, partially offset by
increases in accounts payable, accrued expenses and deferred revenue.
Cash used for investing activities for the six-month period ended December
31, 1999 was $3.6 million, primarily due to purchases of equipment totaling
$2.1 million, consisting largely of computer servers, workstations and
networking equipment, and a $1.5 million investment in Safe Harbor, Inc., an
unrelated private company. Cash used for investing activities for the year
ended June 30, 1999 was $2.0 million due primarily to purchases of equipment,
consisting largely of computer servers, workstations and networking equipment.
Cash provided by financing activities for the six-month period ended
December 31, 1999 was $623,000, primarily due to proceeds from the exercise of
options to purchase Silknet common stock, partially offset by payments on a
note payable under an equipment loan line and on notes payable to investors.
Cash provided by financing activities for the year ended June 30, 1999 was
$55.8 million, primarily due to the net proceeds from Silknet's initial public
offering totaling $46.8 million and the issuance of preferred stock prior to
Silknet's initial public offering, for net proceeds totaling $8.8 million.
As of December 31, 1999 and June 30, 1999, Silknet's primary financial
commitments consisted of obligations outstanding under operating leases, notes
payable under the equipment loan line, and notes payable to investors of
$156,000 and $359,000, respectively. Notes payable to investors were paid off
in full during the quarter ended December 31, 1999.
In March 1999, Silknet entered into a new bank line of credit which allows
Silknet to borrow up to $3.0 million for working capital purposes and for the
issuance of letters of credit. The line of credit expires in March 2000 and
Silknet expects to renew the line on similar terms and conditions. Amounts
available under the line of credit are a function of eligible accounts
receivable and bear interest at the bank's prime rate plus 0.5%. As of December
31, 1999, $3.0 million was available for borrowing and the bank's prime rate
was 8.50%.
As of June 30, 1999, Silknet had net operating loss carryforwards of
approximately $18.6 million available for federal, state and foreign purposes
to reduce future taxable income expiring on various dates beginning in 2012.
Under the provisions of the Internal Revenue Code, certain substantial changes
in our ownership may have limited, or may limit in the future, the amount of
net operating loss carryforwards which could be utilized annually to offset
future taxable income.
Since Silknet's inception, Silknet has significantly increased its
operating expenses. Silknet anticipates that it will continue to experience
significant growth in its operating expenses for the foreseeable future and
that its operating expenses and capital expenditures will constitute a material
use of its cash resources. In addition, Silknet may utilize cash resources to
fund acquisitions or
177
<PAGE>
investments in businesses, technologies, products or services that are
complementary to its business. Silknet believes that funds currently available
will be sufficient to meet its anticipated cash requirements for working
capital and capital expenditures for at least twelve months.
Year 2000 Readiness Disclosure
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, many companies' software and computer systems
needed to be upgraded or replaced in order to comply with these Year 2000
requirements. The use of software and computer systems that are not Year 2000
ready could result in system failures or miscalculations causing disruptions of
operations including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
The purchasing patterns of customers or potential customers may be affected
by Year 2000 issues as companies expend significant resources to make their
current systems Year 2000 ready. These expenditures may result in reduced funds
available for purchases of interactive, Web-based electronic business
solutions, which could have a material adverse effect on our business,
operating results and financial condition. Year 2000 complications may disrupt
the operations, viability or commercial acceptance of the Internet, which also
could have a material adverse impact on our business, operating results and
financial condition.
Silknet has experienced no material adverse effect on its products,
including any problems with third-party software and hardware incorporated into
its products or which interface with its products due to the transition to Year
2000. Nevertheless, there can be no assurances that Silknet will not experience
problems resulting from any of the foregoing which could have a material
adverse impact on its business, operating results and financial condition.
To date, Silknet has not incurred significant incremental costs in order to
comply with Year 2000 requirements for its products or internal systems, and
Silknet does not believe it will incur significant incremental costs in the
foreseeable future. Silknet's Year 2000 contingency plans, identifying mission
critical functions for its internal systems, for unanticipated Year 2000 issues
were in effect prior to the end of calendar 1999.
In October 1999, Silknet acquired InSite Marketing Technology, Inc. Silknet
is continuing the process of assessing systems and products related to this
acquisition. To date, products and processes related to the acquisition have
not experienced a material impact from the transition from 1999 to 2000. There
can be no assurance that Year 2000 issues will not be discovered in products,
or any third-party software included therein, or internal software systems or
in the third-party software or computer hardware related to this acquisition.
If such issues are discovered, there can be no assurance that such products,
software or hardware may be made Year 2000 ready or that the costs of making
such products and systems Year 2000 ready will not have a material adverse
effect on Silknet's business, operating results and financial condition.
Recently Issued Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. Silknet does not expect SFAS No.
133 to have a material effect on its financial position or results of
operations.
178
<PAGE>
EXPERTS
The consolidated financial statements of Kana as of December 31, 1998 and
1999 and for each of the years in the three-year period ended December 31, 1999
have been included in this registration statement in reliance upon the report
of KPMG LLP, independent auditors, appearing elsewhere in this registration
statement, and upon the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of Silknet Software, Inc. and its
subsidiaries as of June 30, 1998 and 1999 and for each of the three years in
the period ended June 30, 1999, all of which are included in this registration
statement, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
LEGAL MATTERS
The validity of the shares of Kana common stock offered by this joint proxy
statement/prospectus and the federal income tax consequences in connection with
the merger 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 36,240 shares of Kana's common stock. Certain
legal matters with respect to federal income tax consequences in connection
with the merger will be passed upon for Silknet by Testa, Hurwitz & Thibeault,
LLP, Boston, Massachusetts.
179
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Kana and Silknet file annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission.
Stockholders may read and copy any reports, statements or other information
filed by Kana or Silknet at the Commission's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the
Commission at 1-800-SEC-0330 for further information on the public reference
rooms. Kana's and Silknet's filings with the Commission are also available to
the public from commercial document-retrieval services and at the Web site
maintained by the Commission at http://www.sec.gov.
Kana has filed a registration statement with the Commission to register the
Kana common stock to be issued to Silknet stockholders in the merger. This
joint proxy statement/prospectus is a part of that registration statement and
constitutes a proxy statement and prospectus of Kana in addition to being a
proxy statement of Silknet for use at its special meeting.
Kana has supplied all information contained in this joint proxy
statement/prospectus relating to Kana, and Silknet has supplied all information
contained in this joint proxy statement/prospectus relating to Silknet. Neither
Kana nor Silknet warrants the accuracy or completeness of information relating
to the other.
Stockholders can obtain any of the reports referenced above through Kana,
Silknet or the Commission. Documents are available from Kana or Silknet without
charge, excluding all exhibits. Stockholders may obtain such documents by
requesting them orally or in writing to the following addresses or by
telephone:
<TABLE>
<S> <C>
Kana Communications, Inc. Silknet Software, Inc.
Investor Relations Investor Relations
740 Bay Road 50 Phillippe Cote Street
Redwood City, CA 94063 Manchester, NH 03101
(650) 298-9282 (603) 625-0070
</TABLE>
If you would like to request documents, please do so as soon as possible.
Kana stockholders should rely only on the information contained in this
joint proxy statement/prospectus to vote on the issuance of Kana common stock
as contemplated by the merger agreement. Silknet stockholders should rely only
on the information contained in this joint proxy statement/prospectus to vote
on the merger agreement. Neither Kana nor Silknet has authorized anyone to
provide information that is different from what is contained in this joint
proxy statement/prospectus. This joint proxy statement/prospectus is dated
, 2000. Stockholders should not assume that the information
contained in this joint proxy statement/prospectus is accurate as of any other
date, and neither the mailing of this joint proxy statement/prospectus to
stockholders nor the issuance of Kana common stock in the merger shall create
any implication to the contrary.
180
<PAGE>
INDEX TO FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS--KANA COMMUNICATIONS, INC.
<TABLE>
<S> <C>
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-7
Notes to Consolidated Financial Statements.................................. F-8
</TABLE>
INDEX TO FINANCIAL STATEMENTS--SILKNET SOFTWARE, INC.
<TABLE>
<S> <C>
Report of Independent Accountants........................................ F-22
Consolidated Balance Sheets.............................................. F-23
Consolidated Statements of Operations.................................... F-24
Consolidated Statements of Convertible Preferred Stock and Stockholders'
Equity (Deficit)........................................................ F-25
Consolidated Statements of Cash Flows.................................... F-27
Notes to Consolidated Financial Statements............................... F-28
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Kana Communications, Inc.
We have audited the accompanying consolidated balance sheets of Kana
Communications, Inc. and subsidiary (the Company) as of December 31, 1998 and
1999, and the related consolidated statements of operations and comprehensive
loss, stockholders' equity, and cash flows for each of the years in the three-
year period ended December 31, 1999. The 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, 1998 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Mountain View, California
January 20, 2000, except as to Note 8,
which is as of February 11, 2000
F-2
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1999
-------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................... $ 13,875 $ 18,695
Short-term investments.................................. 160 36,167
Accounts receivable, less allowance for doubtful
accounts of $110 in 1998 and $366 in 1999.............. 847 4,655
Prepaid expenses and other current assets............... 150 2,036
-------- ---------
Total current assets.................................. 15,032 61,553
Property and equipment, net............................... 1,473 8,360
Other assets.............................................. 371 316
-------- ---------
Total assets.......................................... $ 16,876 $ 70,229
======== =========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of notes payable........................ $ 1,071 $ 4,224
Accounts payable........................................ 698 2,766
Accrued commissions..................................... 143 1,984
Accrued payroll......................................... 280 1,639
Other accrued liabilities............................... 445 1,303
Accrued acquisition related costs....................... -- 3,148
Deferred revenue........................................ 562 6,253
-------- ---------
Total current liabilities............................. 3,199 21,317
Notes payable, less current portion....................... 726 412
-------- ---------
Total liabilities..................................... 3,925 21,729
-------- ---------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $0.001 par value;
50,000,000 and 5,000,000 shares authorized; 12,512,641
and no shares issued and outstanding................... 13 --
Common stock, $0.001 par value; 60,000,000 and
100,000,000 shares authorized; 19,274,516 and
60,766,650 shares issued and outstanding............... 19 61
Additional paid-in capital.............................. 29,246 202,473
Deferred stock-based compensation....................... (2,284) (14,962)
Notes receivable from stockholders...................... (164) (6,380)
Accumulated other comprehensive losses.................. (5) (75)
Accumulated deficit..................................... (13,874) (132,617)
-------- ---------
Total stockholders' equity............................ 12,951 48,500
-------- ---------
Total liabilities and stockholders' equity............ $ 16,876 $ 70,229
======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1997 1998 1999
------- -------- ---------
<S> <C> <C> <C>
Revenue:
License........................................ $ -- $ 2,014 $ 10,536
Service........................................ 617 333 3,528
------- -------- ---------
Total revenue................................ 617 2,347 14,064
------- -------- ---------
Cost of revenue:
License........................................ -- 54 271
Service, excluding amortization of stock-based
compensation of $13, $143 and $19,752......... 253 666 6,610
------- -------- ---------
Total cost of revenue........................ 253 720 6,881
------- -------- ---------
Gross profit................................. 364 1,627 7,183
------- -------- ---------
Operating expenses:
Sales and marketing, excluding amortization of
stock-based compensation of $52, $564 and
$34,000....................................... 512 5,504 21,199
Research and development, excluding
amortization of stock-based compensation of
$31, $438 and $19,864......................... 971 5,669 12,854
General and administrative, excluding
amortization of stock-based compensation of
$17, $311 and $6,860.......................... 378 1,826 5,018
Amortization of stock-based compensation....... 113 1,456 80,476
Acquisition related costs...................... -- -- 5,635
------- -------- ---------
Total operating expenses..................... 1,974 14,455 125,182
------- -------- ---------
Operating loss................................... (1,610) (12,828) (117,999)
Other income (expense), net...................... 57 227 (744)
------- -------- ---------
Net loss..................................... (1,553) (12,601) (118,743)
------- -------- ---------
Other comprehensive loss:
Net unrealized gain on available for sale
securities.................................... -- -- 26
Foreign currency translation adjustments....... -- (5) (96)
------- -------- ---------
Total other comprehensive loss............... -- (5) (70)
------- -------- ---------
Comprehensive loss........................... $(1,553) $(12,606) $(118,813)
======= ======== =========
Basic and diluted net loss per share............. $ (0.37) $ (2.01) $ (4.61)
======= ======== =========
Shares used in computing basic and diluted net
loss per share amounts.......................... 4,152 6,258 25,772
======= ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Convertible Notes Accumulated
Preferred Stock Common Stock Additional Deferred Receivable Other
----------------- ------------------ Paid-in Stock-based From Comprehensive Accumulated
Shares Amount Shares Amount Capital Compensation Stockholders Losses Deficit
---------- ------ ---------- ------ ---------- ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
January 1,
1997............ -- $ -- 106,742 $ -- $ -- $ -- $ -- $ -- $ 280
Issuance of
common stock to
Kana and
netDialog
founders........ -- -- 6,931,916 7 (6) -- -- -- --
Issuance of
common stock
upon exercise of
stock options... -- -- 106,666 -- -- -- -- -- --
Repurchase of
founders' common
stock, net...... -- -- (833,332) -- -- -- -- -- --
Issuance of
Series A and B
convertible
preferred stock,
net............. 8,917,855 9 -- -- 4,764 -- -- -- --
Issuance of
common stock of
pooled company.. -- -- 173,232 -- 2,070 -- -- -- --
Issuance of
shares of common
stock in
exchange for
services........ -- -- 1,334 -- 7 -- -- -- --
Deferred stock-
based
compensation.... -- -- -- -- 890 (890) -- -- --
Amortization of
deferred stock-
based
compensation.... -- -- -- -- -- 106 -- -- --
Net loss........ -- -- -- -- -- -- -- -- (1,553)
---------- ----- ---------- ----- ------ ------ ----- ----- -------
Balances,
December 31,
1997............ 8,917,855 9 6,486,558 7 7,725 (784) -- -- (1,273)
Issuance of
common stock to
Connectify and
BEI founders.... -- -- 3,954,940 4 61 -- -- -- --
Issuance of
stock upon
exercise of
stock options
and warrants,
net of
repurchases..... 68,139 -- 5,314,624 5 174 -- (164) -- --
Issuance of
common stock of
pooled
companies....... -- -- 3,442,704 3 6,573 -- -- -- --
Issuance of
Series B and C
convertible
preferred stock,
net............. 3,526,647 4 -- -- 11,624 -- -- -- --
Issuance of
common stock and
warrants in
exchange for
services and
intellectual
property........ -- -- 75,690 -- 133 -- -- -- --
Deferred stock-
based
compensation.... -- -- -- -- 2,956 (2,956) -- -- --
Amortization of
deferred stock-
based
compensation.... -- -- -- -- -- 1,456 -- -- --
Other
comprehensive
loss............ -- -- -- -- -- -- -- (5) --
Net loss........ -- -- -- -- -- -- -- -- (12,601)
---------- ----- ---------- ----- ------ ------ ----- ----- -------
Balances,
December 31,
1998............ 12,512,641 13 19,274,516 19 29,246 (2,284) (164) (5) (13,874)
<CAPTION>
Total
Stockholders'
Equity
-------------
<S> <C>
Balances,
January 1,
1997............ $ 280
Issuance of
common stock to
Kana and
netDialog
founders........ 1
Issuance of
common stock
upon exercise of
stock options... --
Repurchase of
founders' common
stock, net...... --
Issuance of
Series A and B
convertible
preferred stock,
net............. 4,773
Issuance of
common stock of
pooled company.. 2,070
Issuance of
shares of common
stock in
exchange for
services........ 7
Deferred stock-
based
compensation.... --
Amortization of
deferred stock-
based
compensation.... 106
Net loss........ (1,553)
-------------
Balances,
December 31,
1997............ 5,684
Issuance of
common stock to
Connectify and
BEI founders.... 65
Issuance of
stock upon
exercise of
stock options
and warrants,
net of
repurchases..... 15
Issuance of
common stock of
pooled
companies....... 6,576
Issuance of
Series B and C
convertible
preferred stock,
net............. 11,628
Issuance of
common stock and
warrants in
exchange for
services and
intellectual
property........ 133
Deferred stock-
based
compensation.... --
Amortization of
deferred stock-
based
compensation.... 1,456
Other
comprehensive
loss............ (5)
Net loss........ (12,601)
-------------
Balances,
December 31,
1998............ 12,951
</TABLE>
F-5
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(Continued)
(In thousands, except share data)
<TABLE>
<CAPTION>
Convertible Notes Accumulated
Preferred Stock Common Stock Additional Deferred Receivable Other
------------------- ----------------- Paid-in Stock-based From Comprehensive Accumulated
Shares Amount Shares Amount Capital Compensation Stockholders Losses Deficit
----------- ------ ---------- ------ ---------- ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
common stock
upon exercise of
stock options
and warrants,
net of
repurchases..... -- -- 5,749,356 6 6,393 -- (6,544) -- --
Issuance of
Series D
convertible
preferred
stock........... 838,466 -- -- -- 10,169 -- -- -- --
Conversion of
convertible
preferred stock
to common
stock........... (13,351,107) (13) 26,702,214 27 (14) -- -- -- --
Issuance of
common stock of
pooled
companies....... -- -- 964,964 1 5,790 -- -- -- --
Issuance of
common stock in
exchange for
services........ -- -- 5,306 -- 60 -- -- -- --
Issuance of
common stock in
conjunction with
initial public
offering, net... -- -- 7,590,000 8 51,058 -- -- -- --
Conversion of
debt, accrued
interest, and
warrants to
common stock.... -- -- 480,294 -- 5,058 -- -- -- --
Payments on
notes receivable
from
stockholders.... -- -- -- -- -- -- 501 -- --
Interest
receivable from
notes receivable
from
stockholders.... -- -- -- -- -- -- (173) -- --
Interest expense
from warrants
issued in
connection with
bridge loans.... -- -- -- -- 1,559 -- -- -- --
Deferred stock-
based
compensation.... -- -- -- -- 93,154 (93,154) -- -- --
Amortization of
deferred stock-
based
compensation.... -- -- -- -- -- 80,476 -- -- --
Other
comprehensive
loss............ -- -- -- -- -- -- -- (70) --
Net loss........ -- -- -- -- -- -- -- -- (118,743)
----------- ----- ---------- --- -------- -------- ------- ---- ---------
Balances,
December 31,
1999............ -- $ -- 60,766,650 $61 $202,473 $(14,962) $(6,380) $(75) $(132,617)
=========== ===== ========== === ======== ======== ======= ==== =========
<CAPTION>
Total
Stockholders'
Equity
-------------
<S> <C>
Issuance of
common stock
upon exercise of
stock options
and warrants,
net of
repurchases..... (145)
Issuance of
Series D
convertible
preferred
stock........... 10,169
Conversion of
convertible
preferred stock
to common
stock........... --
Issuance of
common stock of
pooled
companies....... 5,791
Issuance of
common stock in
exchange for
services........ 60
Issuance of
common stock in
conjunction with
initial public
offering, net... 51,066
Conversion of
debt, accrued
interest, and
warrants to
common stock.... 5,058
Payments on
notes receivable
from
stockholders.... 501
Interest
receivable from
notes receivable
from
stockholders.... (173)
Interest expense
from warrants
issued in
connection with
bridge loans.... 1,559
Deferred stock-
based
compensation.... --
Amortization of
deferred stock-
based
compensation.... 80,476
Other
comprehensive
loss............ (70)
Net loss........ (118,743)
-------------
Balances,
December 31,
1999............ $ 48,500
=============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1997 1998 1999
------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $(1,553) $(12,601) $(118,743)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 45 328 1,531
Amortization of stock-based compensation and
other stock-based items....................... 113 1,589 80,536
Interest expense from warrants issued in
connection with bridge loans.................. -- -- 1,559
Conversion of accrued interest to common
stock......................................... -- -- 258
Interest on stockholders' notes receivable..... -- -- (173)
Changes in operating assets and liabilities:
Accounts receivable........................... (15) (690) (3,807)
Prepaid expenses and other assets............. (50) (469) (1,831)
Accounts payable and accrued liabilities...... 379 1,177 9,274
Deferred revenue.............................. -- 562 5,691
------- -------- ---------
Net cash used in operating activities......... (1,081) (10,104) (25,705)
------- -------- ---------
Cash flows from investing activities:
(Purchases) sales of short-term investments,
net............................................ (210) 50 (35,981)
Purchases of property and equipment............. (371) (1,446) (8,418)
------- -------- ---------
Net cash used in investing activities......... (581) (1,396) (44,399)
------- -------- ---------
Cash flows from financing activities:
Proceeds from notes payable and convertible
notes payable.................................. 256 1,834 9,790
Payments on notes payable....................... -- (122) (2,151)
Net proceeds from issuance of convertible
preferred stock................................ 4,603 11,628 10,169
Net proceeds from issuance of common stock and
warrants....................................... 2,070 6,656 5,645
Net proceeds from initial public offering....... -- -- 51,066
Payments on stockholders' notes receivable...... -- -- 501
------- -------- ---------
Net cash provided by financing activities..... 6,929 19,996 75,020
------- -------- ---------
Effect of exchange rate changes on cash and cash
equivalents..................................... -- (5) (96)
------- -------- ---------
Net change in cash and cash equivalents.......... 5,267 8,491 4,820
Cash and cash equivalents at beginning of year... 117 5,384 13,875
------- -------- ---------
Cash and cash equivalents at end of year......... $ 5,384 $ 13,875 $ 18,695
======= ======== =========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.......... $ 3 $ 36 $ 131
======= ======== =========
Noncash investing and financial activities:
Issuance of Series A convertible preferred
stock upon conversion of stockholder loan..... $ 170 $ -- $ --
======= ======== =========
Issuance of common stock upon conversion of
convertible note payable...................... $ -- $ 300 $ 4,800
======= ======== =========
Issuance of common stock in exchange for notes
receivable from stockholders.................. $ -- $ 155 $ 6,544
======= ======== =========
Grant of options to purchase common stock with
an exercise price below fair value............ $ 890 $ 2,273 $ 93,154
======= ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1999
1. Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
Kana Communications, Inc. and subsidiaries (the Company or Kana) develop,
market and support 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 primarily through its direct sales force.
(b) Principles of Consolidation
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.
(c) 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.
(d) 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 average exchange rates
prevailing during the year. Any translation adjustments are included in other
comprehensive loss.
(e) 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. 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, are reported as a
separate component of accumulated other comprehensive losses in stockholders'
equity. All short term investments mature in less than one year. To date,
realized gains or losses have not been material.
(f) 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
F-8
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
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.
(g) 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.
(h) Revenue Recognition
The Company recognizes revenue in accordance with Statement of Position
(SOP) 97-2, Software Revenue Recognition. SOP 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 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. Other service revenue, consisting primarily of consulting and
implementation, is generally recognized at the time the service is performed.
(i) 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, technological
feasibility and general availability of such software have occurred
simultaneously and software development costs qualifying for capitalization
have been insignificant. Accordingly, the Company has not capitalized any
software development costs.
F-9
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
The Company accounts for the costs of computer software developed or
obtained for internal use in accordance with SOP 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use, which was
effective for fiscal years beginning after December 15, 1998. This statement
requires that certain costs incurred during a software development project be
capitalized. These costs generally include external direct costs of materials
and services consumed in the project, and internal costs such as payroll and
benefits of those employees directly associated with the development of the
software. During 1999, the Company did not capitalize any internal costs as
such costs qualifying for capitalization have been insignificant. External
direct costs of purchased internal use software have been capitalized and
included in fixed assets.
(j) 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.
A valuation allowance is recorded to reduce deferred tax assets to an amount
whose realization is more likely than not.
(k) 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. Nonemployee options are accounted for under
Statement of Financial Accounting Standards (SFAS) No. 123.
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.
(l) Comprehensive Loss
Other comprehensive loss recorded by the Company for the years ended
December 31, 1998 and 1999 was attributable to foreign currency translation
adjustments for the Company's U.K. subsidiary and unrealized gain from
investments. Tax effects and reclassification adjustments of comprehensive loss
are not material.
(m) 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-10
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
Diluted net loss per share does not include the effect of the following
antidilutive common equivalent shares:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Stock options and warrants................... 3,576,632 824,630 3,771,116
Common stock subject to repurchase........... 5,189,824 8,926,146 9,101,206
Convertible preferred stock (as if converted
basis)...................................... 17,835,710 25,025,282 --
---------- ---------- ----------
26,602,166 34,776,058 12,872,322
========== ========== ==========
</TABLE>
(n) Segment Reporting
The Company is organized in a single operating segment for purposes of
making operating decisions and assessing performance. The chief executive
officer, 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 derived from sources outside of the United States,
primarily in the United Kingdom, for the year ended December 31, 1999 were
approximately $1,385,000. Prior to 1999, 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 years ended December 31, 1997,
1998 and 1999.
(o) Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standard
(SFAS) No. 133, Accounting for Derivative and Hedging Activities. 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 98-9, Modification of SOP 97-2, Software Revenue Recognition with
Respect to Certain Transactions. SOP 98-9 amends SOP 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; 2) vendor-specific evidence of fair value
does not exist for one or more of the delivered elements; and 3) the revenue
recognition criteria of SOP 97-2 are satisfied. SOP 98-9 will be effective
beginning January 1, 2000. The Company believes the adoption of SOP 98-9 will
not have a material effect on its results of operations, financial position or
cash flows.
2. Business Combinations
On August 13, 1999, the Company issued 6,982,542 shares of its common stock
to the shareholders of 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 10,191,638
shares of Kana common stock. As a result of the conversion, the Company created
a controlling class of common stock.
F-11
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
On December 3, 1999, in connection with the acquisition of Business
Evolution, Inc. ("BEI"), 1,935,206 shares of Kana common stock were issued or
reserved for issuance for all outstanding shares, warrants and options of BEI.
Pursuant to the terms of the merger, BEI's convertible preferred stock with a
book value of $4,976,000 converted into 474,332 shares of Kana common stock. On
the same date, in connection with the acquisition of netDialog, Inc.
("netDialog"), 1,244,062 shares of Kana common stock were issued or reserved
for issuance for all outstanding shares, warrants, convertible notes and
options of netDialog. Pursuant to the terms of the merger, netDialog's
redeemable preferred stock with a book value of $4,995,000 and convertible debt
with a book value of $4,800,000 converted into 773,942 shares of Kana's common
stock at the closing of the merger.
The mergers have been accounted for as poolings of interests, and,
accordingly, the Company's consolidated financial statements have been restated
for all periods prior to the merger to include the results of operations,
financial position, and cash flows of the acquired companies. No significant
adjustments were required to conform the accounting policies of the Company and
the acquired companies.
In connection with the merger with Connectify, Kana recorded a charge for
merger integration costs of $1.2 million consisting primarily of transaction
fees for attorneys and accountants of approximately $390,000 and employee
severance benefits and facility related costs of $780,000. As of December 31,
1999, Kana had $30,000 remaining in accrued acquisition related costs, which
Kana expects to pay by the first quarter of fiscal 2000.
In connection with the mergers with BEI and netDialog, the Company recorded
a nonrecurring charge for merger integration costs of $4.5 million, consisting
primarily of transaction fees for attorneys and, accountants of approximately
$1.5 million, merger-related advertising and announcements of $1.7 million
incurred by December 31, 1999, charges for the elimination of duplicate
facilities of approximately $840,000 and severance costs and certain other
related costs of approximately $433,000. As of December 31, 1999, Kana had
$3,118,000 remaining in accrued acquisition related costs, which Kana expects
to pay during fiscal 2000.
Certain results of operations data for the separate companies and the
combined amounts presented in the consolidated financial statements were as
follows (in thousands):
<TABLE>
<CAPTION>
Years Ended
December Nine Months
31, Ended
----------- September 30,
1997 1998 1999
---- ------ -------------
(Unaudited)
-----------
<S> <C> <C> <C>
Revenues:
Kana................................................ $-- $2,049 $7,174
Connectify(1)....................................... -- -- --
BEI................................................. 617 298 361
netDialog........................................... -- -- 72
---- ------ ------
$617 $2,347 $7,607
==== ====== ======
</TABLE>
F-12
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
<TABLE>
<CAPTION>
Years Ended Nine Months
December 31, Ended
------------------ September 30,
1997 1998 1999
-------- -------- -------------
(Unaudited)
-------------
<S> <C> <C> <C>
Net Loss:
Kana........................................ $ (1,383) $ (6,337) $(16,828)
Connectify(1)............................... -- (1,041) (2,627)
BEI......................................... 93 (1,360) (2,404)
netDialog................................... (262) (3,863) (6,288)
-------- -------- --------
$(1,553) $(12,601) $(28,147)
======== ======== ========
</TABLE>
(1) Connectify figures included in the nine months ended 1999 are stated
for the six months ended June 30, 1999.
The following table presents results for the combined entities for the
month ended January 31, 2000 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
MONTH ENDED
January 31,
2000
-----------
(unaudited)
-----------
<S> <C>
Revenue.......................................................... $6,395
Net loss......................................................... $ (52)
Basic and diluted net loss per share............................. $(0.00)
</TABLE>
3. Financial Statements Detail
Cash equivalents consist of the following as of December 31, 1999 (in
thousands):
<TABLE>
<CAPTION>
Unrealized Unrealized Fair
Cost Loss Gain Value
------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Money market funds.................... $ 3,553 $ -- $ -- $ 3,553
Municipal securities.................. 4,014 -- -- 4,014
Commercial paper...................... 7,949 -- -- 7,949
Certificates of deposit............... 283 -- -- 283
------- ----- ----- -------
$15,799 $ -- $ -- $15,799
======= ===== ===== =======
</TABLE>
Short-term investments consist of the following as of December 31, 1999 (in
thousands):
<TABLE>
<CAPTION>
Unrealized Unrealized
Cost Loss Gain Fair Value
------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Municipal securities................ $18,450 $ -- $ -- $18,450
Commercial paper.................... 9,330 -- 23 9,307
Corporate bonds..................... 5,121 -- 3 5,118
Certificates of deposit............. 3,292 -- -- 3,292
------- ----- ----- -------
$36,193 $ -- $ 26 $36,167
======= ===== ===== =======
</TABLE>
As of December 31, 1998, short-term investments consisted of certificates
of deposit.
F-13
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
Property and equipment, net consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1998 1999
------ -------
<S> <C> <C>
Computer equipment........................................... $1,352 $ 6,688
Furniture and fixtures....................................... 259 1,972
Leasehold improvements....................................... 241 1,531
------ -------
1,852 10,191
Less accumulated depreciation and amortization............... 379 1,831
------ -------
$1,473 $ 8,360
====== =======
</TABLE>
Other income (expense), net consisted of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------
1997 1998 1999
---- ---- -------
<S> <C> <C> <C>
Interest income....................................... $59 $324 $ 1,419
Interest expense...................................... (2) (53) (520)
Interest expense from warrants issued in connection
with bridge loans.................................... -- (35) (1,559)
Other ................................................ -- (9) (84)
--- ---- -------
$57 $227 $ (744)
=== ==== =======
</TABLE>
4. Notes Payable
The Company maintained a line of credit providing for borrowings of up to
$2,000,000 and $3,000,000 as of December 31, 1998 and 1999, respectively, to be
used for qualified equipment purchases or working capital needs. 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% and 8.50% as of December 31, 1998
and 1999, respectively). Total borrowings as of December 31, 1998 and 1999 were
$720,000 and $1,187,000, respectively. The line of credit expires on March 2,
2000.
As of December 31, 1998, the Company had two commercial loans totalling
$1,077,000. These were paid as of December 31, 1999.
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>
2000................................................................. $ 237
2001................................................................. 263
2002................................................................. 149
-----
$ 649
=====
</TABLE>
On October 22, 1999, the Company issued subordinated promissory notes in
the aggregate principal amount of $2,800,000 to entities affiliated with Bay
Partners, BankAmerica Ventures and 5S Ventures LLC. Such notes bear interest at
an annual rate of 10%. This debt was paid in January 2000.
F-14
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
5. Stockholders' Equity
(a) Reincorporation
In September 1999, Kana reincorporated into the State of Delaware, effected
a two for three reverse stock split of Kana's common stock and preferred stock
and increased Kana's authorized common stock to 100,000,000 shares. Kana's
common stock has 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.
(b) Initial Public Offering
On September 27, 1999, Kana consummated its initial public offering in
which it sold 7,590,000 shares of common stock, including 990,000 shares in
connection with the exercise of the underwriters' over-allotment option, at
$7.50 per share. Kana received approximately $51.0 million in cash, net of
underwriting discounts, commissions and other offering costs. The net proceeds
were predominately held in short-term municipal securities and commercial paper
at December 31, 1999.
(c) Convertible Preferred Stock
Since inception Kana issued 13,351,107 shares of convertible preferred
stock. During 1999, at the time of the Connectify merger, 11,581,379 shares
were converted to common stock and, 1,769,728 shares were converted to common
stock at the initial public offering at a ratio of 1 share of preferred stock
for 2 shares of common stock.
(d) Common Stock
The Company has issued to founders 10,994,398 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, 1999, 2,401,412 shares were
subject to repurchase. During 1997, the Company repurchased a net of 833,332
shares from one founder at the original exercise price of $0.00005 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, 1999, there were 6,699,794 shares subject to repurchase. These options were
exercised at prices ranging from $0.02 to $4.50 with a weighted-average
exercise price of $3.29 per share.
(e) Stock Compensation 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
F-15
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
after the grant date and the remainder at a rate of 1/36 per month thereafter.
Connectify's 1998 Stock Plan, netDialog's 1997 Stock Plan and BEI's 1999 Stock
Plan have similar terms as those of the 1997 Plan. Outstanding options under
all these plans were assumed in the merger.
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 became effective immediately prior to the
IPO. The common stock reserved for future issuances under these plans was 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, in
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.
The 1999 ESPP allows eligible employees to purchase common stock through
payroll deductions of up to 15% of an employee's compensation. The 1999 ESPP
currently has a two-year offering period that ends in October 2001. The
purchase price of the common stock 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 fair market value per share on each semi-annual purchase date.
The 1999 ESPP qualifies as an employee stock purchase plan under Section 423 of
the Internal Revenue Code of 1986, as amended. No shares have been issued from
the 1999 ESPP as of December 31, 1999.
In December 1999, the board of directors approved the 1999 Special Stock
Option Plan and 1,000,000 shares of common stock were reserved for issuance
under this plan. The Special Stock Option Plan has similar terms as those of
the 1997 plan, except that options may be granted with an exercise price less
than, equal to, or greater than the fair market value of the option shares on
the grant date.
A summary of stock option activity follows:
<TABLE>
<CAPTION>
Shares Weighted
Available for Number Average
Grant of Shares Exercise Price
------------- ---------- --------------
<S> <C> <C> <C>
Balances, December 31, 1996............ -- -- $ --
Additional shares authorized......... 7,434,222 -- --
Options granted...................... (3,503,810) 3,503,810 0.03
Options exercised.................... -- (106,666) 0.01
Options canceled..................... -- -- --
---------- ----------
Balances, December 31, 1997............ 3,930,412 3,397,144 0.03
Additional shares authorized......... 3,825,842 -- --
Options granted...................... (3,004,420) 3,004,420 0.13
Options exercised.................... -- (5,394,478) 0.04
Options canceled..................... 230,770 (230,770) 0.12
---------- ----------
Balances, December 31, 1998............ 4,982,604 776,316 0.19
Additional shares authorized......... 11,976,310 -- --
Options granted...................... (9,394,740) 9,394,740 6.24
Options exercised.................... -- (6,096,242) 1.01
Options canceled..................... 303,698 (303,698) 14.88
---------- ----------
Balances, December 31, 1999............ 7,867,872 3,771,116 $12.71
========== ==========
</TABLE>
F-16
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
The following table summarizes information about fixed stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
------------------------------ ------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number of Contractual Exercise Number of Exercise
shares Life Price Shares Price
--------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$0.02......................... 33,332 7.3 $ 0.02 33,332 $0.02
$0.03--$0.18.................. 104,796 9.2 $ 0.17 104,796 $0.17
$0.26--$0.34.................. 10,666 9.3 $ 0.34 10,666 $0.34
$1.81--$2.25.................. 590,048 9.6 $ 2.16 486,058 $2.23
$3.38--$4.50.................. 491,598 9.6 $ 4.45 491,598 $4.45
$7.50......................... 1,346,730 9.7 $ 7.50 60,000 $7.50
$15.00........................ 738,264 10.0 $15.00 -- --
$31.63--$40.57................ 304,400 9.8 $39.62 -- --
$73.50--$85.24................ 151,282 9.9 $73.64 -- --
--------- ---------
$0.02--$85.24................. 3,771,116 9.1 $12.71 1,186,450 $3.15
========= =========
</TABLE>
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 December 31, 1999, the Company recorded deferred stock-
based compensation of $97.0 million for the difference at the grant date
between the exercise price and the fair value of the common stock underlying
the options. Subsequent to the consummation of the BEI and netDialog
acquisitions, the Company granted 698,264 under the 1999 Special Stock Option
Plan options to certain employees hired from the acquired companies for an
exercise price below the fair market value of the common stock. These options
were immediately vested on the date of grant and 50% of the options can be
exercised 15 months after the grant date and the remaining 50% of the options
can be exercised 30 months after the grant date, provided the individual
remains an employee of the Company. If the employee is terminated prior to
these dates, the options can be exercised after 9.5 years. The difference
between the fair market value of the underlying common stock and the exercise
price of the options was recorded as compensation expense in the fourth quarter
of 1999 in the amount of approximately $60,372,000.
F-17
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
Pursuant to SFAS No. 123, the Company is required to disclose the pro forma
effects on net loss and net loss per share data as if the Company had elected
to use the fair value approach to account for its employee stock-based
compensation plans. 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 for the years ended December 31, 1997 and 1998. Had compensation cost
for the Company's plans been determined consistent with the fair value approach
enumerated in SFAS No. 123, the Company's net loss and net loss per share for
the year ended December 31, 1999 would have been as indicated below (in
thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
1999
------------
<S> <C>
Net loss:
As reported................................................... $(118,743)
Pro forma..................................................... $(124,603)
Basic and diluted net loss per share:
As reported................................................... $ (4.61)
Pro forma..................................................... $ (4.83)
</TABLE>
The fair value of the Company's stock-based awards was estimated assuming
no expected dividends and the following weighted average assumptions:
<TABLE>
<CAPTION>
Options ESPP
------------------------- --------------------------
Interest Interest
Rate Term Volatility Rate Term Volatility
-------- ----- ---------- -------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
1997.................... 6.22% 3 yrs 0% -- -- --
1998.................... 5.15% 3 0 -- -- --
1999--Pre IPO........... 5.30% 3 0 -- -- --
1999--Post IPO.......... 5.45% 3 100 5.14% 6 mths 100%
</TABLE>
The weighted average fair value of the employee stock purchase rights
granted under the 1999 ESPP during 1999 was $6.55. The weighted average fair
value and exercise price of the options granted in 1997, 1998, and 1999 are as
follows:
<TABLE>
<CAPTION>
Weighted Average Weighted Average
Exercise Price Fair Value
------------------ ------------------
1997 1998 1999 1997 1998 1999
----- ----- ------ ----- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Exercise price equals fair value on
grant date............................. $ -- $ -- $24.67 $ -- $ -- $15.94
Exercise price exceeds fair value on
grant date............................. $0.03 $0.13 2.71 0.03 0.13 12.83
----- ----- ------ ----- ----- ------
Total options........................... $0.03 $0.13 $ 6.24 $0.03 $0.13 $13.39
===== ===== ====== ===== ===== ======
</TABLE>
(f) Warrants
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 preferred stock back to
the Company.
F-18
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
In connection with the issuance of convertible notes payable of $300,000,
Connectify issued warrants to purchase 48,314 shares of common stock for $1.25
per share in August 1998. Such warrants were exercised at the time of the
initial public offering. 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
in 1998, the Company recorded $35,000 of interest expense associated with the
warrants.
In connection with its convertible debt offerings, netDialog issued
warrants to purchase preferred stock. The warrants were initially exercisable
into an amount of preferred stock equal to 10% of the value of the convertible
debt outstanding. As long as the convertible debt remained outstanding, the
amount of preferred stock into which the warrants could be exercised increased
in tranches of 3.33% of the value of the debt every two or three months
following the initial grant date up to a maximum of an additional 10% of the
debt value.
The fair value of each tranche of warrants was measured at each date the
exercise terms of the warrants changed. The fair value of the warrants was
treated as a discount on the convertible debt and recorded as interest expense.
In connection with the acquisition of netDialog, all warrants issued under the
arrangement were converted into approximately 74,000 shares of Kana common
stock at an exercise price of $12.13 per share, of which, approximately 10,000
shares of Kana common stock were surrendered back to the Company in lieu of
paying cash. The full value of the warrants of approximately $1.6 million was
expensed during the year ended December 31, 1999.
6. Commitments and Contingencies
(a) Lease Obligations
On June 18, 1999, the Company entered into a lease agreement for a new
facility. Payments under this lease began in November 1999. The Company leases
its facilities under noncancelable operating leases with various expiration
dates through October 2006. In connection with its existing leases, the Company
entered into three letters for credit totalling $1,645,000, expiring in 2000
and 2001. The letters of credit are secured by certificates of deposit.
Future minimum lease payments under noncancelable operating leases as of
December 31, 1999, were as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
2000............................................................... $ 2,587
2001............................................................... 2,487
2002............................................................... 2,554
2003............................................................... 2,196
2004............................................................... 2,189
Thereafter......................................................... 4,599
-------
$16,612
=======
</TABLE>
Rent expense, net of sublease payments, was approximately $85,000, $604,000
and $1,620,000 for the years ended December 31, 1997, 1998 and 1999,
respectively. Sublease payments were approximately -0-, $140,000 and $212,000
in the years ended December 31, 1997, 1998 and 1999, respectively. The
Company's sublease and the underlying lease arrangements expired in December
1999.
F-19
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
(b) Litigation
On October 8, 1999, Genesys Telecommunications Laboratories, Inc. (Genesys)
filed a complaint against Kana in the United States District Court for the
District of Delaware. Genesys alleges that Kana's Customer Messaging System 3.0
infringes upon one or more claims of a Genesys patent. Genesys is seeking
relief in the forms of an injunction, damages, punitive damages, attorneys'
fees, costs and pre- and post-judgment interest. The litigation is currently in
its early stages and Kana has not received material information or
documentation. Kana intends to fight this claim vigorously and does not expect
it to materially impact its results from operations. Kana is not currently a
party to any other material legal proceedings.
7. Income Taxes
The 1997, 1998 and 1999 income tax benefit differed from the amounts
computed by applying the U.S. federal income tax rate of 34% to pretax loss as
a result of the following (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1997 1998 1999
---------------- ---------
<S> <C> <C> <C>
Federal tax benefit at statutory rate............ $ (528) $ (4,284) $ (40,372)
Stock compensation expense....................... -- 432 27,222
Merger costs..................................... -- -- 726
Current year foreign losses, no tax benefit
recognized...................................... -- -- 486
Current year net operating losses and temporary
differences, no tax benefit recognized.......... 478 3,172 11,896
S corporation income, no tax effect.............. 12 123 --
Other permanent differences...................... 38 557 42
------ -------- ---------
Total tax expense.............................. $ -- $ -- $ --
====== ======== =========
</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>
Years Ended
December 31,
---------------
1998 1999
------ -------
<S> <C> <C>
Deferred tax assets:
Accruals and reserves........................................ $1,065 $ 2,489
Plant and equipment.......................................... 2 --
Net operating loss and credit carryforwards.................. 4,409 18,020
------ -------
Gross deferred tax assets...................................... 5,476 20,509
Valuation allowance............................................ (5,459) (20,469)
------ -------
Total deferred tax assets.................................. 17 40
Deferred tax liabilities:
Plant and equipment.......................................... (17) (40)
------ -------
Total deferred tax liabilities............................. (17) (40)
------ -------
Net deferred tax assets (liabilities)...................... $ -- $ --
====== =======
</TABLE>
F-20
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
The net change in the valuation allowance for the year ended December 31,
1999 was an increase of approximately $15,010,000. Management believes that
sufficient uncertainty exists as to whether the deferred tax assets will be
realized, and accordingly, a valuation allowance is required.
As of December 31, 1999, the Company had net operating loss carryforwards
for federal and state income tax purposes of approximately $43,969,000 and
$34,621,000, respectively. The federal net operating loss carryforwards, if not
offset against future taxable income, will expire from 2011 through 2019. The
state net operating loss carryforwards, if not offset against future taxable
income, expire from 2003 through 2004.
As of December 31, 1999, unused research and development tax credits of
approximately $623,000 and $425,000 were available to reduce future federal and
state income taxes, respectively. Federal credit carryforwards expire from 2011
through 2019. The Company also has an unused California manufacturers'
investment credit of approximately $15,000. The California manufacturers'
investment credit, if not utilized, will expire in 2008.
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.
8. Subsequent Events
On January 10, 2000, the Company announced that its Board of Directors has
approved a two-for-one stock split of its common stock. The split will be
effected in the form of a stock dividend. Stockholders will receive one
additional share for each share held of record at the end of business on
January 28, 2000. Shares resulting from the split were distributed by the
transfer agent in February 2000. The accompanying financial statements have
been retroactively restated to reflect the effect of this stock split.
On February 6, 2000, the Company, Pistol Acquisition Corp., a wholly-owned,
subsidiary of Kana, and Silknet Software, Inc. ("Silknet") entered into an
Agreement and Plan of Reorganization. As a result of the merger, each
outstanding share of Silknet common stock will be converted into the right to
acquire 1.66 shares of Kana common stock. In addition, all outstanding options
and warrants to purchase Silknet common stock will be assumed by Kana, adjusted
for the exchange ratio. On a fully diluted basis, Kana will issue (or reserve)
approximately 32.8 million shares of its common stock having a value of
approximately $4.2 billion based on Kana's closing stock price on February 4,
2000. The transaction will be accounted for as a purchase.
On February 11, 2000, the Company entered into an agreement to lease
approximately 62,500 square feet under a lease that expires in December 2010.
The annual base rent for this facility for the first year is approximately $2.4
million. The total lease obligation pursuant to this lease is $28.3 million.
F-21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Silknet Software, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, convertible preferred stock and
stockholders' equity (deficit) and cash flows present fairly, in all material
respects, the consolidated financial position of Silknet Software, Inc.
("Silknet") at June 30, 1998 and 1999 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1999, in conformity with accounting principles generally accepted in
the United States. These financial statements are the responsibility of
Silknet's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
July 19, 1999 except
as to the pooling
of interests with
InSite Marketing
Technology, Inc.
discussed in Note C
which is as of
December 27, 1999
and Note P which is
as of February 6,
2000
F-22
<PAGE>
SILKNET SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
---------------- ------------
1998 1999 1999
------- ------- ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $10,651 $57,565 $48,211
Accounts receivable, net of allowance for
doubtful accounts of $0, $275, and $600 at
June 30, 1998 and 1999 and December 31, 1999,
respectively.................................. 1,557 3,985 6,707
Prepaid expenses and other current assets...... 265 689 1,089
------- ------- -------
Total current assets......................... 12,473 62,239 56,007
Property and equipment, net..................... 1,236 2,530 3,825
Other assets.................................... 54 252 1,648
------- ------- -------
Total assets................................. $13,763 $65,021 $61,480
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Note payable to bank, current portion.......... 249 133 133
Accounts payable............................... 208 1,193 870
Accrued expenses............................... 967 4,849 6,879
Deferred revenue............................... 1,013 2,187 3,078
------- ------- -------
Total current liabilities.................... 2,437 8,362 10,960
Note payable to bank............................ 222 89 23
Notes payable to investors...................... 137 137 --
Convertible preferred stock, $.01 par value;
15,000,000 shares authorized:
Series A;
Designated: 2,364,584 shares
Issued and outstanding: 2,364,584 shares at
June 30, 1998 and no shares at June 30, 1999
and December 31, 1999......................... 2,659 -- --
Series B;
Designated: 2,500,000 shares
Issued and outstanding: 2,500,000 shares at
June 30, 1998 and no shares at June 30, 1999
and December 31, 1999......................... 5,519 -- --
Series C;
Designated: 3,089,157 shares
Issued and outstanding: 3,089,157 shares at
June 30, 1998 and no shares at June 30, 1999
and December 31, 1999......................... 10,929 -- --
Series D;
Designated: 1,205,913 shares
Issued and outstanding: no shares at June 30,
1998, June 30, 1999 and December 31, 1999..... -- -- --
------- ------- -------
Total convertible preferred stock............ 19,107 -- --
------- ------- -------
Commitments and contingencies (Note L)
Stockholders' equity (deficit):
Common stock, $.01 par value;
Authorized: 50,000,000 shares
Issued and outstanding: 3,124,753, 16,044,094
and 17,090,338 at June 30, 1998 and 1999 and
December 31, 1999, respectively............... 31 160 171
Additional paid-in capital..................... 2,929 78,080 78,929
Accumulated dividends on preferred stock....... (1,093) -- --
Deferred compensation.......................... (125) (1,108) (572)
Other comprehensive income (loss).............. -- 3 (22)
Accumulated deficit............................ (9,882) (20,702) (28,009)
------- ------- -------
Total stockholders' equity (deficit)......... (8,140) 56,433 50,497
------- ------- -------
Total liabilities and stockholders' equity
(deficit)................................... $13,763 $65,021 $61,480
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-23
<PAGE>
SILKNET SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Six months ended
For the years ended June 30, December 31,
---------------------------------- -----------------------
1997 1998 1999 1998 1999
---------- ---------- ---------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
License................ $ 75 $ 2,977 $ 10,050 $ 3,688 $ 9,369
Services............... 119 750 3,980 1,860 4,679
---------- ---------- ---------- ---------- -----------
Total revenue........ 194 3,727 14,030 5,548 14,048
Cost of revenue:
License................ 29 32 317 183 232
Services............... 312 1,354 3,424 1,519 3,538
---------- ---------- ---------- ---------- -----------
Total cost of
revenue............. 341 1,386 3,741 1,702 3,770
---------- ---------- ---------- ---------- -----------
Gross margin............ (147) 2,341 10,289 3,846 10,278
Operating expenses:
Sales and marketing.... 888 4,802 10,921 4,238 8,382
Research and
development........... 1,018 2,857 7,186 2,748 6,563
General and
administrative........ 747 1,299 3,683 1,453 4,019
---------- ---------- ---------- ---------- -----------
Total operating
expenses............ 2,653 8,958 21,790 8,439 18,964
---------- ---------- ---------- ---------- -----------
Operating loss.......... (2,800) (6,617) (11,501) (4,593) (8,686)
Interest income
(expense), net......... (59) 121 681 179 1,379
---------- ---------- ---------- ---------- -----------
Net loss................ (2,859) (6,496) (10,820) (4,414) (7,307)
Accrued dividends for
preferred
stockholders........... 190 903 1,787 913 --
---------- ---------- ---------- ---------- -----------
Net loss attributable to
common stockholders.... $ (3,049) $ (7,399) $ (12,607) $ (5,327) $ (7,307)
========== ========== ========== ========== ===========
Basic and diluted net
loss per share......... $ (1.13) $ (2.57) $ (2.44) $ (1.68) $ (0.45)
Shares used in computing
basic and diluted net
loss per share......... 2,697,068 2,875,256 5,176,208 3,172,479 16,353,852
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-24
<PAGE>
SILKNET SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
<TABLE>
<CAPTION>
Convertible
Preferred Accumulated Total
Stock Common Stock Additional Dividends on Other Stockholders'
-------------- ------------ Paid-in Preferred Deferred Comprehensive Accumulated Equity
Shares Value Shares Value Capital Stock Compensation Income (Loss) Deficit (Deficit)
------ ------- ------ ----- ---------- ------------ ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June
30, 1996........ 2,555 $26 $ 818 $(351) $ (527) $ (34)
Issuance of
common stock.... 305 3 95 98
Issuance of
Series A
Convertible
Participating
Preferred Stock,
net of offering
costs........... 2,365 $ 2,252
Issuance of
Series B
Convertible
Participating
Preferred Stock
net of offering
costs........... 2,500 4,990
Issuance of
common stock
purchase
warrants........ 47 47
Stock options
cancelled....... (49) 49
Amortization of
deferred
compensation.... 93 93
Accrued
dividends for
preferred
stockholders.... 190 $ (190) (190)
Net loss........ (2,859) (2,859)
----- ------- ----- --- ------ ------ ----- --- ------- -------
Balance at June
30, 1997........ 4,865 7,432 2,860 29 911 (190) (209) (3,386) (2,845)
Issuance of
common stock.... 265 2 2,018 2,020
Issuance of
Series C
Convertible
Participating
Preferred Stock,
net of offering
costs........... 3,089 10,772
Amortization of
deferred
compensation.... 84 84
Accrued
dividends for
preferred
stockholders.... 903 (903) (903)
Net loss........ (6,496) (6,496)
----- ------- ----- --- ------ ------ ----- --- ------- -------
Balance at June
30, 1998........ 7,954 19,107 3,125 31 2,929 (1,093) (125) (9,882) (8,140)
Issuance of
common stock
under stock
option plans.... 309 3 359 362
</TABLE>
F-25
<PAGE>
SILKNET SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)--(Continued)
(In thousands)
<TABLE>
<CAPTION>
Convertible
Preferred Accumulated Total
Stock Common Stock Additional Dividends on Other Stockholders'
--------------- ------------ Paid-in Preferred Deferred Comprehensive Accumulated Equity
Shares Value Shares Value Capital Stock Compensation Income (Loss) Deficit (Deficit)
------ ------- ------ ----- ---------- ------------ ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
Series D
Convertible
Preferred Stock,
net of offering
costs........... 1,206 8,788
Accrued
dividends for
preferred
stockholders.... 1,787 (1,787) (1,787)
Conversion of
Convertible
Participating
Preferred Stock
and Convertible
Preferred
Stock........... (9,160) (29,682) 9,160 92 26,711 2,880 29,683
Issuance of
common stock in
initial public
offering, net of
offering costs.. 3,450 34 46,906 46,940
Deferred
compensation
related to grant
of stock
options......... 1,188 (1,188)
Stock options
cancelled....... (13) 13
Amortization of
deferred
compensation.... 192 192
Net loss........ (10,820) (10,820)
Other
comprehensive
income.......... $ 3 3
------ ------- ------ ---- ------- ------ ------ ---- -------- -------
Balance at June
30, 1999........ -- -- 16,044 160 78,080 -- (1,108) 3 (20,702) 56,433
Issuance of
common stock,
net of offering
costs........... 1,046 11 815 826
Deferred
compensation
related to grant
of stock
options......... 37 (37) --
Stock options
cancelled....... (3) 3 --
Amortization of
deferred
compensation.... 570 570
Net loss........ (7,307) (7,307)
Other
comprehensive
loss............ (25) (25)
------ ------- ------ ---- ------- ------ ------ ---- -------- -------
Balance at
December 31,
1999
(unaudited)..... -- $ -- 17,090 $171 $78,929 $ -- $ (572) $(22) $(28,009) $50,497
====== ======= ====== ==== ======= ====== ====== ==== ======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-26
<PAGE>
SILKNET SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the years ended June Six months ended
30, December 31,
----------------------------- ------------------
1997 1998 1999 1998 1999
-------- -------- --------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss................... $ (2,859) $ (6,496) $ (10,820) $ (4,414) $ (7,307)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and
amortization.............. 188 342 758 323 814
Provision for doubtful
accounts.................. -- -- 275 200 325
Loss (gain) on disposal of
equipment................. -- 4 (11) -- --
Amortization of deferred
compensation.............. 93 84 192 73 570
Stock issued for
services.................. 3 -- -- -- --
Changes in operating
assets and liabilities:
Accounts receivable....... 23 (1,524) (2,703) (2,521) (3,047)
Prepaid and other current
assets................... (23) (206) (424) (338) (400)
Other assets.............. (60) (25) (198) -- 104
Accounts payable.......... 236 (62) 985 484 (323)
Accrued expenses.......... 102 844 3,882 1,425 2,030
Deferred revenue.......... 154 858 1,174 384 891
-------- -------- --------- -------- --------
Net cash used in
operating activities.... (2,143) (6,181) (6,890) (4,384) (6,343)
-------- -------- --------- -------- --------
Cash flows from investing
activities:
Purchase of property and
equipment................. (563) (1,073) (2,052) (605) (2,104)
Proceeds from dispositions
of property and
equipment................. -- 27 12 -- --
Investment in Safe Harbor.. -- -- -- -- (1,500)
-------- -------- --------- -------- --------
Net cash used in
investing activities.... (563) (1,046) (2,040) (605) (3,604)
-------- -------- --------- -------- --------
Cash flows from financing
activities:
Proceeds from issuance of
common stock, net of
offering costs............ 96 1,737 46,940 -- (110)
Proceeds from exercise of
common stock options...... -- 70 362 88 936
Proceeds from issuance of
notes payable and
warrants.................. 560 700 -- -- --
Payments on notes payable.. (187) (198) (249) (143) (203)
Proceeds from issuance of
preferred stock, net of
offering costs............ 6,992 10,773 8,788 -- --
-------- -------- --------- -------- --------
Net cash provided by
(used in) financing
activities.............. 7,461 13,082 55,841 (55) 623
-------- -------- --------- -------- --------
Net increase (decrease) in
cash and cash equivalents.. 4,755 5,855 46,911 (5,044) (9,324)
Effect of exchange rate
changes on cash and cash
equivalents................ -- -- 3 1 (30)
-------- -------- --------- -------- --------
Cash and cash equivalents at
beginning of period........ 40 4,796 10,651 10,651 57,565
-------- -------- --------- -------- --------
Cash and cash equivalents at
end of period.............. $ 4,795 $ 10,651 $ 57,565 $ 5,608 $ 48,211
======== ======== ========= ======== ========
Supplemental schedule of
cash flow information:
Interest paid.............. $ 16 $ 39 $ 36 $ 26 $ 37
======== ======== ========= ======== ========
Income taxes paid.......... $ -- $ 12 $ 19 $ 15 $ 33
======== ======== ========= ======== ========
Supplemental schedule of
non-cash financing
activity:
Settlement of debt through
issuance of Series A
Convertible Participating
Preferred Stock........... $ 250 $ -- $ -- $ -- $ --
======== ======== ========= ======== ========
Settlement of debt through
issuance of common stock.. $ -- $ 213 $ -- $ -- $ --
======== ======== ========= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-27
<PAGE>
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Information as of December 31, 1999 and for the six months ended December 31,
1998 and 1999 is unaudited.
A. Nature of the Business:
Silknet provides electronic customer relationship management software, or
eCRM software, that allows companies to offer marketing, sales, e-commerce and
support services through a single Web site interface personalized for
individual customers.
On October 5, 1999, Silknet completed its acquisition of InSite Marketing
Technology, Inc. ("InSite"). Silknet eSales, based on InSite's technology, is
an e-sales application that provides the customer an electronic, or virtual,
personal sales assistant with the ability to identify the buying needs and
style of a customer. The underlying InSite technology uses demographic and
psychographic analysis, microsegmentation and probability models to personalize
the interaction between a virtual personal sales assistant and each customer.
This transaction was accounted for using the pooling of interests method. The
accompanying consolidated financial statements of Silknet have been restated to
include the results and balances of InSite for all periods presented.
Silknet operates in one segment and is subject to risks and uncertainties
common to growing technology-based companies, including rapid technological
change, growth and commercial acceptance of the Internet, dependence on
principal products and third party technology, new product development, new
product introductions and other activities of competitors, dependence on key
personnel, reliance on a limited number of distributors, international
expansion, lengthening sales cycle and limited operating history.
Silknet has also experienced substantial net losses since its inception
and, as of December 31, 1999, had an accumulated deficit of $28,009. Such
losses and accumulated deficit resulted from Silknet's lack of substantial
revenue and significantly increased costs incurred in the development of
Silknet's products and in the preliminary establishment of Silknet's
infrastructure. For the foreseeable future, Silknet expects to continue to
experience significant growth in its operating expenses in order to execute its
current business plan, particularly research and development and sales and
marketing expenses.
B. Summary of Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements include the accounts of Silknet and
its wholly-owned subsidiaries. Intercompany balances and transactions have been
eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates include the valuation of deferred tax assets.
F-28
<PAGE>
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Information as of December 31, 1999 and for the six months ended December 31,
1998 and 1999 is unaudited.
Cash and Cash Equivalents
Silknet considers money market mutual funds and all short-term investments
with original maturities of three months or less at the date of purchase to be
cash equivalents. Silknet invests its excess cash in money market funds and
short-term investments which management believes are subject to minimal market
and credit risk.
Property and Equipment
Property and equipment are stated at cost and are depreciated over their
estimated useful lives, generally three years, using the straight-line method.
Upon sale or retirement, the asset cost and related accumulated depreciation
are removed from the respective accounts, and any related gain or loss is
reflected in operations. Repair and maintenance costs are expensed as incurred.
Income Taxes
Silknet accounts for income taxes under the asset and liability method.
Under this method, 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 rates in effect for the year in which those temporary differences
are expected to be recovered or settled.
Fair Value of Financial Instruments
The carrying amounts of Silknet's financial instruments, which include cash
equivalents, accounts receivable, accounts payable, accrued expenses and notes
payable approximate their fair values at December 31, 1999.
Revenue Recognition
Silknet recognizes revenue from software licenses upon delivery to
customers provided no significant post-delivery obligations or uncertainties
remain and collection of the related receivable is probable. License or
services revenue subject to an acceptance clause is deferred until acceptance
is received from the customer. Revenue under arrangements where multiple
products or services are sold together under one contract is allocated to each
element based on their relative fair values, with these fair values being
determined using the price charged when that element is sold separately. For
agreements with specified upgrade rights, the revenue related to such upgrade
rights is deferred until the specified upgrade is delivered. Training and
consulting services revenue is recognized as services are provided and revenue
for maintenance and post-contract customer support services is recognized
ratably over the term of the service agreement.
Concentrations of Credit Risk and Significant Customers
A potential exposure to Silknet is a concentration of credit risk in trade
accounts receivable. To minimize this risk, ongoing credit evaluations of
customers' financial condition are performed, although collateral generally is
not required. As of June 30, 1998, three customers accounted for 34%, 25% and
11% of accounts receivable, while two customers accounted for 28% and 15% of
F-29
<PAGE>
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Information as of December 31, 1999 and for the six months ended December 31,
1998 and 1999 is unaudited.
accounts receivable as of June 30, 1999. In addition, five customers accounted
for 20%, 14%, 11%, 10% and 10% of total revenue for the year ended June 30,
1998, while two customers accounted for 21% and 17% of total revenue for the
year ended June 30, 1999.
Research and Development and Software Development Costs
Costs incurred in the research and development of Silknet's products are
expensed as incurred, except for certain software development costs. Costs
associated with the development of computer software are expensed prior to the
establishment of technological feasibility (as defined by Statement of
Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed") and capitalized
thereafter. Costs eligible for capitalization have been insignificant.
Accounting for Stock-Based Compensation
Silknet accounts for stock-based awards to employees using the intrinsic
value method as prescribed by Accounting Principles Board ("APB") No. 25,
"Accounting for Stock Issued to Employees" and related interpretations.
Accordingly, no compensation expense is recorded for options issued to
employees in fixed amounts and with fixed exercise prices at least equal to the
fair market value of Silknet's common stock at the date of grant. Silknet has
adopted the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," through disclosure only (Note K). All stock-based awards to non-
employees are accounted for at their fair value in accordance with SFAS No.
123.
Net Loss Per Share
Net loss per share is computed under SFAS No. 128, "Earnings Per Share."
Basic net loss per share is computed using the weighted average number of
shares of common stock outstanding. Net loss used in the calculation is
increased by the accrued dividends for the Preferred Stock outstanding in each
year. Diluted loss per share does not differ from basic loss per share since
potential common shares from conversion of preferred stock, stock options and
warrants are anti-dilutive for all periods presented and are therefore excluded
from the calculation. During the years ended June 30, 1997, 1998, and 1999 and
the six months ended December 31, 1999, options to purchase 1,256,744,
1,581,531, 2,567,678 and 2,313,339 shares of common stock, respectively,
Preferred Stock convertible into 4,864,584, 7,953,741, 9,159,654, and 0 shares
of common stock, respectively, and warrants for 750,000, 750,000, 750,000 and
424,340 shares of common stock, respectively, were not included in the
computation of diluted earnings per share since their inclusion would be
antidilutive.
Stock Split
In February 1999, Silknet reincorporated from New Hampshire to Delaware. In
connection with the reincorporation, Silknet effected a one-for-two exchange of
all common and preferred stock and assigned a par value of $.01 per share to
the common stock. Additionally, Silknet increased the number of shares of
authorized common stock to 50,000,000 and authorized preferred stock to
15,000,000. All references to shares and per share amounts in the financial
statements and related footnotes have been adjusted to reflect the exchange and
the new par value for all periods presented.
F-30
<PAGE>
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Information as of December 31, 1999 and for the six months ended December 31,
1998 and 1999 is unaudited.
Comprehensive Income
On July 1, 1998, Silknet adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." This statement
establishes standards for the reporting and display of comprehensive income and
its components. SFAS No. 130 is effective for Silknet's fiscal year ending June
30, 1999 including interim periods for that year. Comprehensive income consists
of net loss and foreign currency translation adjustments and is presented in
the consolidated statement of convertible preferred stock and stockholders'
equity (deficit). Prior year financial statements have been reclassified to
conform to the SFAS No. 130 requirements. The following table presents the
calculation of comprehensive loss and its components for the six months ended
December 30, 1999 and 1998:
<TABLE>
<CAPTION>
Six months
ended December
31,
----------------
1999 1998
------- -------
<S> <C> <C>
Net loss.................................................. $(7,307) $(4,414)
Foreign currency translation adjustments.................. (25) --
------- -------
Comprehensive loss........................................ $(7,332) $(4,414)
======= =======
</TABLE>
Recently Issued Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133, as amended by SFAS 137, is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. Silknet does not expect SFAS No.
133 to have a material effect on its financial position or results of
operations.
C. Business Combination:
On October 5, 1999, Silknet completed its acquisition of InSite. In
connection with the transaction, an aggregate of 590,708 shares of Silknet
common stock were issued or reserved in exchange for all the shares of InSite
common stock issued and outstanding and all options to purchase InSite common
stock at the effective time of the merger. This merger was accounted for as a
pooling of interests.
F-31
<PAGE>
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Information as of December 31, 1999 and for the six months ended December 31,
1998 and 1999 is unaudited.
The balance sheets at June 30, 1998 and 1999 and the results of operations
for each of the three years in the period ended June 30, 1999 and the six
months ended December 31, 1999 have been restated to include the balances and
results of InSite. Results on a stand-alone basis were as follows:
<TABLE>
<CAPTION>
Year ended June 30, 1997 Silknet InSite Combined
------------------------ -------- --------- --------
<S> <C> <C> <C>
Revenues....................................... $ 194 $ -- $ 194
Operating loss................................. (2,692) (108) (2,800)
Net loss....................................... (2,752) (107) (2,859)
Net loss per share............................. (1.15) (0.77) (1.13)
<CAPTION>
Year ended June 30, 1998 Silknet InSite Combined
------------------------ -------- --------- --------
<S> <C> <C> <C>
Revenues....................................... $ 3,647 $ 80 $ 3,727
Operating loss................................. (6,137) (480) (6,617)
Net loss....................................... (6,003) (493) (6,496)
Net loss per share............................. (2.69) (1.60) (2.57)
<CAPTION>
Year ended June 30, 1999 Silknet InSite Combined
------------------------ -------- --------- --------
<S> <C> <C> <C>
Revenues....................................... $ 13,918 $ 112 $ 14,030
Operating loss................................. (10,010) (1,491) (11,501)
Net loss....................................... (9,374) (1,446) (10,820)
Net loss per share............................. (2.39) (2.91) (2.44)
<CAPTION>
Six months ended December 31, 1999 Silknet InSite(1) Combined
---------------------------------- -------- --------- --------
<S> <C> <C> <C>
Revenues....................................... $ 13,844 $ 204 $ 14,048
Operating loss................................. (7,967) (719) (8,686)
Net loss....................................... (6,584) (723) (7,307)
</TABLE>
- --------
(1) includes the results of Insite through October 5, 1999, the date of
consummation of the transaction.
Expenses related to the merger were recognized as incurred or were recorded
when it became probable that the transaction would occur and the expense could
be reasonably estimated. Merger-related costs incurred for the six-month period
ended December 31, 1999 are as follows:
<TABLE>
<S> <C>
Amortization of deferred compensation upon acceleration of stock
option vesting...................................................... $393
Legal................................................................ 224
Accounting/Tax....................................................... 40
Printing............................................................. 4
----
Total.............................................................. $661
====
</TABLE>
F-32
<PAGE>
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Information as of December 31, 1999 and for the six months ended December 31,
1998 and 1999 is unaudited.
D. Property and Equipment:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
June 30,
--------------
1998 1999
------ ------
<S> <C> <C>
Computer..................................................... $1,054 $2,404
Furniture and fixtures....................................... 525 961
Leasehold improvements....................................... 103 366
------ ------
1,682 3,731
Less accumulated depreciation and amortization............... (446) (1,201)
------ ------
Total...................................................... $1,236 $2,530
====== ======
</TABLE>
Depreciation and amortization expense for the years ended June 30, 1997,
1998 and 1999 was $94, $342 and $758, respectively.
E. Accrued Expenses:
Accrued expenses consist of:
<TABLE>
<CAPTION>
June 30,
-----------
1998 1999
---- ------
<S> <C> <C>
Commissions, bonuses and other incentives....................... $334 $1,849
Vacation........................................................ 227 493
Royalties....................................................... 16 100
Professional services........................................... 77 640
Marketing....................................................... 74 542
Sales tax....................................................... 113 660
Other........................................................... 126 565
---- ------
Total......................................................... $967 $4,849
==== ======
</TABLE>
F-33
<PAGE>
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Information as of December 31, 1999 and for the six months ended December 31,
1998 and 1999 is unaudited.
F. Income Taxes:
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
June 30,
----------------
1998 1999
------- -------
<S> <C> <C>
Deferred tax assets:
Organizational and start-
up costs, capitalized for
tax...................... $ 4 $ 8
Fixed assets.............. 76 (36)
Accrued expenses.......... 288 109
Deferred compensation..... 214 146
Research and
experimentation credit... 140 37
Allowance for doubtful
accounts................. 172 --
Net operating loss
carryforwards............ 6,965 3,225
------- -------
7,859 3,489
Less valuation allowance.. (7,859) (3,489)
------- -------
Net deferred tax
assets................. $ -- $ --
======= =======
</TABLE>
In assessing the realizability of deferred tax assets, Silknet considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. Due to the fact that Silknet has incurred net
losses to date and expects to experience net losses in the near future, there
is substantial doubt about whether Silknet will have sufficient future taxable
income necessary to utilize the deferred tax assets over the periods which the
deferred tax assets are deductible for federal and state income tax purposes.
As a result, a 100% valuation allowance has been applied against Silknet net
deferred tax assets.
The following reconciles the difference between the federal statutory rate
and Silknet's effective tax rate:
<TABLE>
<CAPTION>
June 30,
------------------------
1997 1998 1999
------ ------- -------
<S> <C> <C> <C>
U.S. federal statutory rate....................... $ (972) $(2,209) $(3,679)
State income taxes, net........................... (29) (59) (645)
Research and experimentation tax credit........... (37) -- (103)
Other............................................. 2 17 59
Change in valuation allowance..................... 1,036 2,251 4,368
------ ------- -------
$ -- $ -- $ --
====== ======= =======
</TABLE>
At June 30, 1999, Silknet has net operating loss carryforwards of
approximately $18,600 for federal, state, and foreign income tax purposes which
expire beginning in 2012. Under the provisions of the Internal Revenue Code,
certain substantial changes in Silknet's ownership may have limited, or may
limit in the future, the amount of net operating loss and research and
experimentation credit carryforwards which could be utilized annually to offset
future taxable income and income tax liabilities. The amount of any annual
limitation is determined based upon Silknet's value prior to an ownership
change.
F-34
<PAGE>
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Information as of December 31, 1999 and for the six months ended December 31,
1998 and 1999 is unaudited.
G. Lines of Credit and Notes Payable:
Lines of Credit
During March 1997, Silknet entered into an equipment loan agreement under
which Silknet was able to borrow up to $300 to finance fixed asset purchases.
Advances under this facility were to be repaid over a 24-month period,
commencing on April 30, 1997. Interest on the facility was at the bank's prime
rate plus 2%. Borrowings under the facility were collateralized by all assets
of Silknet. Silknet was required to meet certain minimum financial covenants
for tangible net worth and liquidity with which Silknet was in compliance. This
line of credit was repaid and terminated in 1999.
During December 1997, Silknet entered into an equipment loan agreement
under which Silknet could borrow up to $400 to finance fixed asset purchases.
Advances under this facility are to be repaid over a 36-month period,
commencing on March 31, 1998. The facility bears interest at the bank's prime
rate (7.75% at June 30, 1999) plus 1%. Borrowings under the facility are
collateralized by all assets of Silknet. Silknet is required to meet certain
minimum financial covenants for tangible net worth and liquidity with which
Silknet was in compliance. At June 30, 1999, the balance outstanding totaled
$222.
During March 1999, Silknet entered into a new bank line of credit which
allows Silknet to borrow up to $3 million for working capital purposes and for
the issuance of letters of credit. The line of credit expires in March 2000.
Amounts available under the line of credit are a function of eligible accounts
receivable and bear interest at the bank's prime rate (7.75% at June 30, 1999)
plus 0.5%. Borrowings under the line of credit are collateralized by all assets
of Silknet. Silknet is required to meet certain minimum financial covenants for
tangible net worth and liquidity with which Silknet has been in compliance. At
June 30, 1999, there were no amounts outstanding under the line of credit.
At June 30, 1999, payments of principal and interest on existing debt were
due as follows:
<TABLE>
<CAPTION>
Fiscal year ending June 30,
<S> <C>
2000................................................................... $148
2001................................................................... 92
----
Total payments......................................................... 240
Less amounts representing interest..................................... 18
----
Total debt............................................................. $222
Less current portion................................................... 133
----
$ 89
====
</TABLE>
Notes Payable
During May 1996, Silknet entered into a Note and Warrant Purchase Agreement
with a private investor. Under the agreement, Silknet could borrow up to $250
and was required to issue warrants to purchase 250,000 shares of Silknet's
common stock at $1.00 per share. In May 1996, Silknet issued a demand
subordinated note payable under the agreement in the amount of $125 in
F-35
<PAGE>
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Information as of December 31, 1999 and for the six months ended December 31,
1998 and 1999 is unaudited.
exchange for cash and issued a warrant to purchase 125,000 shares of Silknet's
common stock at $1.00 per share. This warrant expires in May 2002. In July
1996, Silknet issued another demand subordinated note payable under the
agreement in the amount of $125 in exchange for cash and an additional warrant
to purchase 125,000 shares of Silknet's common stock at $1.00 per share. This
warrant expires in July 2002 (Note H). The fair value of each warrant at the
time of issuance was estimated to be approximately $47, which was recorded as
additional paid-in capital and reduced the carrying value of the debt. The fair
value was estimated using the Black-Scholes model. The discount on each note of
$47 was amortized over the estimated life of the note of six months.
In November 1996, Silknet repaid the full amount due under each demand
subordinated note by issuing 268,388 shares of Series A Convertible
Participating Preferred Stock (Note I). No gain or loss was recognized on the
exchange.
During fiscal 1998, three investors and board members of InSite advanced
$240 to InSite. On June 15, 1998 these advances were converted to 22,416 shares
of common stock and notes payable in the amount of $27. The notes payable were
due January 31, 2002 and had a stated interest rate of 6.1%. These notes were
fully repaid in December 1999.
On January 13, 1997, InSite issued notes payable to three investors and
board members totaling $50, with a stated interest rate of 6.1% and a due date
of January 31, 2002.
On August 20, 1997, InSite issued notes payable to three investors and
board members totaling $60, with a stated interest rate of 6.1% and a due date
of January 31, 2002.
These notes payable were all outstanding as of June 30, 1999. Interest
expense on these notes payable totaled $1, $13 and $9 for the years ended June
30, 1997, 1998 and 1999.
On August 20, 1999, InSite issued notes payable to three investors and
board members totaling $225, with a stated interest rate of 10% and a due date
of August 31, 2001.
The notes payable outstanding at December 20, 1999 were repaid in full,
including accrued interest.
H. Common Stock and Common Stock Warrants:
During May 1996, Silknet issued a warrant to purchase 125,000 shares of
common stock at $1.00 per share in connection with the first draw of $125 under
a bridge loan agreement with Zero Stage Capital V, L.P. During July 1996,
Silknet issued an additional warrant to purchase 125,000 shares of common stock
in connection with the second draw of $125 under the bridge loan agreement with
Zero Stage Capital V, L.P. (Note G). The total consideration received under
each issuance was allocated between the note and the warrants based upon their
relative fair values at the date of issuance. The estimated fair value at the
time of issuance assigned to each issue of the warrants was approximately $47
and was recorded as additional paid-in capital, thus reducing the carrying
value of the debt. The discount on the note of $94 was amortized over the
estimated life of the note of six-months. One warrant expires in May 2002 and
the other expires in July 2002.
On January 13, 1997, InSite issued 302,358 shares of common stock at $0.33
per share to its founders for total consideration of $96 (net of offering costs
of $4).
F-36
<PAGE>
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Information as of December 31, 1999 and for the six months ended December 31,
1998 and 1999 is unaudited.
During 1997, in connection with the issuance of the Series B Convertible
Participating Preferred Stock, Silknet issued warrants to purchase 500,000
shares of common stock at $2.20 per share. The warrants expire in June 2003.
The estimated fair value of the warrants at the time of issuance using the
Black-Scholes model was insignificant.
In June 1998, InSite issued 194,770 shares of common stock at an average
price of $10.08 per share to its founders and private investors for total
consideration of $1,951 (net of offering costs of $11). Of the total
consideration, $213 was paid by its founders through the conversion of advances
outstanding (Note G).
I. Convertible Preferred Stock:
In October 1996, Silknet issued 2,364,584 shares of Series A Convertible
Participating Preferred Stock ("Series A Preferred Stock") at $0.96 per share
to private investors for total consideration of $2,252 (net of offering costs
of $18). Of the total consideration, $250 was paid by one investor through the
cancellation of demand subordinated notes payable issued by Silknet (Note G).
The Series A Preferred Stock is voting. Dividends accrue annually and are
cumulative at a rate of 10% of the original purchase price of $0.96 per share,
on a per share basis. Dividends must be paid before any other dividends can be
declared or paid on any other class of preferred stock or on any class of
common stock. The Series A Preferred Stock is convertible at any time by the
holders, at the then applicable conversion rate adjusted from time to time (one
to one on the date of issuance). The Series A Preferred Stock is redeemable at
the option of the holder beginning in May 2003 if Silknet has not made a
qualified initial public offering of its common stock, as defined. Upon
liquidation, holders of Series A Preferred Stock are entitled to receive, out
of funds then generally available, $0.96 per share, plus any accrued and unpaid
dividends, thereon. Following payment to holders of all other classes of
preferred stock subordinate to the Series A Preferred Stock, holders of Series
A Preferred Stock are then entitled to share in remaining available funds on an
"as-if converted" basis with holders of common stock.
In June 1997, the Company issued 2,500,000 shares of Series B Convertible
Participating Preferred Stock ("Series B Preferred Stock") at $2.00 per share
to private investors for total consideration of $4,990 (net of offering costs
of $10).
The Series B Preferred Stock is voting. Dividends accrue annually and are
cumulative at a rate of 10% of the original purchase price of $2.00 per share,
on a per share basis. Dividends must be paid before any other dividends can be
declared or paid on any class of common stock. The Series B Preferred Stock is
convertible at any time by the holders, at the then applicable conversion rate
as adjusted from time to time (one to one on the date of issuance). The Series
B Preferred Stock is redeemable at the option of the holder beginning in May
2003 if Silknet has not made a qualified initial public offering of its common
stock, as defined. Upon liquidation, holders of Series B Preferred Stock are
entitled to receive, out of funds then generally available, $2.00 per share,
plus any accrued and unpaid dividends, thereon. Following payment to holders of
all other classes of preferred stock subordinate to the Series B Preferred
Stock, holders of Series B Preferred Stock are then entitled to share in
remaining available funds on an "as if converted" basis with holders of common
stock.
F-37
<PAGE>
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Information as of December 31, 1999 and for the six months ended December 31,
1998 and 1999 is unaudited.
In May 1998, Silknet issued 3,089,157 shares of Series C Convertible
Participating Preferred Stock ("Series C Preferred Stock") at $3.498117 per
share to private investors for total consideration of $10,772 (net of offering
costs of $34).
The Series C Preferred Stock is voting. Dividends accrue annually and are
cumulative at a rate of 10% of the original purchase price of $3.498117 per
share, on a per share basis. Dividends must be paid before any other dividends
can be declared or paid on any class of common stock. The Series C Preferred
Stock is convertible at any time by the holders, at the then applicable
conversion rate as adjusted from time to time (one to one on the date of
issuance). The Series C Preferred Stock is redeemable at the option of the
holder beginning in May 2003 if Silknet has not made a qualified initial public
offering of its common stock, as defined. Upon liquidation, holders of Series C
Preferred Stock are entitled to receive, out of funds then generally available,
$3.498117 per share, plus all accrued and unpaid dividends thereon. Following
payment to holders of all other classes of preferred stock subordinate to the
Series C Preferred Stock, holders of Series C Preferred Stock are then entitled
to share in remaining available funds on an "as if converted" basis with
holders of common stock.
In February 1999, Silknet issued 1,205,913 shares of Series D Convertible
Preferred Stock ("Series D Preferred Stock") at $7.324109 per share to private
investors for total consideration of $8,788 (net of offering costs of $44).
The Series D Preferred Stock is voting. Dividends accrue annually and are
cumulative at a rate of 10% of the original purchase price of $7.324109 per
share, on a per share basis. Dividends must be paid before any other dividends
can be declared or paid on any other classes of common stock. The Series D
Preferred Stock is convertible at any time by the holders, at the then
applicable conversion rate as adjusted from time to time (one to one on the
date of issuance). The Series D Preferred Stock is redeemable at the option of
the holder beginning in February 2004 if Silknet has not made a qualified
initial public offering of its common stock, as defined. Upon liquidation,
holders of Series D Preferred Stock are entitled to receive, out of funds then
generally available, $7.324109 per share, plus all accrued and unpaid
dividends.
Upon the closing of Silknet's initial public offering, all outstanding
shares of Preferred Stock automatically converted into shares of common stock
as follows:
<TABLE>
<CAPTION>
Shares of
Series Common Stock
------ ------------
<S> <C>
Series A Preferred Stock........................................ 2,364,584
Series B Preferred Stock........................................ 2,500,000
Series C Preferred Stock........................................ 3,089,157
Series D Preferred Stock........................................ 1,205,913
---------
9,159,654
=========
</TABLE>
F-38
<PAGE>
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Information as of December 31, 1999 and for the six months ended December 31,
1998 and 1999 is unaudited.
J. Initial Public Offering:
In February 1999, the board of directors authorized Silknet management to
file a Registration Statement with the Securities and Exchange Commission
permitting Silknet to sell shares of its common stock in an initial public
offering. The 9,159,654 outstanding shares of Series A, Series B, Series C and
Series D Preferred Stock converted into 9,159,654 shares of common stock (Note
I).
In May 1999, Silknet offered for sale 3,450,000 shares of common stock.
Silknet received net proceeds from the offering of $46,830.
K. Stock Options:
The 1999 Non-Employee Director Stock Option Plan (the "Director Plan") was
adopted by the board of directors and received stockholder approval in February
1999 and becomes effective on the date on which Silknet's common stock is
registered under the Exchange Act. A total of 350,000 shares of common stock
have been authorized for issuance under the Director Plan. The Director Plan is
administered by the Silknet Compensation Committee. Under the Director Plan,
each non-employee director who is or becomes a member of the board of directors
is automatically granted on the date which the common stock becomes registered
under the Exchange Act or, if not a director on that date, the date first
elected to the board of directors, an initial option to purchase 10,000 shares
of common stock. In addition, provided that the director continues to serve as
a member of the board of directors, each non-employee director will be
automatically granted on the third anniversary of his or her initial option
grant date and each three years thereafter an option to purchase 10,000 shares
of common stock. Provided that the director continues to serve as a member of
the board of directors, one-third of the shares included in each grant will
become exercisable on each of the first, second and third anniversaries of the
date of grant. If a director fails to attend at least 75% of the board of
directors meetings held in a fiscal year, that director will forfeit his or her
rights with respect to the option installment which vested on the preceding
vesting date, in proportion to the percentage of board of directors meetings
not attended. All options granted under the Director Plan will have an exercise
price equal to the fair market value of the common stock on the date of grant
and a term of ten years from the date of grant. As of June 30, 1999 options to
purchase 50,000 shares of Silknet common stock had been granted under the
Director Plan.
The 1999 Stock Option and Incentive Plan (the "1999 Option Plan") was
adopted by the board of directors and received stockholder approval in February
1999. A total of 1,000,000 shares of common stock have initially been reserved
for issuance under the 1999 Option Plan. The 1999 Option Plan provides that the
number of shares authorized for issuance will automatically increase by 5% of
the outstanding number of shares of common stock on December 31, 1999, 2000 and
2001 up to a maximum of an additional 2,500,000 shares of common stock. Under
the terms of the 1999 Option Plan, Silknet is authorized to grant incentive
stock options as defined under the Internal Revenue Code, non-qualified
options, stock awards or opportunities to make direct purchases of common stock
to employees, officers, directors, consultants and advisors of Silknet and its
subsidiaries. The 1999 Option Plan is administered by the Silknet Compensation
Committee. The Silknet Compensation Committee selects the individuals to whom
options will be granted and
F-39
<PAGE>
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Information as of December 31, 1999 and for the six months ended December 31,
1998 and 1999 is unaudited.
determines the option exercise price and other terms of each award, subject to
the provisions of the 1999 Option Plan. Options granted under the 1999 Option
Plan will expire on a date determined by the Compensation Committee, not to
exceed 10 years. As of June 30, 1999, options to purchase 414,775 shares of
Silknet common stock had been granted under the 1999 Option Plan.
Silknet also has an Employee Stock Option Plan (the "1995 Option Plan")
which provides for the issuance of options to purchase up to 2,391,900 shares
of Silknet's common stock to eligible employees, officers, directors,
consultants and advisors of Silknet. As of June 30, 1999, options to purchase
2,388,826 shares of Silknet common stock had been granted under the 1995 Option
Plan. Under the 1995 Option Plan, the board of directors may award incentive
and non-qualified stock options. Stock options entitle the holder to purchase
common stock from Silknet for a specified exercise price, during a period
specified by the applicable option agreement.
Generally, options under the 1995 and 1999 Option vest over four years.
Incentive stock options may not be granted with an exercise price less than the
fair market value of Silknet's common stock at the date of grant or for a term
exceeding ten years. The exercise price of each non-qualified stock option
shall be specified by the board of directors.
As part of Silknet's acquisition of InSite, Silknet assumed InSite's
obligations under the InSite Marketing Technology, Inc. 1997 Stock Option Plan
(the "1997 Option Plan). Options to purchase an aggregate 93,580 share of
Silknet common stock were exchanged for all of the outstanding options under
the 1997 Option Plan. No additional options will be granted under the 1997
Option Plan.
Stock option activity for the years ended June 30, 1997, 1998 and 1999 is
as follows:
<TABLE>
<CAPTION>
Exercise Price Exercise Price
Equals Grant Less Than Grant
Date Stock Fair Date Stock Fair
Value Value Total
------------------- ----------------- -------------------
Weighted Weighted Weighted
Average Number Average Average
Number Exercise of Exercise Number Exercise
of Shares Price Shares Price of Shares Price
--------- -------- ------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at June 30,
1996................... 173,250 1.00 497,150 0.02 670,400 0.27
Granted................. 671,086 0.96 -- -- 671,086 0.96
Cancelled............... (84,742) 1.00 -- -- (84,742) 1.00
--------- ---- ------- ---- --------- ----
Outstanding at June 30,
1997................... 759,594 0.97 497,150 0.02 1,256,744 0.59
Granted................. 439,228 1.25 -- -- 439,228 1.25
Exercised............... (69,725) 1.00 -- -- (69,725) 1.00
Cancelled............... (44,716) 1.04 -- -- (44,716) 1.04
--------- ---- ------- ---- --------- ----
Outstanding at June 30,
1998................... 1,084,381 1.07 497,150 0.02 1,581,531 0.74
Granted................. 960,750 9.18 462,214 4.75 1,422,964 7.74
Exercised............... (309,194) 1.17 (493) 1.75 (309,687) 1.17
Cancelled............... (123,380) 1.72 (3,750) 1.75 (127,130) 1.72
--------- ---- ------- ---- --------- ----
Outstanding at June 30,
1999................... 1,612,557 5.83 955,121 2.30 2,567,678 4.52
========= ==== ======= ==== ========= ====
</TABLE>
As of June 30, 1999, 632,701 shares were available for grant under the 1999
Option Plan, the 1997 Option Plan and the 1995 Option plan.
F-40
<PAGE>
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Information as of December 31, 1999 and for the six months ended December 31,
1998 and 1999 is unaudited.
The following table summarizes information about stock options outstanding
at June 30, 1999:
<TABLE>
<CAPTION>
Vested and
Exercisable
Weighted- -----------------
Average Weighted-
remaining Number Average
Number contractual of Exercise
Exercise Price Outstanding life (in years) Shares Price
-------------- ----------- --------------- ------ ---------
<S> <C> <C> <C> <C>
$ 0.02......................... 497,150 6.15 467,851 $0.02
0.33......................... 47,168 7.71 21,818 0.33
1.00......................... 726,898 7.67 283,339 1.00
1.75......................... 649,166 9.20 89,101 1.75
3.31......................... 22,678 8.39 7,559 3.31
5.50--7.32................... 236,000 9.73 -- --
9.50--12.24.................. 113,307 9.77 843 9.54
15.00......................... 50,000 9.85 -- --
24.81--35.56.................. 220,561 9.87 -- --
41.56--46.38.................. 4,750 9.88 -- --
--------- ---- ------- -----
$ 0.02--46.38.................. 2,567,678 8.08 870,511 0.56
========= ==== ======= =====
</TABLE>
Silknet records deferred compensation for options issued with exercise
prices below the estimated fair value of common stock. Deferred compensation
is amortized and recorded as compensation expense ratably over the vesting
period of the options. Compensation expense of $93, $84 and $192 was
recognized during the years ended June 30, 1997, 1998, and 1999, respectively.
Silknet applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," in accounting for its plans. Silknet has
adopted the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").
Accordingly, no compensation expense has been recognized for the stock option
plans as calculated under SFAS 123.
Had compensation cost for Silknet's stock option plan been determined
based on the fair value at the grant date for awards in 1999, 1998 and 1997,
consistent with the provisions of SFAS 123, Silknet's net loss and basic and
diluted net loss per share would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Net loss--as reported....................... $(3,049) $(7,399) $(12,607)
Net loss--pro forma......................... $(3,227) $(7,587) $(13,761)
Basic and diluted net loss per share--as
reported................................... $(1.13) $(2.57) $ (2.44)
Basic and diluted net loss per share--pro
forma...................................... $ (1.20) $ (2.64) $ (2.66)
</TABLE>
F-41
<PAGE>
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Information as of December 31, 1999 and for the six months ended December 31,
1998 and 1999 is unaudited.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-
average assumptions used for grants in each of the following periods:
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Dividend yield.................................... 0% 0% 0%
Expected volatility............................... 0% 0% 85%
Risk free interest rate........................... 6.0% 5.5% 5.0%
Expected lives.................................... 5 years 5 years 5 years
</TABLE>
The weighted average grant date fair values using the Black-Scholes option
pricing model were:
<TABLE>
<CAPTION>
Year ended June
30,
-----------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Exercise price equals grant date stock fair value......... $0.34 $0.40 $7.28
Exercise price less than grant date stock fair value...... -- -- $5.82
All options............................................... $0.34 $0.40 $6.80
</TABLE>
The effects of applying SFAS 123 in this disclosure are not indicative of
future amounts. Additional grants in future years are anticipated.
On February 23, 1999, the board of directors adopted the 1999 Employee
stock purchase plan (the "Purchase Plan"). The Purchase Plan allows for the
issuance of 350,000 shares of Silknet's common stock to eligible employees.
Under the Purchase Plan, Silknet is authorized to make a series of offerings
during which employees may purchase shares of common stock through payroll
deductions made over the term of the offering. The per-share purchase price at
the end of each offering is equal to 85% of the fair market value of the
common stock at the beginning or end of the offering period (as defined by the
Purchase Plan), whichever is lower. The first offering period of the Purchase
Plan commenced upon the initial public offering of the common stock to the
public and ended on January 31, 2000.
L. Commitments and Contingencies:
Silknet leases office space and equipment under non-cancelable operating
leases extending through July 2004. Certain of these leases contain renewal
options and provisions that adjust the lease payment based upon changes in the
consumer price index and require Silknet to pay operating costs, including
property taxes, insurance and maintenance. Rent expense under non-cancelable
operating leases totaled $83, $299 and $735 for the years ended June 30, 1997,
1998 and 1999, respectively.
F-42
<PAGE>
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share amounts)
Information as of December 31, 1999 and for the six months ended December 31,
1998 and 1999 is unaudited.
The following is a schedule of future minimum lease payments on
noncancelable operating leases at June 30, 1999:
<TABLE>
<S> <C>
Fiscal Years ending June 30:
2000............................................................... $1,138
2001............................................................... 1,185
2002............................................................... 1,170
2003............................................................... 1,228
2004............................................................... 890
Thereafter......................................................... 45
</TABLE>
M. Employee Benefit Plans:
Silknet maintains two 401(k) plans qualified under Section 401(k) of the
Internal Revenue Code. One plan is for former InSite employees and the other is
for all other Silknet employees. All Silknet employees are eligible to
participate in their respective 401(k) plans. Under the Silknet and InSite
401(k) plans, a participant may contribute a maximum of 20% and 15%,
respectively, of his or her pre-tax salary, commissions and bonuses through
payroll deductions (up to the statutorily prescribed annual limit of $10,000 in
1999) to the 401(k) plan. The percentage elected by more highly compensated
participants may be required to be lower. In addition, at the discretion of the
board of directors, Silknet may make discretionary profit-sharing contributions
into the 401(k) plans for all eligible employees. To date, Silknet has made no
profit-sharing contributions to either 401(k) plan.
N. Related Party Transactions:
During the years ended June 30, 1997, 1998 and 1999, Silknet recognized
license and services revenue from transactions with affiliated companies of
$31, $56 and $16, respectively. Additionally, Silknet recognized license and
service revenue from transactions with an investor of $1,006 during the year
ended June 30, 1999.
A member of the board of directors of InSite provided consulting services
to InSite for which he was paid $3 during the year ended June 30, 1999.
O. Investment in Private Company
In October 1999 Silknet invested $1,500 in Safe Harbor Inc., an unrelated
private company. In exchange for its investment, Silknet received approximately
9% ownership interest in Safe Harbor at the time of purchase and a seat on the
board of directors. The Company has recorded its investment using the cost
basis of accounting.
P. Subsequent Event
On February 6, 2000, Silknet entered into an Agreement and Plan of
Reorganization with Kana Communications, Inc. ("Kana"). Pursuant to the
agreement, holders of outstanding shares of Silknet common stock will receive,
in exchange for each share of Silknet common stock held, 1.66 shares of common
stock of Kana. In addition, Kana will assume all outstanding options and
warrants to purchase Silknet common stock and will assume all purchase rights
outstanding under Silknet's employee stock purchase plan. The transaction will
be accounted for as a purchase. The transaction has been approved by both Kana
and Silknet Board of Directors and the closing is subject to approval by Kana
and Silknet stockholders and certain other customary closing conditions.
F-43
<PAGE>
APPENDIX I
AGREEMENT AND PLAN OF REORGANIZATION
dated as of
FEBRUARY 6, 2000
by and among
KANA COMMUNICATIONS, INC.,
PISTOL ACQUISITION CORP.
and
SILKNET SOFTWARE INC.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
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<C> <S> <C>
ARTICLE I. THE MERGER................................................... I-2
Section 1.01 Effective Time Of The Merger........................... I-2
Section 1.02 Closing................................................ I-2
Section 1.03 Effects Of The Merger.................................. I-2
Section 1.04 Directors And Officers................................. I-2
ARTICLE II. CONVERSION OF SECURITIES.................................... I-3
Section 2.01 Conversion Of Capital Stock............................ I-3
Section 2.02 Exchange Of Certificates............................... I-3
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF SILKNET.................. I-6
Section 3.01 Organization of Silknet................................ I-6
Section 3.02 Silknet Capital Structure.............................. I-6
Section 3.03 Authority; No Conflict; Required Filings And Consents.. I-7
Section 3.04 SEC Filings; Financial Statements...................... I-8
Section 3.05 No Undisclosed Liabilities............................. I-8
Section 3.06 Absence Of Certain Changes Or Events................... I-9
Section 3.07 Taxes.................................................. I-9
Section 3.08 Properties............................................. I-9
Section 3.09 Intellectual Property.................................. I-10
Section 3.10 Agreements, Contracts And Commitments.................. I-10
Section 3.11 Litigation............................................. I-11
Section 3.12 Environmental Matters.................................. I-11
Section 3.13 Employee Benefit Plans................................. I-12
Section 3.14 Compliance With Laws................................... I-12
Section 3.15 Tax Matters............................................ I-13
Section 3.16 Labor Matters.......................................... I-13
Section 3.17 Insurance.............................................. I-13
Section 3.18 No Existing Discussions................................ I-13
Section 3.19 Interested Party Transactions.......................... I-13
Registration Statement; Joint Proxy
Section 3.20 Statement/Prospectus................................... I-13
Section 3.21 Payments Resulting from Mergers........................ I-14
Section 3.22 Opinion Of Financial Advisor........................... I-14
Section 203 of the DGCL Not Applicable; Silknet Rights
Section 3.23 Plan................................................... I-14
Section 3.24 Voting Requirements.................................... I-15
Section 3.25 Brokers................................................ I-15
Section 3.26 Certain Contracts...................................... I-15
Section 3.27 Silknet Voting Agreement............................... I-15
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF Kana...................... I-15
Section 4.01 Organization Of Kana And Merger Sub.................... I-15
Section 4.02 Kana Capital Structure................................. I-16
Section 4.03 Authority; No Conflict; Required Filings And Consents.. I-16
Section 4.04 SEC Filings; Financial Statements...................... I-17
Section 4.05 No Undisclosed Liabilities............................. I-18
Section 4.06 Absence Of Certain Changes Or Events................... I-18
Section 4.07 Taxes.................................................. I-18
Section 4.08 Agreements, Contracts And Commitments.................. I-18
Section 4.09 Litigation............................................. I-19
Section 4.10 Employee Benefit Plans................................. I-19
Section 4.11 Compliance With Laws................................... I-19
</TABLE>
I-ii
<PAGE>
TABLE OF CONTENTS--(Continued)
<TABLE>
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<C> <S> <C>
Section 4.12 Tax Matters............................................ I-19
Registration Statement; Joint Proxy
Section 4.13 Statement/Prospectus................................... I-19
Section 4.14 Opinion Of Financial Advisor........................... I-20
Section 4.15 Voting Requirements.................................... I-20
Section 4.16 Brokers................................................ I-20
Section 4.17 Kana Voting Agreement.................................. I-20
Section 4.18 Intellectual Property.................................. I-20
Section 4.19 Certain Contracts...................................... I-21
ARTICLE V. CONDUCT OF BUSINESS.......................................... I-21
Section 5.01 Covenants Of Silknet................................... I-21
Section 5.02 Covenants Of Kana...................................... I-23
Section 5.03 Cooperation............................................ I-24
Section 5.04 Advice of Changes...................................... I-24
ARTICLE VI. ADDITIONAL AGREEMENTS....................................... I-25
Section 6.01 Proxy Statement/Prospectus; Registration Statement..... I-25
Section 6.02 No Solicitation by Silknet............................. I-25
Section 6.03 No Solicitation by Kana................................ I-27
Section 6.04 Nasdaq................................................. I-28
Section 6.05 Access To Information.................................. I-28
Section 6.06 Stockholders Meetings.................................. I-29
Section 6.07 Legal Conditions To Merger............................. I-31
Section 6.08 Public Disclosure...................................... I-32
Section 6.09 Tax-Free Reorganization................................ I-32
Section 6.10 Nasdaq Quotation....................................... I-32
Section 6.11 Stock Plans and Warrants............................... I-32
Section 6.12 Stock Option and Voting Agreements..................... I-35
Section 6.13 Board Composition...................................... I-35
Section 6.14 Brokers Or Finders..................................... I-35
Section 6.15 Stand-Off Agreements................................... I-35
Section 6.16 Registration Rights.................................... I-36
Section 6.17 Indemnification........................................ I-36
Section 6.18 Benefit Plans.......................................... I-37
Registration Statement; Joint Proxy
Section 6.19 Statement/Prospectus................................... I-38
Section 6.20 Section 16............................................. I-38
ARTICLE VII. CONDITIONS TO MERGER....................................... I-39
Conditions To Each Party's Obligation To Effect The
Section 7.01 Merger................................................. I-39
Additional Conditions To Obligations Of Kana And Merger
Section 7.02 Sub.................................................... I-39
Section 7.03 Additional Conditions To Obligations Of Silknet........ I-40
Section 7.04 Frustration of Closing Conditions...................... I-41
ARTICLE VIII. TERMINATION AND AMENDMENT................................. I-41
Section 8.01 Termination............................................ I-41
Section 8.02 Effect of Termination.................................. I-42
Section 8.03 Expenses and Termination Fees.......................... I-42
Section 8.04 Amendment.............................................. I-43
Section 8.05 Extension; Waiver...................................... I-44
ARTICLE IX. MISCELLANEOUS............................................... I-44
Nonsurvival Of Representations, Warranties And
Section 9.01 Agreements............................................. I-44
</TABLE>
I-iii
<PAGE>
TABLE OF CONTENTS--(Continued)
<TABLE>
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Section 9.02 Notices................................................. I-44
Section 9.03 Definitions............................................. I-45
Section 9.04 Interpretation.......................................... I-46
Section 9.05 Counterparts............................................ I-46
Section 9.06 Entire Agreement; No Third Party Beneficiaries.......... I-46
Section 9.07 Governing Law........................................... I-46
Section 9.08 Assignment.............................................. I-47
EXHIBITS
EXHIBIT A Silknet Stock Voting Agreement
EXHIBIT B Kana Stock Voting Agreement
EXHIBIT C Silknet Stock Option Agreement
EXHIBIT D Kana Stock Option Agreement
EXHIBIT E Stand-Off Agreement
EXHIBIT F Rights Agreement Amendment
</TABLE>
I-iv
<PAGE>
TABLE OF DEFINED TERMS
<TABLE>
<CAPTION>
Cross-Reference
Terms in Agreement
- ----- ------------------
<S> <C>
Agreement.................................................... Preamble
Bankruptcy and Equity Exception.............................. Section 3.03(a)
Certificate of Merger........................................ Section 1.01
Closing...................................................... Section 1.02
Closing Date................................................. Section 1.02
Confidentiality Agreement.................................... Section 9.01
Constituent Corporations..................................... Section 1.03
Costs........................................................ Section 6.17(a)
Current Premium.............................................. Section 6.17(b)
DGCL......................................................... Section 1.01
Effective Time............................................... Section 1.01
Environmental Law............................................ Section 3.12(b)
ERISA........................................................ Section 3.13(a)
ERISA Affiliate.............................................. Section 3.13(a)
Exchange Act................................................. Section 3.03(c)
Exchange Agent............................................... Section 2.02(a)
Exchange Fund................................................ Section 2.02(a)
Exchange Ratio............................................... Section 2.01(c)
Governmental Entity.......................................... Section 3.03(c)
Hazardous Substance.......................................... Section 3.12(c)
Indemnified Parties.......................................... Section 6.17(a)
Internal Revenue Code........................................ Preamble
IRS.......................................................... Section 3.07(b)
Joint Proxy Statement/Prospectus............................. Section 3.20
Kana Balance Sheet........................................... Section 4.04(b)
Kana Common Stock............................................ Section 2.01(b)
Kana Disclosure Schedule..................................... Article IV
Kana Employee Plans.......................................... Section 6.18(c)
Kana Entry Date.............................................. Section 6.11(f)
Kana ESPP.................................................... Section 6.18(b)
Kana Intellectual Property Rights............................ Section 4.18(a)
Kana Material Adverse Effect................................. Section 9.03(b)
Kana Material Contracts...................................... Section 4.08
Kana Preferred Stock......................................... Section 4.02(a)
Kana Principal Stockholders.................................. Preamble
Kana SEC Reports............................................. Section 4.04(a)
Kana Stock Option Agreement.................................. Preamble
Kana Stock Plans............................................. Section 4.02(a)
Kana Stockholders Agreement.................................. Preamble
Kana Stockholders Meeting.................................... Section 3.20
Kana Superior Offer.......................................... Section 6.06(d)
Kana Takeover Proposal....................................... Section 6.03(d)
Kana Voting Proposal......................................... Section 6.03(a)
Material Lease(s)............................................ Section 3.08(a)
Merger....................................................... Preamble
Merger Consideration......................................... Section 2.01(c)(c)
Merger Sub................................................... Preamble
Order........................................................ Section 6.07(b)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Cross-Reference
Terms in Agreement
- ----- ---------------
<S> <C>
Other Filings................................................... Section 6.01
Payment Period.................................................. Section 3.02(c)
Registration Statement.......................................... Section 3.20
Representatives................................................. Section 6.02(a)
Repurchase Options.............................................. Section 6.11(a)
SEC............................................................. Section 3.03(c)
SEC Effective Date.............................................. Section 6.01
Securities Act.................................................. Section 3.04(a)
Stand-Off Agreement............................................. Section 6.15
Silknet Balance Sheet........................................... Section 3.04(b)
Silknet Certificates............................................ Section 2.02(b)
Silknet Common Stock............................................ Section 2.01(b)
Silknet Disclosure Schedule..................................... Article III
Silknet Employee Plans.......................................... Section 3.13(a)
Silknet ESPP.................................................... Section 3.02(c)
Silknet Intellectual Property Rights............................ Section 3.09(a)
Silknet Material Adverse Effect................................. Section 9.03(a)
Silknet Material Contracts...................................... Section 3.10
Silknet Preferred Stock......................................... Section 3.02(a)
Silknet Principal Stockholders.................................. Preamble
Silknet Rights Plan............................................. Section 3.23(b)
Silknet SEC Reports............................................. Section 3.04(a)
Silknet Stock Option............................................ Section 6.11
Silknet Stock Option Agreement.................................. Preamble
Silknet Stock Plans............................................. Section 3.02(a)
Silknet Stockholder Approval.................................... Section 3.24
Silknet Stockholders Agreement.................................. Preamble
Silknet Stockholders Meeting.................................... Section 3.20
Silknet Superior Offer.......................................... Section 6.06(b)
Silknet Takeover Proposal....................................... Section 6.01(c)
Stock Option Agreements......................................... Preamble
Subsidiary...................................................... Section 3.01
Surviving Corporation........................................... Section 1.03
Tax............................................................. Section 3.07(a)
Taxes........................................................... Section 3.07(a)
Voting Agreements............................................... Section 6.12
</TABLE>
I-vi
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement"), dated as of
February 6, 2000, by and among Kana Communications, Inc., a Delaware
corporation ("Kana"), Pistol Acquisition Corp., a Delaware corporation and a
direct, wholly-owned subsidiary of Kana ("Merger Sub") and Silknet Software
Inc., a Delaware corporation ("Silknet").
WHEREAS, the Boards of Directors of Kana and Silknet deem it advisable and
in the best interests of each corporation and their respective stockholders
that Kana and Silknet combine in order to advance the long-term business
interests of Kana and Silknet;
WHEREAS, the respective Boards of Directors of Kana and Silknet have each
determined that the Merger and the other transactions contemplated hereby are
consistent with, and in furtherance of, their respective business strategies
and goals and that the products and services of Silknet will compliment and
enhance the products and services of Kana;
WHEREAS, the combination of Kana and Silknet shall be effected by the terms
of this Agreement through a merger in which the stockholders of Silknet will
become stockholders of Kana (the "Merger");
WHEREAS, simultaneously with the execution and delivery of this Agreement
and as a condition and inducement to the willingness of Kana and Merger Sub to
enter into this Agreement, Kana and certain principal stockholders of Silknet
(the "Silknet Principal Stockholders") are entering into an agreement (the
"Silknet Stockholders Agreement") pursuant to which the Silknet Principal
Stockholders will agree to vote to approve this Agreement and to take certain
other actions in furtherance of the Merger upon the terms and subject to the
conditions set forth in the Silknet Stockholders Agreement;
WHEREAS, simultaneously with the execution and delivery of this Agreement
and as a condition and inducement to the willingness of Silknet to enter into
this Agreement, Silknet and certain directors, officers and principal
stockholders of Kana (the "Kana Principal Stockholders") are entering into an
agreement (the "Kana Stockholders Agreement") pursuant to which the Kana
Principal Stockholders will agree to vote to approve the transactions
contemplated by this Agreement and to take certain other actions in furtherance
of the Merger upon the terms and subject to the conditions set forth in the
Kana Stockholders Agreement;
WHEREAS, immediately following execution and delivery of this Agreement,
Silknet and Kana will enter into stock option agreements whereby Silknet will
grant Kana the option to purchase shares of Silknet Common Stock (the "Silknet
Stock Option Agreement") and Kana will grant Silknet the option to purchase
shares of Kana Common Stock (the "Kana Stock Option Agreement") (collectively,
the "Stock Option Agreements");
WHEREAS, for federal income tax purposes, it is intended that (a) the
Merger shall qualify as a reorganization within the meaning of Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code")
and the rules and regulations promulgated thereunder, (b) this Agreement
constitutes a plan of reorganization, and (c) Kana, Merger Sub and Silknet will
each be a party to such reorganization within the meaning of Section 368(b) of
the Code;
WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a purchase; and
WHEREAS, Kana, Merger Sub and Silknet desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger.
I-1
<PAGE>
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth below, the
parties agree as follows:
ARTICLE I.
THE MERGER
Section 1.01 Effective Time Of The Merger.
Subject to the provisions of this Agreement, a certificate of merger (the
"Certificate of Merger") in such form as is required by the relevant provisions
of the Delaware General Corporation Law ("DGCL") shall be duly prepared,
executed and acknowledged by the Surviving Corporation (as defined in Section
1.03) and thereafter delivered to the Secretary of State of the State of
Delaware for filing, as provided in the DGCL, as early as practicable on the
Closing Date (as defined in Section 1.02). The Merger shall become effective
upon the filing of the Certificate of Merger with the Secretary of State of the
State of Delaware (the "Effective Time").
Section 1.02 Closing.
The closing of the Merger (the "Closing") will take place at 10:00 a.m.,
local time, on a date to be specified by Kana and Silknet, which shall be no
later than the second business day after satisfaction of the latest to occur of
the conditions set forth in Section 7.01, Section 7.02(b) (other than the
delivery of the officers' certificate referred to therein) and Section 7.03(b)
(other than the delivery of the officers' certificate referred to therein)
(provided that the other closing conditions set forth in Article VII have been
met or waived as provided in Article VII at or prior to the Closing), (the
"Closing Date"), at the offices of Brobeck, Phleger & Harrison LLP, Palo Alto
California, unless another date, place or time is agreed to in writing by Kana
and Silknet.
Section 1.03 Effects Of The Merger.
At the Effective Time (i) the separate existence of Merger Sub shall cease
and Merger Sub shall be merged with and into Silknet (Merger Sub and Silknet
are sometimes referred to below as the "Constituent Corporations" and Silknet
following the Merger is sometimes referred to below as the "Surviving
Corporation"), (ii) the Certificate of Incorporation of Silknet shall be
amended so that Article Fourth of such Certificate of Incorporation reads in
its entirety as follows: "The total number of shares of all classes of stock
which the Corporation shall have authority to issue is 1000, all of which shall
consist of Common Stock, par value $.001 per share," and, as so amended, such
Certificate of Incorporation shall be the Certificate of Incorporation of the
Surviving Corporation, and (iii) the Bylaws of Merger Sub as in effect
immediately prior to the Effective Time shall be the Bylaws of the Surviving
Corporation.
Section 1.04 Directors And Officers.
(a) The officers of Merger Sub immediately prior to the Effective Time
shall be the initial officers of the Surviving Corporation, each to hold
office in accordance with the Certificate of Incorporation and Bylaws of
the Surviving Corporation.
(b) Kana shall take such action so that, upon the Effective Time,
James C. Wood shall become a director of Kana. James C. Wood shall be
nominated for director of Kana at the next annual meeting of stockholders
of Kana.
I-2
<PAGE>
ARTICLE II.
CONVERSION OF SECURITIES
Section 2.01 Conversion Of Capital Stock.
As of the Effective Time, by virtue of the Merger and without any action on
the part of the holder of any shares of Silknet Common Stock or capital stock
of Merger Sub:
(a) Capital Stock Of Merger Sub. Each issued and outstanding share of the
capital stock of Merger Sub shall be converted into and become one fully paid
and nonassessable share of Common Stock, par value $.001 per share, of the
Surviving Corporation.
(b) Cancellation Of Treasury Stock And Kana-Owned Stock. All shares of
Common Stock, par value $.01 per share, of Silknet ("Silknet Common Stock")
that are owned by Silknet as treasury stock and any shares of Silknet Common
Stock owned by Kana, Merger Sub or any other wholly-owned Subsidiary (as
defined in Section 3.01) of Kana shall be cancelled and retired and shall cease
to exist and no stock of Kana or other consideration shall be delivered in
exchange therefor. All shares of Common Stock, par value $.001 per share, of
Kana ("Kana Common Stock") owned by Silknet shall be unaffected by the Merger.
(c) Exchange Ratio For Silknet Common Stock. Subject to Section 2.02, each
issued and outstanding share of Silknet Common Stock (other than shares to be
cancelled in accordance with Section 2.01(b)) shall be converted into the right
to receive 0.83 of a duly authorized, validly issued, fully paid and
nonassessable share (the "Exchange Ratio") of Kana Common Stock (the "Merger
Consideration"). As of the Effective Time, all such shares of Silknet Common
Stock, when so converted, shall no longer be outstanding and shall
automatically be cancelled and retired and shall cease to exist, and each
holder of a certificate representing any such shares shall cease to have any
rights with respect thereto, except the right to receive the shares of Kana
Common Stock and any cash in lieu of fractional shares of Kana Common Stock to
be issued or paid in consideration therefor upon the surrender of such
certificate in accordance with Section 2.02, without interest. In the event
Kana changes (or establishes a record date for changing) the number of shares
of Kana Common Stock issued and outstanding prior to the Effective Time as a
result of a stock split, stock dividend, recapitalization, subdivision,
reclassification, combination, exchange of shares or similar transaction with
respect to the outstanding Kana Common Stock and the record date therefor shall
be prior to the Effective Time (including the two-for-one stock dividend
expected to be paid by Kana on February 22, 2000), the Exchange Ratio shall be
proportionately and equitably adjusted to reflect such stock split, stock
dividend, recapitalization, subdivision, reclassification, combination,
exchange of shares or similar transaction.
Section 2.02 Exchange Of Certificates.
The procedures for exchanging outstanding shares of Silknet Common Stock
for Kana Common Stock pursuant to the Merger are as follows:
(a) Exchange Agent. As of the Effective Time, Kana shall deposit with a
bank or trust company designated by Kana and Silknet (the "Exchange Agent"),
for the benefit of the holders of shares of Silknet Common Stock, for exchange
in accordance with this Section 2.02, through the Exchange Agent, certificates
representing the shares of Kana Common Stock (such shares of Kana Common Stock,
together with any dividends or distributions with respect thereto issuable by
virtue of subsection (c) below, being hereinafter referred to as the "Exchange
Fund") issuable pursuant to Section 2.01 in exchange for outstanding shares of
Silknet Common Stock and any cash payable in lieu of fractional shares of
Silknet Common Stock.
I-3
<PAGE>
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of Silknet Common Stock (the "Silknet
Certificates") whose shares were converted pursuant to Section 2.01 into the
right to receive the Merger Consideration (i) a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to
the Silknet Certificates shall pass, only upon delivery of the Silknet
Certificates to the Exchange Agent and shall be in such form and have such
other provisions as Kana and Silknet may reasonably specify) and (ii)
instructions for effecting the surrender of the Silknet Certificates in
exchange for the Merger Consideration (plus cash in lieu of fractional shares,
if any, of Kana Common Stock as provided below). Upon surrender of a Silknet
Certificate for cancellation to the Exchange Agent, together with such letter
of transmittal, duly executed, the holder of such Silknet Certificate shall
receive in exchange therefor a certificate representing that number of whole
shares of Kana Common Stock which such holder has the right to receive pursuant
to the provisions of this Article II, certain dividends or other distributions
in accordance with subsection (c) below, cash in lieu of any fractional share
of Kana Common Stock in accordance with subsection (e) below, and the Silknet
Certificate so surrendered shall immediately be cancelled. In the event of a
transfer of ownership of Silknet Common Stock which is not registered in the
transfer records of Silknet, a certificate representing the proper number of
shares of Kana Common Stock may be issued to a transferee if the Silknet
Certificate representing such Silknet Common Stock is presented to the Exchange
Agent, accompanied by all documents required to evidence and effect such
transfer and by evidence that any applicable stock transfer taxes have been
paid. Until surrendered as contemplated by this Section 2.02, each Silknet
Certificate shall be deemed at any time after the Effective Time to represent
only the right to receive upon such surrender the Merger Consideration and cash
in lieu of any fractional shares of Kana Common Stock as contemplated by this
Section 2.02.
(c) Distributions With Respect To Unexchanged Shares. No dividends or other
distributions declared or made after the Effective Time with respect to Kana
Common Stock with a record date after the Effective Time shall be paid to the
holder of any unsurrendered Silknet Certificate with respect to the shares of
Kana Common Stock represented thereby and no cash payment in lieu of fractional
shares shall be paid to any such holder pursuant to subsection (e) below, and
all such dividends, other distributions and cash in lieu of fractional shares
of Kana Common Stock shall be paid by Kana to the Exchange Agent and shall be
included in the Exchange Fund, in each case until the holder of record of such
Silknet Certificate shall surrender such Silknet Certificate. Subject to the
effect of applicable laws, following surrender of any such Silknet Certificate,
there shall be paid to the record holder of the certificates representing whole
shares of Kana Common Stock issued in exchange therefor, without interest, (i)
at the time of such surrender, the amount of any cash payable in lieu of a
fractional share of Kana Common Stock to which such holder is entitled pursuant
to subsection (e) below and the amount of dividends or other distributions with
a record date after the Effective Time previously paid with respect to such
whole shares of Kana Common Stock, and (ii) at the appropriate payment date,
the amount of dividends or other distributions with a record date after the
Effective Time but prior to surrender and a payment date subsequent to
surrender payable with respect to such whole shares of Kana Common Stock.
(d) No Further Ownership Rights In Silknet Common Stock. All shares of Kana
Common Stock issued upon the surrender for exchange of Silknet Certificates in
accordance with the terms hereof (including any cash paid pursuant to
subsection (c) or subsection (e) of this Section 2.02) shall be deemed to have
been issued in full satisfaction of all rights pertaining to such shares of
Silknet Common Stock, subject, however, to the Surviving Corporation's
obligation to pay any dividends or make any other distributions with a record
date prior to the Effective Time which may have been declared or made by
Silknet on such shares of Silknet Common Stock in accordance with the terms of
this Agreement (to the extent permitted under Section 5.01) prior to the date
hereof and
I-4
<PAGE>
which remain unpaid at the Effective Time, and from and after the Effective
Time there shall be no further registration of transfers on the stock transfer
books of the Surviving Corporation of the shares of Silknet Common Stock which
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Silknet Certificates are presented to the Surviving Corporation
or the Exchange Agent for any reason, they shall be cancelled and exchanged as
provided in this Section 2.02.
(e) No Fractional Shares. No certificate or scrip representing fractional
shares of Kana Common Stock shall be issued upon the surrender for exchange of
Silknet Certificates, and such fractional share interests will not entitle the
owner thereof to vote or to any other rights of a stockholder of Kana.
Notwithstanding any other provision of this Agreement, each holder of shares of
Silknet Common Stock exchanged pursuant to the Merger who would otherwise have
been entitled to receive a fraction of a share of Kana Common Stock (after
taking into account all Silknet Certificates delivered by such holder) shall
receive, in lieu thereof, cash (without interest) in an amount equal to such
fractional part of a share of Kana Common Stock multiplied by the average of
the last reported sales prices of Kana Common Stock, as reported on the Nasdaq
National Market, on each of the ten (10) trading days immediately preceding the
date of the Effective Time.
(f) Termination Of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the holders of Silknet Certificates for one hundred
eighty (180) days after the Effective Time shall be delivered to Kana, upon
demand, and any holders of Silknet Certificates who have not previously
complied with this Section 2.02 shall thereafter look only to Kana for payment
of their claim for Merger Consideration, any cash in lieu of fractional shares
of Kana Common Stock and any dividends or distributions with respect to Kana
Common Stock.
(g) No Liability. Neither Kana nor Silknet shall be liable to any holder of
shares of Silknet Common Stock or Kana Common Stock, as the case may be, for
such shares (or dividends or distributions with respect thereto) delivered to a
public official pursuant to any applicable abandoned property, escheat or
similar law.
(h) Withholding Rights. Each of Kana and the Surviving Corporation shall be
entitled to deduct and withhold from the consideration otherwise payable
pursuant to this Agreement to any holder of shares of Silknet Common Stock such
amounts as it is required to deduct and withhold with respect to the making of
such payment under the Internal Revenue Code, or any provision of state, local
or foreign tax law. To the extent that amounts are so withheld by Surviving
Corporation or Kana, as the case may be, such withheld amounts shall be treated
for all purposes of this Agreement as having been paid to the holder of the
shares of Silknet Common Stock in respect of which such deduction and
withholding was made by Surviving Corporation or Kana, as the case may be.
(i) Lost Silknet Certificates. If any Silknet Certificate shall have been
lost, stolen or destroyed, upon the making of an affidavit of that fact by the
person claiming such Silknet Certificate to be lost, stolen or destroyed and,
if required by the Surviving Corporation, the posting by such person of a bond
in such reasonable amount as the Surviving Corporation may direct as indemnity
against any claim that may be made against it with respect to such Silknet
Certificate, the Exchange Agent will issue in exchange for such lost, stolen or
destroyed Silknet Certificate the shares of Kana Common Stock and any cash in
lieu of fractional shares, and unpaid dividends and distributions on shares of
Kana Common Stock deliverable in respect thereof pursuant to this Agreement.
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ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF SILKNET
Silknet represents and warrants to Kana and Merger Sub that the statements
contained in this Article III are true and correct except as set forth herein
and in the disclosure schedule delivered by Silknet to Kana on or before the
date of this Agreement (the "Silknet Disclosure Schedule"). The Silknet
Disclosure Schedule shall be arranged in paragraphs corresponding to the
numbered and lettered sections contained in this Article III and the disclosure
in any paragraph shall qualify other sections in this Article III only to the
extent that it is reasonably apparent from a reading of such disclosure that it
also qualifies or applies to such other sections.
Section 3.01 Organization of Silknet.
Each of Silknet and its Subsidiaries (as defined below) is a corporation
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, has all requisite corporate power to own,
lease and operate its property 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 as a foreign corporation in each jurisdiction in which
the failure to be so qualified would have a Silknet Material Adverse Effect, as
defined in Section 9.03(a). Except as set forth in the Silknet SEC Reports (as
defined in Section 3.04) filed prior to the date hereof, neither Silknet nor
any Subsidiary of Silknet directly or indirectly owns any equity or similar
interest in, or any interest convertible into or exchangeable or exercisable
for, any corporation, partnership, joint venture or other business association
or entity, excluding securities in any publicly traded company held for
investment by Silknet and comprising less than five percent (5%) of the
outstanding stock of such company. Each and every Subsidiary of Silknet and its
place of incorporation or organization is listed in Section 3.01 of the Silknet
Disclosure Schedule. As used in this Agreement, the word "Subsidiary" or
"Subsidiaries" means, with respect to any party, any corporation or other
organization, whether incorporated or unincorporated, of which (i) such party
or any other Subsidiary of such party is a general partner (excluding
partnerships, the general partnership interests of which held by such party or
any Subsidiary of such party do not have a majority of the voting interest in
such partnership) or (ii) at least a majority of the securities or other
interests having by their terms ordinary voting power to elect a majority of
the Board of Directors or others performing similar functions with respect to
such corporation or other organization is directly or indirectly owned or
controlled by such party or by any one or more of its Subsidiaries, or by such
party and one or more of its Subsidiaries.
Section 3.02 Silknet Capital Structure.
(a) The authorized capital stock of Silknet consists of 50,000,000 shares
of Common Stock, $.01 par value, and 15,000,000 shares of Preferred Stock, $.01
par value, ("Silknet Preferred Stock"). As of February 3, 2000, (i) 17,174,133
shares of Silknet Common Stock were issued and outstanding, all of which are
validly issued, fully paid and nonassessable and (ii) no shares of Silknet
Common Stock were held in the treasury of Silknet or by its Subsidiaries. The
Silknet Disclosure Schedule shows the number of shares of Silknet Common Stock
reserved for future issuance pursuant to stock options granted and outstanding
as of February 3, 2000 and the plans under which such options were granted
(collectively, the "Silknet Stock Plans"). No material change in such
capitalization has occurred between December 31, 2000 and the date of this
Agreement. As of the date of this Agreement, none of the shares of Silknet
Preferred Stock is issued and outstanding. All shares of Silknet Common Stock
subject to issuance as specified above are duly authorized and, upon issuance
on the terms and conditions specified in the instruments pursuant to which they
are issuable, shall be validly issued, fully paid and nonassessable. There are
no obligations, contingent or otherwise, of Silknet or its Subsidiaries to
repurchase, redeem or otherwise acquire any shares of Silknet Common Stock or
the capital stock of any Subsidiary or to provide funds to or make any
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material investment (in the form of a loan, capital contribution or otherwise)
in any Subsidiary or any other entity other than guarantees of bank obligations
of its Subsidiaries entered into in the ordinary course of business, except for
repurchase rights of Silknet under the Silknet stock option plans, or under any
stock option agreements pursuant to which options were granted under these
plans. All of the outstanding shares of capital stock of Silknet's Subsidiaries
are duly authorized, validly issued, fully paid and nonassessable and all such
shares (other than directors' qualifying shares in the case of foreign
Subsidiaries) are owned by Silknet or another Subsidiary free and clear of all
security interests, liens, claims, pledges, agreements, limitations in
Silknet's voting rights, charges or other encumbrances of any nature.
(b) Except as disclosed in Section 3.02 of the Silknet Disclosure Schedule
or as set forth in this Section 3.02 or as reserved for future grants of
options under the Silknet Stock Plans or the Silknet Stock Option Agreement,
there are no equity securities of any class of Silknet or its Subsidiaries, or
any security exchangeable into or exercisable for such equity securities,
issued, reserved for issuance or outstanding. There are no options, warrants,
equity securities, calls, rights, commitments or agreements of any character to
which Silknet or any Subsidiary is a party or by which it is bound obligating
Silknet or any Subsidiary to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of capital stock of Silknet or any
Subsidiary or obligating Silknet or any Subsidiary to grant, extend, accelerate
the vesting of or enter into any such option, warrant, equity security, call,
right, commitment or agreement. There are no voting trusts, proxies or other
voting agreements or understandings with respect to the shares of capital stock
of Silknet and to which Silknet is a party. The terms of the Silknet Stock
Plans and the agreements evidencing the outstanding options thereunder will
permit the assumption of those options by Kana in the manner contemplated in
Section 6.11 of this Agreement, without the approval or consent of the holders
of those options, the Silknet stockholders or other party.
(c) The current "Payment Period" (as defined under the Silknet Employee
Purchase Plan (the "Silknet ESPP")) began on February 1, 2000, and will end on
the date determined in accordance with Section 6.11(f) of this Agreement.
Except for the purchase rights granted under the Silknet ESPP on February 1,
2000, to the current participants in the Payment Period that commenced on that
date, there are no other purchase rights or options outstanding under the
Silknet ESPP.
Section 3.03 Authority; No Conflict; Required Filings And Consents.
(a) Silknet has all requisite corporate power and authority to enter into
this Agreement and the Silknet Stock Option Agreement and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of
this Agreement and the Silknet Stock Option Agreement and the consummation of
the transactions contemplated by this Agreement and the Silknet Stock Option
Agreement by Silknet have been duly authorized by all necessary corporate
action on the part of Silknet, subject only to the approval of the Merger by
Silknet stockholders under the DGCL. This Agreement and the Silknet Stock
Option Agreement have been duly executed and delivered by Silknet and
constitute the valid and binding obligations of Silknet, enforceable in
accordance with their terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general principles of equity
(the "Bankruptcy and Equity Exception").
(b) The execution and delivery of this Agreement and the Silknet Stock
Option Agreement by Silknet does not, and the consummation of the transactions
contemplated by this Agreement and the Silknet Stock Option Agreement will not,
(i) conflict with, or result in any violation or breach of, any provision of
the Certificate of Incorporation or Bylaws of Silknet, (ii) result in any
violation or breach of, or constitute (with or without notice or lapse of time,
or both) a default (or give rise to a right of termination, cancellation or
acceleration of any obligation or loss of any material benefit) under, or
require a consent or waiver under, any of the terms, conditions or provisions
of any note, bond,
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mortgage, indenture, lease, contract or other agreement, instrument or
obligation to which Silknet or its Subsidiaries is a party or by which any of
them or any of their properties or assets may be bound, or (iii) conflict with
or violate any permit, concession, franchise, license, judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to Silknet or any
Subsidiary or any of its or their properties or assets, except in the case of
(ii) and (iii) for any such conflicts, violations, defaults, terminations,
cancellations or accelerations which, individually or in the aggregate, would
not have a Silknet Material Adverse Effect.
(c) 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 Silknet or any of its Subsidiaries in connection
with the execution and delivery of this Agreement and the Silknet Stock Option
Agreement or the consummation of the transactions contemplated hereby, except
for (i) the filing of the Certificate of Merger with the Delaware Secretary of
State, (ii) the filing of the Joint Proxy Statement/Prospectus (as defined in
Section 3.20 below) with the Securities and Exchange Commission (the "SEC") in
accordance with the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), (iii) such consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable state securities
laws and the laws of any foreign country and (iv) such other consents,
authorizations, filings, approvals and registrations which, if not obtained or
made, would not be reasonably likely to have a Silknet Material Adverse Effect.
Section 3.04 SEC Filings; Financial Statements.
(a) Silknet has filed and made available to Kana all forms, reports and
documents required to be filed by Silknet with the SEC since May 5, 1999 other
than registration statements on Form S-8 (collectively, the "Silknet SEC
Reports"). The Silknet SEC Reports (i) at the time filed, complied in all
material respects with the applicable requirements of the Securities Act of
1933, as amended (the "Securities Act"), and the Exchange Act, as the case may
be, and (ii) did not at the time they were filed (or if amended or superseded
by a filing prior to the date of this Agreement, then as and on the date so
amended or superseded) contain any untrue statement of a material fact or omit
to state a material fact required to be stated in such Silknet SEC Reports or
necessary in order to make the statements in such Silknet SEC Reports, in the
light of the circumstances under which they were made, not misleading.
Silknet's Subsidiaries are not required to file any forms, reports or other
documents with the SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes) contained in the Silknet SEC Reports complied as to form in
all material respects with the applicable published rules and regulations of
the SEC with respect thereto, was prepared in accordance with generally
accepted accounting principles applied on a consistent basis throughout the
periods involved (except as may be indicated in the notes to such financial
statements or, in the case of unaudited statements, as permitted by Form 10-Q
of the SEC) and fairly presented the consolidated financial position of Silknet
and its Subsidiaries as of the dates and the consolidated results of its
operations and cash flows for the periods indicated, except that the unaudited
interim financial statements were or are subject to normal and recurring year-
end adjustments which were not or are not expected to be material in amount.
The audited balance sheet of Silknet as of June 30, 1999 is referred to herein
as the "Silknet Balance Sheet."
Section 3.05 No Undisclosed Liabilities.
Except as disclosed in the Silknet SEC Reports filed prior to the date
hereof, and except for normal or recurring liabilities incurred since December
31, 1999 in the ordinary course of business consistent with past practices,
Silknet and its Subsidiaries do not have any liabilities, either accrued,
contingent or otherwise (whether or not required to be reflected in financial
statements in accordance
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with generally accepted accounting principles), and whether due or to become
due, which individually or in the aggregate would have a Silknet Material
Adverse Effect.
Section 3.06 Absence Of Certain Changes Or Events.
Except as disclosed in the Silknet SEC Reports filed prior to the date
hereof or disclosed in writing by Silknet to Kana on or prior to the date
hereof, since the date of the Silknet Balance Sheet, Silknet and its
Subsidiaries have conducted their businesses only in the ordinary course and in
a manner consistent with past practice and, since such date, there has not been
(i) any Silknet Material Adverse Effect; (ii) any damage, destruction or loss
(whether or not covered by insurance) with respect to Silknet or any of its
Subsidiaries having a Silknet Material Adverse Effect; (iii) any material
change by Silknet in its accounting methods, principles or practices to which
Kana has not previously consented in writing; (iv) any revaluation by Silknet
of any of its assets having a Silknet Material Adverse Effect; or (v) any other
action or event that would have required the consent of Kana pursuant to
Section 5.01 of this Agreement had such action or event occurred after the date
of this Agreement and that, individually or in the aggregate, has had a Silknet
Material Adverse Effect.
Section 3.07 Taxes.
(a) For the purposes of this Agreement, the terms "Tax" and, collectively,
"Taxes" mean any and all material federal, state, local and foreign taxes,
assessments and other governmental charges, duties, impositions and
liabilities, including taxes based upon or measured by gross receipts, income,
profits, sales, use and occupation, and value added, ad valorem, transfer,
gains, franchise, withholding, payroll, recapture, employment, excise,
unemployment insurance, social security, business license, occupation, business
organization, stamp, environmental and property taxes, together with all
interest, penalties and additions imposed with respect to such amounts and any
obligations under any agreements or arrangements with any other person with
respect to such amounts and including any liability for taxes of a predecessor
entity.
(b) Silknet and each of its Subsidiaries have (i) filed all federal, state,
local and foreign tax returns and reports required to be filed by them prior to
the date of this Agreement (taking into account extensions), (ii) paid or
accrued all Taxes due and payable, and (iii) paid or accrued all Taxes for
which a notice of assessment or collection has been received (other than
amounts being contested in good faith by appropriate proceedings), except in
the case of clause (i), (ii) or (iii) for any such filings, payments or
accruals which are not reasonably likely, individually or in the aggregate, to
have a Silknet Material Adverse Effect. Neither the Internal Revenue Service
(the "IRS") nor any other taxing authority has asserted any claim for taxes, or
to the actual knowledge of the executive officers of Silknet or any of its
Subsidiaries, is threatening to assert any claims for Taxes, which claims,
individually or in the aggregate, are reasonably likely to have a Silknet
Material Adverse Effect. Silknet and each of its Subsidiaries have withheld or
collected and paid over to the appropriate governmental authorities (or are
properly holding for such payment) all Taxes required by law to be withheld or
collected, except for amounts which are not reasonably likely, individually or
in the aggregate, to have a Silknet Material Adverse Effect. Neither Silknet
nor any of its Subsidiaries has made an election under Section 341(f) of the
Internal Revenue Code, except for any such election which shall not have a
Silknet Material Adverse Effect. There are no liens for Taxes upon the assets
of Silknet or its Subsidiaries (other than liens for Taxes that are not yet due
or that are being contested in good faith by appropriate proceedings), except
for liens which would not, individually or in the aggregate, have a Silknet
Material Adverse Effect.
Section 3.08 Properties.
(a) Silknet has provided to Kana a true and complete list of all material
real property leased by Silknet or its Subsidiaries (collectively "Material
Lease(s)") and the location of the premises. Neither
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Silknet nor any Subsidiary is in default under any such leases, except where
the existence of such defaults, individually or in the aggregate, is not
reasonably likely to have a Silknet Material Adverse Effect.
(b) Silknet owns no real property.
Section 3.09 Intellectual Property.
(a) Except as disclosed in Section 3.09 of the Silknet Disclosure Schedule,
Silknet and its Subsidiaries own, or are licensed or otherwise possess legally
enforceable rights to use, all patents, trademarks, trade names, service marks,
copyrights and mask works, any applications for and registrations of such
patents, trademarks, trade names, service marks, copyrights and mask works, and
all processes, formulae, methods schematics, technology, know how, computer
software programs or applications and tangible or intangible proprietary
information or material that are necessary to conduct the business of Silknet
and its Subsidiaries as currently conducted or planned to be conducted by
Silknet and its Subsidiaries (the "Silknet Intellectual Property Rights").
(b) Except as disclosed in Section 3.09 of the Silknet Disclosure Schedule,
neither Silknet nor any of its Subsidiaries is, or will 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 material license, sublicense or other
agreement relating to the Silknet Intellectual Property Rights or any material
license, sublicense or other agreement pursuant to which Silknet or any of its
Subsidiaries is authorized to use any third party patents, trademarks or
copyrights, including software, which are incorporated in or form a part of any
product of Silknet or any of its Subsidiaries that is material to the business
of Silknet and its Subsidiaries, taking Silknet and its Subsidiaries together
as a whole, and where such breach would have a Silknet Material Adverse Effect.
(c) Except as disclosed in Schedule 3.09 of the Silknet Disclosure
Schedule, (i) all patents, registered trademarks, service marks and copyrights
which are held by Silknet or any of its Subsidiaries, and which are material to
the business of Silknet and its Subsidiaries, taking Silknet and its
Subsidiaries together as a whole, are valid and subsisting; (ii) Silknet 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; and (iii)
the manufacturing, marketing, licensing or sale of Silknet's products does not
infringe any patent, trademark, service mark, copyright, trade secret or other
proprietary right of any third party, which infringement, either individually
or in the aggregate, could reasonably be expected to have a Silknet Material
Adverse Effect.
(d) Silknet has taken all actions necessary and appropriate to assure that
there shall be no material adverse change in the delivery of Silknet's products
and services by reason of the advent of the year 2000, and warrants that all of
its products (including products currently under development) will, without
interruption or manual intervention, continue to consistently, predictably and
accurately record, store, process, calculate and present calendar dates falling
on and after (and if applicable, spans of time including) January 1, 2000, and
will consistently, predictably and accurately calculate any information
dependent on or relating to such dates in the same manner, and with the same
functionality, data integrity and performance, as such products record, store,
process, calculate and present calendar dates on or before December 31, 1999,
or calculate any information dependent on or relating to such dates.
Section 3.10 Agreements, Contracts And Commitments.
Neither Silknet nor any of its Subsidiaries has breached, or received in
writing any claim or notice that it has breached, any of the terms or
conditions of any material agreement, contract or
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commitment to which it is a party or by which any of its assets and properties
are bound ("Silknet Material Contracts") in such a manner as, individually or
in the aggregate, is reasonably likely to have a Silknet Material Adverse
Effect. Each Silknet Material Contract that has not expired by its terms is in
full force and effect and is not subject to any material default thereunder of
which Silknet is aware by any party obligated to Silknet or any of its
Subsidiaries pursuant to such Silknet Material Contract.
Section 3.11 Litigation.
Except as described in the Silknet SEC Reports filed prior to the date
hereof, there is no action, suit or proceeding, claim, arbitration or
investigation against Silknet or any of its Subsidiaries pending or as to which
Silknet or any such Subsidiary has received any written notice of assertion,
which, individually or in the aggregate, if determined adversely to Silknet or
any such Subsidiary, would be reasonably likely to have a Silknet Material
Adverse Effect or would materially impair or delay the ability of Silknet to
consummate the transactions contemplated by this Agreement nor is there, to the
knowledge of Silknet, any claim, action, suit, proceeding or investigation
described in Section 6.17(d), or any basis therefor.
Section 3.12 Environmental Matters.
(a) Except as disclosed in the Silknet SEC Reports filed prior to the date
hereof: (i) Silknet and its Subsidiaries have complied with all applicable
Environmental Laws (as defined in Section 3.12(b)); (ii) the properties
currently owned or operated by Silknet and its Subsidiaries (including soils,
groundwater, surface water, buildings or other structures) are not contaminated
with any Hazardous Substances (as defined in Section 3.12(c)); (iii) the
properties formerly owned or operated by Silknet or any of its Subsidiaries
were not contaminated with Hazardous Substances during the period of ownership
or operation by Silknet or its Subsidiaries; (iv) neither Silknet nor any of
its Subsidiaries is subject to liability for any Hazardous Substance disposal
or contamination on any third party property; (v) neither Silknet nor any
Subsidiary has been associated with any release or threat of release of any
Hazardous Substance; (vi) neither Silknet nor any of its Subsidiaries has
received any notice, demand, letter, claim or request for information alleging
that Silknet or any of its Subsidiaries may be in violation of or liable under
any Environmental Law; (vii) neither Silknet nor any of its Subsidiaries is
subject to any orders, decrees, injunctions or other arrangements with any
Governmental Entity or is subject to any indemnity or other agreement with any
third party relating to liability under any Environmental Law or relating to
Hazardous Substances; and (viii) there are no circumstances or conditions
involving Silknet or any of its Subsidiaries that could reasonably be expected
to result in any claims, liability, investigations, costs or restrictions on
the ownership, use or transfer of any property of Silknet or its Subsidiaries
pursuant to any Environmental Law.
(b) As used herein, the term "Environmental Law" means any federal, state,
local or foreign law, regulation, order, decree, permit, authorization,
opinion, common law or agency requirement relating to: (A) the protection,
investigation or restoration of the environment, health and safety, or natural
resources, (B) the handling, use, presence, disposal, release or threatened
release of any Hazardous Substance or (C) noise, odor, wetlands, pollution,
contamination or any injury or threat of injury to persons or property.
(c) As used herein, the term "Hazardous Substance" means any substance that
is: (A) listed, classified or regulated pursuant to any Environmental Law; (B)
any petroleum product or by-product, asbestos-containing material, lead-
containing paint or plumbing, polychlorinated biphenyls, radioactive materials
or radon; or (C) any other substance which is the subject of regulatory action
by any Governmental Entity pursuant to any Environmental Law.
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Section 3.13 Employee Benefit Plans.
(a) Silknet has listed in Section 3.13 of the Silknet Disclosure Schedule
all employee benefit plans (as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")) and all bonus,
stock option, stock purchase, incentive, deferred compensation, supplemental
retirement, severance and other similar employee benefit plans, and all
unexpired severance agreements, written or otherwise, for the benefit of, or
relating to, any current or former employee of Silknet or any trade or business
(whether or not incorporated) which is a member or which is under common
control with Silknet (an "ERISA Affiliate") within the meaning of Section 414
of the Internal Revenue Code, or any Subsidiary of Silknet (together, the
"Silknet Employee Plans").
(b) With respect to each Silknet Employee Plan, Silknet has made available
to Kana, a true and correct copy of (i) the most recent annual report (Form
5500) filed with the IRS, (ii) such Silknet Employee Plan, (iii) each trust
agreement and group annuity contract, if any, relating to such Silknet Employee
Plan and (iv) the most recent actuarial report or valuation relating to a
Silknet Employee Plan subject to Title IV of ERISA.
(c) With respect to the Silknet Employee Plans, individually and in the
aggregate, no event has occurred, and to the knowledge of Silknet, there exists
no condition or set of circumstances in connection with which Silknet could be
subject to any liability that is reasonably likely to have a Silknet Material
Adverse Effect under ERISA, the Internal Revenue Code or any other applicable
law.
(d) With respect to the Silknet Employee Plans, individually and in the
aggregate, there are no funded benefit obligations for which contributions have
not been made or properly accrued and there are no unfunded benefit obligations
which have not been accounted for by reserves, or otherwise properly footnoted
in accordance with generally accepted accounting principles, on the financial
statements of Silknet, which obligations are reasonably likely to have a
Silknet Material Adverse Effect.
(e) Except as disclosed in Silknet SEC Reports filed prior to the date of
this Agreement or the Silknet Disclosure Schedule, and except as provided for
in this Agreement, neither Silknet nor any of its Subsidiaries is a party to
any oral or written (i) agreement with any officer or other key employee of
Silknet or any of its Subsidiaries, the benefits of which are contingent, or
the terms of which are materially altered, upon the occurrence of a transaction
involving Silknet of the nature contemplated by this Agreement, (ii) agreement
with any officer of Silknet or any of its Subsidiaries providing any term of
employment or compensation guarantee extending for a period longer than one
year from the date hereof and for the payment of compensation in excess of
$200,000 per annum, or (iii) agreement or plan, including any stock option
plan, stock appreciation right plan, restricted stock plan or stock purchase
plan, any of the benefits of which will be increased, or the vesting of the
benefits of which will be accelerated, by the occurrence of any of the
transactions contemplated by this Agreement or the Stock Option Agreements or
the value of any of the benefits of which will be calculated on the basis of
any of the transactions contemplated by this Agreement, except that (a) the
vesting date of each outstanding option under the Silknet Stock Plans other
than the 1999 NonEmployee Director Stock Option Plan at the Effective Time
shall immediately accelerate by one year, and the vesting date of any unvested
shares previously purchased under any of the Silknet Stock Plans shall at the
Effective Time accelerate by one year, and (b) each outstanding option under
the Silknet 1999 Non-Employee Director Stock Option Plan at the Effective Time
shall immediately become fully vested and exercisable following the Effective
Time.
Section 3.14 Compliance With Laws.
Silknet and each of its Subsidiaries has complied with, is not in violation
of, and has not received any notices of violation with respect to, any federal,
state or local statute, law or regulation
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with respect to the conduct of its business, or the ownership or operation of
its business, except for failures to comply or violations which, individually
or in the aggregate, have not had and are not reasonably likely to have a
Silknet Material Adverse Effect.
Section 3.15 Tax Matters.
To its knowledge, neither Silknet nor any of its Affiliates has taken or
agreed to take any action which would prevent the Merger from constituting a
transaction qualifying as a reorganization under Section 368(a) of the Internal
Revenue Code.
Section 3.16 Labor Matters.
Neither Silknet nor any of its Subsidiaries is a party to or otherwise
bound by any collective bargaining agreement, contract or other agreement or
understanding with a labor union or labor organization, nor, as of the date
hereof, is Silknet or any of its Subsidiaries the subject of any material
proceeding asserting that Silknet or any of its Subsidiaries has committed an
unfair labor practice or is seeking to compel it to bargain with any labor
union or labor organization nor, as of the date of this Agreement, is there
pending or, to the knowledge of Silknet, threatened, any material labor strike,
dispute, walkout, work stoppage, slow-down or lockout involving Silknet or any
of its Subsidiaries.
Section 3.17 Insurance.
All material fire and casualty, general liability, business interruption,
product liability, and sprinkler and water damage insurance policies maintained
by Silknet or any of its Subsidiaries are with reputable insurance carriers,
and copies or a summary of such policies have been made available to Kana.
Section 3.18 No Existing Discussions.
As of the date hereof, Silknet is not engaged, directly or indirectly, in
any discussions or negotiations with any other party with respect to a Silknet
Takeover Proposal (as defined in Section 6.02(d)).
Section 3.19 Interested Party Transactions.
Except as set forth in the Silknet SEC Reports or by virtue of the Merger,
no event has occurred that would be required to be reported by Silknet as a
Certain Relationship or Related Transaction pursuant to Item 404 of Regulation
S-K promulgated by the SEC.
Section 3.20 Registration Statement; Joint Proxy Statement/Prospectus.
The information supplied by Silknet for inclusion in the registration
statement of Kana on Form S-4 pursuant to which shares of Kana Common Stock
issued in the Merger will be registered with the SEC (the "Registration
Statement ") shall not contain, at the time the Registration Statement is
declared effective by the SEC, any untrue statement of a material fact or omit
to state any material fact required to be stated in the Registration Statement
or necessary in order to make the statements in the Registration Statement, in
light of the circumstances under with they were made, not misleading. The
information supplied by Silknet for inclusion in the joint proxy
statement/prospectus (the "Joint Proxy Statement/Prospectus") to be sent to the
stockholders of Silknet in connection with the special meeting of Silknet
stockholders to consider this Agreement and the Merger (the "Silknet
Stockholders Meeting") and to the stockholders of Kana in connection with the
special meeting of Kana stockholders to consider the issuance of Kana Common
Stock in connection with the Merger (the "Kana Stockholders Meeting") shall
not, on the date the Joint Proxy Statement/Prospectus is
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first mailed to stockholders of Kana and Silknet, at the time of the Silknet
Stockholders Meeting, at the time of the Kana Stockholders Meeting or at the
Effective Time, contain any statement which, at such time and in light of the
circumstances under which it was made, is false or misleading with respect to
any material fact, or omit to state any material fact necessary in order to
make the statements made in the Joint Proxy Statement/Prospectus not false or
misleading or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of
proxies for the Kana Stockholders Meeting or the Silknet Stockholders Meeting
which has become false or misleading. If at any time prior to the Effective
Time any event relating to Silknet or any of its affiliates should be
discovered by Silknet which should be set forth in an amendment to the
Registration Statement or a supplement to the Joint Proxy Statement/Prospectus,
Silknet shall promptly inform Kana.
Section 3.21 Payments Resulting from Mergers.
(a) The consummation or announcement of any transaction contemplated by
this Agreement or the Silknet Stock Option Agreement will not (either alone or
upon the occurrence of any additional or further acts or events) result in any
(i) payment (whether of severance pay or otherwise) becoming due from Silknet
or any of its Subsidiaries to any officer, employee, former employee or
director thereof or to the trustee under any "rabbi trust" or similar
arrangement pursuant to any management, employment, deferred compensation,
severance (including any payment, right or benefit resulting from a change in
control), bonus or other contract for personal services with any officer,
director or employee or any plan agreement or understanding similar to any of
the foregoing, or (ii) benefit under any Silknet benefit plan being established
or becoming accelerated, vested or payable.
(b) James C. Wood has agreed to enter into an amendment to his employment
agreement providing for the waiver of any benefits that would otherwise be due
Mr. Wood (including severance payments) as a result of the Merger. Nigel
Donovan has agreed to deliver a written acknowledgement that the Merger, and
his subsequent employment by Kana, will not result in any benefits becoming due
to Mr. Donovan. Patrick J. Scannell, has agreed to amend his current employment
agreement to provide for the waiver of any cash payments as a result of the
Merger, and to provide that his employment agreement will be amended so that he
will continue providing services to Kana for 180 days after the date hereof, on
which date Mr. Scannell will be entitled to the benefits under his employment
agreement (including acceleration of his then unvested options and severance
payments equal to one year's salary).
Section 3.22 Opinion Of Financial Advisor.
The financial advisor of Silknet, Credit Suisse First Boston, has delivered
to Silknet an opinion dated the date of this Agreement to the effect that the
Exchange Ratio is fair to the holders of Silknet Common Stock from a financial
point of view.
Section 3.23 Section 203 of the DGCL Not Applicable; Silknet Rights Plan.
(a) Section 203 of the DGCL is not applicable to Silknet or (by reason of
Silknet's participation therein) the Merger. No other "fair price,"
"moratorium," "control share acquisition" or other similar anti-takeover
statute or regulation is applicable to Silknet or (by reason of Silknet's
participation therein) the Merger or the other transactions contemplated by
this Agreement.
(b) The execution, delivery and performance of this Agreement and the
Silknet Stock Option Agreement and the consummation of the Merger will not
cause any change, effect or result under any stockholder rights plan which is
or will as of the Effective Time be in effect (a "Silknet Rights Plan") which
is adverse to the interests of Kana.
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Section 3.24 Voting Requirements.
The affirmative vote at the Silknet Stockholders Meeting of the holders of
a majority of the voting power of all outstanding shares of Silknet Common
Stock to adopt this Agreement (the "Silknet Stockholder Approval ") is the only
vote of the holders of any class or series of Silknet 's capital stock
necessary to approve and adopt this Agreement, the Silknet Stock Option
Agreement and the transactions contemplated hereby and thereby.
Section 3.25 Brokers.
No broker, investment banker, financial advisor or other person, other than
Credit Suisse First Boston Corporation, the fees and expenses of which will be
paid by Silknet, is entitled to any broker's, finder's, financial advisor's or
other similar fee or commission in connection with the transactions
contemplated by this Agreement and the Stock Option Agreements based upon
arrangements made by or on behalf of Silknet. Silknet has furnished to Kana
true and complete copies of all agreements under which any such fees or
expenses are payable and all indemnification and other agreements related to
the engagement of the persons to whom such fees are payable.
Section 3.26 Certain Contracts.
Neither Silknet nor any of its Subsidiaries is a party to or bound by any
non-competition agreement or any other similar agreement or obligation which
purports to limit in any material respect the manner in which, or the
localities in which, all or any material portion of the business of Silknet and
its Subsidiaries, taken as a whole, is conducted.
Section 3.27 Silknet Voting Agreement.
Each officer, director and affiliate under the control of Silknet is listed
on Schedule 3.27 and has executed and delivered to Kana a voting agreement,
substantially in the form of Exhibit A hereto.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF KANA
Kana and Merger Sub represent and warrant to Silknet that the statements
contained in this Article IV are true and correct, except as set forth in the
disclosure schedule delivered by Kana to Silknet on or before the date of this
Agreement (the "Kana Disclosure Schedule"). The Kana Disclosure Schedule shall
be arranged in paragraphs corresponding to the numbered and lettered sections
contained in this Article IV and the disclosure in any paragraph shall qualify
other sections in this Article IV only to the extent that it is reasonably
apparent from a reading of such document that it also qualifies or applies to
such other sections.
Section 4.01 Organization Of Kana And Merger Sub.
Each of Kana and Merger Sub and Kana's other Subsidiaries is a corporation
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, has all requisite corporate power to own,
lease and operate its property 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 as a foreign corporation in each jurisdiction in which
the failure to be so qualified would have a Kana Material Adverse Effect as
defined in Section 9.03(b). Except as set forth in the Kana SEC Reports (as
defined in Section 4.04) filed prior to the date hereof, neither Kana nor any
of its Subsidiaries directly or indirectly owns any equity or similar interest
in, or any interest convertible into or exchangeable or exercisable for, any
corporation, partnership, joint venture or other business
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association or entity, excluding securities in any publicly traded company held
for investment by Kana and comprising less than five percent (5%) of the
outstanding stock of such company.
Section 4.02 Kana Capital Structure.
(a) The authorized capital stock of Kana consists of 100,000,000 shares of
Common Stock, $.001 par value, and 5,000,000 shares of Preferred Stock, $.001
par value ("Kana Preferred Stock"). As of February 3, 2000, (i) 30,391,355
shares of Kana Common Stock were issued and outstanding, all of which are
validly issued, fully paid and nonassessable, and (ii) no shares of Kana Common
Stock were held in the treasury of Kana or by Subsidiaries of Kana. The Kana
Disclosure Schedule shows the number of shares of Kana Common Stock reserved
for future issuance pursuant to stock options granted and outstanding as of
February 3, 2000 and the plans under which such options were granted
(collectively, the "Kana Stock Plans"). No material change in such
capitalization has occurred between December 31, 2000 and the date of this
Agreement. As of the date of this Agreement, none of the shares of Kana
Preferred Stock is issued and outstanding. All shares of Kana Common Stock
subject to issuance as specified above are duly authorized and, upon issuance
on the terms and conditions specified in the instruments pursuant to which they
are issuable, shall be validly issued, fully paid and nonassessable. There are
no obligations, contingent or otherwise, of Kana to repurchase, redeem or
otherwise acquire any shares of Kana Common Stock or the capital stock of any
of its Subsidiaries or to provide funds to or make any material investment (in
the form of a loan, capital contribution or otherwise) in any such Subsidiary
or any other entity other than guarantees of bank obligations of Subsidiaries
entered into in the ordinary course of business, except for repurchase rights
of Kana under the Kana stock option plans, or under any stock option agreements
pursuant to which options were granted under these plans. All of the
outstanding shares of capital stock of each of Kana's Subsidiaries are duly
authorized, validly issued, fully paid and nonassessable and all such shares
(other than directors' qualifying shares in the case of foreign Subsidiaries)
are owned by Kana or another Subsidiary free and clear of all security
interests, liens, claims, pledges, agreements, limitations in Kana's voting
rights, charges or other encumbrances of any nature.
(b) Except and as disclosed in Section 4.02 of the Kana Disclosure Schedule
or as set forth in this Section 4.02 or as reserved for future grants of
options under the Kana Stock Plans or the Kana Stock Option Agreement, there
are no equity securities of any class of Kana or any of its Subsidiaries, or
any security exchangeable into or exercisable for such equity securities,
issued, reserved for issuance or outstanding. There are no voting trusts,
proxies or other voting agreements or understandings with respect to the shares
of capital stock of Kana and to which Kana is a party.
Section 4.03 Authority; No Conflict; Required Filings And Consents.
(a) Each of Kana and Merger Sub has all requisite corporate power and
authority to enter into this Agreement and the Kana Stock Option Agreement and
to consummate the transactions contemplated hereby and thereby. The execution
and delivery of this Agreement and the Kana Stock Option Agreement and the
consummation of the transactions contemplated by this Agreement and by the Kana
Stock Option Agreement by Kana and Merger Sub have been duly authorized by all
necessary corporate action on the part of each of Kana and Merger Sub
(including the approval of the Merger by Kana as the sole stockholder of Merger
Sub), subject only to the approval of the Kana Voting Proposal (as defined in
Section 6.03(a) by Kana stockholders. This Agreement and the Kana Stock Option
Agreement have been duly executed and delivered by each of Kana and, in the
case of this Agreement, Merger Sub constitute the valid and binding obligations
of each of Kana and Merger Sub, enforceable in accordance with their terms,
subject to the Bankruptcy and Equity Exception.
(b) The execution and delivery of this Agreement and the Kana Stock Option
Agreement by each of Kana and Merger Sub does not, and the consummation of the
transactions contemplated by
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this Agreement and the Kana Stock Option Agreement will not, (i) conflict with,
or result in any violation or breach of, any provision of the Certificate of
Incorporation or Bylaws of Kana or the Certificate of Incorporation or Bylaws
of Merger Sub, (ii) result in any violation or breach of, or constitute (with
or without notice or lapse of time, or both) a default (or give rise to a right
of termination, cancellation or acceleration of any obligation or loss of any
material benefit) under, or require a consent or waiver under, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, lease,
contract or other agreement, instrument or obligation to which Kana or any of
its Subsidiaries is a party or by which any of them or any of their properties
or assets may be bound, or (iii) conflict with or violate any permit,
concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Kana or any of its Subsidiaries or
any of its or their properties or assets, except in the case of (ii) and (iii)
for any such conflicts, violations, defaults, terminations, cancellations or
accelerations which, individually or in the aggregate, would have a Kana
Material Adverse Effect.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to Kana or any of its Subsidiaries in connection with the execution and
delivery of this Agreement and the Kana Stock Option Agreement or the
consummation of the transactions contemplated hereby, except for (i) the filing
of the Registration Statement with the SEC in accordance with the Securities
Act, (ii) the filing of the Certificate of Merger with the Delaware Secretary
of State, (iii) the filing of the Joint Proxy Statement/Prospectus with the SEC
in accordance with the Exchange Act, (iv) such consents, approvals, orders,
authorizations, registrations, declarations and filings as may be required
under applicable state securities laws and the laws of any foreign country and
(v) such other consents, authorizations, filings, approvals and registrations
which, if not obtained or made, would not be reasonably likely to have a Kana
Material Adverse Effect.
Section 4.04 SEC Filings; Financial Statements.
(a) Kana has filed and made available to Silknet all forms, reports and
documents required to be filed by Kana with the SEC since September 21, 1999
other than registration statements on Form S-8 (collectively, the "Kana SEC
Reports"). The Kana SEC Reports (i) at the time filed, complied in all material
respects with the applicable requirements of the Securities Act and the
Exchange Act, as the case may be, and (ii) did not at the time they were filed
(or if amended or superseded by a filing prior to the date of this Agreement,
then as and on the date so amended or superseded) contain any untrue statement
of a material fact or omit to state a material fact required to be stated in
such Kana SEC Reports or necessary in order to make the statements in such Kana
SEC Reports, in the light of the circumstances under which they were made, not
misleading. Kana's Subsidiaries are not required to file any forms, reports or
other documents with the SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes) contained in the Kana SEC Reports complied as to form in all
material respects with the applicable published rules and regulations of the
SEC with respect thereto, was prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes to such financial statements
or, in the case of unaudited statements, as permitted by Form 10-Q of the SEC)
and fairly presented the consolidated financial position of Kana and its
Subsidiaries as of the dates and the consolidated results of its operations and
cash flows for the periods indicated, except that the unaudited interim
financial statements were or are subject to normal and recurring year-end
adjustments which were not or are not expected to be material in amount. The
audited balance sheet of Kana as of December 31, 1999 is referred to herein as
the "Kana Balance Sheet."
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Section 4.05 No Undisclosed Liabilities.
Except as disclosed in the Kana SEC Reports filed prior to the date hereof,
and except for normal or recurring liabilities incurred since December 31, 1999
in the ordinary course of business consistent with past practices, Kana and its
Subsidiaries do not have any liabilities, either accrued, contingent or
otherwise (whether or not required to be reflected in financial statements in
accordance with generally accepted accounting principles), and whether due or
to become due, which individually or in the aggregate, would have a Kana
Material Adverse Effect.
Section 4.06 Absence Of Certain Changes Or Events.
Except as disclosed in the Kana SEC Reports filed prior to the date hereof
or disclosed in writing by Kana to Silknet on or prior to the date hereof,
since the date of the Kana Balance Sheet, Kana and its Subsidiaries have
conducted their businesses only in the ordinary course and in a manner
consistent with past practice and, since such date, there has not been (i) any
Kana Material Adverse Effect; (ii) any damage, destruction or loss (whether or
not covered by insurance) with respect to Kana or any of its Subsidiaries
having a Kana Material Adverse Effect; (iii) any material change by Kana in its
accounting methods, principles or practices to which Silknet has not previously
consented in writing; (iv) any revaluation by Kana of any of its assets having
a Kana Material Adverse Effect; or (v) any other action or event that would
have required the consent of Silknet pursuant to Section 5.01 of this Agreement
had such action or event occurred after the date of this Agreement and that,
individually or in the aggregate, has had a Kana Material Adverse Effect.
Section 4.07 Taxes.
Kana and each of its Subsidiaries have (i) filed all federal, state, local
and foreign tax returns and reports required to be filed by them prior to the
date of this Agreement (taking into account extensions), (ii) paid or accrued
all Taxes due and payable, and (iii) paid or accrued all Taxes for which a
notice of assessment or collection has been received (other than amounts being
contested in good faith by appropriate proceedings), except in the case of
clause (i), (ii) or (iii) for any such filings, payments or accruals which are
not reasonably likely, individually or in the aggregate, to have a Kana
Material Adverse Effect. Neither the IRS nor any other taxing authority has
asserted any claim for Taxes, or to the actual knowledge of the executive
officers of Kana or any of its Subsidiaries, is threatening to assert any
claims for Taxes, which claims, individually or in the aggregate, are
reasonably likely to have a Kana Material Adverse Effect. Kana and each of its
Subsidiaries have withheld or collected and paid over to the appropriate
governmental authorities (or are properly holding for such payment) all Taxes
required by law to be withheld or collected, except for amounts which are not
reasonably likely, individually or in the aggregate, to have a Kana Material
Adverse Effect. Neither Kana nor any of its Subsidiaries has made an election
under Section 341(f) of the Internal Revenue Code, except for any such election
which shall not have a Kana Material Adverse Effect. There are no liens for
Taxes upon the assets of Kana or any of its Subsidiaries (other than liens for
Taxes that are not yet due or that are being contested in good faith by
appropriate proceedings), except for liens which are not reasonably likely,
individually or in the aggregate, to have a Kana Material Adverse Effect.
Section 4.08 Agreements, Contracts And Commitments.
Neither Kana nor any of its Subsidiaries has breached, or received in
writing any claim or notice that it has breached, any of the terms or
conditions of any material agreement, contract or commitment to which it is a
party or by which any of its assets or properties are bound ("Kana Material
Contracts") in such a manner as, individually or in the aggregate, is
reasonably likely to have a Kana Material Adverse Effect. Each Kana Material
Contract that has not expired by its terms is in full force and effect and is
not subject to any material default thereunder of which Kana is aware by any
party obligated to Kana or any of its Subsidiaries pursuant to such Kana
Material Contract.
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Section 4.09 Litigation.
Except as described in the Kana SEC Reports filed prior to the date hereof,
there is no action, suit or proceeding, claim, arbitration or investigation
against Kana or any of its Subsidiaries pending or as to which Kana or any of
its Subsidiaries has received any written notice of assertion, which,
individually or in the aggregate, if determined adversely to Kana or any such
Subsidiary, would be reasonably likely to have a Kana Material Adverse Effect
or would materially impair or delay the ability of Kana to consummate the
transactions contemplated by this Agreement.
Section 4.10 Employee Benefit Plans.
With respect to the Kana Employee Plans, individually and in the aggregate,
there are no funded benefit obligations for which contributions have not been
made or properly accrued and there are no unfunded benefit obligations which
have not been accounted for by reserves, or otherwise properly footnoted in
accordance with generally accepted accounting principles, on the financial
statements of Kana, which obligations are reasonably likely to have a Kana
Material Adverse Effect.
Section 4.11 Compliance With Laws.
Kana and each of its Subsidiaries has complied with, is not in violation
of, and has not received any notices of violation with respect to, any federal,
state or local statute, law or regulation with respect to the conduct of its
business, or the ownership or operation of its business, except for failures to
comply or violations which, individually or in the aggregate, have not had and
are not reasonably likely to have a Kana Material Adverse Effect.
Section 4.12 Tax Matters.
To its knowledge, neither Kana nor any of its Affiliates has taken or
agreed to take any action which would prevent the Merger from constituting a
transaction qualifying as a reorganization under Section 368(a) of the Internal
Revenue Code.
Section 4.13 Registration Statement; Joint Proxy Statement/Prospectus.
The information supplied by Kana for inclusion in the Registration
Statement shall not contain, at the time the Registration Statement is declared
effective by the SEC, any untrue statement of a material fact or omit to state
any material fact required to be stated in the Registration Statement or
necessary in order to make the statements in the Registration Statement, in
light of the circumstances under with they were made, not misleading. The
information supplied by Kana for inclusion in the Joint Proxy
Statement/Prospectus to be sent to the stockholders of Silknet in connection
with the Silknet Stockholders Meeting and to the stockholders of Kana in
connection with the Kana Stockholders Meeting shall not, on the date the Joint
Proxy Statement/Prospectus is first mailed to stockholders of Kana and Silknet,
at the time of the Silknet Stockholders Meeting, at the time of the Kana
Stockholders Meeting or at the Effective Time, contain any statement which, at
such time and in light of the circumstances under which it was made, is false
or misleading with respect to any material fact, or omit to state any material
fact necessary in order to make the statements made in the Joint Proxy
Statement/Prospectus not false or misleading or omit to state any material fact
necessary to correct any statement in any earlier communication with respect to
the solicitation of proxies for the Kana Stockholders Meeting or the Silknet
Stockholders Meeting which has become false or misleading. If at any time prior
to the Effective Time any event relating to Kana or any of its affiliates
should be discovered by Kana which should be set forth in an amendment to the
Registration Statement or a supplement to the Joint Proxy Statement/Prospectus,
Kana shall promptly inform Silknet.
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Section 4.14 Opinion Of Financial Advisor.
The financial advisor of Kana, Goldman, Sachs & Co., has delivered to Kana
an opinion dated the date of this Agreement to the effect that the Exchange
Ratio is fair to Kana from a financial point of view.
Section 4.15 Voting Requirements.
No vote of the holders of shares of Kana Common Stock or any other class or
series of capital stock of Kana is necessary to approve and adopt this
Agreement and the Kana Option Agreement and the transactions contemplated
hereby and thereby other than the approval of the Kana Voting Proposal.
Section 4.16 Brokers.
No broker, investment banker, financial advisor or other person, other than
Goldman, Sachs & Co., the fees and expenses of which will be paid by Kana, is
entitled to any broker's, finder's, financial advisor's or other similar fee or
commission in connection with the transactions contemplated by this Agreement
and the Stock Option Agreements based upon arrangements made by or on behalf of
Kana.
Section 4.17 Kana Voting Agreement.
Each officer, director and affiliate under the control of Kana is listed on
Schedule 4.17 and has executed and delivered to Silknet a voting agreement,
substantially in the form of Exhibit B hereto.
Section 4.18 Intellectual Property.
(a) Except as disclosed in Section 4.18 of the Kana Disclosure Schedule,
Kana and its Subsidiaries own, or are licensed or otherwise possess legally
enforceable rights to use, all patents, trademarks, trade names, service marks,
copyrights and mask works, any applications for and registrations of such
patents, trademarks, trade names, service marks, copyrights and mask works, and
all processes, formulae, methods schematics, technology, know how, computer
software programs or applications and tangible or intangible proprietary
information or material that are necessary to conduct the business of Kana and
its Subsidiaries as currently conducted or planned to be conducted by Kana and
its Subsidiaries (the "Kana Intellectual Property Rights").
(b) Except as disclosed in Section 4.18 of the Kana Disclosure Schedule,
neither Kana nor any of its Subsidiaries is, or will be as a result of the
execution and delivery of this Agreement of the performance of its obligations
under this Agreement, in breach of any material license, sublicense or other
agreement relating to the Kana Intellectual Property Rights or any material
license, sublicense or other agreement pursuant to which Kana or any of its
Subsidiaries is authorized to use any third party patents, trademarks or
copyrights, including software, which are incorporated in or form a part of any
product of Kana or any of its Subsidiaries that is material to the business of
Kana and its Subsidiaries, taking Kana and its Subsidiaries together as a
whole, and where such breach would have a Kana Material Adverse Effect.
(c) Except as disclosed in the Kana Disclosure Schedule, (i) all patents,
registered trademarks, service marks and copyrights which are held by Kana or
any of its Subsidiaries, and which are material to the business of Kana and its
Subsidiaries, taking Kana and its Subsidiaries together as a whole, are valid
and subsisting; (ii) Kana 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 where such proceeding would have a Kana Material Adverse
Effect; and (iii) the manufacturing, marketing, licensing or sale of Kana's
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products does not infringe any patent, trademark, service mark, copyright,
trade secret or other proprietary right of any third party, which infringement,
either individually or in the aggregate, could reasonably be expected to have a
Kana Material Adverse Effect.
Section 4.19 Certain Contracts.
Neither Kana nor any of its Subsidiaries is a party to or bound by any non-
competition agreement or any other similar agreement or obligation which
purports to limit in any material respect the manner in which, or the
localities in which, all or any material portion of the business of Kana and
its Subsidiaries, taken as a whole, is conducted.
ARTICLE V.
CONDUCT OF BUSINESS
Section 5.01 Covenants Of Silknet.
During the period from the date of this Agreement and continuing until the
earlier of the termination of this Agreement or the Effective Time, Silknet
agrees, as to itself and its Subsidiaries, except to the extent that Kana shall
otherwise consent in writing, to carry on its business in the usual, regular
and ordinary course in substantially the same manner as previously conducted,
and consistent with preserving and advancing the revenues and results of
operation of Silknet, to pay its debts and taxes when due subject to good faith
disputes over such debts or taxes, to pay or perform its other obligations when
due, and, to the extent consistent with such business, use all reasonable
efforts consistent with past practices and policies to preserve intact its
present business organization, keep available the services of its present
officers and key employees and preserve its relationships with customers,
suppliers, distributors, and others having business dealings with it, except in
each case where the failure to do so would not have a Silknet Material Adverse
Effect. Silknet shall promptly notify Kana of any material event or occurrence
not in the ordinary course of business of Silknet. Except as expressly
contemplated by this Agreement or as set forth in Section 5.01 of the Silknet
Disclosure Schedule, Silknet shall not (and shall not permit its Subsidiaries
to), without the written consent of Kana (which shall not be unreasonably
delayed):
(a) accelerate, amend or change the period of exercisability of options or
restricted stock granted under any employee stock plan of such party or
authorize cash payments in exchange for any options granted under any of such
plans except as required by the terms of such plans or any related agreements
in effect as of the date of this Agreement, and except that (a) the vesting
date of each outstanding option under the Silknet Stock Plans other than the
1999 Non-Employee Director Stock Option Plan at the Effective Time shall
immediately accelerate by one year, and the vesting date of any unvested shares
previously purchased under any of the Silknet Stock Plans shall at the
Effective Time accelerate by one year, and (b) each outstanding option under
the Silknet 1999 Non-Employee Director Stock Option Plan at the Effective Time
shall immediately become fully vested and exercisable following the Effective
Time.
(b) 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 purchase 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 such
party;
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(c) transfer or license to any person or entity or otherwise extend, amend
or modify in any material respect any rights to the Silknet Intellectual
Property Rights other than on a non-exclusive basis in the ordinary course of
business consistent with past practices;
(d) issue, deliver or sell, or authorize or propose the issuance, delivery
or sale of, any shares of its capital stock or securities convertible into
shares of its capital stock, or subscriptions, rights, warrants or options to
acquire, or other agreements or commitments of any character obligating it to
issue any such shares or other convertible securities, other than (i) the grant
of options consistent with past practices to existing employees, not to exceed
25,000 shares, and to newly hired employees, which hiring of new employees
shall be in the ordinary course of business and which options represent in the
aggregate the right to acquire no more than 100,000 shares (net of
cancellations) of Silknet Common Stock and which will not be entitled to
accelerated vesting as a result of the Merger, or (ii) the issuance of shares
of Silknet Common Stock pursuant to the exercise of options outstanding on the
date of this Agreement;
(e) acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial equity interest in or substantial portion of the
assets of, or by any other manner, any business or any corporation, partnership
or other business organization or division, or otherwise acquire or agree to
acquire any assets (other than inventory and other items in the ordinary course
of business);
(f) sell, lease, license or otherwise dispose of any material properties or
assets, except for transactions in the ordinary course of business; provided,
however, that in no event shall Silknet enter into any agreement, option or
other arrangements (including any joint venture) involving the exclusive
licensing of Silknet's name or system outside of the ordinary course of
business or inconsistent with past practice;
(g) (i) increase or agree to increase the compensation payable or to become
payable to its officers or employees, except for increases in salary or wages
of employees (other than officers) in accordance with past practices, (ii)
grant any additional severance or termination pay to, or enter into any
employment or severance agreements with, any employees or officers, (iii) enter
into any collective bargaining agreement (other than as required by law or
extensions to existing agreements in the ordinary course of business), (iv)
establish, adopt, enter into or amend any bonus, profit sharing, thrift,
compensation, stock option, restricted stock, pension, retirement, deferred
compensation, employment, termination, severance or other plan, trust, fund,
policy or arrangement for the benefit of any directors, officers or employees,
and except as contemplated by Section 3.21 and Section 5.01(a);
(h) amend or propose to amend its Certificate of Incorporation or Bylaws,
except as contemplated by this Agreement;
(i) enter into or amend in any material respect any OEM agreement or any
agreements pursuant to which any third party is granted exclusive marketing,
manufacturing or other rights with respect to any Silknet product, process or
technology;
(j) amend or terminate any material contract, agreement or license to which
it is a party except in the ordinary course of business or where such action
would not have a Silknet Material Adverse Effect;
(k) waive or release any material right or claim, except in the ordinary
course of business;
(l) initiate any litigation or arbitration proceeding without otherwise
first consulting with Kana or where the initiation of such proceedings, if
determined adversely, would have a Silknet Material Adverse Effect;
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(m) incur any indebtedness in excess of $10,000,000 for borrowed money
other than in the ordinary course of business;
(n) make or agree to make any new capital expenditure or expenditures, or
enter into any agreement or agreements providing for payments which,
individually, are in excess of $1,000,000 or, in the aggregate, are in excess
of $5,000,000;
(o) make any tax election that, individually or in the aggregate, is
reasonably likely to have a Silknet Material Adverse Effect on the tax
liability of Silknet or settle or compromise any material income tax liability;
(p) pay, discharge, settle or satisfy any material claims, liabilities,
obligations or litigation (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than in the ordinary course of business and
where such action would not have a Silknet Material Adverse Effect; or
(q) take, or agree in writing or otherwise to take, any of the actions
described in Section 5.01(a) through Section 5.01(p) above.
Section 5.02 Covenants Of Kana.
During the period from the date of this Agreement and continuing until the
earlier of the termination of this Agreement or the Effective Time, Kana
agrees, as to itself and its Subsidiaries, except to the extent that Silknet
shall otherwise consent in writing, to carry on its business in the usual,
regular and ordinary course in substantially the same manner as previously
conducted (it being acknowledged that the foregoing shall not limit the ability
of Kana to make or pursue corporate acquisitions) and consistent with
preserving and advancing the revenues and results of operations of Kana, to pay
its debts and taxes when due subject to good faith disputes over such debts or
taxes, to pay or perform its other obligations when due, and, to the extent
consistent with such business, use all reasonable efforts consistent with past
practices and policies to preserve intact its present business organization,
keep available the services of its present officers and key employees and
preserve its relationships with customers, suppliers, distributors, and others
having business dealings with it and except in each case where the failure to
do so would not have a Kana Material Adverse Effect. Kana shall promptly notify
Silknet of any material event or occurrence not in the ordinary course of
business of Kana. Except as expressly contemplated by this Agreement or as set
forth in Section 5.02 of the Kana Disclosure Schedule, Kana shall not (and
shall not permit any of its Subsidiaries to), without the written consent of
Silknet (which shall not be unreasonably withheld or delayed):
(a) accelerate, amend or change the period of exercisability of options or
restricted stock granted under any employee stock plan of such party or
authorize cash payments in exchange for any options granted under any of such
plans except as required by the terms of such plans or any related agreements
in effect as of the date of this Agreement and except that the vesting date of
all options granted to employees of Kana under all options granted under all of
Kana's various stock plans may be accelerated by up to one year by the Kana
Board of Directors or an appropriate committee;
(b) 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 purchase 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 such
party;
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(c) sell, lease, license or otherwise dispose of a material amount of
properties or assets, except for transactions in the ordinary course of
business;
(d) transfer or license to any person or entity or otherwise extend, amend
or modify in any material respect any rights to the Kana Intellectual Property
Rights other than on a non-exclusive basis in the ordinary course of business
consistent with past practices.
(e) enter in to or amend in any material respect any material OEM agreement
or any agreements pursuant to which any third party is granted exclusive
marketing, manufacturing or other rights with respect to any Kana product,
process or technology and where such action would have a Kana Material Adverse
Effect;
(f) amend or terminate any material contract, agreement or license to which
it is a party except in the ordinary course of business or where such action
would not have a Kana Material Adverse Effect;
(g) initiate any litigation or arbitration proceeding without otherwise
first notifying Silknet where the initiation of such proceedings, if determined
adversely, would have a Kana Material Adverse Effect;
(h) pay, discharge, settle or satisfy any material claims, liabilities,
obligations or litigation (absolute, accrued asserted or unasserted, contingent
or otherwise), other than in the ordinary course of business or where such
action would not have a Kana Material Adverse Effect; or
(i) take, or agree in writing or otherwise to take, any of the actions
described in Section 5.02(a) through Section 5.02(h) above.
Section 5.03 Cooperation.
Subject to compliance with applicable law, from the date hereof until the
Effective Time, each of Kana and Silknet shall confer on a regular and frequent
basis with one or more representatives of the other party to report on the
general status of ongoing operations and shall promptly provide the other party
or its counsel with copies of all filings made by such party with any
Governmental Entity in connection with this Agreement, the Merger and the
transactions contemplated hereby and thereby.
Section 5.04 Advice of Changes.
Silknet and Kana shall promptly advise the other party orally and in
writing to the extent it has knowledge of (i) any representation or warranty
made by it (and, in the case of Kana, made by Sub) contained in this Agreement
or the Stock Option Agreements becoming untrue or inaccurate in any respect
where the failure of such representation to be so true and correct (without
giving effect to any limitation as to "materiality" or "material adverse
effect" set forth therein), individually or in the aggregate, has had or is
reasonably likely to have a material adverse effect on it, (ii) the failure by
it (and, in the case of Kana, by Sub) to comply in any material respect with or
satisfy in any material respect any covenant, condition or agreement to be
complied with or satisfied by it under this Agreement or the Stock Option
Agreements and (iii) any change or event having, or which is reasonably likely
to have, a material adverse effect on such party or on the truth of their
respective representations and warranties or the ability of the conditions set
forth in Article VII to be satisfied; provided, however, that no such
notification shall affect the representations, warranties, covenants or
agreements of the parties (or remedies with respect thereto) or the conditions
to the obligations of the parties under this Agreement or the Stock Option
Agreements.
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ARTICLE VI.
ADDITIONAL AGREEMENTS
Section 6.01 Proxy Statement/Prospectus; Registration Statement.
As promptly as reasonably practicable after the execution of this
Agreement, Silknet and Kana will prepare, and file with the SEC, the Joint
Proxy Statement/Prospectus, and Kana will prepare and file with the SEC the
Registration Statement, in which the Joint Proxy Statement/Prospectus will be
included as a prospectus. Each of Kana and Silknet shall provide promptly to
the other such information concerning its business and financial statements and
affairs as, in the reasonable judgment of the providing party or its counsel,
may be required or appropriate for inclusion in the Joint Proxy
Statement/Prospectus and the Registration Statement, or in any amendments or
supplements thereto, and to cause its counsel and auditors to cooperate with
the other's counsel and auditors in the preparation of the Joint Proxy
Statement/Prospectus and the Registration Statement. Each of Silknet and Kana
will respond to any comments of the SEC, and will use its respective
commercially reasonable efforts to have the Registration Statement declared
effective under the Securities Act as promptly as practicable after such
filing, and Silknet will cause the Joint Proxy Statement/Prospectus to be
mailed to its stockholders at the earliest practicable time after the
Registration Statement is declared effective by the SEC (the "SEC Effective
Date"). As promptly as practicable after the date of this Agreement, each of
Silknet and Kana will prepare and file any other filings required to be filed
by it under the Exchange Act, the Securities Act or any other federal, foreign
or Blue Sky or related securities laws in order to consummate the Merger and
the transactions contemplated by this Agreement (the "Other Filings"). Each of
Silknet and Kana will notify the other promptly upon the receipt of any
comments from the SEC or its staff and of any request by the SEC or its staff
for amendments or supplements to the Registration Statement or the Joint Proxy
Statement/Prospectus and will supply the other with copies of all
correspondence between such party or any of its representatives, on the one
hand, and the SEC or its staff, on the other hand, with respect to the
Registration Statement, the Joint Proxy Statement/Prospectus or the Merger.
Each of Silknet and Kana will cause all documents that it is responsible for
filing with the SEC under this Section 6.01 to comply in all material respects
with all applicable requirements of law and the rules and regulations
promulgated thereunder. Whenever any event occurs which is required to be set
forth in an amendment or supplement to the Joint Proxy Statement/Prospectus or
the Registration Statement, Silknet or Kana, as the case may be, will promptly
inform the other of such occurrence and cooperate in filing with the SEC or its
staff, and/or mailing to stockholders of Silknet, such amendment or supplement.
Notwithstanding any other provision of this Agreement, nothing herein shall
required Kana to qualify to do business in any jurisdiction in which it is not
now so qualified or to file a general consent to service of process under any
applicable state securities laws in connection with the issuance of Kana Common
Stock in the Merger.
Section 6.02 No Solicitation by Silknet.
(a) Until the earlier of the Effective Time or a valid termination of this
Agreement pursuant to Article VIII, Silknet will not, and will not authorize,
direct or permit any of its officers, directors, employees, affiliates under
the control of Silknet, investment bankers, attorneys, accountants or other
agents, advisors or representatives (collectively, "Representatives") to,
directly or indirectly, (i) solicit, initiate, encourage or induce the making,
submission or announcement of any Silknet Takeover Proposal (as defined below),
(ii) participate in any discussions or negotiations with any person regarding,
or furnish to any person any information with respect to, or take any other
action to facilitate any inquiry or proposal that constitutes or may reasonably
be expected to lead to, any Silknet Takeover Proposal, (iii) authorize, approve
or recommend any Silknet Takeover Proposal, or (iv) enter into any letter of
intent or similar document or any contract, agreement or commitment accepting
or providing for any Silknet Takeover Proposal; provided, however, nothing
herein shall
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prohibit Silknet's Board of Directors from complying with Rules 14d-9 and 14e-2
under the Exchange Act; and provided, further, however, that this Section
6.02(a) shall not prohibit Silknet, before the adoption of this Agreement by
the stockholders of Silknet, from furnishing information regarding Silknet or
entering into negotiations or discussions with, any person or group in response
to a Silknet Takeover Proposal submitted by such person or group (and not
withdrawn) and, subject to the provisions of Section 6.06 of this Agreement,
endorsing and/or recommending a Silknet Superior Offer (as defined below), and
any such actions shall not be considered a breach of this Agreement to the
extent they are taken in compliance with the conditions and limitations set
forth in this Agreement if (1) neither Silknet nor any of its Representatives
shall have violated any of the restrictions set forth in this Section 6.02(a)
or Section 6.06, (2) the Board of Directors of Silknet determines in good
faith, after considering the advice of an investment bank of nationally
recognized reputation, that such Silknet Takeover Proposal is substantially
more favorable to Silknet and its stockholders than the Merger, taking into
account the anticipated long-term strategic benefits of the Merger to Silknet
stockholders, (3) the Board of Directors of Silknet concludes in good faith,
after consultation with its outside legal counsel, that failure to take such
action would be inconsistent with the fiduciary obligations of the Board of
Directors of Silknet to Silknet stockholders under applicable law, (4) prior to
furnishing any such information to, or entering into discussions or
negotiations with, such person or group, Silknet gives Kana written notice of
the identity of such person or group, the terms and conditions of the offer and
Silknet's intention to furnish information to, or enter into discussions or
negotiations with, such person or group, (5) Silknet receives from such person
or group an executed confidentiality agreement which shall not in any way
restrict Silknet from complying with its disclosure obligations under this
Agreement and which shall contain customary limitations on the use and
disclosure of all nonpublic written and oral information furnished to such
person or group by or on behalf of Silknet and other terms no less favorable to
Silknet than those set forth in the Confidentiality Agreement (as hereinafter
defined), and (6) contemporaneously with furnishing any such information to
such person or group, Silknet furnishes such information to Kana (to the extent
that such information has not been previously furnished by Silknet to Kana).
(b) Silknet and its Representatives will immediately cease and cause to be
terminated any and all existing discussions, negotiations, exchanges of
information and other activities with respect to any Silknet Takeover Proposal.
Promptly following the execution and delivery of this Agreement, Silknet shall
(i) inform each of its Representatives of the obligations undertaken in this
Section 6.02 and in the Confidentiality Agreement and (ii) request each person
that has heretofore executed a confidentiality or non-disclosure agreement in
connection with its consideration of acquiring it or any of its Subsidiaries to
return to Silknet all confidential information heretofore furnished to such
person by or on behalf of it or any of its Subsidiaries. At the Closing,
Silknet shall assign to Kana the non-exclusive right to enforce the rights of
Silknet and its Subsidiaries under any and all such confidentiality or non-
disclosure agreements. Any violation of the restrictions set forth in this
Section 6.02 by any officer, director or employee of Silknet, any affiliate
under the control of Silknet, or any investment banker, attorney, accountant or
other agent, advisor or representative of Silknet shall be deemed to be a
breach of this Section 6.02 by Silknet. Silknet shall notify Kana forthwith if
any inquiries, proposals or offers relating to a Silknet Takeover Proposal are
received by, any such information is requested from, or any such discussions or
negotiations are sought to be initiated or continued with, Silknet or any of
its Representatives, indicating, in connection with such notice, the name of
the person making the inquiry, proposal or offer and the material terms and
conditions of any proposals or offers. Thereafter Silknet shall provide Kana
with a true and complete copy of such Silknet Takeover Proposal or
communication (if it is in writing) and shall otherwise keep Kana informed, on
a current basis, with respect to the status and terms of any such proposal or
offer and the status of any such negotiations or discussions.
(c) Silknet and Kana agree that irreparable damage would occur in the event
that the provisions of this Section 6.02 were not performed in accordance with
their specific terms or were otherwise
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breached. It is accordingly agreed by the parties hereto that Kana shall be
entitled to seek an injunction or injunctions to prevent breaches of this
Section 6.02 and to enforce specifically the terms and provisions hereof in any
court of the United States or any state having jurisdiction, this being in
addition to any other remedy to which the parties may be entitled at law or in
equity.
(d) For purposes of this Agreement, "Silknet Takeover Proposal" means any
offer or proposal for, or any indication of interest in, a merger or other
business combination involving Silknet or the acquisition of twenty percent
(20%) or more of the outstanding shares of capital stock of Silknet, or all or
substantially all of the assets of Silknet or any asset of Silknet, the absence
of which would materially diminish the value of the Merger to Kana or the
benefits expected by Kana to be realized from the Merger (other than the
transactions contemplated by this Agreement), or any other transaction
inconsistent with consummation of the transactions contemplated hereby.
Section 6.03 No Solicitation by Kana.
(a) Until the earlier of the Effective Time or a valid termination of this
Agreement pursuant to Article VIII, Kana will not, and will not authorize,
direct or permit any of its Representatives to, directly or indirectly, (i)
solicit, initiate, encourage or induce the making, submission or announcement
of any Kana Takeover Proposal (as defined below), (ii) participate in any
discussions or negotiations with any person regarding, or furnish to any person
any information with respect to, or take any other action to facilitate any
inquiry or proposal that constitutes or may reasonably be expected to lead to,
any Kana Takeover Proposal, (iii) authorize, approve or recommend any Kana
Takeover Proposal, or (iv) enter into any letter of intent or similar document
or any contract, agreement or commitment accepting or providing for any Kana
Takeover Proposal; provided, however, nothing herein shall prohibit Kana's
Board of Directors from complying with Rules 14d-9 and 14e-2 under the Exchange
Act; and provided, further, however, that this Section 6.03(a) shall not
prohibit Kana, before the approval by Kana stockholders of the issuance of Kana
Common Stock pursuant to this Agreement (the "Kana Voting Proposal"), from
furnishing information regarding Kana or entering into negotiations or
discussions with, any person or group in response to a Kana Takeover Proposal
submitted by such person or group (and not withdrawn) and, subject to the
provisions of Section 6.06 of this Agreement, endorsing and/or recommending a
Kana Superior Offer (as defined below), and any such actions shall not be
considered a breach of this Agreement to the extent they are taken in
compliance with the conditions and limitations set forth in this Agreement if
(1) neither Kana nor any of its Representatives shall have violated any of the
restrictions set forth in this Section 6.03(a) or Section 6.06, (2) the Board
of Directors of Kana determines in good faith, after considering the advice of
an investment bank of nationally recognized reputation, that such Kana Takeover
Proposal is substantially more favorable to Kana and its stockholders than the
Merger, taking into account the anticipated long-term value and strategic
benefits of the Merger to Kana stockholders, (3) the Board of Directors of Kana
concludes in good faith, after consultation with its outside legal counsel,
that failure to take such action would be inconsistent with the fiduciary
obligations of the Board of Directors of Kana to Kana stockholders under
applicable law, (4) prior to furnishing any such information to, or entering
into discussions or negotiations with, such person or group, Kana gives Silknet
written notice of the identity of such person or group, the terms and
conditions of the offer and Kana's intention to furnish information to, or
enter into discussions or negotiations with, such person or group, (5) Kana
receives from such person or group an executed confidentiality agreement which
shall not in any way restrict Kana from complying with its disclosure
obligations under this Agreement and which shall otherwise contain customary
limitations on the use and disclosure of all nonpublic written and oral
information furnished to such person or group by or on behalf of Kana and other
terms no less favorable to Kana than those set forth in the Confidentiality
Agreement, including with respect to such Kana Takeover Proposal), and (6)
contemporaneously with furnishing any such information to such person or group,
Kana furnishes such information to Silknet (to the extent that such information
has not been previously furnished by Kana to Silknet).
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(b) Kana and its Representatives will immediately cease and cause to be
terminated any and all existing discussions, negotiations, exchanges of
information and other activities with respect to any Kana Takeover Proposal.
Promptly following the execution and delivery of this Agreement, Kana shall (i)
inform each of its Representatives of the obligations undertaken in this
Section 6.03 and in the Confidentiality Agreement, and (ii) request each person
that has heretofore executed a confidentiality or non-disclosure agreement in
connection with its consideration of acquiring it or any of its Subsidiaries to
return to Kana all confidential information heretofore furnished to such person
by or on behalf of it or any of its Subsidiaries. Any violation of the
restrictions set forth in this Section 6.03 by any officer, director or
employee of Kana, any affiliate under the control of Kana, or any investment
banker, attorney, accountant or other agent, advisor or representative of Kana
shall be deemed to be a breach of this Section 6.03 by Kana. Kana shall notify
Silknet forthwith if any inquiries, proposals or offers relating to a Kana
Takeover Proposal are received by, any such information is requested from, or
any such discussions or negotiations are sought to be initiated or continued
with, Kana or any of its Representatives, indicating, in connection with such
notice, the name of the person making the inquiry, proposal or offer and the
material terms and conditions of any proposals or offers. Thereafter Kana shall
provide Silknet with a true and complete copy of such Kana Takeover Proposal or
communication (if it is in writing) and shall otherwise keep Silknet informed,
on a current basis, with respect to the status and terms of any such proposal
or offer and the status of any such negotiations or discussions.
(c) Kana and Silknet agree that irreparable damage would occur in the event
that the provisions of this Section 6.03 were not performed in accordance with
their specific terms or were otherwise breached. It is accordingly agreed by
the parties hereto that Silknet shall be entitled to seek an injunction or
injunctions to prevent breaches of this Section 6.03 and to enforce
specifically the terms and provisions hereof in any court of the United States
or any state having jurisdiction, this being in addition to any other remedy to
which the parties may be entitled at law or in equity.
(d) For purposes of this Agreement, "Kana Takeover Proposal" means any
offer or proposal for, or any indication of interest in, a merger or other
business combination involving an acquisition or a change in control of Kana or
the acquisition of a majority of the outstanding shares of capital stock of
Kana, or all or substantially all of the assets of Kana, or any other
transaction inconsistent with consummation of the transactions contemplated
hereby, which offer, proposal or indication of interest is conditioned on the
termination of this Agreement by Kana or the denial by Kana stockholders of the
Kana Voting Proposal.
Section 6.04 Nasdaq.
Each of Silknet and Kana agrees to continue the quotation of Kana Common
Stock and Silknet Common Stock, respectively, on the Nasdaq National Market,
during the term of this Agreement so that appraisal rights will not be
available to stockholders of Silknet under Section 262 of the DGCL.
Section 6.05 Access To Information.
Upon reasonable notice, Silknet and Kana shall each (and shall cause each
of their respective Subsidiaries to) afford to the officers, employees,
accountants, counsel and other representatives of the other, access, during
normal business hours during the period prior to the Effective Time, to all its
properties, books, contracts, commitments and records and, during such period,
each of Silknet and Kana shall (and shall cause each of their respective
Subsidiaries to) furnish promptly to the other (a) a copy of each report,
schedule, registration statement and other document filed or received by it
during such period pursuant to the requirements of federal securities laws and
(b) all other information concerning its business, properties and personnel as
such other party may reasonably request. Unless otherwise required by law, the
parties will hold any such information which is nonpublic in confidence in
accordance with the Confidentiality Agreement. No information or
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knowledge obtained in any investigation pursuant to this Section 6.05 shall
affect or be deemed to modify any representation or warranty contained in this
Agreement or the conditions to the obligations of the parties to consummate the
Merger.
Section 6.06 Stockholders Meetings.
(a) Promptly after the date hereof, Silknet will take all action reasonably
necessary in accordance with the DGCL and its Certificate of Incorporation and
by-laws to cause the Silknet Stockholders' Meeting to be held as promptly as
practicable for the purpose of voting upon this Agreement and the Merger, and
Kana will take all action reasonably necessary in accordance with the DGCL and
its Certificate of Incorporation and by-laws to cause the Kana Stockholders'
Meeting to be held as promptly as practicable for the purpose of voting upon
the Kana Voting Proposal. Unless otherwise mutually agreed by Kana and Silknet,
Kana and Silknet shall coordinate and cooperate with respect to the timing of
such meetings and shall use their reasonable best efforts to hold such meetings
on the same day and as soon as practicable after the date hereof. Subject to
their rights under Section 8.01(i) and Section 8.01(j), Silknet and Kana shall
solicit from their respective stockholders proxies in favor of the approval and
adoption of this Agreement and approval of the Merger (in the case of Silknet
stockholders) and the Kana Voting Proposal (in the case of Kana stockholders),
and will take all other action necessary or advisable to secure the vote or
consent of their respective stockholders required by the rules of Nasdaq or the
DGCL to obtain such approvals; provided, however, that neither Silknet nor Kana
shall be required to take any action that its respective Board of Directors
determines in good faith after consultation with outside legal counsel would be
inconsistent with its fiduciary duties to its stockholders under applicable
law. Notwithstanding anything to the contrary contained in this Agreement,
Silknet may adjourn or postpone the Silknet Stockholders' Meeting, and Kana may
adjourn or postpone the Kana Stockholders' Meeting, to the extent that (i) such
adjournment or postponement is necessary to ensure that any necessary
supplement or amendment to the Prospectus/Proxy Statement is provided to such
party's stockholders in advance of the applicable vote or (ii) additional time
is reasonably required to solicit proxies in favor of the approvals required by
Section 7.01(a) or (iii) as of the time for which such stockholders' meeting is
originally scheduled (as set forth in the Prospectus/Proxy Statement) there are
insufficient shares represented (either in person or by proxy) to constitute a
quorum necessary to conduct the business of such stockholders' meeting. Silknet
shall ensure that Silknet Stockholders' Meeting is called, noticed, convened,
held and conducted, and that all proxies solicited by Silknet in connection
with Silknet Stockholders' Meeting are solicited, and Kana shall ensure that
Kana Stockholders' Meeting is called, noticed, convened, held and conducted,
and that all proxies solicited by Kana in connection with Kana Stockholders'
Meeting are solicited, in compliance with the DGCL, applicable charter
documents, the rules of Nasdaq and all other applicable legal requirements.
(b) (i) The Board of Directors of Silknet shall recommend that Silknet
stockholders vote in favor of the approval and adoption of this Agreement and
approval of the Merger at the Silknet Stockholders' Meeting; (ii) the
Prospectus/Proxy Statement shall include a statement to the effect that the
Board of Directors of Silknet has recommended that Silknet stockholders vote in
favor of the approval and adoption of this Agreement and approval of the Merger
at Silknet Stockholders' Meeting; and (iii) neither the Board of Directors of
Silknet nor any committee thereof shall withdraw, amend or modify, or propose
or resolve to withdraw, amend or modify in a manner adverse to Kana the
recommendation of the Board of Directors of Silknet that Silknet stockholders
vote in favor of the approval and adoption of this Agreement and approval of
the Merger; provided, however, that nothing in this Agreement shall prevent the
Board of Directors of Silknet from withholding, withdrawing, amending or
modifying its recommendation in favor of approval and adoption of this
Agreement and approval of the Merger if: (A) a Silknet Superior Offer is made
to Silknet and is not withdrawn, (B) neither Silknet nor any of its
representatives shall have violated any of the restrictions set forth in
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Section 6.02, (C) five business days elapse following delivery by Silknet to
Kana of written notice advising Kana that the Board of Directors of Silknet
intends to withhold, withdraw, amend or modify its recommendation; and (D) the
Board of Directors of Silknet concludes in good faith, after considering
applicable state law and consultation with its outside counsel, that, in light
of such Silknet Superior Offer, the failure to withhold, withdraw, amend or
modify such recommendation would be inconsistent with the fiduciary duties of
the Board of Directors of Silknet to Silknet stockholders under applicable law.
For purposes of this Agreement, "Silknet Superior Offer" shall mean an
unsolicited, bona fide written offer made by a third party to consummate any of
the following transactions: (x) a merger, consolidation, business combination,
recapitalization, liquidation, dissolution or similar transaction involving
Silknet pursuant to which the stockholders of Silknet immediately preceding
such transaction hold less than fifty percent (50%) of the equity interest in
the surviving or resulting entity of such transaction; (y) a sale or other
disposition by Silknet of assets (excluding inventory and used equipment sold
in the ordinary course of business) representing all or substantially all of
Silknet's assets, or (z) the acquisition by any person or group (including by
way of a tender offer or an exchange offer or issuance by Silknet), directly or
indirectly, of beneficial ownership or a right to acquire beneficial ownership
of shares representing fifty percent (50%) or more of the voting power of the
then outstanding shares of capital stock of Silknet, in each case on terms
that, in the good faith judgment of the Board of Directors of Silknet (after
consultation with an investment bank of nationally recognized reputation) are
substantially more favorable to Silknet stockholders than the Merger (after
taking into account all relevant factors, including the anticipated long-term
value and strategic benefits of the Merger to Silknet stockholders, any
conditions to the Silknet Superior Offer, the timing of the consummation of the
transaction pursuant to the Silknet Superior Offer, the risk of nonconsummation
thereof and the need for any required governmental or other consents, filings
and approvals); provided, however, that an offer shall only be a Silknet
Superior Offer if any financing required to consummate the transaction
contemplated by such offer is committed or is otherwise reasonably likely in
the good faith judgment of Silknet's Board of Directors to be obtained by such
third party on a timely basis.
(c) Subject to the right of Silknet to terminate this Agreement pursuant to
Section 8.01(i), nothing contained in Section 6.06(b) shall limit Silknet's
obligation to call, give notice of, convene and hold the Silknet Stockholders'
Meeting (regardless of whether the recommendation of the Board of Directors of
Silknet shall have been withdrawn, amended or modified and regardless of
whether any Silknet Takeover Proposal has been commenced, disclosed, or
announced).
(d) (i) The Board of Directors of Kana shall recommend that Kana
stockholders vote in favor of approval of the Kana Voting Proposal at the Kana
Stockholders' Meeting; (ii) the Prospectus/Proxy Statement shall include a
statement to the effect that the Board of Directors of Kana has recommended
that Kana stockholders vote in favor approval of the Kana Voting Proposal
pursuant to this Agreement at the Kana Stockholders' Meeting; and (iii) neither
the Board of Directors of Kana nor any committee thereof shall withdraw, amend
or modify, or propose or resolve to withdraw, amend or modify in a manner
adverse to Silknet the recommendation of the Board of Directors of Kana that
Kana stockholders vote in favor approval of the Kana Voting Proposal pursuant
to this Agreement; provided, however, that nothing in this Agreement shall
prevent the Board of Directors of Kana from withholding, withdrawing, amending
or modifying its recommendation in favor of approval and adoption of this
Agreement and approval of the Merger if (A) a Kana Superior Offer is made to
Kana and is not withdrawn, (B) neither Kana nor any of its representatives
shall have violated any of the restrictions set forth in Section 6.03, (C) five
business days elapse following delivery by Kana to Silknet of written notice
advising Silknet that the Board of Directors of Kana intends to withhold,
withdraw, amend or modify its recommendation absent modification of the terms
and conditions of this Agreement, and (D) the Board of Directors of Kana
concludes in good faith, after considering applicable state law and
consultation with its outside counsel, that, in light of such Kana Superior
Offer, the failure to withhold, withdraw, amend or modify such recommendation
would be inconsistent
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with the fiduciary duties of the Board of Directors of Kana to Kana
stockholders under applicable law. For purposes of this Agreement, "Kana
Superior Offer" shall mean an unsolicited, bona fide written offer made by a
third party to consummate any of the following transactions: (x) a merger,
consolidation, business combination, recapitalization, liquidation, dissolution
or similar transaction involving Kana pursuant to which the stockholders of
Kana immediately preceding such transaction hold less than fifty percent (50%)
of the equity interest in the surviving or resulting entity of such
transaction; (y) a sale or other disposition by Kana of assets (excluding
inventory and used equipment sold in the ordinary course of business)
representing all or substantially all of Kana's assets, or (z) the acquisition
by any person or group (including by way of a tender offer or an exchange offer
or issuance by Kana), directly or indirectly, of beneficial ownership or a
right to acquire beneficial ownership of shares representing fifty percent
(50%) or more of the voting power of the then outstanding shares of capital
stock of Kana, in each case on terms that, in the good faith judgment of the
Board of Directors of Kana (after consultation with an investment bank of
nationally recognized reputation) are substantially more favorable to Kana or
its stockholders than the Merger (after taking into account all relevant
factors, including the anticipated long-term value and strategic benefits of
the Merger to Kana and its stockholders, any conditions to the Kana Superior
Offer, the timing of the consummation of the transaction pursuant to the Kana
Superior Offer, the risk of nonconsummation thereof and the need for any
required governmental or other consents, filings and approvals); provided,
however, that an offer shall only be a Kana Superior Offer if any financing
required to consummate the transaction contemplated by such offer is committed
or is otherwise reasonably likely in the good faith judgment of Kana's Board of
Directors to be obtained by such third party on a timely basis.
(e) Subject to the right of Kana to terminate this Agreement pursuant to
Section 8.01(j), nothing contained in Section 6.06(d) shall limit Kana's
obligation to call, give notice of, convene and hold the Kana Stockholders'
Meeting (regardless of whether the recommendation of the Board of Directors of
Kana shall have been withdrawn, amended or modified and regardless of whether
any Kana Takeover Proposal has been commenced, disclosed, or announced).
(f) Kana may also submit additional proposals to its stockholders at the
Kana Stockholders' Meeting (including a proposal to amend its Certificate of
Incorporation to increase the number of authorized shares of Kana Common Stock
or amend its Stock Incentive Plan to increase the number of Kana Common Stock
issuable thereunder) that are not inconsistent with Kana's obligations under
this Agreement, separate from the proposal referred to in Section 3.20. The
approval by Kana stockholders of such additional proposals shall not be a
condition to the closing of the Merger under this Agreement.
Section 6.07 Legal Conditions To Merger.
(a) Silknet and Kana shall each use all requisite commercially reasonable
efforts to (i) take, or cause to be taken, all appropriate action, and do, or
cause to be done, all things necessary and proper under applicable law to
consummate and make effective the transactions contemplated hereby as promptly
as practicable, (ii) obtain from any Governmental Entity or any other third
party any consents, licenses, permits, waivers, approvals, authorizations, or
orders required to be obtained or made by Silknet or Kana or any of their
Subsidiaries in connection with the authorization, execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby
including the Merger, and (iii) as promptly as practicable, make all necessary
filings, and thereafter make any other required submissions, with respect to
this Agreement and the Merger required under (A) the Securities Act and the
Exchange Act, and any other applicable federal or state securities laws, and
(B) any other applicable law. Silknet and Kana shall cooperate with each other
in connection with the making of all such filings, including providing copies
of all such documents to the non-filing party and its advisors prior to filing
and, if requested, to accept all reasonable additions, deletions or changes
suggested in connection therewith. Silknet and Kana shall use commercially
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reasonable efforts to furnish to each other all information required for any
application or other filing to be made pursuant to the rules and regulations of
any applicable law (including all information required to be included in the
Joint Proxy Statement/Prospectus and the Registration Statement) in connection
with the transactions contemplated by this Agreement.
(b) Kana and Silknet agree, and shall cause each of their respective
Subsidiaries, to cooperate and to use their respective commercially reasonable
efforts to obtain any government clearances required for Closing, to respond to
any government requests for information, and to contest and resist any action,
including any legislative, administrative or judicial action, and to have
vacated, lifted, reversed or overturned any decree, judgment, injunction or
other order (whether temporary, preliminary or permanent) (an "Order") that
restricts, prevents or prohibits the consummation of the Merger or any other
transactions contemplated by this Agreement, including by vigorously pursuing
all available avenues of administrative and judicial appeal and all available
legislative action.
(c) Each of Silknet and Kana shall give (or shall cause their respective
Subsidiaries to give) any notices to third parties, and use, and cause their
respective Subsidiaries to use, commercially reasonable efforts to obtain any
third party consents related to or required in connection with the Merger that
are (i) necessary to consummate the transactions contemplated hereby, (ii)
disclosed or required to be disclosed in the Silknet Disclosure Schedule or the
Kana Disclosure Schedule, as the case may be, or (iii) required to prevent a
Silknet Material Adverse Effect or a Kana Material Adverse Effect from
occurring.
Section 6.08 Public Disclosure.
Kana and Silknet shall consult with each other before issuing any press
release or otherwise making any public statement with respect to the Merger or
this Agreement and shall not issue any such press release or make any such
public statement prior to such consultation, except as may be required by law.
Section 6.09 Tax-Free Reorganization.
Kana and Silknet shall each use all requisite commercially reasonable
efforts to cause the Merger to be treated as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code.
Section 6.10 Nasdaq Quotation.
Kana shall use all requisite commercially reasonable efforts to cause the
shares of Kana Common Stock to be issued in the Merger to be approved for
quotation on the Nasdaq National Market, subject to official notice of
issuance, prior to the Closing Date.
Section 6.11 Stock Plans and Warrants.
(a) At the Effective Time, each outstanding option to purchase shares of
Silknet Common Stock (a "Silknet Stock Option") under the Silknet Stock Plans,
whether vested or unvested, shall be assumed and shall constitute an option to
acquire, on the same terms and conditions as were applicable under such Silknet
Stock Option, the same number of shares of Kana Common Stock as the holder of
such Silknet Stock Option would have been entitled to receive pursuant to the
Merger had such holder exercised such option in full immediately prior to the
Effective Time (rounded downward to the nearest whole number), at a price per
share (rounded upward to the nearest whole cent) equal to (y) the aggregate
exercise price for the shares of Silknet Common Stock purchasable pursuant to
such Silknet Stock Option immediately prior to the Effective Time divided by
(z) the number of full shares of Kana Common Stock deemed purchasable pursuant
to such Silknet Stock Option in accordance with the foregoing. All outstanding
rights of Silknet that it may hold immediately
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prior to the Effective Time to repurchase unvested shares of Silknet Common
Stock issued or issuable under any of the Silknet Stock Plans (the "Repurchase
Options") shall be assigned to Kana and shall thereafter be exercisable by Kana
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 shall be adjusted to reflect the Exchange Ratio.
(b) As soon as practicable after the Effective Time, Kana shall deliver to
the participants in Silknet Stock Plans appropriate notice setting forth such
participants' rights pursuant thereto and the grants pursuant to Silknet Stock
Plans shall continue in effect on the same terms and conditions (subject to the
adjustments required by this Section 6. 11 after giving effect to the Merger).
Consistent with the terms of the Silknet Stock Plans and the documents
governing the outstanding options under those plans, the Merger shall not
result in the termination of any outstanding options under the Silknet Stock
Plans that are so assumed by Kana or the shares of Kana Common Stock that will
be subject to those options upon Kana's assumption of the options in the
Merger. All holders of Silknet stock options shall have the right to exercise
such options following the Effective Time, with full credit given to all of the
provisions of the existing stock option agreements and the Silknet stock option
plans, including provisions regarding vesting and service relating to any
predecessor corporation acquired by Silknet and including the vesting
acceleration provisions pursuant to which the vesting date of all options shall
accelerate by one year upon a change in control such as the Merger. It is the
intention of the parties that the options so assumed by Kana qualify following
the Effective Time as incentive stock options as defined in Section 422 of the
Code to the extent such options qualified as incentive stock options prior to
the Effective Time. Within 30 business days after the Effective Time, provided
that Kana has received within 10 business days after the Effective Time all
option documentation it requires relating to the outstanding options, Kana will
issue to each person who, immediately prior to the Effective Time, is a holder
of an outstanding option under the Silknet stock option plans that is to be
assumed by Kana hereunder, a document in form and substance reasonably
satisfactory to Silknet evidencing the foregoing assumption of such option by
Kana, including provisions regarding vesting and service relating to any
predecessor corporation acquired by Silknet and its subsidiaries and including
the vesting acceleration provisions pursuant to which the vesting date of all
options shall accelerate by one year upon a change in control such as the
Merger. For purposes of clarity, an option to purchase 10,000 shares of Silknet
Common Stock which but for the Merger would, immediately prior to the Effective
Time, be vested with respect to 2,500 shares of Silknet Common Stock and
scheduled to vest with respect to 2,500 shares of Silknet Common Stock in each
of the first, second and third years following the Effective Time shall,
immediately prior to the Effective Time, accelerate such that it is vested with
respect to 5,000 shares of Silknet Common Stock (2,500 previously vested; 2,500
accelerated by one year) and scheduled to vest with respect to 2,500 shares of
Silknet Common Stock in each of the first and second years following the
Effective Time and thereafter be fully vested and exercisable in accordance
with its terms.
(c) Kana shall take all corporate action necessary to reserve for issuance
a sufficient number of shares of Kana Common Stock for delivery under Silknet
Stock Plans assumed in accordance with this Section 6.11. As soon as
practicable and in no event more than thirty (30) business days after the
Effective Time, provided that Kana has received within 10 business days after
the Effective Time all option documentation it requires relating to the
outstanding options, Kana shall file a registration statement on Form S-8 (or
any successor forms), subject to such options and shall use commercially
reasonable efforts to maintain the effectiveness of such registration statement
or registration statements (and maintain the current status of the prospectus
or prospectuses contained therein) for so long as such options remain
outstanding. Silknet shall cooperate with and assist Kana in the preparation of
such registration statements.
(d) The Board of Directors of Silknet shall, prior to or as of the
Effective Time, take all necessary actions, pursuant to and in accordance with
the terms of the Silknet Stock Plans and the
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instruments evidencing the Silknet Stock Options, to provide for the conversion
of the Silknet Stock Options into options to acquire Kana Common Stock in
accordance with this Section 6.11, and that no consent of the holders of the
Silknet Stock Options is required in connection with such conversion.
(e) The Board of Directors of Silknet shall, prior to or as of the
Effective Time, take appropriate action to approve the deemed cancellation of
the Silknet Stock Options for purposes of Section 16(b) of the Exchange Act.
The Board of Directors of Kana shall, prior to or as of the Effective Time,
take appropriate action to approve the deemed grant of options to purchase Kana
Common Stock under the Silknet Stock Options (as converted pursuant to this
Section 6.11) for purposes of Section 16(b) of the Exchange Act.
(f) Effective as of the date that is two business days prior to the Closing
Date, Silknet shall take, or cause to be taken, all action necessary to amend
the Silknet ESPP to (a) provide that the Silknet ESPP, and all future payment
periods thereunder, shall terminate on the business day immediately prior to
the first semi-annual entry date under the Kana Employee Stock Purchase Plan
that is at least 30 business days following the Effective Time (the "Kana Entry
Date"), and (b) any purchase rights that are outstanding on the business day
immediately prior to the Kana Entry Date shall be exercised immediately prior
to the Plan termination. Outstanding purchase rights under the Silknet ESPP
shall be assumed by Kana at the Effective Time. On the Closing Date, Silknet
shall deliver to Kana a complete list of all holders of outstanding purchase
rights under the Silknet ESPP, including payroll deduction amounts elected by
each holder and the price per share of Silknet Common Stock at the beginning of
the current Silknet ESPP payment period. Each such purchase right so assumed by
Kana under this Agreement shall continue to have, and be subject to, the same
terms and conditions set forth in the Silknet ESPP and the documents governing
the outstanding purchase rights under the Silknet ESPP, immediately prior to
the Effective Time, except that the purchase price of shares of Kana Common
Stock and the number of shares of Kana Common Stock to be issued upon the
exercise of the assumed purchase right under the Silknet ESPP shall be adjusted
in accordance with the Exchange Ratio. On the date the assumed purchase rights
under the Silknet ESPP are exercised in accordance with the foregoing, each
participant in the Silknet ESPP shall accordingly be issued shares of Kana
Common Stock upon such purchase (adjusted for the Exchange Ratio). The Silknet
ESPP, and all outstanding purchase rights thereunder, shall terminate with such
purchase date, and no purchase rights shall be subsequently granted or
exercised under the Silknet ESPP. Silknet employees who meet the eligibility
requirements for participation in the Kana Employee Stock Purchase Plan (giving
credit for service to Silknet for purposes of determining eligibility) shall be
eligible to begin payroll deductions under that plan as of the first semi-
annual entry date thereunder after the Effective Time.
(g) Within five (5) business days following the date of this Agreement,
Silknet shall set forth on Schedule 6.11(g) a list of all persons who Silknet
reasonably believes are, with respect to Silknet and as of the date of this
Agreement, "disqualified individuals" (within the meaning of Section 280G of
the Code and the regulations promulgated thereunder). Within five (5) business
days prior to the Closing Date, Silknet shall revise Schedule 6.11(g) to
reflect any additional information that Silknet reasonably believes would
impact the determination of persons who are, with respect to Silknet, such
"disqualified individuals."
(h) At the Effective Time, Kana shall assume all outstanding warrants to
exercise Silknet Common Stock ("Silknet Warrants") which have not expired or
been exercised prior thereto. Each Silknet Warrant so assumed by Kana under
this Agreement shall continue to have, and be subject to, the same terms and
conditions as were applicable to such Silknet Warrant immediately prior to the
Effective Time (including, without limitation, any repurchase rights or vesting
provisions), provided that (A) such Silknet Warrant shall be exercisable for
that number of whole shares of Kana Common Stock equal to the product of the
number of shares of Silknet Common Stock that were issuable
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upon exercise of such Silknet Warrant immediately prior to the Effective Time
multiplied by the Exchange Ratio applicable to the Silknet Common Stock subject
to such Silknet Warrant (rounded down to the nearest whole number of shares of
Kana Common Stock) and (B) the per share exercise price for the shares of Kana
Common Stock issuable upon exercise of such assumed Silknet Warrant shall be
equal to the quotient determined by dividing the exercise price per share of
Silknet Common Stock at which such Silknet Warrant was exercisable immediately
prior to the Effective Time by the Exchange Ratio applicable to the series of
Silknet Common Stock subject to such Silknet Warrant (rounded up to the nearest
whole cent). Kana shall, from and after the Effective Time, upon exercise of
the Silknet Warrants in accordance with the terms thereof, make available for
issuance all shares of Kana Common Stock covered thereby and shall, as promptly
as practicable after the Effective Time, issue to each holder of an outstanding
Silknet Warrant a document evidencing the foregoing assumption by Kana.
Section 6.12 Stock Option and Voting Agreements.
Concurrently with the execution and delivery of this Agreement, Silknet and
Kana shall (a) execute and deliver the Silknet Stock Option Agreement and the
Kana Stock Option Agreement in the form annexed hereto as Exhibit C and Exhibit
D, respectively, and (b) cause each of their respective directors and executive
officers and each of their respective controlled affiliates listed on Schedule
6.12 herewith to execute and deliver voting agreements and irrevocable proxies
in the applicable forms annexed hereto as Exhibits A and B (the "Voting
Agreements"), agreeing, among other things, to vote in favor of the Merger and
against any competing proposals. Silknet and Kana shall each take all corporate
action necessary to reserve for issuance a sufficient number of shares of its
common stock for delivery upon an exercise in full of the option granted to
Kana in the Silknet Stock Option Agreement and to Silknet in the Kana Stock
Option Agreement.
Section 6.13 Board Composition.
Kana and the Kana Board of Directors shall take all action required to
increase the size of the Board to nine (9) as of the Effective Time and to
cause the election promptly after the Election Time by the Kana Board of James
C. Wood to the Kana Board for at least a period of one (1) year following the
Closing Date.
Section 6.14 Brokers Or Finders.
Each of Kana and Silknet represents, as to itself, its Subsidiaries and its
affiliates, that no agent, broker, investment banker, financial advisor or
other firm or person is or will be entitled to any broker's or finder's fee or
any other commission or similar fee in connection with any of the transactions
contemplated by this Agreement except Credit Suisse First Boston, whose fees
and expenses will be paid by Silknet in accordance with Silknet's agreement
with such firm (copies of which have been delivered by Silknet to Kana prior to
the date of this Agreement), and Goldman, Sachs & Co., whose fees and expenses
will be paid by Kana in accordance with Kana's agreement with such firm (a copy
of which has been delivered by Kana prior to the date of this Agreement). Each
of Kana and Silknet agrees to indemnify and hold the other harmless from and
against any and all claims, liabilities or obligations with respect to any such
fees, commissions or expenses asserted by any person on the basis of any act or
statement alleged to have been made by such party or any of its Affiliates.
Section 6.15 Stand-Off Agreements.
On or before the Effective Time, each officer and director of Silknet and
Kana and affiliates controlled by Silknet or Kana will execute a Market Stand-
Off Agreement in substantially the form attached hereto as Exhibit E (the
"Stand-Off Agreement").
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Section 6.16 Registration Rights.
On or before the Effective Time, Kana shall use all commercially reasonable
efforts to amend its Fourth Amended and Restated Investors Rights Agreement to
provide registration rights to Silknet Principal Stockholders which possess
rights to cause their Silknet Common Stock to be registered, on a basis pari
passu with the holders of Kana registration rights, substantially in the form
of Exhibit F hereto (the "Rights Agreement Amendment").
Section 6.17 Indemnification.
(a) From and after the Effective Time, Kana agrees that it will, and will
cause the Surviving Corporation to, indemnify and hold harmless each present
and former director and officer of Silknet (the "Indemnified Parties"), against
any costs or expenses (including attorneys' fees), judgments, fines, losses,
claims, damages, liabilities or amounts paid in settlement (collectively,
"Costs") incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative,
arising out of or pertaining to matters existing or occurring at or prior to
the Effective Time, whether asserted or claimed prior to, at or after the
Effective Time, to the fullest extent that Silknet would have been permitted
under Delaware law and its certificate of incorporation or bylaws in effect on
the date hereof to indemnify such Indemnified Party (and Kana and the Surviving
Corporation shall also advance expenses as incurred to the fullest extent
permitted under applicable law, provided the Indemnified Party to whom expenses
are advanced provides an undertaking to repay such advances if it is ultimately
determined that such Indemnified Party is not entitled to indemnification).
(b) For a period of six (6) years after the Effective Time, Kana shall
cause the Surviving Corporation to maintain (to the extent available in the
market) in effect a directors' and officers' liability insurance policy
covering those persons who are currently covered by Silknet's directors' and
officers' liability insurance policy (a copy of which has been heretofore
delivered to Kana) with coverage in amount and scope at least as favorable as
Silknet's existing coverage; provided, that in no event shall Kana or the
Surviving Corporation be required to expend in excess of two hundred percent
(200%) of the annual premium currently paid by Silknet for such coverage as
heretofore disclosed by Silknet to Kana (the "Current Premium"); and if such
premium would at any time exceed 200% of the Current Premium, then the
Surviving Corporation shall maintain insurance policies which provide the
maximum and best coverage available at an annual premium equal to two hundred
percent (200%) of the Current Premium.
(c) The provisions of this Section 6.17 are intended to be an addition to
the rights otherwise available to the current officers and directors of Silknet
by law, charter, statute, bylaw or agreement, and shall operate for the benefit
of, and shall be enforceable by, each of the Indemnified Parties, their heirs
and their representatives.
(d) To the extent there is any claim, action, suit, proceeding or
investigation (whether arising before or after the Effective Time) against any
Indemnified Party that arises out of or pertains to any action or omission in
his or her capacity as a director, officer, employee, principal stockholder,
fiduciary or agent of Silknet occurring prior to the Effective Time, or arises
out of or pertains to the transactions contemplated by this Agreement for a
period of six years after the Effective Time (whether arising before or after
the Effective Time), such Indemnified Party shall be entitled to be represented
by counsel and following the Effective Time (i) any counsel retained by the
Indemnified Parties shall be reasonably satisfactory to the Surviving
Corporation and Kana, (ii) the Surviving Corporation and Kana shall pay as
incurred the reasonable fees and expenses of such counsel, promptly after
statement therefor are received, and (iii) the Surviving Corporation and Kana
will cooperate in the defense of any such matter; provided, however, that
neither the Surviving Corporation nor Kana shall be liable for any settlement
effected without its written consent (which
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consent shall not be unreasonably withheld, conditioned or delayed); and
provided, further, that, in the event that any claim or claims for
indemnification are asserted or made within such six-year period, all rights to
indemnification in respect to any such claim or claims shall continue until the
final disposition of any and all such claims. The Indemnified Parties as a
group may retain only one law firm to represent them with respect to any single
action unless there is, under applicable standards of professional conduct, a
conflict on any significant issue between the positions of any two or more
Indemnified Parties. The provisions of this Section are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party, his or her
heirs and representatives.
Section 6.18 Benefit Plans.
Kana agrees that, during the period commencing at the Effective Time and
continuing for a reasonable period thereafter, the employees of Silknet and its
Subsidiaries will continue to be provided with benefits under employee benefit
plans (other than stock option or other plans involving the potential issuance
of securities) each of which are listed in Section 3.13 of the Silknet
Disclosure Schedule which are substantially as favorable in the aggregate as
those currently provided by Silknet and its Subsidiaries to such employees
(except with respect to the 401(k) plan as provided below).
(a) Unless Kana consents otherwise in writing, Silknet shall take all
action necessary to terminate, or cause to terminate, before the Effective
Time, any Silknet Employee Plan that is a 401(k) plan or other defined
contribution retirement plan or employee stock purchase plan. Kana shall permit
the rollover of the accounts of participants in the Silknet 401(k) plans to the
Kana 401(k) plan (including outstanding loans of those participants who became
employees of Kana).
(b) Kana shall include Silknet employees in Kana's welfare plans (within
the meaning of Section 3(1) of ERISA) and fringe benefit plans on the same
basis and terms as Silknet employees currently participate and, in any event,
with respect to particular welfare plans of Kana, upon the termination of the
Silknet welfare plans. All welfare benefit plans of Kana or the Surviving
Corporation in which Silknet's employees participate after the Effective Time
shall (i) recognize expenses and claims that were incurred by Silknet'
employees in the year in which the Effective Time occurs and entitle Silknet
employees to applicable co-payments and deductibles, if any, at a rate not
higher than that in effect under the corresponding welfare benefit plan of
Silknet in effect at the Effective Time, and (ii) provide coverage for
preexisting health conditions to the extent covered under the applicable plans
or programs of Silknet as of the Effective Time. In addition, for eligibility
purposes under plans of the Surviving Corporation or Kana, service by an
employee for Silknet or any of its subsidiaries and any predecessor prior to
the Effective Time shall be taken into account to the same extent as service
for Kana; provided, that nothing hereby shall require the inclusion any such
employee in any such plan prior to the Effective Time, and further provided,
that in determining the amount of vacation pay owed to any such Silknet
employee from and after the Effective Time under the applicable terms of the
vacation pay plan of the Surviving Corporation or Kana (which terms need not be
comparable to the terms of the vacation plan or policy of Silknet or any of its
subsidiaries and any predecessor), credit shall be given for such employee's
service for Silknet or any of its subsidiaries and any predecessor corporation
prior to the Effective Time. Employees of Silknet or any of its subsidiaries
and any predecessor corporation as of the Effective Time shall be permitted to
participate in Kana's Employee Stock Purchase Plan (the "Kana ESPP") (if any)
commencing on the first enrollment date following the Effective Time, subject
to compliance with the eligibility provisions of such plan (with employees
receiving credit, for purposes of such eligibility provisions, for service with
Silknet or any of its subsidiaries and any predecessor corporation. In
addition, for eligibility and vesting purposes (but not for benefit computation
or accrual purposes) under plans of the Surviving Corporation or the Parent,
service by an employee for Silknet, its subsidiaries and any of their
predecessor corporations prior to the Effective Time shall be taken into
account to the same extent as service for Kana. Notwithstanding the foregoing,
for a period of no less than one year after the Effective Time, Kana
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shall provide severance and termination benefits to employees of Silknet that
are no less favorable than those provided by Silknet to such Silknet employees
as of the date hereof.
(c) With respect to each benefit plan, program practice, policy or
arrangement maintained by Kana (the "Kana Employee Plans") in which employees
of Silknet subsequently participate, Kana will recognize such employee's
cumulative prior service to Silknet and its subsidiaries (and their predecessor
corporation) for purposes of determining eligibility to participate in and for
the vesting of benefits under such Kana Employee Plans; provided that such
recognition shall not be for the purpose of determining retirement benefits and
accrual. Such service also shall apply for purposes of satisfying any waiting
periods, evidence of insurability requirements, or the application of any pre-
existing condition limitations. Each Kana Employee Plan shall waive pre-
existing condition limitations to the same extent waived under the applicable
Silknet benefit plan. Silknet Employees shall be given credit for amounts paid
under a corresponding benefit plan during the same period for purposes of
applying deductibles, co-payments and out-of-pocket maximums as though such
amounts had been paid in accordance with the terms and conditions of the Kana
Employee Plan.
Section 6.19 Registration Statement; Joint Proxy Statement/Prospectus.
If at any time prior to the Effective Time any event relating to Silknet or
any of its Affiliates, officers or directors should be discovered by Silknet
which should be set forth in an amendment to the Registration Statement or a
supplement to the Joint Proxy Statement/Prospectus, Silknet shall promptly
inform Kana. If at any time prior to the Effective Time any event relating to
Kana or any of its Affiliates, officers or directors should be discovered by
Kana which should be set forth in an amendment to the Registration Statement or
a supplement to the Joint Proxy Statement/Prospectus, Kana shall promptly
inform Silknet.
Section 6.20 Section 16.
Assuming that Silknet delivers to Kana the Section 16 Information (as
defined below) in a timely fashion, the Board of Directors of Kana, or a
committee of two or more "non-employee directors" thereof (as such item is
defined for purposes of Rule 16b-3 under the Exchange Act), shall adopt
resolutions prior to the consummation of the Merger, providing that the receipt
by Silknet Insiders (as defined below) of Kana Common Stock in exchange for
Silknet Common Stock, and of options and warrants for Kana Common Stock upon
conversion of outstanding options and warrants of Silknet, in each case
pursuant to the transactions contemplated hereby and to the extent such
securities are listed in the Section 16 Information, are intended to be exempt
from liability pursuant to Section 16(b) under the Exchange Act. Such
resolutions shall comply with the approval conditions of Rule 16b-3 under the
Exchange Act for purposes of such Section 16(b) exemption, including, but not
limited to, specifying the name of Silknet Insiders, the number of equity
securities to be acquired or disposed of for each such person, the material
terms of any derivative securities, and that the approval is intended to make
the receipt of such securities exempt pursuant to Rule 16b-3(d). "Section 16
Information" shall mean information accurate in all respects regarding Silknet
Insiders, the number of Silknet Common Stock (or options or warrants therefor,
collectively, the "Options") held by each such Silknet Insider and expected to
be exchanged for Kana Common stock in the Merger, and the number and
description of the Options held by each such Silknet Insider and expected to be
converted into options or warrants for Kana Common Stock in connection with the
Merger. "Silknet Insiders" shall mean those officers, directors and 10%
stockholders of Silknet who will be subject to the reporting requirements of
Section 16(b) of the Exchange Act with respect to Kana and who are listed in
the Section 16 Information.
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ARTICLE VII.
CONDITIONS TO MERGER
Section 7.01 Conditions To Each Party's Obligation To Effect The Merger.
The respective obligations of each party to this Agreement to effect the
Merger shall be subject to the satisfaction prior to the Closing Date of the
following conditions:
(a) Stockholder Approval. This Agreement and the Merger shall have been
approved and adopted by the affirmative vote of the holders of a majority of
the outstanding shares of Silknet Common Stock and the Kana Voting Proposal
shall have been approved by the affirmative vote of the holders of a majority
of the shares of Kana Common Stock present or represented at the Kana
Stockholders' Meeting at which a quorum is present.
(b) Approvals. Other than the filing provided for by Section 1.01, all
authorizations, consents, orders or approvals of, or declarations or filings
with, or expirations of waiting periods imposed by, any Governmental Entity
shall have been obtained or made or shall have expired, other than those, the
absence of which would not reasonably be expected to have a Kana Material
Adverse Effect or Silknet Material Adverse Effect and would not prohibit or
render unlawful the consummation of the Merger.
(c) Registration Statement. The Registration Statement shall have become
effective under the Securities Act and shall not be the subject of any stop
order or proceedings seeking a stop order.
(d) No Legal Impediment. No Governmental Entity or federal, state or
foreign court of competent jurisdiction shall have enacted, issued,
promulgated, enforced or entered any Order, statute, rule or regulation which
is in effect and which has the effect of making the Merger unlawful or
otherwise prohibiting consummation of the Merger.
(e) Nasdaq. The shares of Kana Common Stock to be issued in the Merger
shall have been approved for quotation on the Nasdaq.
Section 7.02 Additional Conditions To Obligations Of Kana And Merger Sub.
The obligations of Kana and Merger Sub to effect the Merger are subject to
the satisfaction of each of the following conditions, any of which may be
waived in writing exclusively by Kana and Merger Sub:
(a) Representations And Warranties. The representations and warranties of
Silknet set forth in this Agreement shall be true and correct as of the date of
this Agreement and as of the Closing Date as though made on and as of the
Closing Date, other than representations and warranties which speak as of an
earlier date (which shall be true and correct as of such earlier date) and
except for (i) changes contemplated by this Agreement and (ii) where the
failure to be true and correct, individually or in the aggregate, has not had
and will not, determined as of the Closing Date and solely with the passage of
time, have a Silknet Material Adverse Effect.
(b) Performance Of Obligations Of Silknet. Silknet shall have performed in
all material respects all obligations required to be performed by it under this
Agreement at or prior to the Closing Date.
(c) Certificate. Kana shall have received a certificate signed on behalf of
Silknet by the chief executive officer and the chief financial officer of
Silknet to the effect that the conditions set forth in Section 7.02(a) and
Section 7.02(b) are satisfied.
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(d) Stand-Off Agreements. Each officer and director of and each affiliate
controlled by Silknet shall have entered into Stand-Off Agreements, pursuant to
which each such person will agree not to sell, transfer, pledge, hypothecate or
otherwise dispose of any shares of Silknet Common Stock held as of the date of
such agreement or later acquired by such person for a period ending 90 days
after the Closing.
(e) Tax Opinion. Kana shall have received a written opinion from Brobeck,
Phleger & Harrison LLP, counsel to Kana, to the effect that the Merger will be
treated for federal income tax purposes as a tax-free reorganization within the
meaning of Section 368(a) of the Internal Revenue Code. The parties to this
Agreement shall make reasonable representations as requested by such counsel
for the purpose of rendering such opinion.
(f) Absence of Material Adverse Effect. No Silknet Material Adverse Effect
or Kana Material Adverse Effect shall have occurred, and no fact or
circumstance shall exist which will, determined as of the Closing Date and
solely with the passage of time, result in a Silknet Material Adverse Effect.
Section 7.03 Additional Conditions To Obligations Of Silknet.
The obligation of Silknet to effect the Merger is subject to the
satisfaction of each of the following conditions, any of which may be waived,
in writing, exclusively by Silknet:
(a) Representations And Warranties. The representations and warranties of
Kana and Merger Sub set forth in this Agreement shall be true and correct as of
the date of this Agreement and as of the Closing Date as though made on and as
of the Closing Date, other than representations which speak as of an earlier
date (which shall be true and correct as of such earlier date) and except for,
(i) changes contemplated by this Agreement and (ii) where the failures to be
true and correct, individually or in the aggregate, have not had and will not,
determined as of the Closing Date and solely with the passage of time, have a
Kana Material Adverse Effect.
(b) Performance Of Obligations Of Kana And Merger Sub. Kana and Merger Sub
shall have performed in all material respects all obligations required to be
performed by them under this Agreement at or prior to the Closing Date.
(c) Certificate. Silknet shall have received a certificate signed on behalf
of Kana by the chief executive officer and the chief financial officer of Kana
to the effect that the conditions set forth in Section 7.03(a) and Section
7.03(b) are satisfied.
(d) Stand-Off Agreements. Each officer and director of and each affiliate
controlled by Kana shall have entered into Stand-Off Agreements, pursuant to
which each such person will agree not to sell, transfer, pledge, hypothecate or
otherwise dispose of any shares of Kana Common Stock held as of the date of
such agreement or later acquired by such person for a period ending 90 days
after the Closing Date.
(e) Tax Opinion. Silknet shall have received the opinion of Testa, Hurwitz
&Thibeault, LLP, counsel to Silknet, to the effect that the Merger will be
treated for federal income tax purposes as a tax-free reorganization within the
meaning of Section 368(a) of the Internal Revenue Code. The parties to this
Agreement shall make reasonable representations as requested by such counsel
for the purpose of rendering such opinion.
(f) Absence of Kana Material Adverse Effect. No Kana Material Adverse
Effect shall have occurred, and no fact or circumstance shall exist which will,
determined as of the Closing Date and solely with the passage of time, result
in a Kana Material Adverse Effect.
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(g) Rights Agreement Amendment. Kana shall have delivered the Rights
Agreement Amendment.
Section 7.04 Frustration of Closing Conditions.
Neither Kana, Merger Sub nor Silknet may rely on the failure of any
condition set forth in Section 7.01, 7.02 or 7.03, as the case may be, to be
satisfied if such failure was caused by such party's failure to use reasonable
efforts to consummate the Merger and the other transactions contemplated by
this Agreement and the Stock Option Agreements, as required by and subject to
Section 6.07.
ARTICLE VIII.
TERMINATION AND AMENDMENT
Section 8.01 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
Silknet, this Agreement may be terminated:
(a) by mutual consent duly authorized by the Boards of Directors of Kana
and Silknet;
(b) by either Kana or Silknet, if the Closing shall not have occurred on or
before July 31, 2000 (provided, that the right to terminate this Agreement
under this Section 8.01(b) shall not be available to any party whose action or
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
material breach of this Agreement);
(c) by Kana, if (i) Silknet shall have breached any representation or
warranty made as of the date of this Agreement, or shall breach any obligation
or agreement hereunder in a manner causing conditions precedent to the Closing
not to be satisfied and such breach shall not have been cured within twenty
(20) business days of receipt by Silknet of written notice of such breach,
provided that the right to terminate this Agreement by Kana under this Section
8.01(c)(i) shall not be available to Kana where Kana is at that time in
material breach of this Agreement, or (ii) the Board of Directors of Silknet
shall have omitted, withdrawn or modified its recommendation of this Agreement
or the Merger in a manner adverse to Kana or recommended, endorsed, accepted or
agreed to a Silknet Takeover Proposal or shall have resolved to do any of the
foregoing;
(d) by Silknet, if (i) Kana shall have breached any representation or
warranty made as of the date of this Agreement, or shall breach any obligation
or agreement hereunder in a manner causing conditions precedent to the Closing
not to be satisfied and such breach shall not have been cured within twenty
(20) business days following receipt by Kana of written notice of such breach,
provided that the right to terminate this Agreement by Silknet under this
Section 8.01(d)(i) shall not be available to Silknet where Silknet is at that
time in material breach of this Agreement, or (ii) the Board of Directors of
Kana shall have omitted, withdrawn or modified its recommendation of this
Agreement or the Merger in a manner adverse to Silknet or recommended,
endorsed, accepted or agreed to a Kana Takeover Proposal or shall have resolved
to do any of the foregoing;
(e) by Kana 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, (ii) if any required approval of the
stockholders of Silknet 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
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any adjournment thereof, or (iii) the Kana Voting Proposal is not obtained at
the Kana Stockholders Meeting or at any adjournment thereof; or
(f) by Silknet 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, (ii) if any required approval of the
stockholders of Silknet 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 (iii) the Kana Voting Proposal
is not obtained at the Kana Stockholders Meeting or at any adjournment thereof.
(g) by Kana, if Silknet or any of its Representatives shall participate in
discussions or negotiations, or take any other action, in breach (other than an
immaterial breach) of Section 6.02.
(h) by Silknet, if Kana or any of its Representatives shall participate in
discussions or negotiations, or take any other action, in breach (other than an
immaterial breach) of Section 6.03.
(i) by Silknet, in response to a Silknet Superior Offer which was not
solicited by Silknet; provided that Silknet shall have complied in all material
respects with its obligations under Sections 6.02 (no-shop) and 6.06
(stockholder meetings) and such Silknet Superior Offer did not otherwise result
from a breach of any of Silknet's obligations under this Agreement; and
provided further, that no termination pursuant to this Section 8.01(i) shall be
effective until after the fifth business day following Kana's receipt of
written notice advising Kana that the Board of Directors of Silknet is prepared
to accept a Silknet Superior Offer, specifying the material terms and
conditions of such Silknet Superior Offer and identifying the person making
such Silknet Superior Offer; and the payment of any applicable termination fee
pursuant to Section 8.03.
(j) by Kana, in response to a Kana Superior Offer which was not solicited
by Kana; provided that Kana shall have complied in all material respects with
its obligations under Sections 6.03 (no-shop) and 6.06 (stockholder meetings)
and such Kana Superior Offer did not otherwise result from a breach of any of
Kana's obligations under this Agreement; and provided further, that no
termination pursuant to this Section 8.01(j) shall be effective until after the
fifth business day following Silknet's receipt of written notice advising
Silknet that the Board of Directors of Kana is prepared to accept a Kana
Superior Offer, specifying the material terms and conditions of such Kana
Superior Offer and identifying the person making such Kana Superior Offer; and
the payment of any applicable termination fee pursuant to Section 8.03.
Section 8.02 Effect of Termination.
In the event of termination of this Agreement as provided in Section 8.01,
this Agreement shall forthwith become void and there shall be no liability or
obligation on the part of Kana or Silknet or their respective officers,
directors, security holders or affiliates, except as provided in Section 8.03
and/or except to the extent that such termination results from the breach by a
party hereto of any of its representations, warranties, covenants or agreements
set forth in this Agreement involving fraud, intentional misrepresentation or
willful misconduct; provided that the provisions of Section 8.03 and this
Section 8.02 shall remain in full force and effect and survive any termination
of this Agreement.
Section 8.03 Expenses and Termination Fees.
(a) Subject to Sections 8.03(b) and 8.03(c), whether or not the Merger is
consummated, all costs and expenses incurred in connection with this Agreement,
related agreements and documents and the transactions contemplated hereby and
thereby (including the fees and expenses of its advisers, accountants and legal
counsel) shall be paid by the party incurring such expense.
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(b) In the event that (i) after a Silknet Takeover Proposal has been made
to Silknet or to Silknet stockholders generally or otherwise has become
publicly known, this Agreement shall be terminated by Kana pursuant to Section
8.01(c)(i) or Section 8.01(e)(ii) or by Silknet pursuant to Section 8.01(f)(ii)
or by either party pursuant to Section 8.01(b), or (ii) this Agreement shall be
terminated by Kana pursuant to Section 8.01(c)(ii) (other than as a result of a
change in the Silknet Board's recommendation based on a right of termination by
Silknet under Section 8.01(d)(i)), or Section 8.01(g), or (iii) this Agreement
shall be terminated by Silknet pursuant to Section 8.01(i), then, in any such
event, in addition to any other remedies Kana may have, Silknet shall pay to
Kana the sum of one hundred forty-eight million three hundred thousand dollars
($148,300,000), (x) which shall be due and payable in full upon termination of
this Agreement (in the case of termination by Silknet pursuant to Section
8.01(i)) and (y) forty million dollars ($40,000,000) of which shall be due and
payable upon termination of this Agreement and the balance of which shall be
due and payable upon the consummation of a Silknet Takeover Proposal at any
time prior to the first anniversary of the termination of this Agreement (in
all other cases within the scope of this Section 8.03(b)). All payments
pursuant to Section 8.03(b) shall be made by wire transfer of same-day funds to
an account specified by Kana.
(c) In the event that (i) after a Kana Takeover Proposal has been made to
Kana or to Kana stockholders generally or otherwise has become publicly known,
this Agreement shall be terminated by Silknet pursuant to Section 8.01(d)(i) or
Section 8.01(f)(iii) or by Silknet pursuant to Section 8.01(e)(iii) or by
either party pursuant to Section 8.01(b), or (ii) this Agreement shall be
terminated by Silknet pursuant to Section 8.01(d)(ii) (other than as a result
of a change in the Kana Board's recommendation based on the occurrence of a
circumstance giving rise to a right of termination by Kana under Section
8.01(c)(i)), or Section 8.01(h), or (iii) this Agreement shall be terminated by
Kana pursuant to Section 8.01(j), then, in any such event, in addition to any
other remedies Silknet may have, Kana shall pay to Silknet the sum of one
hundred forty-eight million three hundred thousand dollars ($148,300,000), (x)
which shall be due and payable in full upon termination of this Agreement (in
the case of termination by Kana pursuant to Section 8.01(j)) and (y) forty
million dollars ($40,000,000) of which shall be due and payable upon
termination of this Agreement and the balance of which shall be due and payable
upon the consummation of a Kana Takeover Proposal at any time prior to the
first anniversary of the termination of this Agreement (in all other cases
within the scope of this Section 8.03(c)). All payments pursuant to Section
8.03(c) shall be made by wire transfer of same-day funds to an account
specified by Silknet.
(d) Each party acknowledges that the agreements contained in this Section
8.03 are an integral part of the transactions contemplated by this Agreement,
and that, without these agreements, the other party would not enter into this
Agreement; accordingly, if a party fails promptly to pay the amount due
pursuant to this Section 8.03 and, in order to obtain such payment, the other
party commences a suit which results in a judgment or settlement for the fee
set forth in this Section 8.03, the liable party shall pay to the party
commencing such suit its costs and expenses (including attorneys' fees and
expenses) in connection with such suit, together with interest on the amount of
the fee at the prime rate of Citibank, N.A. in effect on the date such payment
was required to be made.
Section 8.04 Amendment.
This Agreement may be amended by the parties hereto, by action taken or
authorized by their respective Boards of Directors, at any time before or after
approval of the matters presented in connection with the Merger by the
stockholders of Silknet or of Kana, but, after any such approval, no amendment
shall be made which by law requires further approval by such stockholders
without such further approval. This Agreement may not be amended except by a
written instrument signed on behalf of each of the parties hereto.
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Section 8.05 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 or (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 a written instrument
signed on behalf of such party.
ARTICLE IX.
MISCELLANEOUS
Section 9.01 Nonsurvival Of Representations, Warranties And Agreements.
None of the representations, warranties and agreements in this Agreement or
in any instrument delivered pursuant to this Agreement shall survive the
Effective Time, except for the agreements contained in Section 1.04, Section
2.01, Section 2.02, Section 6.13, Section 6.14, Section 6.15, Section 6.17,
Section 6.18, Section 19 and Article IX. The Confidentiality Agreement between
Kana and Silknet dated as of February 1, 2000 (the "Confidentiality Agreement")
shall survive the execution and delivery of this Agreement.
Section 9.02 Notices.
All notices and other communications hereunder shall be in writing and
shall be deemed given if delivered personally or by a nationally recognized
express overnight courier service, telecopied (which is confirmed) or mailed by
registered or certified mail (return receipt requested), to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
(a) if to Kana or Merger Sub, to:
Kana Communications, Inc.
740 Bay Road
Redwood City, CA 94063
Fax: (650) 474-8501
Attn.: Chief Executive Officer
with a copy to:
Warren T. Lazarow, Esq.
David A. Makarechian, Esq.
Brobeck, Phleger & Harrison LLP
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303
Fax: (650) 496-2885
and to:
Rod J. Howard, Esq.
Brobeck, Phleger & Harrison LLP
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303
Fax: (650) 496-2777
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(b) if to Silknet, to:
Silknet Software Inc.
50 Phillippe Cote Street
Manchester, NH 03101
Fax: (603) 625-0428
Attn.: Chief Executive Officer
with a copy to:
John Hession, Esq.
Testa, Hurwitz & Thibeault, LLP
Oliver Street Tower
125 High Street
Boston, MA 02110
Fax: (617) 248-7100
Section 9.03 Definitions.
For purposes of this Agreement:
(a) "Silknet Material Adverse Effect" means any change, effect, event,
occurrence, state of facts or development that is materially adverse to the
business, financial condition or results of operations of Silknet and its
Subsidiaries, taking Silknet and its Subsidiaries together as a whole,
provided, however, that none of the following shall be deemed either alone or
in combination, to constitute a Material Adverse Effect; (a) any change in the
market price or trading volume of Silknet after the date hereof; (b) any
failure by Silknet to meet the revenue or earnings predictions or other
expectations of equity analysts, or any decrease in revenues from prior
periods, for any period ending (or for which earnings are released) on or after
the date of this Agreement; (c) any adverse effect on the bookings, revenues,
gross margins or earnings of Silknet (or the direct consequence thereof)
following the date of this Agreement which is directly and primarily
attributable to or arises directly and primarily from a delay of, reduction in
or cancellation or change in the terms or timing of product orders by customers
of Silknet or any change in the timing of projects or implementations,
purchasing patterns or habits of Silknet customers, whether current or
prospective, or any indecision of any such customer regarding Silknet products
or Services; (d) any change arising directly and primarily out of conditions
affecting the electronic customer relationship management (eCRM) market, the
U.S. economy as a whole or the international economy as a whole or any
political, economic or social instability in any such markets or economies; (e)
any termination or modification of any existing Silknet contract with a
customer or termination or modifications of negotiations between Silknet and
its customers (however, this proviso shall not exclude any underlying change,
effect, event, occurrence, state of facts or development which results in a
change in price or trading volume within the scope of clause (a) or a failure
to meet estimates, predictions or expectations within the scope of clause (b).
(b) "Kana Material Adverse Effect" means any change, effect, event,
occurrence, state of facts or development that is, materially adverse to the
business, financial condition or results of operations of Kana and its
Subsidiaries, taking Kana and its Subsidiaries together as a whole, provided,
however, that none of the following shall be deemed either alone or in
combination, to constitute a Material Adverse Effect; (a) any change in the
market price or trading volume of Kana after the date hereof; (b) any failure
by Kana to meet the revenue or earnings predictions or other expectations of
equity analysts, or any decrease in revenues from prior periods, for any period
ending (or for which earnings are released) on or after the date of this
Agreement; (c) any adverse effect on the bookings, revenues, gross margins or
earnings of Kana (or for direct consequence thereof) following the date of this
Agreement which is directly and primarily attributable to or arises directly
and primarily from a
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delay of, reduction in or cancellation or change in the terms or timing of
product orders by customers of Kana or any change in the timing of projects or
implementations, purchasing patterns or habits of Kana customers, whether
current or prospective, or any indecision of any such customer regarding Kana
products or services; (d) any change arising directly and primarily out of
conditions affecting the electronic customer relationship management (eCRM)
markets, the U.S. economy as a whole or the international economy as a whole or
any political, economic or social instability in any such markets or economies;
(e) any termination or modification of any existing Kana contract with a
customer or termination or modifications of negotiations between Kana and its
customers (however, this proviso shall not exclude any underlying change,
effect, event, occurrence, state of facts or developments which results in a
change in price or trading volume within the scope of clause (a) or a failure
to meet estimates, predictions or expectations within the scope of clause (b)).
Section 9.04 Interpretation.
When a reference is made in this Agreement to Sections, such reference
shall be to a Section of this Agreement unless otherwise indicated. 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. Whenever the words "include," "includes" or "including" are used in
this Agreement they shall be deemed 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 of similar import, unless the context
otherwise requires, shall be deemed to refer to February 6, 2000.
Section 9.05 Counterparts.
This Agreement may be executed in two or more counterparts, all of which
shall be considered one and the same agreement and shall become effective when
two 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.
Section 9.06 Entire Agreement; No Third Party Beneficiaries.
This Agreement (including the documents and the instruments referred to
herein) (a) constitute the entire agreement and supersedes all prior agreements
and understandings, both written and oral, among the parties with respect to
the subject matter hereof, and (b) except as provided in Section 6.14 are not
intended to confer upon any person other than the parties hereto any rights or
remedies hereunder; provided that the Confidentiality Agreement shall remain in
full force and effect until the Effective Time. Each party hereto agrees that,
except for the representations and warranties contained in this Agreement,
neither Silknet nor Kana makes any other representations or warranties, and
each hereby disclaims any other representations and warranties made by itself
or any of its officers, directors, employees, agents, financial and legal
advisors or other representatives, with respect to the execution and delivery
of this Agreement or the transactions contemplated hereby, notwithstanding the
delivery or disclosure to the other or the other's representatives of any
documentation or other information with respect to any one or more of the
foregoing.
Section 9.07 Governing Law.
This Agreement shall be governed and construed in accordance with the laws
of the State of Delaware, including matters relating to merger procedure,
corporate governance and fiduciary duty without regard to any applicable
conflicts of law. All disputes or controversies shall be settled in the
Delaware Chancery Court and each party irrevocably and unconditionally consents
and submits to the jurisdiction of the courts of the State of Delaware for any
actions, suits or proceedings arising out of or relating to this Agreement and
the transactions contemplated hereby.
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Section 9.08 Assignment.
Neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by any of the parties hereto (whether by operation
of law or otherwise) without the prior written consent of the other parties.
Subject to the preceding sentence, this Agreement will be binding upon, inure
to the benefit of and be enforceable by the parties and their respective
successors and assigns.
[SIGNATURE PAGE FOLLOWS]
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<PAGE>
IN WITNESS WHEREOF, Kana, Merger Sub and Silknet have caused this Agreement
to be signed by their respective officers thereunto duly authorized as of the
date first written above.
KANA COMMUNICATIONS, INC. PISTOL ACQUISITION CORP.
/s/
By: _________________________________ /s/
By: _________________________________
Title: Chief Executive Officer Title: President
SILKNET SOFTWARE INC.
/s/
By: _________________________________
Title: Chief Executive Officer
[SIGNATURE PAGE TO AGREEMENT AND PLAN OF REORGANIZATION]
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<PAGE>
EXHIBIT A
SILKNET STOCK VOTING AGREEMENT
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<PAGE>
EXHIBIT B
KANA STOCK VOTING AGREEMENT
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<PAGE>
EXHIBIT C
SILKNET STOCK OPTION AGREEMENT
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<PAGE>
EXHIBIT D
KANA STOCK OPTION AGREEMENT
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<PAGE>
EXHIBIT E
STAND-OFF AGREEMENT
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<PAGE>
EXHIBIT F
RIGHTS AMENDMENT AGREEMENT
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<PAGE>
APPENDIX II
KANA STOCK VOTING AGREEMENT
THIS KANA STOCK VOTING AGREEMENT ("Kana Stock Voting Agreement") is made
and entered into as of February 6, 2000 by and between Silknet Software Inc., a
Delaware corporation ("Silknet"), and the undersigned director, officer or
affiliate (the "Holder") of Kana Communications, Inc., a Delaware corporation
("Kana").
Recitals
Concurrently with the execution of this Kana Stock Voting Agreement,
Silknet, Pistol Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of Kana ("Sub"), and Kana have entered into an Agreement and Plan of
Reorganization, dated as of February 6, 2000 (the "Merger Agreement") providing
for the merger of Sub with and into Silknet (the "Merger"). As a result of the
Merger, which is intended to qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended, Silknet will
become a wholly-owned subsidiary of Kana and stockholders of Silknet will
become stockholders of Kana. Holder is the holder of record and the beneficial
owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) of the number of shares of the capital stock of
Kana indicated on the signature page of this Kana Stock Voting Agreement (the
"Shares"). As a condition to its execution and delivery of the Merger
Agreement, Silknet has requested that Holder agree, and in consideration, and
to induce the execution and delivery, of the Merger Agreement by Silknet,
Holder is willing to agree (i) not to transfer or otherwise dispose of the
Shares or any other shares of capital stock of Kana acquired after the date of
this Kana Stock Agreement and prior to the expiration of this Kana Stock Voting
Agreement, except as specifically permitted hereby, and (ii) to vote the Shares
and any other such shares of Kana stock so as to facilitate consummation of the
Merger, as more fully described below.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties agree as follows:
Agreement
Section 1 No Transfer or Encumbrance of Shares. Holder agrees not to sell,
pledge, assign, encumber, dispose of or otherwise transfer (including by
merger, testamentary disposition, interspousal disposition pursuant to a
domestic relations proceeding or otherwise by operation of law) ("transfer")
any of the Shares or any New Shares (as defined below), or to make any offer or
agreement relating thereto at any time prior to the expiration of this Kana
Stock Voting Agreement. The foregoing restrictions shall not prohibit a
transfer of shares or New Shares (i) in the case of an individual, to any
member of his immediate family, to a trust for the benefit of Holder or any
member of his immediate family or a transfer of Shares or New Shares upon the
death of Holder, (ii) in the case of a partnership or limited liability
company, to one or more partners or members or to an affiliated corporation, or
(iii) which Holder can not prevent (it being understood that Holder shall use
his best efforts to prevent transfers other than pursuant to (i) and (ii)
hereof; provided, however, that any transferee with respect to a transfer
permitted under (i) or (ii) shall, as a precondition to such transfer, agree in
a writing delivered to Silknet, to be bound by the terms and conditions of this
Kana Stock Voting Agreement. This Kana Stock Voting Agreement shall expire on
the earlier of (a) the date and time on which the Merger shall become effective
in accordance with the terms of the Merger Agreement or (b) the date on which
the Merger Agreement shall be terminated pursuant to Section 8.01 of the Merger
Agreement (the "Expiration Date"). Holder agrees that any shares of
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capital stock of Kana that Holder purchases or with respect to which Holder
otherwise acquires beneficial ownership after the date of this Kana Stock
Voting Agreement and prior to the Expiration Date ("New Shares") shall be
subject to the terms and conditions of this Kana Stock Voting Agreement to the
same extent as if such shares constituted Shares.
Section 2 Agreement to Vote Shares. Holder hereby agrees to appear, or,
using Holder's best efforts and to the full extent legally permitted, cause the
holder of record on any applicable record date to appear in person or by proxy
for the purpose of obtaining a quorum at any annual or special meeting of
stockholders of the Company and at any adjournment thereof at which matters
relating to the Merger, the Merger Agreement or any transaction contemplated
thereby are considered. At every meeting of the Kana stockholders called with
respect to any of the following, and at any adjournment thereof, Holder shall
vote or, using Holder's best efforts and to the full extent legally permitted,
cause the holder of record to vote the Shares and any New Shares (except those
Shares or New Shares which are not voting securities):
(a) in favor of approval of the issuance of shares of Kana stock
pursuant to the Merger Agreement, and any proposal or action which would,
or could reasonably be expected to, facilitate the Merger;
(b) against approval of any proposal made in opposition to or
competition with consummation of the Merger and the Merger Agreement;
(c) against any merger, consolidation or other business combination of
Kana with, sale of assets or stock of Kana to, or reorganization or
recapitalization involving Kana, other than as contemplated or permitted
by the Merger Agreement;
(d) against any liquidation, or winding up of Kana; and
(e) against any other proposal or action which would, or could
reasonably be expected to, impede, frustrate, prevent, prohibit or
discourage the Merger (each of (b) through (e) collectively, an "Opposing
Proposal").
Holder, as the holder of voting stock of Kana, shall be present, in person or
by proxy, or, using Holder's best efforts and to the full extent legally
permitted, cause the holder of record to be present, in person or by proxy, at
all meetings of stockholders of Kana so that all Shares and New Shares are
counted for the purposes of determining the presence of a quorum at such
meetings. This Kana Stock Voting Agreement is intended to bind Holder only with
respect to the specific matters set forth herein, and shall not prohibit Holder
from acting in accordance with Holder's fiduciary duties as an officer or
director of Kana.
Section 3 Option Exercise. Holder agrees that if, at any meeting of
stockholders of Kana called with respect to any of (a) through (e) of Section 2
hereof, the number of shares of Kana's capital stock voting in accordance with
(a) through (e) of Section 2 hereof shall not be enough to prevail in such
vote, Holder will immediately exercise any and all options and warrants, or
otherwise convert or exercise any securities, beneficially owned by him (to the
full extent permitted by applicable law) in order to vote all New Shares
resulting from such exercise or conversion in accordance with Section 2 hereof.
Silknet hereby agrees that, in the event Holder is required pursuant to this
Section 3 to convert or exercise any securities and upon request by Holder,
Silknet will make a loan, evidenced by a promissory note and on reasonable
terms, to Holder (or any third party) in the amount of any tax imposed on
Holder (or such third party) solely as a result of such conversion or exercise.
Section 4 Irrevocable Proxy. Concurrently with the execution of this Kana
Stock Voting Agreement, Holder agrees to deliver to Silknet a proxy in the form
attached hereto as Annex A (the "Proxy"), which shall be irrevocable to the
extent provided therein; provided, however, that the Proxy shall be revoked
upon termination of this Kana Stock Voting Agreement in accordance with its
terms.
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Section 5 Representations, Warranties and Covenants of Holder. Holder
hereby represents, warrants and covenants to Silknet as follows:
(a) Ownership of Shares. Holder (i) is the holder of record or
beneficial owner or holder of the voting power of the Shares and will be
the holder of record or beneficial owner or holder of the voting power of
all New Shares, if any, which at the date hereof and at all times until
the Expiration Date will be free and clear of any liens, claims, options,
charges or other encumbrances that would interfere with the voting of the
Shares or the granting of any proxy with respect thereto, (ii) does not
beneficially own any shares of capital stock of Kana other than the Shares
(except to the extent that Holder currently disclaims beneficial ownership
in accordance with applicable law) and (iii) has full power and authority
to make, enter into, deliver and carry out the terms of this Kana Stock
Voting Agreement and the Proxy.
(b) No Voting Trusts and Agreements. Between the date of this
Agreement and the Expiration Date, Holder will not, and will not permit
any entity under Holder's control to, deposit any shares of Kana capital
stock held by Holder or such entity in a voting trust or subject any
shares of Kana capital stock held by such Holder or such entity to any
arrangement or agreement with respect to the voting of such shares of
capital stock, other than agreements entered into with Silknet.
(c) Validity; No Conflict. This Kana Stock Voting Agreement
constitutes the legal, valid and binding obligation of Holder. Neither the
execution of this Kana Stock Voting Agreement by Holder nor the
consummation of the transactions contemplated herein will violate or
result in a breach of (i) any provision of any trust, charter, partnership
agreement or other charter document applicable to Holder, (ii) any
agreement to which Holder is a party or by which Holder is bound, (iii)
any decree, judgment or order to which Holder is subject, or (iv) any law
or regulation now in effect applicable to Holder.
(d) No Proxy Solicitations. Subject to the last sentence of Section 2,
between the date of this Agreement and the Expiration Date, Holder will
not, and will not permit any entity under Holder's control, to (i) solicit
proxies or become a "participant" in a "solicitation" (as such terms are
defined in Rule 14A under the Exchange Act) with respect to an Opposing
Proposal or otherwise encourage or assist any party in taking or planning
any action which would compete with, restrain or otherwise serve to
interfere with or inhibit the timely consummation of the Merger in
accordance with the terms of the Merger Agreement, (ii) initiate a
stockholders' vote with respect to an Opposing Proposal or (iii) become a
member of a "group" (as such term is used in Section 13(d) of the Exchange
Act) with respect to any voting securities of Kana with respect to an
Opposing Proposal.
Section 6 Representations, Warranties and Covenants of Silknet. Silknet
represents, warrants and covenants to Holder as follows:
(a) Due Authorization. This Kana Stock Voting Agreement has been
authorized by all necessary corporate action on the part of Silknet and
has been duly executed by a duly authorized officer of Silknet.
(b) Validity; No Conflict. This Kana Stock Voting Agreement
constitutes the legal, valid and binding obligation of Silknet. Neither
the execution of this Kana Stock Voting Agreement by Silknet nor the
consummation of the transactions contemplated herein will violate or
result in a breach of (i) any agreement to which Silknet is a party or by
which Silknet is bound, (ii) any decree, judgment or order to which
Silknet is subject, or (iii) any law or regulation now in effect
applicable to Silknet.
Section 7 Additional Documents. Holder and Silknet hereby covenant and
agree to execute and deliver any additional documents necessary or desirable,
in the reasonable opinion of Silknet's
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<PAGE>
legal counsel or Holder, as the case may be, to carry out the intent of this
Kana Stock Voting Agreement.
Section 8 Legending of Shares. Upon the request of Silknet, Holder agrees
that it shall forthwith surrender all certificates representing the Shares so
that they shall bear a conspicuous legend stating that they are subject to this
Agreement (and the restrictions on transfer provided for herein) and to an
Irrevocable Proxy. Subject to the terms of Section 2 hereof, Stockholder agrees
that it shall not Transfer the Shares without first having the aforementioned
legend affixed to the certificates representing the Shares.
Section 9 Consent and Waiver. Holder hereby gives any consent or waiver
reasonably required for the consummation of the Merger under the terms of any
agreement to which Holder is a party.
Section 10 Termination. Notwithstanding any other provision contained
herein, this Kana Stock Voting Agreement and the Proxy, and all obligations of
Holder hereunder and thereunder, shall terminate as of the Expiration Date.
Section 11 No Solicitation.
(a) Until the earlier of the Effective Time (as defined in the Merger
Agreement) or a valid termination of the Merger Agreement pursuant to
Article VIII thereof, Holder will not, and will not authorize, direct or
permit any of its officers, directors, employees, affiliates under its
control, investment bankers, attorneys, accountants or other agents,
advisors or representatives (collectively, "Representatives") to, directly
or indirectly, (i) solicit, initiate, encourage or induce the making,
submission or announcement of any Kana Takeover Proposal (as defined
below), (ii) participate in any discussions or negotiations with any
person regarding, or furnish to any person any information with respect
to, or take any other action to facilitate any inquiry or proposal that
constitutes or may reasonably be expected to lead to, any Kana Takeover
Proposal, (iii) authorize, approve or recommend any Kana Takeover
Proposal, or (iv) enter into any letter of intent or similar document or
any contract, agreement or commitment accepting or providing for any Kana
Takeover Proposal.
(b) Holder and Silknet agree that irreparable damage would occur in
the event that the provisions of this Section 11 were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed by the parties hereto that Silknet shall be entitled to
seek an injunction or injunctions to prevent breaches of this Section 11
and to enforce specifically the terms and provisions hereof in any court
of the United States or any state having jurisdiction, this being in
addition to any other remedy to which the parties may be entitled at law
or in equity.
(c) For purposes of this Agreement, "Kana Takeover Proposal" means any
offer or proposal for, or any indication of interest in, a merger or other
business combination involving an acquisition or a change in control of
Kana or the acquisition of a majority of the outstanding shares of capital
stock of Kana, or all or substantially all of the assets of Kana, or any
other transaction inconsistent with consummation of the transactions
contemplated hereby, which offer, proposal or indication of interest is
conditioned on the termination of the Merger Agreement by Kana or the
denial by Kana stockholders of the Kana Voting Proposal.
Section 12 Confidentiality. Holder agrees (i) to hold any information
regarding this Agreement and the Merger in strict confidence and (ii) not to
divulge any such information to any third person, except to the extent any of
the same is hereafter publicly disclosed by Silknet.
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Section 13 Miscellaneous.
(a) Severability. If any term, provision, covenant or restriction of
this Kana Stock Voting Agreement or the Proxy (i) is held by a court of
competent jurisdiction to be invalid, void or unenforceable for any
reason, or (ii) would preclude the Merger from qualifying as a
reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended, such term, provision, covenant or
restriction shall be modified or voided, as may be necessary to achieve
the intent of the parties to the extent possible, and the remainder of the
terms, provisions, covenants and restrictions of this Kana Stock Voting
Agreement shall remain in full force and effect and shall in no way be
affected, impaired or invalidated.
(b) Binding Effect and Assignment. This Kana Stock Voting Agreement
and all of the provisions hereof shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and
permitted assigns, but, except as otherwise specifically provided herein,
neither this Kana Stock Voting Agreement nor any of the rights, interests
or obligations of the parties hereto may be assigned by either of the
parties hereto without the prior written consent of the other, and any
attempted assignment thereof without such consent shall be null and void.
(c) Amendments and Modifications. This Kana Stock Voting Agreement may
not be modified, amended, altered or supplemented except upon the
execution and delivery of a written agreement executed by the parties
hereto.
(d) Specific Performance: Injunctive Relief. The parties hereto
acknowledge that Silknet will be irreparably harmed by a breach of any of
the covenants or agreements of Holder set forth herein and that there will
be no adequate remedy at law for such a breach. Therefore, it is agreed
that, in addition to any other remedies which may be available to Silknet
upon such breach, Silknet shall have the right to enforce such covenants
and agreements by specific performance, injunctive relief or by any other
means available to it at law or in equity.
(e) Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and sufficient if delivered
in person, by commercial overnight courier service, by confirmed telecopy,
or sent by mail (registered or certified mail, postage prepaid, return
receipt requested), to the respective parties as follows:
If to Silknet:
Silknet Software Inc.
The Gateway Building
50 Phillippe Cote Street
Fax: (603) 625-0070
Attention: Chief Executive Officer
If to Holder:
To the address for notice set forth on the last page hereof.
With a copy to:
Kana Communications, Inc.
740 Bay Road
Redwood City, CA 94063
Fax: (650) 474-8507
Attention: Chief Executive Officer
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and to:
Brobeck, Phleger & Harrison LLP
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303
Fax: (650) 496-2885
Attention: Warren T. Lazarow, Esq.
David A. Makarechian, Esq.
and to:
Brobeck, Phleger & Harrison LLP
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303
Fax: (650) 496-2777
Attention: Rod J. Howard, Esq.
or to such other address as either party may have furnished to the other
in writing in accordance herewith, except that notices of change of
address shall only be effective upon receipt.
(f) Governing Law. This Kana Stock Voting Agreement shall be governed
by, construed and enforced in accordance with the laws of the State of
Delaware, without giving effect to principles of conflicts of law. Each
party hereto irrevocably and unconditionally consents and submits to the
jurisdiction of the courts of the State of Delaware and of the United
States of America located in the State of Delaware for any actions, suits
or proceedings arising out of or relating to this agreement and the
transactions contemplated hereby.
(g) Entire Agreement. This Kana Stock Voting Agreement contains the
entire understanding of the parties with respect to the subject matter
hereof, and supersedes all prior negotiations and understandings between
the parties with respect to such subject matter.
(h) Counterparts. This Kana Stock Voting Agreement may be executed in
one or more counterparts, each of which shall be an original, but all of
which together shall constitute one and the same instrument.
(i) Effect of Headings. The section headings contained herein are for
convenience only and shall not affect the construction or interpretation
of this Kana Stock Voting Agreement.
(j) Holder Capacity. Notwithstanding anything herein to the contrary,
no person executing this Agreement who is, or becomes during the term
hereof, a director of Silknet makes any agreement or understanding herein
in his or her capacity as such director, and the agreements set forth
herein shall in no way restrict any director in the exercise of his or her
fiduciary duties as a director of Silknet. Holder has executed this
Agreement solely in his or her capacity as the record or beneficial holder
of such Holder's Shares or as the trustee of a trust whose beneficiaries
are the beneficial owners of such Holder's Shares.
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IN WITNESS WHEREOF, the parties have caused this Kana Stock Voting
Agreement to be duly executed on the day and year first above written.
SILKNET SOFTWARE INC.
By: _________________________________
Its: ________________________________
HOLDER
By: _________________________________
Holder's Address for Notice:
_____________________________________
_____________________________________
_____________________________________
Number of Shares owned beneficially:
_____________________________________
Number of Shares owned of record (if
different from above):
_____________________________________
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ANNEX A
IRREVOCABLE PROXY
The undersigned stockholder of Kana Communications, Inc., a Delaware
corporation ("Kana"), hereby irrevocably appoints and constitutes the members
of the Board of Directors of Silknet Software Inc., a Delaware corporation
("Silknet"), and each of them (the "Proxyholders"), the agents and proxies of
the undersigned, with full power of substitution and resubstitution, to the
full extent of the undersigned's rights with respect to the shares of capital
stock of Kana beneficially owned by the undersigned, which shares are listed
below and any and all other shares or securities issued or issuable in respect
thereof, or which the undersigned otherwise acquires, on or after the date
hereof and prior to the date this proxy terminates (collectively, the
"Shares"), to vote the Shares (except those Shares which are not voting
securities at the time of the vote, or are not converted into voting securities
at the time of a vote) as follows:
The agents and proxies named above are empowered at any time prior to
termination of this proxy to exercise all voting and other rights
(including, without limitation, the power to execute and deliver written
consents with respect to the Shares) of the undersigned at every annual,
special or adjourned meeting of Kana stockholders, and in every written
consent in lieu of such a meeting, or otherwise,
(a) in favor of (i) the issuance of shares of Kana stock pursuant to
the Agreement and Plan of Reorganization by and among Kana, Pistol
Acquisition Corp. ("Sub"), and Silknet, dated as of February 6, 2000, as
the same may be amended from time to time (the "Merger Agreement"), and
(ii) any proposal or action which would or could reasonably be expected to
facilitate the merger of Sub with and into Silknet pursuant to the Merger
Agreement (the "Merger");
(b) against approval of any proposal made in opposition to or
competition with consummation of the Merger and the Merger Agreement;
(c) against any merger, consolidation or other business combination of
Kana with, sale of assets or stock of Kana to, or reorganization or
recapitalization involving Kana, other than as contemplated or permitted
by the Merger Agreement;
(d) against any liquidation, or winding up of Kana; and
(e) against any other proposal or action which would, or could
reasonably be expected to, prohibit or discourage the Merger.
The Proxyholders may not exercise this proxy with respect to any other matter.
The undersigned may vote the Shares on all such other matters.
The proxy granted by the undersigned to the Proxyholders hereby is granted
as of the date of this Irrevocable Proxy in order to secure the obligations of
the undersigned set forth in Section 2 of the Kana Stock Voting Agreement, and
is irrevocable and coupled with an interest in such obligations and in the
interests in Kana to be purchased and sold pursuant the Merger Agreement. This
proxy will terminate upon the termination of the Kana Stock Voting Agreement in
accordance with its terms.
Upon the execution hereof, all prior proxies given by the undersigned with
respect to the Shares are hereby revoked, and no subsequent proxies will be
given with respect to the Shares until such time as this proxy shall be
terminated in accordance with its terms.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned. The undersigned authorizes the
Proxyholders to file this proxy and any substitution or revocation of
substitution with the Secretary of Kana and with any Inspector of Elections at
any meeting of the stockholders of Kana.
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This proxy is irrevocable and shall survive the insolvency, incapacity,
death or liquidation of the undersigned.
Dated: February , 2000.
Name of Stockholder: _______________________________________________________
Signature of Stockholder: __________________________________________________
Shares beneficially owned by Stockholder: __________________________________
Shares owned of record by Stockholder: _____________________________________
[Signature page to Irrevocable Proxy]
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APPENDIX III
SILKNET STOCK VOTING AGREEMENT
THIS SILKNET STOCK VOTING AGREEMENT ("Silknet Stock Voting Agreement") is
made and entered into as of February 6, 2000 by and between Kana
Communications, Inc., a Delaware corporation ("Kana"), and the undersigned
director, officer or affiliate (the "Holder") of Silknet Software Inc., a
Delaware corporation ("Silknet").
Recitals
Concurrently with the execution of this Silknet Stock Voting Agreement,
Kana, Pistol Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of Kana ("Sub"), and Silknet have entered into an Agreement and
Plan of Reorganization, dated as of February 6, 2000 (the "Merger Agreement")
providing for the merger of Sub with and into Silknet (the "Merger"). As a
result of the Merger, which is intended to qualify as a reorganization within
the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended, Silknet will become a wholly-owned subsidiary of Kana and
stockholders of Silknet will become stockholders of Kana. Holder is the holder
of record and the beneficial owner (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended, (the "Exchange Act")) of the
number of shares of the capital stock of Silknet indicated on the signature
page of this Silknet Stock Voting Agreement (the "Shares"). As a condition to
its execution and delivery of the Merger Agreement, Kana has requested that
Holder agree, and in consideration, and to induce the execution and delivery,
of the Merger Agreement by Kana, Holder is willing to agree (i) not to
transfer or otherwise dispose of the Shares or any other shares of capital
stock of Silknet acquired after the date of this Silknet Stock Agreement and
prior to the expiration of this Silknet Stock Voting Agreement, except as
specifically permitted hereby, and (ii) to vote the Shares and any other such
shares of Silknet stock so as to facilitate consummation of the Merger, as
more fully described below.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties agree as
follows:
Agreement
Section 1 No Transfer or Encumbrance of Shares. Holder agrees not to sell,
pledge, assign, encumber, dispose of or otherwise transfer (including by
merger, testamentary disposition, interspousal disposition pursuant to a
domestic relations proceeding or otherwise by operation of law) ("transfer")
any of the Shares or any New Shares (as defined below), or to make any offer
or agreement relating thereto at any time prior to the expiration of this
Silknet Stock Voting Agreement. The foregoing restrictions shall not prohibit
a transfer of Shares or New Shares (i) in the case of an individual, to any
member of his immediate family, to a trust for the benefit of Holder or any
member of his immediate family or a transfer of Shares or New Shares upon the
death of Holder, (ii) in the case of a partnership or limited liability
company, to one or more partners or members or to an affiliated corporation or
(iii) which Holder can not prevent (it being understood that Holder shall use
his best efforts to prevent transfers other than pursuant to (i) or (ii)
hereof); provided, however, that any transferee with respect to a transfer
permitted under (i) or (ii) shall, as a precondition to such transfer, agree
in a writing delivered to Kana, to be bound by the terms and conditions of
this Silknet Stock Voting Agreement. This Silknet Stock Voting Agreement shall
expire on the earlier of (a) the date and time on which the Merger shall
become effective in accordance with the terms of the Merger Agreement or (b)
the date on which the Merger Agreement shall be terminated pursuant to
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<PAGE>
Section 8.01 of the Merger Agreement (the "Expiration Date"). Holder agrees
that any shares of capital stock of Silknet that Holder purchases or with
respect to which Holder otherwise acquires beneficial ownership after the date
of this Silknet Stock Voting Agreement and prior to the Expiration Date ("New
Shares") shall be subject to the terms and conditions of this Silknet Stock
Voting Agreement to the same extent as if such shares constituted Shares.
Section 2 Agreement to Vote Shares. Holder hereby agrees to appear, or,
using Holder's best efforts and to the full extent legally permitted, cause the
holder of record on any applicable record date to appear in person or by proxy
for the purpose of obtaining a quorum at any annual or special meeting of
stockholders of the Company and at any adjournment thereof at which matters
relating to the Merger, the Merger Agreement or any transaction contemplated
thereby are considered. At every meeting of the Silknet stockholders called
with respect to any of the following, and at any adjournment thereof, Holder
shall vote or, using Holder's best efforts and to the full extent legally
permitted, cause the holder of record to vote the Shares and any New Shares
(except those Shares or New Shares which are not voting securities):
(a) in favor of adoption of the Merger Agreement and approval of the
Merger and any proposal or action which would, or could reasonably be
expected to, facilitate the Merger;
(b) against approval of any proposal made in opposition to or
competition with consummation of the Merger and the Merger Agreement;
(c) against any merger, consolidation or other business combination of
Silknet with, sale of assets or stock of Silknet to, or reorganization or
recapitalization involving Silknet with, any party other than Kana or an
affiliate of Kana as contemplated by the Merger Agreement;
(d) against any liquidation, or winding up of Silknet; and
(e) against any other proposal or action which would, or could
reasonably be expected to, impede, frustrate, prevent, prohibit or
discourage the Merger (each of (b) through (e) collectively, an "Opposing
Proposal").
Holder, as the holder of voting stock of Silknet, shall be present, in person
or by proxy, or, using Holder's best efforts and to the full extent legally
permitted, cause the holder of record to be present, in person or by proxy, at
all meetings of stockholders of Silknet so that all Shares and New Shares are
counted for the purposes of determining the presence of a quorum at such
meetings. This Silknet Stock Voting Agreement is intended to bind Holder only
with respect to the specific matters set forth herein, and shall not prohibit
Holder from acting in accordance with Holder's fiduciary duties as an officer
or director of Silknet.
Section 3 Option Exercise. Holder agrees that if, at any meeting of
stockholders of Silknet called with respect to any of (a) through (e) of
Section 2 hereof, the number of shares of Silknet's capital stock voting in
accordance with (a) through (e) of Section 2 hereof shall not be enough to
prevail in such vote, Holder will immediately exercise any and all options and
warrants, or otherwise convert or exercise any securities, beneficially owned
by him (to the full extent permitted by applicable law) in order to vote all
New Shares resulting from such exercise or conversion in accordance with
Section 2 hereof. Kana hereby agrees that, in the event Holder is required
pursuant to this Section 3 to convert or exercise any securities and upon
request by Holder, Kana will make a loan, evidenced by a promissory note and on
reasonable terms, to Holder (or any third party) in the amount of any tax
imposed on Holder (or such third party) solely as a result of such conversion
or exercise.
Section 4 Irrevocable Proxy. Concurrently with the execution of this
Silknet Stock Voting Agreement, Holder agrees to deliver to Kana a proxy in the
form attached hereto as Annex A (the "Proxy"), which shall be irrevocable to
the extent provided therein; provided, however, that the Proxy shall be revoked
upon termination of this Silknet Stock Voting Agreement in accordance with its
terms.
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Section 5 Representations, Warranties and Covenants of Holder. Holder
hereby represents, warrants and covenants to Kana as follows:
(a) Ownership of Shares. Holder (i) is the holder of record or
beneficial owner or holder of the voting power of the Shares and will be
the holder of record or beneficial owner or holder of voting power of all
New Shares, if any, which at the date hereof and at all times until the
Expiration Date will be free and clear of any liens, claims, options,
charges or other encumbrances that would interfere with the voting of the
Shares or the granting of any proxy with respect thereto, (ii) does not
beneficially own any shares of capital stock of Silknet other than the
Shares (except to the extent that Holder currently disclaims beneficial
ownership in accordance with applicable law) and (iii) has full power and
authority to make, enter into, deliver and carry out the terms of this
Silknet Stock Voting Agreement and the Proxy.
(b) No Voting Trusts and Agreements. Between the date of this
Agreement and the Expiration Date, Holder will not, and will not permit
any entity under Holder's control to, deposit any shares of Silknet
capital stock held by Holder or such entity in a voting trust or subject
any shares of Silknet capital stock held by such Holder or such entity to
any arrangement or agreement with respect to the voting of such shares of
capital stock, other than agreements entered into with Kana.
(c) Validity; No Conflict. This Silknet Stock Voting Agreement
constitutes the legal, valid and binding obligation of Holder. Neither the
execution of this Silknet Stock Voting Agreement by Holder nor the
consummation of the transactions contemplated herein will violate or
result in a breach of (i) any provision of any trust, charter, partnership
agreement or other charter document applicable to Holder, (ii) any
agreement to which Holder is a party or by which Holder is bound, (iii)
any decree, judgment or order to which Holder is subject, or (iv) any law
or regulation now in effect applicable to Holder.
(d) No Proxy Solicitations. Subject to the last sentence of Section 2,
between the date of this Agreement and the Expiration Date, Holder will
not, and will not permit any entity under Holder's control, to (i) solicit
proxies or become a "participant" in a "solicitation" (as such terms are
defined in Rule 14A under the Exchange Act) with respect to an Opposing
Proposal or otherwise encourage or assist any party in taking or planning
any action which would compete with, restrain or otherwise serve to
interfere with or inhibit the timely consummation of the Merger in
accordance with the terms of the Merger Agreement, (ii) initiate a
stockholders' vote with respect to an Opposing Proposal or (iii) become a
member of a "group" (as such term is used in Section 13(d) of the Exchange
Act) with respect to any voting securities of Silknet with respect to an
Opposing Proposal.
Section 6 Representations, Warranties and Covenants of Kana. Kana
represents, warrants and covenants to Holder as follows:
(a) Due Authorization. This Silknet Stock Voting Agreement has been
authorized by all necessary corporate action on the part of Kana and has
been duly executed by a duly authorized officer of Kana.
(b) Validity; No Conflict. This Silknet Stock Voting Agreement
constitutes the legal, valid and binding obligation of Kana. Neither the
execution of this Silknet Stock Voting Agreement by Kana nor the
consummation of the transactions contemplated herein will violate or
result in a breach of (i) any agreement to which Kana is a party or by
which Kana is bound, (ii) any decree, judgment or order to which Kana is
subject, or (iii) any law or regulation now in effect applicable to Kana.
Section 7 Additional Documents. Holder and Kana hereby covenant and agree
to execute and deliver any additional documents necessary or desirable, in the
reasonable opinion of Kana's legal counsel or Holder, as the case may be, to
carry out the intent of this Silknet Stock Voting Agreement.
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<PAGE>
Section 8 Legending of Shares. Upon the request of Kana, Holder agrees that
it shall forthwith surrender all certificates representing the Shares so that
they shall bear a conspicuous legend stating that they are subject to this
Agreement (and the restrictions on transfer provided
for herein) and to an Irrevocable Proxy. Subject to the terms of Section 2
hereof, Stockholder agrees that it shall not Transfer the Shares without first
having the aforementioned legend affixed to the certificates representing the
Shares.
Section 9 Consent and Waiver. Holder hereby gives any consent or waiver
reasonably required for the consummation of the Merger under the terms of any
agreement to which Holder is a party.
Section 10 Termination. Notwithstanding any other provision contained
herein, this Silknet Stock Voting Agreement and the Proxy, and all obligations
of Holder hereunder and thereunder, shall terminate as of the Expiration Date.
Section 11 No Solicitation.
(a) Until the earlier of the Effective Time (as defined in the Merger
Agreement) or a valid termination of the Merger Agreement pursuant to
Article VIII thereof, Holder will not, and will not authorize, direct or
permit any of its officers, directors, employees, affiliates under its
control, investment bankers, attorneys, accountants or other agents,
advisors or representatives (collectively, "Representatives") to, directly
or indirectly, (i) solicit, initiate, encourage or induce the making,
submission or announcement of any Silknet Takeover Proposal (as defined
below), (ii) participate in any discussions or negotiations with any
person regarding, or furnish to any person any information with respect
to, or take any other action to facilitate any inquiry or proposal that
constitutes or may reasonably be expected to lead to, any Silknet Takeover
Proposal, (iii) authorize, approve or recommend any Silknet Takeover
Proposal, or (iv) enter into any letter of intent or similar document or
any contract, agreement or commitment accepting or providing for any
Silknet Takeover Proposal.
(b) Holder and Kana agree that irreparable damage would occur in the
event that the provisions of this Section 11 were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed by the parties hereto that Kana shall be entitled to
seek an injunction or injunctions to prevent breaches of this Section 11
and to enforce specifically the terms and provisions hereof in any court
of the United States or any state having jurisdiction, this being in
addition to any other remedy to which the parties may be entitled at law
or in equity.
(c) For purposes of this Agreement, "Silknet Takeover Proposal" means
any offer or proposal for, or any indication of interest in, a merger or
other business combination involving Silknet or the acquisition of twenty
percent (20%) or more of the outstanding shares of capital stock of
Silknet, or all or substantially all of the assets of Silknet or any asset
of Silknet, the absence of which would materially diminish the value of
the Merger to Kana or the benefits expected by Kana to be realized from
the Merger, or any other transaction inconsistent with consummation of the
transactions contemplated by the Merger Agreement.
Section 12 Confidentiality. Holder agrees (i) to hold any information
regarding this Agreement and the Merger in strict confidence and (ii) not to
divulge any such information to any third person, except to the extent any of
the same is hereafter publicly disclosed by Kana.
Section 13 Miscellaneous.
(a) Severability. If any term, provision, covenant or restriction of
this Silknet Stock Voting Agreement or the Proxy (i) is held by a court of
competent jurisdiction to be invalid, void or unenforceable for any
reason, or (ii) would preclude the Merger from qualifying as a
reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as
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<PAGE>
amended, such term, provision, covenant or restriction shall be modified
or voided, as may be necessary to achieve the intent of the parties to the
extent possible, and the remainder of the terms, provisions, covenants and
restrictions of this Silknet Stock Voting Agreement shall remain in full
force and effect and shall in no way be affected, impaired or invalidated.
(b) Binding Effect and Assignment. This Silknet Stock Voting Agreement
and all of the provisions hereof shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and
permitted assigns, but, except as otherwise specifically provided herein,
neither this Silknet Stock Voting Agreement nor any of the rights,
interests or obligations of the parties hereto may be assigned by either
of the parties hereto without the prior written consent of the other, and
any attempted assignment thereof without such consent shall be null and
void.
(c) Amendments and Modifications. This Silknet Stock Voting Agreement
may not be modified, amended, altered or supplemented except upon the
execution and delivery of a written agreement executed by the parties
hereto.
(d) Specific Performance: Injunctive Relief. The parties hereto
acknowledge that Kana will be irreparably harmed by a breach of any of the
covenants or agreements of Holder set forth herein and that there will be
no adequate remedy at law for such a breach. Therefore, it is agreed that,
in addition to any other remedies which may be available to Kana upon such
breach, Kana shall have the right to enforce such covenants and agreements
by specific performance, injunctive relief or by any other means available
to it at law or in equity.
(e) Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and sufficient if delivered
in person, by commercial overnight courier service, by confirmed telecopy,
or sent by mail (registered or certified mail, postage prepaid, return
receipt requested), to the respective parties as follows:
If to Kana:
Kana Communications, Inc.
740 Bay Road
Redwood City, CA 94063
Fax: (650) 474-8507
Kana Communications, Inc.
Attention: Chief Executive Officer
If to Holder:
To the address for notice set forth on the last page hereof.
With a copy to:
Silknet Software Inc.
50 Phillippe Cote Street,
Manchester, NH 03101
Fax: (603) 625-0428
Attention: Chief Executive Officer
and to:
Brobeck, Phleger & Harrison LLP
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303
Fax: (650) 496-2885
Attention: Warren T. Lazarow, Esq.
David A. Makarechian, Esq.
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<PAGE>
and to:
Brobeck, Phleger & Harrison LLP
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303
Fax: (650) 496-2777
Attention: Rod J. Howard, Esq.
or to such other address as either party may have furnished to the other
in writing in accordance herewith, except that notices of change of
address shall only be effective upon receipt.
(f) Governing Law. This Silknet Stock Voting Agreement shall be
governed by, construed and enforced in accordance with the laws of the
State of Delaware, without giving effect to principles of conflicts of
law. Each party hereto irrevocably and unconditionally consents and
submits to the jurisdiction of the courts of the State of Delaware and of
the United States of America located in the State of Delaware for any
actions, suits or proceedings arising out of or relating to this agreement
and the transactions contemplated hereby.
(g) Entire Agreement. This Silknet Stock Voting Agreement contains the
entire understanding of the parties with respect to the subject matter
hereof, and supersedes all prior negotiations and understandings between
the parties with respect to such subject matter.
(h) Counterparts. This Silknet Stock Voting Agreement may be executed
in one or more counterparts, each of which shall be an original, but all
of which together shall constitute one and the same instrument.
(i) Effect of Headings. The section headings contained herein are for
convenience only and shall not affect the construction or interpretation
of this Silknet Stock Voting Agreement.
(j) Holder Capacity. Notwithstanding anything herein to the contrary,
no person executing this Agreement who is, or becomes during the term
hereof, a director of Kana makes any agreement or understanding herein in
his or her capacity as such director, and the agreements set forth herein
shall in no way restrict any director in the exercise of his or her
fiduciary duties as a director of Kana. Holder has executed this Agreement
solely in his or her capacity as the record or beneficial holder of such
Holder's Shares or as the trustee of a trust whose beneficiaries are the
beneficial owners of such Holder's Shares.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Silknet Stock Voting
Agreement to be duly executed on the day and year first above written.
KANA COMMUNICATIONS, INC.
By: _________________________________
Its: ________________________________
HOLDER
By: _________________________________
Holder's Address for Notice:
_____________________________________
_____________________________________
_____________________________________
Number of Shares owned beneficially:
_____________________________________
Number of Shares owned of record (if
different from above):
_____________________________________
[Signature page of Voting Agreement]
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<PAGE>
ANNEX A
IRREVOCABLE PROXY
The undersigned stockholder of Silknet Software Inc., a Delaware
corporation ("Silknet"), hereby irrevocably appoints and constitutes the
members of the Board of Directors of Kana Communications, Inc., a Delaware
corporation ("Kana"), and each of them (the "Proxyholders"), the agents and
proxies of the undersigned, with full power of substitution and resubstitution,
to the full extent of the undersigned's rights with respect to the shares of
capital stock of Silknet beneficially owned by the undersigned, which shares
are listed below and any and all other shares or securities issued or issuable
in respect thereof, or which the undersigned otherwise acquires, on or after
the date hereof and prior to the date this proxy terminates (collectively, the
"Shares"), to vote the Shares (except those Shares which are not voting
securities at the time of a vote, or are not converted into voting securities
at the time of a vote) as follows:
The agents and proxies named above are empowered at any time prior to
termination of this proxy to exercise all voting and other rights
(including, without limitation, the power to execute and deliver written
consents with respect to the Shares) of the undersigned at every annual,
special or adjourned meeting of Silknet stockholders, and in every written
consent in lieu of such a meeting, or otherwise,
(a) in favor of (i) adoption of the Agreement and Plan of
Reorganization, by and among Kana, Pistol Acquisition Corp. ("Sub"), and
Silknet, dated as of February , 2000, as the same may be amended from
time to time, (the "Merger Agreement") and (ii) approval of the merger of
Sub with and into Silknet as contemplated by the Merger Agreement (the
"Merger"), and any proposal or action which would, or could reasonably be
expected to, facilitate the Merger;
(b) against approval of any proposal made in opposition to or
competition with consummation of the Merger and the Merger Agreement;
(c) against any merger, consolidation or other business combination of
Silknet with, sale of assets or stock of Silknet to, or reorganization or
recapitalization involving Silknet with, any party other than Kana or an
affiliate of Kana as contemplated by the Merger Agreement;
(d) against any liquidation, or winding up of Silknet; and
(e) against any other proposal or action which would, or could
reasonably be expected to, prohibit or discourage the Merger.
The Proxyholders may not exercise this proxy with respect to any other matter.
The undersigned may vote the Shares on all such other matters.
The proxy granted by the undersigned to the Proxyholders hereby is granted
as of the date of this Irrevocable Proxy in order to secure the obligations of
the undersigned set forth in Section 2 of the Silknet Stock Voting Agreement,
and is irrevocable and coupled with an interest in such obligations and in the
interests in Silknet to be purchased and sold pursuant to the Merger Agreement.
This proxy will terminate upon the termination of the Silknet Stock Voting
Agreement in accordance with its terms.
Upon the execution hereof, all prior proxies given by the undersigned with
respect to the Shares are hereby revoked, and no subsequent proxies will be
given with respect to the Shares until such time as this proxy shall be
terminated in accordance with its terms.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned. The undersigned authorizes the
Proxyholders to file this proxy and any substitution or revocation of
substitution with the Secretary of Silknet and with any Inspector of Elections
at any meeting of the stockholders of Silknet.
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<PAGE>
This proxy is irrevocable and shall survive the insolvency, incapacity,
death or liquidation of the undersigned.
Dated: February , 2000.
Name of Stockholder: _______________________________________________________
Signature of Stockholder: __________________________________________________
Shares beneficially owned by Stockholder: __________________________________
Shares owned of record by Stockholder: _____________________________________
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<PAGE>
APPENDIX IV
KANA STOCK OPTION AGREEMENT
THIS KANA STOCK OPTION AGREEMENT (this "Agreement") is made and entered
into as of February 6, 2000, between Silknet Software Inc., a Delaware
corporation ("Silknet"), and Kana Communications, Inc., a Delaware corporation
(the "Company"). Capitalized terms used but not otherwise defined herein have
the meanings ascribed to them in the Merger Agreement (as defined below).
RECITALS
A. Concurrently with the execution and delivery of this Agreement, the
Company, Merger Sub (as defined below) and Silknet are entering into an
Agreement and Plan of Merger (the "Merger Agreement") that provides for the
merger of a wholly-owned subsidiary of the Company ("Merger Sub") with and
into Silknet (the "Merger"). Pursuant to the Merger, each share of common
stock, par value $0.01 per share, of Silknet will be converted into the right
to receive common stock, par value $0.001 per share, of the Company, upon the
terms and subject to the conditions set forth in the Merger Agreement.
B. As a condition to Silknet's willingness to enter into the Merger
Agreement, Silknet has required that the Company agree, and the Company has so
agreed, to grant to Silknet an option to acquire shares of common stock, par
value $0.001 per share ("Company Shares"), upon the terms and subject to the
conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein and in the Merger Agreement and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto agree as follows:
1. Grant of Option.
The Company hereby grants to Silknet an irrevocable option (the "Option")
to purchase from the Company up to the number of fully paid and nonassessable
Company Shares equal to nine and nine-tenths percent (9.9%) of the Company
Shares issued and outstanding at the time of exercise of the Option (the
"Option Shares"), in the manner set forth below by paying cash to the Company
at a price of two hundred fifty-eight dollars and eight-eight cents ($258.88)
per Company Share (the "Exercise Price").
2. Exercise of Option.
(a) The Option may be exercised by Silknet, in whole or in part, at any
time or from time to time on or after the occurrence of an Exercise Event. The
Company shall notify Silknet promptly in writing of the occurrence of any
Exercise Event, it being understood that the giving of such notice by the
Company shall not be a condition to the right of Silknet to exercise the
option. For all purposes of this Agreement, an "Exercise Event" shall mean the
occurrence of any of (i) a Triggering Event (as defined below), (ii) the
public announcement of an Acquisition Proposal (as defined below), or (iii)
the commencement of a solicitation within the meaning of Rule 14a-1(1) by any
person or entity seeking control of the Company's Board of Directors in
opposition to the Merger. If Silknet wishes to exercise the Option, Silknet
will deliver to the Company a written notice (each an "Exercise Notice")
specifying the total number of Option Shares it wishes to acquire. Each
closing of a purchase of Option Shares (a "Closing") will occur on a date and
at a time prior to the termination of the Option designated by Silknet in an
Exercise Notice delivered at least two (2) business days prior to the date of
such Closing, which Closing will be held at the principal offices of the
Company.
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<PAGE>
(i) For purposes of this Agreement, "Acquisition Proposal" shall mean
any offer or proposal (other than by Silknet) for a transaction or series
of related transactions involving: (A) any purchase from the Company or
acquisition by any person or "group" (as defined in Section 13(d) of the
Exchange Act and the rules and regulations thereunder) of a majority of
the total outstanding voting securities of the Company or any of its
subsidiaries or any tender offer or exchange offer that if consummated
would result in any person or group beneficially owning a majority of the
total outstanding voting securities of the Company or any merger,
consolidation, business combination or similar transaction involving the
Company; (B) any sale, lease (other than in the ordinary course of
business), exchange, transfer, license (other than in the ordinary course
of business), acquisition or disposition of a majority of the assets of
the Company; or (C) any liquidation or dissolution of the Company.
(ii) For purposes of this Agreement, a "Triggering Event" shall be
deemed to have occurred if: (i) the Board of Directors of the Company or
any committee thereof shall for any reason have withdrawn or shall have
amended or modified in a manner adverse to Silknet its recommendation in
favor of the approval of the issuance of Company Common Stock pursuant to
the Merger Agreement; (ii) the Company shall have failed to include in the
Joint Proxy Statement/Prospectus the recommendation of the Board of
Directors of the Company in favor of the issuance of Company Common Stock
pursuant to the Merger Agreement; (iii) the Board of Directors of the
Company shall have failed to reaffirm its recommendation in favor of the
issuance of Company Common Stock pursuant to the Merger Agreement within
ten (10) business days after Silknet requests in writing that such
recommendation be reaffirmed at any time following the making,
announcement or submission of a Kana Takeover Proposal (as such term is
defined in the Merger Agreement); or (iv) a tender or exchange offer for a
majority of the outstanding voting securities of the Company shall have
been commenced by a person unaffiliated with the Company and the Company
shall not have sent to its security holders pursuant to Rule 14e-2
promulgated under the Securities Act, within ten (10) business days after
such tender or exchange offer is first published sent or given, a
statement disclosing that the Company recommends rejection of such tender
or exchange offer.
(b) The Option and this Agreement will terminate upon the earliest of (i)
the Effective Time, (ii) termination of the Merger Agreement pursuant to
Section 8.01(a) thereof, (iii) termination of the Merger Agreement pursuant to
Section 8.01(e)(i) or 8.01(f)(i) thereof or otherwise under circumstances which
cannot give rise to a termination fee under Section 8.03(c) of the Merger
Agreement if prior thereto no Exercise Event shall have occurred or (iv) twelve
(12) months following the termination of the Merger Agreement under any other
circumstances; provided, however, that if the Option cannot be exercised by
reason of any applicable judgment, decree, order, law or regulation (including,
without limitation, if the waiting period related to the issuance of the Option
Shares under the HSR Act shall not have expired or been terminated), then the
Option will not terminate until the forty fifth (45th) business day after such
impediment to exercise will have been removed or will have become final and not
subject to appeal. In addition, the period for the exercise of the Option shall
be extended to the extent necessary to avoid liability under Section 16(b) of
the Securities Exchange Act of 1934, as amended, and the rules and regulations
of the Securities and Exchange Commission thereunder, by reason of such
exercise.
3. Conditions to Closing.
The obligation of the Company to issue Option Shares to Silknet hereunder
is subject to the conditions that (A) any waiting period under the HSR Act
applicable to the issuance of the Option Shares hereunder shall have expired or
been terminated; (B) all material consents, approvals, orders or authorizations
of, or registrations, declarations or filings with, any United States Federal,
state or local administrative agency or commission or other United States
Federal state or local governmental authority or instrumentality, if any,
required in connection with the issuance of the Option Shares
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<PAGE>
hereunder shall have been obtained or made, as the case may be; and (C) no
preliminary or permanent injunction or other order by any court of competent
jurisdiction or other Governmental Entity in the United States prohibiting or
otherwise restraining such issuance shall be in effect. It is understood and
agreed that at any time during which the Option is exercisable, the parties
will use their respective best efforts to satisfy all conditions to Closing, so
that a Closing may take place as promptly as practicable.
4. Closing.
At any Closing, (A) the Company will deliver to Silknet a single
certificate in definitive form representing the number of Company Shares
designated by Silknet in its Exercise Notice, such certificate to be registered
in the name of Silknet and to bear the restrictive legend set forth in Section
9 hereof, against delivery of (B) payment by Silknet to the Company of the
aggregate purchase price for the Company Shares so designated and being
purchased by wire transfer of immediately available funds to an account
designated by the Company, provided that failure or refusal of the Company to
designate such an account shall not preclude Silknet from exercising the
Option. Upon delivery of an Exercise Notice and the tender of the aggregate
purchase price in immediately available funds, Silknet shall be deemed to be
the holder of record of the Option Shares issuable upon such exercise,
notwithstanding that the stock transfer books of the Company shall then be
closed or that certificates representing such Company Shares shall not be
actually delivered to Silknet.
5. Representations and Warranties of the Company.
The Company represents and warrants to Silknet that (A) the Company is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware and has the corporate power and authority to
enter into this Agreement and to carry out its obligations hereunder; (B) the
execution and delivery of this Agreement by the Company and consummation by the
Company of the transactions contemplated hereby have been duly authorized by
all necessary corporate action on the part of the Company and no other
corporate proceedings on the part of the Company are necessary to authorize
this Agreement or any of the transactions contemplated hereby; (C) this
Agreement has been duly executed and delivered by the Company and constitutes a
legal, valid and binding obligation of the Company enforceable against the
Company in accordance with its terms; (D) the Company has taken all necessary
corporate and other action to authorize and reserve for issuance and to permit
it to issue upon exercise of the Option, and at all times from the date hereof
until the termination of the Option will have reserved for issuance, a
sufficient number of unissued Company Shares for Silknet to exercise the Option
in full and will take all necessary corporate or other action to authorize and
reserve for issuance all additional Company Shares or other securities which
may be issuable pursuant to Section 8(a) upon exercise of the Option, all of
which, upon their issuance and delivery in accordance with the terms of this
Agreement, will be validly issued, fully paid and nonassessable; (E) upon
delivery of the Company Shares and any other securities to Silknet upon
exercise of the Option, Silknet will acquire such Company Shares or other
securities free and clear of all material claims, liens, charges, encumbrances
and security interests of any kind or nature whatsoever; (F) the execution and
delivery of this Agreement by the Company do not, and the performance of this
Agreement by the Company will not, (i) conflict with or violate the Certificate
of Incorporation or Bylaws of the Company, (ii) conflict with or violate any
law, rule, regulation, order, judgment or decree applicable to the Company or
by which its properties is bound or affected or (iii) result in any breach of
or constitute a default (or an event that with notice or lapse of time or both
would become a default) under, or impair the Company's rights or alter the
rights or obligations of any third party under, or give to others any rights of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or encumbrance on any of the properties or assets of the
Company pursuant to, any material note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which the
IV-3
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Company is a party or by which the Company or its properties are bound or
affected, except, with respect to clauses (ii) and (iii), for any such
conflicts, violations, breaches, defaults or other occurrences that could not,
individually and in the aggregate, reasonably be expected to have a Material
Adverse Effect on the Company; and (G) the execution and delivery of this
Agreement by the Company does not, and the performance of this Agreement by
the Company will not, require any consent, approval, authorization or permit
of, or filing with, or notification to, any Governmental Entity except as
disclosed in the Merger Agreement and the disclosure schedule of the Company
thereto.
6. Certain Rights.
(a) Silknet Put. At the request of and upon notice by Silknet (the "Put
Notice"), at any time during the period during which the Option is exercisable
pursuant to Section 2 (the "Purchase Period"), the Company (or any successor
entity thereof) shall be obligated to purchase from Silknet all or any portion
of the Option, to the extent not previously exercised, at the price set forth
in subparagraph (i) below (as limited by subparagraph (iii) below), and all or
any portion of the Option Shares, if any, acquired by Silknet pursuant
thereto, at the price set forth in subparagraph (ii) below (as limited by
subparagraph (iii) below):
(i) The difference between the Market/Tender Offer Price (as defined
below) for the Company Shares as of the date Silknet gives notice of its
intent to exercise its rights under this Section 6(a) and the Exercise
Price, multiplied by the number of Company Shares purchasable pursuant to
the Option (or portion thereof with respect to which Silknet is exercising
its rights under this Section 6), but only if the Market/Tender Offer
Price is greater than the Exercise Price. "Market/Tender Offer Price"
shall mean the highest of (A) the highest price per share offered pursuant
to any Kana Takeover Proposal which was made prior to such date and has
not terminated or been withdrawn as of such date and (B) the highest
closing sale price of Company Shares as reported on the Nasdaq National
Market during the six (6) months ending on the trading day immediately
preceding such date. For purposes of determining the highest price offered
pursuant to any Kana Takeover Proposal which involves consideration other
than cash, the value of such consideration will be equal to the higher of
(x) if securities of the same class of the proponent of such Kana Takeover
Proposal as such consideration are traded on any national securities
exchange or by any registered securities association, a value based on the
closing sale price or closing asked price for such securities on their
principal trading market on such date and (y) the value ascribed to such
consideration by the proponent of such Kana Takeover Proposal, or if no
such value is ascribed, a value determined in good faith by the Board of
Directors of the Company.
(ii) The Exercise Price paid by Silknet for Company Shares acquired
pursuant to the Option plus the difference between the Market/Tender Offer
Price and such Exercise Price (but only if the Market/Tender Offer Price
is greater than the Exercise Price) multiplied by the number of Company
Shares so purchased (provided that Silknet then has beneficial ownership
of such Company Shares).
(iii) The foregoing shall be subject to the limitations on Total
Profit set forth in Section 10.
(b) Payment and Redelivery of Option or Shares. If Silknet exercises its
rights under Section 6(a), the Company will, within five (5) business days
after Silknet delivers a Put Notice pursuant to Section 6(a), pay the required
amount to Silknet in immediately available funds and Silknet will surrender to
the Company the certificates evidencing the Company Shares and the portion of
the Option purchased by Silknet pursuant thereto.
7. Reserved.
8. Adjustment Upon Changes in Capitalization; Rights Plans.
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(a) In the event of any change in the Company Shares by reason of stock
dividends, stock splits, reclassifications, reverse stock splits, mergers
(other than the Merger), recapitalizations, combinations, exchanges of shares
and the like, the type and number of shares or securities subject to the Option
and the Exercise Price will be adjusted appropriately, and proper provision
will be made in the agreements governing such transaction so that Silknet will
receive, upon exercise of the Option, the number and class of shares or other
securities or property that Silknet would have received in respect of the
Company Shares if the Option had been exercised immediately prior to such event
or the record date therefor, as applicable.
(b) At any time during which the Option is exercisable, and at any time
after the Option is exercised (in whole or in part, if at all), the Company
will not amend (nor permit the amendment of) any current stockholder rights
plan of the Company or its subsidiaries nor adopt (nor permit the adoption of)
a new stockholders rights plan that contains provisions for the distribution or
exercise of rights thereunder as a result of Silknet or any affiliate being the
beneficial owner of shares of the Company by virtue of the Option being
exercisable or having been exercised (or as a result of beneficially owning
shares issuable in respect of any Option Shares).
9. Restrictive Legends.
Each certificate representing Option Shares issued to Silknet hereunder
will include a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR SOLD ONLY
IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. SUCH
SECURITIES ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER AS SET FORTH
IN THE STOCK OPTION AGREEMENT DATED AS OF FEBRUARY 6, 2000, A COPY OF WHICH MAY
BE OBTAINED FROM THE ISSUER.
It is understood and agreed that (i) the reference to restrictions arising
under the Securities Act in the above legend will be removed by delivery of
substitute certificate(s) without such reference if such Option Shares have
been registered pursuant to the Securities Act, such Option Shares have been
sold in reliance on and in accordance with Rule 144 under the Securities Act or
Silknet has delivered to the Company a copy of a letter from the staff of the
SEC, or an opinion of counsel in form and substance reasonably satisfactory to
the Company, to the effect that such legend is not required for purposes of the
Securities Act and (ii) the reference to restrictions pursuant to this
Agreement in the above legend will be removed by delivery of substitute
certificate(s) without such reference if the Option Shares evidenced by
certificate(s) containing such reference have been sold or transferred in
compliance with the provisions of this Agreement under circumstances that do
not require the retention of such reference.
10. Total Profit.
(a) Notwithstanding any other provision of this Agreement, in no event
shall Net Company Payments (as hereinafter defined) exceed one hundred forty-
eight million three hundred thousand dollars ($148,300,000) and in no event
shall Total Silknet Profits (as hereinafter defined) exceed one hundred eight-
eight million three hundred thousand dollars ($188,300,000), and if Net Company
Payments or Total Silknet Profits otherwise would exceed such amounts, Silknet,
at its sole election, shall either (i) reduce the number of Company Shares
subject to this Option, (ii) deliver to the Company for cancellation Option
Shares previously purchased by Silknet (or other securities into which such
Option Shares are converted or exchanged), (iii) pay cash to the Company or
(iv) any combination thereof, so that Silknet's actually realized Net Company
Payments and Total Silknet Profit shall not exceed such amounts after taking
into account the foregoing actions.
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(b) As used herein, (i) the term "Net Company Payments" means the aggregate
amount (without duplication) of (A) the net cash amounts received by Silknet
from the Company pursuant to the Company's repurchase of the Option or Option
Shares pursuant to Section 6(a), less (in the case of the Option Shares)
Silknet's purchase price for such Option Shares, and (ii) the aggregate amount
actually received by Silknet from the Company (exclusive of attorneys' fees and
interest) pursuant to Section 8.03 of the Merger Agreement; and (ii) the term
"Total Silknet Profit" means the aggregate amount (without duplication) of (A)
the net cash amounts received by Silknet pursuant to the Company's repurchase
of the Option or Option Shares pursuant to Section 6(a), less (in the case of
the Option Shares) Silknet's purchase price for such Option Shares, (B) the
aggregate amount actually received by Silknet pursuant to Section 8.03 of the
Merger Agreement, and (C) the net cash amounts received by Silknet pursuant to
the sale of Option Shares (or securities into which such shares are converted
or exchanged) to any other unaffiliated third party, less Silknet's purchase
price for such Option Shares.
11. Listing and HSR Filing.
The Company, upon the request of Silknet, will promptly file an application
to list the Company Shares to be acquired upon exercise of the Option for
quotation on the Nasdaq National Market and will use its best efforts to obtain
approval of such listing as soon as practicable. Promptly after the date
hereof, each of the parties hereto will promptly file with the Federal Trade
Commission and the Antitrust Division of the United States Department of
Justice all required premerger notification and report forms and other
documents and exhibits required to be filed under the HSR Act to permit the
acquisition of the Company Shares subject to the Option at the earliest
possible date.
12. Miscellaneous.
(a) Binding Effect. This Agreement will be binding upon and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns. Nothing contained in this Agreement, express or implied, is intended
to confer upon any person other than the parties hereto and their respective
successors and permitted assigns any rights or remedies of any nature
whatsoever by reason of this Agreement. Except as expressly provided for in
this Agreement, neither this Agreement nor the rights or the obligations of
either party hereto are assignable, except by operation of law or with the
written consent of the other party.
(b) Specific Performance. The parties hereto recognize and agree that if
for any reason any of the provisions of this Agreement are not performed in
accordance with their specific terms or are otherwise breached, immediate and
irreparable harm or injury would be caused for which money damages would not be
an adequate remedy. Accordingly, each party hereto agrees that in addition to
other remedies available, the other party hereto will be entitled to an
injunction restraining any violation or threatened violation of the provisions
of this Agreement or the right to enforce any of the covenants or agreements
set forth herein by specific performance. If any action will be brought in
equity to enforce the provisions of this Agreement, neither party hereto will
allege, and each party hereto hereby waives the defense, that there is an
adequate remedy at law.
(c) Entire Agreement. This Agreement and the Merger Agreement (including
the exhibits thereto) constitute the entire agreement between the parties
hereto with respect to the subject matter hereof and supersede all other prior
agreements and understandings, both written and oral, between the parties
hereto with respect to the subject matter hereof, it being understood that the
Confidentiality Agreement shall continue in full force and effect until the
Closing under the Merger Agreement and shall survive any terminations thereof
or hereof.
(d) Further Assurances. Each party hereto will execute and deliver all such
further documents and instruments and take all such further action as may be
necessary in order to consummate the transactions contemplated hereby.
IV-6
<PAGE>
(e) Validity. The invalidity or unenforceability of any provision of this
Agreement will not affect the validity or enforceability of the other
provisions of this Agreement, which will remain in full force and effect. In
the event any Governmental Entity of competent jurisdiction holds any provision
of this Agreement to be null, void or unenforceable, the parties hereto will
negotiate in good faith and will execute and deliver an amendment to this
Agreement in order, as nearly as possible, to effectuate, to the extent
permitted by law, the intent of the parties hereto with respect to such
provision.
(f) Notices. All notices and other communications hereunder will be in
writing and will be deemed given if delivered personally or by commercial
delivery service, or sent via telecopy (receipt confirmed) to the parties at
the following addresses or telecopy numbers (or at such other address or
telecopy numbers for a party as will be specified by like notice):
if to Silknet, to:
Silknet Software Inc.
50 Phillipe Cote Street
Manchester, NE 03101
Attention: Chief Executive Officer
Facsimile: (603) 6250428
and with a copy to:
Testa, Hurwitz & Thibeault, LLP
Oliver Street Tower
125 High Street
Boston, MA 02110
Attention: John Hession, Esq.
Telephone: (617) 248-7000
Facsimile: (617) 248-7100
if to the Company, to:
Kana Communications, Inc.
740 Bay Road
Redwood City, CA 94063
Attention: Chief Executive Officer
Telephone: (650) 298-9282
Facsimile: (650) 474-8501
with a copy to:
Brobeck, Phleger & Harrison LLP
Two Embarcadero Road
2200 Geng Road
Palo Alto, CA 94303
Attention: Warren T. Lazarow, Esq.
David A. Makarechian, Esq.
Telephone: (650) 424-0160
Facsimile: (650) 496-2885
(g) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of law thereof.
(h) Expenses. Except as otherwise expressly provided herein or in the
Merger Agreement, all costs and expenses incurred in connection with the
transactions contemplated by this Agreement will be paid by the party incurring
such expenses.
IV-7
<PAGE>
(i) Amendments; Waiver. This Agreement may be amended by the parties hereto
and the terms and conditions hereof may be waived only by an instrument in
writing signed on behalf of each of the parties hereto, or, in the case of a
waiver, by an instrument signed on behalf of the party waiving compliance.
(j) Assignment. Neither of the parties hereto may sell, transfer, assign or
otherwise dispose of any of its rights or obligations under this Agreement or
the Option created hereunder to any other person, without the express prior
written consent of the other party, except that the rights and obligations
hereunder will inure to the benefit of and be binding upon any successor of a
party hereto.
(k) Counterparts. This Agreement may be executed in counterparts, each of
which will be deemed to be an original, but both of which, taken together, will
constitute one and the same instrument.
(l) Descriptive Headings. The section headings are for convenience only and
shall not affect the construction or interpretation of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers as of the date first
above written.
KANA COMMUNICATIONS, INC.
_____________________________________
Name:
Title:
SILKNET SOFTWARE, INC.
_____________________________________
Name:
Title:
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<PAGE>
APPENDIX V
SILKNET STOCK OPTION AGREEMENT
THIS SILKNET STOCK OPTION AGREEMENT (this "Agreement") is made and entered
into as of February 6, 2000, between Kana Communications, Inc., a Delaware
corporation ("Kana"), and Silknet Software Inc., a Delaware corporation (the
"Company"). Capitalized terms used but not otherwise defined herein have the
meanings ascribed to them in the Merger Agreement (as defined below).
RECITALS
A. Concurrently with the execution and delivery of this Agreement, Kana,
Merger Sub (as defined below) and the Company are entering into an Agreement
and Plan of Merger (the "Merger Agreement") that provides for the merger of a
wholly-owned subsidiary of Kana ("Merger Sub") with and into the Company (the
"Merger"). Pursuant to the Merger, each share of common stock, par value $0.01
per share, of the Company ("Company Shares") outstanding at the Effective Time
of the Merger will be converted into the right to receive common stock, par
value $0.001 per share, of Kana, upon the terms and subject to the conditions
and exceptions set forth in the Merger Agreement.
B. As a condition to Kana's willingness to enter into the Merger Agreement,
Kana has required that the Company agree, and the Company has so agreed, to
grant to Kana an option to acquire Company Shares upon the terms and subject to
the conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein and in the Merger Agreement and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto agree as follows:
1. Grant of Option.
The Company hereby grants to Kana an irrevocable option (the "Option") to
purchase from the Company up to the number of fully paid and nonassessable
Company Shares equal to nineteen and nine tenths percent (19.9%) of the Company
Shares issued and outstanding at the time of exercise of the Option (the
"Option Shares"), in the manner set forth below by paying cash to the Company
at a price of two hundred fourteen dollars and eighty-seven cents ($214.87) per
Company Share (the "Exercise Price").
2. Exercise of Option.
(a) The Option may be exercised by Kana, in whole or in part, at any time
or from time to time on or after the occurrence of an Exercise Event. The
Company shall notify Kana promptly in writing of the occurrence of any Exercise
Event, it being understood that the giving of such notice by the Company shall
not be a condition to the right of Kana to exercise the option. For all
purposes of this Agreement, an "Exercise Event" shall mean the occurrence of
any of (i) a Triggering Event (as defined below), (ii) the public announcement
of an Acquisition Proposal (as defined below), or (iii) the commencement of a
solicitation within the meaning of Rule 14a-1(1) by any person or entity other
than the Company or its Board of Directors (or any person or entity acting on
behalf of the Company or its Board of Directors) seeking to alter the
composition of the Company's Board of Directors. If Kana wishes to exercise the
Option, Kana will deliver to the Company a written notice (each an "Exercise
Notice") specifying the total number of Option Shares it wishes to acquire.
Each closing of a purchase of Option Shares (a "Closing") will occur on a date
and at a time prior to the termination of the Option designated by Kana in an
Exercise Notice delivered at least two (2) business days prior to the date of
such Closing, which Closing will be held at the principal offices of the
Company.
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(i) For purposes of this Agreement, "Acquisition Proposal" shall mean
any offer or proposal (other than by Kana) for any transaction or series
of related transactions involving: (A) any purchase from the Company or
acquisition by any person or "group" (as defined in Section 13(d) of the
Exchange Act and the rules and regulations thereunder) of more than a ten
percent (10%) interest in the total outstanding voting securities of the
Company or any of its subsidiaries or any tender offer or exchange offer
that if consummated would result in any person or group beneficially
owning ten percent (10%) or more of the total outstanding voting
securities of the Company or any of its subsidiaries or any merger,
consolidation, business combination or similar transaction involving the
Company; (B) any sale, lease (other than in the ordinary course of
business), exchange, transfer, license (other than in the ordinary course
of business), acquisition or disposition of more than ten percent (10%) of
the assets of the Company; or (C) any liquidation or dissolution of the
Company.
(ii) For purposes of this Agreement, a "Triggering Event" shall be
deemed to have occurred if: (i) the Board of Directors of the Company or
any committee thereof shall for any reason have withdrawn or shall have
amended or modified in a manner adverse to Kana its recommendation in
favor of the approval and adoption of the Merger Agreement and approval of
the Merger; (ii) the Company shall have failed to include in the Joint
Proxy Statement/ Prospectus the recommendation of the Board of Directors
of the Company in favor of the approval and adoption of the Merger
Agreement and the Merger; (iii) the Board of Directors of the Company
shall have failed to reaffirm its recommendation in favor of the approval
and adoption of the Merger Agreement and the Merger within ten (10)
business days after Kana requests in writing that such recommendation be
reaffirmed at any time following the making, announcement or submission of
a Silknet Takeover Proposal (as such term is defined in the Merger
Agreement); or (iv) a tender or exchange offer relating to securities of
the Company shall have been commenced by a person unaffiliated with the
Company and the Company shall not have sent to its security holders
pursuant to Rule 14e-2 promulgated under the Securities Act, within ten
(10) business days after such tender or exchange offer is first published
sent or given, a statement disclosing that the Company recommends
rejection of such tender or exchange offer.
(b) The Option and this Agreement will terminate upon the earliest of (i)
the Effective Time, (ii) termination of the Merger Agreement pursuant to
Section 8.01(a) thereof, (iii) termination of the Merger Agreement pursuant to
Section 801(e)(i) or 8.01(f)(i) thereof or otherwise under circumstances which
cannot give rise to a termination fee under Section 8.03(b) of the Merger
Agreement if prior thereto no Exercise Event shall have occurred or (iv) twelve
(12) months following the termination of the Merger Agreement under any other
circumstances; provided, however, that if the Option cannot be exercised by
reason of any applicable judgment, decree, order, law or regulation (including,
without limitation, if the waiting period related to the issuance of the Option
Shares under the HSR Act shall not have expired or been terminated), then the
Option will not terminate until the forty fifth (45th) business day after such
impediment to exercise will have been removed or will have become final and not
subject to appeal. In addition, the period for the exercise of the Option shall
be extended to the extent necessary to avoid liability under Section 16(b) of
the Securities Exchange Act of 1934, as amended, and the rules and regulations
of the Securities and Exchange Commission thereunder, by reason of such
exercise.
3. Conditions to Closing.
The obligation of the Company to issue Option Shares to Kana hereunder is
subject to the conditions that (A) any waiting period under the HSR Act
applicable to the issuance of the Option Shares hereunder shall have expired or
been terminated; (B) all material consents, approvals, orders or authorizations
of, or registrations, declarations or filings with, any United States Federal,
state or local administrative agency or commission or other United States
Federal state or local governmental
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<PAGE>
authority or instrumentality, if any, required in connection with the issuance
of the Option Shares hereunder shall have been obtained or made, as the case
may be; and (C) no preliminary or permanent injunction or other order by any
court of competent jurisdiction or other Governmental Entity in the United
States prohibiting or otherwise restraining such issuance shall be in effect.
It is understood and agreed that at any time during which the Option is
exercisable, the parties will use their respective best efforts to satisfy all
conditions to Closing, so that a Closing may take place as promptly as
practicable.
4. Closing.
At any Closing, (A) the Company will deliver to Kana a single certificate
in definitive form representing the number of Company Shares designated by Kana
in its Exercise Notice, such certificate to be registered in the name of Kana
and to bear the restrictive legend set forth in Section 9 hereof, against
delivery of (B) payment by Kana to the Company of the aggregate purchase price
for the Company Shares so designated and being purchased by wire transfer of
immediately available funds to an account designated by the Company, provided
that failure or refusal of the Company to designate such an account shall not
preclude Kana from exercising the Option. Upon delivery of an Exercise Notice
and the tender of the aggregate purchase price in immediately available funds,
Kana shall be deemed to be the holder of record of the Option Shares issuable
upon such exercise, notwithstanding that the stock transfer books of the
Company shall then be closed or that certificates representing such Company
Shares shall not be actually delivered to Kana.
5. Representations and Warranties of the Company.
The Company represents and warrants to Kana that (A) the Company is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware and has the corporate power and authority to
enter into this Agreement and to carry out its obligations hereunder; (B) the
execution and delivery of this Agreement by the Company and consummation by the
Company of the transactions contemplated hereby have been duly authorized by
all necessary corporate action on the part of the Company and no other
corporate proceedings on the part of the Company are necessary to authorize
this Agreement or any of the transactions contemplated hereby; (C) this
Agreement has been duly executed and delivered by the Company and constitutes a
legal, valid and binding obligation of the Company enforceable against the
Company in accordance with its terms; (D) the Company has taken all necessary
corporate and other action to authorize and reserve for issuance and to permit
it to issue upon exercise of the Option, and at all times from the date hereof
until the termination of the Option will have reserved for issuance, a
sufficient number of unissued Company Shares for Kana to exercise the Option in
full and will take all necessary corporate or other action to authorize and
reserve for issuance all additional Company Shares or other securities which
may be issuable pursuant to Section 8(a) upon exercise of the Option, all of
which, upon their issuance and delivery in accordance with the terms of this
Agreement, will be validly issued, fully paid and nonassessable; (E) upon
delivery of the Company Shares and any other securities to Kana upon exercise
of the Option, Kana will acquire such Company Shares or other securities free
and clear of all material claims, liens, charges, encumbrances and security
interests of any kind or nature whatsoever; (F) the execution and delivery of
this Agreement by the Company do not, and the performance of this Agreement by
the Company will not, (i) conflict with or violate the Certificate of
Incorporation or Bylaws of the Company, (ii) conflict with or violate any law,
rule, regulation, order, judgment or decree applicable to the Company or by
which its properties is bound or affected or (iii) result in any breach of or
constitute a default (or an event that with notice or lapse of time or both
would become a default) under, or impair the Company's rights or alter the
rights or obligations of any third party under, or give to others any rights of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or encumbrance on any of the properties or assets of the
Company pursuant to, any material note, bond, mortgage, indenture,
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contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which the Company is a party or by which the Company or its
properties are bound or affected, except, with respect to clauses (ii) and
(iii), for any such conflicts, violations, breaches, defaults or other
occurrences that could not, individually and in the aggregate, reasonably be
expected to have a Material Adverse Effect on the Company; and (G) the
execution and delivery of this Agreement by the Company does not, and the
performance of this Agreement by the Company will not, require any consent,
approval, authorization or permit of, or filing with, or notification to, any
Governmental Entity except as disclosed in the Merger Agreement and the
disclosure schedule of the Company thereto.
6. Certain Rights.
(a) Kana Put. At the request of and upon notice by Kana (the "Put
Notice"), at any time during the period during which the Option is exercisable
pursuant to Section 2 (the "Purchase Period"), the Company (or any successor
entity thereof) shall be obligated to purchase from Kana all or any portion of
the Option, to the extent not previously exercised, at the price set forth in
subparagraph (i) below (as limited by subparagraph (iii) below), and all or
any portion of the Option Shares, if any, acquired by Kana pursuant thereto,
at the price set forth in subparagraph (ii) below (as limited by subparagraph
(iii) below):
(i) The difference between the Market/Tender Offer Price (as defined
below) for the Company Shares as of the date Kana gives notice of its
intent to exercise its rights under this Section 6(a) and the Exercise
Price, multiplied by the number of Company Shares purchasable pursuant to
the Option (or portion thereof with respect to which Kana is exercising
its rights under this Section 6), but only if the Market/Tender Offer
Price is greater than the Exercise Price. "Market/Tender Offer Price"
shall mean the highest of (A) the highest price per share offered pursuant
to any Silknet Takeover Proposal which was made prior to such date and has
not terminated or been withdrawn as of such date and (B) the highest
closing sale price of Company Shares as reported on the Nasdaq National
Market during the six (6) months ending on the trading day immediately
preceding such date. For purposes of determining the highest price offered
pursuant to any Silknet Takeover Proposal which involves consideration
other than cash, the value of such consideration will be equal to the
higher of (x) if securities of the same class of the proponent of such
Silknet Takeover Proposal as such consideration are traded on any national
securities exchange or by any registered securities association, a value
based on the closing sale price or closing asked price for such securities
on their principal trading market on such date and (y) the value ascribed
to such consideration by the proponent of such Silknet Takeover Proposal,
or if no such value is ascribed, a value determined in good faith by the
Board of Directors of the Company.
(ii) The Exercise Price paid by Kana for Company Shares acquired
pursuant to the Option plus the difference between the Market/Tender Offer
Price and such Exercise Price (but only if the Market/Tender Offer Price
is greater than the Exercise Price) multiplied by the number of Company
Shares so purchased (provided that Kana then has beneficial ownership of
such Company Shares).
(iii) The foregoing shall be subject to the limitations on Total
Profit set forth in Section 10.
(b) Payment and Redelivery of Option or Shares. If Kana exercises its
rights under Section 6(a), the Company will, within five (5) business days
after Kana delivers a Put Notice pursuant to Section 6(a), pay the required
amount to Kana in immediately available funds and Kana will surrender to the
Company the certificates evidencing the Company Shares and the portion of the
Option purchased by Kana pursuant thereto.
7. Reserved.
V-4
<PAGE>
8. Adjustment Upon Changes in Capitalization; Rights Plans.
(a) In the event of any change in the Company Shares by reason of stock
dividends, stock splits, reclassifications, reverse stock splits, mergers
(other than the Merger), recapitalizations, combinations, exchanges of shares
and the like, the type and number of shares or securities subject to the Option
and the Exercise Price will be adjusted appropriately, and proper provision
will be made in the agreements governing such transaction so that Kana will
receive, upon exercise of the Option, the number and class of shares or other
securities or property that Kana would have received in respect of the Company
Shares if the Option had been exercised immediately prior to such event or the
record date therefor, as applicable.
(b) At any time during which the Option is exercisable, and at any time
after the Option is exercised (in whole or in part, if at all), the Company
will not amend (nor permit the amendment of) any current stockholder rights
plan of the Company or its subsidiaries nor adopt (nor permit the adoption of)
a new stockholders rights plan that contains provisions for the distribution or
exercise of rights thereunder as a result of Kana or any affiliate being the
beneficial owner of shares of the Company by virtue of the Option being
exercisable or having been exercised (or as a result of beneficially owning
shares issuable in respect of any Option Shares).
9. Restrictive Legends.
Each certificate representing Option Shares issued to Kana hereunder will
include a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR SOLD ONLY
IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. SUCH
SECURITIES ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER AS SET FORTH
IN THE STOCK OPTION AGREEMENT DATED AS OF FEBRUARY 6, 2000, A COPY OF WHICH MAY
BE OBTAINED FROM THE ISSUER.
It is understood and agreed that (i) the reference to restrictions arising
under the Securities Act in the above legend will be removed by delivery of
substitute certificate(s) without such reference if such Option Shares have
been registered pursuant to the Securities Act, such Option Shares have been
sold in reliance on and in accordance with Rule 144 under the Securities Act or
Kana has delivered to the Company a copy of a letter from the staff of the SEC,
or an opinion of counsel in form and substance reasonably satisfactory to the
Company, to the effect that such legend is not required for purposes of the
Securities Act and (ii) the reference to restrictions pursuant to this
Agreement in the above legend will be removed by delivery of substitute
certificate(s) without such reference if the Option Shares evidenced by
certificate(s) containing such reference have been sold or transferred in
compliance with the provisions of this Agreement under circumstances that do
not require the retention of such reference.
10. Total Profit.
(a) Notwithstanding any other provision of this Agreement, in no event
shall Net Company Payments (as hereinafter defined) exceed one hundred forty-
eight million three hundred thousand dollars ($148,300,000) and in no event
shall Total Kana Profits (as hereinafter defined) exceed one hundred eighty-
eight million three hundred thousand dollars ($188,300,000), and if Net Company
Payments or Total Kana Profits otherwise would exceed such amounts, Kana, at
its sole election, shall either (i) reduce the number of Company Shares subject
to this Option, (ii) deliver to the Company for cancellation Option Shares
previously purchased by Kana (or other securities into which such Option Shares
are converted or exchanged), (iii) pay cash to the Company or (iv) any
V-5
<PAGE>
combination thereof, so that Kana's actually realized Net Company Payments and
Total Kana Profit shall not exceed such amounts after taking into account the
foregoing actions.
(b) As used herein, (i) the term "Net Company Payments" means the aggregate
amount (without duplication) of (A) the net cash amounts received by Kana from
the Company pursuant to the Company's repurchase of the Option or Option Shares
pursuant to Section 6(a), less (in the case of the Option Shares) Kana's
purchase price for such Option Shares, and (ii) the aggregate amount actually
received by Kana from the Company (exclusive of attorneys' fees and interest)
pursuant to Section 8.03 of the Merger Agreement; and (ii) the term "Total Kana
Profit" means the aggregate amount (without duplication) of (A) the net cash
amounts received by Kana pursuant to the Company's repurchase of the Option or
Option Shares pursuant to Section 6(a), less (in the case of the Option Shares)
Kana's purchase price for such Option Shares, (B) the aggregate amount actually
received by Kana pursuant to Section 8.03 of the Merger Agreement, and (C) the
net cash amounts received by Kana pursuant to the sale of Option Shares (or
securities into which such shares are converted or exchanged) to any other
unaffiliated third party, less Kana's purchase price for such Option Shares.
11. Listing and HSR Filing.
The Company, upon the request of Kana, will promptly file an application to
list the Company Shares to be acquired upon exercise of the Option for
quotation on the Nasdaq National Market and will use its best efforts to obtain
approval of such listing as soon as practicable. Promptly after the date
hereof, each of the parties hereto will promptly file with the Federal Trade
Commission and the Antitrust Division of the United States Department of
Justice all required premerger notification and report forms and other
documents and exhibits required to be filed under the HSR Act to permit the
acquisition of the Company Shares subject to the Option at the earliest
possible date.
12. Miscellaneous.
(a) Binding Effect. This Agreement will be binding upon and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns. Nothing contained in this Agreement, express or implied, is intended
to confer upon any person other than the parties hereto and their respective
successors and permitted assigns any rights or remedies of any nature
whatsoever by reason of this Agreement. Except as expressly provided for in
this Agreement, neither this Agreement nor the rights or the obligations of
either party hereto are assignable, except by operation of law or with the
written consent of the other party.
(b) Specific Performance. The parties hereto recognize and agree that if
for any reason any of the provisions of this Agreement are not performed in
accordance with their specific terms or are otherwise breached, immediate and
irreparable harm or injury would be caused for which money damages would not be
an adequate remedy. Accordingly, each party hereto agrees that in addition to
other remedies available, the other party hereto will be entitled to an
injunction restraining any violation or threatened violation of the provisions
of this Agreement or the right to enforce any of the covenants or agreements
set forth herein by specific performance. If any action will be brought in
equity to enforce the provisions of this Agreement, neither party hereto will
allege, and each party hereto hereby waives the defense, that there is an
adequate remedy at law.
(c) Entire Agreement. This Agreement and the Merger Agreement (including
the exhibits thereto) constitute the entire agreement between the parties
hereto with respect to the subject matter hereof and supersede all other prior
agreements and understandings, both written and oral, between the parties
hereto with respect to the subject matter hereof, it being understood that the
Confidentiality Agreement shall continue in full force and effect until the
Closing under the Merger Agreement and shall survive any terminations thereof
or hereof.
V-6
<PAGE>
(d) Further Assurances. Each party hereto will execute and deliver all such
further documents and instruments and take all such further action as may be
necessary in order to consummate the transactions contemplated hereby.
(e) Validity. The invalidity or unenforceability of any provision of this
Agreement will not affect the validity or enforceability of the other
provisions of this Agreement, which will remain in full force and effect. In
the event any Governmental Entity of competent jurisdiction holds any provision
of this Agreement to be null, void or unenforceable, the parties hereto will
negotiate in good faith and will execute and deliver an amendment to this
Agreement in order, as nearly as possible, to effectuate, to the extent
permitted by law, the intent of the parties hereto with respect to such
provision.
(f) Notices. All notices and other communications hereunder will be in
writing and will be deemed given if delivered personally or by commercial
delivery service, or sent via telecopy (receipt confirmed) to the parties at
the following addresses or telecopy numbers (or at such other address or
telecopy numbers for a party as will be specified by like notice):
if to Kana, to:
Kana Communications, Inc.
740 Bay Road
Redwood City, CA 94063
Attention: Chief Executive Officer
Telephone: (650) 298-9282
Facsimile: (650) 474-8501
with a copy to:
Brobeck, Phleger & Harrison LLP
Two Embarcadero Road
2200 Geng Road
Palo Alto, CA 94303
Attention: Warren T. Lazarow, Esq.
David A. Makarechian, Esq.
Telephone: (650) 424-0160
Facsimile: (650) 496-2885
if to the Company, to:
Silknet Software Inc.
50 Phillipe Cote Street
Manchester, NE 03101
Attention: Chief Executive Officer
Facsimile: (603) 6250428
and with a copy to:
Testa, Hurwitz & Thibeault, LLP
Oliver Street Tower
125 High Street
Boston, MA 02110
Attention: John Hession, Esq.
Telephone: (617) 248-7000
Facsimile: (617) 248-7100
V-7
<PAGE>
(g) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of law thereof.
(h) Expenses. Except as otherwise expressly provided herein or in the
Merger Agreement, all costs and expenses incurred in connection with the
transactions contemplated by this Agreement will be paid by the party incurring
such expenses.
(i) Amendments; Waiver. This Agreement may be amended by the parties hereto
and the terms and conditions hereof may be waived only by an instrument in
writing signed on behalf of each of the parties hereto, or, in the case of a
waiver, by an instrument signed on behalf of the party waiving compliance.
(j) Assignment. Neither of the parties hereto may sell, transfer, assign or
otherwise dispose of any of its rights or obligations under this Agreement or
the Option created hereunder to any other person, without the express prior
written consent of the other party, except that the rights and obligations
hereunder will inure to the benefit of and be binding upon any successor of a
party hereto.
(k) Counterparts. This Agreement may be executed in counterparts, each of
which will be deemed to be an original, but both of which, taken together, will
constitute one and the same instrument.
(l) Descriptive Headings. The section headings are for convenience only and
shall not affect the construction or interpretation of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers as of the date first
above written.
KANA COMMUNICATIONS, INC.
_____________________________________
Name:
Title:
SILKNET SOFTWARE INC.
_____________________________________
Name:
Title:
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<PAGE>
APPENDIX VI
[LETTERHEAD OF GOLDMAN, SACHS & CO.]
February 6, 2000
Board of Directors
Kana Communications, Inc
740 Bay Road
Redwood City, CA 94063
Gentlemen:
You have requested our opinion as to the fairness from a financial point
of view to Kana Communications, Inc. ("Kana") of the exchange ratio (the
"Exchange Ratio") of 0.83 of a share of Common Stock, par value $0.001 per
share (the "Kana Shares"), of Kana to be exchanged for each share of Common
Stock, par value $0.01 per share (the "Silknet Shares"), of Silknet Software,
Inc. ("Silknet") pursuant to the Agreement and Plan of Merger, dated as of
February 6, 2000, by and among Kana, Pistol Acquisition Corp. and Silknet (the
"Agreement").
Goldman, Sachs & Co., as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings,
competitive biddings, secondary distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes. We are familiar with Kana having provided certain investment banking
services to Kana from time to time, including having acted as a managing
underwriter of an initial public offering of 3,300,000 Kana Shares in
September 1999 and having acted as its financial advisor in connection with,
and having participated in certain of the negotiations leading to, the
Agreement. Goldman, Sachs & Co. provides a full range of financial advisory
and securities services and, in the course of its normal trading activities,
may from time to time effect transactions and hold securities, including
derivative securities, of Kana or Silknet for its own account and for the
accounts of customers. As of the date hereof, entities affiliated with the
Goldman Sachs Group L.P., which is the General Partner of Goldman, Sachs &
Co., accumulated a long position of 477,874 Silknet Shares.
In connection with this opinion, we have reviewed, among other things, the
Agreement; the Registration Statement on Form S-1, including the prospectus
contained therein dated September 21, 1999, relating to the initial public
offering of Kana Shares; the Registration Statement on Form S-1, including the
prospectus contained therein dated May 4, 1999, relating to the initial public
offering of Silknet Shares; Annual Report to Stockholders and Annual Report on
Form 10-K of Silknet for the fiscal year ended June 30, 1999; certain interim
reports to stockholders and Quarterly Reports on Form 10-Q of Kana and
Silknet; certain other communications from Kana and Silknet to their
respective stockholders; certain internal financial analyses and forecasts for
Silknet and Kana provided for our use by management of Kana; and certain cost
savings and operating synergies projected by the management of Kana to result
from the transaction contemplated by the Agreement (the "Synergies"). We also
have held discussions with members of the senior management of Kana and
Silknet regarding their assessment of the strategic rationale for, and the
potential benefits of, the transaction contemplated by the Agreement and the
past and current business operations, financial condition and future prospects
of their respective companies. In addition, we have reviewed the reported
price and trading activity for the Kana Shares and the Silknet Shares, which
like many Internet-related stocks have been and are likely to continue to be
subject to significant short-term price and trading volatility, compared
certain financial and stock market information for Kana and
VI-1
<PAGE>
Silknet with similar information for certain other companies the securities of
which are publicly traded, reviewed the financial terms of certain recent
business combinations in the software industry specifically and in other
industries generally and performed such other studies and analyses as we
considered appropriate.
We have relied upon the accuracy and completeness of all of the financial
and other information discussed with, or reviewed by us and have assumed such
accuracy and completeness for purposes of rendering this opinion. In that
regard, we have assumed with your consent that the internal financial forecasts
for Silknet and Kana provided by the management of Kana, including the
Synergies, have been reasonably prepared on a basis reflecting the best
currently available judgments and estimates of Kana, and that such forecasts
and Synergies will be realized in the amounts and time periods contemplated
thereby. In addition, we have not made an independent evaluation or appraisal
of the assets and liabilities of Kana or Silknet or any of their subsidiaries
and we have not been furnished with any such evaluation or appraisal. Our
advisory services and the opinion expressed herein are provided for the
information and assistance of the Board of Directors of Kana in connection with
its consideration of the transaction contemplated by the Agreement and such
opinion does not constitute a recommendation as to how stockholders should vote
with respect to such transaction.
Based upon and subject to the foregoing and based upon such other matters
as we consider relevant, it is our opinion that as of the date hereof the
Exchange Ratio pursuant to the Agreement is fair from a financial point of view
to Kana.
Very truly yours,
VI-2
<PAGE>
APPENDIX VII
[LETTERHEAD OF CREDIT SUISSE FIRST BOSTON]
Board of Directors
Silknet Software, Inc.
50 Phillippe Cote Street
Manchester, NH 03101
February 6, 2000
Dear Sirs and Mesdames:
You have asked us to advise you with respect to the fairness to the
stockholders of Silknet, Inc. (the "Company"), other than Kana Communications,
Inc. ("Kana"), from a financial point of view of the Exchange Ratio (as
defined below) as provided by the terms of the Agreement and Plan of
Reorganization, dated as of February 6, 2000 (the "Merger Agreement"), among
the Company, Kana and Kana Acquisition Corp. ("Merger Sub"). The Merger
Agreement provides for the merger (the "Merger") of the Company with Merger
Sub pursuant to which the Company will become a wholly-owned subsidiary of
Kana and each outstanding share of common stock, par value $0.01 per share, of
the Company (the "Company Common Stock") will be converted into the right to
receive 0.830 of a share (the "Exchange Ratio") of common stock, par value
$0.001 per share, of Kana (the "Kana Common Stock").
In arriving at our opinion, we have reviewed certain publicly available
business and financial information relating to the Company and Kana, as well
as the Merger Agreement. We have also reviewed certain other information,
including financial forecasts provided to us by the Company and Kana, and have
met with the Company's and Kana's management to discuss the business and
prospects of the Company and Kana. We have also considered certain financial
and stock market data of the Company and Kana, and we have compared that data
with similar data for other publicly held companies in businesses we deemed
similar to those of the Company and Kana and we have considered, to the extent
publicly available, the financial terms of certain other business combinations
and other transactions which have recently been effected. We also considered
such other information, financial studies, analyses and investigations and
financial, economic and market criteria which we deemed relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied
on its being complete and accurate in all material respects. With respect to
the financial information relating to the Company and Kana, we have been
advised, and have assumed, that such information reflects reasonable estimates
and judgments as to the future financial performance of the Company and Kana.
You have also informed us, and we have assumed, that the Merger will be
treated as a tax-free reorganization for federal income tax purposes. In
addition, we have not been requested to make, and have not made, an
independent evaluation or appraisal of the assets or liabilities (contingent
or otherwise) of the Company or Kana, nor have we been furnished with any such
evaluations or appraisals. Our opinion is necessarily based upon financial,
economic, market and other conditions as they exist and can be evaluated on
the date hereof. We are not expressing any opinion as to what the value of
Kana Common Stock actually will be when issued to the Company's stockholders
pursuant to the Merger or the prices at which such Kana Common Stock will
trade subsequent to the Merger. We were not requested to, and did not, solicit
third party indications of interest in acquiring all or any part of the
Company.
VII-1
<PAGE>
We have acted as financial advisor to the Company in connection with the
Merger and will receive a fee for our services, a significant portion of which
is contingent upon the consummation of the Merger. We will also receive a fee
for rendering this opinion. Credit Suisse First Boston and its affiliates have
in the past provided financial services to the Company, including, but not
limited to, acting as the lead underwriter in the Company's initial public
offering, and have received customary compensation for such services. In the
ordinary course of our business, we and our affiliates may actively trade the
debt and equity securities of both the Company and Kana for our own and such
affiliates' accounts and for the accounts of customers and, accordingly, may at
any time hold a long or short position in such securities.
It is understood that this letter is for the information of the Company in
connection with its consideration of the Merger, does not constitute a
recommendation to any stockholder as to how such stockholder should vote on the
proposed Merger and is not to be quoted or referred to, in whole or in part, in
any registration statement, prospectus or proxy statement, or in any other
document used in connection with the offering or sale of securities, nor shall
this letter be used for any other purposes, without our prior written consent.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Exchange Ratio is fair to the Company's stockholders, other
than Kana, from a financial point of view.
Very truly yours,
CREDIT SUISSE FIRST BOSTON
CORPORATION
/s/ Joseph T. Josephson
By: ________________________________
Joseph T. Josephson
Managing Director
VII-2
<PAGE>
Appendix VIII
(Form of Proxy)
KANA COMMUNICATIONS, INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS--March 29, 2000
(This Proxy is solicited by the Board of Directors of the Company)
The undersigned stockholder of Kana Communications, Inc. hereby appoints
Michael J. McCloskey and Mark S. Gainey, and each of them, with full power of
substitution, proxies to vote the shares of stock which the undersigned could
vote if personally present at the Special Meeting of Stockholders of Kana
Communications, Inc. to be held at 10:00 a.m., local time, on April , 2000,
at the offices of Brobeck, Phleger & Harrison L.L.P. at Two Embarcadero Place,
2200 Geng Road, Palo Alto, California 94303.
1. APPROVAL OF THE ISSUANCE OF SHARES OF COMMON STOCK PURSUANT TO THE
MERGER AGREEMENT AMONG KANA COMMUNICATIONS, INC., SILKNET SOFTWARE,
INC. AND PISTOL ACQUISITION CORP.
[_] FOR[_] AGAINST[_] ABSTAIN
2. APPROVAL AND ADOPTION OF AN AMENDMENT TO KANA'S CERTIFICATE OF
INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON
STOCK FROM 100,000,000 TO 1,000,000,000.
[_] FOR[_] AGAINST[_] ABSTAIN
3. APPROVAL AND ADOPTION OF AN AMENDMENT TO KANA'S 1999 STOCK INCENTIVE
PLAN TO (i) INCREASE THE NUMBER OF SHARES OF COMMON STOCK AVAILABLE
FOR ISSUANCE UNDER THE 1999 PLAN BY 10,000,000 SHARES, (ii) ALLOW
OPTION GRANTS AND DIRECT STOCK ISSUANCES TO BE MADE UNDER THE 1999
PLAN AT AN EXERCISE OR ISSUE PRICE BELOW THE FAIR MARKET VALUE OF THE
SHARES ON THE DATE OF GRANT OR ISSUE, AND (iii) INCREASE THE
LIMITATION ON THE MAXIMUM NUMBER OF SHARES BY WHICH THE SHARE RESERVE
UNDER THE 1999 PLAN IS TO INCREASE EACH YEAR PURSUANT TO THE AUTOMATIC
SHARE INCREASE PROVISIONS OF SUCH PLAN FROM 4,000,000 TO 6,000,000
SHARES.
[_] FOR[_] AGAINST[_] ABSTAIN
4. IN THEIR DISCRETION UPON SUCH OTHER MATTERS AS MAY PROPERLY COME
BEFORE THE MEETING
UNLESS OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED FOR PROPOSAL 1, PROPOSAL
2 AND PROPOSAL 3.
Please date and sign exactly as your name appears on the envelope in which
this material was mailed. If shares are held jointly, each stockholder should
sign. Executors, administrators, trustees, etc. should use full title and, if
more than one, all should sign. If the stockholder is a corporation, please
sign full corporate name by an authorized officer. If the stockholder is a
partnership, please sign full partnership name by an authorized person.
_____________________________________
Name(s) of Stockholder
_____________________________________
Signature(s) of Stockholder
Dated: ________________________
VIII-1
<PAGE>
Appendix IX
(Form of Proxy)
SILKNET SOFTWARE, INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS-- , 2000
(This Proxy is solicited by the Board of Directors of the Company)
The undersigned stockholder of Silknet Software, Inc. hereby appoints James
C. Wood and Patrick J. Scannell, Jr., and each of them, with full power of
substitution, proxies to vote the shares of stock which the undersigned could
vote if personally present at the Special Meeting of Stockholders of Silknet
Software, Inc. to be held at 10:00 a.m., local time, on April , 2000, at the
offices of Testa, Hurwitz & Thibeault, L.L.P. at 125 High Street, High Street
Tower, 20th Floor, Boston Massachusetts 02110.
1. ADOPTION OF THE MERGER AGREEMENT AMONG KANA COMMUNICATIONS, INC.,
SILKNET SOFTWARE, INC. AND PISTOL ACQUISITION CORP.
[_] FOR[_] AGAINST[_] ABSTAIN
2. IN THEIR DISCRETION UPON SUCH OTHER MATTERS AS MAY PROPERLY COME
BEFORE THE MEETING
UNLESS OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED FOR PROPOSAL 1 AND
PROPOSAL 2.
Please date and sign exactly as your name appears on the envelope in which
this material was mailed. If shares are held jointly, each stockholder should
sign. Executors, administrators, trustees, etc. should use full title and, if
more than one, all should sign. If the stockholder is a corporation, please
sign full corporate name by an authorized officer. If the stockholder is a
partnership, please sign full partnership name by an authorized person.
_____________________________________
Name(s) of Stockholder
_____________________________________
Signature(s) of Stockholder
Dated: ________________________
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<PAGE>
APPENDIX X
KANA COMMUNICATIONS, INC.
1999 STOCK INCENTIVE PLAN
AS AMENDED AND RESTATED , 2000
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.
All share numbers in the , 2000 restatement reflect the two-for-one
stock split by Kana on February 22, 2000 effected by means of a stock dividend
of one share of Kana common stock per share of Kana common stock then
outstanding.
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.
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.
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<PAGE>
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.
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
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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.
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 Twenty One
Million Nine Hundred Eighty Three Thousand and One Hundred (21,983,100) shares.
Such reserve shall consist of (i) the number of shares which remained 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 approximately Seven Million One Hundred Thirty Thousand (7,130,000)
shares approved by the Corporation's stockholders prior to the Underwriting
Date, plus (iii) an additional increase of Two Million Five Hundred Eighty
Three Thousand and One Hundred (2,583,100) shares on January 3, 2000 pursuant
to the automatic share increase provisions of Section V.B of this Article One,
plus (iv) an additional increase of Ten Million (10,000,000) shares authorized
by the Board in 2000, subject to stockholder approval at the Special
Stockholders Meeting to be held on April , 2000.
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 Six Million (6,000,000) shares./1/
- --------
/1/ The increase in the limitation on the annual increase from Four
Million (4,000,000) to Six Million (6,000,000) shares is subject to stockholder
approval at the Special Meeting to be held on April , 2000.
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C. No one person participating in the Plan may receive stock options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 2,000,000 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.
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.
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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
and may be set at a price per share less than, equal to or greater than the
Fair Market Value per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon exercise of the
option and shall, subject to the provisions of Section I of Article 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.
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
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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.
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
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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. Exercise Price. The exercise price per share for each Incentive Option
shall not be less than one hundred percent (100%) of the Fair Market Value per
share of Common Stock on the grant date of that Incentive Option.
C. Dollar Limitation. The aggregate Fair Market Value of the shares of
Common Stock (determined as of the respective date or dates of grant) for which
one or more options granted to any Employee under the Plan (or any other option
plan of the Corporation or any Parent or Subsidiary) may for the first time
become exercisable as Incentive Options during any one calendar year shall not
exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the
Employee holds two (2) or more such options which become exercisable for the
first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
D. 10% 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
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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 (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 effective 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 effective 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
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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 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 a 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.
(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
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(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.
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
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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 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 prior to the effective date of the Change in
Control, 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
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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.
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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
and may be less than, equal to or greater than 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 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
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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.
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.
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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 40,000 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 10,000 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 10,000-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
40,000 share grant shall vest, and the Corporation's repurchase right shall
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 10,000-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
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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.
(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 a Corporate Transaction while the Optionee remains a
Board member, the shares of Common Stock at the time subject to each
outstanding option held by such Optionee under this Automatic Option Grant
Program 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 the event of a Change in Control while the Optionee remains a Board
member, the shares of Common Stock at the time subject to each outstanding
option held by such Optionee under this Automatic Option Grant Program 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
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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.
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.
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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 the 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
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
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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.
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.
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B. In the event of a Change in Control 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 Change in Control, 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.
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.
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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.
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.
X-21
<PAGE>
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.
B. The Plan was amended and restated in 2000 (the " 2000
Restatement") to effect the following changes, subject to stockholder approval
at the Special Stockholders Meeting to be held on April , 2000:
(i) increase the maximum number of shares of Common Stock authorized
for issuance under the Plan by an additional 10,000,000 shares so that the
authorized share reserve was thereby increased from 11,983,100 shares to
21,983,100 shares of Common Stock;
(ii) provide the Plan Administrator with the authority to make option
grants and direct stock issuances under the Discretionary Option Grant and
Stock Issuance Programs with an exercise or issue price less than the Fair
Market Value of the shares on the date of the option grant or stock
issuance; and
(iii) increase the limitation on the number of shares by which the
share reserve is to increase automatically each year pursuant to the
provisions of Section V.B of Article One from 4,000,000 shares to
6,000,000 shares.
No option grants or direct stock issuances shall be made on the basis of
the amendments authorized by the 2000 Restatement unless and until that
restatement is approved by the stockholders at the Special Stockholders
Meeting.
C. 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
X-22
<PAGE>
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.
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
X-23
<PAGE>
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.
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.
X-24
<PAGE>
(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.
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.
X-25
<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 1997 Stock Option/Stock
Issuance 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.
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.
X-26
<PAGE>
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.
X-27
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits indemnification
of officers, directors and other corporate agents under certain circumstances
and subject to certain limitations. The Registrant's certificate of
Incorporation and Bylaws provide that the Registrant shall indemnify its
directors, officers, employees and agents to the fullest extent permitted by
Delaware General Corporation Law, including in circumstances in which
indemnification is otherwise discretionary under Delaware law. Kana has entered
into an indemnification agreement (Exhibit 10.4) 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. The Registrant also maintains
director and officer liability insurance.
Item 21. Exhibits and Financial Statement Schedules
a) Exhibit Schedule
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
2.1** Agreement and Plan of Reorganization by and among Kana Communications,
Inc., Pistol Acquisition Corp. and Silknet Software, Inc.
3.1* Certificate of Incorporation.
3.2* Amended and Restated Bylaws.
4.1* Fourth Amended and Restated Investors' Rights Agreement dated August
13, 1999 by and among Kana Communications, Inc. and parties listed on
Schedule A therein.
4.2*** Form of amendment to Fourth Amended and Restated Investors' Rights
Agreement.
5.1*** Opinion of Brobeck, Phleger & Harrison LLP regarding the validity of
the securities to be issued.
8.1 Form of Opinion of Brobeck, Phleger & Harrison LLP regarding certain
tax aspects of the merger.
8.2 Form of Opinion of Testa, Hurwitz & Thibeault, LLP regarding certain
tax aspects of the merger.
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 On-Line 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.
10.12 Lease, dated February 11, 2000, by and between Veterans Self-Storage,
LLC and the Registrant.
</TABLE>
Part II-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.13 Amended and Restated 1999 Stock Incentive Plan of Kana Communications,
Inc. (attached as Appendix A to the Joint Proxy Statement/Prospectus
forming part of this registration statement).
21.1 Subsidiaries of Kana Communications, Inc.
23.1 Report on Schedule and Consent of KPMG LLP, Independent Auditors.
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
23.4 Consent of Testa, Hurwitz & Thibeault, LLP (included in Exhibit 8.2).
24.1 Power of Attorney (See page II-4).
27.1 Financial Data Schedule.
99.1 Consent of Goldman, Sachs & Co.
99.2 Consent of Credit Suisse First Boston Corporation.
</TABLE>
- --------
* Incorporated into this registration statement by reference to the exhibit
of the same number to the registrant's registration statement on form S-1,
File No. 333-82587, originally filed with the Commission on July 9, 1999,
as subsequently amended.
** Previously filed as an exhibit to the form 13D filed with the Commission by
the registrant on February 16, 2000, and incorporated into this
registration statement by reference, and which is attached as Appendix I to
the Joint Proxy Statement/Prospectus forming part of this registration
statement.
*** To be filed by amendment.
b) Schedule II -- Valuation and Qualifying Accounts
KANA COMMUNICATIONS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged Balance
Beginning to at End
of Period Revenues Deductions of Year
---------- -------- ---------- -------
(in thousands)
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year ended December 31, 1997........... $ -- $ -- $ -- $ --
Year ended December 31, 1998........... -- 110 -- 110
Year ended December 31, 1999........... 110 156 -- 366
</TABLE>
Item 22. Undertakings
The undersigned registrant hereby undertakes:
(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter
within the meaning of Rule 145(c), the issuer undertakes that such
reoffering prospectus will contain the information called for by the
applicable registration form with respect to reofferings by persons who
may be deemed underwriters, in addition to the information called for by
the other items of the applicable form.
(2) That every prospectus: (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is
Part II-2
<PAGE>
used in connection with an offering of securities subject to Rule 415,
will be filed as a part of an amendment to the registration statement and
will not be used until such amendment is effective, and that, for purposes
of determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(4) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of
responding to the request.
(5) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement
when it became effective.
Part II-3
<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 Redwood
City, State of California, on this 14th day of March, 2000.
Kana Communications, Inc.
/s/ Michael J. McCloskey
By: _________________________________
Michael J. McCloskey
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Michael J. McCloskey, Mark S. Gainey and
Joseph D. McCarthy, and each of them, as such person's true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for such person and in such person's name, place and stead, in
any and all capacities, to sign any and all amendments (including post-
effective amendments) to this Registration Statement, and to file same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as such person might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his or her substitutes, may lawfully do or
cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Michael J. McCloskey Chief Executive Officer and March 14, 2000
____________________________________ Director (Principal
Michael J. McCloskey Executive Officer)
/s/ Joseph D. McCarthy Vice President, Finance and March 14, 2000
____________________________________ Operations (Principal
Joseph D. McCarthy Financial and Accounting
Officer)
/s/ Mark S. Gainey President and Chairman of March 14, 2000
____________________________________ the Board of Directors
Mark S. Gainey
/s/ David M. Beirne Director March 14, 2000
____________________________________
David M. Beirne
/s/ Robert W. Frick Director March 14, 2000
____________________________________
Robert W. Frick
</TABLE>
Part II-4
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Eric A. Hahn Director March 14, 2000
____________________________________
Eric A. Hahn
/s/ Dr. Charles A. Holloway Director March 14, 2000
____________________________________
Dr. Charles A. Holloway
/s/ Steven T. Jurvetson Director March 14, 2000
____________________________________
Steven T. Jurvetson
/s/ Ariel Poler Director March 14, 2000
____________________________________
Ariel Poler
</TABLE>
Part II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
2.1** Agreement and Plan of Reorganization by and among Kana Communications,
Inc., Pistol Acquisition Corp. and Silknet Software, Inc.
3.1* Certificate of Incorporation.
3.2* Amended and Restated Bylaws.
4.1* Fourth Amended and Restated Investors' Rights Agreement dated August
13, 1999 by and among Kana Communications, Inc. and parties listed on
Schedule A therein.
4.2*** Form of amendment to Fourth Amended and Restated Investors' Rights
Agreement.
5.1*** Opinion of Brobeck, Phleger & Harrison LLP regarding the validity of
the securities to be issued.
8.1 Form of Opinion of Brobeck, Phleger & Harrison LLP regarding certain
tax aspects of the merger.
8.2 Form of Opinion of Testa, Hurwitz & Thibeault, LLP regarding certain
tax aspects of the merger.
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 On-Line 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.
10.12 Lease, dated February 11, 2000, by and between Veterans Self-Storage,
LLC and the Registrant.
10.13 Amended and Restated 1999 Stock Incentive Plan of Kana Communications,
Inc. (attached as Appendix X to the Joint Proxy Statement/Prospectus
forming part of this registration statement).
21.1 Subsidiaries of Kana Communications, Inc.
23.1 Report on Schedule and Consent of KPMG LLP, Independent Auditors.
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
23.4 Consent of Testa, Hurwitz & Thibeault, LLP (included in Exhibit 8.2).
24.1 Power of Attorney (See Page II-4).
27.1 Financial Data Schedule.
99.1 Consent of Goldman, Sachs & Co.
99.2 Consent of Credit Suisse First Boston Corporation.
</TABLE>
1
<PAGE>
- --------
* Incorporated into this registration statement by reference to the exhibit
of the same number to the registrant's registration statement on form S-1,
File No. 333-82587, originally filed with the Commission on July 9, 1999,
as subsequently amended.
** Previously filed as an exhibit to the form 13D filed with the Commission
by the registrant on February 16, 2000, and incorporated into this
registration statement by reference, and which is attached as Appendix I
to the Joint Proxy Statement/Prospectus forming part of this registration
statement.
*** To be filed by amendment.
2
<PAGE>
Exhibit 8.1
[LETTERHEAD OF BROBECK PHLEGER & HARRISON LLP]
____________, 2000
Kana Communications, Inc.
740 Bay Road
Redwood City, CA 94063
Ladies and Gentlemen:
This opinion is being delivered to you in connection with (i) the
Agreement and Plan of Reorganization (the "Agreement") dated as of February 6,
2000, between Kana Communications, Inc., a Delaware corporation ("Parent"),
Pistol Acquisition Corp., a Delaware corporation and a wholly owned subsidiary
of Parent ("Merger Sub"), and Silknet Software, Inc., a Delaware corporation
("Target"), and (ii) the preparation and filing with the Securities and Exchange
Commission of a Form S-4 Registration Statement relating to the Merger (the
"Registration Statement"). Pursuant to the Agreement, Merger Sub will merge
with and into Target (the "Merger"), and Target will become a wholly owned
subsidiary of Parent.
Except as otherwise provided, capitalized terms referred to herein
have the meanings set forth in the Agreement. All section references, unless
otherwise indicated, are to the Internal Revenue Code of 1986, as amended (the
"Code").
We have acted as legal counsel to Parent in connection with the
Merger. As such, and for the purpose of rendering this opinion, we have
examined and are relying upon (without any independent investigation or review
thereof) the truth and accuracy, at all relevant times, of the statements,
covenants, representations and warranties contained in the following documents
(including all schedules and exhibits thereto):
1. The Agreement;
2. The Registration Statement; and
3. Such other instruments and documents related to Parent, Target,
Merger Sub and the Merger as we have deemed necessary or appropriate.
In connection with rendering this opinion, we have assumed or obtained
representations (and are relying thereon, without any independent investigation
or review thereof) that:
A. Original documents submitted to us (including signatures) are
authentic, documents submitted to us as copies conform to the original
documents, and there has been (or
<PAGE>
Kana Communications, Inc. _________, 2000
Page 2
will be by the Effective Time) due execution and delivery of all documents
where due execution and delivery are prerequisites to the effectiveness thereof;
and
B. The Merger will be consummated in accordance with the Agreement
without any waiver or breach of any material provision thereof, and the Merger
will be effective under applicable state law.
Based on our examination of the foregoing items and subject to the
assumptions, exceptions, limitations and qualifications set forth herein, we are
of the opinion that the statements regarding United States federal income tax
consequences set forth in the Registration Statement under the heading "Material
Federal Income Tax Considerations," insofar as they constitute statements of law
or legal conclusions, are correct in all material respects. We express no
opinion as to any federal, state or local, foreign or other tax consequences,
other than as set forth in the Registration Statement under the heading
"Material Federal Income Tax Considerations."
In addition to the assumptions and representations described above,
this opinion is subject to the exceptions, limitations and qualifications set
forth below.
(1) This opinion represents and is based upon our best judgment
regarding the application of federal income tax laws arising under the Code,
existing judicial decisions, administrative regulations and published rulings
and procedures. Our opinion is not binding upon the Internal Revenue Service or
the courts, and there is no assurance that the Internal Revenue Service will not
successfully assert a contrary position. Furthermore, no assurance can be given
that future legislative, judicial or administrative changes, on either a
prospective or retroactive basis, will not adversely affect the accuracy of the
conclusions stated herein. Nevertheless, we undertake no responsibility to
advise you of any new developments in the application or interpretation of the
federal income tax laws.
(2) No opinion is expressed as to any transaction other than the
Merger (whether or not undertaken in connection with the Merger) or as to any
transaction whatsoever, including the Merger, if all the transactions described
in the Agreement are not consummated in accordance with the terms of such
Agreement and without waiver or breach of any material provision thereof or if
all of the statements, representations, warranties and assumptions upon which we
relied are not true and accurate at all relevant times. In the event any one of
the statements, representations, warranties or assumptions upon which we have
relied to issue this opinion is incorrect, our opinion might be adversely
affected and may not be relied upon.
This opinion is rendered to you solely in connection with the filing
of the Registration Statement. We hereby consent to the filing of this opinion
as an exhibit to the Registration Statement. We also consent to the references
to our firm name wherever appearing in the Registration Statement with respect
to the discussion of the federal income tax consequences of
<PAGE>
Kana Communications, Inc. _____________, 2000
Page 3
the Merger, including any amendments to the Registration Statement. This opinion
may not be relied upon for any other purpose, and may not be made available to
any other person, without our prior written consent.
Very truly yours,
<PAGE>
Exhibit 8.2
__________, 2000
Silknet Software, Inc.
50 Phillippe Cote Street
Manchester, NH 03101
Ladies and Gentlemen:
This opinion is being delivered to you in connection with (i) the Agreement
and Plan of Reorganization (the "Agreement"), dated as of February 6, 2000, by
and among Kana Communications, Inc., a Delaware corporation ("Kana"), Pistol
Acquisition Corp. ("Merger Sub"), a Delaware corporation wholly-owned by Kana,
and Silknet Software, Inc., a Delaware corporation ("Silknet"), and (ii) the
preparation and filing with the Securities and Exchange Commission of a Form S-4
Registration Statement relating to the Merger (the "Registration Statement").
Pursuant to the Agreement, Merger Sub will merge with and into Silknet (the
"Merger"), and Silknet will become a wholly-owned subsidiary of Kana. Unless
otherwise defined, capitalized terms referred to herein have the meanings set
forth in the Agreement. All section references, unless otherwise indicated, are
to the Internal Revenue Code of 1986, as amended (the "Code").
We have acted as legal counsel to Silknet in connection with the Merger.
As such, and for purposes of rendering this opinion, we have reviewed and are
relying upon (without any independent investigation or examination thereof) the
truth and accuracy, at all relevant times, of the facts, statements,
descriptions, covenants, representations and warranties set forth in the
Agreement, the Registration Statement and such other instruments and documents
pertaining to the formation, organization and operation of Silknet, Kana and
Merger Sub and to the consummation of the Merger and the transactions
contemplated thereby as we have deemed necessary or appropriate.
In connection with rendering this opinion, we have also assumed or obtained
representations (and are relying thereon, without any independent investigation
or examination thereof) that:
1. Original documents (including signatures) are authentic, documents
submitted to us as copies conform to the original documents, and there has been
(or will be by the Effective Time) due execution and delivery of all documents
where due execution and delivery are prerequisites to effectiveness thereof.
2. Any statement made in any of the documents referred to herein "to the
knowledge of" or "to the best of the knowledge of" any person or party or
similarly qualified is correct without such qualification.
<PAGE>
Silknet Software, Inc.
Page 2
_________, 2000
3. The Merger will be consummated in accordance with the terms of the
Agreement and without any waiver, breach or amendment of any provision thereof,
and the Merger will be effective under applicable state laws.
Based upon our examination of the foregoing items and subject to the
assumptions, limitations and qualifications set forth herein, it is our opinion
that, under current law, the statements regarding United States federal income
tax considerations set forth under the heading "THE MERGER - Material Federal
Income Tax Considerations" in the Registration Statement, insofar as they
constitute statements of law or legal conclusions, although general in nature,
are correct in all material respects. The United States federal income tax
consequences of the Merger to a holder of Silknet common stock will, however,
depend upon that holder's particular situation and we express no opinion as to
the completeness of the discussion set forth in "THE MERGER - Material Federal
Income Tax Considerations" as applied to any particular holder.
This opinion represents and is based upon our judgment regarding the
application of current federal income tax laws including the Code, existing
judicial decisions, administrative regulations and published rulings and
procedures. Our opinion is not binding upon the Internal Revenue Service or the
courts, and there is no assurance that the Internal Revenue Service will not
successfully assert a contrary position. Furthermore, we can give no assurance
that future legislative, judicial or administrative changes, on either a
prospective or retroactive basis, would not adversely affect the accuracy of the
conclusions stated herein. Nevertheless, we undertake no responsibility to
advise you of any new developments in the application or interpretation of the
federal income tax laws.
This opinion addresses only the matters set forth above, and does not
address any other federal, state, local or foreign tax consequences that may
result from the Merger or any other transaction (including any transaction
undertaken in connection with the Merger). In particular, we express no opinion
regarding (i) whether and the extent to which any Silknet stockholder who has
provided or will provide services to Silknet, Kana or Merger Sub will have
compensation income under any provision of the Code; (ii) the effects of any
such compensation income, including but not limited to the effect upon the basis
and holding period of the Kana common stock received by any such stockholder;
(iii) the potential application of the "golden parachute" provisions (Sections
280G, 3121(v)(2) and 4999) of the Code, the alternative minimum tax provisions
(Sections 55, 56 and 57) of the Code or Sections 305, 306, 357, 424, and 708 of
the Code, or the Treasury regulations promulgated thereunder; (iv) the corporate
level tax consequences of the Merger to Kana, Merger Sub or Silknet, including
without limitation the survival and/or availability, after the Merger, of any of
the federal income tax attributes or elections of Silknet, after application of
any provision of the Code, as well as the regulations promulgated thereunder and
judicial interpretations thereof; (v) the tax consequences of the Merger as
applied to specific shareholders of Silknet or that may be relevant to
particular classes of Silknet shareholders such as dealers in securities,
foreign persons and holders of shares
<PAGE>
Silknet Software, Inc.
Page 3
____________, 2000
acquired upon exercise of stock options or in other compensatory transactions;
(vi) the basis of any equity interest in Silknet acquired by Kana in the Merger;
(vii) the tax consequences of any transaction in which a right to acquire
Silknet stock or Kana stock was received, or the effect of the Merger upon such
tax consequences; (viii) the tax consequences of the Merger to holders of
options, warrants or other rights to acquire Silknet stock; (ix) any state,
local or foreign tax consequences of the Merger; or (x) whether the Merger
constitutes a reorganization within the meaning of Section 368(a) of the Code.
No opinion is expressed as to any transaction other than the Merger as
described in the Agreement (whether or not undertaken in connection with or in
contemplation of the Merger) or as to any transaction whatsoever, including the
Merger, if all the transactions described in the Agreement are not consummated
in accordance with the terms of the Agreement and without waiver or breach of
any provision thereof or if any of the facts, statements, descriptions,
covenants, representations, warranties or assumptions upon which we relied are
not true and accurate at all relevant times. In the event any one of the facts,
statements, descriptions, covenants, representations, warranties or assumptions
upon which we have relied to issue this opinion is incorrect, our opinion might
be adversely affected and may not be relied upon.
This opinion has been delivered to you solely for the purpose of being
included as an exhibit to the Registration Statement; it may not be relied upon
for any other purpose or by any other person or entity and may not be made
available to any other person or entity without our prior written consent. We
hereby consent to the filing of this opinion as an exhibit to the Registration
Statement, and to the references to our firm name under the heading, "THE MERGER
- --Material Federal Income Tax Considerations" in the Registration Statement. In
giving this consent, however, we do not admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act, as
amended.
Very truly yours,
<PAGE>
Exhibit 10.12
OFFICE BUILDING LEASE
BETWEEN
VETERANS SELF-STORAGE, LLC
LANDLORD
AND
KANA COMMUNICATIONS, INC.
TENANT
<PAGE>
OFFICE BUILDING LEASE
---------------------
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. BASIC LEASE TERMS 1
2. PREMISES 4
3. TERM 5
4. POSSESSION 8
5. RENT 10
6. ADDITIONAL RENT; OPERATING EXPENSES 10
7. SECURITY DEPOSIT 14
8. USE 16
9. NOTICES 18
10. BROKERS 18
11. SURRENDER; HOLDING OVER 18
12. TAXES ON TENANT'S PROPERTY 19
13. ALTERATIONS 19
14. REPAIRS 21
15. LIENS 22
16. ENTRY BY LANDLORD 23
17. UTILITIES AND SERVICES 23
18. BANKRUPTCY 23
19. INDEMNIFICATION AND EXCULPATION 24
20. INSURANCE 24
21. DAMAGE OR DESTRUCTION 27
22. EMINENT DOMAIN 29
23. TENANT'S DEFAULT; LANDLORD'S REMEDIES 29
24. LANDLORD'S DEFAULT 32
25. ASSIGNMENT AND SUBLETTING 32
26. SUBORDINATION 36
27. ESTOPPEL CERTIFICATE 36
28. INTENTIONALLY OMITTED
29. RULES AND REGULATIONS 37
30. MODIFICATION AND CURE RIGHTS OF LANDLORD'S
MORTGAGEES AND LESSORS 37
31. DEFINITION OF LANDLORD 37
32. WAIVER 38
33. IDENTIFICATION OF TENANT 38
34. PARKING 38
35. FORCE MAJEURE 39
36. SIGNS 39
37. LIMITATION ON LIABILITY 40
</TABLE>
<PAGE>
<TABLE>
<S> <C>
38. FINANCIAL STATEMENTS 40
39. QUIET ENJOYMENT 40
40. CONDITION OF EFFECTIVENESS OF LEASE 40
41. MISCELLANEOUS 41
SIGNATURE PAGE 42
</TABLE>
<PAGE>
EXHIBITS:
A Site Plan
B Diagram of the Land
C Work Letter Agreement
D Notice of Lease Term Dates
E Rules and Regulations
F Form of Subordination, Non-Disturbance, and Attornment Agreement
<PAGE>
OFFICE BUILDING LEASE
---------------------
THIS OFFICE BUILDING LEASE ("Lease") is made and entered into as of the 8th
day of February, 2000, by and between VETERANS SELF-STORAGE, LLC, a California
limited liability company ("Landlord"), and KANA COMMUNICATIONS, INC., a
Delaware corporation ("Tenant").
1. BASIC LEASE TERMS. For the purposes of this Lease, the following terms
-----------------
shall have the following definitions and meanings:
(a) Landlord: VETERANS SELF-STORAGE, LLC, a California limited
liability company.
(b) Landlord's Address:
(For Rent and Notices)
20725 Valley Green Drive, Suite 100
Cupertino, California 95014
Telephone: (408) 255-4100
Attention: Derek K. Hunter, Jr.
or such other places as Landlord may from time to time designate by notice to
Tenant.
(c) Tenant: KANA COMMUNICATIONS, INC., a Delaware corporation.
(d) Tenant's Address:
740 Bay Road
Redwood City, California 94063
Telephone: (650) 298-9282
Attention: General Counsel
(e) Land: The parcel(s) of real property located in the City of
Redwood City (the "City"), County of San Mateo (the "County"), State of
California, as shown on Exhibit "B" attached hereto.
(f) Building: A four (4) story office building to be constructed on
the Land, expected to contain approximately sixty-two thousand five hundred
(62,500) Rentable Square Feet (subject to adjustment as set forth in
Subparagraph 2(e)), as generally shown on Exhibit "A".
5
<PAGE>
(g) Premises: The Land, the Building, the Parking Structure, and the
Outside Areas.
(h) Parking Structure: A three (3) story parking structure to be
constructed on the Land, containing approximately one hundred seventy (170)
parking spaces, as generally shown on Exhibit "A".
(i) Term: Ten (10) Lease Years.
(j) Outside Areas: The parking areas of the Premises other than the
Parking Structure, trash areas, roadways, sidewalks, walkways, driveways,
landscaped areas, plaza areas, fountains and similar areas and facilities within
the Premises.
(k) Commencement Date: The Commencement Date shall be the date which
is ninety (90) days after the date that the Landlord's Work [as defined in
Subparagraph 1(a) of the Work Letter Agreement attached hereto as Exhibit "C"
("Work Letter Agreement")] has been substantially completed (as defined below);
provided, however, the Commencement Date may be advanced or extended as follows:
(i) if substantial completion of the Landlord's Work is delayed as a result of
any Tenant Delays (as defined in the Work Letter Agreement), then the
Commencement Date, as would otherwise have been established as set forth in this
sentence, shall be advanced by the number of days of such Tenant Delays; and
(ii) if Tenant is delayed in the substantial completion of the Tenant
Improvements beyond the ninety (90) day period set forth in this sentence as a
result of Landlord Delays (as defined in the Work Letter Agreement), then for
each day of such delay the Commencement Date shall be extended by one (1) day.
For purposes of this Lease, the Landlord's Work shall be deemed to be
"substantially completed" when Landlord's contractor certifies in writing
("Landlord's Work Substantial Completion Certificate") to Landlord and Tenant
that Landlord has substantially performed all of the Landlord's Work required to
be performed by Landlord under the Work Letter Agreement other than minor
"punch-list" type items and adjustments which do not materially interfere with
Tenant's access to the Premises. Within seven (7) days after Tenant receives
the Landlord's Work Substantial Completion Certificate, Tenant shall be entitled
to have its architect inspect the Landlord's Work for purposes of confirming the
matters set forth in the Landlord's Work Substantial Completion Certificate,
provided Tenant shall give Landlord at least forty-eight (48) hours' prior
written notice of such inspection. Landlord shall be entitled to have its
contractor, architect and/or other representatives present during such
inspection by Tenant's architect. If Tenant fails to have its architect inspect
the Landlord's Work within the aforesaid seven (7) day period, it shall be
deemed that Tenant has waived its right to make such inspection.
For purposes of this Lease, substantial completion of the Tenant
Improvements shall occur on the date that the Tenant Improvements have been
substantially completed in accordance with the Final Tenant Improvement Plans
and Specifications (hereafter defined in
6
<PAGE>
Subparagraph 3(b) of the Work Letter Agreement) other than decoration and minor
"punch-list" type items and adjustments which do not materially interfere with
Tenant's use of the Building.
(l) Intentionally Omitted.
7
<PAGE>
(m) Monthly Base Rent: Monthly Base Rent for the Term shall be as
follows:
Monthly Per
Lease Building Rentable Rentable Square
Year Square Footage Foot Base Rent Rate Monthly Base Rent
---- -------------- ------------------- ---------------------
1 62,500 $3.25 $203,125.00 per month
2 62,500 $3.35 $209,375.00 per month
3 62,500 $3.45 $215,625.00 per month
4 62,500 $3.55 $221,875.00 per month
5 62,500 $3.65 $228,125.00 per month
6 62,500 $3.80 $237,500.00 per month
7 62,500 $3.95 $246,875.00 per month
8 62,500 $4.10 $256,250.00 per month
9 62,500 $4.25 $265,625.00 per month
10 62,500 $4.40 $275,000.00 per month
(n) Intentionally Omitted.
(o) Security Deposit: $2,115,000.00, consisting of the following: (i)
$365,000.00 in cash ("Cash Portion of the Security Deposit"), and (ii)
$1,750,000.00 in the form of a letter of credit ("Letter of Credit").
(p) Tenant Improvements: All tenant improvements installed or to be
installed by Tenant within the Premises to prepare the Premises for occupancy by
Tenant pursuant to the terms of the Work Letter Agreement.
(q) Tenant Improvement Allowance: $30.00 per Usable Square Foot of
the Building, to be applied as provided in the Work Letter Agreement. The
expected total number of Usable Square Feet of the Building for purposes of
establishing the Tenant Improvement Allowance amount is fifty-three thousand one
hundred twenty-five (53,125) Usable Square Feet.
Notwithstanding the foregoing in this Subparagraph 1(q) or any other
provision of this Lease to the contrary, the Tenant Improvement Allowance shall
in no event, and regardless of the actual number of Usable Square Feet of the
Building, exceed One Million Five Hundred Ninety-Three Thousand Seven Hundred
Fifty and 00/100ths Dollars ($1,593,750.00).
(r) Permitted Use: (i) General office uses, and (ii) training uses
and light research and development uses which are ancillary to Tenant's general
office uses.
(s) Parking: Tenant's parking rights and obligations are contained in
the parking provisions of the Rules and Regulations attached hereto as Exhibit
"E".
8
<PAGE>
(t) Broker(s): Cornish & Carey/Oncor International ("Cornish &
Carey") exclusively representing Landlord, and Colliers International
exclusively representing Tenant.
(u) Brokerage Commission Payable By: Landlord shall pay Cornish &
Carey a brokerage commission pursuant to a separate written agreement between
Landlord and Cornish & Carey.
(v) Intentionally Omitted.
(w) Interest Rate: shall mean the greater of ten percent (10%) per
annum or five percent (5%) in excess of the discount rate of the Federal Reserve
Bank of San Francisco in effect on the twenty-fifth (25th) day of the calendar
month immediately prior to the event giving rise to the Interest Rate
imposition; provided, however, the Interest Rate shall in no event exceed the
maximum interest rate permitted to be charged by applicable law.
(x) Exhibits: A through F, inclusive, which Exhibits are attached to
this Lease and incorporated herein by this reference.
This Paragraph 1 represents a summary of the basic terms of this Lease. In
the event of any inconsistency between the terms contained in this Paragraph 1
and any specific provision of this Lease, the terms of the more specific
provision shall prevail.
2. PREMISES.
--------
(a) Premises. Landlord hereby leases to Tenant and Tenant hereby
--------
leases from Landlord the Premises described in Subparagraph l(g).
(b) Mutual Covenants. Landlord and Tenant agree that said letting and
----------------
hiring is upon and subject to the terms, covenants and conditions herein set
forth and each party covenants as a material part of the consideration for this
Lease to keep and perform their respective obligations under this Lease.
(c) Landlord's Reservation of Rights. Landlord reserves the right
--------------------------------
from time to time to do any of the following, as long as Tenant's use of and
access to the Premises is not interfered with in an unreasonable manner, the
number of parking spaces in the Parking Structure and Outside Areas are not
materially reduced, and the first class character of the Building is not
materially impaired: (i) to make changes to the location, size, shape and number
of driveways, entrances, ingress, egress, direction of traffic, landscaped areas
and walkways of the Premises; (ii) to use temporarily the Building, the Parking
Structure, the Outside Areas or other portions of the Premises while engaged in
making improvements, repairs or alterations thereto; (iii) to grant easements or
other rights of access in and to the Premises to third parties; and (iv) to do
and perform such other acts and make such other changes in, to or with respect
to the Outside Areas as Landlord may, in the exercise of sound business
judgment, deem to be appropriate.
(d) Rentable Square Feet and Usable Square Feet
-------------------------------------------
9
<PAGE>
(i) Standard of Calculation. For purposes of this Lease: (1)
-----------------------
the terms "Rentable Square Feet," "Rentable Square Foot," and "Rentable Square
Footage" of the Building shall be calculated as "Rentable Area" is calculated
pursuant to the Standard Method For Measuring Floor Area in Office Buildings
(ANSI/BOMA Z65.1-1996) ("BOMA Standard"); and (2) the terms "Usable Square
Feet," "Usable Square Foot," and "Usable Square Footage" of the Building shall
be calculated as "Usable Area" is calculated pursuant to the BOMA Standard.
(ii) Calculation of Rentable Square Feet and Usable Square Feet.
----------------------------------------------------------
Within thirty (30) days after substantial completion of the Building Shell Work
(hereafter defined in Schedule 1 of Exhibit "C" hereto), Landlord's architect
shall calculate and certify in writing ("Landlord's Square Footage
Certification") to Landlord and Tenant the Rentable Square Feet and the Usable
Square Feet of the Building. Within seven (7) days after Tenant receives the
Landlord's Square Footage Certification, Tenant shall be entitled to have its
architect calculate the Rentable Square Feet and the Usable Square Feet of the
Building, provided Tenant shall give Landlord at least forty-eight (48) hours'
prior written notice of any measurements for purposes of making such
calculation. Landlord shall be entitled to have its architect and other
representatives present during such measurements. Tenant's architect shall
certify its calculation results to both Tenant and Landlord. If Tenant fails to
have its architect calculate the Rentable Square Feet and the Usable Square Feet
within the aforesaid seven (7) day period, it shall be deemed that Tenant has
waived its right to make such calculations. If the Rentable Square Feet and
Usable Square Feet calculations of Landlord's architect and Tenant's architect
differ, then both such architects shall work together in good faith to resolve
such differences, if at all, within ten (10) days after Landlord's receipt of
the calculations of Tenant's architect. If the architects are unable to resolve
the differences in their calculations within such ten (10) day period, then they
shall together select a third architect, who shall be reasonably acceptable to
both Landlord and Tenant, to resolve such differences, which architect shall
resolve such differences within twenty (20) days after the expiration of the
aforesaid ten (10) day period. If Landlord and Tenant are unable to agree on a
third architect within five (5) days after the aforesaid ten (10) day period,
then either Landlord or Tenant may request that the third architect be appointed
by the presiding judge of the Superior Court of San Mateo County. If the third
architect is appointed by the presiding judge of the Superior Court of San Mateo
County, such architect shall resolve the differences between the calculations of
Landlord's architect and Tenant's architect within ten (10) days after his or
her appointment. Landlord and Tenant shall pay the fees of its own architect
and each shall pay one-half of the fee of the third architect.
(iii) Adjustment of Rent and Tenant Improvement Allowance. If the
---------------------------------------------------
determination of the number of Rentable Square Feet of the Building pursuant to
the provisions of Subparagraph 2(d)(ii) is different from the number of Rentable
Square Feet of the Building as stated in this Lease, all Monthly Base Rent and
all Additional Rent due under this Lease based on that incorrect amount shall be
modified in accordance with that determination. If the determination of the
number of Usable Square Feet of the Building pursuant to the provisions of
Subparagraph 2(d)(ii) is different from the number of Usable Square Feet of the
Building as stated in this Lease, the Tenant Improvement Allowance based on that
incorrect amount shall be modified in accordance with that determination. If any
modifications are made pursuant to this
10
<PAGE>
Subparagraph 2(d)(iii), they shall be confirmed in writing by Landlord to
Tenant. Tenant shall pay Monthly Base Rent and all Additional Rent due under
this Lease in the amount stated in this Lease until Tenant is notified by
Landlord of any modifications being made pursuant to this Subparagraph
2(d)(iii). Any additional Monthly Base Rent or Additional Rent due under this
Lease by Tenant as a result of any modifications being made pursuant to this
Subparagraph 2(d)(iii) shall be paid by Tenant to Landlord within ten (10) days
after receipt by Tenant of written demand therefor by Landlord. Any overpayments
of Monthly Base Rent or Additional Rent due under this Lease by Tenant as a
result of any modifications being made pursuant to this Subparagraph 2(d)(iv)
shall be applied to the next payments of Monthly Base Rent or Additional Rent,
respectively, due by Tenant under this Lease.
3. TERM.
----
(a) Term. The term of this Lease ("Term") shall be for the period
----
designated in Subparagraph l(i), commencing on the Commencement Date, and ending
on the last day of the month in which the expiration of such period occurs,
including any extensions of the Term pursuant to Subparagraph 3(b) or written
agreement of the parties. Notwithstanding the foregoing, if the Commencement
Date falls on any day other than the first day of a calendar month then the Term
of this Lease shall be measured from the first day of the month following the
month in which the Commencement Date occurs. Each consecutive twelve (12) month
period of the Term of this Lease, commencing on the Commencement Date and
including the last twelve (12) month period of the Term of this Lease or portion
thereof (if the expiration of the Term of this Lease occurs prior to the
expiration of such last twelve (12) month period), shall be referred to herein
as a "Lease Year". Landlord's Notice of Lease Term Dates ("Notice"), in the form
of Exhibit "D" attached hereto, shall set forth the Commencement Date, the date
upon which the Term of this Lease shall end, and, if then determined, the
Rentable Square Feet within the Building. The Notice shall be served upon
Tenant as provided in Paragraph 9 after Landlord delivers or tenders possession
of the Premises to Tenant. The Notice shall be binding upon Tenant unless Tenant
objects to the Notice in writing, served upon Landlord as provided for in
Paragraph 9 hereof, within ten (10) days of Tenant's receipt of the Notice.
(b) Option To Extend Term.
---------------------
(1) Option Period. Provided that Tenant is not in default under
-------------
the Lease at the time of exercise of the Option (hereafter defined), Tenant
shall have the option ("Option") to extend the initial ten (10) year Term for
one (1) period of five (5) years ("Option Period") on the same terms, covenants
and conditions provided herein, except that the Monthly Base Rent due hereunder
shall be determined pursuant to Subparagraph 3(b)(2) below. Tenant shall
exercise the Option by giving Landlord written notice ("Option Notice") at least
two hundred forty (240) days but not more than three hundred sixty-five (365)
days prior to the expiration date of the initial ten (10) year Term.
(2) Option Period Monthly Base Rent. The Monthly Base Rent for
-------------------------------
the Option Period shall be determined as follows:
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(a) The Monthly Base Rent for the Option Period for the
Premises shall be the fair market rent, as determined below, as of the
commencement of the Option Period, but in no event shall the Monthly Base Rent
ever be reduced below the amount payable immediately preceding such Option
Period. The determination of fair market rent for the Premises shall take into
consideration all relevant factors, including length of term, the uses permitted
under this Lease, the quality, size, design and location of the Premises, the
monthly base rent for premises comparable to the Premises, current market
concessions given by landlords of premises comparable to the Premises, the
amount of tenant improvement allowances, if any, being given by landlords of
premises comparable of the Premises, and the amount of brokerage commissions
being paid by landlords for new leases for premises comparable to the Premises.
All other terms and conditions of the Lease, as amended from time to time by the
parties in accordance with the provisions of the Lease, shall remain in full
force and effect and shall apply during the Option Period.
(b) The fair market rent for the Option Period shall be
determined by mutual agreement of the parties or, if the parties are unable to
agree within ten (10) days after Landlord's receipt of the Option Notice, then
fair market rent shall be determined pursuant to the procedure set forth in
Subparagraphs 3(b)(2)(c) and 3(b)(2)(d) below. If the parties agree on the fair
market rent for the Option Period within the required time period, then they
shall immediately execute an amendment to this Lease stating the Monthly Base
Rent for the Option Period.
(c) If the parties are unable mutually to agree upon the
fair market rent pursuant to Subparagraph 3(b)(2)(b), then the fair market rent
initially shall be determined by Landlord by written notice ("Landlord's
Notice") given to Tenant promptly following the expiration of the ten (10) day
period set forth in Subparagraph 3(b)(2)(b). If Tenant disputes the amount of
fair market rent set forth in Landlord's Notice, then, within ten (10) days
after the date of Landlord's Notice, Tenant shall send Landlord a written notice
("Tenant's Notice") which clearly (i) disputes the fair market rent set forth in
Landlord's Notice, (ii) demands arbitration pursuant to Subparagraph 3(b)(2)(d),
and (iii) states the name and address of the person who shall act as arbitrator
on Tenant's behalf. Tenant's Notice shall be deemed defective, and not given to
Landlord, if it fails strictly to comply with the requirements and time period
set forth above. If Tenant does not send Tenant's Notice within ten (10) days
after the date of Landlord's Notice, or if Tenant's Notice fails to contain all
of the required information, then the fair market rent for the Option Period
shall be the amount specified in Landlord's Notice.
(d) The arbitration shall be conducted in the City of
Redwood City in accordance with the then existing Commercial Arbitration Rules
of the American Arbitration Association (or its successor), except that the
procedures mandated by such rules shall be modified as follows:
(i) Each arbitrator must be a real estate appraiser
with at least five (5) years of full-time commercial appraisal experience who is
familiar with the fair market rent of office properties located in the vicinity
of the Premises. Within five (5) business
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days after receipt of Tenant's Notice, Landlord shall notify Tenant of the name
and address of the person designated by Landlord to act as arbitrator on
Landlord's behalf.
(ii) The two arbitrators chosen pursuant to
Subparagraphs (3(b)(2)(c) and 3(b)(2)(d)(i) above shall meet within ten (10)
business days after the second arbitrator is appointed and shall appoint a third
arbitrator possessing the qualifications set forth in Subparagraph 3(b)(2)(d)(i)
above. If the two arbitrators are unable to agree upon the third arbitrator
within five (5) business days after the expiration of such ten (10) business day
period, the third arbitrator shall be selected by the parties themselves. If the
parties do not agree on the third arbitrator within five (5) business days after
the expiration of such five (5) business day period, then either party, on
behalf of both, may request appointment of the third arbitrator by the president
of the real estate board of San Mateo County or the Presiding Judge of the
Superior Court of San Mateo County. The three arbitrators shall decide the
dispute, if it has not been previously resolved, by following the procedures set
forth in Subparagraph 3(b)(2)(d)(iii) below. Each party shall pay the fees and
expenses of its respective arbitrator and both shall share the fees and expenses
of the third arbitrator. Each party shall pay its own attorneys' fees and costs
of witnesses.
(iii) The three arbitrators shall determine the fair
market rent in accordance with the procedures set forth in this Subparagraph
3(b)(2)(d)(iii). Each of Landlord's arbitrator and Tenant's arbitrator shall
state, in writing, his or her determination of the fair market rent, supported
by the reasons therefor, and shall make counterpart copies for the other
arbitrators. All of the arbitrators shall arrange for a simultaneous exchange
of the their determinations within ten (10) business days after appointment of
the third arbitrator. If either arbitrator fails to deliver his or her own
determination to the other arbitrators within such ten (10) business day period,
then the determination of the other arbitrator shall be final and binding upon
the parties and such determination shall be the Monthly Base Rent for the Option
Period. The role of the third arbitrator shall be to select which determination
of the fair market rent by the first two arbitrators most closely approximates
his or her own determination of the fair market rent. The third arbitrator
shall have no right to propose a middle ground or any modification of either of
the two proposed determinations. The third arbitrator shall make his or her
determination within twenty (20) business days after the date of appointment of
the third arbitrator. The determination of fair market rent the third arbitrator
chooses as that most closely approximating his or her determination of the fair
market rent shall constitute the decision of the arbitrators, shall be final and
binding upon the parties, and shall be the Monthly Base Rent for the Option
Period; provided, however, that if the first two arbitrators independently
arrive at the same fair market rent determination, then such fair market rent
shall be the Monthly Base Rent for the Option Period. However, the arbitrator
selected by Landlord and the arbitrator selected by Tenant shall not attempt to
reach a mutual agreement of the fair market rent; such arbitrators shall
independently arrive at their determinations.
(iv) The arbitrators shall have the right to consult
experts and competent authorities for factual information or evidence pertaining
to a determination of fair market rent, but any such consultation shall be made
in the presence of both parties with full right on their part to cross-examine.
The arbitrators shall render the decision
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and award in writing with counterpart copies to each party. The arbitrators
shall have no power to modify the provisions of this Lease. In the event of a
failure, refusal or inability of any arbitrator to act, his or her successor
shall be appointed by him or her, but in the case of the third arbitrator, his
or her successor shall be appointed in the same manner as that set forth herein
with respect to the appointment of the original third arbitrator.
(v) If the arbitration is not concluded prior to the
commencement of the Option Period, then Tenant shall pay Monthly Base Rent at
one hundred twenty-five percent (125%) of the rate payable immediately prior to
the commencement of the Option Period. If the fair market rent determined by
arbitration differs from that paid by Tenant pending the results of arbitration,
then any adjustment required to adjust the amount previously paid shall be made
by payment by the appropriate party within ten (10) days after the determination
of fair market rent.
(3) Default. Notwithstanding the exercise by Tenant of the
-------
Option, in the event that Tenant is in default of the Lease at any time from the
date of the Option Notice through the date on which the Option Period commences,
then, at Landlord's election and upon written notice by Landlord to Tenant,
Tenant's exercise of the Option may be voided by Landlord and Tenant shall
thereafter have no rights hereunder to extend the Term through the Option
Period.
(4) Option Personal. Notwithstanding any other provision of
---------------
this Lease to the contrary, the Option is personal to Kana Communications, Inc.,
a Delaware corporation ("Original Tenant") and an Original Tenant Affiliate
(hereafter defined), shall be exercised, if at all, by the Original Tenant or an
Original Tenant Affiliate, and shall not be assignable or transferable to or
exercisable by or on behalf of any assignee, subtenant or licensee of the
Original Tenant other than any assignee, subtenant or licensee which is an
Original Tenant Affiliate. The term "Original Tenant Affiliate" as used herein
shall mean an entity which controls, is controlled by or is under common control
with the Original Tenant. The term "control" and variations thereof as used in
this Subparagraph 3(b)(4) shall mean with respect to a corporation the right to
exercise, directly or indirectly, more than fifty percent (50%) of the voting
rights attributable to the controlled corporation, and, with respect to any
partnership or limited liability company, the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of the controlled partnership or limited liability company, as
applicable.
4. POSSESSION.
----------
(a) Delivery of Possession. Landlord agrees to deliver possession of
----------------------
the Premises to Tenant when the Landlord's Work is substantially completed in
accordance with the terms of the Work Letter Agreement. Notwithstanding the
foregoing, Landlord shall not be obligated to deliver possession of the Premises
to Tenant until Landlord has received from Tenant all of the following: (i) the
Security Deposit and the first installment of Monthly Base Rent; (ii) or
certificates of insurance evidencing the existence of the policies of insurance
required to be carried by Tenant under Paragraph 20 of this Lease; and (iii)
copies of all
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governmental permits and authorizations required in connection with Tenant's
operation of its business within the Premises. After Landlord delivers
possession of the Premises to Tenant Landlord and Landlord's employees,
contractors, agents, and suppliers shall have an irrevocable license to enter
the Premises for the purpose of completing any unfinished Landlord's Work
described in the Punch-List (hereafter defined in Subparagraph 4(b) below).
Tenant waives, and releases Landlord and Landlord's employees, contractors, and
agents from, any liability for any damage or loss of property or injury to or
death of persons as a result of the completion of any unfinished Landlord's Work
described in the Punch-List, except to the extent resulting from the gross
negligence or willful misconduct of Landlord or Landlord's employees or
contractors.
(b) Condition of Premises. Upon substantial completion of the
---------------------
Landlord's Work, Landlord and Tenant shall jointly conduct a walk-through
inspection of the Premises and shall jointly prepare a punch-list ("Punch-List")
of items needing additional work; provided, however, the Punch-List shall be
limited to items required to be installed by Landlord under the Work Letter
Agreement and the Punch-List will not include any items of damage to the
Premises caused by Tenant's move-in or early entry, if permitted. Damage caused
by Tenant will be corrected or repaired by Tenant, at Tenant's expense. Other
than the items specified in the Punch-List, by taking possession of the
Premises, Tenant will be deemed to have accepted the Premises in their condition
on the date of delivery of possession and to have acknowledged that the
Landlord's Work have been completed as required by the Work Letter Agreement and
that there are no additional items needing work or repair. Landlord shall cause
all items set forth in the Punch-List to be repaired or corrected within thirty
(30) days following the preparation of the Punch-List. Tenant acknowledges that
neither Landlord nor any agent of Landlord has made any representation or
warranty with respect to the Premises, or any portions thereof, or with respect
to the suitability of same for the conduct of Tenant's business and Tenant
further acknowledges that Landlord shall have no obligation to construct or
complete any additional buildings or improvements within the Premises.
(c) Early Entry. Provided Tenant is not in default under this Lease
-----------
and further provided that Tenant has delivered to Landlord certificates of
insurance evidencing the existence of the policies of insurance required to be
carried by Tenant under Paragraph 20 of this Lease, Tenant shall be entitled to
enter the Building for the Early Entry Period (hereafter defined) for the
purpose of installing wiring and equipment therein for Tenant's telephone and
other communications systems and for no other purpose. The term "Early Entry
Period" as used in this Lease shall mean the period commencing on the date on
which the Landlord's Work is ninety percent (90%) complete, as determined by
Landlord's contractor, and expiring on the date immediately preceding the
Commencement Date. The activities by Tenant during the Early Entry Period shall
not interfere with nor delay the completion by Landlord of the Landlord's Work,
and in the event of any such interference or delay Landlord shall be entitled to
terminate Tenant's early entry rights under this Subparagraph 4(c). During the
Early Entry Period all terms and conditions of the Lease, except for the payment
of Rent (hereafter defined in Subparagraph 5(b)), shall apply. Landlord shall
not be liable to Tenant or its employees or agents for any loss or damage to
property, or injury to or death of a person arising from or related to any
entries by Tenant or its employees, contractors, or agents into the Building
during the Early Entry Period. Tenant shall take all reasonable precautions to
protect against such loss, damage, injury or death.
15
<PAGE>
During any such entries Tenant shall cooperate with all reasonable directives of
Landlord and Landlord's contractor performing the Landlord's Work.
(d) Termination Right for Delay in Delivery of Possession. In the
-----------------------------------------------------
event that Landlord for reasons other than Tenant Delays has not delivered the
Premises in the condition required under Subparagraph 4(a) of this Lease by July
1, 2001, Tenant may elect to terminate this Lease. Termination of this Lease as
provided for herein shall be the sole and exclusive remedy of Tenant for delay
in the delivery of possession of the Premises. Tenant shall exercise the right
to terminate provided for herein by giving Landlord written notice of its intent
to so terminate ("Possession Delay Termination Notice"). The Possession Delay
Termination Notice shall be given, if at all, on or before July 10, 2001. If
the Possession Delay Termination Notice is not given as and when required
hereunder, then Tenant shall not be entitled to terminate this Lease.
Termination of the Lease shall be effective upon Tenant's receipt of the
Possession Delay Termination Notice.
5. RENT.
----
(a) Monthly Base Rent. Tenant agrees to pay Landlord as Monthly Base
-----------------
Rent for the Premises the Monthly Base Rent designated in Subparagraph 1(m) in
advance on the first day of each calendar month during the Term, except that
Monthly Base Rent for the first month of the Term shall be paid concurrently
with Tenant's delivery of the executed Lease to Landlord. If the Term of this
Lease commences or ends on a day other than the first day of a calendar month,
then the Rent for such period shall be prorated in the proportion that the
number of days this Lease is in effect during such period bears to the number of
days in such month. All Rent shall be paid to Landlord, without prior demand
and without any deduction or offset, in lawful money of the United States of
America, at the address for Landlord designated in Subparagraph l(b) hereof or
to such other person or at such other place as Landlord may from time to time
designate in writing.
(b) Additional Rent. All amounts and charges to be paid by Tenant
---------------
hereunder, including, without limitation, payments for Operating Expenses,
insurance and repairs, shall be considered additional rent for purposes of this
Lease ("Additional Rent"), and the word "Rent" as used in this Lease shall
include the Monthly Base Rent and all such Additional Rent unless the context
specifically or clearly implies that only Monthly Base Rent is intended.
6. ADDITIONAL RENT; OPERATING EXPENSES.
-----------------------------------
(a) Payment of Operating Expenses. In addition to Monthly Base Rent,
-----------------------------
throughout the Term of this Lease, Tenant shall pay to Landlord as Additional
Rent, in accordance with the terms of this Paragraph 6, all Operating Expenses
(hereafter defined in Subparagraph 6(b)).
(b) Definition of Operating Expenses; Limitations on Operating
----------------------------------------------------------
Expenses; and Exclusions from Operating Expenses.
- ------------------------------------------------
16
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(i) Definition of Operating Expenses. As used in this Lease,
--------------------------------
"Operating Expenses" shall consist of all direct costs incurred by Landlord
during the Term for the operation, management, maintenance and repair (to the
extent that Landlord has the obligation under this Lease to maintain or repair
such) of the Building, the Parking Structure, the Outside Areas, and other
portions of the Premises, including the following costs by way of illustration,
but not limitation: the percentage of charges assessed against the Premises
pursuant to any covenants, conditions and restrictions, reciprocal easement
agreements or similar restrictions and agreement now or hereafter affecting the
Premises; Real Property Taxes (as defined below) and any taxes and assessments
hereafter imposed in lieu thereof; rent taxes, gross receipt taxes (whether
assessed against Landlord or assessed against Tenant and paid by Landlord, or
both) and water and sewer charges; accounting, legal and other consulting fees;
any transportation or traffic fee, assessments, tax, tariff, charge, or other
payment imposed on Landlord by any governmental authority having jurisdiction
relating to the Premises, or imposed by Landlord in connection with any
transportation or traffic plan or program relating to the Premises as mandated
by any governmental authority having jurisdiction; premiums for commercial
liability insurance covering the Premises; premiums for "Special Form" or
similar property insurance (and, at Landlord's option, flood and earthquake
insurance) on the Building, the Parking Structure and other improvements within
the Premises; premiums for insurance against loss of rents for a period of
twelve (12) months from the date of the loss; premiums for any other insurance
Landlord deems reasonably necessary; deductibles paid under any insurance
policies maintained by Landlord; security costs; labor costs; costs of utilities
and utilities surcharges; costs levied, assessed, or imposed by, or at the
direction of, or resulting from statutes or regulations or interpretations
thereof, promulgated by any federal, state, regional, municipal or local
government authority in connection with the use or occupancy of the Premises;
the cost (amortized over such reasonable period as Landlord shall determine
together with interest at the maximum rate allowed by law on the unamortized
balance) of any capital improvements, repairs or replacements made to the
Building, the Parking Structure, the Outside Areas or other improvements within
the Premises by Landlord (to the extent that Landlord has the obligation under
this Lease to make such improvements, repairs or replacements) or replacement of
any equipment in the Building, Parking Structure or Outside Areas (to the extent
that Landlord has the obligation under this Lease to replace such equipment) for
any reason whatsoever, including, without limitation, capital improvements,
repairs or replacements made to the Building, the Parking Structure the Outside
Areas or other improvements within the Premises (A) needed to operate the same
at the same quality levels as prior to replacement, (B) required by revisions to
or governmental interpretations of any applicable building codes or other
applicable laws, orders, regulations or ordinances, or (C) made by Landlord to
reduce Operating Expenses; costs incurred in the management of the Premises
[including supplies, wages and salaries of employees used in the management,
operation and maintenance of the Premises, payroll expenses and payroll taxes
and similar governmental charges with respect thereto, and an annual property
management fee in an amount equal to no more than three percent (3%) of the
total Monthly Base Rent payable by Tenant under this Lease for the Expense Year
(hereafter defined in Subparagraph 6(f)) in question]; waste disposal costs;
costs of snow and ice removal; costs of supplies, materials, equipment and tools
(including rental costs incurred in the repair and maintenance of the Building,
the Parking Structure, the Outside Areas or other improvements within the
Premises);
17
<PAGE>
costs and expenses of gardening and landscaping; maintenance of signs (other
than signs of Tenant); maintenance, repair and replacement of asphalt paving,
bumpers, striping, light bulbs, light standards, guard and directional signs and
lighting systems, perimeter walls, retaining walls, sidewalks, planters,
landscaping and sprinkling in planting areas; and personal property taxes levied
on or attributable to personal property used in connection with the Premises.
As used herein, the term "Real Property Taxes" shall include any
form of assessment, license fee, business license fee, commercial rental tax,
levy, charge, penalty, tax or similar imposition, imposed by any authority
having the direct power to tax, including any city, county, state or federal
government, or any school, agricultural, lighting, drainage or other improvement
or special assessment district thereof, as against any legal or equitable
interest of Landlord in the Premises, or any portion thereof, including, but not
limited to, the following:
(A) any tax on Landlord's "right" to rent or "right" to
other income from the Premises or as against Landlord's business of leasing
the Premises;
(B) any assessment, tax, fee, levy or charge in
substitution, partially or totally, of any assessments, taxes, levies and
charges that may be imposed by governmental agencies for such services as
fire protection, street, sidewalk and road maintenance, refuse removal and
for other governmental services formerly provided without charge to
property owners or occupants. It is the intention of Tenant and Landlord
that all such new and increased assessments, taxes, fees, levies and
charges be included within the definition of "Real Property Taxes" for the
purposes of this Lease;
(C) any assessment, tax, fee, levy or charge allocable to
or measured by the area of the Premises or the rent payable hereunder,
including, without limitation, any gross income tax or excise tax levied by
the state, city or federal government, or any political subdivision
thereof, with respect to the receipt of such rent, or upon or with respect
to the possession, leasing, operating, management, maintenance,
alterations, repair, use or occupancy by Tenant of the Premises, or any
portion thereof; and
(D) any assessment, tax, fee, levy or charge upon this
transaction or any document to which Tenant is a party creating or
transferring an interest or an estate in the Premises, or based upon a
reassessment of the Premises, or any portion thereof, due to a change in
ownership or transfer of all or part of Landlord's interest in this Lease,
the Premises, or any portion thereof.
Notwithstanding any provision to the contrary in this Lease,
"Real Property Taxes" shall not include Landlord's federal or state income,
franchise, inheritance or estate taxes.
(ii) Limitations on Operating Expenses. Notwithstanding
---------------------------------
Subparagraph 6(b)(i) to the contrary:
18
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(A) Operating Expenses shall include the premium(s) for and
deductible(s) under any flood insurance policy or policies maintained by
Landlord on the Building, Parking Structure, or other improvements within
the Premises only if (i) Landlord is required to carry such insurance
pursuant to any applicable law, statute, ordinance, rule, regulation, or
requirement of any governmental authorities and their agencies,
departments, bureaus, boards, commissions, and officials, or (ii) Landlord
is required to carry such insurance by any mortgagee under a mortgage now
or hereafter encumbering the Premises, or any portion thereof, or a
beneficiary under any deed of trust now or hereafter encumbering the
Premises, or any portion thereof.
(B) Operating Expenses shall only include the deductible(s)
under any policy or policies of property insurance maintained by Landlord
(other than a policy or policies of insurance covering earthquake or flood)
on the Building, Parking Structure, or other improvements within the
Premises, up to the amount of Ten Thousand and 00/100ths Dollars
($10,000.00) per deductible.
(C) Operating Expenses shall only include the deductible(s)
under any policy or policies of earthquake insurance maintained by Landlord
on the Building, Parking Structure, or other improvements within the
Premises, up to the amount of Fifty Thousand and 00/100ths Dollars
($50,000.00) per deductible.
(D) Operating Expenses shall only include the premium(s)
for any policy or policies of earthquake insurance on the Building, Parking
Structure and other improvements within the Premises if the coverage under
such policy or policies is for an amount which is (i) less than or equal to
seventy-five percent (75%) of the replacement value of the Building,
Parking Structure and other improvements within the Premises which are
covered under such policy or policies, or (ii) an amount greater than
seventy-five percent (75%) of the replacement value of the Building,
Parking Structure and other improvements within the Premises if such
greater amount is required from time to time by (A) any applicable law,
statute, ordinance, rule, regulation or requirement of any governmental
authorities and their agencies, departments, bureaus, boards, commissions,
and officials, or (B) any mortgagee under a mortgage now or hereafter
encumbering the Premises, or any portion thereof, or a beneficiary under
any deed of trust now or hereafter encumbering the Premises, or any portion
thereof. Notwithstanding the immediately preceding sentence to the
contrary, in event that Landlord maintains any policy or policies of
earthquake insurance providing for coverage in excess of the amount limits
set forth in clauses (i) and (ii) of the immediately preceding sentence,
then Operating Expenses will include that portion of the premium(s) for
such policy or policies which would be the premium(s) if the policy or
policies had been written to provide for coverage not exceeding the amount
limits set forth in clauses (i) and (ii) of the immediately preceding
sentence.
(E) If on the first day of the sixth Lease Year Tenant
occupies the entire Building and for so long thereafter as Tenant continues
to occupy the entire Building, then the property management fee
reimbursable by Tenant as an Operating
19
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Expense shall be, from such date and continuing for the remainder of the
Expense Year in which the sixth Lease Year commenced and continuing for
every Expense Year thereafter, limited to an amount equal to three percent
(3%) of the total annual Monthly Base Rent payable by Tenant for the fifth
Lease Year; provided, however, such limitation shall be prorated for any
partial Expense Year to which it may apply. In the event that the above
property management fee limitation is in effect and in the further event
that at any time after the commencement of the sixth Lease Year Tenant
ceases to occupy the entire Building for any reason whatsoever (including,
without limitation, vacating all or portions of the Building, subleasing
all or portions of the Building, or assigning its interest in this Lease),
then said limitation shall no longer be applicable and thereafter the
property management fee reimbursable by Tenant as an Operating Expense for
every Expense Year shall be an amount equal to three (3%) of the actual
total annual Monthly Base Rent payable by Tenant under this Lease for such
Expense Year.
(iii) Exclusions from Operating Expenses. Notwithstanding
----------------------------------
Subparagraph 6(b)(i) to the contrary, Operating Expenses shall not include the
following: legal fees, brokerage commissions, advertising costs and other
related expenses incurred in connection with the leasing of the Building;
repairs, alterations, additions, improvements or replacements made to rectify or
correct any defects under warranty in the design, materials or workmanship of
the Building, the Parking Structure, or the Outside Areas; and repairs,
alterations, additions, improvements or replacements to the Building, Parking
Structure, or Outside Areas made to comply with any applicable requirements of
any governmental authority having jurisdiction in effect as of the date the
building permits were issued for the construction of the Building, Parking
Structure, or Outside Areas; damage and repairs to the Building, Parking
Structure or Outside Areas resulting from fire or other casualty but only to the
extent covered by insurance policies carried by Landlord, repairs to the
Building, Parking Structure, or Outside Areas resulting from the exercise of a
public agency of its power of eminent domain but only to the extent Landlord
receives an award from such public agency as a result of the exercise of such
power of eminent domain; Landlord's general overhead expenses not related to the
Building, Parking Structure, or Outside Areas; interest, principal, points and
fees on debt or amortization on any mortgages or deeds of trust encumbering the
Premises; depreciation, except on materials, tools, supplies and vendor-type
equipment purchased by Landlord to enable Landlord to supply services Landlord
might otherwise contract for with a third party, where such depreciation would
otherwise have been included in the charge of such third party's service, as
determined in accordance with standard accounting practices; costs incurred due
to a default by Landlord under this Lease; charitable or political contributions
made by Landlord; and any costs incurred by Landlord to test, clean-up,
transport and store any Hazardous Materials (hereafter defined in Subparagraph
8(c)) present in or on the Premises, provided, however, the foregoing shall in
no way modify or limit Tenant's obligations regarding Hazardous Materials as
provided for in Subparagraph 8(c) hereof.
(c) Monthly Payments. From and after the Commencement Date, Tenant
----------------
shall pay to Landlord on the first day of each calendar month of each Expense
Year of the Term the estimated monthly Operating Expenses incurred by Landlord.
The foregoing estimated monthly charges may be adjusted by Landlord at the end
of any calendar quarter of an Expense
20
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Year on the basis of Landlord's experience and reasonably anticipated costs or
based on any increases in Real Property Taxes resulting from a change in
ownership (as that term is defined in Section 60 of the California Revenue and
Taxation Code or any successor statute(s) thereto) of the Premises or any new
construction (as that term is defined in Section 70 of the California Revenue &
Taxation Code or any successor statute(s) thereto) on the Premises. Any such
adjustment shall be effective as of the calendar month next succeeding receipt
by Tenant of written notice of such adjustment.
Notwithstanding the foregoing to the contrary, if Landlord is not
paying an impound for Real Property Taxes to its lenders holding a deed of trust
or mortgage on the Premises or any part thereof, then for such time that
Landlord is not paying any such impounds, Tenant shall pay the Real Property
Taxes portion of the Operating Expenses in two annual installments on the date
which is no later than thirty (30) days prior to date that each such installment
shall become delinquent if not paid to the appropriate taxing authority. If
Landlord has not been paying any impounds of Real Property Taxes to its lender
or lenders and thereafter Landlord shall begin paying impounds of Real Property
Taxes, then, at Landlord's election, Tenant shall pay the Real Property Taxes
portion of Operating Expenses on a monthly estimated basis as provided for in
the first paragraph of this Subparagraph 6(c).
(d) Actual Operating Expenses. Within one hundred twenty (120) days
-------------------------
following the end of each Expense Year Landlord shall furnish Tenant a statement
of actual Operating Expenses ("Actual Expenses") for such Expense Year and the
payments made by Tenant with respect to such Expense Year. If Tenant's payments
for the Operating Expenses for an Expense Year do not equal the amount of the
Actual Expenses for such Expense Year, Tenant shall pay Landlord the deficiency
within ten (10) days after receipt of such statement. If Tenant's payments for
an Expense Year exceed the Actual Expenses for such Expense Year, Landlord shall
offset the excess against the Operating Expenses thereafter becoming due to
Landlord. There shall be appropriate adjustments of the Operating Expenses as of
the Commencement Date and expiration of the Term.
(e) Miscellaneous. Even though the Term has expired and Tenant has
-------------
vacated the Premises, when the final determination is made of the Actual
Expenses for the Expense Year in which this Lease terminates, Tenant shall
promptly pay any increase due over the estimated Operating Expenses paid for
such Expense Year and, conversely, any overpayment made in the event said
Operating Expenses decrease for such Expense Year shall promptly be rebated by
Landlord to Tenant.
(f) Definition of Expense Year. As used in this Lease, the term
--------------------------
"Expense Year" shall mean each calendar year or portion thereof in which any
portion of the Term falls, through and including the calendar year in which the
Term expires.
7. SECURITY DEPOSIT.
----------------
(a) General Terms. Concurrently with Tenant's execution of this
-------------
Lease, Tenant will deposit with Landlord the Security Deposit designated in
Subparagraph l(o). The
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Security Deposit shall consist of the Cash Portion of the Security Deposit (as
defined in Subparagraph 1(o) and the Letter of Credit (as defined in
Subparagraph 1(o)). The Security Deposit shall be held by Landlord as security
for the full and faithful performance by Tenant of all of the terms, covenants,
and conditions of this Lease to be kept and performed by Tenant during the Term
hereof. If Tenant defaults with respect to any provisions of this Lease
including, but not limited to, the provisions relating to the payment of Rent,
Landlord may (but shall not be required to) use, apply or retain all or any part
of the Security Deposit for the payment of any Rent or any other sum in default,
or for the payment of any other amount which Landlord may spend or become
obligated to spend by reason of Tenant's default or to compensate Landlord for
any loss or damage which Landlord may suffer by reason of Tenant's default. If
any portion of the Security Deposit is so used or applied, Tenant shall, within
ten (10) days after Landlord's written demand therefor, deposit cash with
Landlord in an amount sufficient to restore the Security Deposit to its original
amount and Tenant's failure to do so shall constitute a default under this
Lease. Without limiting the generality of the immediately preceding sentence,
Tenant shall deposit cash with Landlord to restore all or any portions of the
Letter of Credit drawn by Landlord. Landlord shall not be required to keep the
Cash Portion of the Security Deposit separate from its general funds, and Tenant
shall not be entitled to interest on the Cash Portion of the Security Deposit.
If Tenant shall fully and faithfully perform every provision of this Lease to be
performed by it, the Security Deposit or any 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 following the expiration of the Term as
required under applicable law. Should Landlord sell its interest in the Premises
during the Term hereof and deposit with the purchaser thereof the then balance
of the Security Deposit and Landlord shall be discharged from any further
liability with respect to such Security Deposit.
(b) Letter of Credit Terms. The Letter of Credit deposited with
----------------------
Landlord as a portion of the Security Deposit shall: (i) be issued by Silicon
Valley Bank, a California banking corporation ("Issuer"); (ii) be a stand-by,
at-sight, irrevocable letter of credit; (iii) be payable to Landlord; (iv)
provide that any draw on the Letter of Credit shall be made upon receipt by the
Issuer of only a written certification from Landlord certifying that Landlord is
entitled pursuant to the terms of this Lease to draw on the letter of Credit;
(v) not expire on a date less than one (1) year from the date of its issuance;
and (vi) provide that it is governed by the Uniform Customs and Practice for
Documentary Credits (1993 revision), International Chamber of Commerce
Publication No. 500. If the expiration date of the Letter of Credit (or any
Letter of Credit replacing previously expired Letters of Credit) is before the
expiration date of the Term, then within thirty (30) days prior to expiration of
the current Letter of Credit, Tenant shall cause the Issuer to issue and deliver
to Landlord a replacement Letter of Credit. Any replacement Letter of Credit
shall be in the same amount as the expiring Letter of Credit and shall be on the
terms and conditions set forth in clauses (i) through (vi) of this Subparagraph
7(b). In the event that Landlord assigns its rights under this Lease, then
Tenant shall, at its sole cost and expense, cause a replacement Letter to Credit
to be issued in the name of the assignee. In the event that Tenant assigns its
rights under this Lease as permitted pursuant to the terms of this Lease, then
Tenant shall, at its sole cost and expense and as a condition to such assignment
being effective, cause a replacement Letter of Credit to be deposited by
Tenant's assignee.
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(c) Letter of Credit Reduction. Notwithstanding anything to the
--------------------------
contrary in this Paragraph 7, in the event all the following conditions have
been satisfied, to the reasonable satisfaction of Landlord, then the amount of
the Letter of Credit then held by Landlord shall be reduced by Three Hundred
Thousand and 00/100ths Dollars ($300,000.00) on the first day of each of the
sixth (6th), seventh (7th), eighth (8th), ninth (9th) and tenth (10th) Lease
Years: (i) Tenant is not in default under this Lease on the date on which the
Letter of Credit is reduced and has not at any time prior to such date been in
default under this Lease; (ii) Tenant has Fifteen Million and 00/100ths Dollars
($15,000,000.00) or more in cash or cash equivalents on the date on which the
Letter of Credit is reduced; and (iii) Tenant has pre-tax income of Two Million
Five Hundred Thousand and 00/100ths Dollars ($2,500,000.00) or more for each of
the three (3) full calendar quarters immediately preceding the date on which the
Letter of Credit is reduced.
(d) Early Return of Letter of Credit. Notwithstanding anything to the
--------------------------------
contrary in this Paragraph 7, the Letter of Credit shall be returned by Landlord
to Tenant, upon the written request of Tenant, in the event of the occurrence of
any of the following: (i) Tenant obtains a "BB" credit rating from Standard &
Poors or an equivalent rating from Moody's, Fitch or any other comparable rating
agency acceptable to Landlord, for six (6) consecutive calendar quarters; or
(ii) as of the first day of the fourth (4th) Lease Year (A) Tenant's market
capitalization is Eight Billion and 00/100ths Dollars ($8,000,000,000.00) or
more, and (B) Tenant has One Hundred Million and 00/100ths Dollars
($100,000,000.00) or more in cash or cash equivalents. If the Letter of Credit
has been returned to Tenant as provided for in the immediately preceding
sentence and if subsequently any of the following occurs, then another letter of
credit shall be deposited with Landlord within fifteen (15) days after written
request of Landlord to replace the returned Letter of Credit, and which
replacement letter of credit shall be in the amount of One Million Seven Hundred
Fifty Thousand and 00/100ths Dollars ($1,750,000.00) and otherwise shall be on
the same terms and conditions as the returned Letter of Credit: (a) for more
than ninety (90) days (either consecutively or cumulatively over a twelve (12)
month period) Tenant's credit rating from Standard & Poors falls below "BB" or
falls below the rating from Moody's, Fitch or any other comparable rating agency
which is equivalent to Standard & Poors' "BB" rating; (b) for more than ninety
(90) days (either consecutively or cumulatively over a twelve (12) month period)
Tenant's market capitalization is less than Eight Billion and 00/100ths Dollars
($8,000,000,000.00); and (c) for more than ninety (90) days (either
consecutively or cumulatively over a twelve (12) month period) Tenant has less
than One Hundred Million and 00/100ths Dollars ($100,000,000.00) in cash or cash
equivalents.
8. USE.
---
(a) Tenant's Use of the Premises. Tenant shall use the Premises for
----------------------------
the use or uses set forth in Subparagraph l(r), and shall not use or permit the
Premises to be used for any other purpose without the prior written consent of
Landlord, which consent Landlord may withhold in its sole and absolute
discretion.
(b) Compliance. At Tenant's sole cost and expense, Tenant shall
----------
procure, maintain and hold available for Landlord's inspection, all governmental
licenses and permits required for the proper and lawful conduct of Tenant's
business from the Premises. Tenant shall
23
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not use or occupy the Premises or allow the Premises to be used or occupied in
violation of (i) any law, statute, zoning restriction, ordinance or governmental
law, rule, regulation or requirement of any insurer, insurance authority or duly
constituted public authority having jurisdiction over the Premises now or
hereafter in force, (ii) the requirements of the Board of Fire Underwriters or
any other similar body now or hereafter constituted, (iii) the certificate of
occupancy issued for the Building, or (iv) any recorded covenants, conditions
and restrictions or similar private contracts, if any, which affect the use and
operation of the Premises. Tenant shall comply with the Rules and Regulations
attached hereto as Exhibit "E" and all reasonable and non-discriminatory
modifications or additions thereto. Tenant shall not do or permit anything to be
done in or about the Premises which will use or allow the Premises to be used
for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant
cause, maintain or permit any nuisance or waste in or about the Premises. Tenant
shall not place a load upon the Building floors exceeding the average pounds of
live load per square foot of floor area specified for the Building by Landlord's
architect, with the partitions to be considered a part of the live load.
Landlord reserves the right to reasonably prescribe the weight and positions of
all safes, files and heavy equipment which Tenant desires to place in the
Premises so as to distribute properly the weight thereof. Tenant shall be
responsible for all structural engineering required to determine structural
load, as well as the expense thereof. Anything contained in this Lease to the
contrary notwithstanding, all transferable development rights related in any way
to the Premises are and shall remain vested in Landlord, and Tenant hereby
waives any rights thereto.
Further, Tenant shall, at its sole cost and expense, comply with,
including the making by Tenant of any alterations, additions, modifications or
improvements to the Premises, all present and future regulations, rules, laws,
ordinances, and requirements of all governmental authorities (including, without
limitation, state, municipal, county and federal governments and their
departments, bureaus, boards and officials) applicable to the Premises or the
use or occupancy of the Premises; provided, however, Tenant shall not be
obligated to make any alterations, additions or modifications to the foundation,
footings, floor slab, load bearing walls, the structural portions of the roof,
and the exterior walls of the Building or the Parking Structure required by any
applicable laws, statute, governmental rule or regulation unless such
alterations, additions, or modifications are required as a result of or in
connection with (a) any alterations, additions, modifications or improvements
made or proposed to be made by Tenant to the Premises, or (b) any particular use
made or proposed to made by Tenant of the Premises.
(c) Hazardous Materials. Except for ordinary and general office
-------------------
supplies typically used in the ordinary course of business within office
buildings, such as copier toner, liquid paper, glue, ink and common household
cleaning materials (some or all of which may constitute Hazardous Materials
(hereafter defined in this Subparagraph 8(c)) pursuant to the terms of this
Lease), Tenant shall not cause or permit any Hazardous Materials to be brought
upon, stored, used, handled, generated, released into the environment or
disposed of on, in, under or about the Premises or any part thereof by Tenant,
its agents, employees, subtenants, assignees, contractors or invitees, without
the prior written consent of Landlord, which consent Landlord may withhold in
its sole and absolute discretion. Any handling, transportation, storage,
treatment, disposal or use of Hazardous Materials by Tenant and Tenant's agents,
employees, subtenants, assignees, contractors or invitees in or about the
Premises shall strictly comply with
24
<PAGE>
all applicable Hazardous Materials Laws (hereafter defined in this Subparagraph
8(c)). Upon the expiration or sooner termination of this Lease, Tenant covenants
to remove from the Premises, at its sole cost and expense, any and all Hazardous
Materials, including any equipment or systems containing Hazardous Materials
which are installed, brought upon, stored, used, generated or released upon, in,
under or about the Premises or any portion thereof by Tenant, its agents,
employees, subtenants, assignees, contractors or invitees. To the fullest extent
permitted by law, Tenant hereby agrees to indemnify, protect, defend and hold
Landlord free and harmless from and against any and all claims, judgments,
damages, penalties, fines, costs (including, without limitation, clean-up,
removal, remediation and restoration costs), liabilities and losses (including,
without limitation, diminution in the value of the Premises, damages for the
loss or restriction on use of rentable space or of any amenity of the Premises,
and sums paid in settlement of claims, attorneys' fees, consultant fees and
expert fees) which arise during or after the Term from the presence of Hazardous
Materials (including those permitted by the terms of this Lease) on, in or about
the Premises or any part thereof which is caused or permitted by Tenant, its
agents, employees, subtenants, assignees, contractors or invitees. Tenant shall
promptly notify Landlord of any release of Hazardous Materials on or about the
Premises which Tenant becomes aware of during the Term of this Lease, whether
caused by Tenant or any other persons or entities. In the event of any release
of Hazardous Materials caused or permitted by Tenant, its agents, employees,
contractors or invitees, Landlord shall have the right to cause Tenant to
immediately take all steps Landlord deems necessary or appropriate to remediate
such release and prevent any similar future release to the satisfaction of
Landlord. Landlord shall indemnify, defend and hold Tenant harmless from and
against any and all claims, judgments, damages, penalties, fines, liabilities,
losses, suits, administrative proceedings and costs (including reasonable
attorneys' fees and costs, but specifically excluding any loss by Tenant of
income or profits, loss or diminution in value of any property of Tenant, and
any consequential and punitive damages suffered or incurred by Tenant), incurred
by Tenant in defending against an order, or satisfying a final order, by
governmental agencies or authorities having jurisdiction which requires clean-up
or other remediation by Tenant of (a) any Hazardous Materials present in or on
the Premises as of the date of this Lease, or (b) any Hazardous Materials used,
stored, generated or released in or on the Premises by Landlord or Landlord's
employees, agents or contractors; provided, however, the foregoing agreement to
indemnify and hold harmless Tenant shall not apply to the extent Tenant
contributes to, or exacerbates the conditions created by the presence of, such
Hazardous Materials. As used herein, the term "Hazardous Materials" means any
hazardous or toxic substances, materials or wastes which is or becomes regulated
by any local governmental authority, the State of California or the United
States Government. The term "Hazardous Materials," includes, without limitation,
petroleum products, asbestos, PCB's, and any materials or substances which are
(i) defined as hazardous or extremely hazardous pursuant to Section 66160 of
Title 26 of the California Code of Regulations, Division 22, (ii) defined as a
"hazardous waste" pursuant to Section 1004 of the Federal Resource Conservation
and Recovery Act, 42 U.S.C., Section 6901 et seq. (42 U.S.C. Section 6903), or
(iii) defined as a "hazardous substance" pursuant to Section 101 of the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.,
Section 9601 et seq. (42 U.S.C. 6901). As used herein the term "Hazardous
Materials Laws" shall mean any and all statutes, laws, ordinances, or
regulations of any governmental body or agency (including the U.S. Environmental
Protection Agency, the California Regional Water Quality Control Board, and the
California Department of Health
25
<PAGE>
Services) which regulates the use, storage, release or disposal of any Hazardous
Materials. The provisions of this Subparagraph 8(c) shall survive the expiration
or earlier termination of this Lease.
9. NOTICES. Any notice required or permitted to be given hereunder must
-------
be in writing and may be given by personal delivery (including delivery by
overnight courier or an express mailing service) or by mail, if sent by
registered or certified mail. Notices to Tenant shall be sufficient if delivered
to Tenant at the address designated in Subparagraph 1(d) and notices to Landlord
shall be sufficient if delivered to Landlord at the address designated in
Subparagraph l(b). Either party may specify a different address for notice
purposes by written notice to the other, except that the Landlord may in any
event use the Premises as Tenant's address for notice purposes.
10. BROKERS. The parties acknowledge that the broker(s) who negotiated
-------
this Lease are stated in Subparagraph l(t), and that the brokerage commissions
payable by Landlord as a result of this Lease shall be paid as provided in
Subparagraph l(u). Each party represents and warrants to the other, that no
other broker, agent or finder (a) negotiated or was instrumental in negotiating
or consummating this Lease on its behalf, and (b) is or might be entitled to a
commission or compensation in connection with this Lease. Landlord and Tenant
each agree to indemnify, protect, defend and hold harmless the other from and
against any and all claims, judgments, suits, causes of action, damages, losses,
liabilities and expenses (including attorneys' fees and court costs) resulting
from any breach by the indemnifying party of the foregoing representation,
including, without limitation, any claims that may be asserted by any broker,
agent or finder undisclosed by the indemnifying party. The foregoing mutual
indemnity shall survive the expiration or earlier termination of this Lease.
11. SURRENDER; HOLDING OVER.
-----------------------
(a) Surrender. The voluntary or other surrender of this Lease by
---------
Tenant, or a mutual cancellation thereof, shall not constitute a merger, and
shall, at the option of Landlord, operate as an assignment to Landlord of any or
all subleases or subtenancies. Upon the expiration or sooner termination of this
Lease, Tenant shall peaceably surrender the Premises broom clean (as applicable)
and in good order, repair and condition, ordinary wear and tear and casualty
damage excepted, with all of Tenant's personal property and Alterations as
required by Paragraph 13 below removed from the Premises and all damage caused
by such removal repaired as required pursuant to Paragraph 13. The delivery of
keys to any employee of Landlord or to Landlord's agent or any employee thereof
alone shall not be sufficient to constitute a termination of this Lease or a
surrender of the Premises.
(b) Holding Over. If Tenant remains in possession of all or any part
------------
of the Premises after the expiration or earlier termination of this Lease, with
the express or implied consent of Landlord, such tenancy shall be month-to-month
only and shall not constitute a renewal or extension for any further term. Such
month-to-month tenancy shall be terminable by either Landlord or Tenant upon
thirty (30) days' prior written notice by one to the other. If Tenant remains
in possession of all or any part of the Premises after the expiration or earlier
26
<PAGE>
termination of this Lease without Landlord's express consent, Tenant's continued
possession shall be on the basis of a tenancy at sufferance. If Tenant remains
in possession either with or without Landlord's consent, Monthly Base Rent shall
be increased to an amount equal to one hundred fifty percent (150%) of the
Monthly Base Rent payable during the last month of the Term, and any other sums
due under this Lease shall be payable in the amount and at the times specified
in this Lease. Such month-to-month tenancy shall be subject to every other term,
condition, and covenant contained herein. If Tenant fails to surrender the
Premises upon the expiration of this Lease in accordance with the terms of this
Paragraph 11 despite demand to do so by Landlord, Tenant shall indemnify,
protect, defend and hold Landlord harmless from all costs, expenses, claims,
loss or liability (including attorneys' fees and costs), including, without
limitation, costs and expenses incurred by Landlord in returning the Premises to
the condition in which Tenant was to surrender it and claims made by any
succeeding tenant founded on or resulting from such failure to surrender.
12. TAXES ON TENANT'S PROPERTY. Tenant shall be liable for, and shall pay
--------------------------
before delinquency, all taxes and assessments levied against any personal
property or trade fixtures placed by Tenant in or about the Premises (including
any increase in the assessed value of the Premises based upon the value of any
such personal property or trade fixtures). If any such taxes or assessments are
levied against Landlord or Landlord's property, Landlord may, after written
notice to Tenant (and under proper protest if requested by Tenant) pay such
taxes and assessments, and Tenant shall reimburse Landlord therefor within ten
(10) business days after demand by Landlord; provided, however, Tenant, at its
sole cost and expense, shall have the right, with Landlord's cooperation, to
bring suit in any court of competent jurisdiction to recover the amount of any
such taxes and assessments so paid under protest.
13. ALTERATIONS. After installation of the Tenant Improvements for the
-----------
Premises pursuant to the Work Letter Agreement, Tenant may, at its sole cost and
expense, make alterations, additions, improvements and decorations to the
interior of the Building (collectively, "Alterations") subject to and upon the
following terms and conditions:
(a) Notwithstanding any provision in this Paragraph 13 to the
contrary, unless Tenant has obtained Landlord's prior written consent (which
consent Landlord can withhold in its sole and absolute discretion), Tenant is
absolutely prohibited from making any alterations, additions, improvements or
decorations (i) to the Parking Structure and to the Outside Areas, (ii) which
affect the Building's structure, equipment, services or systems, or the proper
functioning thereof, or Landlord's access thereto; (iii) which affect the
outside appearance, character or use of the Building, (iv) which in the
reasonable opinion of Landlord, lessen the value of the Building, or (v) which
will violate or require a change in any occupancy certificate applicable to the
Building.
(b) Before proceeding with any Alterations which are not otherwise
prohibited in Subparagraph 13(a) above, Tenant must first obtain Landlord's
written approval thereof (including approval of all plans, specifications and
working drawings for such Alterations), which approval Landlord shall not
unreasonably withhold or delay; provided, however, Landlord's prior approval
shall not be required for any such Alterations which are not
27
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prohibited by Subparagraph 13(a) above, which do not require any building or
other governmental permits or approvals for the making thereof, and the cost of
which, when added together with all other Alterations made by Tenant during the
current Lease Year, does not exceed Fifty Thousand Dollars ($50,000) as long as
(i) Tenant delivers to Landlord notice and a copy of any final plans,
specifications and working drawings for any such Alterations at least ten (10)
days prior to commencement of the work thereof, and (ii) Tenant and such
Alterations otherwise satisfy all other conditions set forth in this Paragraph
13.
(c) Any and all Alterations shall be made or installed only by
contractors and subcontractors which have been approved by Landlord, which
approval Landlord shall not unreasonably withhold or delay. Before proceeding
with any Alterations, Tenant shall provide Landlord with ten (10) days' prior
written notice thereof and Tenant's contractors shall obtain, on behalf of
Tenant and at Tenant's sole cost and expense all necessary governmental permits
and approvals for the commencement and completion of such Alterations.
Throughout the performance of the Alterations, Tenant shall obtain, or cause its
contractors to obtain, workers compensation insurance and general liability
insurance in compliance with the provisions of Paragraph 20 of this Lease.
(d) Tenant shall pay to Landlord, as Additional Rent, the reasonable
costs of Landlord's third party consultants (but not Landlord's "in-house"
personnel) for review of all plans, specifications and working drawings for any
Alterations, within ten (10) business days after Tenant's receipt of invoices
either from Landlord or such consultants.
(e) All Alterations shall be performed: (i) in accordance with the
approved plans, specifications and working drawings; (ii) in a lien-free and
first-class and workmanlike manner; (iii) in compliance with all permits, laws,
rules and regulations of all governmental agencies and authorities; and (iv) in
such a manner so as not to impose any additional expense upon Landlord in the
performance of its maintenance obligations with respect to the Building.
(f) The Tenant Improvements and all Alterations shall become the
property of Landlord and shall remain upon and be surrendered with the Premises
at the end of the Term of this Lease; provided, however, Landlord may, by
written notice delivered to Tenant concurrently with Landlord's approval of the
final working drawings for any Alterations (or if no approval is required for
any such Alterations pursuant to Subparagraph 13(b)), Landlord may, by written
notice delivered to Tenant within thirty (30) days after Landlord has received
the final working drawings for any such Alterations) identify those items of the
Alterations which Landlord shall require Tenant to remove at the end of the Term
of this Lease. If Landlord requires Tenant to remove any such items as described
above, Tenant shall, at its sole cost, remove the identified items on or before
the expiration or sooner termination of this Lease and repair any damage to the
Premises caused by such removal (or, at Landlord's option, shall pay to Landlord
all of Landlord's costs of such removal and repair).
(g) All articles of personal property owned by Tenant or installed by
Tenant at its expense in the Premises (including business and trade fixtures,
furniture and movable partitions) shall be, and remain, the property of Tenant,
and shall be removed by Tenant from the
28
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Premises, at Tenant's sole cost and expense, on or before the expiration or
sooner termination of this Lease. Tenant shall repair any damage caused by such
removal at its cost.
(h) If Tenant fails to remove by the expiration or sooner termination
of this Lease all of its personal property, or any Alterations identified by
Landlord for removal pursuant to this Paragraph 13, Landlord may, at its option,
treat such failure as a hold-over pursuant to Subparagraph 11(b) above, and/or
may (without liability to Tenant for loss thereof), at Tenant's sole cost and in
addition to Landlord's other rights and remedies under this Lease, at law or in
equity: (a) remove and store such items; and/or (b) upon ten (10) days' prior
notice to Tenant, sell all or any such items at private or public sale for such
price as Landlord may obtain. Landlord shall apply the proceeds of any such sale
to any amounts due to Landlord under this Lease from Tenant (including
Landlord's attorneys' fees and other costs incurred in the removal, storage
and/or sale of such items), with any remainder to be paid to Tenant.
14. REPAIRS.
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(a) Landlord's Obligations. Subject to the provisions of Paragraphs
----------------------
21 and 22, Landlord shall, at its sole cost and expense, maintain in good order,
condition and repair the following items of the Building and the Parking
Structure: foundation, footings, floor slab, load bearing walls, the structural
portions of the roof (excluding roof coverings), and exterior walls (excluding
any glass, and further excluding the painting, sealing, patching or
waterproofing of the exterior walls). Subject to the provisions of Paragraphs 21
and 22, Landlord also shall maintain the Outside Areas in good order, condition
and repair and the costs thereof shall be included in Operating Expenses. It is
the express intent of Landlord and Tenant that Landlord shall have no
obligation, in any manner whatsoever, to repair and maintain all or any part of
the Premises other than those portions of the Building and Parking Structure as
expressly provided for in this Subparagraph 14(a), it being the further express
intent of Landlord and Tenant that such be maintained and repaired by Tenant at
its sole cost and expense. Notwithstanding anything to the contrary in this
Lease, Landlord shall have no obligation to repair or maintain those portions of
the Premises which it is obligated to do so under this Subparagraph 14(a) if
such maintenance or repair is (i) required as a result of any damage thereto
caused by the acts or omissions of Tenant or of Tenant's agents, employees,
subtenants, contractors, or invitees, and the cost of any such repairs or
maintenance is not covered by insurance required to be carried by Landlord
pursuant to the terms of this Lease, or (ii) is required by reason of the
failure of Tenant to perform or comply with any terms of this Lease, or (iii) is
caused by any Alterations made by Tenant or by Tenant's agents, employees,
subtenants or contractors. It is an express condition precedent to all
obligations of Landlord to repair and maintain as provided herein that Tenant
shall have notified Landlord of the need for such repairs and maintenance.
(b) Tenant's Obligations. Subject to the provisions of Paragraphs 21
--------------------
and 22, Tenant shall at all times and at its own cost and expense clean, keep
and maintain in good order, condition and repair every part of the Premises
which is not within Landlord's obligation pursuant to Subparagraph 14(a),
whether or not the portion of the Premises requiring maintenance or repair or
the means thereof are reasonably or readily accessible to Tenant, and whether or
not the need for such repairs or maintenance occurs as a result of Tenant's use,
29
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changes in applicable laws, codes, rules or regulations, the elements, or the
age of such portion of the Premises. Tenant's repair and maintenance obligations
shall include, without limitation, the following: all plumbing, sewage, heating,
ventilating, air-conditioning, electrical, water, lighting, telephone, data
transmission, and communication facilities, equipment, and systems; elevators;
stairs; stairwells; restrooms; lobbies; boilers and pressure vessels; fire
protection systems, including fire alarm and/or smoke detection facilities; all
fixtures; walls (interior and exterior); ceilings; roofs (including roof
coverings); floors; windows; window frames; doors; plateglass; showcases;
skylights; lighting fixtures; lamps; fans and any exhaust equipment and systems;
and motors. Tenant shall exercise good maintenance practices in performing its
obligations hereunder, specifically including, without limitation, procurement
and maintenance of service contracts, reasonably acceptable to Landlord, for
heating, ventilation and air-conditioning equipment, roofs, elevators, boiler
and pressure vessels, and fire protection systems. Tenant's obligations under
this Subparagraph 14(b) shall include restorations, replacements and/or renewals
when necessary to keep the Premises and all improvements therein required to be
maintained by Tenant under this Lease in good order, condition and repair.
Notwithstanding the foregoing to the contrary, Tenant shall have no obligation
to repair or maintain those portions of the Premises which it is obligated to do
so under this Subparagraph 14(b) if such maintenance or repair is required as a
result of any damage thereto caused by the gross negligence of willful
misconduct of Landlord or Landlord's employees or contractors and the cost of
any such repair or maintenance is not covered by insurance maintained or
required to be maintained by Tenant under this Lease. Tenant shall keep the
exterior appearance of the Building and the Parking Structure in a first-class
condition consistent with the exterior appearance of other similar facilities of
comparable age in the vicinity, including, when necessary, the repainting of any
painted exterior surfaces of the Building and the Parking Structure. Tenant
shall also be responsible for all pest control within the Premises.
Notwithstanding the foregoing to the contrary, if after the last day
of the eighth Lease Year any of the improvements required to be maintained by
Tenant under this Paragraph 14(b) require, in the reasonable opinion of Tenant's
contractor (and with which opinion Landlord reasonably concurs), replacement and
the cost of such replacement would, under generally accepted accounting
principles, be a capital expense, then Landlord shall cause such replacement to
be made and the cost thereof (amortized over the useful life of the replacement
made, as determined in accordance with generally accepted accounting principles,
together with interest at the maximum rate allowed by law on the unamortized
balance) shall be payable by Tenant to Landlord as Additional Rent hereunder on
the first day of each month of the Term (including any extension thereof through
the Option Period); provided, however, in the event the replacement is required
as a result of the negligence or willful misconduct of Tenant or Tenant's
employees, contractors, agents, or invitees, then the replacement shall be made
by Tenant at its sole cost and expense.
(c) Tenant's Failure to Repair. In the event of a default by Tenant
--------------------------
in the performance of its maintenance obligations under this Lease, Landlord may
enter upon the Premises and make such repairs and/or maintenance without
liability to Tenant for any loss or damage that may accrue to Tenant's
merchandise, fixtures or other property or to Tenant's business by reason
thereof, and, upon completion thereof, Tenant shall pay to Landlord as
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Additional Rent Landlord's costs for making such repairs or maintenance upon
presentation of a written itemized bill therefor. Said bill shall include
interest at the Interest Rate on said costs from the date of such bill until
paid by Tenant.
(d) Tenant's Self-Help Rights. Tenant waives the right to make repairs
-------------------------
at Landlord's expense under any law, statute or ordinance now or hereafter in
effect (including the provisions of California Civil Code Sections 1941 and 1942
and any successor sections or statutes of a similar nature).
15. LIENS. Tenant shall not permit any mechanic's, materialmen's or other
-----
liens to be filed against all or any part of the Premises, nor against Tenant's
leasehold interest in the Premises, by reason of or in connection with any
repairs, alterations, improvements or other work contracted for or undertaken by
Tenant or any other act or omission of Tenant or Tenant's agents, employees,
contractors, licensees or invitees. Tenant shall, at Landlord's request, provide
Landlord with enforceable, conditional and final lien releases (and other
evidence reasonably requested by Landlord to demonstrate protection from liens)
from all persons furnishing labor and/or materials with respect to the Premises.
Landlord shall have the right at all reasonable times to post on the Premises
and record any notices of non-responsibility which it deems necessary for
protection from such liens. If any such liens are filed, Tenant shall, at its
sole cost, immediately cause such liens to be released of record or bonded so
that it no longer affects title to the Premises. If Tenant fails to cause any
such liens to be so released or bonded within ten (10) days after filing
thereof, such failure shall be deemed a material breach by Tenant under this
Lease without the benefit of any additional notice or cure period described in
Paragraph 23 below, and Landlord may, without waiving its rights and remedies
based on such breach, and without releasing Tenant from any of its obligations,
cause such lien to be released by any means it shall deem proper, including
payment in satisfaction of the claim giving rise to such lien. Tenant shall pay
to Landlord within five (5) days after receipt of invoice from Landlord, any sum
paid by Landlord to remove such liens, together with interest at the Interest
Rate from the date of such payment by Landlord.
16. ENTRY BY LANDLORD. Landlord and its employees and agents shall at all
-----------------
times have the right to enter the Premises to inspect the same, to show the
Premises to prospective purchasers or tenants, to post notices of
nonresponsibility, and/or to alter, improve, maintain or repair the Premises or
any portion thereof as permitted or required by this Lease, all without being
deemed guilty of or liable for any breach of Landlord's covenant of quiet
enjoyment or any eviction of Tenant, and without abatement of Rent. Landlord
may, in order to carry out such purposes, erect scaffolding and other necessary
structures where reasonably required by the character of the work to be
performed. In exercising such entry rights, Landlord shall minimize, to the
extent reasonably practicable, the interference with Tenant's business, and
shall provide Tenant with reasonable advance notice of any such entry (except in
emergency situations). Landlord shall not have any liability to Tenant for any
damages or losses on account of any such entry by Landlord. Nothing in this
Paragraph 16 shall be construed as obligating Landlord to perform any
maintenance repairs, or alterations, except as otherwise expressly required in
this Lease to be performed by Landlord.
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17. UTILITIES AND SERVICES. Landlord shall be responsible for and pay all
----------------------
charges to hook up electrical, telephone and water service to the Building.
Tenant shall be responsible for and shall pay promptly all deposits to activate
service to the Building for, and all service charges for, water, gas,
electricity, telephone, refuse pickup, janitorial service and all other
utilities, materials and services furnished directly to or used by Tenant in, on
or about the Premises during the Term, together with any taxes thereon. Landlord
shall not be liable in damages or otherwise for any failure or interruption of
any utility service or other service furnished to the Premises.
18. BANKRUPTCY. If Tenant shall file a petition in bankruptcy under any
----------
provision of the Bankruptcy Code, or if Tenant shall be adjudicated a bankrupt
in involuntary bankruptcy proceedings and such adjudication shall not have been
vacated within thirty (30) days from the date thereof, or if a receiver or
trustee of Tenant's property shall be appointed and the order appointing such
receiver of trustee shall not be set aside or vacated within thirty (30) days
after the entry thereof, or if Tenant shall assign Tenant's estate or effects
for the benefit of creditors, or if this Lease shall, by operation of law or
otherwise, pass to any person or persons other than Tenant other than as
permitted under Paragraph 25, then in any such event Landlord may terminate this
Lease, if Landlord so elects, with or without notice of such election and with
or without entry or action by Landlord. In such case, notwithstanding any other
provisions of this Lease, Landlord, in addition to any and all rights and
remedies allowed by law or equity, shall, upon such termination, be entitled to
recover damages in the amount provided in Subparagraph 23(b) hereof. Neither
Tenant nor any person claiming through or under Tenant or by virtue of any
statute or order of any court shall be entitled to possession of the Premises
but shall surrender the Premises to Landlord. Nothing contained herein shall
limit or prejudice the right of Landlord to recover damages by reason of any
such termination equal to the maximum allowed by any statute or rule of law in
effect at the time when, and governing the proceedings in which, such damages
are to be proved, whether or not such amount is greater, equal to or less than
the amount of damages recoverable under the provisions of this Paragraph 18.
19. INDEMNIFICATION AND EXCULPATION.
-------------------------------
(a) Tenant's Indemnification of landlord. Tenant shall be liable for,
------------------------------------
and shall indemnify, protect, defend and hold harmless Landlord and Landlord's
partners, officers, directors, members, employees, agents, successors and
assigns (collectively, "Landlord Indemnified Parties"), from and against, any
and all claims, damages, judgments, suits, causes of action, losses, liabilities
and expenses, including reasonable attorneys' fees and court costs
(collectively, "Indemnified Claims"), arising or resulting from: (i) any act or
omission of Tenant or any of Tenant's agents, employees, contractors,
subtenants, assignees, licensees or invitees (collectively, "Tenant Parties");
(ii) the use of the Premises and conduct of Tenant's business by Tenant or any
Tenant Parties, or any other activity, work or thing done, permitted or suffered
by Tenant or any Tenant Parties, in or about the Premises; and/or (iii) any
default by Tenant of any obligations on Tenant's part to be performed under the
terms of this Lease. In case any action or proceeding is brought against
Landlord or any Landlord Indemnified Parties by reason of any such Indemnified
Claims, Tenant, upon notice from Landlord, shall defend the same at Tenant's
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expense by counsel approved in writing by Landlord, which approval Landlord
shall not unreasonably withhold.
(b) Tenant's Assumption of Risk and Waiver. Except to the extent
--------------------------------------
caused by the gross negligence or willful misconduct of Landlord or the Landlord
Indemnified Parties, Tenant, as a material part of the consideration to
Landlord, hereby agrees that neither Landlord nor any Landlord Indemnified
Parties shall be liable to Tenant for, and Tenant expressly assumes the risk of
and waives any and all claims it may have against Landlord or any Landlord
Indemnified Parties with respect to, any and all damage to property or injury to
persons in, upon or about the Premises resulting from any other cause
whatsoever, including, without limitation, (i) any such damage caused by other
persons in or about the Premises, or caused by quasi-public work, (ii) any loss
of or damage to property by theft or otherwise, or (iii) any injury or damage to
persons or property resulting from any casualty, explosion, falling plaster or
other masonry or glass, steam, gas, electricity, water or rain which may leak
from any part of the Building or any other portion of the Premises, or from the
pipes, appliances or plumbing works therein, or from the roof, street or
subsurface, or from any other place, or resulting from dampness, or any other
cause whatsoever. Notwithstanding anything to the contrary contained in this
Lease, neither Landlord nor any Landlord Indemnified Parties shall be liable for
any damages arising out of any loss of the use of the Premises or any equipment
or facilities therein by Tenant or any Tenant Parties or for interference with
light or other incorporeal hereditaments.
(c) Survival; No Release of Insurers. Tenant's indemnification
--------------------------------
obligations under Subparagraph l9(a) shall survive the expiration or earlier
termination of this Lease. Tenant's covenants, agreements and indemnification in
Subparagraphs 19(a) and l9(b) above are not intended to and shall not relieve
any insurance carrier of its obligations under policies required to be carried
by Tenant pursuant to the provisions of this Lease.
20. INSURANCE.
---------
(a) Tenant's Insurance. During the entire Term hereof and any other
------------------
period of occupancy, Tenant shall, at its sole cost and expense, keep in full
force and effect the following insurance:
(i) "Special Form" property insurance including at least the
following perils: fire and extended coverage, smoke damage, vandalism, malicious
mischief, and sprinkler leakage. This insurance policy shall be upon all
property owned by Tenant, for which Tenant is legally liable, or that is
installed at Tenant's expense, and which is located in the Building, including,
without limitation, any Alterations, and all furniture, fittings, installations,
fixtures and any other personal property, in an amount equal to the full
replacement cost thereof. As long as this Lease is in effect, the proceeds of
such policy shall be used for the repair and replacement of such items so
insured.
(ii) Six (6) months business interruption and loss of income and
extra expense insurance insuring the same perils described in Subparagraph
20(a)(i) above, in such
33
<PAGE>
amounts as will reimburse Tenant for any direct or indirect loss of earnings
attributable to any such perils including prevention of access to the Premises
as a result of any such perils.
(iii) Commercial General Liability Insurance (on an occurrence
form) insuring bodily injury, personal injury and property damage including the
following divisions and extensions of coverage: premises and operations; owners
and contractors protective; blanket contractual liability (including coverage
for Tenant's indemnity obligations under this Lease); products and completed
operations; and liquor liability (if Tenant serves alcohol on the Premises).
Such insurance shall be in an amount not less than Five Million and 00/100ths
Dollars ($5,000,000.00) combined single limit.
(iv) Comprehensive Automobile Liability insuring bodily injury
and property damage arising from owned, hired and non-owned automobiles with
minimum limits of liability of Two Million and 00/100ths Dollars ($2,000,000.00)
per accident.
(v) Worker's Compensation as required by laws of the State of
California with the following minimum limits of liability: Coverage A -
statutory benefits; Coverage B - One Million and 00/100ths Dollars
($1,000,000.00) per accident and disease.
(vi) Any other form or forms of insurance as Landlord may
reasonably require from time to time in form, in amounts and for insurance risks
against which a prudent tenant would protect itself, but only to the extent
coverage for such risks and amounts are available in the insurance market at
commercially acceptable rates.
(b) Supplemental Tenant Insurance Requirements. All policies of
------------------------------------------
insurance required to be maintained by Tenant under this Lease shall be subject
to the following additional requirements:
(i) All policies shall be in a form reasonably satisfactory to
Landlord.
(ii) All policies shall be issued by an insurer admitted to
do business in the State of California.
(iii) All policies shall be issued by insurers with a
policyholder rating of "A" and a financial rating of "X" in the most recent
version of Best's Key Rating Guide.
(iv) All policies shall contain a requirement to notify Landlord
(and mortgagees or ground lessors of Landlord who are named as additional
insureds, if any) in writing not less than thirty (30) days prior to any
reduction in coverage, cancellation or other termination thereof. Tenant agrees
to deliver to Landlord certificate(s) of insurance evidencing the existence of
such insurance and Tenant's compliance with the foregoing provisions of this
Paragraph 20. Tenant shall cause replacement policies or certificates to be
delivered to Landlord not less than five (5) days prior to the expiration of any
such policy or policies. If any such initial or replacement policies or
certificates are not furnished within the time(s) specified herein, Tenant shall
be deemed to be in material default under this Lease without the benefit of any
34
<PAGE>
additional notice or cure period provided in Subparagraph 23(a)(iii) below, and
Landlord shall have the right, but not the obligation, to procure such policies
and certificates at Tenant's expense. If Landlord obtains any insurance that is
the responsibility of Tenant under this Paragraph 20, Landlord shall deliver to
Tenant a written statement setting forth the cost of any such insurance and
showing in reasonable detail the manner in which it has been computed and Tenant
shall promptly remit said amount to Landlord as Additional Rent.
(v) The deductible amounts of all policies shall be commercially
reasonable.
(vi) General Liability and Automobile Liability policies under
Subparagraphs 20(a)(iii) and (iv), respectively, shall name Landlord (and at
Landlord's request, Landlord's mortgagees and ground lessors of which Tenant has
been informed in writing) as additional insureds and shall also contain a
provision that the insurance afforded by such policy shall be primary insurance
and any insurance carried by Landlord or Landlord's mortgagees or ground lessors
shall be excess over and non-contributing with Tenant's insurance.
(c) Landlord's Insurance. During the Term Landlord shall maintain
--------------------
"Special Form" property insurance (including inflation endorsement, sprinkler
leakage endorsement and, at Landlord's option, boiler and machinery insurance,
earthquake and flood coverage) on the Building and the Parking Structure,
excluding coverage of all property which Tenant is obligated to insure under
Subparagraphs 20(a) and (b), but including the Tenant Improvements. Such
insurance shall also include insurance against loss of rents on a "Special Form"
basis, including, at Landlord's option, earthquake and flood, in an amount equal
to the Monthly Base Rent and Additional Rent, and any other sums payable under
the Lease, for a period of at least twelve (12) months commencing on the date of
loss. Such insurance shall name Landlord and its agents as named insureds and
include a lender's loss payable endorsement in favor of Landlord's lender (Form
438 BFU Endorsement). Notwithstanding any contribution by Tenant to the cost of
insurance premiums, as provided herein, Tenant acknowledges that it has no right
to directly receive any proceeds from any insurance policies carried by
Landlord.
(d) Tenant's Use. Tenant will not keep, use, sell or offer for sale in
------------
or upon the Premises any article which may be prohibited by any insurance policy
periodically in force covering the Premises. Tenant shall promptly comply with
all reasonable requirements of the insurance authority or any present or future
insurer relating to the Premises.
(e) Cancellation of Landlord's Policies. If any of Landlord's
-----------------------------------
insurance policies shall be cancelled or cancellation shall be threatened or the
coverage thereunder reduced or threatened to be reduced in any way because of
the use of the Premises or any part thereof by Tenant or any assignee or
subtenant of Tenant or by anyone Tenant permits on the Premises and, if Tenant
fails to remedy the condition giving rise to such cancellation, threatened
cancellation, reduction of coverage, threatened reduction of coverage, increase
in premiums, or threatened increase in premiums, within forty-eight (48) hours
after notice thereof, Landlord may, at its option, either terminate this Lease
or enter upon the Premises and attempt to remedy such condition, and Tenant
shall promptly pay the cost thereof to Landlord as Additional Rent. If
35
<PAGE>
Landlord is unable, or elects not to remedy such condition, then Landlord shall
have all of the remedies provided for in this Lease in the event of a default by
Tenant. Notwithstanding the foregoing provisions of this Subparagraph 20(e), if
Tenant fails to remedy as aforesaid, Tenant shall be in default of its
obligation hereunder and Landlord shall have no obligation to remedy such
default.
(f) Waiver of Subrogation. To the extent permitted by law and without
---------------------
affecting the coverage provided by insurance required to be maintained
hereunder, Landlord and Tenant each waive any right to recover against the other
on account of any and all claims Landlord or Tenant may have against the other
with respect to any risk insured against by casualty insurance actually carried,
or required to be carried hereunder, to the extent of the proceeds realized from
such casualty insurance coverage. Each casualty insurance policy carried by
Landlord or Tenant hereunder, or which either may obtain with respect to the
Premises independent of obligations hereunder, shall provide that the insurer
waives all rights of recovery by way of subrogation against Landlord or Tenant
in connection with all matters included within the scope of the waiver of
recovery contained in this Subparagraph 20(f).
21. DAMAGE OR DESTRUCTION.
---------------------
(a) Partial Destruction. If the Building or the Parking Structure is
-------------------
damaged by fire or other casualty to an extent not exceeding twenty-five percent
(25%) of the full replacement cost thereof, and Landlord's contractor reasonably
estimates in a writing delivered to Landlord and Tenant that the damage thereto
may be repaired, reconstructed or restored to substantially its condition
immediately prior to such damage within one hundred eighty (180) days from the
date of such casualty, and Landlord will receive insurance proceeds sufficient
to cover the costs of such repairs, reconstruction and restoration (including
proceeds from Tenant and/or Tenant's insurance which Tenant is required to
deliver to Landlord pursuant to Subparagraph 21(e) below to cover the costs of
repair, reconstruction and restoration of Tenant's Alterations), then Landlord
shall commence and proceed diligently with the work of repair, reconstruction
and restoration and this Lease shall continue in full force and effect.
(b) Substantial Destruction. Any damage or destruction to the Building
-----------------------
or the Parking Structure which Landlord is not obligated to repair pursuant to
Subparagraph 21(a) above shall be deemed a substantial destruction. In the event
of a substantial destruction, Landlord may elect to either:
(i) repair, reconstruct and restore the portion of the Building
and/or Parking Structure damaged by such casualty, in which case this Lease
shall continue in full force and effect, subject to Tenant's termination right
contained in Subparagraph 2l(d) below; or
(ii) terminate this Lease effective as of the date which is forty-
five (45) days after Tenant's receipt of Landlord's election to so terminate.
(c) Notice. Under any of the conditions of Subparagraph 21(a) or (b)
------
above, Landlord shall give written notice to Tenant of its intention to repair
or terminate, as permitted in
36
<PAGE>
such subparagraphs, within the earlier of sixty (60) days after the occurrence
of such casualty, or fifteen (15) days after Landlord's receipt of the estimate
from Landlord's contractor (the applicable time period to be referred to herein
as the "Notice Period").
(d) Tenant's Termination Rights. If Landlord elects to repair,
---------------------------
reconstruct and restore pursuant to Subparagraph 21(b)(i) hereinabove rather
than terminate the Lease pursuant to Subparagraph 21(b)(ii) above, and if
Landlord's contractor estimates that as a result of such damage, Tenant cannot
be given reasonable use of and access to the Building and the Parking Structure
within one hundred eighty (180) days after the date of issuance of all
governmental permits or approvals for such repair, reconstruction or
restoration, then Tenant may terminate this Lease upon delivery of written
notice to Landlord within fifteen (15) days after Landlord delivers notice to
Tenant of its election to so repair, reconstruct or restore, which termination
shall be effective as of the date which is thirty (30) days after Landlord's
receipt of Tenant's termination notice.
(e) Tenant's Costs and Insurance Proceeds. In the event of any damage
-------------------------------------
or destruction of all or any part of the Building or the Parking Structure,
Tenant shall immediately (i) notify Landlord thereof, and (ii) deliver to
Landlord all property insurance proceeds received by Tenant with respect to any
Alterations, but excluding proceeds for Tenant's furniture, fixtures, equipment
and other personal property, whether or not this Lease is terminated as
permitted in this Paragraph 21, and Tenant hereby assigns to Landlord all rights
to receive such insurance proceeds. If, for any reason (including Tenant's
failure to obtain insurance for the full replacement cost of the Alterations
from any and all casualties), Tenant fails to receive insurance proceeds
covering the full replacement cost of the Alterations which are damaged, Tenant
shall be deemed to have self-insured the replacement cost of such items, and
upon any damage or destruction thereto, Tenant shall immediately pay to Landlord
the full replacement cost of such items, less any insurance proceeds actually
received by Landlord from Landlord's or Tenant's insurance with respect to such
items.
(f) Abatement of Rent. In the event of any damage, repair,
-----------------
reconstruction and/or restoration described in this Paragraph 21, Monthly Base
Rent shall be abated or reduced, as the case may be, in proportion to the degree
to which Tenant's use of the Premises is impaired during such period of damage
and repair until such use is restored. Except for abatement of Monthly Base
Rent as provided hereinabove, Tenant shall not be entitled to any compensation
or damages for loss of, or interference with, Tenant's business or use or access
of all or any part of the Premises resulting from any such damage, repair,
reconstruction or restoration.
(g) Damage Near End of Term. In addition to its termination rights set
-----------------------
forth above, Landlord and Tenant shall have the right to terminate this Lease if
any damage to the Building or the Parking Structure occurs during the last
twelve (12) months of the Term of this Lease or the last twelve (12) months of
any extension period and Landlord's contractor estimates in a writing delivered
to Landlord and Tenant that the repair, reconstruction or restoration of such
damage cannot be completed within the earlier of (i) the scheduled expiration
date of the Term, or (ii) sixty (60) days after the date of such casualty;
provided, however, Landlord shall not have such additional right to terminate
this Lease pursuant to this Subparagraph 21(g) if
37
<PAGE>
Tenant has any rights under this Lease to extend the Term and either (A) prior
to such damage Tenant has previously exercised such rights to extend the Term of
this Lease, or (B) such damage occurs prior to the time Tenant is required to
deliver its notice of its election to extend the Term, and within five (5) days
after Landlord exercises such termination right pursuant to this Subparagraph
21(g), Tenant properly and timely delivers such notice exercising such rights to
extend the Term.
(h) Waiver of Termination Right. The provisions of California Civil
---------------------------
Code Section 1932, Subsection 2, and Section 1933, Subsection 4 (and any
successor statutes thereof permitting Tenant to terminate this Lease as a result
of any damage or destruction) are hereby expressly waived by Tenant, the parties
hereby agreeing that the foregoing provisions of this Paragraph 21 shall govern
their respective rights and obligations in the event of any damage or
destruction.
(i) Termination. Upon any termination of this Lease under any of the
-----------
provisions of this Paragraph 21, the parties shall be released without further
obligation to the other from the date possession of the Premises is surrendered
to Landlord except for items which have theretofore accrued and are then unpaid.
22. EMINENT DOMAIN.
--------------
(a) Substantial Taking. If title to all of the Premises or so much
------------------
thereof is taken for any public or quasi-public use under any statute or by
right of eminent domain so that reconstruction of the Premises will not, in
Landlord's reasonable opinion, result in the Premises being reasonably suitable
for Tenant's continued occupancy for the uses and purposes permitted by this
Lease, this Lease shall terminate as of the date that possession of the Premises
or part thereof be taken, and Landlord shall refund to Tenant any prepaid
Monthly Base Rent allocable to the period following the date of the taking. A
sale by Landlord to any authority having the power of eminent domain, either
under threat of condemnation or while condemnation proceedings are pending,
shall be deemed a taking under the power of eminent domain for all purposes of
this Paragraph 22.
(b) Partial Taking; Abatement of Rent. If any part of the Premises is
---------------------------------
taken and the remaining part is, in Landlord's reasonable opinion, reasonably
suitable for Tenant's continued occupancy for the purposes and uses permitted by
this Lease, this Lease shall, as to the part so taken, terminate as of the date
that possession of such part of the Premises is taken. The Monthly Base Rent
and other sums payable hereunder shall be reduced in the same proportion that
Tenant's use and occupancy of the Premises is reduced; provided, however if the
portion of the Premises taken is Outside Areas, then Tenant's Monthly Base Rent
shall be reduced only if such taking materially interferes with Tenant's use of
the Outside Areas and then only to the extent that the fair market rental value
of the Premises is diminished by such partial taking. If the parties disagree
as to the amount of the Monthly Base Rent reduction, the matter shall be
resolved by arbitration and such arbitration shall comply with and be governed
by the California Arbitration Act, Sections 1280 through 1294.2 of the
California Code of Civil Procedure. Each party hereby waives the provisions of
Section 1265.130 of the California Code of Civil
38
<PAGE>
Procedure allowing either party to petition the Superior Court to terminate this
Lease in the event of a partial taking of the Premises.
(c) Condemnation Award. In connection with any taking of the
------------------
Premises, Landlord shall be entitled to receive the entire amount of any award
which may be made or given in such taking or condemnation, without deduction or
apportionment for any estate or interest of Tenant, it being expressly
understood and agreed by Tenant that no portion of any such award shall be
allowed or paid to Tenant for any so-called bonus or excess value of this Lease,
and such bonus or excess value shall be the sole property of Landlord. Tenant
shall not assert any claim against Landlord or the taking authority for any
compensation because of such taking (including any claim for bonus or excess
value of this Lease); provided, however, Tenant shall have the right to recover
from the condemning authority (but not from Landlord) any compensation as may be
separately awarded or recoverable by Tenant for the taking of Tenant's
furniture, fixtures, equipment and other personal property, for Tenant's
relocation expenses, and for any loss of goodwill to Tenant's business by reason
of such taking.
23. TENANT'S DEFAULT; LANDLORD'S REMEDIES.
-------------------------------------
(a) Tenant's Default. The occurrence of any one or more of the
----------------
following events shall constitute a default hereunder by Tenant:
(i) The failure by Tenant to open for business in the Premises
within one hundred fifty (150) days after substantial completion of the
Landlord's Work, or the abandonment of the Premises by Tenant.
(ii) The failure by Tenant to make any payment of Rent or any
other payment required to be made by Tenant hereunder, as and when due, where
such failure shall continue for a period of three (3) days after written notice
thereof from Landlord to Tenant; provided, however, that any such notice shall
be in lieu of, and not in addition to, any notice required under California Code
of Civil Procedure Section 1161 regarding unlawful detainer actions or any
similar successor statute.
(iii) The failure by Tenant to observe or perform any of the
express or implied covenants or provisions of this Lease to be observed or
performed by Tenant, other than as specified in Subparagraph 23(a)(i) or (ii)
above, where such failure shall continue for a period of ten (10) days after
written notice thereof from Landlord to Tenant. Any such notice shall be in lieu
of, and not in addition to, any notice required under California Code of Civil
Procedure Section 1161 regarding unlawful detainer actions or any similar
successor statute. If the nature of Tenant's default is such that more than
twenty (20) days are reasonably required for its cure, then Tenant shall not be
deemed to be in default if Tenant shall commence such cure within said twenty
(20) day period and thereafter diligently prosecute such cure to completion,
which completion shall occur not later than sixty (60) days from the date of
such notice from Landlord.
(iv) (A) The making by Tenant of any general assignment for the
benefit of creditors; (B) the filing by or against Tenant of a petition to have
Tenant adjudged a
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bankrupt or a petition for reorganization or arrangement under any law relating
to bankruptcy (unless, in the case of a petition filed against Tenant, the same
is dismissed within thirty (30) days); (C) the appointment of a trustee or
receiver to take possession of substantially all of Tenant's assets located at
the Premises or of Tenant's interest in this Lease, where possession is not
restored to Tenant within thirty (30) days; or (D) the attachment, execution or
other judicial seizure of substantially all of Tenant's assets located at the
Premises or of Tenant's interest in this Lease where such seizure is not
discharged within thirty (30) days.
(b) Remedies. Upon a default by Tenant, Landlord shall have the
--------
following remedies:
(i) Continuation of Lease in Effect. Landlord shall have
-------------------------------
the remedy described in Civil Code Section 1951.4, which provides that, when a
tenant has the right to sublet or assign (subject only to reasonable
limitations), the landlord may continue the lease in effect after the tenant's
breach and abandonment and recover rent as it becomes due. Accordingly, if
Landlord does not elect to terminate this Lease on account of any default by
Tenant, Landlord may enforce all of Landlord's rights and remedies under this
Lease, including the right to recover all Rent as it becomes due.
(ii) Termination. Landlord may terminate Tenant's right to
-----------
possession of the Premises at any time by giving written notice to that effect,
and relet the Premises or any part thereof. Tenant shall be liable immediately
to Landlord for all costs Landlord incurs in reletting the Premises or any part
thereof, including, without limitation, broker's commissions, expenses of
cleaning and redecorating the Premises required by the reletting and like costs.
Reletting may be for a period shorter or longer than the remaining term of this
Lease. No act by Landlord other than giving written notice to Tenant shall
terminate this Lease. Acts of maintenance, efforts to relet the Premises or the
appointment of a receiver on Landlord's initiative to protect Landlord's
interest under this Lease shall not constitute a termination of Tenant's right
to possession. On termination, Landlord has the right to remove all Tenant's
furniture, trade fixtures and other personal property and store the same at
Tenant's cost and to recover from Tenant as damages:
(a) The worth at the time of award of unpaid Rent and
other sums due and payable which had been earned at the time of termination;
plus
(b) The worth at the time of award of the amount by
which the unpaid Rent and other sums due and payable which would have been
payable after termination until the time of award exceeds the amount of such
Rent loss that Tenant prove could have been reasonably avoided; plus
(c) The worth at the time of award of the amount by
which the unpaid Rent and other sums due and payable for the balance of the Term
after the time of award exceeds the amount of such Rent loss that Tenant proves
could be reasonably avoided; plus
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(d) Any other amount necessary to compensate Landlord for
all the detriment proximately caused by Tenant's failure to perform Tenant's
obligations under this Lease, or which, in the ordinary course of things, would
be likely to result therefrom, including, without limitation, any costs or
expenses incurred by Landlord: (i) in retaking possession of the Premises; (ii)
in maintaining, repairing, preserving, restoring, replacing, cleaning, altering
or rehabilitating the Premises or any portion thereof, including such acts for
reletting to a new tenant or tenants; (iii) for leasing commissions; or (iv) for
any other costs necessary or appropriate to relet the Premises; plus
(e) At Landlord's election, such other amounts in addition
to or in lieu of the foregoing as may be permitted from time to time by the laws
of the State of California.
The "worth at the time of award" of the amounts referred to in
Subparagraphs 23(b)(ii)(a) and 23(b)(ii)(b) is computed by allowing interest at
the Interest Rate on the unpaid Rent and other sums due and payable from the
termination date through the date of award. The "worth at the time of award" of
the amount referred to in Subparagraph 23(b)(ii)(c) is computed by discounting
such amount at the discount rate of the Federal Reserve Bank of San Francisco at
the time of award plus one percent (1%). Tenant waives redemption or relief from
forfeiture under California Code of Civil Procedure Sections 1174 and 1179, or
under any other present or future law, in the event Tenant is evicted or
Landlord takes possession of the Premises by reason of any default of Tenant
hereunder.
(iii) Re-Entry. Landlord may, with or without terminating this
--------
Lease, re-enter the Premises and remove all persons and property from the
Premises; such property may be removed and stored in a public warehouse or
elsewhere at the cost of and for the account of Tenant. No re-entry or taking
possession of the Premises by Landlord pursuant to this subparagraph shall be
construed as an election to terminate this Lease unless a written notice of such
intention is given to Tenant.
(c) Performance for Tenant. All covenants and agreements to be
----------------------
performed by Tenant under any of the terms of this Lease shall be performed by
Tenant at Tenant's sole cost and expense and without any abatement of Rent. If
Tenant shall fail to pay any sum of money owed to any party other than Landlord,
for which it is liable under this Lease, or if Tenant shall be in default
hereunder (after being given any notice as may be required herein and the
expiration of any cure period as provided for herein) for the failure to perform
any other act on its part to be performed hereunder, Landlord may, without
waiving or releasing Tenant from its obligations hereunder, but shall not be
obligated to, make any such payment or perform any such other act to be made or
performed by Tenant. All sums so paid by Landlord and all necessary incidental
costs together with interest thereon at the Interest Rate set forth in
Subparagraph l(w), from the date of such payment by Landlord, shall be payable
to Landlord on demand. Tenant covenants to pay any such sums, and Landlord shall
have (in addition to any other right or remedy of Landlord) all rights and
remedies in the event of the non-payment thereof by Tenant as are set forth in
this Paragraph 23.
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(d) Late Payment. In the event Tenant fails to pay any installment of
------------
Rent when due or in the event Tenant fails to make any other payment for which
Tenant is obligated under this Lease when due, such late amount shall accrue
interest at the Interest Rate and Tenant shall pay Landlord as Additional Rent
such interest on such amount from the date such amount became due until such
amount is paid. In addition, in the event Tenant fails to pay any installment
of Rent or other payment for which it is obligated under this Lease within three
(3) days after receipt of written notice thereof by Landlord to Tenant, then
Tenant shall pay to Landlord concurrently with such late payment amount, as
Additional Rent, a late charge equal to five percent (5%) of the amount due to
compensate Landlord for the extra costs incurred as a result of such late
payment; provided, however, if Tenant has been given two (2) or more written
notices of late payment within the preceding twelve (12) month period, then
Tenant shall no longer be entitled to receive written notice prior to assessment
of the late charge. The parties agree that such interest and late charge
represents a fair and reasonable estimate of the detriment that Landlord will
suffer by reason of late payment by Tenant. Acceptance of any such interest and
late charge shall not constitute a waiver of the Tenant's default with respect
to the overdue amount, or prevent Landlord from exercising any of the other
rights and remedies available to Landlord.
Initials:
________________________ ________________________
Landlord Tenant
(e) Rights and Remedies Cumulative. All rights, options and remedies
------------------------------
of Landlord contained in this Lease shall be construed and held to be
cumulative, and no one of them shall be exclusive of the other, and Landlord
shall have the right to pursue any one or all of such remedies or any other
remedy or relief which may be provided by law or in equity, whether or not
stated in this Lease. Nothing in this Paragraph 23 shall be deemed to limit or
otherwise affect Tenant's indemnification of Landlord pursuant to any provision
of this Lease.
24. Landlord's Default. Landlord shall not be in default in the
------------------
performance of any obligation required to be performed by Landlord under this
Lease unless Landlord has failed to perform such obligation within thirty (30)
days after the receipt of written notice from Tenant specifying in detail
Landlord's failure to perform; provided however, that if the nature of
Landlord's obligation is such that more than thirty (30) days are required for
its performance, then Landlord shall not be deemed in default if it commences
such performance within such thirty (30) day period and thereafter diligently
pursues the same to completion. Upon any such default by Landlord, Tenant may
exercise any of its rights provided at law or in equity, subject to the
limitations on liability set forth in Paragraph 37 of this Lease.
25. ASSIGNMENT AND SUBLETTING.
-------------------------
(a) Restriction on Transfer. Except as expressly provided in this
-----------------------
Paragraph 25, Tenant shall not assign or encumber this Lease or any interest
herein or sublet the Premises or any part thereof, or permit the use or
occupancy of the Premises by any party other than
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Tenant (any such assignment, encumbrance, sublease or the like shall sometimes
be referred to as a "Transfer"), without the prior written consent of Landlord,
which consent Landlord shall not unreasonably withhold or delay. Any Transfer
without Landlord's consent (except for a Transfer pursuant to Subparagraph 25(h)
below) shall constitute a default by Tenant under this Lease and shall be
voidable at Landlord's election. In addition, this Lease shall not, nor shall
any interest of Tenant herein, be assignable by operation of law without the
prior written consent of Landlord. For purposes of this Paragraph 25, if Tenant
is a corporation, partnership or other entity, any transfer, assignment,
encumbrance or hypothecation of twenty-five percent (25%) or more (individually
or in the aggregate) of any stock or other ownership interest in such entity,
and/or any transfer, assignment, hypothecation or encumbrance of any controlling
ownership or voting interest in such entity, shall be deemed a Transfer and
shall be subject to all of the restrictions and provisions contained in this
Paragraph 25. Notwithstanding the foregoing, the immediately preceding sentence
shall not apply to any transfers of stock of Tenant if Tenant is a publicly-held
corporation and such stock is transferred publicly over a recognized security
exchange or over-the-counter market.
(b) Transfer Notice. If at any time during the Term of this Lease
---------------
Tenant desires to effect a Transfer, then at least fifteen (15) days prior to
the date when Tenant desires the Transfer to be effective (the "Transfer Date"),
Tenant shall give Landlord a notice (the "Transfer Notice"), which shall set
forth the name, address and business of the proposed assignee, sublessee or
other transferee (sometimes referred to hereinafter as "Transferee"), financial
statements of the proposed Transferee, other reasonable information regarding
the financial condition of the proposed Transferee, reasonable information
(including references) concerning the character and ownership of the proposed
Transferee, the Transfer Date, any ownership or commercial relationship between
Tenant and the proposed Transferee, and the consideration and all other material
terms and conditions of the proposed Transfer, all in such detail as Landlord
shall reasonably require. If Landlord reasonably requests additional detail, the
Transfer Notice shall not be deemed have been received until Landlord receives
such additional detail, and Landlord may withhold consent to any Transfer until
such information is provided to it.
(c) Landlord's Options. Within thirty (30) days of Landlord's receipt
------------------
of any such Transfer Notice, and additional information requested by Landlord
concerning the proposed Transferee's financial responsibility, Landlord shall
elect to do one of the following:
(i) consent to such proposed Transfer;
(ii) refuse such consent, which refusal shall be on reasonable
grounds including, without limitation, those set forth in Subparagraph 25(e)
below;
(iii) with respect to a sublease of all or less than all of the
Premises, terminate this Lease as to the portion of the Premises proposed to be
sublet and recapture such portion of the Premises for reletting by Landlord; or
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(iv) with respect to an assignment of the Lease, terminate this
Lease and recapture the Premises for reletting by Landlord.
Notwithstanding the foregoing to the contrary: (a) during the first
five (5) Lease Years Landlord shall not be entitled to make the termination
election described in clause (iii) above if (1) the proposed sublease is a
sublease of the Building, or a portion hereof, and (2) the term (including the
initial term and any extensions thereof) of the proposed sublease expires prior
to the last day of the fifth Lease Year; and (b) Landlord shall not be entitled
to make the termination election described in clause (iv) above in the event of
an assignment of the Lease to a Tenant Affiliate (hereafter defined in
Subparagraph 25(h)). Nothing contained in the immediately preceding sentence
shall prohibit or affect in any way Landlord's rights hereunder to make the
elections described in clauses (i) and (ii) above with respect to the proposed
sublease or assignment.
(d) Additional Conditions. A condition to Landlord's consent to any
---------------------
Transfer of this Lease shall be the delivery to Landlord of a true copy of the
fully executed instrument of assignment, transfer or hypothecation, and, in the
case of an assignment, the delivery to Landlord of an agreement executed by the
Transferee in form and substance satisfactory to Landlord and expressly
enforceable by Landlord, whereby the Transferee assumes and agrees to be bound
by all of the terms and provisions of this Lease and to perform all of the
obligations of Tenant hereunder. As a condition to Landlord's consent to any
sublease, such sublease shall provide that it is subject and subordinate to this
Lease and to all mortgages; that Landlord may enforce the provisions of the
sublease, including collection of rent; that in the event of termination of this
Lease for any reason, including without limitation a voluntary surrender by
Tenant, or in the event of any reentry or repossession of the Premises by
Landlord, Landlord may, at its option, either (i) terminate the sublease, or
(ii) take over all of the right, title and interest of Tenant, as sublessor,
under such sublease, in which case such sublessee shall attorn to Landlord, but
that nevertheless Landlord shall not (l) be liable for any previous act or
omission of Tenant under such sublease, (2) be subject to any defense or offset
previously accrued in favor of the sublessee against Tenant, or (3) be bound by
any previous modification of any sublease made without Landlord's written
consent, or by any previous prepayment by sublessee of more than one month's
rent.
(e) Reasonable Disapproval. Landlord and Tenant hereby acknowledge
----------------------
that Landlord's disapproval of any proposed Transfer pursuant to Subparagraph
25(c) shall be deemed reasonably withheld if based upon any reasonable factor,
including, without limitation, any or all of the following factors: (i) the
proposed Transfer would result in more than two subleases of portions of the
Premises being in effect at any one time during the Term; (ii) the proposed
Transferee is a governmental entity; (iii) the use of the Premises by the
Transferee is not permitted by the use provisions in Paragraph 8 hereof; (iv)
the Transferee does not have the financial capability to fulfill the obligations
imposed by the Transfer and this Lease; (v) the Transferee is not in Landlord's
reasonable opinion of reputable or good character or consistent with Landlord's
desired tenant identity for the Premises; or (vi) the Transferee is a real
estate developer or landlord which is a competitor of Landlord or is acting
directly or indirectly on behalf of a real estate developer or landlord which is
a competitor of Landlord.
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(f) Excess Rent. If Landlord shall consent to any assignment of this
-----------
Lease, Tenant shall pay to Landlord, as Additional Rent, fifty percent (50%) of
all sums and other consideration payable to and for the benefit of Tenant by the
assignee on account of the assignment (less reasonable leasing commissions and
reasonable attorneys' fees paid by Tenant in connection with such assignment,
and less up to Twenty-Five Thousand and 00/100ths Dollars ($25,000.00) in tenant
improvements required to be made by Tenant by the terms of the assignment), as
and when such sums and other consideration are due and payable by the assignee
to or for the benefit of Tenant. If for any proposed sublease of all of the
Premises Tenant receives rent or other consideration, either initially or over
the term of the sublease (less reasonable leasing commissions and reasonable
attorneys' fees paid by Tenant in connection with such sublease, and less up to
Twenty-Five Thousand and 00/100ths Dollars ($25,000.00) in tenant improvements
required to be made by Tenant by the terms of the sublease), in excess of the
Rent called for hereunder or, in case of the sublease of a portion of the
Premises, in excess of such Rent fairly allocable to such portion based on
square footage, after appropriate adjustments to assure that all other payments
called for hereunder are taken into account, Tenant shall pay to Landlord as
Additional Rent hereunder fifty percent (50%) of the excess of each such payment
of rent or other consideration received by Tenant promptly after its receipt.
(g) Termination Rights. If Tenant requests Landlord's consent to any
------------------
subletting of all or a portion of the Premises, Landlord shall have the right,
as provided in Subparagraph 25(c), to terminate this Lease as to the portion of
the Premises proposed to be sublet effective as of the date Tenant proposes to
sublet all or less than all of the Premises. Landlord's right to terminate this
Lease as to the portion of the Premises proposed to be sublet shall not
terminate as to any future additional subletting as a result of Landlord's
consent to a subletting of all or a portion of the Premises or Landlord's
failure to exercise its termination right with respect to any subletting. If
Tenant requests Landlord's consent to an assignment of the Lease, Landlord shall
have the right, as provided in Subparagraph 25(c), to terminate the Lease
effective as of the date that Tenant proposes to assign the Lease. Landlord
shall exercise such termination rights, if at all, by giving written notice to
Tenant within fifteen (15) days of receipt by Landlord of the financial
responsibility information required by this Paragraph 25. Tenant understands
and acknowledges that the options, as provided in this Paragraph 25, to
terminate this Lease is a material inducement for Landlord's agreeing to lease
the Premises to Tenant upon the terms and conditions herein set forth. In the
event of any such termination due to a proposed sublease of less than all of the
Premises, the cost of segregating the recaptured space from the balance of the
Premises shall be paid by Tenant and Tenant's monetary obligations under this
Lease shall be reduced proportionately to correspond to the balance of the
Premises leased by Tenant.
(h) Permitted Controlled Transfers. Notwithstanding the provisions
------------------------------
of this Paragraph 25 to the contrary, Tenant may assign this Lease or sublet the
Premises or any portion thereof, without Landlord's consent and without
extending any assignment or sublease termination option to Landlord, to any
entity which controls, is controlled by or is under common control with Tenant
(any such entity being referred to herein as "Tenant Affiliate"), or to any
corporation resulting from a merger or consolidation with Tenant, or to any
person or
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entity which acquires all the assets of Tenant's business as a going concern,
provided that: (i) at least twenty (20) days prior to such assignment or
sublease, Tenant delivers to Landlord the financial statements and other
financial and background information of the assignee or sublessee described in
Subparagraph 25(b) above; (ii) if an assignment, the assignee assumes, in full,
the obligations of Tenant under this Lease (or if a sublease, the sublessee of a
portion of the Premises or Term assumes, in full, the obligations of Tenant with
respect to such portion); (iii) the proposed assignee or sublessee has, in the
reasonable opinion of Landlord, a sufficient net worth to ensure the performance
by such proposed assignee or such proposed sublessee of the obligations of
Tenant under this Lease which are assumed by such assignee or sublessee as
provided in clause (ii) above; (iv) Tenant remains fully liable under this
Lease; (v) the use of the Premises under Paragraph 8 remains unchanged; and (vi)
such transaction is not entered into as a subterfuge to avoid the restrictions
and provisions of this Paragraph 25. The term "control" and variations thereof
as used in this Subparagraph 25(h) shall mean with respect to a corporation the
right to exercise, directly or indirectly, more than fifty percent (50%) of the
voting rights attributable to the controlled corporation, and, with respect to
any partnership or limited liability company, the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of the controlled partnership or limited liability company, as
applicable.
(i) No Release. No Transfer shall release Tenant of Tenant's
----------
obligations under this Lease or alter the primary liability of Tenant to pay the
Rent and to perform all other obligations to be performed by Tenant hereunder.
Consent by Landlord to one Transfer shall not be deemed consent to any
subsequent Transfer. In the event of default by any Transferee of Tenant or any
successor of Tenant in the performance of any of the terms hereof, Landlord may
proceed directly against Tenant without the necessity of exhausting remedies
against such Transferee or successor. Landlord may consent to subsequent
assignments of this Lease or sublettings 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 any such actions
shall not relieve Tenant of liability under this Lease.
(j) Administrative and Attorneys' Fees. If Tenant effects a Transfer
----------------------------------
or requests the consent of Landlord to any Transfer (whether or not such
Transfer is consummated), then Tenant shall, upon demand, pay Landlord any
reasonable attorneys' and paralegal fees incurred by Landlord in connection with
such Transfer or request for consent (whether attributable to Landlord's in-
house attorneys or paralegals or otherwise) not to exceed One Thousand and
00/100ths Dollars ($1,000.00). Acceptance of the aforesaid reimbursement of
Landlord's attorneys' and paralegal fees shall in no event obligate Landlord to
consent to any proposed Transfer.
26. SUBORDINATION. Without the necessity of any additional document being
-------------
executed by Tenant for the purpose of effecting a subordination, and at the
election of Landlord or any mortgagee or beneficiary with a deed of trust
encumbering the Premises, or any part thereof, or any lessor of a ground or
underlying lease with respect to the Premises, or any part thereof, this Lease
shall be subject and subordinate at all times to: (i) all ground leases or
underlying leases which may now exist or hereafter be executed affecting the
Premises, or any
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part thereof; and (ii) the lien of any mortgage or deed of trust which may now
exist or hereafter be executed for which the Premises, or any part thereof, is
specified as security. Notwithstanding the foregoing, Landlord shall have the
right to subordinate or cause to be subordinated any such ground leases or
underlying leases or any such liens to this Lease. In the event that any such
ground lease or underlying lease terminates for any reason or any such mortgage
or deed of trust is foreclosed or a conveyance in lieu of foreclosure is made
for any reason, at the election of Landlord's successor in interest, Tenant
shall attorn to and become the tenant of such successor and Tenant's right to
possession of the Premises shall not be disturbed as long as Tenant is not in
default under this Lease. Tenant hereby waives its rights under any current or
future law which gives or purports to give Tenant any right to terminate or
otherwise adversely affect this Lease and the obligations of Tenant hereunder in
the event of any such foreclosure proceeding or sale. Notwithstanding anything
to the contrary in this Paragraph 26, Tenant covenants and agrees to execute and
deliver, upon demand by Landlord and in the form reasonably required by
Landlord, any proposed lessor under a ground lease or underlying lease, or any
holder or proposed holder of the lien of a mortgage or deed of trust, any
additional documents evidencing the priority or subordination of this Lease with
respect to any such ground lease or underlying leases or the lien of any such
mortgage or deed of trust. Should Tenant fail to sign and return any such
documents within fifteen (15) days of receipt, Tenant shall be in default
hereunder without the benefit of any additional notice or cure periods specified
in Paragraph 23 above.
Notwithstanding the foregoing to the contrary, Landlord shall obtain a
subordination, non-disturbance and attornment agreement from the holder of the
deed of trust currently encumbering a portion of the Premises in the form
attached hereto as Exhibit F and incorporated herein by this reference, and
---------
which agreement Tenant and Landlord shall also execute and deliver as required
thereby.
27. ESTOPPEL CERTIFICATE.
--------------------
(a) Tenant's Obligations. Within fifteen (15) days following receipt
--------------------
of any written request which Landlord may make from time to time, Tenant shall
execute and deliver to Landlord a statement certifying: (i) the date of
commencement of this Lease; (ii) the fact that this Lease is unmodified and in
full force and effect (or, if there have been modifications hereto, that this
Lease is in full force and effect, and stating the date and nature of such
modifications); (iii) the date to which the Rent and other sums payable under
this Lease have been paid; (iv) that there are no current defaults under this
Lease by either Landlord or Tenant except as specified in Tenant's statement;
and (v) such other matters requested by Landlord. Landlord and Tenant intend
that any statement delivered pursuant to this Paragraph 27 may be relied upon by
Landlord and/or any mortgagee, beneficiary, purchaser or prospective purchaser
of the Premises or any interest therein.
(b) Tenant's Failure to Deliver. Tenant's failure to deliver such
---------------------------
statement within such time shall be conclusive upon Tenant (i) that this Lease
is in full force and effect, without modification except as may be represented
by Landlord, (ii) that there are no uncured defaults in Landlord's performance,
and (iii) that not more than one (l) month's Rent has been
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paid in advance. Without limiting the foregoing, if Tenant fails to deliver any
such statement within such ten (10) day period, such failure shall, without the
need for any additional notice by Landlord, constitute a default under this
Lease. Tenant shall indemnify Landlord from and against any and all claims,
damages, losses, liabilities and expenses (including attorneys' fees and costs)
attributable to any failure by Tenant to timely deliver any such estoppel
certificate to Landlord as required by this Paragraph 27.
28. INTENTIONALLY OMITTED.
---------------------
29. RULES AND REGULATIONS. Tenant shall faithfully observe and comply with
---------------------
the "Rules and Regulations," a copy of which is attached hereto and marked
Exhibit "E," and all reasonable and nondiscriminatory modifications thereof and
additions thereto from time to time put into effect by Landlord.
30. MODIFICATION AND CURE RIGHTS OF LANDLORD'S MORTGAGEES AND LESSORS.
-----------------------------------------------------------------
(a) Modifications. If, in connection with Landlord's obtaining or
-------------
entering into any financing or ground lease for any portion of the Premises, the
lender or ground lessor shall request modifications to this Lease, Tenant shall,
within ten (10) days after receipt of request therefor, execute an amendment to
this Lease including such modifications, provided such modifications are
reasonable and do not increase the obligations of Tenant hereunder or adversely
affect the leasehold estate created hereby or Tenant's rights hereunder.
(b) Cure Rights. In the event of any default on the part of Landlord,
-----------
Tenant will give notice by registered or certified mail to any beneficiary of a
deed of trust or mortgagee covering the Premises or ground lessor of Landlord
whose address shall have been furnished to Tenant, and shall offer such
beneficiary, mortgagee or ground lessor an additional sixty (60) days beyond the
period provided to Landlord under this Lease to cure the default.
31. DEFINITION OF LANDLORD. The term "Landlord," as used in this Lease, so
----------------------
far as covenants or obligations on the part of Landlord are concerned, shall be
limited to mean and include only the owner or owners, at the time in question,
of the fee title of the Premises or the lessees under any ground lease, if any.
In the event of any transfer, assignment or other conveyance or transfers of any
such title (other than a transfer for security purposes only), Landlord herein
named (and in case of any subsequent transfers or conveyances, the then grantor)
shall be automatically freed and relieved from and after the date of such
transfer, assignment or conveyance of all liability as respects the performance
of any covenants or obligations on the part of Landlord contained in this Lease
thereafter to be performed, so long as the transferee assumes in writing all
such covenants and obligations of Landlord arising after the date of such
transfer. Landlord and Landlord's transferees and assignees shall have the
absolute right to transfer all or any portion of their respective title and
interest in the Premises and/or this Lease without the consent of Tenant, and
such transfer or subsequent transfer shall not be deemed a violation on
Landlord's part of any of the terms and conditions of this Lease.
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32. WAIVER. The waiver by either party of any breach of any term,
------
covenant or condition herein contained shall not be deemed to be a waiver of any
subsequent breach of the same or any other term, covenant or condition herein
contained, nor shall any custom or practice which may develop between the
parties in the administration of the terms hereof be deemed a waiver of or in
any way affect the right of either party to insist upon performance in strict
accordance with said terms. The subsequent acceptance of Rent or any other
payment hereunder by Landlord shall not be deemed to be a waiver of any
preceding breach by Tenant of any term, covenant or condition of this Lease,
other than the failure of Tenant to pay the particular Rent so accepted,
regardless of Landlord's knowledge of such preceding breach at the time of
acceptance of such Rent. No acceptance by Landlord of a lesser sum than the
Rent or other sum then due shall be deemed to be other than on account of the
earliest installment of such Rent or other amount due, nor shall any endorsement
or statement on any check or any letter accompanying any check be deemed an
accord and satisfaction, and Landlord may accept such check or payment without
prejudice to Landlord's right to recover the balance of such installment or
other amount or pursue any other remedy provided in this Lease. The consent or
approval of Landlord to or of any act by Tenant requiring Landlord's consent or
approval shall not be deemed to waive or render unnecessary Landlord's consent
or approval to or of any subsequent similar acts by Tenant.
33. IDENTIFICATION OF TENANT.
------------------------
(a) Joint and Several Obligations. If more than one person executes
-----------------------------
this Lease as Tenant, their execution of this Lease shall constitute their
covenant and agreement that (i) each of them shall be jointly and severally
liable for the keeping, observing and performing of all of the terms, covenants,
conditions, provisions and agreements of this Lease to be kept, observed and
performed by Tenant, and (ii) the term "Tenant" as used in this Lease shall mean
and include each of them jointly and severally. The act of or notice from, or
notice or refund to, or the signature of any one or more of them, with respect
to the tenancy of this Lease, including, but not limited to, any renewal,
extension, expiration, termination or modification of this Lease, shall be
binding upon each and all of the persons executing this Lease as Tenant with the
same force and effect as if each and all of them had so acted or so given or
received such notice or refund or so signed.
(b) Tenant as Corporation or Partnership. If Tenant executes this
------------------------------------
Lease as a corporation, a partnership or a limited liability company, then
Tenant and the persons executing this Lease on behalf of Tenant represent and
warrant that such entity is duly qualified to do business in California and that
the individuals executing this Lease on Tenant's behalf are duly authorized to
execute and deliver this Lease on its behalf, and in the case of a corporation,
in accordance with a duly adopted resolution of the board of directors of
Tenant, a copy of which is to be delivered to Landlord on execution hereof, and
in accordance with the by-laws of Tenant, and, in the case of a partnership or
limited liability company, in accordance with the partnership or operating
agreement (as applicable) and the most current amendments thereto, if any,
copies of which are to be delivered to Landlord on execution hereof, and that
this Lease is binding upon Tenant in accordance with its terms.
49
<PAGE>
34. PARKING. Tenant shall be entitled to use all parking facilities
-------
(including the Parking Structure) of the Premises. Tenant's use of such parking
facilities shall be subject to all applicable provisions of the Rules and
Regulations.
Notwithstanding the foregoing to the contrary, Landlord may use
fifteen (15) parking spaces ("Landlord Reserved Parking Spaces"), as designated
by Landlord from time to time, located in the Parking Structure and/or other
parking facilities of the Premises. The location of the Landlord Reserved
Parking Spaces shall be subject to the prior approval of Tenant, which Tenant
shall not unreasonably withhold. Tenant shall approve or disapprove the location
of the Landlord Reserved Parking Spaces within fifteen (15) days after written
request therefor by Landlord. The failure by Tenant to give its approval or
disapproval within such fifteen (15) day period shall be deemed approval thereof
by Tenant. The Landlord Reserved Parking Spaces may be used by Landlord or by
other parties as specified by Landlord without any sums being due by Landlord or
such parties to Tenant for the use thereof; provided, however, for so long as
Landlord or such other parties use Landlord Reserved Parking Spaces in the
Parking Structure, Landlord shall reimburse Tenant for its proportionate share
of all reasonable costs incurred by Tenant for the maintenance and repair of the
Parking Structure. Landlord's proportionate share of such costs shall be
determined by multiplying such costs by a fraction the numerator of which is
fifteen (15) and the denominator of which is the total number of parking spaces
in the Parking Structure. Landlord's proportionate share of such costs shall be
paid to Tenant within thirty (30) days after receipt by Landlord of the last of
the following: (a) an invoice therefor, or (b) all documents reasonably
requested by Landlord supporting the costs set forth in such invoice.
35. FORCE MAJEURE. In the event that either Landlord or Tenant is delayed,
-------------
hindered in or prevented from the performance of any act required under this
Lease by reason of strikes, lock-outs, labor troubles, inability to procure
materials, failure of power, restrictive governmental laws, regulations or
orders, riots, insurrection, war or other reason of a like nature not the fault
of the party delayed in performing work or doing acts required under the
provisions of this Lease, then performance of such act shall be excused for the
period of the delay and the period for the performance of any such act shall be
extended for a period equivalent to the period of such delay. The provisions of
this Paragraph 35 shall not operate to excuse Tenant from prompt payment of Rent
or any other payments required under the provisions of this Lease.
36. SIGNS. Landlord shall designate the location on the Premises, if any,
-----
for one or more Tenant identification sign(s). Tenant shall install and maintain
its identification sign(s) in such designated location in accordance with this
Paragraph 36. Tenant shall have no right to install or maintain Tenant
identification signs in any other location in, on or about the Premises. The
size, design, color and other physical aspects of any and all permitted sign(s)
shall be subject to (i) Landlord's written approval prior to installation, which
approval may be withheld in Landlord's reasonable discretion, (ii) any
covenants, conditions or restrictions governing the Premises, and (iii) any
applicable municipal or governmental permits and approvals. The cost of the
sign(s), including the installation, maintenance, repair and removal thereof
shall be at Tenant's sole cost and expense. If Tenant fails to maintain its
sign(s), or if Tenant fails to remove same upon termination of this Lease and
repair any damage caused by such removal, Landlord may do so at Tenant's
expense. Tenant shall reimburse Landlord for all costs incurred
50
<PAGE>
by Landlord to effect such installation, maintenance or removal, which amount
shall be deemed Additional Rent, and shall include, without limitation, all sums
disbursed, incurred or deposited by Landlord including Landlord's costs,
expenses and actual attorneys' fees with interest thereon at the Interest Rate
from the date of Landlord's demand and until paid by Tenant. Any sign rights
granted to Tenant under this Lease are personal to Tenant and a Tenant Affiliate
and may not be assigned, transferred or otherwise conveyed to any assignee or
subtenant of Tenant other than a Tenant Affiliate without Landlord's prior
written consent, which consent Landlord may withhold in its reasonable
discretion.
Notwithstanding the foregoing to the contrary, Tenant shall be
entitled, in accordance with the provisions of this Paragraph 36, to install one
(1) sign on the top of the Building in a location reasonably approved by both
Landlord and Tenant and one (1) sign on the sign monument for the Premises;
provided, however, for such period of time that a portion of the Building is
subleased in accordance with the provisions of Paragraph 25 of this Lease, then
Tenant shall be entitled to have two (2) signs on the sign monument for the
Premises.
37. LIMITATION ON LIABILITY. Landlord shall never be personally liable
-----------------------
under this Lease. Tenant shall look solely to Landlord's interest in the
Premises for any recovery of damages for any breach by Landlord of this Lease,
or any recovery of any judgment against Landlord. None of the members
comprising Landlord (whether partners, members, shareholders, officers,
directors, trustees, employees, beneficiaries or otherwise) shall ever be
personally liable for any such damages or judgment. There shall be no levy of
execution against any assets of Landlord, other than the Premises, or the assets
of such members on account of any liability of Landlord hereunder. Tenant
hereby waives any right of recovery or satisfaction of any judgment against
Landlord or its members, except as to Landlord's interest in the Premises as
herein specified.
38. FINANCIAL STATEMENTS. Prior to the execution of this Lease by
--------------------
Landlord and at any time during the Term of this Lease upon ten (10) days prior
written notice from Landlord, Tenant shall provide Landlord with a current
financial statement for Tenant and financial statements for the two (2) years
prior to the current financial statement year for Tenant. Such statements shall
be prepared in accordance with generally accepted accounting principles and, if
such is the normal practice of Tenant, shall be audited by an independent
certified public accountant.
39. QUIET ENJOYMENT. Landlord covenants and agrees with Tenant that upon
---------------
Tenant paying the Rent required under this Lease and paying all other charges
and performing all of the covenants and provisions aforesaid on Tenant's part to
be observed and performed under this Lease, Tenant shall and may peaceably and
quietly have, hold and enjoy the Premises in accordance with this Lease.
40. CONDITION TO EFFECTIVENESS OF LEASE. The effectiveness of this Lease,
-----------------------------------
and the rights and obligations of Landlord and Tenant hereunder, are expressly
conditioned upon the satisfaction of the following condition ("Condition"),
which Condition
51
<PAGE>
shall be satisfied, if at all, by the "Latest Date for Performance" for the
Condition as set forth below:
Lease Condition Latest Date for Performance
--------------- ---------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Acquisition by Landlord, on terms Ninety (90) days after the date
and conditions satisfactory to of this
Landlord (in its sole and absolute
discretion), of real property
commonly known as 1495 and 1535
Marshall Street, Redwood City
("1495/1535 Marshall Street
Property"), which 1495/1535 Marshall
Street Property is a portion of the
Land.
- --------------------------------------------------------------------------------
Any delay in the satisfaction of the Condition due to a Tenant Delay shall
extend the Latest Date for Performance for such Condition by the same number of
days as such delay. If the Condition is not satisfied by the Latest Date for
Performance for the Condition, then this Lease may be terminated by either
Landlord or Tenant by written notice of such termination given by one to the
other; provided, however, Landlord shall only be entitled to exercise its
termination right as provided for herein if the 1495/1535 Marshall Street
Property is not acquired by Landlord due to a default by the seller of the
1495/1535 Marshall Street Property under the purchase and sale agreement
therefor, or due to the termination of such purchase and sale agreement for
reasons of condemnation, damage, or destruction. Upon termination of this Lease,
as provided for herein, neither Landlord nor Tenant shall have any further
rights or obligations hereunder nor any liability whatsoever one to the other as
a result of such termination. In the event of such termination, the Security
Deposit and any prepaid Rent shall be returned to Tenant.
41. MISCELLANEOUS.
-------------
(a) Conflict of Laws. This Lease shall be governed by and construed
----------------
pursuant to the laws of the State of California.
(b) Successors and Assigns. Except as otherwise provided in this
----------------------
Lease, all of the covenants, conditions and provisions of this Lease shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective heirs, personal representatives, successors and assigns.
(c) Professional Fees and Costs. If either Landlord or Tenant should
---------------------------
bring suit against the other with respect to this Lease, then all costs and
expenses, including without limitation, actual professional fees and costs such
as appraisers', accountants' and attorneys' fees and costs, incurred by the
prevailing party therein shall be paid by the other party, which obligation on
the part of the other party shall be deemed to have accrued on the date of the
52
<PAGE>
commencement of such action and shall be enforceable whether or not the action
is prosecuted to judgment.
(d) Terms and Headings. The words "Landlord" and "Tenant" as used
------------------
herein shall include the plural as well as the singular. Words used in any
gender include other genders. The paragraph headings of this Lease are not a
part of this Lease and shall have no effect upon the construction or
interpretation of any part hereof.
(e) Examination of Lease. Submission of this instrument for
--------------------
examination or signature by Tenant does not constitute a reservation of or
option for lease, and it is not effective as a lease or otherwise until
execution by and delivery to both Landlord and Tenant.
(f) Time. Time is of the essence with respect to the performance of
----
every provision of this Lease in which time of performance is a factor.
(g) Prior Agreement; Amendments. This Lease contains all of the
---------------------------
agreements of the parties hereto with respect to any matter covered or mentioned
in this Lease, and no prior agreement or understanding pertaining to any such
matter shall be effective for any purpose. No provisions of this Lease may be
amended or added to except by an agreement in writing signed by the parties
hereto or their respective successors-in-interest.
(h) Separability. Any provision of this Lease which shall prove to be
------------
invalid, void or illegal in no way affects, impairs or invalidates any other
provision hereof, and such other provisions shall remain in full force and
effect.
(i) Recording. Neither Landlord nor Tenant shall record this Lease
---------
nor a short form memorandum thereof without the consent of the other.
(j) Counterparts. This Lease may be executed in one or more
------------
counterparts, each of which shall constitute an original and all of which shall
be one and the same agreement.
IN WITNESS WHEREOF, the parties have executed this Lease as of the date
first above written.
LANDLORD: TENANT:
VETERANS SELF-STORAGE, LLC, KANA COMMUNICATIONS, INC.,
a California limited liability company a Delaware corporation
By: Hunter/Storm Veterans, LLC
a California limited liability
company By:__________________________
Its: Manager
Name:________________________
53
<PAGE>
By:______________________________ Title:_________________________
Derek K. Hunter, Jr.
Its: Member
By:____________________________
By:______________________________ Name:__________________________
Edward D. Storm
Its: Member Title:_________________________
54
<PAGE>
SITE PLAN OF PREMISES
---------------------
[To be supplied]
Note: The configuration, dimensions, location and other matters regarding the
improvements shown on this Site Plan are proposed and subject to change by
Landlord.
EXHIBIT "A"
-----------
<PAGE>
DIAGRAM OF LAND
---------------
[To be supplied]
EXHIBIT "B"
-----------
<PAGE>
WORK LETTER AGREEMENT
---------------------
THIS WORK LETTER AGREEMENT ("Work Letter Agreement") is entered into as of
the ____ day of ________________, 2000 by and between VETERANS SELF-STORAGE,
LLC, a California limited liability company ("Landlord"), and KANA
COMMUNICATIONS, INC., a Delaware corporation ("Tenant").
R E C I T A L S
---------------
A. Concurrently with the execution of this Work Letter Agreement,
Landlord and Tenant have entered into a lease (the "Lease") covering certain
premises (the "Premises") more particularly described in the Lease. All terms
not defined herein shall have the same meaning as set forth in the Lease. To the
extent applicable, the provisions of the Lease are hereby incorporated herein by
this reference.
B. In order to induce Tenant to enter into the Lease and in consideration
of the mutual covenants hereinafter contained, Landlord and Tenant hereby agree
as follows:
A G R E E M E N T S
-------------------
1. LANDLORD'S WORK.
---------------
(a) Construction of Landlord's Work. Landlord will construct at
-------------------------------
Landlord's sole cost and expense, through its contractor, the improvements
described in Schedule 1 attached hereto and incorporated herein by this
----------
reference (collectively, the "Landlord's Work"). The Landlord's Work shall be
constructed in accordance with Landlord's plans and specifications therefor
("Landlord's Work Plans and Specifications"). No changes, alterations, or
modifications shall be made to the Landlord's Work Plans and Specifications
without the prior written consent of Landlord and Tenant, which consent Landlord
or Tenant may withhold in its sole and absolute discretion; provided, however,
Landlord, without the consent of Tenant, shall be entitled to make any changes,
alterations, or modifications to the Landlord's Work as shown in Landlord's Work
Plans and Specifications necessary to (a) accommodate on-site or field
variations, (b) to comply with building codes and other applicable governmental
regulations, or (c) to comply with permits, approvals or entitlements obtained
by Landlord for the Landlord's Work or Landlord's intended development of the
Land. The cost of any changes, alterations or modifications to the Landlord's
Work requested to be made by Tenant, and approved by Landlord, shall be paid by
Tenant to Landlord within ten (10) days after written demand by Landlord to
Tenant therefor.
(b) Termination Right for Delay in Commencement of Landlord's Work.
--------------------------------------------------------------
In the event that Landlord for reasons other than Tenant Delays has not
commenced the construction of the Landlord's Work by August 1, 2000, Tenant may
elect to terminate the Lease. Termination of the Lease as provided for herein
shall be the sole and exclusive remedy of Tenant for delay in the commencement
of the Landlord's Work. Tenant shall exercise the right to terminate provided
for herein by giving Landlord written notice of its intent to so terminate
EXHIBIT "C"
-----------
57
<PAGE>
("Construction Delay Termination Notice"). The Construction Delay Termination
Notice shall be given, if at all, on or before August 10, 2000. If the
Construction Delay Termination Notice is not given as and when required
hereunder, then Tenant shall not be entitled to terminate the Lease.
Termination of the Lease shall be effective upon Tenant's receipt of the
Construction Delay Termination Notice.
2. TENANT IMPROVEMENTS. After completion of the Landlord's Work Tenant
-------------------
shall furnish and install within the Building those items of general interior
tenant improvement construction [including any distribution to the Building of
any of the services as provided as part of the Building Shell Work (hereafter
defined in Schedule 1 attached hereto)] shown on the Final Tenant Improvement
Plans and Specifications (described in Subparagraph 3(b) below), including, but
not limited to, partitioning, doors, ceilings, floor coverings, wall finishes
(including paint and wall covering), electrical (including lighting, switching,
telephones, outlets, etc.), plumbing, heating, ventilating and air conditioning,
fire protection, cabinets and other millwork (collectively, the "Tenant
Improvements" or the "Tenant Improvement Work").
3. TENANT IMPROVEMENT PLANS.
------------------------
(a) Preliminary Plans and Specifications. Tenant shall retain a
------------------------------------
reputable architect ("Architect") to prepare preliminary working architectural
and engineering plans and specifications ("Preliminary Tenant Improvement Plans
and Specifications") for the Tenant Improvements. The Architect shall be
subject to the prior written approval of Landlord, which Landlord shall not
unreasonably withhold. Tenant shall deliver the Preliminary Tenant Improvement
Plans and Specifications to Landlord. The Preliminary Tenant Improvement Plans
and Specifications shall be in sufficient detail to show locations, types and
requirements for all heat loads, people loads, floor loads, power and plumbing,
regular and special HVAC needs, telephone communications, telephone and
electrical outlets, lighting, lighting fixtures and related power, and
electrical and telephone switches. Landlord shall approve or disapprove the
Preliminary Tenant Improvement Plans and Specifications within ten (10) days
after Landlord receives the Preliminary Tenant Improvement Plans and
Specifications and, if disapproved, Landlord shall return the Preliminary Tenant
Improvement Plans and Specifications to Tenant, who shall make all necessary
revisions within ten (10) days after Tenant's receipt thereof. This procedure
shall be repeated until Landlord approves the Preliminary Tenant Improvement
Plans and Specifications; provided, however, Landlord shall approve or
disapprove any Landlord requested revisions to the Preliminary Tenant
Improvement Plans and Specifications within five (5) days after Landlord's
receipt of such revisions.
(b) Final Plans and Specifications. After the Preliminary Tenant
------------------------------
Improvement Plans and Specifications are approved by Landlord, Tenant shall
cause the Architect to prepare, in sixty (60) days following Landlord's approval
of the Preliminary Tenant Improvement Plans and Specifications, the final
working architectural and engineering plans and specifications ("Final Tenant
Improvement Plans and Specifications") for the Tenant Improvements. The Final
Tenant Improvement Plans and Specifications shall be consistent with the
Landlord-approved Preliminary Tenant Improvement Plans and Specifications.
Tenant shall
EXHIBIT "C"
-----------
58
<PAGE>
then deliver the Final Tenant Improvement Plans and Specifications to Landlord.
Landlord shall approve or disapprove the Final Tenant Improvement Plans and
Specifications within ten (10) days after Landlord receives the Final Tenant
Improvement Plans and Specifications and, if disapproved, Landlord shall return
the Final Tenant Improvement Plans and Specifications to Tenant who shall make
all necessary revisions within ten (10) days after Tenant's receipt thereof.
This procedure shall be repeated until Landlord approves the Final Tenant
Improvement Plans and Specifications; provided, however, Landlord shall approve
or disapprove any Landlord requested revisions to the Final Tenant Improvement
Plans and Specifications within five (5) days after Landlord's receipt of such
revisions.
(c) Miscellaneous. All deliveries of the Preliminary Tenant
-------------
Improvement Plans and Specifications and the Final Tenant Improvement Plans and
Specifications shall be delivered by messenger service, by personal hand
delivery or by overnight parcel service. While Landlord has the right to
approve all such plans and specifications, Landlord's interest in doing so is to
protect the Premises and Landlord's interest. Accordingly, Tenant shall not
reply upon Landlord's approvals and Landlord shall not be the guarantor of, nor
responsible for, the correctness or accuracy of the Preliminary Tenant
Improvement Plans and Specifications and the Final Tenant Improvement Plans and
Specifications, or the compliance thereof with applicable laws, and Landlord
shall incur no liability of any kind by reason of granting such approvals.
4. TENANT IMPROVEMENT PERMITS. Tenant at its sole cost and expense shall
--------------------------
obtain all governmental approvals of the Final Tenant Improvement Plans and
Specifications to the full extent necessary for the issuance of a building
permit for the Tenant Improvements based upon such Final Tenant Improvement
Plans and Specifications. Tenant at its sole cost and expense shall also cause
to be obtained all other necessary approvals and permits from all governmental
agencies having jurisdiction or authority for the construction and installation
of the Tenant Improvements in accordance with the approved Final Tenant
Improvement Plans and Specifications. Tenant at its sole cost and expense shall
undertake all steps necessary to insure that the construction of the Tenant
Improvements is accomplished in strict compliance with all statutes, laws,
ordinances, rules, and regulations applicable to the construction of the Tenant
Improvements and the requirements and standards of any insurance underwriting
board, inspection bureau or insurance carrier insuring the Building.
5. TENANT IMPROVEMENT CONSTRUCTION.
--------------------------------
(a) Tenant shall be solely responsible for the construction,
installation and completion of the Tenant Improvements in accordance with the
Final Tenant Improvement Plans and Specifications approved by Landlord and is
solely responsible for the payment of all amounts when payable in connection
therewith without any cost or expense to Landlord, except for Landlord's
obligation to contribute the Tenant Improvement Allowance. Tenant shall
diligently proceed with the construction, installation and completion of the
Tenant Improvements in accordance with the Final Tenant Improvement Plans and
Specifications and the completion schedule approved by Landlord. No material
changes shall be made to the Final Tenant Improvement Plans and Specifications
and the completion schedule approved by Landlord without Landlord's prior
written consent.
EXHIBIT "C"
-----------
59
<PAGE>
(b) Tenant at its sole cost and expense shall employ a reputable
general contractor ("Contractor") to construct the Tenant Improvements in
accordance with the Final Tenant Improvement Plans and Specifications. The
Contractor selected by Tenant shall be subject to the written approval of
Landlord, which approval Landlord shall not unreasonably withhold. The
construction contracts between Tenant and the Contractor shall be subject to
Landlord's prior written approval, which approval Landlord shall not
unreasonably withhold. Proof that the Contractor is licensed in California, is
bonded, and has insurance coverage typically carried by a reputable general
contractor in the State of California shall be provided to Landlord at the time
that Tenant requests approval of the Contractor from Landlord. The name of all
Subcontractors (hereafter defined in Subparagraph 6(b) of this Work Letter
Agreement) hired by the Contractor, together with proof they are licensed in
California, are bonded, and have insurance typically carried by reputable
subcontractors in the State of California, shall be provided to Landlord as each
separate Subcontractor is hired.
(c) Prior to the commencement of the construction and installation of
the Tenant Improvements, Tenant shall provide the following to the Landlord, all
of which shall be to the Landlord's reasonable satisfaction:
(i) An estimated budget and cost breakdown for the Tenant
Improvements.
(ii) Estimated completion schedule for the Tenant Improvements.
(iii) Copies of all required approvals and permits from
governmental agencies having jurisdiction or authority for the construction and
installation of the Tenant Improvements.
(d) Landlord shall at all times have a right to inspect the Tenant
Improvements and Tenant shall immediately cease work upon written notice from
the Landlord if the Tenant Improvements are not in compliance with the Final
Tenant Improvement Plans and Specifications approved by Landlord. If Landlord
shall give notice of faulty construction or any other deviation from the Final
Tenant Improvement Plans and Specifications, Tenant shall cause Contractor to
make corrections promptly. However, neither the privilege herein granted to
Landlord to make such inspections, nor the making of such inspections by
Landlord, shall operate as a waiver of any rights of Landlord to require good
and workmanlike construction and improvements constructed in accordance with the
Final Tenant Improvement Plans and Specifications.
(E) Tenant shall pay and discharge promptly and fully all claims for
labor done and materials and services furnished in connection with the Tenant
Improvements. The Tenant Improvements shall not be commenced until ten (10)
days after Landlord has received notice from Tenant stating the date the
construction of the Tenant Improvements is to commence so that Landlord can post
and record any appropriate notice of non-responsibility.
EXHIBIT "C"
-----------
60
<PAGE>
(f) Tenant acknowledges and agrees that the agreements and covenants
of Tenant in Subparagraphs 19(a), 19(b), and 20(a) (except as modified by
Subparagraph 5(g) below) of the Lease shall be fully applicable to Tenant's
construction of the Tenant Improvements.
(g) Tenant shall maintain during the construction of the Tenant
Improvements, at its sole cost and expense, builders' risk insurance for the
amount of the completed value of the Tenant Improvements providing for "special
form" coverage covering all improvements under construction, including building
materials, and other or different insurance in amounts and against such risks as
the Landlord shall reasonably require in connection with the Tenant
Improvements. Landlord reserves the right to establish reasonable rules and
regulations for the use of the Premises during the course of construction of the
Tenant Improvements, including, but not limited to, construction parking,
storage of materials, hours of work, use of elevators, and clean-up of
construction related debris.
(h) Upon completion of the Tenant Improvements, Tenant shall deliver
to Landlord the following, and of which shall be to the Landlord's reasonable
satisfaction:
(i) Any certificates required for occupancy, including a
permanent and complete Certificate of Occupancy issues by the City of Redwood
City.
(ii) A Certificate of Completion signed by the Architect who
prepared the Final Tenant Improvement Plans and Specifications approved by the
Landlord.
(iii) A copy of as-built plans and specifications for the Tenant
Improvements.
(iv) Final and unconditional mechanic's lien waivers from all
the contractors, subcontractors, materialmen and suppliers who furnished work or
materials in connection with the construction of the Tenant Improvements.
(v) Copies of any warranties covering the Tenant Improvements
or any portions thereof.
(vi) A Notice of Completion for execution by Landlord, which
certificate once executed by Landlord shall be recorded by Tenant in the
official records of San Mateo County, and the expiration of the period of time
within which any mechanic's liens may be filed without the filing of any such
liens.
6. TENANT IMPROVEMENT ALLOWANCE.
----------------------------
(a) Tenant Improvement Allowance. Landlord hereby grants to Tenant
----------------------------
the Tenant Improvement Allowance described in Subparagraph 1(q) of the Lease.
The Tenant Improvement Allowance shall only be used for:
EXHIBIT "C"
-----------
61
<PAGE>
(i) Payment of the cost of preparing the Preliminary Tenant
Improvement Plans and Specifications and the Final Tenant Improvement Plans and
Specifications, including mechanical, electrical, plumbing and structural
drawings and of all other aspects necessary to complete the Tenant Improvement
Plans; provided, however, no more than Seventy-Five Thousand and 00/100ths
Dollars ($75,00.00) of the Tenant Improvement Allowance may be used for the
payment of the Architect, designers and any other consultants used or consulted
by Tenant in connection with the planning or construction of the Tenant
Improvements.
(ii) The payment of plan check, permit and license fees relating
to construction of the Tenant Improvements.
(iii) Construction of the Tenant Improvements, including, without
limitation, the following:
(aa) Installation within the Premises of all partitioning,
doors, floor coverings, ceilings, wall coverings and painting, millwork and
similar items;
(bb) All electrical wiring, lighting fixtures, outlets and
switches, and other electrical work necessary for the Premises;
(cc) The furnishing and installation of all duct work,
terminal boxes, diffusers and accessories necessary for the heating, ventilation
and air conditioning systems within the Premises, including the cost of meter
and key control for after-hour air conditioning;
(dd) Any additional Tenant requirements including, but not
limited to, odor control, special heating, ventilation and air conditioning,
noise or vibration control or other special systems;
(ee) All fire and life safety control systems such as fire
walls, sprinklers, halon, fire alarms, including piping, wiring and accessories,
necessary for the Premises;
(ff) All plumbing, fixtures, pipes and accessories
necessary for the Premises;
(gg) Testing and inspection costs; and
(hh) All reasonable contractors' fees for the construction
of the Tenant Improvements.
Notwithstanding anything to the contrary in this Work Letter Agreement
or the Lease, the Tenant Improvements Allowance shall not be used for the
acquisition of Tenant's
EXHIBIT "C"
-----------
62
<PAGE>
personal property or trade fixtures nor for any expenses incurred by Tenant in
moving into the Premises.
(b) Payment of Tenant Improvement Allowance. Landlord shall pay to
---------------------------------------
Tenant from the Tenant Improvement Allowance monthly, as progress payments,
amounts necessary to reimburse Tenant for the costs of the Tenant Improvements
paid or incurred by Tenant. Payment of any Tenant Improvement Allowance progress
payment shall be made only after satisfaction of the following conditions
precedent: (i) receipt of Landlord of a written request for payment of a Tenant
Improvement Allowance progress payment, in form and content reasonably
satisfactory to Landlord; (ii) receipt by Landlord of conditional mechanics'
lien releases from the Contractor and all major subcontractors and labor
suppliers (hereafter defined) (the major subcontractors and labor suppliers are
collectively referred to herein as the "Subcontractors") for all work completed
and materials supplied by the Contractor and the Subcontractors to be paid by
the subject Tenant Improvement Allowance progress payment, conditioned only upon
payment of the sum due the Contractor and the Subcontractors for such work
completed and materials supplied; (iii) receipt by Landlord of any and all
documentation requested by Landlord detailing the Tenant Improvement work which
has been completed and the materials and supplies used, including, without
limitation, invoices, bills, or statements for such work materials and supplies;
(iv) completion by Landlord or Landlord's agents or any inspections of the
Tenant Improvement work completed and the materials and supplies used as deemed
necessary by Landlord; (v) receipt by Landlord of unconditional mechanics' lien
releases from the Contractor and the Subcontractors for all progress payments
prior to the progress payments for which Tenant is requesting payment; and (vi)
satisfaction of any and all other reasonable conditions which may be imposed by
Landlord or Landlord's lender providing the financing for the funding of the
Tenant Improvement Allowance ("Lender"). A request for payment of a Tenant
Improvement Allowance progress payment, together with all other additional
required documentation in connection therewith, shall be submitted by Tenant on
the first (1st) business day of a calendar month. Payment of the Tenant
Improvement Allowance progress payment shall be paid by Landlord to Tenant
within thirty (30) days after receipt by Landlord of Tenant's request for
payment and satisfaction of all other conditions described above in this
Subparagraph 6(b); provided, however, if Landlord does not, within such thirty
(30) day period, receive proceeds from its loan from Lender to pay such Tenant
Improvement Allowance progress payment, then Landlord shall pay such progress
payment within three (3) business days after receipt of such loan proceeds from
its Lender. Notwithstanding the foregoing to the contrary, Landlord shall be
entitled to withhold and retain from each Tenant Improvement Allowance progress
payment ten percent (10%) of such Tenant Improvement Allowance progress payment
amount until thirty (30) days after the last of the following has occurred: (x)
the last of the matters described in Subparagraphs 5(h)(i) through (vi) above
has occurred; and (y) the Usable Square Footage of the Building has been
calculated as provided for in Subparagraph 2(d) of the Lease. Further
notwithstanding the foregoing to the contrary, Landlord shall not be obligated
to pay any Tenant Improvement Allowance progress payment or the Tenant
Improvement Allowance retention if on the date Tenant is entitled to receive
any such Tenant Improvement Allowance progress payment or the Tenant Improvement
Allowance retention Tenant is in default under this Work Letter Agreement or the
Lease. For purposes of this Subparagraph 6(b) a "major subcontractor or labor
supplier" shall be a subcontractor or
EXHIBIT "C"
-----------
63
<PAGE>
supplier providing in excess of Fifty Thousand and 00/100ths Dollars
($50,000.00) of services, labor, supplies, or materials in connection with the
construction of the Tenant Improvements.
(c) Unused Tenant Improvement Allowance Amounts. Any unused portion
-------------------------------------------
of the Tenant Improvement Allowance upon completion of the Tenant Improvements
shall not be refunded to Tenant or be available to Tenant as a credit against
any obligations of Tenant under the Lease.
7. TENANT DELAYS. For purposes of the Lease and this Work Letter
-------------
Agreement, "Tenant Delays" shall mean any delay in the completion of the
Landlord's Work, or any portion thereof, resulting from any or all of the
following:
(a) Tenant's failure to timely perform any of its obligations
pursuant to the Lease or this Work Letter Agreement relating to the Landlord's
Work, including any failure to complete, on or before the due date therefor, any
action item which is Tenant's responsibility pursuant to any schedule delivered
by Landlord to Tenant;
(b) Tenant's changes to the Landlord's Work Plans and Specifications
requested by Tenant and approved by Landlord;
(c) Tenant's request for materials, finishes, or installations which
are not readily available or which are incompatible with the Landlord's Building
Standards; or
(d) any other act or failure to act by Tenant, Tenant's employees,
agents, architects, independent contractors, consultants and/or any other person
performing or required to perform services on behalf of Tenant.
Notwithstanding the foregoing to the contrary, none of the delays described in
clauses (a) through (d) above of this Paragraph 7 shall constitute a Tenant
Delay unless and until Tenant has received from Landlord a written notice of
such delay and Tenant has failed within five (5) days of Tenant's receipt of
such notice to perform such act causing such delay.
8. LANDLORD DELAYS. For purposes of the Lease and this Work Letter
---------------
Agreement, "Landlord Delays" shall mean any delay in the substantial completion
of the Tenant Improvements, or any portion thereof, resulting from any or all of
the following:
(a) Landlord's failure to approve or disapprove the Preliminary
Tenant Improvement Plans and Specifications or the Final Tenant Improvement
Plans and Specifications within the time period required by this Work Letter
Agreement;
(b) Landlord's failure to perform any of its material obligations
under this Work Letter Agreement other than those obligations described in
clause (a) above; and
EXHIBIT "C"
-----------
64
<PAGE>
(c) Landlord's failure to allow Tenant sufficient access to the
Building during the ninety (90) day period described in Subparagraph 1(k) of the
Lease to cause the Tenant Improvements to be constructed.
Notwithstanding the foregoing to the contrary, none of the delays described in
clauses (a) through (c) above of this Paragraph 8 shall constitute a Landlord
Delay unless and until Landlord has received from Tenant a written notice of
such delay and Landlord has failed within five (5) days of Landlord's receipt of
such notice to perform such act causing such delay.
EXHIBIT "C"
-----------
65
<PAGE>
IN WITNESS WHEREOF, the undersigned Landlord and Tenant have executed this
Work Letter Agreement as of the date of the Lease.
TENANT: LANDLORD:
KANA COMMUNICATIONS, INC., VETERANS SELF-STORAGE, LLC,
a California corporation a California limited liability company
By:__________________________ By: Hunter/Storm Veterans, LLC
a California limited liability company
Name:________________________ Its: Manager
Title:_______________________
By:______________________________
Derek K. Hunter, Jr.
By:__________________________ Its: Member
Name:________________________
By:______________________________
Title:_______________________ Edward D. Storm
Its: Member
EXHIBIT "C"
-----------
66
<PAGE>
DESCRIPTION OF LANDLORD'S WORK
------------------------------
The Landlord's Work shall consist of all of the following: (a) the Building
Shell Work (hereafter defined), (b) the Parking Structure Work (hereafter
defined), and (c) the Outside Areas Work (hereafter defined).
A. The "Building Shell Work" shall mean and consist of only the following
work:
A four-story concrete steel structure with approximately eighty five percent
(85%) of the perimeter containing glass, consisting of the following:
1. Building Structure:
a. The foundation shall include footings, foundation walls or other
building foundation components required to support the entire building
structure with structural reinforcement as required.
b. Columns shall be steel tube; beams/purlins/joists shall be structural
steel solid shapes -no bar joists.
c. All columns, beams, joists, purlins, headers or other structural
members as required to support the roof deck and roofing membrane.
d. Five inch (5") thick concrete slab on grade with welded wire mesh and
any other reinforcing or structural connections that may be necessary or
required as specified by a California licensed structural engineer. The
slab on grade should be waterproof and impervious to upward vapor migration
to avoid deterioration of vinyl tile.
e. Exterior walls that enclose the perimeter of the building or service
yard shall be concrete with steel reinforcing and structural connections
that may be necessary or required.
f. All exterior glass and glazing with anodized aluminum frames with
soffits and overhangs. Glass to be tinted as appropriate to the aesthetic
design of the building and Title 24 requirements. All exterior doors, door
closers and locking devices necessary for proper functioning.
g. Steel deck roof systems with insulation on top to meet Title 24
requirements.
h. Four (4) ply built-up roofing with cap sheet (bondable to 10 years)
and all flashing by Owens-Corning, John Manville, or equal providing a
waterproof building shell.
EXHIBIT "D"
-----------
<PAGE>
i. Exterior painting of all concrete with Tex-Coat or Kel-Tex textural
painting. All caulking of exterior concrete joints providing a complete
waterproof building shell.
j. A building interior clear height of fourteen feet (14') to bottom of
structural beams.
k. A metal roof screen to a level of eight (8) feet above roof height.
2. Plumbing:
a. Sanitary sewer systems to consist of the main line.
b. Underground sanitary sewer laterals connected to the city sewer main
in the street and piped into the building and under the concrete slab on
grade for the length of the building. Main waste lines under the slab will
be at a location to the building rest room locations.
c. Domestic water mains connected to the city water main in the street
and stubbed to the building. Water mains to the building shall not be less
than 2" in size.
d. Roof drain leaders and roof overflows piped and draining onto paved
areas or connected to the site storm drainage system.
e. Gas lines and primary electrical connected to the city or public
utility mains and run to gas meters adjacent to, or in proximity to, the
building. Meter supplied by utility company.
f. Gas main to be sized for 4,000,000 (four million) BTU's or 4,000 cubic
feet per hour.
3. Electrical:
a. A primary electrical service to the building, including underground
conduit wire feeders, transformers, and transformer pads. Underground
conduits and secondary feeders from transformer pads into the building's
main switchgear and electrical room. The electrical characteristics of the
secondary conduit sized for a transformer with a rated capacity of 2,000
amps of 277/480 volts, three phase, four wire.
b. Underground pull section, meter, and house panel for exterior lighting
and landscaping.
c. An electrically operated landscape irrigation system, with controller,
such that it is a complete and functioning system.
EXHIBIT "D"
-----------
<PAGE>
d. Underground conduit from the building to the main fire protection
system shut-off valve (PlV) for installation of supervisory alarm wiring.
e. Telephone service conduits from the street to a designated location in
the building are required as part of the shell.
f. Electrical and gas services are each to have two meters for a total of
four meters.
4. Fire Protection (Sprinklers):
a. A complete and fully functional overhead system of laboratory density
distributed throughout the building. All locations must be provided with
plugged tees for future below-ceiling use.
b. System shall include all upright pendant sprinkler beads ("uppers")
with plugged tees for future sprinkler head drops.
c. Site sprinkler main to be sized adequately to support required
densities.
5. Core Improvements:
a. Lighting and controls for restrooms, Janitor rooms, Accessory rooms,
Exit corridors, stair wells, Elevator Machine rooms (to be located on the
roof, but not shown), 10x12 Fire pump.
b. Convenience power for restrooms, Janitor rooms, Accessory rooms, Exit
corridors, Elevator Machine rooms (to be located on the roof), but now
shown), 10x12 Fire pump room (Not shown).
c. Fire/Life safety system with expansion capability for future tenant
improvements.
d. Exit lighting as required.
e. Power for hydraulic elevators as shown. Elevator controls to be
located in the elevator room. Power for elevator pit sump pumps.
f. Power for house HVAC system. Allow for 325 tons of VAV with VAV
reheat. Allow for up to three main units, and accessory equipment such as
control air compressor, boiler, etc. Exhaust fans for stairwell
pressurization. Exhaust fans for restrooms, and mechanical rooms as
required.
g. Power for water heaters for housing plumbing system.
h. Three (3) finished hydraulic elevators.
EXHIBIT "D"
-----------
<PAGE>
i. Restrooms at each floor per plan with tile floor finishes, formica
partitions and marble countertops.
j. Fire system included in the shell description.
k. Roof screen included in the shell description.
l. Base utilities included in the shell description.
B. The "Parking Structure Work" shall mean and consist of only the following
work:
A four-level, approximately 170 stall garage built out of concrete, with
all necessary ADA improvements, an automotive fire system, elevator and at
least two stair wells. Power will be provided from the house meter to
operate lighting, elevator and future gate controls, if necessary.
C. The "Outside Areas Work" shall mean and consist of only the following work:
1. All work outside the Building perimeter walls shall be considered site
work for the building shell and shall include grading, asphalt concrete,
paving, landscaping, landscape irrigation, storm drainage, utility service
laterals, curbs, gutters, sidewalks, specialty paving (if required, i.e.
reinforced roadway section to truck doors), retaining walls and trash
enclosures.
2. Paving sections for automobile and truck access shall be according to
the Geologic Soils Report.
3. All parking lot striping to include handicap signage wheel stops, and
spaces.
4. Underground site storm drainage systems shall be connected to the city
storm system main.
5. Trash enclosure with two sets of double doors to accommodate oversize
dumpsters.
EXHIBIT "D"
-----------
<PAGE>
NOTICE OF LEASE TERM DATES
--------------------------
To: Kana Communications, Inc. Date:_____________
_____________________________
_____________________________
Re: Lease dated ________________, 2000 (the "Lease"), between Veterans Self-
Storage LLC, a California limited liability company, ("Landlord"), and Kana
Communications, Inc., a Delaware corporation, ("Tenant"), for premises in
Redwood City, California, more particularly described in the Lease (the
"Premises").
Gentlemen:
In accordance with the subject Lease, we wish to advise and/or confirm as
follows:
1. That the Premises have been accepted herewith by the Tenant as being
substantially complete in accordance with the subject Lease and that there is no
deficiency in construction except as may be indicated on the "Punch-List"
prepared by Landlord and Tenant.
2. That the Tenant has possession of the subject Premises and
acknowledges that under the provisions of the Lease the Commencement Date is
_________________, and the Term of the Lease shall expire on ______________.
3. That in accordance with the Lease, Rent commenced to accrue on
__________________.
4. If the Commencement Date of the Lease is other than the first day of
the month, the first billing will contain a pro rata adjustment. Each billing
thereafter shall be for the full amount of the monthly installment as provided
for in the Lease.
5. Rent is due and payable in advance on the first day of each and every
month during the Term of the Lease. Your Rent checks should be made payable to
_________________________________ at ______________________________.
EXHIBIT "D"
-----------
<PAGE>
[6. The number of Rentable Square Feet within the Building is __________
square feet as determined in accordance with the terms of the Lease.]
LANDLORD: VETERANS SELF-STORAGE, LLC,
a California limited liability company
By: Hunter/Storm Veterans, LLC
a California limited liability company
Its: Manager
By:______________________________
Derek K. Hunter, Jr.
Its: Member
By:______________________________
Edward D. Storm
Its: Member
AGREED AND ACCEPTED:
TENANT: KANA COMMUNICATIONS, INC.,
a Delaware corporation
By:_____________________________
Name:___________________________
Title:__________________________
By:_____________________________
Name:___________________________
Title:__________________________
EXHIBIT "D"
-----------
<PAGE>
RULES AND REGULATIONS
---------------------
1. If Tenant requires telegraphic, satellite dishes, antennae or similar
services, it shall first obtain, and comply with, Landlord's reasonable
instructions in their installation.
2. Tenant shall not place a load upon any floor of the Building which
exceeds the load per square foot which such floor was designed to carry and
which is allowed by law. Landlord shall have the right to prescribe the weight,
size and position of all equipment, materials, furniture or other property
brought into the Building. Heavy objects shall, if considered necessary by
Landlord, stand on such platforms as determined by Landlord to be necessary to
properly distribute the weight, which platforms shall be provided at Tenant's
expense.
3. Tenant shall not use or keep in the Premises any kerosene, gasoline or
inflammable or combustible fluid or material other than those limited quantities
necessary for the operation or maintenance of office equipment. Tenant shall not
use or permit to be used in the Premises any foul or noxious gas or substance,
nor shall Tenant bring into or keep in or about the Premises any birds or
animals.
4. Landlord reserves the right, exercisable without notice and without
liability to Tenant, to change the name and street address of the Building.
5. The toilet rooms, toilets, urinals, wash bowls and other apparatus
shall not be used for any purpose other than that for which they were
constructed and no foreign substance of any kind whatsoever shall be thrown
therein.
6. Tenant shall not sell, or permit the sale at retail of newspapers,
magazines, periodicals, theater tickets or any other goods or merchandise to the
general public in or on the Premises. Tenant shall not use the Premises for any
business or activity other than that specifically provided for in this Lease.
7. Tenant shall not install any radio or television antenna, loudspeaker,
satellite dishes or other devices on the roof(s) or exterior walls of the
Building or other improvements on the Premises. Tenant shall not interfere with
any radio or television broadcasting or reception.
8. Tenant shall store all its trash in the trash storage areas of the
Premises. Tenant shall not place in any trash box or receptacle any material
which cannot be disposed of in the ordinary and customary manner of trash and
garbage disposal. All garbage and refuse disposal shall be made in accordance
with directions issued from time to time by Landlord.
9. The Premises shall not be used for the storage of merchandise held for
sale to the general public, or for lodging or for manufacturing of any kind, nor
shall the Premises be used for any improper, immoral or objectionable purpose.
No cooking shall be done or permitted on
EXHIBIT "E"
-----------
<PAGE>
the Premises without Landlord's consent, except the use by Tenant of
Underwriters' Laboratory approved equipment for brewing coffee, tea, hot
chocolate and similar beverages shall be permitted, and the use of a microwave
oven for employees use shall be permitted, provided that such equipment and use
is in accordance with all applicable federal, state, county and city laws,
codes, ordinances, rules and regulations.
10. Tenant shall comply with all safety, fire protection and evacuation
procedures and regulations established by Landlord or any governmental agency.
11. The following rules and regulations shall govern the use of the
parking facilities which serve the Building (including the Parking Structure):
a. Tenant shall not permit or allow any vehicles that belong to or
are controlled by Tenant or Tenant's employees, subtenants, customers or
invitees to be loaded, unloaded or parked in areas other than those designated
by Landlord for such activities. No vehicles shall be left in the parking areas
overnight and no vehicles shall park in the parking areas other than
automobiles, motorcycles and four wheeled trucks. No extended term storage of
vehicles shall be permitted.
b. Vehicles must be parked entirely within painted stall lines of a
single parking stall.
c. All directional signs and arrows must be observed.
d. The speed limit within all parking areas shall be five (5) miles
per hour.
e. Parking is prohibited:
(i) in areas not striped for parking;
(ii) in aisles;
(iii) where "no parking" signs are posted;
(iv) on ramps; and
(v) in cross-hatched areas.
f. Washing, waxing, cleaning or servicing of any vehicle in any area
not specifically reserved for such purpose is prohibited.
g. Parking stickers or any other device or form of identification
supplied by Landlord as a condition of use of the parking facilities shall
remain the property of Landlord. Such parking identification device must be
displayed as requested and may not mutilate in any
EXHIBIT "E"
-----------
<PAGE>
manner. The serial number of the parking identification device may not be
obliterated. Devices are not transferable and any device in the possession of an
unauthorized holder will be void.
h. Tenant agrees to use its reasonable, good faith efforts to
cooperate in traffic mitigation programs which may be undertaken by Landlord
independently, or in cooperation with local municipalities or governmental
agencies or other property owners in the vicinity of the Building. Such
programs may include, but shall not be limited to, carpools, van pools and other
ride sharing programs, public and private transit, flexible work hours,
preferential assigned parking programs and programs to coordinate occupants of
the Premises with existing or proposed traffic mitigation programs.
12. These Rules and Regulations are in addition to, and shall not be
construed to in any way modify or amend, in whole or in part, the terms,
covenants, agreements and conditions of the Lease.
13. Landlord reserves the right to make such other and reasonable and
non-discriminatory Rules and Regulations as, in its judgment, may from time to
time be needed for safety and security, for care and cleanliness of the Premises
and for the preservation of good order therein. Tenant agrees to abide by all
such Rules and Regulations hereinabove stated and any additional reasonable and
non-discriminatory rules and regulations which are adopted.
14. Tenant shall be responsible for the observance of all of the foregoing
rules by Tenant's employees, agents, clients, customers, invitees and guests.
EXHIBIT "E"
-----------
<PAGE>
FORM OF SUBORDINATION, NON-DISTURBANCE,
AND ATTORNMENT AGREEMENT
EXHIBIT "F"
-----------
<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.
(3)netDialog, Inc., a California corporation.
(4)Business Evolution, Inc. a Delaware corporation.
<PAGE>
Exhibit 23.1
REPORT ON SCHEDULE AND CONSENT OF KPMG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Kana Communications, Inc
The audits referred to in our report dated January 20, 2000, except as to Note
8, which is as of February 11, 2000, included the related financial statement
schedule as of December 31, 1999, and for each of the years in the three-year
ended December 31, 1999, included herein. This financial statement schedule is
the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statement schedule based on our audits. In
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
We consent to the use of our reports included herein and to the references to
our firm under the headings "Selected Consolidated Financial Data" and
"Experts" in the joint proxy statement/prospectus.
/s/ KMPG LLP
Mountain View, California
March 10, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 of
Kana Communications, Inc. of our report dated July 19, 1999 except as to the
pooling of interests with InSite Marketing Technology, Inc. discussed in Note C
which is as of December 27, 1999 and Note P which is as of February 6, 2000
relating to the financial statements of Silknet Software, Inc., which appear in
such Registration Statement. We also consent to the references to us under the
headings "Experts" and "Summary Historical Financial Information" in such
Registration Statement.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 10, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM KANA
COMMUNICATIONS, INC. 10K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-01-1998
<CASH> 18,695 13,875
<SECURITIES> 36,167 160
<RECEIVABLES> 5,021 957
<ALLOWANCES> 366 110
<INVENTORY> 0 0
<CURRENT-ASSETS> 61,553 15,032
<PP&E> 8,360 1,493
<DEPRECIATION> 1,531 328
<TOTAL-ASSETS> 70,229 16,876
<CURRENT-LIABILITIES> 21,317 3,199
<BONDS> 0 0
0 0
0 13
<COMMON> 61 19
<OTHER-SE> 48,500 12,951
<TOTAL-LIABILITY-AND-EQUITY> 70,229 16,876
<SALES> 10,536 2,014
<TOTAL-REVENUES> 14,064 2,347
<CGS> 271 54
<TOTAL-COSTS> 14,455 125,182
<OTHER-EXPENSES> 2,163 97
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,079 88
<INCOME-PRETAX> 0 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (118,743) (12,601)
<EPS-BASIC> (4.61) (2.01)
<EPS-DILUTED> (4.61) (2.01)
</TABLE>
<PAGE>
EXHIBIT 99.1
PERSONAL AND CONFIDENTIAL
- -------------------------
[Date]
Board of Directors
Kana Communications, Inc
740 Bay Road
Redwood City, CA 94063
Re: Registration Statement (File No. 333- ) of
Kana Communications, Inc.
Gentlemen:
Reference is made to our opinion letter dated February 6, 2000 with respect to
the fairness from a financial point of view to Kana Communications, Inc.
("Kana") of the exchange ratio of 0.83 of a share of Common Stock, par value
$0.001 per share, of Kana to be exchanged for each share of Common Stock, par
value $0.01 per share, of Silknet Software, Inc. ("Silknet") pursuant to the
Agreement and Plan of Merger, dated as of February 6, 2000, by and among Kana,
Pistol Acquisition Corp. and Silknet.
The foregoing opinion letter is provided for the information and assistance of
the Board of Directors of Kana in connection with its consideration of the
transaction contemplated therein and is not to be used, circulated, quoted or
otherwise referred to for any other purpose, nor is it to be filed with,
included in or referred to in whole or in part in any registration statement,
proxy statement or any other document, except in accordance with our prior
written consent. We understand that the Company has determined to include our
opinion in the above-referenced Registration Statement.
In that regard, we hereby consent to the reference to the opinion of our Firm
under the captions "Kana Letter to Stockholders", "Summary", "The Merger" and
"Appendix VI" and to the inclusion of the foregoing opinion in the above-
mentioned Joint Proxy Statement/Prospectus included in the above-mentioned
Registration Statement. In giving such consent, we do not thereby admit that we
come within the category of persons whose consent is required under Section 7 of
the Securities Act of 1933 or the rules and regulations of the Securities and
Exchange Commission thereunder.
1
<PAGE>
EXHIBIT 99.2
[LETTERHEAD OF CREDIT SUISSE FIRST BOSTON CORPORATION]
March 10, 2000
VIA FACSIMILE
- -------------
Board of Directors
Silknet Software, Inc.
50 Philippe Cote Street
Manchester, NH 03101
Consent to Include Fairness Opinion
in the Joint Proxy/Registration Statement
-----------------------------------------
Dear Sirs:
We hereby consent to the inclusion of and reference to our opinion, dated
February 6, 2000, in the prospectus included in this Registration Statement on
Form S-4 (the "Registration Statement") of Kana Communications, Inc., a Delaware
corporation (the "Company") covering common stock to be issued in connection
with the merger of Pistol Acquisition Corp., a Delaware corporation and a wholly
owned subsidiary of the Company, with and into Silknet Software, Inc. In giving
the foregoing consent, we do not admit that we come within the category of
persons whose consent is required under Section 7 of the Securities Act of 1933,
as amended (the "Securities Act"), or the rules and regulations promulgated
thereunder, nor do we admit that we are experts with respect to any part of such
Registration Statement within the meaning of the term "experts" as used in the
Securities Act or the rules and regulations promulgated thereunder.
Very truly yours,
CREDIT SUISSE FIRST BOSTON CORPORATION
By: /s/ Joseph T. Josephson
--------------------------------
Name: Joseph T. Josephson
Title: Managing Director
