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File Pursuant to Rule 424(b)(4)
Registration Number 333-40338
2,500,000 Shares
[KANA LOGO]
KANA
COMMUNICATIONS, INC.
COMMON STOCK
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This prospectus relates to the resale of up to 2,500,000 shares of our
common stock by certain of our current stockholders. Of this amount, 1,800,000
shares are being offered for sale by entities affiliated with Putnam Investment
Management, Inc. and The Putnam Advisory Company, Inc., 400,000 shares are being
offered for sale by entities affiliated with The Galleon Group, 150,000 shares
are being offered for sale by DWS Investments and 150,000 shares are being
offered for sale by Metzler Investments. We are registering our common stock for
resale by these selling stockholders. The prices at which such stockholders may
sell the shares will be determined by the prevailing market for the shares or in
negotiated transactions. We will not receive any proceeds from the sale of
shares offered under this prospectus.
Our common stock is traded on the Nasdaq National Market under the symbol
"KANA." The closing price on August 3, 2000 was $34.75 per share.
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THE SHARES OF COMMON STOCK OF KANA OFFERED OR SOLD UNDER THIS PROSPECTUS
INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS
PROSPECTUS TO READ ABOUT IMPORTANT FACTORS YOU SHOULD CONSIDER BEFORE BUYING THE
COMMON STOCK.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this prospectus is August 4, 2000.
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TABLE OF CONTENTS
PAGE
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Prospectus Summary........................................................................................ 3
Summary Selected Consolidated Financial Data.............................................................. 4
Summary Unaudited Pro Forma Combined Consolidated Financial Information................................... 5
Risk Factors.............................................................................................. 7
Forward-Looking Statements................................................................................ 18
Use of Proceeds........................................................................................... 19
Price Range of Common Stock............................................................................... 19
Dividend Policy........................................................................................... 19
Selected Consolidated Financial Data...................................................................... 20
Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 22
Business.................................................................................................. 32
Management................................................................................................ 45
Employment Arrangements, Termination of Employment Arrangements and Change in Control
Arrangements......................................................................................... 51
Certain Relationships and Related Transactions............................................................ 54
Security Ownership of Certain Beneficial Owners and Management............................................ 56
Description of Capital Stock.............................................................................. 58
Plan of Distribution...................................................................................... 61
Selling Stockholders...................................................................................... 63
Transfer Agent and Registrar.............................................................................. 64
Legal Matters............................................................................................. 64
Experts................................................................................................... 64
Change in Accountants..................................................................................... 64
Where You Can Find More Information....................................................................... 64
Index to Financial Statements............................................................................. F-1
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company, the common stock being sold in this offering,
and our consolidated financial statements and related notes appearing elsewhere
in this prospectus. Because this is only a summary, you should read the entire
prospectus carefully, especially the risks of investing in the common stock
discussed under "Risk Factors" on pages 7-18.
OUR BUSINESS
We are a leading provider of integrated e-business solutions that deliver
a Web-architected e-business platform and a comprehensive suite of
customer-facing applications for marketing, sales and service. We define
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." Our
products and services allow companies to offer customers, business partners and
businesses alike, the ability to collaborate with the company and each other to
efficiently resolve their problems and to receive timely, easy to access,
relevant information.
Our objective is to become the leading provider of mission critical
Web-architected communications and relationship management software products and
services for e-businesses. To achieve our objective, we intend to expand our
products to enter new markets, increase our global distribution capabilities and
alliances, leverage our hosted application service and continue to emphasize
customer advocacy and satisfaction.
RECENT DEVELOPMENTS
On April 19, 2000, we completed a merger with Silknet Software, Inc.
under which Silknet became our wholly-owned subsidiary. Silknet provides
electronic relationship management software, or eRM 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 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.
In connection with the merger, each share of Silknet common stock
outstanding immediately prior to the completion of the Merger was converted into
the right to receive 1.66 shares of our common stock and we assumed Silknet's
outstanding stock options and warrants based on the exchange ratio, issuing
approximately 29.2 million shares of our common stock and assuming options and
warrants to acquire approximately 4.0 million shares of Silknet common stock.
The transaction is intended to qualify as a tax-free reorganization under the
Internal Revenue Code of 1986, as amended, and was accounted for using the
purchase method of accounting.
CORPORATE INFORMATION
We were founded by Mark Gainey and Michael Horvath in 1996. We were first
incorporated in California in July 1996 as Kana Net Works, Inc., and we changed
our name to Kana.com, Inc. in January 1997. We then changed our name to Kana
Communications, Inc. in October 1997. We reincorporated in Delaware in September
1999. In December 1999, we completed mergers with Business Evolution, Inc. and
netDialog, Inc., and in April 2000, we completed our merger with Silknet.
References in this prospectus to "Kana," "we," "our," and "us" collectively
refer to Kana Communications, Inc., a Delaware corporation, its subsidiaries and
its California predecessor. Our principal executive offices are located at 740
Bay Road, Redwood City, California 94063 and our telephone number is (650)
298-9282.
THE OFFERING
On June 12, 2000, we sold 2,500,000 shares of our common stock for gross
proceeds of $125.0 million (net proceeds of $120.0 million) in a private
transaction, which we refer to in this prospectus as the "private placement."
This prospectus relates to the resale of up to 2,500,000 shares of our common
stock sold in the private placement. Of this amount, 1,800,000 shares are being
offered for sale by entities affiliated with Putnam Investment Management,
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Inc. and The Putnam Advisory Company, Inc., 400,000 shares are being offered for
sale by entities affiliated with The Galleon Group, 150,000 shares are being
offered for sale by DWS Investments and 150,000 shares are being offered for
sale by Metzler Investments. We are registering our common stock for resale by
these selling stockholders. The prices at which these stockholders may sell the
shares will be determined by the prevailing market for the shares or in
negotiated transactions. See "Selling Stockholders."
USE OF PROCEEDS
The selling stockholders will receive all of the proceeds from the sale
of the common stock pursuant to this prospectus. We will not receive any of the
proceeds from sales by the selling stockholders of the offered shares of common
stock.
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
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1997 1998 1999 1999 2000
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CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenue...................................... $ 617 $ 2,347 $ 14,064 $ 3,827 $ 36,173
Gross profit....................................... 364 1,627 7,183 2,406 20,568
Amortization of goodwill and identifiable
intangibles..................................... -- -- -- -- 247,043
In process research and development................ -- -- -- -- 6,900
Amortization of stock-based compensation........... 113 1,456 80,476 3,254 6,913
Acquisition related costs.......................... -- -- 5,635 -- 6,564
Operating loss..................................... (1,610) (12,828) (117,999) (14,379) (301,280)
Net loss........................................... $ (1,553) $ (12,601) $ (118,743) $ (14,898) $ (299,389)
=========== =========== ============ ========== ============
Basic and diluted net loss per share............... $ (0.37) $ (2.01) $ (4.61) $ (2.51) $ (4.53)
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Shares used in computing basic and diluted net
loss per share.................................. 4,152 6,258 25,772 5,944 66,030
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DECEMBER 31,
--------------------------------------- JUNE 30,
1997 1998 1999 2000
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(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short term investments.......... $ 5,594 $ 14,035 $ 53,217 $ 162,842
Goodwill and identifiable intangibles...................... -- -- -- 3,510,792
Working capital............................................ 5,364 11,833 38,591 116,412
Total assets............................................... 6,158 16,876 70,229 3,741,444
Notes payable, less current portion........................ 51 726 412 262
Total stockholders' equity................................. 5,684 12,951 48,500 3,657,831
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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 selected 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 prospectus. Silknet's fiscal year ended 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. Kana's
consolidated statement of operations for the six months ended June 30, 2000 has
been combined with Silknet's consolidated statement of operations for the period
from January 1, 2000 to April 19, 2000 (merger date).
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, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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SELECTED PRO FORMA COMBINED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1999 2000
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PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS DATA:
Total revenues.................................................................. $ 36,594 $ 49,497
Gross profit.................................................................... 23,918 20,525
Amortization of goodwill and identifiable intangibles........................... 1,252,856 626,428
In process research and development............................................. -- 6,900
Amortization of stock-based compensation........................................ 80,773 6,923
Acquisition-related costs....................................................... 6,296 6,564
Operating loss.................................................................. (1,386,449) (684,689)
Net loss........................................................................ (1,385,313) (682,179)
Basic and diluted net loss per share............................................ $ (30.52) $ (8.21)
Shares used in per share computations........................................... 45,392 83,134
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RISK FACTORS
OUR FUTURE OPERATING RESULTS MAY VARY SUBSTANTIALLY FROM PERIOD TO
PERIOD. THE PRICE OF OUR COMMON STOCK WILL FLUCTUATE IN THE FUTURE, AND AN
INVESTMENT IN OUR COMMON STOCK IS SUBJECT TO A VARIETY OF RISKS, INCLUDING BUT
NOT LIMITED TO THE SPECIFIC RISKS IDENTIFIED BELOW. INEVITABLY, SOME INVESTORS
IN OUR SECURITIES WILL EXPERIENCE GAINS WHILE OTHERS WILL EXPERIENCE LOSSES
DEPENDING ON THE PRICES AT WHICH THEY PURCHASE AND SELL SECURITIES. PROSPECTIVE
AND EXISTING INVESTORS ARE STRONGLY URGED TO CAREFULLY CONSIDER THE VARIOUS
CAUTIONARY STATEMENTS AND RISKS SET FORTH IN THIS PROSPECTUS.
RISKS RELATED TO OUR BUSINESS
BECAUSE WE HAVE A LIMITED OPERATING HISTORY, THERE IS LIMITED INFORMATION UPON
WHICH YOU CAN EVALUATE OUR BUSINESS
We are still in the early stages of our development, and our limited
operating history makes it difficult to evaluate our business and prospects. We
were incorporated in July 1996 and first recorded revenue in February 1998.
Thus, we have a limited operating history upon which you can evaluate our
business and prospects. In addition, our operating results include the results
of operations of Connectify, Inc., netDialog, Inc. and Business Evolution, Inc.,
three companies acquired by us and accounted for as poolings of interests. Due
to our limited operating history, it is difficult or impossible to predict
future results of operations. For example, we cannot forecast operating expenses
based on our historical results because they are limited, and we are required to
forecast expenses in part on future revenue projections. Moreover, due to our
limited operating history, any evaluation of our business and prospects must be
made in light of the risks and uncertainties often encountered by early-stage
companies in Internet-related markets. Many of these risks are discussed in the
subheadings below, and include our ability to:
o attract more customers;
o implement our sales, marketing and after-sales service
initiatives, both domestically and internationally;
o execute our product development activities;
o anticipate and adapt to the changing Internet market;
o attract, retain and motivate qualified personnel;
o respond to actions taken by our competitors;
o continue to build an infrastructure to effectively manage growth
and handle any future increased usage; and
o integrate acquired businesses, technologies, products and
services.
If we are unsuccessful in addressing these risks or in executing our
business strategy, our business, results of operations and financial condition
would be materially and adversely affected.
OUR QUARTERLY REVENUES AND OPERATING RESULTS MAY FLUCTUATE IN FUTURE PERIODS AND
WE MAY FAIL TO MEET EXPECTATIONS, WHICH MAY CAUSE THE PRICE OF OUR COMMON STOCK
TO DECLINE
Our quarterly revenues and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter particularly because our
products and services are relatively new and our prospects uncertain. If
quarterly revenues or operating results fall below the expectations of investors
or public market analysts, the price of our common stock could decline
substantially. Factors that might cause quarterly fluctuations in our operating
results include the factors described in the subheadings below as well as:
o the evolving and varying demand for customer communication
software products and services for e-businesses, particularly our
products and services;
o costs associated with integrating our recent acquisitions, and
costs associated with any future acquisitions;
o the timing of new releases of our products;
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o the discretionary nature of our customers' purchasing and
budgetary cycles;
o changes in our pricing policies or those of our competitors;
o the timing of execution of large contracts that materially affect
our operating results;
o the mix of sales channels through which our products and services
are sold;
o the mix of our domestic and international sales;
o costs related to the customization of our products;
o our ability to expand our operations, and the amount and timing of
expenditures related to this expansion; and
o global economic the conditions, as well as those specific to large
enterprises with high e-mail volume.
We also often offer volume-based pricing, which may affect operating
margins. Most of our expenses, such as employee compensation and rent, are
relatively fixed in the short term. Moreover, our expense levels are based, in
part, on our expectations regarding future revenue levels. As a result, if total
revenues for a particular quarter are below expectations, we could not
proportionately reduce operating expenses for that quarter. Therefore, this
revenue shortfall would have a disproportionate effect on our expected operating
results for that quarter. In addition, because our service revenue is largely
correlated with our license revenue, a decline in license revenue could also
cause a decline in service revenue in the same quarter or in subsequent
quarters.
Due to the foregoing factors, we believe that quarter-to-quarter
comparisons of our operating results are not a good indication of our future
performance.
WE HAVE A HISTORY OF LOSSES AND MAY NOT BE PROFITABLE IN THE FUTURE, WHICH MAY
REDUCE THE TRADING PRICE OF OUR COMMON STOCK
Since we began operations in 1997, we have incurred substantial operating
losses in every quarter. As a result of accumulated operating losses, as of June
30, we had an accumulated deficit of approximately $432.0 million. For the six
months ended June 30, 2000, we had a net loss of approximately $299.4 million,
or 827.7% of revenues for that period. Since inception, we have funded our
business primarily through selling our stock, not from cash generated by our
business. Our growth in recent periods has been from a limited base of
customers, and we may not be able to sustain these growth rates. We expect to
continue to increase our operating expenses. As a result, we expect to continue
to experience losses and negative cash flows, even if sales of our products and
services continue to grow, and we may not generate sufficient revenues to
achieve profitability in the future.
In addition, as a result of our mergers with Connectify, netDialog,
Business Evolution and Silknet, we expect that our losses will increase even
more significantly because of additional costs and expenses related to:
o an increase in the number of employees;
o an increase in research and development activities;
o an increase in sales and marketing activities; and
o assimilation of operations and personnel.
If we do achieve profitability, we may not be able to sustain or increase
any profitability on a quarterly or annual basis in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
WE HAVE COMPLETED FOUR MERGERS IN THE PAST ELEVEN MONTHS, AND THOSE MERGERS MAY
RESULT IN DISRUPTIONS TO OUR BUSINESS AND MANAGEMENT DUE TO DIFFICULTIES IN
ASSIMILATING PERSONNEL AND OPERATIONS
We may not realize the benefits from the significant mergers we have
completed. In August 1999, we acquired Connectify, and in December 1999, we
acquired netDialog and Business Evolution. On April 19, 2000, we completed our
merger with Silknet. We may not be able to successfully assimilate the
additional personnel, operations, acquired technology and products into our
business. In particular, we will need to assimilate and retain key professional
services, engineering and marketing personnel. This is particularly difficult
with Business
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Evolution and Silknet, since their operations are located on the east coast and
we are 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 us. In addition, products of these companies
will have to be integrated into our products, and it is uncertain whether we may
accomplish this easily or at all. These difficulties could disrupt our ongoing
business, distract management and employees or increase expenses. Acquisitions
are inherently risky and we may also face unexpected costs, which may adversely
affect operating results in any quarter.
THE MERGER OF SILKNET INTO OUR COMPANY COULD ADVERSELY AFFECT COMBINED FINANCIAL
RESULTS
If the benefits of the merger of Silknet into our company do not exceed
the costs associated with the merger, including any dilution to our stockholders
resulting from the issuance of shares in connection with the merger, our
financial results, including earnings per share, could be adversely affected. In
addition, we have recorded goodwill and intangible assets of approximately $3.8
billion in connection with the merger, which will be amortized over a period of
three years.
THE MARKET PRICE OF OUR COMMON STOCK MAY DECLINE AS A RESULT OF THE MERGER OF
SILKNET INTO OUR COMPANY
The market price of our common stock may decline as a result of the
merger if:
o the integration of our company and Silknet is unsuccessful;
o we do not achieve the perceived benefits of the merger as rapidly
or to the extent anticipated by financial or industry analysts or
investors; or
o the effect of the merger on our financial results is not
consistent with the expectations of financial or industry analysts
or investors.
The market price of our 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 our common stock could materially and adversely affect our
operating results.
IF WE ACQUIRE ADDITIONAL COMPANIES, PRODUCTS OR TECHNOLOGIES, WE MAY FACE RISKS
SIMILAR TO THOSE FACED IN OUR OTHER MERGERS
If we are presented with appropriate opportunities, we intend to make
other investments in complementary companies, products or technologies. We may
not realize the anticipated benefits of any other acquisition or investment. If
we acquire another company, we will likely face the same risks, uncertainties
and disruptions as discussed above with respect to our other mergers.
Furthermore, we may have to incur debt or issue equity securities to pay for any
additional future acquisitions or investments, the issuance of which could be
dilutive to our company or our existing stockholders. In addition, our
profitability may suffer because of acquisition-related costs or amortization
costs for acquired goodwill and other intangible assets.
WE FACE SUBSTANTIAL COMPETITION AND MAY NOT BE ABLE TO COMPETE EFFECTIVELY
The market for our products and services is intensely competitive,
evolving and subject to rapid technological change. We expect the intensity of
competition to increase in the future. Increased competition may result in price
reductions, reduced gross margins and loss of market share.
We currently face competition for our products from systems designed by
in-house and third-party development efforts. We expect that these systems will
continue to be a principal source of competition for the foreseeable future. Our
competitors include a number of companies offering one or more products for the
e-business communications and relationship management market, some of which
compete directly with our products. For example, our competitors include
companies providing stand-alone point solutions, including Annuncio, Inc.,
AskJeeves, Inc., Brightware, Inc., Broadbase, Inc., Digital Impact, Inc., eGain
Communications Corp., E.piphany, Inc., Inference Corp., Marketfirst, Inc., Live
Person, Inc., Mustang Software, Inc., Responsys.com and Servicesoft, Inc. In
addition, we compete with companies providing traditional, client-server based
customer management and communications solutions, such as Clarify Inc. (which
was acquired by Northern Telecom), Genesys Telecommunications Laboratories, Inc.
(which was acquired by Alcatel), Cisco Systems, Inc., Lucent Technologies, Inc.,
Message Media, Inc., Oracle Corporation, Pivotal Corporation, Siebel Systems,
Inc. and Vantive Corporation
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(which was acquired by PeopleSoft, Inc.). Furthermore, we may face increased
competition should we expand our product line, through acquisition of
complementary businesses or otherwise.
Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition and a larger installed base of customers than we have.
In addition, many of our competitors have well-established relationships with
our current and potential customers and have extensive knowledge of our
industry. We may lose potential customers to competitors for various reasons,
including the ability or willingness of competitors to offer lower prices and
other incentives that we cannot match. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. We also expect that competition will increase as a
result of recently-announced industry consolidations, as well as future
consolidations.
We may not be able to compete successfully against current and future
competitors, and competitive pressures may seriously harm our business.
OUR FAILURE TO CONSUMMATE OUR EXPECTED SALES IN ANY GIVEN QUARTER COULD
DRAMATICALLY HARM OUR OPERATING RESULTS BECAUSE OF THE LARGE SIZE OF TYPICAL
ORDERS
Our sales cycle is subject to a number of significant risks, including
customers' budgetary constraints and internal acceptance reviews, over which we
have little or no control. Consequently, if sales expected from a specific
customer in a particular quarter are not realized in that quarter, we are
unlikely to be able to generate revenue from alternate sources in time to
compensate for the shortfall. As a result, and due to the relatively large size
of a typical order, a lost or delayed sale could result in revenues that are
lower than expected. Moreover, to the extent that significant sales occur
earlier than anticipated, revenues for subsequent quarters may be lower than
expected.
WE MAY NOT BE ABLE TO FORECAST OUR REVENUES ACCURATELY BECAUSE OUR PRODUCTS HAVE
A LONG AND VARIABLE SALES CYCLE
The long sales cycle for our products may cause license revenue and
operating results to vary significantly from period to period. To date, the
sales cycle for our products has taken 3 to 12 months in the United States and
longer in foreign countries. Our sales cycle has required pre-purchase
evaluation by a significant number of individuals in our customers'
organizations. Along with third parties that often jointly market our software
with us, we invest significant amounts of time and resources educating and
providing information to prospective customers regarding the use and benefits of
our products. Many of our customers evaluate our software slowly and
deliberately, depending on the specific technical capabilities of the customer,
the size of the deployment, the complexity of the customer's network
environment, and the quantity of hardware and the degree of hardware
configuration necessary to deploy our products.
OUR STOCK PRICE MAY BE HIGHLY VOLATILE AND COULD DROP, PARTICULARLY BECAUSE OUR
BUSINESS DEPENDS ON THE INTERNET
The trading price of our common stock has fluctuated widely in the past
and is expected to continue to do so in the future, as a result of a number of
factors, many of which are outside our control. In addition, the stock market
has experienced extreme price and volume fluctuations that have affected the
market prices of many technology and computer software companies, particularly
Internet-related companies, and 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 our common stock.
FUTURE SALES OF STOCK COULD AFFECT OUR STOCK PRICE
If our stockholders sell substantial amounts of our common stock,
including shares issued upon the exercise of outstanding options and warrants,
in the public market, the market price of our common stock could fall. These
sales also might make it more difficult for us to sell equity or equity-related
securities in the future at a time and price that we deem appropriate.
In particular, in July 2000, the lockup agreement executed by the
affiliates of Kana and Silknet will elapse and such stockholders will be
eligible to sell all vested shares. In addition, in August 2000, shares held by
former Connectify stockholders will become eligible for sale under Rule 144.
Also in August 2000, we intend to file a registration statement to allow the
resale of shares held by former netDialog and Business Evolution stockholders in
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accordance with the terms of those merger agreements. See "Security Ownership of
Certain Beneficial Owners and Management" and "Description of Capital
Stock-Registration Rights of Certain Holders."
DIFFICULTIES IN IMPLEMENTING OUR PRODUCTS COULD HARM OUR REVENUES AND MARGINS
Forecasting our revenues depends upon the timing of implementation of our
products. This implementation typically involves working with sophisticated
software, computing and communications systems. If we experience difficulties
with implementation or do not meet project milestones in a timely manner, we
could be obligated to devote more customer support, engineering and other
resources to a particular project. Some customers may also require us to develop
customized features or capabilities. If new or existing customers have
difficulty deploying our products or require significant amounts of our
professional services support or customized features, our revenue recognition
could be further delayed and our costs could increase, causing increased
variability in our operating results.
OUR BUSINESS DEPENDS ON THE ACCEPTANCE OF OUR PRODUCTS AND SERVICES, AND IT IS
UNCERTAIN WHETHER THE MARKET WILL ACCEPT OUR PRODUCTS AND SERVICES
Of our total revenue of $36.2 million for the six months ended June 30,
2000, $22.9 million was derived from licenses of products and $13.3 million from
related services. We are not certain that our target customers will widely adopt
and deploy our products and services. Our future financial performance will
depend on the successful development, introduction and customer acceptance of
new and enhanced versions of our products and services. In the future, we may
not be successful in marketing our products and services, including any new or
enhanced products.
WE MAY BE UNABLE TO HIRE AND RETAIN THE SKILLED PERSONNEL NECESSARY TO DEVELOP
OUR ENGINEERING, PROFESSIONAL SERVICES AND SUPPORT CAPABILITIES IN ORDER TO
CONTINUE TO GROW
We intend to increase our sales, marketing, engineering, professional
services and product management personnel over the next 12 months. Competition
for these individuals is intense, and we may not be able to attract, assimilate
or retain highly qualified personnel in the future. Our business cannot continue
to grow if we cannot attract qualified personnel. Our failure to attract and
retain the highly trained personnel that are integral to our product development
and professional services group, which is the group responsible for
implementation and customization of, and technical support for, our products and
services, may limit the rate at which we can develop and install new products or
product enhancements, which would harm our business. We will need to increase
our staff to support new customers and the expanding needs of our existing
customers, without compromising the quality of our customer service. Since our
inception, a number of employees have left or have been terminated, and we
expect 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 our industry, particularly in the
San Francisco Bay Area, where we are headquartered, due to the limited number of
people available with the necessary technical skills. We face greater difficulty
attracting these personnel with equity incentives as a public company than we
did as a privately held company.
WE MAY FACE DIFFICULTIES IN HIRING AND RETAINING QUALIFIED SALES PERSONNEL TO
SELL OUR PRODUCTS AND SERVICES, WHICH COULD HARM OUR ABILITY TO INCREASE OUR
REVENUES IN THE FUTURE
Our financial success depends to a large degree on the ability of our
direct sales force to increase sales to a level required to adequately fund
marketing and product development activities. Therefore, our ability to increase
revenues in the future depends considerably upon our success in recruiting,
training and retaining additional direct sales personnel and the success of the
direct sales force. Also, it may take a new salesperson a number of months
before he or she becomes a productive member of our sales force. Our business
will be harmed if we fail to hire or retain qualified sales personnel, or if
newly hired salespeople fail to develop the necessary sales skills or develop
these skills more slowly than we anticipate.
LOSS OF OUR CHIEF EXECUTIVE OFFICER OR ANY OF OUR EXECUTIVE OFFICERS COULD HARM
OUR BUSINESS
Our future success depends to a significant degree on the skills,
experience and efforts of our senior management. In particular, we depend upon
the continued services of Michael J. McCloskey, our Chief Executive Officer. The
loss of the services of Mr. McCloskey or any of our executive officers could
harm our business and
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operations. In addition, we have not obtained life insurance benefiting us on
any of our employees or entered into employment agreements with our key
employees. If any of our key employees left or was seriously injured and unable
to work and we were unable to find a qualified replacement, our business could
be harmed.
A FAILURE TO MANAGE OUR INTERNAL OPERATING AND FINANCIAL FUNCTIONS COULD LEAD TO
INEFFICIENCIES IN CONDUCTING OUR BUSINESS AND SUBJECT US TO INCREASED EXPENSES
Our ability to offer our products and services successfully in a rapidly
evolving market requires an effective planning and management process. We have
limited experience in managing rapid growth. We are experiencing a period of
growth that is placing a significant strain on our managerial, financial and
personnel resources. Our business will suffer if this growth continues and we
fail to manage it successfully. On June 30, 2000, we had a total of 889
full-time employees compared to 98 on June 30, 1999. We expect to continue to
hire new employees at a rapid pace. The recent completion of the merger with
Silknet resulted in approximately 300 new employees joining us. Moreover, we
will need to assimilate substantially all of Silknet's operations into our
operations. The rate of our recent growth has made management of that growth
more difficult. Any additional growth will further strain our management,
financial, personnel, internal training and other resources. To manage any
future growth effectively, we must improve our financial and accounting systems,
controls, reporting systems and procedures, integrate new personnel and manage
expanded operations. Any failure to do so could negatively affect the quality of
our products, our ability to respond to our customers and retain key personnel,
and our business in general.
THE INTEGRATION OF OUR NEW PRESIDENT, VICE PRESIDENT OF PRODUCT DEVELOPMENT,
VICE PRESIDENT OF MARKETING, CHIEF FINANCIAL OFFICER, VICE PRESIDENT OF HUMAN
RESOURCES, VICE PRESIDENT OF EBUSINESS SERVICES AND VICE PRESIDENT OF REALTIME
INTO OUR MANAGEMENT TEAM MAY INTERFERE WITH OUR OPERATIONS
The recent completion of the merger with Silknet has resulted in the
addition of a new President, Vice President of Development and Vice President of
Marketing. In addition, we have recently hired a Chief Financial Officer and
Vice President of Human Resources, each of whom has been with us for less than
nine months. To integrate into our company, these individuals must spend a
significant amount of time learning our business model and management system, in
addition to performing their regular duties. Accordingly, the integration of new
personnel has resulted and will continue to result in some disruption to our
ongoing operations.
DELAYS IN THE DEVELOPMENT OF NEW PRODUCTS OR ENHANCEMENTS TO EXISTING PRODUCTS
WOULD HURT OUR SALES AND DAMAGE OUR REPUTATION
To be competitive, we must develop and introduce on a timely basis new
products and product enhancements for companies with significant e-business
customer interactions needs. Any failure to do so could harm our business. If we
experience product delays in the future, we may face:
o customer dissatisfaction;
o cancellation of orders and license agreements;
o negative publicity;
o loss of revenues;
o slower market acceptance; and
o legal action by customers.
In the future, our efforts to remedy this situation may not be successful
and we may lose customers as a result. Delays in bringing to market new products
or their enhancements, or the existence of defects in new products or their
enhancements, could be exploited by our competitors. If we were to lose market
share as a result of lapses in our product management, our business would
suffer.
TECHNICAL PROBLEMS WITH EITHER OUR INTERNAL OR OUTSOURCED COMPUTER AND
COMMUNICATIONS SYSTEMS COULD INTERRUPT OUR KANA ONLINE SERVICE
The success of the Kana Online service depends on the efficient and
uninterrupted operation of our own and outsourced computer and communications
hardware and software systems. These systems and operations are
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<PAGE>
vulnerable to damage or interruption from human error, natural disasters,
telecommunications failures, break-ins, sabotage, computer viruses, intentional
acts of vandalism and similar adverse events. We have entered into an
Internet-hosting agreement with Exodus Communications, Inc. to maintain all of
the Kana Online servers at Exodus' data center in Santa Clara, California. Our
operations depend on Exodus' ability to protect its and our systems in Exodus'
data center against damage or interruption. Exodus does not guarantee that our
Internet access will be uninterrupted, error-free or secure. We have no formal
disaster recovery plan in the event of damage or interruption, and our insurance
policies may not adequately compensate us for any losses that we may incur. Any
system failure that causes an interruption in our service or a decrease in
responsiveness could harm our relationships with customers and result in reduced
revenues.
IF WE FAIL TO BUILD SKILLS NECESSARY TO SELL OUR KANA ONLINE SERVICE, WE WILL
LOSE REVENUE OPPORTUNITIES AND OUR SALES WILL SUFFER
The skills necessary to market and sell Kana Online are different from
those relating to our software products. We license our software products for a
fixed fee based on the number of concurrent users and the optional applications
purchased. We license Kana Online based on a fixed fee for installation,
configuration and training, and a variable monthly component depending on actual
customer usage. Our sales force sells both our software products and Kana
Online. Because different skills are necessary to sell Kana Online as compared
to selling software products, our sales and marketing groups may not be able to
maintain or increase the level of sales of either Kana Online or our software
products.
OUR PENDING PATENTS MAY NEVER BE ISSUED AND, EVEN IF ISSUED, MAY PROVIDE LITTLE
PROTECTION
Our success and ability to compete depend to a significant degree upon
the protection of our software and other proprietary technology rights. We
regard the protection of patentable inventions as important to our future
opportunities. We currently have nine U.S. patent applications pending relating
to our software. Although we have filed four international patent applications
corresponding to four of our U.S. patent applications, none of our technology is
patented outside of the United States. It is possible that:
o our pending patent applications may not result in the issuance of
patents;
o any patents issued may not be broad enough to protect our
proprietary rights;
o any issued patent could be successfully challenged by one or more
third parties, which could result in our loss of the right to
prevent others from exploiting the inventions claimed in those
patents;
o current and future competitors may independently develop similar
technology, duplicate our products or design around any of our
patents; and
o effective patent protection may not be available in every country
in which we do business.
WE RELY UPON TRADEMARKS, COPYRIGHTS AND TRADE SECRETS TO PROTECT OUR PROPRIETARY
RIGHTS, WHICH MAY NOT BE SUFFICIENT TO PROTECT OUR INTELLECTUAL PROPERTY
We also rely on a combination of laws, such as copyright, trademark and
trade secret laws, and contractual restrictions, such as confidentiality
agreements and licenses, to establish and protect our proprietary rights. In the
United States, we currently have a registered trademark, "Kana," and seven
pending trademark applications, including trademark applications for our logo
and "KANA COMMUNICATIONS and Design." Although none of our trademarks is
registered outside of the United States, we have trademark applications pending
in Australia, Canada, the European Union, India, Japan, South Korea and Taiwan.
However, despite the precautions that we have taken:
o laws and contractual restrictions may not be sufficient to prevent
misappropriation of our technology or deter others from developing
similar technologies;
o 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;
o other companies may claim common law trademark rights based upon
state or foreign laws that precede the federal registration of our
marks; and
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o policing unauthorized use of our products and trademarks is
difficult, expensive and time-consuming, and we may be unable to
determine the extent of this unauthorized use.
Also, the laws of other countries in which we market our products may
offer little or no effective protection of our proprietary technology. Reverse
engineering, unauthorized copying or other misappropriation of our proprietary
technology could enable third parties to benefit from our technology without
paying us for it, which would significantly harm our business.
WE 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 US
Substantial litigation regarding intellectual property rights exists in
our industry. We expect that software in our industry may be increasingly
subject to third-party infringement claims as the number of competitors grows
and the functionality of products in different industry segments overlaps. Third
parties may currently have, or may eventually be issued, patents upon which our
products or technology infringe. Any of these third parties might make a claim
of infringement against us. Many of our software license agreements require us
to indemnify our customers from any claim or finding of intellectual property
infringement. Any litigation, brought by us or others, could result in the
expenditure of significant financial resources and the diversion of management's
time and efforts. In addition, litigation in which we are accused of
infringement might cause product shipment delays, require us to develop
non-infringing technology or require us to enter into royalty or license
agreements, which might not be available on acceptable terms, or at all. If a
successful claim of infringement were made against us and we could not develop
non-infringing technology or license the infringed or similar technology on a
timely and cost-effective basis, our business could be significantly harmed.
On October 8, 1999, Genesys Telecommunications Laboratories, Inc. filed a
complaint against us in the United States District Court for the District of
Delaware. Genesys has amended its complaint to allege that our Customer
Messaging System 3.0 infringes one or more claims of two Genesys patents.
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 we have not received material
information or documentation. We intend to fight this claim vigorously and do
not expect it to materially impact our results from operations. We are not
currently a party to any other material legal proceedings.
WE MAY FACE HIGHER COSTS AND LOST SALES IF OUR SOFTWARE CONTAINS ERRORS
We face the possibility of higher costs as a result of the complexity of
our products and the potential for undetected errors. Due to the
mission-critical nature of our products and services, undetected errors are of
particular concern. We have only a few "beta" customers that test new features
and functionality of our software before we make these features and
functionalities generally available to our customers. If our software contains
undetected errors or we fail to meet customers' expectations in a timely manner,
we could experience:
o loss of or delay in revenues expected from the new product and an
immediate and significant loss of market share;
o loss of existing customers that upgrade to the new product and of
new customers;
o failure to achieve market acceptance;
o diversion of development resources;
o injury to our reputation;
o increased service and warranty costs;
o legal actions by customers; and
o increased insurance costs.
WE MAY FACE LIABILITY CLAIMS THAT COULD RESULT IN UNEXPECTED COSTS AND DAMAGE TO
OUR REPUTATION
Our licenses with customers generally contain provisions designed to
limit our exposure to potential product liability claims, such as disclaimers of
warranties and limitations on liability for special, consequential and
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<PAGE>
incidental damages. In addition, our license agreements generally cap the
amounts recoverable for damages to the amounts paid by the licensee to us for
the product or service giving rise to the damages. However, these contractual
limitations on liability may not be enforceable and we may be subject to claims
based on errors in our software or mistakes in performing our services including
claims relating to damages to our customers' internal systems. A product
liability claim, whether or not successful, could harm our business by
increasing our costs, damaging our reputation and distracting our management.
WE INTEND TO EXPAND OUR INTERNATIONAL OPERATIONS, WHICH COULD DIVERT MANAGEMENT
ATTENTION AND PRESENT FINANCIAL ISSUES
Our international operations are located in the United Kingdom,
Australia, Germany and Japan and, to date, have been limited. We plan to expand
our existing international operations and establish additional facilities in
other parts of the world. We may face difficulties in accomplishing this
expansion, including finding adequate staffing and management resources for our
international operations. The expansion of our existing international operations
and entry into additional international markets will require significant
management attention and financial resources. In addition, in order to expand
our international sales operations, we will need to, among other things:
o expand our international sales channel management and support
organizations;
o customize our products for local markets; and
o develop relationships with international service providers and
additional distributors and system integrators.
Our investments in establishing facilities in other countries may not
produce desired levels of revenues. Even if we are able to expand our
international operations successfully, we may not be able to maintain or
increase international market demand for our products. In addition, we have only
licensed our products internationally since January 1999 and have limited
experience in developing localized versions of our software and marketing and
distributing them internationally. Localizing our products may take longer than
we anticipate due to difficulties in translation and delays we may experience in
recruiting and training international staff.
OUR GROWTH COULD BE LIMITED IF WE FAIL TO EXECUTE OUR PLAN TO EXPAND
INTERNATIONALLY
For the six month periods ended June 30, 2000 and June 30, 1999, we
derived approximately 10.4% and 9%, respectively, of our total revenues from
sales outside North America. We have established offices in the United Kingdom,
Australia, Germany and Japan. As of June 30, 2000, we had 70 sales persons in
our offices outside of North America. As a result, we face risks from doing
business on an international basis, any of which could impair our internal
revenues. We 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, our international operations could
cause our average tax rate to increase. Any of these events could harm our
international sales and results of operations.
INTERNATIONAL LAWS AND REGULATIONS MAY EXPOSE US TO POTENTIAL COSTS AND
LITIGATION
Our international operations will increase our exposure to international
laws and regulations. If we cannot comply with foreign laws and regulations,
which are often complex and subject to variation and unexpected changes, we
could incur unexpected costs and potential litigation. For example, the
governments of foreign countries might attempt to regulate our products and
services or levy sales or other taxes relating to our 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 us to conduct our 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 our products and
services, could negatively impact our results of operations.
WE MAY SUFFER FOREIGN EXCHANGE RATE LOSSES
Our international revenues are denominated in local currency. Therefore,
a weakening of other currencies versus the U.S. dollar could make our products
less competitive in foreign markets. We do not currently engage in currency
hedging activities. We have not yet but may in the future experience significant
foreign currency translation losses, especially to the extent that we do not
engage in hedging.
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OUR PROSPECTS FOR OBTAINING ADDITIONAL FINANCING, IF REQUIRED, ARE UNCERTAIN AND
FAILURE TO OBTAIN NEEDED FINANCING COULD AFFECT OUR ABILITY TO PURSUE FUTURE
GROWTH
We may need to raise additional funds to develop or enhance our products
or services, to fund expansion, to respond to competitive pressures or to
acquire complementary products, businesses or technologies. We do not have a
long enough operating history to know with certainty whether our existing cash
and expected revenues will be sufficient to finance our anticipated growth.
Additional financing may not be available on terms that are acceptable to us. If
we raise additional funds through the issuance of equity or convertible debt
securities, the percentage ownership of our stockholders would be reduced and
these securities might have rights, preferences and privileges senior to those
of our current stockholders. If adequate funds are not available on acceptable
terms, our ability to fund our expansion, take advantage of unanticipated
opportunities, develop or enhance products or services, or otherwise respond to
competitive pressures would be significantly limited.
OUR EXECUTIVE OFFICERS AND DIRECTORS CAN EXERCISE SIGNIFICANT INFLUENCE OVER
STOCKHOLDER VOTING MATTERS
After this offering, our executive officers and directors, and their
affiliates together will control approximately 33.6% of our outstanding common
stock. As a result, these stockholders, if they act together, will have a
significant impact on all matters requiring approval of our stockholders,
including the election of directors and significant corporate transactions. This
concentration of ownership may delay, prevent or deter a change in control of
our company, could deprive our stockholders of an opportunity to receive a
premium for their common stock as part of a sale of our company or our assets
and might affect the market price of our common stock.
WE HAVE ADOPTED ANTI-TAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN
ACQUISITION OF OUR COMPANY
Our 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 us with flexibility in connection with possible acquisitions and
other corporate purposes, this issuance may make it more difficult for a third
party to acquire a majority of our outstanding voting stock. We currently have
no plans to issue preferred stock.
Our certificate of incorporation, bylaws and equity compensation plans
include provisions that may deter an unsolicited offer to purchase our company.
These provisions, coupled with the provisions of the Delaware General
Corporation Law, may delay or impede a merger, tender offer or proxy contest
involving our company. Furthermore, our 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 our company.
RISKS RELATED TO OUR INDUSTRY
OUR FAILURE TO MANAGE MULTIPLE TECHNOLOGIES AND TECHNOLOGICAL CHANGE COULD HARM
OUR FUTURE PRODUCT DEMAND
Future versions of hardware and software platforms embodying new
technologies and the emergence of new industry standards could render our
products obsolete. The market for e-business customer communication software is
characterized by:
o rapid technological change;
o frequent new product introductions;
o changes in customer requirements; and
o evolving industry standards.
Our products are designed to work on a variety of hardware and software
platforms used by our customers. However, our software may not operate correctly
on evolving versions of hardware and software platforms, programming languages,
database environments and other systems that our customers use. For example, the
server component of the current version of our products runs on the Windows NT
operating system from Microsoft, and we
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must develop products and services that are compatible with UNIX and other
operating systems to meet the demands of our customers. If we cannot
successfully develop these products in response to customer demands, our
business could suffer. Also, we must constantly modify and improve our products
to keep pace with changes made to these platforms and to database systems and
other back-office applications and Internet-related applications. This may
result in uncertainty relating to the timing and nature of new product
announcements, introductions or modifications, which may cause confusion in the
market and harm our business. If we fail to modify or improve our products in
response to evolving industry standards, our products could rapidly become
obsolete, which would harm our business.
IF WE FAIL TO RESPOND TO CHANGING CUSTOMER PREFERENCES IN OUR MARKET, DEMAND FOR
OUR PRODUCTS AND OUR ABILITY TO ENHANCE OUR REVENUES WILL SUFFER
We must continually improve the performance, features and reliability of
our products, particularly in response to competitive offerings. Our success
depends, in part, on our ability to enhance our existing software and to develop
new services, functionality and technology that address the increasingly
sophisticated and varied needs of our prospective customers. If we do not
properly identify the feature preferences of prospective customers, or if we
fail to deliver features that meet the requirements of these customers, our
ability to market our products successfully and to increase our revenues could
be impaired. The development of proprietary technology and necessary service
enhancements entails significant technical and business risks and requires
substantial expenditures and lead time.
IF THE INTERNET AND E-MAIL FAIL TO GROW AND BE ACCEPTED AS MEDIA OF
COMMUNICATION, DEMAND FOR OUR PRODUCTS AND SERVICES WILL DECLINE
We sell our products and services primarily to organizations that receive
large volumes of e-mail and Web-based communications. Many of our customers have
business models that are based on the continued growth of the Internet.
Consequently, our 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 our products and services. Moreover, companies
that have already invested significant resources in other methods of
communications with customers, such as call centers, may be reluctant to adopt a
new strategy that may limit or compete with their existing investments. If
businesses do not continue to accept the Internet and e-mail as media of
communication, our business will suffer.
FUTURE REGULATION OF THE INTERNET MAY SLOW OUR GROWTH, RESULTING IN DECREASED
DEMAND FOR OUR PRODUCTS AND SERVICES AND INCREASED COSTS OF DOING BUSINESS
Due to the increasing popularity and use of the Internet, it is possible
that state, federal and foreign regulators could adopt laws and regulations that
impose additional burdens on those companies that conduct business online. These
laws and regulations could discourage communication by e-mail or other Web-based
communications, particularly targeted e-mail of the type facilitated by the
Connectify product, which could reduce demand for our products and services.
The growth and development of the market for online services may prompt
calls for more stringent consumer protection laws or laws that may inhibit the
use of Internet-based communications or the information contained in these
communications. The adoption of any additional laws or regulations may decrease
the expansion of the Internet. A decline in the growth of the Internet,
particularly as it relates to online communication, could decrease demand for
our products and services and increase our costs of doing business, or otherwise
harm our business. Our costs could increase and our growth could be harmed by
any new legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the Internet and other online
services.
OUR SECURITY COULD BE BREACHED, WHICH COULD DAMAGE OUR REPUTATION AND DETER
CUSTOMERS FROM USING OUR SERVICES
We must protect our 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
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information stored in and transmitted through our computer systems and network,
which could adversely affect our ability to retain or attract customers, damage
our reputation and subject us to litigation. We have been in the past, and could
be in the future, subject to denial of service, vandalism and other attacks on
our systems by Internet hackers. Although we intend to continue to implement
security technology and establish operational procedures to prevent break-ins,
damage and failures, these security measures may fail. Our insurance coverage in
certain circumstances may be insufficient to cover losses that may result from
such events.
RISKS RELATED TO THIS OFFERING
THE COMMON STOCK SOLD IN THIS OFFERING WILL INCREASE THE SUPPLY OF OUR COMMON
STOCK ON THE PUBLIC MARKET, WHICH MAY CAUSE OUR STOCK PRICE TO DECLINE
The sale into the public market of the common stock to be sold in this
offering could materially adversely affect the market price of our common stock.
Most of the shares of our common stock are eligible for immediate and
unrestricted sale in the public market at any time. Once the registration
statement of which this prospectus forms a part is declared effective, all
shares of common stock to be sold in this offering will be eligible for
immediate and unrestricted resale into the public market. The presence of these
additional shares of common stock in the public market may further depress our
stock price.
WE MAY ISSUE STOCK AT A DISCOUNT TO THE CURRENT MARKET PRICE, WHICH WOULD DILUTE
OUR EXISTING STOCKHOLDERS
In order to raise the funds we need to execute our business plan and fund
operations generally, we may continue to issue stock at a discount to the
current market price. Transactions of that kind would result in dilution to our
existing stockholders.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are not
historical facts but rather are based on current expectations, estimates and
projections about our business and industry, our beliefs and assumptions. Words
such as "anticipates," "expects," "intends," "plans," "believes," "seeks,"
"estimates" and variations of these words and similar expressions are intended
to identify forward-looking statements. These statements are not guarantees of
future performance and are subject to risks, uncertainties and other factors,
some of which are beyond our control, are difficult to predict and could cause
actual results to differ materially from those expressed or forecasted in the
forward-looking statements. These risks and uncertainties include those
described in "Risk Factors" and elsewhere in this prospectus. Forward-looking
statements that were true at the time made may ultimately prove to be incorrect
or false. Readers are cautioned not to place undue reliance on forward-looking
statements, which reflect our management's view only as of the date of this
prospectus. Except as required by law, we undertake no obligation to update any
forward-looking statement, whether as a result of new information, future events
or otherwise.
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USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the common stock
by the selling stockholders. All proceeds will be received by the selling
stockholders. See "Selling Stockholders."
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq National Market under the symbol
KANA. The reported last sale price of our common stock on the Nasdaq National
Market on August 3, 2000 was $34.75. The following table sets forth the range of
high and low closing sale prices, adjusted to reflect the two-for-three reverse
stock split effective September 1999 and the two-for-one forward stock split
effective February 2000, as reported on the Nasdaq National Market for each
quarter since our initial public offering on September 21, 1999. At June 30,
2000, we had approximately 701 holders of record of our common stock and
93,162,339 shares outstanding.
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
--------------------
HIGH LOW
--------- ---------
<S> <C> <C>
Year Ended December 31, 1999
Third Quarter (commencing on September 22, 1999)........................ $ 26.13 $ 22.78
Fourth Quarter.......................................................... 122.50 24.03
Period Ending June 30, 2000
First Quarter........................................................... 175.50 66.00
Second Quarter.......................................................... 62.00 29.63
</TABLE>
DIVIDEND POLICY
We have not paid any cash dividends on our capital stock. We currently
intend to retain earnings to fund the development and growth of the business
and, therefore, we do not anticipate paying cash dividends in the foreseeable
future. In addition, our current credit facilities prohibit the payment of cash
or stock dividends on our capital stock without the lender's prior written
consent.
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SELECTED CONSOLIDATED FINANCIAL DATA
You should read the selected consolidated financial data set forth below
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements of Kana
Communications, Inc. and the notes to consolidated financial statements included
elsewhere in this prospectus.
Kana was incorporated in July 1996 but had no significant operations
until 1997. The consolidated statement of operations data for each of the years
in the 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 consolidated balance sheet data as of June 30, 2000 and the
consolidated statement of operations data for the six months ended June 30, 1999
and 2000 are derived from unaudited consolidated financial statements included
elsewhere in this prospectus, and include, in the opinion of management, all
adjustments consisting only of normal recurring adjustments that we consider
necessary for the fair presentation of our financial position and results of
operations for those periods. The diluted net loss per share computation
excludes potential shares of common stock (preferred stock, options to purchase
common stock and common stock subject to repurchase rights held by Kana), since
their effect would be antidilutive. See Note 1 of Notes to 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.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------- ---------------------
1997 1998 1999 1999 2000
--------- ---------- ----------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
License........................................... $ -- $ 2,014 $ 10,536 $ 3,030 $ 22,903
Service........................................... 617 333 3,528 797 13,270
--------- ---------- ----------- ----------- ---------
Total revenues.................................. 617 2,347 14,064 3,827 36,173
--------- ---------- ----------- ----------- ---------
Cost of revenues:
License........................................... -- 54 271 72 801
Service........................................... 253 666 6,610 1,349 14,804
--------- ---------- ----------- ----------- ---------
Total cost of revenues.......................... 253 720 6,881 1,421 15,605
--------- ---------- ----------- ----------- ---------
Gross profit (a)..................................... 364 1,627 7,183 2,406 20,568
--------- ---------- ----------- ----------- ---------
Operating expenses:
Sales and marketing............................... 512 5,504 21,199 6,659 32,548
Research and development.......................... 971 5,669 12,854 5,061 16,298
General and administrative........................ 378 1,826 5,018 1,811 5,582
Amortization of goodwill and indentifiable
intangibles..................................... -- -- -- -- 247,043
Amortization of stock-based compensation (a)...... 113 1,456 80,476 3,254 6,913
In process research and development............... -- -- -- -- 6,900
Acquisition related costs......................... -- -- 5,635 -- 6,564
--------- ---------- ----------- ----------- ---------
Total operating expenses........................ 1,974 14,455 125,182 16,785 321,848
--------- ---------- ----------- ----------- ---------
Operating loss....................................... (1,610) (12,828) (117,999) (14,379) (301,280)
Other income (expense), net.......................... 57 227 (744) (519) 1,891
--------- ---------- ----------- ----------- ---------
Net loss............................................. $ (1,553) $ (12,601) $ (118,743) $ (14,898) $(299,389)
========= ========== =========== =========== =========
Basic and diluted net loss per share................. $ (0.37) $ (2.01) $ (4.61) $ (2.51) $ (4.53)
========= ========== =========== =========== =========
Shares used in computing basic and diluted net loss
per share amounts................................. 4,152 6,258 25,772 5,944 66,030
========= ========== =========== =========== =========
</TABLE>
(a) AMORTIZATION OF STOCK-BASED COMPENSATION. In connection with the
granting of stock options to our employees, we recorded stock-based compensation
in the aggregate of approximately $102.0 million through June 30, 2000. 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.
20
<PAGE>
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>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- ---------------------
1997 1998 1999 1999 2000
--------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cost of service.................... $ 13 $ 143 $ 19,752 $ 799 $ 1,690
Sales and marketing................ 52 564 34,000 1,375 2,925
Research and development........... 31 438 19,864 803 1,699
General and administrative......... 17 311 6,860 277 599
--------- --------- ---------- --------- ---------
Total........................... $ 113 $ 1,456 $ 80,476 $ 3,254 $ 6,913
========= ========= ========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------- JUNE 30,
1997 1998 1999 2000
--------- ------------- ------------- ----------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
<S> <C> <C> <C> <C>
Cash, cash equivalents and short term investments.......... $ 5,594 $ 14,035 $ 53,217 $ 162,842
Goodwill and identifiable intangibles...................... - - - 3,510,792
Working capital............................................ 5,364 11,833 38,591 116,412
Total assets............................................... 6,158 16,876 70,229 3,741,444
Notes payable, less current portion........................ 51 726 412 262
Total stockholders' equity................................. 5,684 12,951 48,500 3,657,831
</TABLE>
--------------
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND THE
NOTES TO THOSE STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. PLEASE
SEE "RISK FACTORS" AND "FORWARD-LOOKING STATEMENTS" ELSEWHERE IN THIS
PROSPECTUS.
OVERVIEW
We were incorporated in July 1996 in California and were reincorporated
in Delaware in September 1999. We had no significant operations until 1997.
Through January 1998, we were a development stage enterprise and had no
revenues. Our operating activities during this period related primarily to
conducting research, developing our initial products, raising capital and
building our sales and marketing organization. In February 1998, we released the
first commercially available version of the Kana platform. To date, we have
derived substantially all of our revenues from licensing our software and
related services, and we have sold our products worldwide primarily through our
direct sales force.
On August 13, 1999, we completed a merger with Connectify, Inc. pursuant
to which Connectify became our wholly-owned subsidiary. Connectify develops,
markets and supports electronic direct marketing software for e-businesses.
Connectify's software enables e-businesses to profile and target potential and
existing customers and then deliver and track personalized e-mails to their
customers. By using electronic direct marketing software in this way,
e-businesses can build customer loyalty, increase the probability of repeat
transactions and reduce customer attrition. Connectify was based in San Mateo,
California, and had 31 employees as of the merger.
In connection with the merger, we issued approximately 6,982,542 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 we assumed in connection with the merger. The
merger was accounted for as a pooling of interests.
On December 3, 1999, we completed a merger with Business Evolution, Inc.
pursuant to which Business Evolution became our 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 realtime channels. Business Evolution's offerings, now called
Kana I-Mail and Kana Voice, let e-businesses engage their customers in a live
two-way dialog while they are browsing a Web site, helping them to conduct more
business and increase customer loyalty. Business Evolution was based in
Princeton, New Jersey, and had 66 employees as of the merger.
In connection with the acquisition of Business Evolution, 1,890,200
shares of our common stock were issued for all outstanding shares and warrants
of Business Evolution. This transaction was accounted for as a pooling of
interests.
On December 3, 1999, we completed a merger with netDialog, Inc. pursuant
to which netDialog became our wholly-owned subsidiary. netDialog provides
context-sensitive, self-service customer service software. netDialog'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.
In connection with the acquisition of netDialog, 1,120,286 shares of our
common stock were issued for all outstanding shares, warrants and convertible
notes of netDialog. This transaction was accounted for as a pooling of
interests.
On April 19, 2000, we completed a merger with Silknet Software, Inc under
which Silknet became our wholly-owned subsidiary. Silknet provides electronic
relationship management software, or eRM software, that allows companies to
offer marketing, sales, e-commerce and support services through a single Web
site interface
22
<PAGE>
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 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.
In connection with the Silknet merger, each share of Silknet common stock
outstanding immediately prior to the consummation of the merger was converted
into the right to receive 1.66 shares of our common stock and we assumed
Silknet's outstanding stock options and warrants based on the exchange ratio,
issuing approximately 29.2 million shares of our common stock and reserving 4.0
million shares of common stock for issuance upon the exercise of Silknet options
and warrants we assumed in connection with the merger. The transaction was
accounted for using the purchase method of accounting. In connection with the
merger, we have recorded goodwill and intangible assets of approximately $3.8
billion, which will be amortized over a period of three years.
We derive our revenues from the sale of software product licenses and
from professional services including implementation, consulting, 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,
consulting and hosting services. Revenue from maintenance contracts is
recognized ratably over the term of the contract. Revenue from implementation,
consulting and hosting services is recognized as the services are provided.
Revenue under arrangements where multiple products or services are sold together
is allocated to each element based on its relative fair value.
Our cost of license revenue includes royalties due to third parties for
technology integrated into some of our products, the cost of product
documentation, the cost of the media used to deliver our products and shipping
costs. Cost of service revenue consists primarily of personnel-related expenses,
travel costs, equipment costs and overhead associated with delivering
professional services to our customers.
Our operating expenses are classified into three general categories:
sales and marketing, research and development, and general and administrative.
We classify all charges to these operating expense categories based on the
nature of the expenditures. Although each category includes expenses that are
unique to the category, some expenditures, such as compensation, employee
benefits, recruiting costs, equipment costs, travel and entertainment costs,
facilities costs and third-party professional services fees, occur in each of
these categories.
We allocate the total costs for information services and facilities to
each functional area that uses the information services and facilities based on
its relative headcount. These allocated costs include rent and other
facility-related costs, communication charges and depreciation expense for
furniture and equipment.
In connection with the granting of stock options to our employees, we
recorded unearned stock-based compensation totaling approximately $102.0 million
through June 30, 2000. This amount represents the total difference between the
exercise prices of stock options and the deemed fair market 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. We recorded
approximately $6.9 million of unearned stock-based compensation for the six
months ended June 30, 2000, approximately $93.2 million of unearned stock-based
compensation for the year ended December 31, 1999 and approximately $3.0 million
of unearned stock-based compensation for the year ended December 31, 1998. The
amortization of stock-based compensation is classified as a separate component
of operating expenses in our consolidated statements of operations.
Since the beginning of 1997, we have incurred substantial costs to
develop our products and to recruit, train and compensate personnel for our
engineering, sales, marketing, client services and administration departments.
As a result, we have incurred substantial losses since inception and, for the
six months ended June 30, 2000, incurred a net loss of $299.4 million. As of
June 30, 2000, we had an accumulated deficit of $432.0 million. We believe our
future success is contingent upon providing superior customer service,
increasing our customer base and developing our products. We intend to invest
heavily in sales, marketing, research and development, client services and
23
<PAGE>
infrastructure to support these activities. We therefore expect to continue to
incur substantial operating losses for the foreseeable future.
We had 889 full-time employees as of June 30, 2000 and intend to hire a
significant number of employees in the future. This expansion places significant
demands on our management and operational resources. To manage this rapid
growth, we must invest in and implement scaleable operational systems,
procedures and controls. We expect future expansion to continue to challenge our
ability to hire, train, manage and retain employees.
We believe that our prospects must be considered in light of the risks,
expenses and difficulties frequently experienced by companies in early stages of
development, particularly companies in new and rapidly evolving markets like
ours. Although we have experienced significant revenue growth recently, this
trend may not continue. Furthermore, we may not achieve or maintain
profitability in the future.
RESULTS OF OPERATIONS OF KANA
The following table sets forth the results of operations for periods
indicated expressed as a percentage of total revenues.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------- --------------------
1997 1998 1999 1999 2000
-------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
License............................................... --% 85.8% 74.9% 79.2% 63.3%
Service............................................... 100.0 14.2 25.1 20.8 36.7
-------- -------- --------- ---------- --------
Total revenues.................................... 100.0 100.0 100.0 100.0 100.0
-------- -------- --------- ---------- --------
Cost of revenues:
License............................................... -- 2.3 1.9 1.9 2.2
Service............................................... 41.0 28.4 47.0 35.2 40.9
-------- -------- --------- ---------- --------
Total cost of revenues............................ 41.0 30.7 48.9 37.1 43.1
-------- -------- --------- ---------- --------
Gross profit............................................... 59.0 69.3 51.1 62.9 56.9
Operating expenses:
Sales and marketing................................... 83.0 234.5 150.7 174.0 90.0
Research and development.............................. 157.4 241.6 91.4 132.2 45.0
General and administrative............................ 61.3 77.8 35.7 47.4 15.4
Amortization of goodwill and indentifiable
intangibles ........................................ -- -- -- -- 683.0
Amortization of stock-based compensation.............. 18.3 62.0 572.2 85.0 19.1
In process research and development................... -- -- -- -- 19.1
Acquisition related costs............................. -- -- 40.1 -- 18.1
-------- -------- --------- ---------- --------
Total operating expenses.......................... 320.0 615.9 890.1 438.6 889.7
-------- -------- --------- ---------- --------
Operating loss........................................ (261.0) (546.6) (839.0) (375.7) (832.8)
-------- -------- --------- ---------- --------
Other income (expense), net................................ 9.2 9.7 (5.3) (13.6) 5.2
-------- -------- --------- ---------- --------
Net loss.......................................... (251.8)% (536.9)% (844.3)% (389.3)% (827.6)%
======== ======== ========= ========== ========
</TABLE>
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUES
Total revenues increased to $36.2 million for the six months ended June
30, 2000 from $3.8 million for the six months ended June 30, 1999. License
revenue increased to $22.9 million for the six months ended June 30, 2000 from
$3.0 million for the six months ended June 30, 1999. The increase in license
revenue was due primarily to increased market acceptance of our products,
expansion of our product line and increased sales generated by our expanded
sales force. Total sales personnel increased to 219 people at June 30, 2000 from
39 people at June 30, 1999. Much of this expansion and related increases is
attributable to our acquisition of Silknet which was completed on April 19,
2000. Silknet's revenues are included in our six months ended June 30, 2000 from
the merger effective date.
24
<PAGE>
License revenue represented 63% of total revenues for the six months
ended June 30, 2000 and 79% of total revenues for the six months ended June 30,
1999.
Service revenue increased to $13.3 million for the six months ended June
30, 2000 from $797,000 for the six months ended June 30, 1999. This increase in
service revenue was due primarily to the increased licensing activity described
above, resulting in increased revenue from customer implementations, system
integration projects, maintenance contracts and hosted service. Much of this
expansion and related increases is attributable to our acquisition of Silknet
which was completed on April 19, 2000. Silknet's revenues are included in our
six months ended June 30, 2000 from the merger effective date.
Service revenue represented 37% of total revenues for the six months
ended June 30, 2000 and 21% of total revenues for the six months ended June 30,
1999. Revenue from international sales for the six months ended June 30, 2000
was 11%, and 9% for the six months ended June 30, 1999.
COST OF REVENUES
Cost of license revenue includes third parties' software royalties,
product packaging, documentation and production. Cost of license revenue
increased to $801,000 for the six months ended June 30, 2000 from $72,000 for
the six months ended June 30, 1999. The absolute dollar increase in the cost of
license revenue was due principally to royalties. As a percentage of license
revenue, cost of license revenue was 3% for the six months ended June 30, 2000
and 2% for the six months ended June 30, 1999. We anticipate that the cost of
license revenue will increase in absolute dollars as we license additional
technologies. Cost of license revenue as a percentage 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 service revenue consists primarily of salaries and related
expenses for our customer support, implementations and training services
organization and allocation of facility costs and system costs incurred in
providing customer support. Cost of service revenue increased to $14.8 million
for the six months ended June 30, 2000 from $1.3 million for the six months
ended June 30, 1999. The growth in cost of service revenue was attributable
primarily to an increase in personnel and related costs associated with an
increased number of customers and recruiting fees. Much of this growth and
related increases is attributable to our acquisition of Silknet. Silknet's
expenses are included in our six month results for the period April 19, 2000 to
June 30, 2000. Cost of service revenue as a percent of service revenue was 112%
for the six months ended June 30, 2000 and 169% for the six months ended June
30,1999. The decrease in cost of service revenue as a percent of service revenue
was due primarily to the increase in service revenue over the period. We
anticipate that cost of service revenue will increase in absolute dollars, but
will decrease as a percentage of service revenue.
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 to $32.5
million for the six months ended June 30, 2000 from $6.7 million for the six
months ended June 30, 1999. This increase was attributable primarily to the
addition of sales and marketing personnel, an increase in sales commissions
associated with increased revenues and higher marketing costs due to expanded
advertising and promotional activities. Much of this growth and related
increases is attributable to our acquisition of Silknet. Silknet's expenses are
included in our six month results for the period April 19, 2000 to June 30,
2000. As a percentage of total revenues, sales and marketing expenses were 90%
for the six months ended June 30, 2000 and 174% for the six months ended June
30, 1999. This decrease in sales and marketing expense as a percent of total
revenues was due primarily to the increase in total revenues over the period. We
expect to continue to increase our marketing and promotional efforts and hire
additional sales personnel. We further expect our sales and marketing expenses
to increase due to our recent mergers. Accordingly, we anticipate that sales and
marketing expenses will increase in absolute dollars, but will vary as a
percentage of total revenues from period to period.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of compensation and related costs for engineering employees and
contractors responsible for new product development and for enhancement of
existing products and quality assurance activities. Research and development
expenses increased to $16.3 million for the six months ended June 30, 2000 from
$5.1 million for the six months ended June 30, 1999.
25
<PAGE>
This increase was attributable primarily to the addition of personnel associated
with product development and related benefits, consulting and recruiting costs.
Much of this growth and related increases is attributable to our acquisition of
Silknet. Silknet's expenses are included in our six month results for the period
April 19, 2000 to June 30, 2000. As a percentage of total revenues, research and
development expenses were 45% for the six months ended June 30, 2000 and 132%
for the six months ended June 30, 1999. This decrease in research and
development expense as a percent of total revenues was due primarily to the
increase in total revenues over the period. We expect to continue to make
substantial investments in research and development and anticipate that research
and development expenses will continue to increase in absolute dollars, but will
vary as a percentage of total revenues from period to period. We further expect
our research and development expenses to increase due to our recent mergers.
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 to $5.6 million for the six months ended June 30, 2000 from
$1.8 million for the six months ended June 30, 1999, due primarily to increased
personnel, legal and professional fees, facilities and other related costs
necessary to support our growth. Much of this growth and related increases is
attributable to our acquisition of Silknet. Silknet's expenses are included in
our six month results for the period April 19, 2000 to June 30, 2000. As a
percentage of total revenues, general and administrative expenses were 15% for
the six months ended June 30, 2000 and 47% for the six months ended June 30,
1999. This decrease in general and administrative expenses as a percent of total
revenues was due primarily to the increase in total revenues over the period. We
expect that general and administrative expenses will increase in absolute
dollars as we add personnel and incur additional costs related to the
anticipated growth of our business and operation as a public company. However,
we expect that these expenses will vary as a percentage of total revenues from
period to period.
AMORTIZATION OF GOODWILL AND IDENTIFIABLE INTANGIBLES. On April 19, 2000,
Kana finalized its merger with Silknet. As a result of the merger, $3.8 billion
was allocated to goodwill and identifiable intangibles. This amount is being
amortized on a straight-line basis over a period of three years from the date of
acquisition. For the six months ended June 30, 2000, we recorded $247.0 million
in amortization.
AMORTIZATION OF STOCK-BASED COMPENSATION. In connection with the granting
of stock options to our employees, we recorded stock-based compensation in the
aggregate of approximately $102.0 million through June 30, 2000. 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>
SIX MONTHS
ENDED JUNE 30,
-------------------
1999 2000
--------- --------
<S> <C> <C>
Cost of service............................................................................... $ 799 $ 1,690
Sales and marketing........................................................................... 1,375 2,925
Research and development...................................................................... 803 1,699
General and administrative.................................................................... 277 599
--------- --------
Total.................................................................................... $ 3,254 $ 6,913
========= ========
</TABLE>
IN PROCESS RESEARCH AND DEVELOPMENT. In connection with the merger of
Silknet, net intangibles of $6.9 million were allocated to in process research
and development. This intangible had not reached technological feasibility and,
in management's opinion, had no probable alternative future use. Thus, the
associated amount was expensed.
ACQUISITION RELATED COSTS. In connection with the Silknet merger, we
recorded $6.6 million of transaction costs and merger-related integration
expenses. These amounts consisted primarily of merger-related advertising and
announcements of $4.5 million and duplicate facility costs of $1.0 million.
26
<PAGE>
OTHER INCOME (EXPENSE), NET. Other income (expense), net consists
primarily of interest earned on cash and short-term investments, offset by
interest expense related to a note. Other income (expense), net was $2.0 million
for the six months ended June 30, 2000 and $(519,000) for the six months ended
June 30, 1999. The increase was due primarily to increased interest income
earned on higher cash balances offset by interest expense.
PROVISION FOR INCOME TAXES. We have incurred operating losses for all
periods from inception through June 30, 2000. We have recorded a provision for
income taxes for the minimum tax provisions. We have recorded a valuation
allowance for the full amount of our gross deferred tax assets, as the future
realization of the tax benefit is not currently likely.
NET LOSS. Our net loss increased to $299.4 million for the six months
ended June 30, 2000 from $14.9 million for the six months ended June 30, 1999.
We have experienced substantial costs related to our recent acquisition of
Silknet, and substantial increases in our expenditures since our inception
consistent with growth in our operations and personnel. We anticipate that our
expenditures will continue to increase in the future. Although our revenue has
grown in recent quarters, we cannot be certain that we can sustain this growth
or that we will generate sufficient revenue for profitability.
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
REVENUES
Total revenues increased by 500% to $14.1 million for the year ended
December 31, 1999 from $2.3 million for the year ended December 31, 1998,
primarily as a result of increased license revenue. License revenues increased
by 423% to $10.5 million for the year ended December 31, 1999 from $2.0 million
for 1998. This increase in license revenue was due primarily to increased market
acceptance of our products, expansion of our product line and increased sales
generated by our expanded sales force. Total headcount in our sales department
increased to 93 people at December 31, 1999 from 20 people at December 31, 1998.
License revenue represented 75% of total revenues for the year ended December
31, 1999 and 86% of total revenues for 1998.
Service revenues increased by 960% to $3.5 million for the year ended
December 31, 1999 from $333,000 for 1998. Service revenue increased primarily
due to increased licensing activity, resulting in increased revenue from
maintenance contracts, customer implementations and hosted service. Service
revenue represented 25% of total revenues for the year ended December 31, 1999
and 14% of total revenues for 1998.
Total revenues increased by 280% to $2.3 million for the year ended
December 31, 1998 from $617,000 for 1997, primarily because we began recognizing
license revenues in February 1998. License revenue represented 86% of total
revenues for the year ended December 31, 1998. No license revenues were
recognized in 1997.
Service revenues decreased by 46% to $333,000 for the year ended December
31, 1998 from $617,000 for 1997. This decrease in service revenues was due
primarily to the completion of a special consulting project. Service revenue
represented 14% of total revenues for the year ended December 31, 1998 and 100%
of total revenues for the year ended December 31, 1997.
Revenues from international sales for the years ended December 31, 1999,
1998 and 1997 were less than 10% of total revenues.
COST OF REVENUES
Total cost of revenues increased by 856% to $6.9 million in 1999 from
$720,000 in 1998. The growth in cost of revenues was attributable primarily to
an increase in cost of service revenues. Cost of license revenues increased by
402% to $271,000 in 1999 from $54,000 in 1998. The growth in cost of license
revenues was due primarily to increased license revenues. As a percentage of
license revenues, cost of license revenues was 3% in 1999 and 1998.
Cost of service revenues increased by 893% to $6.6 million in 1999 from
$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 recruiting and travel expenses as well as facility
expenses and system costs. As a percentage of service revenues, cost of service
revenues was 187% in 1999 and 200% in 1998.
27
<PAGE>
Total cost of revenues increased by 185% to $720,000 in 1998 from
$253,000 in 1997, primarily due to increased cost of service revenues. Cost of
license revenues increased to $54,000 in 1998 from zero in 1997. 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 3% in 1998 and zero
in 1997.
Cost of service revenues increased by 163% to $666,000 for the year ended
December 31, 1998 from $253,000 in 1997. 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. As a
percent of service revenues, cost of service revenues was 200% in 1998 and 41%
in 1997.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses increased by 285% to
$21.2 million for the year ended December 31, 1999 from $5.5 million for the
year ended December 31, 1998. 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 151% for the
year ended December 31, 1999 and 235% for the year ended December 31, 1998. 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.
Sales and marketing expenses were $5.5 million for the year ended
December 31,1998 and $512,000 for 1997. 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 235% in
1998 and 83% in 1997.
RESEARCH AND DEVELOPMENT. Research and development expenses increased by
127% to $12.9 million for the year ended December 31, 1999 from $5.7 million for
the year ended December 31, 1998. 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 91% for the year ended
December 31, 1999 and 242% for the year ended December 31, 1998. 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.
Research and development expenses increased by 484% to $5.7 million for
the year ended December 31,1998 from $971,000 for 1997. 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 242% in 1998 and 157% in 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
by 175% to $5.0 million for the year ended December 31, 1999 from $1.8 million
for the year ended December 31, 1998, due primarily to increased personnel,
consultants, facilities expenses and outside services necessary to support our
growth. As a percentage of total revenues, general and administrative expenses
were 36% for the year ended December 31, 1999 and 78% for 1998. This decrease in
general and administrative expenses as a percent of total revenues from 1999 to
1998 was due primarily to the proportionately greater increase in total revenues
than general and administrative expenses over the period.
General and administrative expenses increased by 383% to $1.8 million for
the year ended December 31, 1998 from $378,000 for the year ended December 31,
1997. The increase was due primarily to the addition of management and financial
personnel necessary to support our growth. As a percentage of total revenues,
general and administrative expenses were 78% in 1998 and 61% in 1997.
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AMORTIZATION OF STOCK-BASED COMPENSATION. The amortization of stock-based
compensation by operating expense is detailed as follows (in thousands):
YEARS ENDED DECEMBER 31,
--------------------------
1997 1998 1999
------ -------- ---------
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
====== ======== =========
ACQUISITION RELATED COSTS. In connection with the merger with Connectify,
we 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, we had $30,000 remaining in accrued merger
expenses, which we expect to pay by the first quarter of 2000.
In connection with the mergers with Business Evolution and netDialog, we
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, we had $3.1
million remaining in accrued acquisition related costs, which we expect to pay
during 2000.
OTHER INCOME (EXPENSE), NET. Other income (expense), net 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), net decreased by 428% to an expense of $744,000 for the year
ended December 31, 1999 from income of $227,000 for 1998. The decrease in other
income (expense), net 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% to $227,000 for the year ended
December 31, 1998 from $57,000 for 1997. The increase was due primarily to an
increase in interest income earned on higher balances of cash and short-term
investments primarily from our Series C preferred stock financing in August and
September 1998.
PROVISION FOR INCOME TAXES. We have incurred operating losses for all
periods from inception through December 31, 1999, and therefore have not
recorded a provision for income taxes. We have recorded a valuation allowance
for the full amount of our gross deferred tax assets, as the future realization
of the tax benefit is not currently likely.
As of December 31, 1999, we 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 ownership may limit the amount of net operating loss
carryforwards that could be utilized annually in the future to offset taxable
income.
NET LOSS. Our net loss was $118.7 million, $12.6 million and $1.6 million
for the years ended December 31, 1999, 1998 and 1997, respectively. We have
experienced substantial increases in our expenditures since inception consistent
with growth in our operations and personnel. In addition, stock based
compensation charges have contributed to the significant increase in net loss
during 1999. We anticipate that our expenditures will continue to increase in
the future. Although our revenue has grown in recent quarters, we cannot be
certain that we can sustain this growth or that we will generate sufficient
revenue to attain profitability.
LIQUIDITY AND CAPITAL RESOURCES
In June 2000, we completed the private placement of 2,500,000 shares of
our common stock, raising net proceeds of approximately $120.0 million. In
September 1999, we completed the initial public offering of our common stock and
realized net proceeds from the offering of approximately $51.1 million. Prior to
the initial public offering, we had financed our 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.
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Our operating activities used $42.2 million of cash for the six months
ended June 30, 2000 and $25.7 million of cash for the year ended December 31,
1999. Such uses are primarily attributable to net losses experienced during
these periods as we invested in the development of our products, expanded our
sales force and expanded our infrastructure to support our growth and increase
in sales, leading to an increase in accounts receivable. Our operating
activities used $8.7 million of cash for the six months ended June 30, 1999 and
$10.1 million of cash for the year ended December 31, 1998, which is primarily
attributable to net losses experienced during this period.
Our investing activities consisted primarily of the acquisition of
Silknet, net sales of short-term investments, purchases of computer equipment,
furniture, fixtures and leasehold improvements to support our growing number of
employees, and provided $62.8 million of cash for the six months ended June 30,
2000 and used $44.4 million of cash for the year ended December 31, 1999. Our
investing activities used $3.4 million of cash for the six months ended June 30,
1999 and $1.4 million of cash for the year ended December 31, 1998, which is
primarily due to purchases of short-term investments and computer equipment,
furniture, fixtures and leasehold improvements.
Our financing activities provided $120.7 million in cash for the six
months ended June 30, 2000, primarily due to proceeds from the private
placement. For the year ended December 31, 1999, our financing activities
generated $75.0 million in cash primarily from the net proceeds of our initial
public offering, net proceeds from private sales of preferred and common stock,
and net proceeds from debt arrangements. For the six months ended June 30, 1999,
our financing activities generated $4.7 million in cash, primarily from the net
proceeds from bank borrowings. For the year ended December 31, 1998, our
financing activities generated $20.0 million in cash primarily from the net
proceeds from private sales of preferred stock.
At June 30, 2000, we had cash and cash equivalents aggregating $159.8
million and short-term investments totaling $3.1 million. We have a line of
credit totaling $3.0 million, which is secured by all of our assets, bears
interest at the bank's prime rate (9.5% as of June 30, 2000), and is in the
process of being extended at June 30, 2000. Our total bank debt was $1.7 million
at June 30, 2000.
Our capital requirements depend on numerous factors. We expect to devote
substantial resources to continue our research and development efforts, expand
our sales, support, marketing and product development organizations, establish
additional facilities worldwide and build the infrastructure necessary to
support our growth. We have experienced substantial increases in our
expenditures since our inception consistent with growth in our operations and
personnel, and we anticipate that our expenditures will continue to increase in
the future. We believe that the net proceeds from the sale of the common stock
in our initial public offering, the private placement of our common stock and
collections on our accounts receivable will be sufficient to meet our working
capital and operating resource expenditure requirements for the next 18 months.
However, we 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, we may, from time to time, evaluate
potential acquisitions of other businesses, products and technologies. In order
to consummate potential acquisitions, we may issue additional securities or need
additional equity or debt financing and any financing may be dilutive to
existing investors.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 133 "Accounting for Derivative Instruments
and Hedging Activities." SFAS 133 establishes accounting and reporting standards
for derivative instruments and for hedging activities. This statement becomes
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
In June 1999, the FASB issued Statement of Financial Accounting Standard No. 137
"Accounting for Derivative Instruments - Deferral of the Effect Date of SFAS
Statement No. 133." SFAS 137 defers the effective date of SFAS 133 until June
15, 2000. We will adopt SFAS 133 in 2001. We expect the adoption of SFAS 133
will not affect results of our operations, financial position or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB
101 provides guidance for revenue recognition under certain circumstances. SAB
101 is effective in the quarter beginning October 1, 2000. We do not believe SAB
101 will have a material impact on our results of operations, financial position
or cash flows.
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In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25." This interpretation has
provisions that are effective on staggered dates, some of which began after
December 15, 1998 and others that become effective after June 30, 2000. The
adoption of this interpretation has not and will not have a material impact on
our results of operations, financial position or cash flows.
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BUSINESS
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 PROSPECTUS.
OVERVIEW
We are a leading provider of integrated e-business solutions that deliver
a Web-architected e-business platform and a comprehensive suite of
customer-facing applications for marketing, sales and service. We define
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." Our
products and services allow companies to offer customers, business partners and
businesses alike, the ability to collaborate with the company and each other to
efficiently resolve their problems and to receive timely, easy to access,
relevant information. By using our software products and services, e-businesses
can, among other things:
o offer a Web-based point of entry (or portals) for customers, business
partners and the enterprise to give all relevant parties within an
e-business their own global view of their communications and
relationships;
o deliver a managed and integrated set of communication channels, such
as e-mail, Web, chat, instant messaging, voice over the Internet,
phone and person-to-person;
o provide a broad range of interaction applications that empower
customers and partners to choose where, when, and how to interact
with the company. These applications offer four methods of operation:
assisted service, virtual assisted service, self-service and
proactive service;
o provide a suite of e-business and communications applications that
integrate marketing, sales and service functions, helping
e-businesses provide complete customer lifecycle solutions that
engage, acquire and grow the customer base; and
o establish an open, scaleable platform that can be easily deployed and
integrated into existing applications and data sources.
As a result, we enable e-businesses to increase sales, reduce costs and
build greater customer loyalty. Our software, which consists of applications
built upon our technology platform, is designed with a Web-based architecture.
By Web-based, we mean that our software design is based on the unique
characteristics of Internet technologies and uses Internet industry open
standards, such as the Java programming language, Hypertext Mark-Up Language
(HTML), and Extensible Mark-up Language (XML). This Web-based architecture
enhances the scalability of our software and enables the rapid integration of
our platform with other e-business and legacy application and data systems. By
integrating with databases and other enterprise systems, our technology platform
functions as the software infrastructure for rapidly deploying and changing an
e-business solution.
We offer our products on both a license and a hosted basis. We also offer
implementation, consulting and maintenance services to support our customers.
Kana Online, our hosted application service, allows e-businesses to rapidly and
efficiently deploy our integrated e-business solutions while minimizing their
up-front investment in hardware, software and services.
Our objective is to become the leading provider of mission critical
Web-architected communications and relationship management software products and
services for e-businesses. To achieve our objective, we intend to expand our
products to enter new markets, increase our global distribution capabilities and
alliances, leverage our hosted application service and continue to emphasize
customer advocacy and satisfaction.
Our customers range from Global 2000 companies pursuing an e-business
strategy to rapidly growing Internet companies. The following is a
representative list of our customers:
o eBay o eToys o E*Trade
o American Airlines o Ameritrade o Kodak
o The Gap o barnesandnoble.com o Sprint PCS
No customer accounted for 10% or more of our total revenues in 1998 or
1999.
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RECENT DEVELOPMENTS
On April 19, 2000, we completed a merger with Silknet Software, Inc.
under which Silknet became our wholly-owned subsidiary. Silknet provides
electronic relationship management software, or eRM 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 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.
In connection with the merger, each share of Silknet common stock
outstanding immediately prior to the completion of the Merger was converted into
the right to receive 1.66 shares of our common stock and we assumed Silknet's
outstanding stock options and warrants based on the exchange ratio, issuing
approximately 29.2 million shares of our common stock and assuming options and
warrants to acquire approximately 4.0 million shares of Silknet common stock.
The transaction is intended to qualify as a tax-free reorganization under the
Internal Revenue Code of 1986, as amended, and was accounted for using the
purchase method of accounting.
INDUSTRY BACKGROUND
With the widespread adoption of the Internet, new businesses can enter
and disrupt established markets virtually overnight. In this environment, most
companies and customers have a variety of purchasing options and are only a
click away from being able to defect to the competition. Whether a company is a
Global 2000 enterprise, or a newly established Internet-based business, the
ability to provide a high quality interaction and experience, and thus to
establish long-term relationships and loyalty, is critical to business survival.
Until recently, the relationships with customers and partners were based
on interactions in-person, by telephone or by letter. In order to respond to
these types of 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 highly effective in terms of conversion and response
rates. With the advent of the Internet and the proliferation of e-mail, the
manner through which businesses communicate has undergone a fundamental change:
customers and partners are now demanding that businesses be accessible anytime
and through a variety of channels, including the Web, e-mail, telephone and
storefront.
Given the emerging shift to online customer and partner interaction,
traditional solutions are not addressing the fundamental changes required by
e-businesses. Datamonitor reported that U.S. online businesses lost over $6.1
billion in potential e-commerce sales in 1999 alone due to lack of customer
service at their Web sites. And as of October 1999, Gartner Group estimated that
more than 90 percent of enterprises are not adequately prepared to handle online
customer service inquiries.
There can be negative consequences for a business if it fails to manage
customer interactions effectively. These consequences can include loss of
customers, increased difficulty in acquiring new customers and a deterioration
of competitive position. In a recent Harris Interactive study, leading Web sites
were consistently found to generate more revenue from the customers that sought
and received service with the company over those customers who did not. In
addition, businesses face higher operating and information technology costs
without efficient and reliable management of customer and partner interactions.
Perhaps most significantly, businesses may lose the opportunity to take
advantage of new revenue-generating opportunities by failing to capitalize upon
the wealth of information conveyed through these communications. While
addressing these challenges, businesses must also be able to deploy a customer
communications solution across multiple departments, to integrate the solution
with existing business and legacy systems and databases and to scale the
solution as volumes grow.
As a result, businesses need to build an infrastructure so that
customers, the enterprise and partners can interact effectively and efficiently.
A business will then be able to enhance the customer experience by not only
better servicing the customer, but by also providing communications mechanisms
so its partners and the enterprise can better collaborate with each other.
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We believe that in order for companies to compete effectively in today's
rapidly changing business environment, they must differentiate themselves by
providing the highest quality experience for their customers and partners. To
accomplish this, businesses require an integrated set of e-business solutions
that:
o allow the customer, the partner and the enterprise each a global view
of its communications and relationships with the other parties;
o empower customers to choose how, when and where to interact with the
e-business;
o establish an open, scaleable platform that can be easily deployed and
integrated into existing applications and data sources;
o broaden the opportunities for revenue generation through the
extraction, analysis and management of valuable information contained
within online interactions; and
o reduce operating and information technology costs while integrating
with existing e-business and legacy systems.
THE KANA SOLUTION
Our products and services enable e-businesses to manage their e-business
interactions and relationships in order to generate additional revenue
opportunities, enhance customer and partner loyalty, and reduce operating and
information technology costs. For those companies unwilling or unable to
implement the solution themselves, Kana Online, our Web-based service, offers
certain of our solution on a hosted basis.
We believe our products and services provide the following business
benefits:
INCREASED REVENUE OPPORTUNITIES. Our software enables e-businesses to
track and manage customer and business partner interactions and integrate the
resulting 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 convert marketing interactions into
sales by attaching highly personalized and targeted communications in electronic
direct marketing campaigns, decrease shopping cart abandonment with proactive
customer service and optimize the abilities of the best sales representative by
automating those skills online to create highly sophisticated automated sales
assistants.
ENHANCED CUSTOMER RELATIONSHIPS. Our products and services were developed
to meet the needs of both the customer and the e-business. Through personalized,
Web-based points of entry for the customer and business partners, we provide a
complete overview of all facets of the customer's and partner's relationship
with the e-business. This unique viewpoint allows the customer to interact with
the e-business on the customer's terms, whether shopping, managing his or her
account or learning about products and services. This ability to collaborate
seamlessly across the enterprise facilitates the generation of comprehensive,
accurate and timely interactions.
Our software also provides e-businesses with the ability to track and
manage online customer interactions. E-businesses can analyze and report on this
information and launch customized initiatives in response to the gathered
information. We believe that the resulting improvements in the overall customer
experience will enable e-businesses to significantly enhance customer retention
and loyalty.
REDUCED OPERATING AND INFORMATION TECHNOLOGY COSTS. Our products and
services reduce the operating and information technology costs of e-businesses
by increasing the efficiency and effectiveness of online customer and partner
interactions and transactions. For instance, an e-business using our software
will be able to integrate Web operations with other business computing systems,
such as fulfillment, call center and supply chain systems, thereby increasing
efficiency and productivity, and reducing costs. Costs may be further reduced as
a result of integrating expensive telephony-based environments with the more
cost-effective channels of e-mail and the Web.
Our products use a combination of automation, business rules, artificial
intelligence, workflow, analytics and advanced messaging analysis technologies
to allow e-businesses to deliver information and respond to customer requests
rapidly and accurately. Our open, scaleable Web-based architecture is designed
to be integrated readily with e-businesses' legacy systems, extending these
systems' useful lives and allowing e-businesses to avoid expensive upgrades. In
addition, our hosted, Web-based service, Kana Online, allows e-businesses to
utilize certain of our product while minimizing information technology
infrastructure costs.
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In addition to these business benefits, our products provide
e-businesses:
o WEB-ARCHITECTED PLATFORM. Our software is developed upon a Web-based
architecture that supports multiple hardware and software platforms
and browser-based interfaces. Our software runs on multiple hardware
platforms simultaneously in order to enhance scaleability and
increase reliability. In addition, our open, standards-based software
is readily deployable and integrates rapidly with existing
applications and data sources.
o PROVEN SCALABILITY AND RELIABILITY. We offer an open and scalable
platform that allows rapid configuration and deployment and allows
modular growth to handle large numbers of transactions and concurrent
users.
o OPEN AND STANDARDS-BASED. Our 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:
o existing enterprise software environments;
o e-mail, telephony, billing and ERP systems;
o product and other databases; and
o a broad range of other information systems.
The ability to share data across these multiple applications provides
e-businesses with a powerful tool for capitalizing on their customer
interactions.
OPTIMIZE KEY BUSINESS PROCESSES. Our software is designed to optimize
workflow, information and communications associated with e-business
communications. Our software can be configured to trigger not only a message
delivery and response but also other actions within an organization. For
example, our software can alert an e-business' engineering department if the
e-business receives repeat inquiries about a software defect or the human
resources department if a resume is attached to a communication.
ENHANCED PRODUCTIVITY. Our software is designed to automate key functions
of e-business communications process while simultaneously providing high-quality
customer communications. Users can customize the applications and access an
integrated knowledge base of corporate information to handle increased message
volume. Our software also provides one-click access to customer histories and
all previous communications so that users can 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.
THE KANA STRATEGY
Our objective is to become the leading provider of Web-architected
communications and relationship management products and services for
e-businesses. The key elements of our strategy include:
EXTEND MARKET LEADERSHIP POSITION. Our objective is to extend our
position as a leader in the e-business software market by delivering a broad
range of world-class Web-architected e-business and interaction applications
with a modular, flexible and scaleable platform. We intend to take advantage of
our technological leadership, strategic customer base and distribution
capabilities to extend our current position as a market leader. Moreover, we
believe that, by broadening our suite of products and services that enable
companies to interact with their customers in the most cost-effective and
efficient ways possible, we can expand our market opportunities and solidify our
position as a leading provider of comprehensive e-business products and
services.
EXPAND OUR SUITE OF PRODUCTS TO ENTER NEW MARKETS. We intend to expand
our suite of products to include additional e-commerce and business applications
in order to enter new markets. In developing these applications, we are working
with our customers to identify the strategic and functional needs of
e-businesses that operate in the rapidly changing Internet environment. Our
focus is to develop applications that address those needs and integrate them
seamlessly with our existing platform to help e-businesses establish broader and
deeper customer relationships. We believe these applications will be integrated
to merge e-commerce transactions with customer communications to create further
revenue opportunities.
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INCREASE DISTRIBUTION CAPABILITIES. We intend to broaden and increase our
distribution capabilities worldwide by combining the efforts of our direct sales
force and our alliances with leading e-business service and infrastructure
providers, such as Andersen Consulting , Convergys Corporation , Davox, KPMG
Consulting, MCI Worldcom and Siemens. By expanding existing alliances and
aggressively developing new ones, we can leverage others' sales, marketing and
deployment capabilities to help establish us as a worldwide provider of
e-business products and services to manage online customer communications.
ESTABLISH TECHNOLOGY LEADERSHIP WITH OPEN, SCALEABLE WEB-BASED
ARCHITECTURE. Our objective is to establish our architecture as the leading
technology platform and market standard for e-business products and services. To
deliver the high performance required in the complex and rapidly changing
e-business environment, we have designed our products to be highly scaleable,
easily customizable and readily able to integrate with existing enterprise
applications and systems. Our Web-based platform enables a universal customer
history, allowing the enterprise to view all interactions from one location,
allows the enterprise to scale to millions of daily interactions and allows for
workflow and business rule adjustments in real time without disabling the entire
system.
In addition, because our 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 our platform. We intend to
continue to develop and enhance our advanced architecture to efficiently handle
the growing volume of online customer communications while providing increased
functionality across e-businesses.
LEVERAGE HOSTED WEB-BASED APPLICATION SERVICE. We offer Kana Online, our
hosted Web-based application service, for e-businesses that want to deploy an
online customer interaction system rapidly and efficiently while minimizing
their up-front investment in hardware, software and services. Kana Online allows
us to manage important customer data and monitor realtime, hands-on customer
feedback on our software. We intend to continue developing this service because
this service allows us to target additional markets that are complementary to
our software-based solution, provide us with recurring revenue streams and may,
in the future, allow us to enter into new business opportunities. To date,
revenues received from Kana Online have not been significant. Although we intend
to develop and support this service, as a result of many factors, including the
relative success of sales of our products and our services, we cannot accurately
predict when revenues from Kana Online will become significant.
EMPHASIZE CUSTOMER ADVOCACY AND SATISFACTION. We believe that delivering
complete customer satisfaction is vital to growing our business. Our emphasis on
customer advocacy and satisfaction has provided us with a strong base of
referenceable customers. This strategy provides many benefits, including
potentially shortened sales cycles, incremental sales opportunities to our
installed-base of customers and new and improved products resulting from
customer feedback. We intend to remain focused on providing the highest level of
satisfaction to our customers and to continue to design our solutions to address
their online customer communications needs. In addition, we intend to continue
to build our professional services group, which maintains customer relationships
beyond the implementation phase and is responsible for providing a superior
customer experience.
PRODUCTS AND SERVICES
OUR PLATFORM AND SUITE OF APPLICATIONS
Our products are comprised of a flexible solutions platform and
applications for marketing, sales and service. Together the platform and the
applications create an advanced and scaleable customer-centric e-business
solution. The suite of software applications consists of the Kana eBusiness
Platform, Kana Service, Kana Commerce, Kana Connect, Kana I-Mail, Kana Voice,
Kana Assist, Kana Advisor, Kana Phone, Kana Classify and Kana Response.
KANA EBUSINESS PLATFORM. The Kana eBusiness Platform is an expandable
platform for building, deploying and adapting software applications. The
platform can service additional users by adding more hardware, allowing a
company to service a growing customer base. Our 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. The Kana eBusiness Platform integrates personalized
interactions, collaborations and transactions over the Web among a company and
that company's customers, partners, employees and suppliers.
KANA SERVICE. Kana Service is a customer services application that
enables a company to unify all touch points with a customer into a single view
that can be provided to both the customer services agent as well as the
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customer. Kana Service includes a case management function that enables case
creation and resolution, workload management and user-defined workflows to
support a company's internal customer services process.
KANA COMMERCE. Kana Commerce application combines the Kana eBusiness
Platform and Microsoft's Site Server engine and enables a company to create and
manage an electronic storefront over the Web. In addition, the Kana eCommerce
application integrates Kana Service 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. Kana
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.
KANA CONNECT. Kana Connect is our 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 I-MAIL. Kana I-Mail lets e-businesses engage in one-to-one realtime
communications with customers. The solution's two-way Web-based instant
messaging between the company and customer provides immediate online assistance
to the customer. Kana I-Mail delivers different service levels to customers
based on a number of contextual factors such as the Web page the customer is
browsing, the value of the items in the customer's shopping cart and the nature
of the customer's question to determine the appropriate service level for that
individual.
KANA VOICE. Kana Voice allows customers to have a voice conversation with
a company agent over the Internet. Customers simply click on a button and are
connected with a live agent online. When a customer requests a voice
conversation, a secure connection is made between the customer and the company
representative using a robust communications network. Kana Voice also takes
advantage of collaborative Web browsing, Web history tracking, prioritization,
escalation, knowledgebase and agent and administrator features.
KANA ADVISOR. Kana Advisor 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.
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 PHONE. Kana Phone integrates to third-party computer telephone
software applications, providing customer service representatives with a single
interface to customer inquiries received over various media, including the Web,
e-mail and the telephone.
KANA CLASSIFY. Kana Classify is our advanced message classification
technology that drives automated actions. Kana Classify categorizes customer
messages and can automatically respond to customers, suggest responses for user
review or route messages to skill-based queues.
KANA RESPONSE. Kana Response is our e-mail and Web communications
management application that assists e-businesses in responding to large numbers
of inbound customer communications. Kana Response provides rule-based
automation, intelligent workflow, message queuing, specialized user tools and a
centralized knowledge base of issues and responses.
KANA ONLINE
Kana Online is a Web-based application service that offers our software
on a hosted basis. Kana Online provides e-businesses with access to a customized
version of our software without the need to purchase, install or maintain their
own server or database infrastructure. With Kana Online, we host the back-end
infrastructure and the customer accesses our powerful functionality through a
Web browser or by deploying Kana's Power Client.
The hardware and core technology supporting Kana Online is pre-installed
and managed at Exodus Communications, Inc., a leading provider of Internet
server hosting and management solutions. We believe that
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Exodus is equipped to provide the security, reliability and performance required
for hosting our solution through its nationwide network operating centers and
high-speed wide area network backbone.
Kana Online offers several key benefits to e-businesses:
o LOW INITIAL INVESTMENT. E-businesses gain the benefits of the core
components of our software with limited hardware and software
infrastructure costs.
o LOW COST OF USE. Because we host the back-end infrastructure for Kana
Online, e-businesses keep IT administration and overhead costs low
while achieving the benefits of our software.
o SCALABILITY. Kana Online is scaleable and, because of the Kana Online
fee structure, an e-business' costs will increase only as its usage
increases.
o RELIABILITY AND SECURITY. A team of dedicated professionals monitors
and maintains the customer business applications in a secure
environment. We actively work to promote the security of e-business
data and the reliability of the Kana Online service.
o RAPID DEPLOYMENT. Since e-businesses run our software locally, they
are not responsible for purchasing and configuring the appropriate
hardware and the system can often be set up in a matter of days. A
Kana Online representative works with the e-business to ensure that
the system is configured to meet its specific needs.
o EASY MIGRATION. Because we offer both a hosted and licensed version
of our software, e-businesses can start by using our hosted
applications and convert to a premise license without disruption of
their service or additional training for system users.
SERVICES
PROFESSIONAL SERVICES. Our professional services group consists of
consulting services, customer advocacy, technical support and education
services.
CONSULTING SERVICES. Our consulting services group provides a wide range
of business and technical expertise to support our 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 our customers and partners.
CUSTOMER ADVOCACY. Our customer advocacy group ensures ongoing customer
satisfaction with our solution. This includes providing experienced account
planning to develop a long-term relationship and ensure business needs are being
met as our customers evolve and grow. The group develops a satisfaction plan
with our customers to ensure the successful delivery of services and resources.
TECHNICAL SUPPORT. Our technical support group provides global support
for our customers through a number of channels, including phone and e-mail, as
well as access to the Kana Support Website.
EDUCATION SERVICES. Our education services group delivers a full set of
training programs for our 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 our customers and partners through monthly
newsletters, Web site FAQ's, and regional user groups.
TECHNOLOGY
Our software incorporates industry standards, such as Java, HTML, XML,
and the J2EE framework, in order to facilitate customization and to enable
efficient development cycles. Our software offers both Web and Windows-based
interfaces and relies on commercial application servers and database platforms
to provide scalability and redundancy.
OPEN, STANDARDS-BASED ARCHITECTURE. The architecture of our 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 our platform. These industry standards include:
o Java;
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o JDBC (Java DataBase Connectivity);
o Standard relational databases from Oracle, Microsoft, and IBM;
o JSP (Java Server Pages);
o The J2EE framework; and
o XML, for presentation layers, metadata, and integration.
The use of industry standards also permits our platform to be readily
customized to users' preferences.
SCALEABLE WEB-BASED ARCHITECTURE. Our software relies on a scaleable
Web-based architecture. This architecture separates the different system
components into logical layers, supports multiple hardware and software
platforms, supports browser-based interfaces and enables the system to run on
multiple hardware platforms simultaneously in order to enhance scaleability. The
tiers are the presentation, user interface, workflow, business object, mail
delivery, tracking and data layers.
ADVANCED MESSAGE CLASSIFICATION TECHNOLOGIES. We have focused our
research and development of advanced message classification technologies on
Bayesian Network technology. Bayesian Network technology is a classification
technology approach that combines machine learning with human expertise to infer
conclusions about new data. Using machine learning, the system automatically
builds a classification model from existing customer messages, thereby reducing
the cost and time of installation and maintenance and allowing the system to
improve as new issues arise. With human expertise, the system enables managers
to add their knowledge selectively to the system in order to improve accuracy
and adjust the model to anticipate new issues or react to them in real time.
Bayesian Network technology underlies Kana Classify, which categorizes customer
messages and drives system automation.
EASE OF PLATFORM UPGRADE. Our software may be readily upgraded to new
versions of our system. New versions of the software, when installed, are
designed to recognize the historical data and configurations from the previous
version of the system and automatically convert them to the new data format.
This enables an e-business to upgrade our software without any programming or
advanced technical capability.
SALES AND MARKETING
SALES
Our sales strategy is to pursue targeted accounts through a combination
of our direct sales force and our strategic alliances. To date, we have targeted
our sales efforts at the e-business divisions of Global 2000 companies and at
rapidly growing Internet companies. We maintain direct sales personnel
domestically in Arizona, California, Colorado, Connecticut, Florida, Georgia,
Illinois, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New
York, Texas, Utah, Virginia, Washington and Washington D.C., and internationally
in the United Kingdom, Germany, Australia and Japan. The direct sales force is
organized into regional teams, which include both sales representatives and
systems engineers. As of June 30, 2000, we employed in our sales force 70
persons in our offices outside of North America. Our office in the United
Kingdom is primarily responsible for sales in Europe generally, and our 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 our Vice President, International. Our direct sales force is
complemented by telemarketing representatives based at our headquarters in
Redwood City, California and Manchester, New Hampshire.
We complement our direct sales force with a series of reseller and sales
alliances, such as those with MCI Worldcom, Davox, KPMG Consulting, Andersen
Consulting, Siemens and Convergys Corporation. Through these alliances we are
able to leverage additional sales, marketing and deployment capabilities. In the
future, we intend to expand our distribution capabilities by increasing the size
of our direct sales force, establishing additional sales offices both
domestically and internationally and broadening our alliance activities.
As of June 30, 2000, 219 of our employees were engaged in sales
activities. See "Business--Strategic Relationships."
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MARKETING
Our marketing programs are targeted at e-businesses and are currently
focused on educating our target market, generating new sales opportunities and
creating awareness for our e-business customer communications software. We
conduct marketing programs worldwide to educate our target market. In addition,
we engage in a variety of marketing activities, including:
o conducting seminars;
o hosting regular customer events;
o participating in industry and technology-related conferences and
trade shows;
o establishing and maintaining close relationships with recognized
industry analysts;
o conducting electronic and traditional direct mailings and
ongoing public relations campaigns;
o managing and maintaining our Web site;
o conducting market research;
o organizing and implementing electronic and traditional direct
marketing; and
o creating and placing advertisements.
Our marketing organization also serves an integral role in acquiring,
organizing and prioritizing industry and customer feedback in order to help
provide product direction to our development organizations. We have a detailed
product management process that surveys customer and market needs to predict and
prioritize future customer requirements, and a product marketing team dedicated
to delivering product positioning and messaging. We also focus on developing a
range of joint marketing strategies and programs in order to leverage our
existing strategic relationships and resources. These alliances provide
collaborative resources to help extend the reach of our presence in the
marketplace. We intend to continue to pursue these alliances in the future. As
of June 30, 2000, 68 of our employees were engaged in marketing activities.
STRATEGIC RELATIONSHIPS
We have three types of strategic relationships: service relationships,
technology relationships, and reseller and strategic sales relationships, all
designed to expand our market coverage. These relationships are formal or
informal agreements with third parties. We view these relationships as critical
to our success in providing enterprise-wide integrated e-business products and
services.
Recently introduced, the Kana Alliance Program was developed to meet the
increasing demand by companies to partner with us. The program provides partners
with the tools, information and marketing benefits through which they can
develop, promote and sell our products and services. Companies participate in
the program at different levels based on their market presence and on mutual
commitments to establishing successful relationships.
SERVICE RELATIONSHIPS. We collaborate with systems integrators such as
Andersen Consulting, CSC Consulting and KPMG Consulting. With the implementation
of our Alliance Program, formal agreements are put into place for these
relationships. These systems integrators are highly trained in our software and
provide integration and implementation services to mutual customers.
TECHNOLOGY RELATIONSHIPS. We have established relationships with
technology partners across a variety of solution areas, including sales force
automation, analytics, content management, telephony systems and IT hardware,
that allow us to provide comprehensive solutions to e-businesses. These
technology relationships are typically formalized in a written agreement and are
focused on technology initiatives and marketing. The agreements are annually
renewable, but generally may be terminated at any time by either party and do
not contain penalties for nonperformance.
RESELLER AND STRATEGIC SALES RELATIONSHIPS. We complement our direct
sales force with reseller and strategic sales relationships with companies in
targeted geographies and industries. Our agreements with these companies are
typically in the form of value-added reseller agreements.
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In the future, we intend to establish additional strategic relationships
to further broaden our product offerings and enhance our distribution channels.
Many of the companies with which we have initiated relationships also
work with competing software companies, and the success of the relationship will
depend on their willingness and ability to devote sufficient resources and
efforts to our products and services. Our arrangements with these parties
typically are in the form of non-exclusive agreements that may be terminated by
either party without cause or penalty and with limited notice. Therefore, we can
provide no guarantee that any of these parties will continue their relationship
with us.
CUSTOMERS
Our customers range from Global 2000 companies pursuing an e-business
strategy to rapidly growing Internet companies. As of June 30, 2000, we have
licensed our solution to more than 600 customers in a variety of industries
worldwide. The following is a list of customers that we believe are
representative of our overall customer base:
<TABLE>
<S> <C> <C>
INTERNET SERVICES FINANCIAL TRAVEL
CityIndex Ameritrade American Airlines
ebay BankAmerica Canadian Airlines
eFax.com CBOE Mapquest.com
Excite@Home ChannelPoint Royal Carribean
GoTo.com Datek Skanadish Railroads
Homeshare DimeSavingsBank Travel Company
iVendor DowJones
iVillage eCloser OTHER
JFAX.com E*Trade Coleman
Lycos FinancialEngines Estee Lauder
priceline.com WitCapital Esteel
TheMotleyFool Ford Motor Company
TheStreet.com FuelSpot
General Motors
E-TAILING COMMUNICATIONS Hewlett-Packard
barnesandnoble.com Ameritech Microsoft
CDNOW AT&T S&H Greenpoints
Cendant BellSouth Shell International
Dan'sChocolates Convergys The Gap
Drugstore.com Davox Utility.com
etoys NTL Williams-Sonoma
Furniture.com Sprint PCS
InsWeb Sprynet(Mindspring)
OfficeDepot StreamInternational
Priceline
PrintConnect
Tickets.com
</TABLE>
No customer accounted for 10% or more of our total revenues for 1999.
Although a substantial portion of our license and service revenues in any given
quarter has been, and is expected to continue to be, generated from a limited
number of customers with large financial commitment contracts, we do not depend
on any ongoing commitments from our large customers.
RESEARCH AND DEVELOPMENT
We believe that strong product development capabilities are essential to
our strategy of enhancing our core technology, developing additional
applications incorporating that technology and maintaining the competitiveness
of our product and service offerings. We have invested significant time and
resources in creating a structured process for undertaking all product
development. This process involves several functional groups at all levels
within our organization and is designed to provide a framework for defining and
addressing the activities required to bring product concepts and development
projects to market successfully. In addition, we have recruited key engineers
and software developers with experience in the customer communications and
internetworking markets and have
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complemented these individuals by hiring senior management with experience in
enterprise application development, sales and deployment.
As of June 30, 2000, 295 of our employees were engaged in research and
development activities. Our success depends, in part, on our ability to enhance
our existing customer interactions solutions and to develop new services,
functionality and technology that address the increasingly sophisticated and
varied needs of our prospective customers. Delays in bringing to market new
products or their enhancements, or the existence of defects in new products or
enhancements, could be exploited by our competitors. If we were to lose market
share as a result of lapses in our product management, our business would
suffer.
COMPETITION
The market for our products and services is intensely competitive,
evolving and subject to rapid technological change. We expect the intensity of
competition to increase in the future. We currently face competition for our
products from systems designed by in-house and third-party development efforts.
We expect that these systems will continue to be a principal source of
competition for the foreseeable future. Our competitors include a number of
companies offering one or more products for the e-business communications and
relationship management market, some of which compete directly with our
products. For example, our competitors include companies providing stand-alone
point solutions, including Annuncio, Inc., AskJeeves, Inc., Brightware, Inc.,
Broadbase, Inc., Digital Impact, Inc., eGain Communications Corp., E.piphany
Inc., Inference Corp., Marketfirst, Inc., Live Person, Inc., Mustang Software,
Inc., Responsys.com and Servicesoft, Inc. In addition, we compete with companies
providing traditional, client-server based customer management and
communications solutions, such as Clarify Inc. (which was recently acquired by
Northern Telecom), 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. and Vantive Corporation (which was recently acquired by PeopleSoft, Inc.).
Furthermore, we may face increased competition should we expand our product
line, through acquisition of complementary businesses or otherwise.
We believe that the principal competitive factors affecting our market
include a significant base of referenceable customers, the breadth and depth of
a given solution, product quality and performance, customer service, core
technology, product scaleability and reliability, product features, the ability
to implement solutions and the value of a given solution. Although we believe
that our solution currently competes favorably with respect to these factors,
our market is relatively new and is evolving rapidly. We may not be able to
maintain our competitive position against current and potential competitors,
especially those with significantly greater financial, marketing, service,
support, technical and other resources.
Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition and a larger installed base of customers than do we. In
addition, many of our competitors have well-established relationships with our
current and potential customers and have extensive knowledge of our industry. It
is possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. We also expect that competition will
increase as a result of industry consolidations. See "Risk Factors--We face
substantial competition and may not be able to compete effectively."
INTELLECTUAL PROPERTY
We rely upon a combination of patent, copyright, trade secret and
trademark laws to protect our intellectual property. We currently have nine U.S.
patent applications pending. These patents, if allowed, will cover a material
portion of our products and services. We have also filed international patent
applications corresponding to four of our U.S. applications.
In addition, we have 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 we rely on patent, copyright, trade secret and trademark law to protect
our technology, we believe that factors such as the technological and creative
skills of our personnel, new product developments, frequent product enhancements
and reliable product maintenance are more essential to establishing and
maintaining a technology leadership position. We can give no assurance that
others will not develop technologies that are similar or superior to our
technology.
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We generally enter into confidentiality or license agreements with our
employees, consultants and alliance partners, and generally control access to
and distribution of our software, documentation and other proprietary
information. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use our products or
technology or to develop products with the same functionality as our products.
Policing unauthorized use of our products is difficult, and we cannot be certain
that the steps we have taken will prevent misappropriation of our technology,
particularly in foreign countries where the laws may not protect proprietary
rights as fully as do the laws of the United States. In addition, some of our
license agreements require us to place the source code for our products into
escrow. These agreements generally provide that some parties will have a
limited, non-exclusive right to use this code if:
o there is a bankruptcy proceeding instituted by or against us;
o we cease to do business without a successor; or
o we discontinue providing maintenance and support.
Substantial litigation regarding intellectual property rights exists in
the software industry. Our software products may be increasingly subject to
third-party infringement claims as the number of competitors in our industry
segment grows and the functionality of products in different industry segments
overlaps. Some of our competitors in the market for customer communications
software may have filed or may intend to file patent applications covering
aspects of their technology that they may claim our technology infringes. Some
of these competitors may make a claim of infringement against us with respect to
our products and technology. See "Risk Factors--We may become involved in
litigation over proprietary rights, which could be costly and time consuming,
and Genesys Telecommunication Laboratories, Inc., has filed an infringement suit
against us."
EMPLOYEES
As of June 30, 2000, we had 889 full-time employees, 214 of whom were in
our professional services group, 287 in sales and marketing, 295 in research and
development, and 93 in finance, administration and operations. We have added 791
employees between June 30, 1999 and June 30, 2000. Our future performance
depends in significant part upon the continued service of our key technical,
sales and marketing, and senior management personnel, none of whom is bound by
an employment agreement requiring service for any defined period of time. The
loss of the services of one or more of our key employees could harm our
business.
Our future success also depends on our continuing ability to attract,
train and retain highly qualified technical, sales and managerial personnel.
Competition for these personnel is intense, particularly in the San Francisco
Bay Area where we are headquartered. Due to the limited number of people
available with the necessary technical skills and understanding of the Internet,
we can give no assurance that we can retain or attract key personnel in the
future. None of our employees is represented by a labor union. We have not
experienced any work stoppages and consider our relations with our employees to
be good. See "Risk Factors--We may be unable to hire and retain the skilled
personnel necessary to develop our engineering, professional services and
support capabilities in order to continue to grow" and "--We may face
difficulties in hiring and retaining qualified sales personnel to sell our
products and services, which could harm our ability to increase our revenues in
the future."
FACILITIES
Our corporate offices are located in Redwood City, California, where we
lease 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. Also, we lease approximately 88,094 square feet of
space in two office buildings in Manchester, New Hampshire. The lease expires in
April 2005, and we have an option to extend the lease for two additional
five-year terms. In addition, we lease facilities and offices in several cities
throughout the United States, including New York, New York, Westport,
Connecticut, Chicago, llinois 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. On
February 11, 2000, we 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.
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LEGAL PROCEEDINGS
On October 8, 1999, Genesys Telecommunications Laboratories, Inc. filed a
complaint against us in the United States District Court for the District of
Delaware. Genesys has amended its complaint to allege that our Customer
Messaging System 3.0 infringes one or more claims of two Genesys patents.
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 we have not received material
information or documentation. We intend to fight this claim vigorously and do
not expect it to impact our results from operations. We are not currently a
party to any other material legal proceedings. See "Risk Factors--We 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 us."
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding our executive officers
and directors (including ages as of July 28, 2000):
NAME AGE POSITION
---- --- --------
Michael J. McCloskey...............44 Chief Executive Officer and Director
James C. Wood .....................43 President and Director
Mark S. Gainey ....................32 Chairman of the Board of Directors
Brian K. Allen ....................39 Chief Financial Officer
Joseph G. Ansanelli................30 Vice President, Product Marketing
Ian P. Cavanagh....................34 Vice President, Business Development
Nigel K. Donovan...................44 Vice President, Development
Alexander E. Evans.................43 Vice President, International
David B. Fowler....................46 Vice President, Corporate Marketing
Paul R. Holland....................39 Vice President, Worldwide Sales
William R. Phelps..................38 Vice President, Professional Services
Toya A. Rico.......................40 Vice President, Human Resources
Michael R. Wolfe...................31 Chief Technology Officer
David M. Beirne....................36 Director
Robert W. Frick....................63 Director
Eric A. Hahn.......................40 Director
Charles A. Holloway, Ph.D..........64 Director
Steven T. Jurvetson................33 Director
MICHAEL J. MCCLOSKEY. Mr. McCloskey joined us in June 1999 as Chief
Executive Officer and a director. Prior to joining us, 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.
JAMES C. WOOD. Mr. Wood joined us in April 2000 as a director in connection
with our acquisition of Silknet Software, Inc. and has served as our President
since May 2000. Mr. Wood founded Silknet in March 1995 and served as its
Chairman of the Board, President and Chief Executive Officer. From January 1988
until November 1994, Mr. Wood 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. Mr. Wood holds a B.S. in Electrical Engineering from
Villanova University.
MARK S. GAINEY. Mr. Gainey co-founded our company in January 1996, served
as our Chief Executive Officer and a director from January 1996 to June 1999 and
served as our President from January 1996 through April 2000. Mr. Gainey
currently serves as our Chairman of the Board of Directors. Prior to co-founding
our company, 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.
BRIAN K. ALLEN. Mr. Allen joined us in April 2000 as Chief Financial
Officer. Prior to joining us, from 1983 until 1986 and from 1989 to April 2000,
Mr. Allen was with KPMG, and was admitted to the partnership in 1995. From 1986
to 1989, Mr. Allen was a member of the staff of the Division of Corporation
Finance at the Securities and Exchange Commission. Mr. Allen holds a B.S. in
Business Administration from the University of Montana and is a CPA.
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JOSEPH G. ANSANELLI. Mr. Ansanelli joined us in August 1999 as Vice
President, Marketing in connection with our acquisition of Connectify, Inc.,
served as Vice President, Product Marketing since April 2000 and resigned from
his position effective July 28, 2000. 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.
IAN P. CAVANAGH. Mr. Cavanagh joined us in July 1999 as Vice President,
Business Development. Prior to joining us, 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.
NIGEL K. DONOVAN. Mr. Donovan joined us in April 2000 as Vice President,
Development in connection with our acquisition of Silknet Software, Inc. Prior
to joining us, from February 1999 to April 2000, Mr. Donovan served as Senior
Vice President and Chief Operating Officer of Silknet. From November 1995 to
February 1999 Mr. Donovan served as Silknet's 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 of Silknet from October 1996 to
February 1999. From March 1988 until October 1995, Mr. Donovan served as Vice
President--Professional Services of CODA Incorporated. Mr. Donovan holds a B.A.
in Accounting and Finance from the London School of Business Studies.
ALEXANDER E. EVANS. Mr. Evans joined us in July 1999 as Vice President,
International. Prior to joining us, 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. and Metal Box PLC. Mr. Evans holds a degree in Electronics from
John Moore University, England.
DAVID B. FOWLER. Mr. Fowler joined us in April 2000 as Vice President,
Corporate Marketing in connection with our acquisition of Silknet Software, Inc.
Prior to joining us, from April 1999 to April 2000, Mr. Fowler served as Vice
President--Marketing of Silknet. 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. Mr. Fowler holds a B.S. in
Computer Science from Worcester Polytechnic Institute and an M.B.A. from New
York University.
PAUL R. HOLLAND. Mr. Holland joined us in December 1997 as Vice President,
Worldwide Sales. Prior to joining us, 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.
WILLIAM R. PHELPS. Mr. Phelps joined us in December 1998 as Vice President,
Professional Services. Prior to joining us, 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,
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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 us in January 2000 as Vice President, Human
Resources. Prior to joining us, 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.
MICHAEL R. WOLFE. Mr. Wolfe joined us in May 1997 and served as Director of
Engineering until April 1998, as Vice President, Engineering from April 1998
through April 2000 and is currently our Chief Technology Officer. Prior to
joining us, 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 one of our directors since
September 1997. Mr. Beirne has been a Managing Member of Benchmark Capital, a
venture capital firm, since June 1997. Prior to joining Benchmark Capital, 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, PlanetRx.com, Inc., Webvan Group,
Inc., 1-800-FLOWERS.COM, Inc., and several private companies. Mr. Beirne holds a
B.S. in Management from Bryant College.
ROBERT W. FRICK. Mr. Frick has served as one of our directors 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
us, 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 one of our directors 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 one of our directors
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 one of our directors 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.,
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ReleaseNow.com Corporation, Everdream Corporation and Vivaldi Networks, Inc. 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.
BOARD OF DIRECTORS AND COMMITTEES
We currently have authorized nine directors. At present, the board consists
of eight directors divided into three classes, with each class serving for a
term of three years, and we currently have one vacancy. 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, Mr. Hahn and
Dr. Holloway are Class II directors whose terms will expire in 2001 and Messrs.
Gainey, McCloskey and Wood are Class III directors whose terms will expire in
2002. Our officers serve at the discretion of the board.
We have established an audit committee composed of independent directors,
which reviews and supervises our financial controls, including the selection of
our auditors, reviews the books and accounts, meets with our officers regarding
our financial controls, acts upon recommendations of the auditors and takes any
further actions the audit committee deems necessary to complete an audit of our
books and accounts, as well as addressing other matters that may come before us
or as directed by the board. The audit committee currently consists of three
directors, Dr. Holloway and Messrs. Jurvetson and Frick.
We have established a compensation committee, which reviews and approves
the compensation and benefits for our executive officers, administers our 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, our compensation committee consisted of Messrs. Beirne and
Hahn. Neither Mr. Beirne nor Mr. Hahn was an employee of us or our subsidiaries
during 1999 or at any time prior to 1999. None of our executive officers serves
on the board of directors or compensation committee of any entity that has one
or more executive officers serving as a member of our board of directors or
compensation committee.
DIRECTOR COMPENSATION
We currently do not compensate any non-employee member of the board.
Directors who are also our employees 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, we granted an option to purchase 66,666 shares of common
stock to Mr. Frick at an exercise price of $4.50 per share under our 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 us 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, we 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 our 1999 Stock Incentive Plan. The option may be
exercised for unvested shares, subject to our 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 our
outstanding voting securities, or a change in the majority of the board through
one or more contested elections for board membership.
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EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning
compensation earned for the year ended December 31, 1999, by the two individuals
who served as our Chief Executive Officer during the 1999 fiscal year, and by
each of our four other most highly compensated current executive officers whose
salary and bonus for the 1999 fiscal year exceeded $100,000. The listed
individuals are referred to in this prospectus 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 our
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 the lesser of either $50,000 or 10% of the total
annual salary and bonus of each of the Named Executive Officers in fiscal 1999
is excluded. The option grants reflected in the table below were made under our
1997 Stock Option Issuance Plan.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
SECURITIES
UNDERLYING
ANNUAL COMPENSATION OPTIONS (#)
---------------------------------------------- ----------------
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)
--------------------------------------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Michael J. McCloskey(1)..................... 1999 81,250 -- 1,866,666
Chief Executive Officer
Mark S. Gainey(2)........................... 1999 122,500 -- --
Former Chief Executive Officer
Joseph D. McCarthy(3)....................... 1999 143,308 -- 100,000
Former Vice President, Finance and
Operations
Paul R. Holland............................. 1999 75,000 721,600 --
Vice President, Worldwide Sales
William R. Phelps........................... 1999 130,000 56,000 413,330
Vice President, Professional Services
Michael R. Wolfe............................ 1999 135,000 -- 100,000
Chief Technology Officer
--------------
</TABLE>
(1) Mr. McCloskey joined us and became Chief Executive Officer in June 1999.
His annualized salary for 1999 was $150,000.
(2) Mr. Gainey served as our Chief Executive Officer through June 1999, and
served as our President from January 1996 through April 2000. Mr. Gainey
currently serves as our Chairman of the Board of Directors.
(3) Mr. McCarthy joined us in March 1998 and resigned from his position as
Vice President, Finance and Operations effective May 2000.
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. We 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. We can give no assurance that the actual stock price will
49
<PAGE>
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 our 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 our
1997 Stock Option/Stock Issuance Plan. The exercise price for each option grant
is equal to the fair market value of our common stock on the date of grant, as
determined in good faith by the board of directors. All options are immediately
exercisable in full, but we 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 our employment. Our repurchase rights will lapse
on an accelerated basis under certain conditions in conjunction with a change of
control. See "Employment Arrangements, Termination of Employment Arrangements
and Change in Control Arrangements."
OPTION GRANTS IN 1999 FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANT
-------------------
% OF TOTAL POTENTIAL REALIZABLE VALUE AT
NUMBER OF OPTIONS ASSUMED ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM (1)
OPTIONS IN FISCAL PRICE EXPIRATION -----------------------------
NAME GRANTED (#) YEAR ($/SH) DATE 5%($) 10%($)
-------- ----------- ---------- -------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Michael J. McCloskey...................... 1,866,666 21.31 0.3375 06/16/09 22,169,850 35,677,715
Mark S. Gainey ........................... -- -- -- -- -- --
Joseph McCarthy .......................... 100,000 1.14 0.3375 06/16/09 1,187,671 1,911,307
Paul R. Holland........................... -- -- -- -- -- --
William R. Phelps......................... 366,664 4.19 0.175 12/06/08 4,415,286 7,068,612
46,666 0.53 0.3375 06/16/09 554,239 891,930
Michael R. Wolfe ......................... 100,000 1.14 4.50 08/17/09 771,671 1,495,307
</TABLE>
--------------
(1) The 5% and 10% values are based upon the $7.50 price per share at which
the common stock was sold in the initial public offering on September 21,
1999.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth the number of shares the Named Executive
Officers purchased in connection with option exercises during the 1999 fiscal
year and the value they realized on those exercises. None of these Named
Executive Officers held any unexercised options at the end of the 1999 fiscal
year. None of them exercised any stock appreciation rights during 1999, and none
held any stock appreciation rights at the end of the year.
The value realized is based on the fair market value of our common stock
on the date of exercise, minus the exercise price payable for the shares. The
fair market value was determined in good faith by the board of directors for
exercises before September 21, 1999, and was based on our closing price on the
exercise date for exercises on or after September 21, 1999. The exercise price
for each grant equaled the fair market value on the date of exercise, so the
Named Executive Officers who exercised did not realize any value on the
exercises.
<TABLE>
<CAPTION>
# OF SECURITIES
NUMBER OF UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
ACQUIRED AT FISCAL YEAR-END(#) AT FISCAL YEAR-END($)
ON VALUE --------------------------- ----------------------------
NAME EXERCISE(#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------- ----------- ------------ ------------ ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. McCloskey..... 1,866,666 0 -- -- -- --
Mark S. Gainey........... -- -- -- -- -- --
Joseph D. McCarthy....... 100,000 0 -- -- -- --
Paul R. Holland.......... -- 0 -- -- -- --
William R. Phelps........ 366,664 0 -- -- -- --
46,666 0 -- -- -- --
Michael R. Wolfe......... 100,000 0 -- -- -- --
</TABLE>
50
<PAGE>
EMPLOYMENT ARRANGEMENTS, TERMINATION OF EMPLOYMENT ARRANGEMENTS
AND CHANGE IN CONTROL ARRANGEMENTS
In February 1997, Dr. Holloway, one of our 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. At the time of this prospectus,
these shares were fully vested.
In April 1997, we sold to Mr. Gainey, our co-founder and Chairman of the
Board, 5,000,000 shares of common stock at a purchase price of $0.01 per share.
At the time of this prospectus, these shares were fully vested.
In April 1998, Mr. Holland, our Vice President, Worldwide Sales,
exercised an option to purchase 811,406 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, we will have the
right to repurchase those shares at the exercise price paid per share. Under the
stock purchase agreement, if we are acquired by merger or asset sale, our 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 we are acquired by merger or asset sale and
Mr. Holland is not offered comparable employment by the successor entity, our
right to repurchase the unvested shares will automatically lapse and the shares
will vest in full.
Also in April 1998, Mr. Wolfe, our Chief Technology Officer, exercised an
option to purchase 466,666 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, we will have the right
to repurchase those shares at the exercise price paid per share. Under the stock
purchase agreement, if we are acquired by merger or asset sale, our right to
repurchase the unvested shares will automatically lapse in its entirety and the
shares will vest in full.
In June 1998, Mr. McCarthy, our former Vice President, Finance and
Operations, exercised an option to purchase 213,330 shares of common stock and
entered into a stock purchase agreement for the purchase of those shares. Mr.
McCarthy will continue to provide services to the Company through August 31,
2000. We will repurchase all shares unvested as of August 31, 2000 at the
exercise price paid per share. Under the stock purchase agreement, if we are
acquired by merger or asset sale, our right to repurchase the unvested shares
will automatically lapse in its entirety and the shares will vest in full.
In July 1998, Mr. Hahn, one of our directors, exercised an option to
purchase 150,064 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, we will have the right to
repurchase those shares at the exercise price paid per share. Under the stock
purchase agreement, if we are acquired by merger or asset sale, our 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, one of our directors 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, we will have the right to
repurchase those shares at the exercise price paid per share. Under the stock
purchase agreement, if we are acquired by merger or asset sale, our 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 we are 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, our Vice President, Professional
Services, exercised options to purchase a total of 413,330 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, we will have the right to repurchase those shares at the exercise price
paid per share. Under the stock purchase agreement, if we are acquired by merger
or asset sale, our 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 we are 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.
In June 1999, we entered into an employment arrangement with Mr.
McCloskey, our Chief Executive Officer. In connection with this arrangement, we
granted Mr. McCloskey an option to purchase 1,866,666 shares of common
51
<PAGE>
stock, which Mr. McCloskey exercised in June 1999. Of these shares, 1,088,888
are subject to a right of repurchase granted to us which will allow us 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 installments 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 our company,
under the following circumstances:
o 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;
o 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;
o 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;
o 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
o 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. Mr. McCarthy will continue to provide services to the
Company through August 31, 2000. We will repurchase all shares unvested as of
August 31, 2000 at the exercise price paid per share. Under the stock purchase
agreement, if we are acquired by merger or asset sale, our right to repurchase
the unvested shares will automatically lapse in its entirety and the shares will
vest in full.
In August 1999, we granted an option to purchase 66,666 fully vested
shares of common stock to Mr. Frick, one of our directors, at an exercise price
of $4.50 per share, which he exercised in full in September 1999.
In September 1999, Mr. Wolfe 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, we will have the right to repurchase those shares at
the exercise price paid per share. Under the stock purchase agreement, if we are
acquired by merger or asset sale, our 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
we are 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.
Also in September 1999, Mr. Wolfe exercised an option to purchase 66,666
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, we will have the right to repurchase those shares at
the exercise price paid per share. Under the stock purchase agreement, if we are
acquired by merger or asset sale, our right to repurchase the unvested shares
will automatically lapse in its entirety and the shares will vest in full.
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<PAGE>
In April 2000, we entered into an employment arrangement with Mr. Allen,
our Chief Financial Officer. Mr. Allen's annual salary is $200,000. In
connection with this arrangement, we granted Mr. Allen an option to purchase
500,000 shares of common stock, of which the option to purchase 80,000 shares
was granted at an exercise price of $15 per share, and the option to purchase
the remaining 420,000 shares was granted at the fair market value which was
$39.31 on the grant date. Under the stock purchase agreement and the terms of
Mr. Allen's employment arrangement, the option shares will vest in a series of
48 successive equal monthly installments upon his completion of each month of
service over the 48-month period measured from April 19, 2000. However, part of
the shares will vest on an accelerated basis if we sign an agreement to acquire
another company within 90 days after April 19, 2000 and the acquisition is
consummated within 90 days of signing the agreement, as follows:
o if Mr. Allen is offered a position with us in a capacity other than
as the Chief Financial Officer following the acquisition, the rate of
vesting on each of his options will double beginning on the closing
date of the acquisition;
o if Mr. Allen is not offered a position with us following the
acquisition, his options will accelerate with respect to 12 months of
additional vesting beginning on the closing date of the acquisition;
o if Mr. Allen continues to serve as Chief Financial Officer following
the acquisition, then all of his then unvested shares of common stock
will continue to vest in accordance with their original terms.
If Mr. Allen is involuntarily terminated or voluntarily resigns for good
reason during the 12 months following a change of control of our company, he
will accelerate with respect to 24 months of additional vesting measured from
his termination or resignation date.
Generally, our option grants to employees, other than those under the
1999 Special Stock Option Plan, provide that if we are 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.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SALES OF SECURITIES
Since January 1999, we have been a party to several transactions in which
the amount involved exceeded $60,000 and in which any of our directors or
executive officers, any holder of more than 5% of our outstanding capital stock
or any member of their immediate families had a direct or indirect material
interest.
These transactions include:
In July 1999, we sold to various investors, including entities affiliated
with Draper Fisher Jurvetson and entities affiliated with Benchmark Capital, a
total of 1,676,932 shares of Series D preferred stock for total consideration of
$10,200,004. At the time of the financing, Mr. Jurvetson, a Managing Director of
Draper Fisher Jurvetson, and Mr. Beirne, a Managing Member of Benchmark Capital,
were two of our directors.
On August 13, 1999, we closed a merger with Connectify pursuant to which
Connectify became our wholly-owned subsidiary. In connection with the
acquisition, we issued approximately 6,982,542 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. In connection with the acquisition, Mr. Frick, a director
of Connectify, Inc., became one of our directors.
On December 3, 1999, we closed a merger with Business Evolution pursuant
to which Business Evolution became our wholly-owned subsidiary. In connection
with the acquisition of Business Evolution, approximately 1,890,200 shares of
our common stock, valued at approximately $140 million, were issued for all
outstanding shares and warrants of Business Evolution.
On December 3, 1999, we closed a merger with netDialog, pursuant to which
netDialog became our wholly-owned subsidiary. In connection with the acquisition
of netDialog, approximately 1,120,286 shares of our common stock, valued at
approximately $90 million, were issued for all outstanding shares, warrants and
convertible notes of netDialog.
On April 19, 2000, we closed a merger with Silknet, pursuant to which
Silknet became our wholly-owned subsidiary. In connection with the acquisition
of Silknet, approximately 33 million shares of common stock, valued at
approximately $4.2 billion, were issued or reserved for issuance for all
outstanding shares, warrants and options of Silknet. In connection with the
acquisition, Mr. Wood, a founder and the Chairman of the Board, President and
Chief Executive Officer of Silknet, became one of our directors.
LOANS TO AND OTHER ARRANGEMENTS WITH OFFICERS AND DIRECTORS
In connection with the option exercises described under "Employment
Arrangements, Termination of Employment Arrangements and Change of Control
Arrangements," the following officers and directors delivered five-year full
recourse promissory notes, bearing interest at an annual rate of 5.7%, except in
the case of Messrs. Frick and Wolfe whose notes bear interest at an annual rate
of 6.0%, in amounts and with the balances indicated:
<TABLE>
<CAPTION>
ORIGINAL AMOUNT AMOUNT
OF OUTSTANDING AT
OFFICER OR DIRECTOR PROMISSORY NOTE JUNE 30, 2000
------------------ --------------- ---------------
<S> <C> <C>
Michael J. McCloskey................................................ $ 630,000 $ 675,655
Robert W. Frick..................................................... 299,997 318,267
William R. Phelps................................................... 79,000 75,651
Ian P. Cavanagh..................................................... 900,000 952,031
Michael R. Wolfe.................................................... 458,000 0
</TABLE>
We have entered into an employment arrangement with Mr. McCloskey, our
Chief Executive Officer. See "Employment Arrangements, Termination of Employment
Arrangements and Change in Control Arrangements."
In August 1999, we loaned $85,000 to Mr. Ansanelli, our Vice President,
Product Marketing. In connection with the loan, Mr. Ansanelli delivered a
five-year full recourse promissory note bearing interest at an annual rate of
5.7%. The loan is expected to be repaid by Mr. Ansanelli in July 2000.
54
<PAGE>
We have granted options to our executive officers and directors. See
"Management--Director Compensation" and "--Executive Compensation."
We have entered into an indemnification agreement with each of our
executive officers and directors containing provisions that may require us,
among other things, to indemnify our executive officers and directors against
liabilities that may arise by reason of our 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.
TRANSACTIONS WITH PROMOTERS
Each of Mr. Gainey, our former President and Chief Executive Officer and
our current Chairman of the Board of Directors, and Mr. Horvath, the former
Treasurer and a former director, is one of our a co-founders and may be deemed a
promoter for purposes of the federal securities laws. In July 1996, we sold to
Mr. Gainey 5,000,000 shares of common stock at a purchase price of $0.0001 per
share. In April 1997, we repurchased those shares and sold to Mr. Gainey
5,000,000 shares of common stock at a purchase price of $0.01 per share. In July
1996, we sold to Mr. Horvath 1,666,666 shares of common stock at a purchase
price of $0.0001 per share. In April 1997, we repurchased those shares and sold
to Mr. Horvath 833,332 shares of common stock at a purchase price of $0.01 per
share. All other material transactions with Messrs. Gainey and Horvath are
described in this section or elsewhere in this prospectus.See
"Management--Executive Compensation."
In April 1997, we entered into a consulting agreement with Mr. Horvath.
Under the agreement, Mr. Horvath agreed to provide up to 20 hours of consulting
services to us per month, at a rate of $25.00 per hour, until July 1, 2000. In
connection with the agreement, Mr. Horvath was granted a right to purchase
833,332 shares of common stock, which he purchased in April 1997, as described
above.
We believe that all of the transactions set forth above were made on
terms no less favorable to us than could have been otherwise obtained from
unaffiliated third parties. All future transactions, including loans, if any,
between us and our officers, directors and principal stockholders and their
affiliates and any transactions between us and any entity with which our
officers, directors or five percent stockholders are affiliated will be approved
by a majority of the board of directors, including a majority of the independent
and disinterested outside directors of the board of directors and will be on
terms no less favorable to us than could be obtained from unaffiliated third
parties.
55
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth information regarding the beneficial ownership
of our common stock as of June 30, 2000, by the following individuals or groups:
o each person or entity who is known by us to own beneficially
more than five percent of our outstanding stock;
o each of the Named Executive Officers;
o each of our directors; and
o all current directors and executive officers as a group.
Applicable percentage ownership in the following table is based on
93,162,339 shares of common stock outstanding as of June 30, 2000, as adjusted
to include all options exercisable within 60 days of June 30, 2000 held by the
particular stockholder and that are included in the first column, and including
the 2,500,000 shares issued on June 12, 2000 to the selling stockholders.
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>
NUMBER OF PERCENTAGE
SHARES OF SHARES
NAME AND ADDRESS OF BENEFICIAL BENEFICIALLY BENEFICIALLY
OWNER OWNED (#) OWNED (%)
----------------------------------- ------------- ------------
<S> <C> <C>
Entities affiliated with Draper Fisher Jurvetson(1).................... 8,077,674 8.7
Entities affiliated with Benchmark Capital Partners L.P.(2)............ 8,624,250 9.3
Entities affiliated with CMG @Ventures II LLC(10)...................... 4,707,553 5.1
Mark S. Gainey(3)...................................................... 4,579,966 4.9
Michael J. McCloskey(4)................................................ 1,869,466 2.0
James C. Wood.......................................................... 2,582,230 2.8
Paul R. Holland(5)..................................................... 816,206 *
William R. Phelps(6)................................................... 416,130 *
Joseph D. McCarthy(7).................................................. 316,130 *
Michael R. Wolfe....................................................... 630,782 *
Steven T. Jurvetson(1)................................................. 8,077,674 8.7
David M. Beirne(2)(11)................................................. 8,828,580 9.5
Eric A. Hahn(8)........................................................ 433,898 *
Dr. Charles A. Holloway(9)............................................. 159,998 *
Robert W. Frick........................................................ 147,034 *
All current directors and executive officers as a group (18 persons)... 31,314,960 33.6
</TABLE>
--------------
* Less than one percent.
(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., 563,134 shares of common stock held by Draper
Fisher Partners IV, LLC and 32,880 shares of common stock held by Draper
Richards L.P. 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 1,057,556 shares of common stock held by
Benchmark Founders' Fund L.P. Mr. Beirne, one of our 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 4,578,666 shares of common stock held by the Mark and
Elisabeth Gainey Family Trust.
(4) Includes 1,057,777 shares of common stock subject to our right of
repurchase. This repurchase right lapses with respect to 31,111 shares
per month.
56
<PAGE>
(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 270,469 shares of common stock subject to our right of
repurchase. This repurchase right lapses with respect to 16,904 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 213,888 shares of
common stock subject to our right of repurchase. This repurchase right
lapses with respect to 7,638 shares per month. Also includes 33,056
shares of common stock subject to our right of repurchase, which lapses
with respect to 972 shares per month.
(7) Includes 33,332 shares of common stock held by The Joseph McCarthy
Grantor Retained Annuity Trust and 33,332 shares of common stock held by
Siobhan Lawlor Grantor Retained Annuity Trust. Includes 84,445 shares of
common stock subject to our right of repurchase. This repurchase right
lapses with respect to 4,444 shares per month. Also includes 70,834
shares of common stock subject to our right of repurchase, which lapses
with respect to 2,084 shares per month. Mr. McCarthy will continue to
provide services to us through August 31, 2000. We will repurchase all
shares unvested as of August 31, 2000 at the exercise price paid per
share.
(8) Includes 68,780 shares of common stock subject to our right of
repurchase. This repurchase right lapses with respect to 3,126 shares per
month.
(9) Includes 8,889 shares of common stock subject to our right of repurchase.
This repurchase right lapses with respect to 1,481 shares per month.
(10) Principal address is 100 Brickstone Plaza, Andover, MA 01810. Includes a
warrant to purchase 123,404 shares of common stock.
(11) Includes 192,000 shares of common stock held by Ramsey/Beirne Investment
Pool II, LLC. Mr. Beirne, one of our directors, was Chief Executive
Officer of Ramsey/Beirne Associates until June 1997. Mr. Beirne disclaims
beneficial ownership of these shares, except to the extent of his
pecuniary interest in the Ramsey/Beirne Investment Pool II, LLC.
57
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 1,000,000,000 shares of common
stock, par value $.001 per share, 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 our certificate of incorporation where such rights are set forth
in full, and the provisions of applicable law.
COMMON STOCK. As of June 30, 2000, there were 93,162,339 shares of common
stock outstanding held of record by approximately 701 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 our 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. Our 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 our stockholders. The issuance of preferred stock by our 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 our company, may discourage bids for our
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. As of June 30, 2000, there are no shares of preferred
stock outstanding and we have no current plans to issue shares of preferred
stock.
WARRANTS. As of June 30, 2000, we had outstanding warrants to purchase an
aggregate of approximately 293,362 shares of our 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. Warrants for 1,982 shares have an
average exercise price of $1.81 and expire on September 1, 2004. Warrants for
123,404 shares are held by CMG@Ventures II LLC, expire on June 11, 2003 and have
an exercise price equal to $1.33. Warrants for 166,000 shares are held by
Vertex/HWH Investment Ltd., expire on June 11, 2003 and have an exercise price
equal to $1.33. The exercise price of all warrants is subject to customary
adjustments on stock splits, stock dividends, any merger or acquisition
involving us 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.
OPTIONS. As of June 30, 2000, we had outstanding options for
approximately 17,974,701 shares of common stock at a weighted average exercise
price of $50.0135.
REGISTRATION RIGHTS OF CERTAIN HOLDERS. In connection with our
acquisition of Connectify, we agreed to register shares of our 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 our acquisition of Business Evolution
and netDialog in December 1999, we agreed to file a registration statement
covering the resale of the shares issued in those acquisitions by August 13,
2000.
We agreed to grant registration rights to the holders of 2,500,000 shares
of our common stock, placed in the private placement pursuant to a Registration
Rights Agreement dated as of June 7, 2000. The Registration Rights Agreement
provided that we were obligated to prepare and file with the Securities and
Exchange Commission on or prior to July 2, 2000, a registration statement on
Form S-1 of which this prospectus forms a part, for the purpose of registering
the shares from the placement for resale from time to time on a delayed or
continuous basis by, and for the account of, the selling stockholders:
o in brokerage transactions;
58
<PAGE>
o over a stock exchange;
o utilizing the facilities of an inter-dealer quotation system;
o in an underwritten offering; or
o in privately negotiated off-market transactions.
We agreed to use our best efforts to keep the registration statement
continuously effective in order to permit this prospectus to be usable by the
selling stockholders of the private placement shares until the earlier of the
date when the selling stockholders have sold all of the private placement shares
or two years from the closing date of the private placement, subject to
extension for delay. As soon as practicable after we become eligible to register
on Form S-3, we will withdraw the registration statement on Form S-1and
re-register it on Form S-3.
EFFECT OF DELAWARE ANTI-TAKEOVER STATUTE. We are 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:
o 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;
o upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned
at lest 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 excluding 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
o 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:
o any merger or consolidation involving the corporation and any
interested stockholder;
o any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
o any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested
stockholder;
o 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
o 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. Our certificate of
incorporation and bylaws include provisions that may have the effect of
discouraging, delaying or preventing a change in control of our company 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.
CLASSIFIED BOARD. Our certificate of incorporation provides that our
board of directors be divided into three classes with staggered three-year
terms. As a result, only one of the three classes of our board of directors will
be elected each year. The classification of our 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.
59
<PAGE>
DIRECTORS. Our certificate of incorporation provides that the size of our
board of directors shall be determined by resolution of the board of directors,
and currently authorizes nine 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.
DIRECTORS' COMMITTEES. Our 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 our board. To
the extent provided in a resolution of our board of directors, these committees
may exercise all the powers and authority of the board of directors in our
management, including, if the resolution expressly provides, the declaration of
a dividend or the issuance of stock, except that no committee may:
o amend our certificate of incorporation or bylaws;
o adopt an agreement of merger or consolidation;
o recommend the sale, lease or exchange of all or substantially all of
our assets; or
o recommend our dissolution or revocation of our dissolution.
SUPERMAJORITY VOTING. Our certificate of incorporation requires the
approval of the holders of 66 2/3% of our outstanding voting stock to effect
certain amendments to the certificate of incorporation with respect to:
o the vote necessary to amend our bylaws or certificate of
incorporation;
o the size, classification and method of election of the board of
directors;
o the conduct of stockholders' meetings and stockholder action by
written consent; and
o indemnification of directors, officers and others.
In addition, our certificate of incorporation provides that directors
are removable by the vote of the holders of 66 2/3% of our outstanding voting
capital stock. Our 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 our outstanding voting
capital stock.
SPECIAL MEETING OF STOCKHOLDERS. Our certificate of incorporation
provides that special meetings of our stockholders may only be called by our
board of directors. This provision prevents our stockholders from initiating or
effecting any action by calling a meeting of the stockholders.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT. Our certificate of
incorporation provides that our stockholders may take action only at an annual
or special meeting of stockholders and shall have no right to take any action by
written consent without a meeting.
NOTICE PROCEDURES. Our bylaws establish advance notice procedures with
respect to all stockholder proposals to be brought before meetings of our
stockholders, including proposals relating to the nomination of candidates for
election as directors, the removal of directors and amendments to our
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 our Secretary
not less than 120 days prior to the meeting.
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<PAGE>
PLAN OF DISTRIBUTION
We are registering all 2,500,000 shares on behalf of the selling
stockholders. We will receive no proceeds from this offering. The selling
stockholders named in the table below or pledgees, donees, transferees or other
successors-in-interest selling shares received from the selling stockholders as
a gift, partnership distribution or other non-sale related transfer after the
date of this prospectus may sell the shares from time to time. The selling
stockholders will act independently of us in making decisions with respect to
the timing, manner and size of each sale. The sales may be made on one or more
exchanges or in the over-the-counter market or otherwise, at prices and at terms
then prevailing or at prices related to the then current market price, or in
negotiated transactions. The selling stockholders may effect these transactions
by selling the shares to or through broker-dealers.
The shares may be sold by one or more of, or a combination of, the
following:
o a block trade in which the broker-dealer so engaged will attempt to
sell the shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by this
broker-dealer for its account through this prospectus;
o an exchange distribution that complies with the rules of the
exchange;
o ordinary brokerage transactions and transactions in which the broker
solicits purchasers; and
o in privately negotiated transactions.
To the extent required, this prospectus may be amended or supplemented
from time to time to describe a specific plan of distribution. In effecting
sales, broker-dealers engaged by the selling stockholders may arrange for other
broker-dealers to participate in the resales.
The selling stockholders may enter into hedging transactions with
broker-dealers in connection with distributions of the shares or otherwise. In
these transactions, broker-dealers may engage in short sales of the shares in
the course of hedging the positions they assume with the selling stockholder.
The selling stockholders also may sell shares short and redeliver the shares to
close out these short positions. The selling stockholders may enter into option
or other transactions with broker-dealers which require the delivery to the
broker-dealer of the shares. The broker-dealer may then resell or otherwise
transfer these shares through this prospectus. The selling stockholders each may
also loan or pledge the shares to a broker-dealer. The broker-dealer may sell
the shares so loaned, or upon a default the broker-dealer may sell the pledged
shares by use of this prospectus.
Broker-dealers or agents may receive compensation in the form of
commissions, discounts or concessions from the selling stockholder.
Broker-dealers or agents may also receive compensation from the purchasers of
the shares for whom they act as agents or to whom they sell as principals, or
both. Compensation as to a particular broker-dealer might be in excess of
customary commissions and will be in amounts to be negotiated in connection with
the sale. Broker-dealers or agents and any other participating broker-dealers or
the selling stockholders may be deemed to be "underwriters" within the meaning
of Section 2(11) of the Securities Act in connection with sales of the shares.
Accordingly, any commission, discount or concession received by them and any
profit on the resale of the shares purchased by them may be deemed to be
underwriting discounts or commissions under the Securities Act. In addition, any
securities covered by this prospectus which qualify for sale through Rule 144
promulgated under the Securities Act may be sold under Rule 144 rather than
through this prospectus. The selling stockholders have advised us that they have
not entered into any agreements, understandings or arrangements with any
underwriters or broker-dealers regarding the sale of the securities. There is no
underwriter or coordinating broker acting in connection with the proposed sale
of shares by the selling stockholder.
The shares will be sold only through registered or licensed brokers or
dealers if required under applicable state securities laws. In addition, in
certain states the shares may not be sold unless they have been registered or
qualified for sale in the applicable state or an exemption from the registration
or qualification requirement is available and is complied with.
Under applicable rules and regulations under the Securities Exchange Act,
any person engaged in the distribution of the shares may not engage in
market-making activities with respect to our common stock during certain
restricted periods. In addition, the selling stockholders will be subject to
applicable provisions of the
61
<PAGE>
Securities Exchange Act and the associated rules and regulations under the
Securities Exchange Act which may limit the timing of purchases and sales of
shares of our common stock by the selling stockholders.
We will bear all costs, expenses and fees in connection with the
registration of the shares. The selling stockholders will bear all commissions
and discounts, if any, attributable to their respective sales of the shares. The
selling stockholders may agree to indemnify any broker-dealer or agent that
participates in transactions involving sales of the shares against some
liabilities, including liabilities arising under the Securities Act. We and the
selling stockholders have agreed to indemnify each other against some
liabilities in connection with the offering of the shares, including liabilities
arising under the Securities Act.
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<PAGE>
SELLING STOCKHOLDERS
The following table sets forth the names of the selling stockholders and
the number of shares being registered for sale as of the date of this prospectus
and sets forth the number of shares of common stock known by us to be
beneficially owned by each of the selling stockholders. The following table
assumes that the selling stockholders will sell all of the shares being offered
for their account by this prospectus, which were issued to them pursuant to a
private placement completed on June 12, 2000. However, we are unable to
determine the exact number of shares that actually will be sold. None of the
selling stockholders has had a material relationship with us within the past
three years other than as a result of the ownership of our shares or other
securities. The shares offered by this prospectus may be offered from time to
time by the selling stockholders. This information is based upon information
provided by each respective selling stockholder and public documents filed with
the SEC, and is not necessarily indicative of beneficial ownership for any other
purpose. The number of shares of common stock beneficially owned and used to
calculate the percentage beneficial ownership of each listed person includes the
shares of common stock underlying warrants or preferred stock held by such
persons that are exercisable or convertible within 60 days of June 30, 2000. The
term "selling stockholders" includes the stockholders listed below and their
transferees, assignees, pledgees, donees or other successors. The percent of
beneficial ownership for each stockholder is based on 93,162,339 shares of
common stock outstanding as of June 30, 2000.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SHARES OF NUMBER OF OUTSTANDING
COMMON STOCK MAXIMUM NUMBER SHARES SHARES
BENEFICIALLY OF SHARES OF BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO COMMON STOCK OWNED AFTER THE OWNED AFTER THE
NAME OF SELLING STOCKHOLDER OFFERING OFFERED OFFERING(1) OFFERING(1)
-------------------------------------- ---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Putnam Voyager Fund II (2)........... 329,128 136,900 192,228 *
Putnam Funds Trust - Putnam New
Century Growth Fund (2)........... 123,108 51,100 72,008 *
Putnam Investment Funds - Putnam
Worldwide Equity Fund (2)......... 2,611 1,300 1,311 *
Putnam OTC and Emerging Growth Fund.. 3,665,358 696,000 2,969,358 3.2
Putnam Variable Trust - Putnam VT
OTC and Emerging Growth Fund...... 156,038 29,700 126,338 *
Putnam New Opportunities Fund (2).... 1,343,802 688,600 655,202 *
Putnam Variable Trust - Putnam VT
New Opportunities Fund (2)........ 278,333 140,300 138,033 *
Putnam World Trust II - Putnam
Emerging Information Sciences
Trust (3)......................... 89,116 35,000 54,116 *
Putnam World Trust II - Putnam New
Opportunities (U.S. Aggressive
Growth Equity Fund) (3)........... 7,422 3,700 3,722 *
Cisalpina/Putnam USA Opportunities
Fund (3).......................... 34,404 17,400 17,004 *
Galleon Technology Partners I, L.P.
(4)............................... 11,591 11,591 -- --
Galleon Technology Partners II, L.P
(4)............................... 58,755 58,755 -- --
Galleon Technology Offshore, Ltd. (4) 129,654 129,654 -- --
Galleon New Media Partners, L.P. (4). 63,708 63,708 -- --
Galleon New Media Offshore, Ltd. (4). 136,292 136,292 -- --
DWS Investments...................... 150,000 150,000 -- --
Metzler Investments.................. 150,000 150,000 -- --
--------------
</TABLE>
* Less than one percent
(1) Assumes the maximum number of shares registered in this offering is sold.
(2) Entities affiliated with Putnam Investment Management, Inc.
(3) Entities affiliated with The Putnam Advisory Company, Inc.
(4) The Galleon Group shares the power to vote, dispose of or direct the
voting and disposition of these securities.
63
<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.
LEGAL MATTERS
The validity of the common stock offered in this prospectus and certain
other legal matters will be passed upon for us by Brobeck, Phleger & Harrison
LLP, Palo Alto, California. As of the date of this prospectus, attorneys of
Brobeck, Phleger & Harrison LLP and family members thereof beneficially owned an
aggregate of approximately 30,017 shares of our common stock.
EXPERTS
The 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
included in this prospectus, have been so included in reliance upon the report
of KPMG LLP, independent certified public accountants, given on the authority of
said firm as experts in auditing and accounting.
The consolidated financial statements of Silknet Software, Inc. as of
June 30, 1999 and 1998 and for each of the three years in the period ended June
30, 1999 included in this prospectus and 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.
CHANGE IN ACCOUNTANTS
KPMG LLP was previously our principal accountants. On March 22, 2000, we
and KPMG LLP mutually agreed to terminate KPMG LLP's appointment as principal
accountants due to an anticipated business relationship between our two
companies. The decision to change accountants was approved by the audit
committee of our board of directors. In connection with the audits of the fiscal
years ended December 31, 1998 and 1999, and the subsequent interim period
through March 22, 2000, there were no disagreements with KPMG LLP on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures, which disagreements, if not resolved to their
satisfaction, would have caused them to make reference in connection with their
opinion to the subject matter of the disagreement. The audit reports of KPMG LLP
on our consolidated financial statements as of and for the years ended December
31, 1998 and 1999, did not contain any adverse opinion or disclaimer of opinion,
nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles.
Effective April 19, 2000, PricewaterhouseCoopers LLP was engaged as our
independent accountants. Prior to April 19, 2000, we had not consulted with
PricewaterhouseCoopers LLP regarding the application of accounting principles to
a specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on our financial statements, and either a written
report was provided to us or oral advice was provided that
PricewaterhouseCoopers LLP concluded was an important factor considered by us in
reaching a decision as to the accounting, auditing or financial reporting issue.
In addition, prior to April 19, 2000, we had not consulted with
PricewaterhouseCoopers LLP regarding any matter that was either the subject of a
disagreement or a reportable event.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. Our SEC filings are also available to the public
from our Web site at http://kana.com or at the SEC's Web site at
http://www.sec.gov.
We have filed a registration statement on Form S-1 with the SEC relating
to the shares of common stock covered by this prospectus. This prospectus is a
part of the registration statement and does not contain all of the information
in the registration statement. Whenever a reference is made in this prospectus
to a contract or other
64
<PAGE>
document of ours, please be aware that such reference is not necessarily
complete and that you should refer to the exhibits that are a part of the
registration statement for a copy of the contract or other document. You may
review a copy of the registration statement at the SEC's public reference room
in Washington, D.C., as well as through the SEC's Internet site.
Upon request, we will provide without charge a copy of this prospectus,
and a copy of any and all of the information that has been or may be
incorporated by reference in this prospectus. Requests for these copies should
be directed to Investor Relations, Kana Communications, Inc., 740 Bay Road,
Redwood City, California 94063, telephone (650) 298-9282.
You should rely only on the information provided in this prospectus or
any prospectus supplement. We have authorized no one to provide you with
different information. We are not making an offer of these securities in any
state where the offer is not permitted.
65
<PAGE>
INDEX TO FINANCIAL STATEMENTS
KANA COMMUNICATIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INDEX TO FINANCIAL STATEMENTS - KANA COMMUNICATIONS, INC.
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-8
Notes to Consolidated Financial Statements...................................................... F-9
INDEX TO FINANCIAL STATEMENTS - SILKNET SOFTWARE, INC.
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-26
Notes to Consolidated Financial Statements...................................................... F-27
INDEX TO PRO FORMA COMBINED FINANCIAL STATEMENTS
Unaudited Pro Forma Combined Condensed Statement of Operations - June 30,2000................... F-41
Unaudited Pro Forma Combined Condensed Statement of Operations - December 31, 1999.............. F-42
Notes to Unaudited Pro Forma Combined Condensed Financial Statements............................ F-43
</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 subsidiaries (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 disclosure 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 subsidiaries 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/ KMPG 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, JUNE 30,
------------------------ -------------
1998 1999 2000
----------- ----------- -------------
ASSETS (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents......................................... $ 13,875 $ 18,695 $ 159,760
Short-term investments............................................ 160 34,522 3,082
Accounts receivable, less allowance for doubtful accounts of $110
in 1998, $366 in 1999 and $1,269 in 2000........................ 847 4,655 31,719
Prepaid expenses and other current assets......................... 150 2,036 5,202
----------- ----------- -------------
Total current assets............................................ 15,032 59,908 199,763
Property and equipment, net.......................................... 1,473 8,360 22,249
Goodwill and identifiable intangibles................................ -- -- 3,510,792
Other assets......................................................... 371 1,961 8,640
----------- ----------- -------------
Total assets.................................................... $ 16,876 $ 70,229 $ 3,741,444
=========== =========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable.................................. $ 1,071 $ 4,224 $ 1,462
Accounts payable.................................................. 698 2,766 5,243
Accrued commissions............................................... 143 1,984 2,984
Accrued payroll................................................... 280 1,639 9,003
Other accrued liabilities......................................... 445 1,303 11,883
Accrued acquisition related costs................................. -- 3,148 30,868
Deferred revenue.................................................. 562 6,253 21,908
----------- ----------- -------------
Total current liabilities....................................... 3,199 21,317 83,351
Notes payable, less current portion.................................. 726 412 262
----------- ----------- -------------
Total liabilities............................................... 3,925 21,729 83,613
----------- ----------- -------------
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, 60,766,650 and 93,162,339 shares issued
and outstanding................................................. 19 61 93
Additional paid-in capital........................................ 29,246 202,473 4,109,094
Deferred stock-based compensation................................. (2,284) (14,962) (13,000)
Notes receivable from stockholders................................ (164) (6,380) (5,974)
Accumulated other comprehensive losses............................ (5) (75) (376)
Accumulated deficit............................................... (13,874) (132,617) (432,006)
----------- ----------- -------------
Total stockholders' equity...................................... 12,951 48,500 3,657,831
----------- ----------- -------------
Total liabilities and stockholders' equity...................... $ 16,876 $ 70,229 $ 3,741,444
=========== =========== =============
</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>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------- -----------------------
(UNAUDITED)
1997 1998 1999 1999 2000
--------- --------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenue:
License............................................. $ -- $ 2,014 $ 10,536 $ 3,030 $ 22,903
Service............................................. 617 333 3,528 797 13,270
--------- --------- ----------- ----------- ----------
Total revenue................................... 617 2,347 14,064 3,827 36,173
--------- --------- ----------- ----------- ----------
Cost of revenue:
License............................................. -- 54 271 72 801
Service, excluding amortization of stock-based
compensation of $13, $143, $19,752, $799, and
$1,690 253 666 6,610 1,349 14,804
--------- --------- ----------- ----------- ----------
Total cost of revenue........................... 253 720 6,881 1,421 15,605
--------- --------- ----------- ----------- ----------
Gross profit.................................... 364 1,627 7,183 2,406 20,568
--------- --------- ----------- ----------- ----------
Operating expenses:
Sales and marketing, excluding amortization of
stock-based compensation of $52, $564,
$34,000, $1,375, and $2,925....................... 512 5,504 21,199 6,659 32,548
Research and development, excluding
amortization of stock-based compensation of
$31, $438, $19,864, $803, and $1,699.............. 971 5,669 12,854 5,061 16,298
General and administrative, excluding
amortization of stock-based compensation of
$17, $311, $6,860, $277, and $599................. 378 1,826 5,018 1,811 5,582
Amortization of goodwill and identifiable
intangibles....................................... -- -- -- -- 247,043
Amortization of stock-based compensation............ 113 1,456 80,476 3,254 6,913
In process research and development -- -- -- -- 6,900
Acquisition related costs........................... -- -- 5,635 -- 6,564
--------- --------- ----------- ----------- ----------
Total operating expenses........................ 1,974 14,455 125,182 16,785 321,848
--------- --------- ----------- ----------- ----------
Operating loss.......................................... (1,610) (12,828) (117,999) (14,379) (301,280)
Other income (expense), net............................. 57 227 (744) (519) 1,891
--------- --------- ----------- ----------- ----------
Net loss............................................ (1,553) (12,601) (118,743) (14,898) (299,389)
--------- --------- ----------- ----------- ----------
Other comprehensive loss:
Net unrealized gain on available for sale
securities........................................ -- -- 26 -- --
Foreign currency translation adjustments............ -- (5) (96) (32) (301)
--------- --------- ----------- ------------ ----------
Total other comprehensive loss.................. -- (5) (70) (32) (301)
--------- --------- ----------- ------------ ----------
Comprehensive loss.............................. $ (1,553) $ (12,606) $ (118,813) $ (14,930) $ (299,690)
========= ========= =========== ============ ==========
Basic and diluted net loss per share.................... $ (0.37) $ (2.01) $ (4.61) $ (2.51) $ (4.53)
========= ========= =========== =========== ==========
Shares used in computing basic and diluted net loss per
share amounts......................................... 4,152 6,258 25,772 5,944 66,030
========= ========= =========== =========== ==========
</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
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED
------------------------ ------------------------ PAID-IN STOCK-BASED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
------------ ---------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1997........... -- $ -- 106,742 $ -- $ -- $ --
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............................ -- -- -- -- -- --
----------- ---------- ----------- ----------- ---------- ------------
Balances, December 31, 1997......... 8,917,855 9 6,486,558 7 7,725 (784)
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 --
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............ -- -- -- -- -- --
Net loss............................ -- -- -- -- -- --
------------ ---------- ----------- ----------- ---------- ------------
Balances, December 31, 1998......... 12,512,641 13 19,274,516 19 29,246 (2,284)
<CAPTION>
NOTES ACCUMULATED
RECEIVABLE OTHER TOTAL
FROM COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
STOCKHOLDERS LOSSES DEFICIT EQUITY
------------ ------------- ----------- -------------
<S> <C> <C> <C> <C>
Balances, January 1, 1997........... $ -- $ -- $ 280 $ 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) (1,553)
------------ ------------- ----------- -------------
Balances, December 31, 1997......... -- -- (1,273) 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..... (164) -- -- 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) -- (5)
Net loss............................ -- -- (12,601) (12,601)
------------ ------------- ----------- -------------
Balances, December 31, 1998......... (164) (5) (13,874) 12,951
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
F-5
<PAGE>
<TABLE>
<CAPTION>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED
--------------------- ------------------- PAID-IN STOCK-BASED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
----------- -------- ---------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1998 12,512,641 13 19,274,516 19 29,246 (2,284)
Issuance of common stock
upon exercise of stock
options and warrants,
net of repurchases......... -- -- 5,749,356 6 6,393 --
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............... -- -- -- -- -- --
Interest receivable from
notes receivable from
stockholders............... -- -- -- -- -- --
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...... -- -- -- -- -- --
Net loss...................... -- -- -- -- -- --
----------- -------- ---------- -------- ----------- ------------
Balances, December 31, 1999... -- -- 60,766,650 61 202,473 (14,962)
=============================
</TABLE>
<TABLE>
<CAPTION>
NOTES ACCUMULATED
RECEIVABLE OTHER TOTAL
FROM COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
STOCKHOLDERS' LOSSES DEFICIT EQUITY
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Balances, December 31, 1999... (164) (5) (13,874) 12,951
Issuance of common stock
upon exercise of stock
options and warrants,
net of repurchases......... (6,544) -- -- (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 -- -- 501
Interest receivable from
notes receivable from
stockholders............... (173) -- -- (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) -- (70)
Net loss...................... -- -- (118,743) (118,743)
------------- ------------- ----------- -------------
Balances, December 31, 1999... (6,380) (75) (132,617) 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 STOCKHOLDERS' EQUITY--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED
-------------------- ----------------------- PAID-IN STOCK-BASED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
--------- --------- ----------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1999...... -- $ -- 60,766,650 $ 61 $ 202,473 $ (14,962)
Issuance of common stock
upon exercise of stock
options and warrants, net
of repurchases
(unaudited)................... -- -- 456,559 -- 1,890 --
Issuance of employee stock
purchase plan(unaudited)...... -- -- 252,394 1 1,889 --
Issuance of common stock
related to Silknet
Software, Inc.
acquisition (unaudited)....... -- -- 29,186,736 29 3,778,318 --
Issuance of common stock
related to private
placement (unaudited)......... -- -- 2,500,000 2 119,573 --
Payments on notes receivable
from stockholders
(unaudited)................... -- -- -- -- -- --
Interest receivable from
notes receivable from
stockholders (unaudited)...... -- -- -- -- -- --
Deferred stock-based
compensation (unaudited)...... -- -- -- -- 4,951 (4,951)
Amortization of deferred
stock based compensation
(unaudited)................... -- -- -- -- -- 6,913
Other comprehensive loss
(unaudited)................... -- -- -- -- -- --
Net loss (unaudited)............. -- -- -- -- -- --
--------- --------- ----------- --------- ----------- ------------
Balances, June 30, 2000
(unaudited)................... -- $ -- 93,162,339 $ 93 $ 4,109,094 $ (13,000)
========= ========= =========== ========= =========== ============
</TABLE>
<TABLE>
<CAPTION>
NOTES ACCUMULATED
RECEIVABLE OTHER TOTAL
FROM COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
STOCKHOLDERS LOSSES DEFICIT EQUITY
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Balances, December 31, 1999....... $ (6,380) $ (75) $ (132,617) $ 48,500
Issuance of common stock
upon exercise of stock
options and warrants, net
of repurchases
(unaudited).................... -- -- 1,890
Issuance of employee stock
purchase plan(unaudited)....... -- -- -- 1,890
Issuance of common stock
related to Silknet
Software, Inc.
acquisition (unaudited)........ -- -- -- 3,778,347
Issuance of common stock
related to private
placement
(unaudited)................... -- -- -- 119,575
Payments on notes receivable
from stockholders
(unaudited).................... 554 -- -- 554
Interest receivable from
notes receivable from
stockholders (unaudited)....... (148) -- -- (148)
Deferred stock-based
compensation (unaudited)....... -- -- -- --
Amortization of deferred
stock based compensation
(unaudited).................... -- -- -- 6,913
Other comprehensive loss
(unaudited).................... -- (301) -- (301)
Net loss (unaudited).............. -- -- (299,389) (299,389)
------------ ------------- ------------ -------------
Balances, June 30, 2000
(unaudited).................... $ (5,974)$ (376) $ (432,006) $ 3,657,831
============ ============= ============ =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-7
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- -----------------------
1997 1998 1999 1999 2000
---------- ----------- ----------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $ (1,553) $ (12,601) $ (118,743) $ (14,898) $ (299,389)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................... 45 328 1,531 373 2,968
Amortization of stock-based compensation and
other stock-based items....................... 113 1,589 80,536 3,254 6,913
Amortization of identifiable assets......... -- -- -- -- 247,043
In process research and development......... -- -- -- -- 6,900
Interest expense from warrants issued in
connection with bridge loans............. -- -- 1,559 539 --
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) (801) (17,944)
Prepaid expenses and other assets........... (50) (469) (1,831) (646) (7,136)
Accounts payable and accrued liabilities.... 379 1,177 9,274 2,109 6,294
Deferred revenue............................ -- 562 5,691 1,419 12,164
---------- ----------- ----------- ---------- ------------
Net cash used in operating activities....... (1,081) (10,104) (25,705) (8,651) (42,187)
---------- ----------- ----------- ---------- ------------
Cash flows from investing activities:
(Purchases) sales of short-term investments, net.. (210) 50 (35,981) (2,091) 31,433
Purchases of property and equipment............... (371) (1,446) (8,418) (1,344) (11,742)
Cash acquired from acquisition.................... -- -- -- -- 43,135
---------- ----------- ----------- ---------- ------------
Net cash (used in) provided by investing
activities.................................... (581) (1,396) (44,399) (3,435) 62,826
---------- ----------- ----------- ---------- ------------
Cash flows from financing activities:
Proceeds from notes payable and convertible notes
payable......................................... 256 1,834 9,790 4,461 --
Payments on notes payable......................... -- (122) (2,151) (65) (3,034)
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 5,645 310 3,780
Net proceeds from initial public offering......... -- -- 51,066 -- --
Net proceeds from common stock related to
private placement............................... -- -- -- -- 119,575
Payments on stockholders' notes receivable...... -- -- 501 -- 406
---------- ----------- ----------- ---------- ------------
Net cash provided by financing activities........ 6,929 19,996 75,020 4,706 120,727
---------- ----------- ----------- ---------- ------------
Effect of exchange rate changes on cash and cash
equivalents....................................... -- (5) (96) (37) (301)
Net change in cash and cash equivalents.............. 5,267 8,491 4,820 (7,417) 141,065
Cash and cash equivalents at beginning of period..... 117 5,384 13,875 13,875 18,695
---------- ----------- ----------- ---------- ------------
Cash and cash equivalents at end of period........... $ 5,384 $ 13,875 $ 18,695 $ 6,458 $ 159,760
========== =========== =========== ========== ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest............ $ 3 $ 36 $ 131 $ 27 $ 130
========== =========== =========== ========== ============
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 $ 1,041 $ --
========== =========== =========== ========== ============
Grant of options to purchase common stock with
an exercise price below fair value............ $ 890 $ 2,273 $ 93,154 $ 14,400 $ 4,738
========== =========== =========== ========== ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-8
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999--(CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements as of June 30,
2000 and for the six months ended June 30, 1999 and 2000 have been prepared by
Kana Communications, Inc. (the Company or Kana) and reflect all adjustments (all
of which are normal and recurring in nature) that, in the opinion of management,
are necessary for a fair presentation of the interim financial information. The
results of operations for the interim periods presented are not necessarily
indicative of the results to be expected for any subsequent quarter or for the
entire year ending December 31, 2000.
(B) DESCRIPTION OF BUSINESS
Kana and subsidiaries 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.
(C) 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.
(D) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(E) FOREIGN CURRENCY TRANSLATION
The functional currency for the Company's international subsidiary is the
local currency of the country in which it operates. Assets and liabilities are
translated using the exchange rate at the balance sheet date. Revenues,
expenses, gains, and losses are translated at the average exchange rates
prevailing during the year. Any translation adjustments are included in other
comprehensive loss.
(F) CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with an original
maturity or reset date of three months or less to be cash equivalents. 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.
(G) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method over
the estimated useful lives of the respective assets, generally three to five
years. Leasehold improvements are amortized over the lesser of the related lease
term or the life of the improvement.
The Company evaluates long-lived assets for impairment whenever changes
in circumstances indicate that the carrying amount of the asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If
F-9
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999--(CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000 IS UNAUDITED
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amounts exceed the fair values of
the assets. Assets to be disposed of are reported at the lower of carrying
values or fair values, less costs of disposal.
(H) 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
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.
(I) 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.
(J) 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.
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.
F-10
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999--(CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000 IS UNAUDITED
(K) 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.
(L) 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.
(M) 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.
(N) NET LOSS PER SHARE
Basic net loss per share is computed using the weighted-average number of
outstanding shares of common stock, excluding common stock subject to
repurchase. Diluted net loss per share is computed using the weighted-average
number of outstanding shares of common stock and, when dilutive, potential
common shares from options and warrants to purchase common stock and common
stock subject to repurchase using the treasury stock method, and from
convertible securities using the as-if converted basis. All potential common
shares have been excluded from the computation of diluted net loss per share for
all periods presented because the effect would have been antidilutive.
Diluted net loss per share does not include the effect of the following
antidilutive common equivalent shares:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------- ---------------------------
1997 1998 1999 1999 2000
---------- ----------- ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Stock options and warrants........... 3,576,632 824,630 3,771,116 421,156 14,623,607
Common stock subject to repurchase... 5,189,824 8,926,146 9,101,206 8,418,674 5,644,931
Convertible preferred stock (as if
converted basis).................. 17,835,710 25,025,282 -- 25,025,282 --
----------- ----------- ------------ ------------- ------------
26,602,166 34,776,058 12,872,322 33,865,112 20,268,538
=========== =========== ============ ============= ============
</TABLE>
(O) 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,
F-11
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999--(CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000 IS UNAUDITED
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, 1999, 1998 and 1997.
For the six months ended June 30 1999 and 2000, revenues from sources outside of
the United States represented $344,000 and $4.0 million, respectively.
(P) 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 Statement of Position (SOP) 98-9, Modification of SOP 97-2, Software
Revenue Recognition with Respect to Certain Transactions. SOP 98-9 amends SOP
97-2 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 became effective January 1, 2000. The Company adopted SOP
98-9 on January 1, 2000 without any material effect on its results of
operations, financial position or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance for revenue recognition under certain
circumstances. SAB 101 is effective in the quarter beginning October 1, 2000.
The Company does not believe SAB 101 will have a material impact on its results
of operations, financial position or cash flows.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25." This interpretation has
provisions that are effective on staggered dates, some of which began after
December 15, 1998 and others that become effective after June 30, 2000. The
adoption of this interpretation has not and will not have a material impact on
the financial statements.
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.
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,
F-12
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999--(CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000 IS UNAUDITED
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 paid in 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. As of June 30, 2000, there was a remaining balance of
$383,000 in accrued acquisition related costs.
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 31, NINE MONTHS
---------------- 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
====== ======== ====================
<CAPTION>
YEARS ENDED
DECEMBER 31, NINE MONTHS
--------------------- ENDED SEPTEMBER 30,
1997 1998 1999
---------- --------- -------------------
(UNAUDITED)
<S> <C> <C> <C>
Net Loss:
Kana.......................................... $ (1,384) $ (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.
F-13
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999--(CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000 IS UNAUDITED
3. FINANCIAL STATEMENTS DETAIL
Cash equivalents consist of the following as of December 31, 1999 (in
thousands):
UNREALIZED UNREALIZED FAIR
COST LOSS GAIN VALUE
--------- ----------- ----------- ---------
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
========= =========== =========== =========
Short-term investments consist of the following as of December 31, 1999
(in thousands):
UNREALIZED UNREALIZED FAIR
COST LOSS GAIN VALUE
---------- ----------- ----------- ---------
Municipal securities........... $ 18,450 $ -- $ -- $ 18,450
Commercial paper............... 9,284 -- 23 9,307
Corporate bonds................ 5,115 -- 3 5,118
Certificates of deposit........ 1,647 -- -- 1,647
---------- ----------- ----------- ---------
$ 34,496 $ -- $ 26 $ 34,522
========== =========== =========== =========
As of December 31, 1998, short-term investments consisted of certificates
of deposit.
Property and equipment, net consisted of the following (in thousands):
DECEMBER 31,
-------------------
1998 1999
--------- --------
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
========= ========
Other income (expense), net consisted of the following (in thousands):
YEARS ENDED
DECEMBER 31,
-------------------------
1997 1998 1999
------ ------ --------
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)
====== ====== ========
F-14
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999--(CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000 IS UNAUDITED
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 expired on June 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):
YEAR ENDING DECEMBER 31,
2000...................................... $ 237
2001...................................... 263
2002...................................... 149
---------
$ 649
=========
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.
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 21, 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.
F-15
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999--(CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000 IS UNAUDITED
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 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.
F-16
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999--(CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000 IS UNAUDITED
A summary of stock option activity follows:
<TABLE>
<CAPTION>
SHARES WEIGHTED
AVAILABLE NUMBER OF AVERAGE
FOR GRANT 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>
The following table summarizes information about fixed stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER OF CONTRACTUL 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
F-17
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999--(CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000 IS UNAUDITED
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.
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):
YEAR ENDED
DECEMBER 31,
1999
-------------
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)
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 -- -- -- --
1998.............................................. 5.15% 3 -- -- -- --
1999--Pre IPO...................................... 5.30% 3 -- -- -- --
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 EXERCISE WEIGHTED AVERAGE FAIR
PRICE 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.
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
F-18
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999--(CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000 IS UNAUDITED
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):
OPERATING
YEAR ENDING DECEMBER 31, LEASES
------------------------ ----------
2000............................................................... $ 2,587
2001............................................................... 2,487
2002............................................................... 2,554
2003............................................................... 2,196
2004............................................................... 2,189
Thereafter......................................................... 4,599
----------
$ 16,612
==========
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.
(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
F-19
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999--(CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000 IS UNAUDITED
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):
YEARS ENDED
DECEMBER 31,
--------------------
1998 1999
--------- ---------
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)............ $ -- $ --
========= =========
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.
F-20
<PAGE>
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999--(CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000 IS UNAUDITED
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 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.
9. ACQUISITION OF SILKNET (UNAUDITED)
On April 19, 2000, the Company finalized the acquisition of Silknet
Software, Inc. (Silknet). In connection with the merger, each share of Silknet
common stock outstanding immediately prior to the consummation of the merger was
converted into the right to receive 1.66 shares of Kana common stock (the
"Exchange Ratio") and Kana assumed Silknet's outstanding stock options and
warrants based on the Exchange Ratio, issuing approximately 29.2 million shares
of Kana common stock and assuming options and warrants to acquire approximately
4.0 million shares of Kana common stock. The transaction is accounted for using
the purchase method of accounting.
The Company has accounted for the merger as a purchase. As a result, Kana
recorded on its balance sheet the fair market value of Silknet's assets and
liabilities, acquisition-related costs of $32.9 million, and identifiable
intangibles and goodwill of approximately $3.8 billion. At June 30, 2000,
intangible assets and goodwill represent approximately 94% of Kana's 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.
The estimated purchase price was approximately $3.8 billion, measured as
the average fair market value of Kana's outstanding common stock from January
31, to February 14, 2000, five trading days before and after the merger
agreement was announced plus the Black-Scholes calculated 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):
Fair market value of Kana's common stock....................... $ 3,373,425
Fair market value of Silknet options and warrants assumed....... 404,922
Acquisition-related costs....................................... 32,900
------------
Total........................................................... $ 3,811,247
============
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
F-22
<PAGE>
SILKNET SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
-------------------- ------------
1998 1999 2000
--------- --------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 10,651 $ 57,565 $ 45,935
Accounts receivable, net of allowance for doubtful
accounts of $0, $275, and $700 at June 30, 1998 and
1999 and March 31, 2000, respectively 1,557 3,985 9,142
Prepaid expenses and other current assets................. 265 689 993
--------- --------- ------------
Total current assets.................................... 12,473 62,239 56,070
Property and equipment, net............................... 1,236 2,530 4,649
Other assets.............................................. 54 252 1,690
--------- --------- ------------
Total assets.......................................... $ 13,763 $ 65,021 $ 62,409
========= ========= ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Note payable to bank, current portion..................... 249 133 122
Accounts payable.......................................... 208 1,193 824
Accrued expenses.......................................... 967 4,849 10,220
Deferred revenue.......................................... 1,013 2,187 3,775
--------- --------- ------------
Total current liabilities............................... 2,437 8,362 14,941
Note payable to bank...................................... 222 89 --
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 March 31, 2000 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 March 31, 2000 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 March 31, 2000 10,929 -- --
Series D;
Designated: 1,205,913 shares
Issued and outstanding: no shares at June 30, 1998,
June 30, 1999 and March 31, 2000...................... -- -- --
--------- --------- ------------
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
17,230,115 at June 30, 1998 and 1999 and March 31,
2000, respectively.................................... 31 160 172
Additional paid-in capital................................... 2,929 78,080 80,418
Accumulated dividends on preferred stock..................... (1,093) -- --
Deferred compensation........................................ (125) (1,108) (517)
Other comprehensive income (loss)............................ -- 3 (7)
Accumulated deficit.......................................... (9,882) (20,702) (32,598)
--------- --------- ------------
Total stockholders' equity (deficit).................. (8,140) 56,433 47,468
--------- --------- ------------
Total liabilities and stockholders' equity (deficit).. $ 13,763 $ 65,021 $ 62,409
========= ========= ============
</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>
NINE-MONTHS ENDED
FOR THE YEARS ENDED JUNE 30, MARCH 31,
-------------------------------------------- ---------------------------
1997 1998 1999 1999 2000
-------------- -------------- ------------ ------------ --------------
Revenue: (UNAUDITED)
<S> <C> <C> <C> <C> <C>
License............................ $ 75 $ 2,977 $ 10,050 $ 6,473 $ 15,870
Services........................... 119 750 3,980 2,734 8,269
-------------- -------------- ------------ ------------ --------------
Total revenue.................. 194 3,727 14,030 9,207 24,139
Cost of revenue:
License............................ 29 32 317 265 646
Services........................... 312 1,354 3,424 2,268 7,151
-------------- -------------- ------------ ------------ --------------
Total cost of revenue.......... 341 1,386 3,741 2,533 7,797
-------------- -------------- ------------ ------------ --------------
Gross margin.......................... (147) 2,341 10,289 6,674 16,342
Operating expenses:
Sales and marketing................ 888 4,802 10,921 7,115 13,359
Research and development........... 1,018 2,857 7,186 4,476 10,406
General and administrative......... 747 1,299 3,683 2,388 6,483
-------------- -------------- ------------ ------------ --------------
Total operating expenses.............. 2,653 8,958 21,790 13,979 30,248
-------------- -------------- ------------ ------------ --------------
Operating loss........................ (2,800) (6,617) (11,501) (7,305) (13,906)
Interest income (expense), net........ (59) 121 681 263 2,010
-------------- -------------- ------------ ------------ --------------
Net loss.............................. (2,859) (6,496) (10,820) (7,042) (11,896)
Accrued dividends for preferred
stockholders....................... 190 903 1,787 1,519 --
-------------- -------------- ------------ ------------ --------------
Net loss attributable to common
stockholders....................... $ (3,049) $ (7,399) $ (12,607) $ (8,561) $ (11,896)
============== ============== ============ ============ ==============
Basic and diluted net loss per share.. $ (1.13) $ (2.57) $ (2.44) $ (2.67) $ (0.72)
============== ============== ============ ============ ==============
Shares used in computing basic and
diluted net loss per share......... 2,697,068 2,875,256 5,176,208 3,204,744 16,620,804
============== ============== ============ ============ ==============
</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 COMMON ACCUMULATED
PREFERRED STOCK STOCK ADDITIONAL DIVIDENDS
----------------- --------------- PAID-IN PREFERRED
SHARES VALUE SHARES VALUE CAPITAL STOCK
-------- ------- -------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996................. 2,555 $ 26 $ 818
Issuance of common stock.............. 305 3 95
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
Stock options cancelled............... (49)
Amortization of deferred compensation.
Accrued dividends for preferred
stockholders........................ 190 $ (190)
Net loss..............................
-------- ------- -------- ------- ----------- ------------
Balance at June 30, 1997................. 4,865 7,432 2,860 29 911 (190)
Issuance of common stock.............. 265 2 2,018
Issuance of Series C Convertible
Participating Preferred Stock, net
of offering costs................... 3,089 10,772
Amortization of deferred compensation.
Accrued dividends for preferred
stockholders........................ 903 (903)
Net loss..............................
-------- ------- -------- ------- ----------- ------------
Balance at June 30, 1998................. 7,954 19,107 3,125 31 2,929 (1,093)
Issuance of common stock under stock.. 309 3 359
option plans........................
Issuance of Series D Convertible
Preferred Stock, net of offering
costs............................... 1,206 8,788
Accrued dividends for preferred
stockholders........................ 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
Issuance of common stock in initial
public offering, net of offering
costs............................... 3,450 34 46,906
Deferred compensation related to
grant of stock
options............................. 1,188
Stock options cancelled............... (13)
Amortization of deferred compensation.
Net loss..............................
Other comprehensive income............
-------- ------- -------- ------- ----------- ------------
Balance at June 30, 1999................. -- -- 16,044 160 78,080 --
Issuance of common stock net of 1,186 12 2,312
offering costs......................
Deferred compensation related to
grant of stock
options............................ 37
Stock options cancelled............... (11)
Amortization of deferred compensation.
Net loss..............................
Other comprehensive loss..............
-------- ------- -------- ------- ----------- ------------
Balance at March 31, 2000 (unaudited).... -- $ -- 17,230 $ 172 $ 80,418 $ --
======== ======= ======== ======= =========== ============
<CAPTION>
OTHER TOTAL
DEFERRED COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
COMPENSATION INCOME (LOSS) DEFICIT EQUITY (DEFICIT)
------------ -------------- ----------- ----------------
Balance at June 30, 1996................. $ (351) $ (527) $ (34)
Issuance of common stock.............. 98
Issuance of Series A Convertible
Participating Preferred Stock, net
of offering costs...................
Issuance of Series B Convertible
Participating Preferred Stock net
of offering costs...................
Issuance of common stock purchase
warrants............................ 47
Stock options cancelled............... 49
Amortization of deferred compensation. 93 93
Accrued dividends for preferred
stockholders........................ (190)
Net loss.............................. (2,859) (2,859)
------------ ----------- ----------------
Balance at June 30, 1997................. (209) (3,386) (2,845)
Issuance of common stock.............. 2,020
Issuance of Series C Convertible
Participating Preferred Stock, net
of offering costs...................
Amortization of deferred compensation. 84 84
Accrued dividends for preferred
stockholders........................ (903)
Net loss.............................. (6,496) (6,496)
------------ ----------- ----------------
Balance at June 30, 1998................. (125) (9,882) (8,140)
Issuance of common stock under stock 362
option plans........................
Issuance of Series D Convertible
Preferred Stock, net of offering
costs...............................
Accrued dividends for preferred
stockholders........................ (1,787)
Conversion of Convertible
Participating Preferred Stock and
Convertible Preferred Stock......... 29,683
Issuance of common stock in initial
public offering, net of offering
costs............................... 46,940
Deferred compensation related to
grant of stock
options............................. (1,188)
Stock options cancelled............... 13
Amortization of deferred compensation. 192 192
Net loss.............................. (10,820) (10,820)
Other comprehensive income............ $ 3 3
Balance at June 30, 1999................. ------------ -------------- ----------- ----------------
(1,108) 3 (20,702) 56,433
Issuance of common stock net of
offering costs...................... 2,324
Deferred compensation related to
grant of stock options.............. (37) --
Stock options cancelled............... 11 --
Amortization of deferred compensation. 617 617)
Net loss.............................. (11,896) (11,896)
Other comprehensive loss.............. (10) (10)
------------ -------------- ----------- ----------------
Balance at March 31, 2000 (unaudited).... $ (517) $ (7) $ (32,598) $ 47,468
============ ============== =========== ================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
F-25
<PAGE>
SILKNET SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE-MONTHS ENDED
FOR THE YEARS ENDED JUNE 30, MARCH 31,
--------------------------------- ---------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................ $ (2,859) $ (6,496) $ (10,820) $ (7,042) $ (11,896)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 188 342 758 507 1,320
Provision for doubtful accounts................... -- -- 275 250 425
Loss (gain) on disposal of equipment.............. -- 4 (11) (11) --
Amortization of deferred compensation............. 93 84 192 94 617
Stock issued for services......................... 3 -- -- -- --
Changes in operating assets and liabilities:
Accounts receivable............................. 23 (1,524) (2,703) (2,969) (5,582)
Prepaid and other current assets................ (23) (206) (424) (74) (304)
Other assets.................................... (60) (25) (198) (62) 62
Accounts payable................................ 236 (62) 985 359 (369)
Accrued expenses................................ 102 844 3,882 1,800 5,371
Deferred revenue................................ 154 858 1,174 552 1,588
---------- ---------- ---------- ---------- ----------
Net cash used in operating activities......... (2,143) (6,181) (6,890) (6,596) (8,768)
---------- ---------- ---------- ---------- ----------
Cash flows from investing activities:
Purchase of property and equipment.................. (563) (1,073) (2,052) (984) (3,438)
Proceeds from dispositions of property and
equipment........................................... -- 27 12 11 --
Investment in Safe Harbor........................... -- -- -- -- (1,500)
---------- ---------- ---------- ---------- ----------
Net cash used in investing activities........... (563) (1,046) (2,040) (973) (4,938)
---------- ---------- ---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of
offering costs.................................... 96 1,737 46,940 271 (110)
Proceeds from exercise of common stock options...... -- 70 362 -- 2,434
Proceeds from issuance of notes payable
and warrants........................................ 560 700 -- -- --
Payments on notes payable........................... (187) (198) (249) (216) (237)
Proceeds from issuance of preferred stock, net of
offering costs.................................... 6,992 10,773 8,788 8,788 --
---------- ---------- ---------- ---------- ----------
Net cash provided by financing activities....... 7,461 13,082 55,841 8,843 2,087
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents... 4,755 5,855 46,911 1,274 (11,619)
Effect of exchange rate changes on cash and cash
equivalents......................................... -- -- 3 1 (11)
--------- ---------- --------- --------- ---------
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 $ 11,926 $ 45,935
========= ========= ========= ========= =========
Supplemental schedule of cash flow information:
Interest paid....................................... $ 16 $ 39 $ 36 $ 33 $ 41
========= ========= ========= ========= =========
Income taxes paid................................... $ -- $ 12 $ 19 $ 19 $ 47
========= ========= ========= ========= =========
Supplemental schedule of non-cash financing activity:
Settlement of debt through issuance of Series A 250 -- -- -- --
Convertible Participating Preferred Stock......... $ $ $ $ $
========= ========= ========= ========= =========
Settlement of debt through issuance of common stock. $ -- $ 213 $ -- $ -- $ --
========== ========== ========== ========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
F-26
<PAGE>
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
INFORMATION AS OF MARCH 31, 2000 AND FOR
THE NINE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.
A. NATURE OF THE BUSINESS:
Silknet provides electronic relationship management software, or eRM
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 March 31, 2000, had an accumulated deficit of $32,598. 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:
UNAUDITED INTERIM RESULTS
The accompanying consolidated balance sheet as of March 31, 2000, the
statements of operations and of cash flows for the nine months ended March 31,
1999 and 2000 and the statement of stockholders' equity for the nine months
ended March 31, 2000 are unaudited. The unaudited interim financial statements
have been prepared on the same basis as the annual financial statements and, in
the opinion of management, reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly the Company's financial
position and its results of operations and its cash flows for the nine months
ended March 31, 1999 and 2000. The financial data and other information
disclosed in these note to financial statements related to these periods are
unaudited. The results for the nine months ended March 31, 2000 are not
necessarily indicative of the results to be expected for the year ending June
30, 2000.
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-27
<PAGE>
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
INFORMATION AS OF MARCH 31, 2000 AND FOR
THE NINE MONTHS ENDED MARCH 31, 1999 AND 2000 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 March 31, 2000.
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 a significant 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
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.
F-28
<PAGE>
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
INFORMATION AS OF MARCH 31, 2000 AND FOR
THE NINE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.
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 nine
months ended March 31, 2000, options to purchase 1,256,744, 1,581,531, 2,567,678
and 2,323,332 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.
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 nine-months ended March 31, 1999
and 2000:
NINE MONTHS ENDED MARCH 31,
---------------------------
1999 2000
-------------- -----------
Net loss........................................ $ (8,561) $ (11,896)
Foreign currency translation adjustments........ -- (10)
-------------- -----------
Comprehensive loss.............................. $ (8,561) $ (11,906)
============== ===========
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
F-29
<PAGE>
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
INFORMATION AS OF MARCH 31, 2000 AND FOR
THE NINE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.
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.
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.
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
nine-months ended March 31, 2000 have been restated to include the balances and
results of InSite. Results on a stand-alone basis were as follows:
YEAR ENDED JUNE 30, 1997 SILKNET INSITE COMBINED
------------------------ ---------- -------- ----------
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)
YEAR ENDED JUNE 30, 1998 SILKNET INSITE COMBINED
------------------------ ---------- -------- ----------
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)
YEAR ENDED JUNE 30, 1999 SILKNET INSITE COMBINED
------------------------ ---------- -------- ----------
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)
NINE MONTHS ENDED MARCH 31, 2000 SILKNET INSITE COMBINED
-------------------------------- ---------- -------- ----------
Revenues.................................... $ 23,935 $ 204 $ 24,139
Operating loss.............................. (13,187) (719) (13,906)
Net loss.................................... (11,173) (723) (11,896)
--------------
(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
nine-month period ended March 31, 2000 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-30
<PAGE>
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
INFORMATION AS OF MARCH 31, 2000 AND
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 2000 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. 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.
F-31
<PAGE>
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
INFORMATION AS OF MARCH 31, 2000 AND
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.
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 Silknets 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 Silknets value prior to an ownership
change.
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:
FISCAL YEAR ENDING JUNE 30,
---------------------------
2000................................. $ 148
2001................................. 92
-----
Total payments....................... 240
Less amounts representing interest... 18
-----
Total debt........................... $ 222
Less current portion................. 133
-----
$ 89
=====
F-32
<PAGE>
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
INFORMATION AS OF MARCH 31, 2000 AND
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.
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 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 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 were all outstanding as of June 30, 1999. Interest expense on
these notes 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 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).
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.
F-33
<PAGE>
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
INFORMATION AS OF MARCH 31, 2000 AND
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.
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.
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).
F-34
<PAGE>
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
INFORMATION AS OF MARCH 31, 2000 AND
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.
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 the anticipated public offering, all outstanding shares
of Preferred Stock automatically converted into shares of common stock as
follows:
SERIES SHARES OF COMMON STOCK
------ ----------------------
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
=========
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 sales 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
F-35
<PAGE>
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
INFORMATION AS OF MARCH 31, 2000 AND
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.
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 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 shares 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 EQUALS EXERCISE PRICE LESS THAN
GRANT DATE STOCK FAIR GRANT DATE STOCK FAIR VALUE
VALUE VALUE TOTAL
--------------------- --------------------------- -------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE 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-36
<PAGE>
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
INFORMATION AS OF MARCH 31, 2000 AND FOR THE NINE MONTHS ENDED MARCH 31,
1999 AND 2000 IS UNAUDITED.
The following table summarizes information about stock options
outstanding at June 30, 1999:
<TABLE>
<CAPTION>
WEIGHTED- VESTED AND EXERCISABLE
AVERAGE -----------------------
REMAINING WEIGHTED-
CONTRACTUAL AVERAGE
NUMBER LIFE (IN NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING YEARS) OF 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 1997, 1998 and 1999,
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>
YEARS 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>
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:
YEARS ENDED JUNE 30,
------------------------------------
1997 1998 1999
----------- ----------- -----------
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
F-37
<PAGE>
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
INFORMATION AS OF MARCH 31, 2000 AND FOR THE NINE MONTHS ENDED MARCH 31,
1999 AND 2000 IS UNAUDITED.
The weighted average grant date fair values using the Black-Scholes
option pricing model were:
<TABLE>
<CAPTION>
YEARS 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 change 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.
The following is a schedule of future minimum lease payments on
noncancelable operating leases at June 30, 1999:
Fiscal Years ending June 30:
2000............................... $1,138
2001............................... 1,185
2002............................... 1,170
2003............................... 1,228
2004............................... 890
Thereafter......................... 45
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.
F-38
<PAGE>
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
INFORMATION AS OF MARCH 31, 2000 AND FOR THE NINE MONTHS ENDED MARCH 31,
1999 AND 2000 IS UNAUDITED.
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 (UNAUDITED)
On April 19, 2000, Silknet completed a merger with Kana Communications,
Inc. (Nasdaq: KANA) under which Silknet became a wholly-owned subsidiary of
Kana. In connection with the Kana merger, each share of Silknet common stock
outstanding immediately prior to the consummation of the merger was converted
into the right to receive 1.66 shares of Kana's common stock and Kana assumed
Silknet's outstanding stock options and warrants based on the exchange ratio,
issuing approximately 29 million shares of Kana's common stock and reserving 4.6
million shares of common stock for issuance upon the exercise of Silknet options
and warrants Kana assumed in connection with the merger. The transaction is
intended to qualify as a tax-free reorganization under the Internal Revenue Code
of 1986, as amended, and will be accounted for using the purchase method of
accounting. The details of the merger are described in a Registration Statement
on SEC Form S-4 that was declared effective by the SEC on March 22, 2000 and the
Current Report on Form 8-K filed May 4, 2000, as amended May 8, 2000.
F-39
<PAGE>
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.
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 and six-month period ended June 30, 2000 has been combined
with Silknet's unaudited condensed consolidated statement of operations for the
twelve-month period ended December 31, 1999, and the period from January 1, 2000
to April 19, 2000 (merger date), 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 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 results of operations. Kana has incurred estimated
acquisition-related costs of approximately $32.9 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 has recorded goodwill and
identifiable intangible assets of approximately $3.8 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 and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
F-40
<PAGE>
KANA AND SILKNET
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
KANA SILKNET ADJUSTMENTS COMBINED
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
License................................................... $ 22,903 $ 7,255 $ 1,677(a) $ 31,835
Service................................................... 13,270 4,392 -- 17,662
------------ ---------- ----------- ------------
Total revenues.......................................... 36,173 11,647 1,677 49,497
------------ ---------- ----------- ------------
Cost of revenues:
License................................................... 801 404 -- 1,205
Service................................................... 14,804 4,516 19,320
------------- --------- ----------- ------------
Total cost of revenues.................................. 15,605 4,920 20,525
------------- --------- ----------- ------------
Gross profit............................................ 20,568 6,727 28,972
Operating expenses:
Sales and marketing....................................... 32,548 5,654 38,202
Research and development.................................. 16,298 4,556 20,854
General and administrative................................ 5,582 2,208 7,790
Amortization of goodwill and identifiable intangibles..... 247,043 -- 379,385 626,428
Amortization of stock-based compensation.................. 6,913 10 6,923
In process research and development....................... 6,900 -- -- 6,900
Acquisition related costs ................................ 6,564 -- 6,564
------------- --------- ----------- ------------
Total operating expenses................................ 321,848 12,428 379,385 713,661
------------- --------- ----------- ------------
Loss from operations.................................... (301,280) (5,701) (377,708) (684,689)
Other income (expense), net.................................. 1,891 619 -- 2,510
------------- --------- ----------- ------------
Net loss................................................ $ (299,389) $ (5,082) $ (377,708) $ (682,179)
============= ========= =========== ============
Net loss per common share:
Basic and diluted......................................... $ (4.53) (0.49) $ (8.21)
============= ========= ============
Weighted-average shares................................... 66,030 10,303 83,134
============= ========= ============
</TABLE>
(a) Represents the deferred revenue of Silknet as of the acquisition date which
has not been recognized as revenue by Kana post acquisition, but would have
been recognized by the combined company assuming the merger occurred as of
the beginning of the period.
F-41
<PAGE>
KANA AND SILKNET
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...................................... -- -- 1,252,856 1,252,856
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 1,252,856 1,410,367
------------ ----------- ------------- -------------
Operating loss........................................ (117,999) (15,594) (1,252,856) (1,386,449)
Other income (expense), net........................... (744) 1,880 1,136
------------ ----------- ------------- -------------
Net loss........................................... $ (118,743) $ (13,714) $ (1,252,856) $(1,385,313)
============ =========== ============= =============
Net loss per common share:
Basic and diluted.................................. $ (4.61) $ (1.16) $ (30.52)
============ =========== =============
Weighted-average shares............................ 25,772 11,819 45,392
============ =========== =============
</TABLE>
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<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(1) DESCRIPTION OF TRANSACTION
Pursuant to an Agreement and Plan of Reorganization dated as of February
6, 2000, by and among Kana, Pistol Acquisition Corp., a Delaware corporation and
a wholly-owned subsidiary of Kana ("Merger Sub"), and Silknet Software, Inc., a
Delaware corporation ("Silknet"), Merger Sub merged with and into Silknet, and
Silknet became a wholly-owned subsidiary of Kana, effective April 19, 2000 (the
"Merger").
In connection with the Merger, each share of Silknet common stock
outstanding immediately prior to the consummation of the Merger was converted
into the right to receive 1.66 shares of Kana common stock (the "Exchange
Ratio") and Kana assumed Silknet's outstanding stock options and warrants based
on the Exchange Ratio, issuing approximately 29.2 million shares of Kana common
stock and assuming options and warrants to acquire approximately 4.0 million
shares of Kana common stock. The transaction is accounted for using the purchase
method of accounting.
Kana has accounted for the merger as a purchase. As a result, Kana
recorded on its balance sheet the fair market value of Silknet's assets and
liabilities, acquisition-related costs of $32.9 million, and identifiable
intangibles and goodwill of approximately $3.8 billion. At June 30, 2000,
intangible assets and goodwill represents approximately 94% of Kana's
consolidated 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 $3.8 billion,
measured as the average fair market value of Kana's outstanding common stock
from January 31, to February 14, 2000, five trading days before and after the
merger agreement was announced plus the Black-Scholes calculated 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):
Fair market value of Kana's common stock...................... $ 3,373,425
Fair market value of Silknet options and warrants assumed..... 404,922
Acquisition-related costs..................................... 32,900
------------
Total......................................................... $ 3,811,247
============
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 an independent valuation. 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 its estimates.
(3) PRO FORMA ADJUSTMENTS
STATEMENTS OF OPERATIONS:
The accompanying unaudited pro forma combined condensed statements of
operations have 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. Goodwill and other
identifiable intangibles totaling approximately $3.8 billion are being amortized
over three years, resulting in annual amortization expense of approximately $1.3
billion.
The accompanying unaudited pro forma combined condensed statements of
operations include the non-recurring charge of $6.9 million for in-process
research and development resulting from the merger. This in process technology
had not reached technological feasibility and, in management's opinion, had no
probable future use. Kana also recorded $6.6 million of transaction costs and
merger-related integration expenses. These amounts consisted primarily of
merger-related advertising and announcements of $4.5 million and $1.0 million in
duplicate facility costs.
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<PAGE>
(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 of the merger,
assuming an exchange ratio of 1.66 shares of Kana common stock for each share of
Silknet common stock.
F-44
