SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission file number: 000-27163
KANA Software, Inc.
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181 Constitution Drive
Menlo Park, California 94025
(650) 614-8300
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
On November 7, 2002, approximately 22,889,654 shares of the Registrant's Common Stock, $0.001 par value, were outstanding.
KANA Software, Inc.
Form 10-Q
Quarter Ended September 30, 2002
Index
| PART I. FINANCIAL INFORMATION | Page No. |
| Item 1. Financial Statements |
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Condensed Consolidated Balance Sheets at September 30, 2002 and December 31, 2001 |
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Condensed Consolidated Statements of Operations for the three and nine months ended September 30 2002 and 2001 |
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Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30 2002 and 2001 |
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| Notes to Condensed Consolidated Financial Statements |
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| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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| Item 4. Disclosure Controls and Procedures |
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| PART II. OTHER INFORMATION |
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| Item 1: Legal Proceedings |
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| Item 2: Changes in Securities and Use of Proceeds |
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| Item 3: Defaults Upon Senior Secuirites |
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| Item 4. Submission of Matters to a Vote of Security Holders |
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| Item 5. Other Information |
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| Item 6. Exhibits and Reports on Form 8-K |
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| Signatures |
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| Certifications |
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Part I: Financial Information
Item 1: Financial Statements
KANA Software, Inc.
See accompanying notes to unaudited condensed consolidated financial statements.
KANA Software, Inc.
See accompanying notes to unaudited condensed consolidated financial statements.
KANA Software, Inc.
See accompanying notes to unaudited condensed consolidated financial statements.
KANA Software, Inc.
Note 1. Basis of Presentation The unaudited condensed consolidated financial statements have been
prepared by KANA Software, Inc. ("KANA" or the "Company"), and reflect all
normal recurring adjustments 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, 2002. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted under the Securities and Exchange Commission's ("SEC")
rules and regulations. These unaudited condensed consolidated financial
statements and notes included herein should be read in conjunction with KANA's
audited consolidated financial statements and notes included in KANA's annual
report on Form 10-K for the year ended December 31, 2001. The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America,
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. Note 2. Net Loss Per Share Basic net loss per share from continuing operations is computed using the
weighted-average number of outstanding shares of common stock, excluding common
stock subject to repurchase. Diluted net loss per share from continuing
operations is computed using the weighted-average number of outstanding shares
of common stock and, when dilutive, potential common shares from options and
warrants using the treasury stock method. The following table presents the
calculation of basic and diluted net loss per share from continuing operations
(in thousands, except net loss per share): All warrants, outstanding stock options and shares subject to repurchase by
KANA have been excluded from the calculation of diluted net loss per share as
all such securities were anti-dilutive for all periods presented. The total
number of shares excluded from the calculation of diluted net loss per share is
as follows (in thousands): The weighted average exercise price of stock options and warrants outstanding
was $33.59 and $147.10 as of September 30, 2002 and 2001, respectively. Note 3. Comprehensive Loss Comprehensive loss comprises net loss and foreign currency translation
adjustments. Comprehensive loss was $6.9 million and $96.3 million for the three months
ended September 30, 2002 and 2001, respectively, and $95.1 million and $915.9
million for the nine months ended September 30, 2002 and 2001, respectively. Note 4. Stock-Based Compensation In September 2000, the Company issued to Accenture 40,000 shares of
common stock and a warrant to purchase up to 72,500 shares of common stock at
$371.25 per share pursuant to a stock and warrant purchase agreement in
connection with its global strategic alliance. The shares of the common stock
issued were vested, and the Company recorded a deferred stock-based compensation
charge of approximately $14.8 million to be amortized over the four-year term of
the agreement. As of September 30, 2002, 33,077 shares of common stock subject
to the warrant were fully vested and 19,423 had been forfeited, with the
remainder to become vested upon the achievement of certain performance goals.
The vested portion of the warrant was valued using the Black-Scholes model
resulting in charges totaling $2.0 million of which $1.0 million was immediately
expensed in the fourth quarter of 2000 and $1.0 million is being amortized over
the remaining term of the agreement. The Company will incur a stock-based
compensation charge for the unvested portion of the warrant when and if annual
performance goals are achieved. In June 2001, the Company entered into an agreement to issue to a customer a
fully vested and exercisable warrant to purchase up to 25,000 shares of common
stock at $40.00 per share. The warrant was valued using the Black-Scholes model,
resulting in a deferred stock based compensation charge of $330,000, which was
fully amortized as a reduction of revenue in 2001. In September 2001, the Company issued to a customer a warrant to purchase up
to 5,000 shares of common stock at $7.50 per share pursuant to a warrant
purchase agreement. The warrant will become fully vested in September 2006 and
has a provision for acceleration of vesting by 1,250 shares annually over four
years if certain marketing criteria are met by the customer. The warrant was
valued using the Black-Scholes model resulting in a deferred stock-based
compensation charge of approximately $29,000 which is being amortized over the
four-year term of the agreement. In September 2001, the Company issued to Accenture an additional warrant to
purchase up to 150,000 shares of common stock at $3.33 per share pursuant to a
warrant purchase agreement in connection with its global strategic alliance. The
warrants were valued using the Black-Scholes model resulting in a deferred
stock-based compensation charge of approximately $946,000 which is being
amortized over the four-year term of the agreement. The warrants were exercised
in March 2002. In November 2001, the Company issued to two investment funds warrants to
purchase up to 386,118 shares of common stock at $10.00 per share in connection
with a proposed financing which was to have been completed in February 2002 upon
attaining stockholder approval. These warrants were initially exercisable into
193,059 shares. The exercisable warrants were valued using the Black-Scholes
model resulting in a charge of approximately $1.0 million to deferred stock-
based compensation. On February 1, 2002, the stockholders voted against the
proposed financing, which resulted in the Company terminating the share purchase
agreement and caused the warrants to become exercisable with respect to all
386,118 shares. The warrants are exercisable for two years from the date the
share purchase agreement was terminated. Using the Black-Scholes model, the
warrants issued in November 2001 that were initially exercisable were re-valued
as of February 1, 2002, and the warrants that became exercisable on February 1,
2002 were valued as of such date, resulting in a charge totaling approximately
$4.7 million which was reflected as amortization of stock-based compensation in
the statement of operations in the first quarter of 2002. As of September 30, 2002, there was approximately $10.9 million of total
deferred stock-based compensation remaining to be amortized relating to the
above warrants and past employee stock option grants. Note 5. Legal Proceedings In April 2001, Office Depot, Inc. filed a complaint against the Company
claiming that the Company has breached its license agreement with Office Depot.
Office Depot is seeking relief in the form of a refund of license fees and
maintenance fees paid to the Company, attorneys' fees and costs. The Company
intends to defend this claim vigorously and does not expect it to have a
material impact on the results of operations or cash flows. The underwriters for the Company's initial public offering, Goldman Sachs
& Co., Lehman Bros, Hambrecht & Quist LLC, Wit Capital Corp as well as
the Company and certain current and former officers of the Company have been
named as defendants in federal securities class action lawsuits filed in the
United States District Court for the Southern District of New York. The cases
allege violations of Section 11, 12(a)(2) and Section 15 of the Securities Act
of 1933 and violations of Section 10(b) and Rule 10b-5 of the Securities
Exchange Act of 1934, on behalf of a class of plaintiffs who purchased the
Company's stock between September 21, 1999 and December 6, 2000 in connection
with the Company's initial public offering. Specifically, the complaints alleged
that the underwriter defendants engaged in a scheme concerning sales of the
Company 's securities in the initial public offering and in the aftermarket. The
Company believes it has meritorious defenses to these claims and intends to
defend the action vigorously. On April 16, 2002, Davox Corporation filed an action against the Company in
the Superior Court, Middlesex, Commonwealth of Massachusetts, in relation to an
OEM Agreement between Davox and the Company under which Davox has paid a total
of approximately $1.6 million in fees, asserting breach of contract, breach of
implied covenant of good faith and fair dealing, unjust enrichment,
misrepresentation, and unfair trade practices. Davox seeks actual and punitive
damages in an amount to be determined at trial, and award of attorneys' fees.
This action is in its early stages. The Company intends to defend the action
vigorously. As of September 30, 2002, approximately $0.7 million was accrued as our
estimate of costs related to the above legal proceedings. The ultimate outcome
of any litigation is uncertain, and either unfavorable or favorable outcomes
could have a material negative impact on the results from operations,
consolidated balance sheet and cash flows, due to defense costs, diversion of
management resources and other factors. Note 6. Restructuring costs In 2001, the Company incurred restructuring charges related to the
reductions in its workforce and costs associated with certain excess leased
facilities and asset impairments. If the real estate market continues to worsen,
additional adjustments to the reserve may be required, which would result in
additional restructuring expenses in the period in which such determination is
made. Likewise, if the real estate market strengthens, and the Company is able
to sublease the properties earlier or at more favorable rates than projected, or
if the Company is otherwise able to negotiate early termination of obligations
on favorable terms, adjustments to the reserve may be required that would
increase income in the period in which such determination is made. As of September 30, 2002, $21.0 million in restructuring liabilities remained
on the consolidated balance sheet in accrued restructuring and merger costs.
Cash payments for severance and excess leased facilities during the nine months
ended September 30, 2002
totaled $8.1 million. Cash received during the nine months ended
September 30, 2002 from subleases and sales of property charged to restructuring
expense in previous periods totaled $0.7 million. The following table provides a
summary of restructuring payments and liabilities during the first nine months
of 2002 (in thousands): Note 7. Internal Use Software Internal use software costs, including fees paid to third parties to
implement the software, are capitalized beginning when we have determined
certain factors are present, including among others, that technology exists to
achieve the performance requirements, buy versus internal development decisions
have been made and management had authorized the funding for the project.
Capitalization of software costs ceases when the software implementation is
substantially complete and is ready for its intended use and is amortized over
its estimated useful life of generally five years using the straight-line
method. As of September 30, 2002, $14.4 million of costs were capitalized as
internal use software. When events or circumstances indicate the carrying value of internal use
software might not be recoverable, the Company assesses the recoverability of
these assets by determining whether the amortization of the asset balance over
its remaining life can be recovered through undiscounted future operating cash
flows. The amount of impairment, if any, is recognized to the extent that the
carrying value exceeds the projected discounted future operating cash flows and
is recognized as a write down of the asset. In addition, if it is no longer
probable that computer software being developed will be placed in service, the
asset will be adjusted to the lower of its carrying value or fair value, if any,
less direct selling costs. Any such adjustment would result in an expense in the
period recorded, which could have a material adverse effect on our consolidated
statement of operations. Note 8. Goodwill and Purchased Intangible Assets On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets ("SFAS
142"). SFAS 142 requires goodwill to be tested for impairment under certain
circumstances and written down when impaired, and requires purchased intangible
assets other than goodwill to be amortized over their useful lives unless these
lives are determined to be indefinite. Under the transition provisions of SFAS
No. 142, there was no goodwill impairment at January 1, 2002 based upon the
Company's analysis at that time. However, during the quarter ended June 30,
2002, circumstances developed that indicated the goodwill was likely impaired
and the Company performed an impairment analysis as of June 30, 2002. This
analysis resulted in a $55.0 million impairment of goodwill. The circumstances
that led to the impairment included the revision of estimates of the Company's
revenues and net loss for the second quarter of 2002 and subsequent quarters
based upon preliminary revenue results late in the second quarter of 2002, and
the reduction of estimated future revenues and cash flow. Following an
announcement of these revisions in connection with the Company's July 2002
release of its preliminary results for the second quarter of 2002, the trading
price of the Company's common stock declined, which reduced the Company's market
capitalization below the net carrying value of goodwill prior to the impairment
charge on June 30, 2002. The Company determined fair value using relevant market
data, including the Company's market capitalization during the period following
the revision of estimates, to calculate an estimated fair value and any
resulting goodwill impairment. The estimated fair value was compared to the
corresponding carrying value of goodwill at June 30, 2002, which resulted in a
revaluation of goodwill as of June 30, 2002. The remaining goodwill balance at
September 30, 2002 was approximately $7.4 million. In 2001, the Company also performed an impairment assessment of the
identifiable intangibles and goodwill recorded in connection with the
acquisition of Silknet, under the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of. The
assessment was performed primarily due to the significant and sustained decline
in the Company's stock price since the valuation date of the shares issued in
the Silknet acquisition which resulted in the net book value of the Company's
assets prior to the impairment charge significantly exceeding its market
capitalization, the overall decline in the industry growth rates, and the
Company's lower-than-projected operating results. As a result, the Company
recorded an impairment charge of approximately $603.4 million to reduce goodwill
in the quarter ended March 31, 2001. The charge was based upon the estimated
discounted cash flows over the remaining useful life of the goodwill using a
discount rate of 20%. The assumptions supporting the cash flows, including the
discount rate, were determined using the Company's best estimates as of such
date. The Company ceased amortizing goodwill as of the beginning of fiscal 2002.
The following tables presents comparative information showing the effects that
the non-amortization of goodwill provisions of SFAS 142 would have had on the
net loss and basic and diluted net loss per share for the periods shown (in
thousands, except per share amounts): In addition, as part of the adoption of SFAS No. 142, negative goodwill was
eliminated and reported as the cumulative effect of accounting change. This
accounting change amounted to approximately $3.9 million in the first quarter of
2002. Purchased intangible assets relate to $14.4 million of existing technology
purchased in connection with the acquisition of Silknet in April 2000 and are
carried at cost less accumulated amortization. Amortization is computed over the
estimated useful lives of the asset, which is three years. The Company expects
amortization expense on purchased intangible assets to be $4.8 million for
fiscal 2002, and $1.5 million in fiscal 2003, at which time purchased intangible
assets will be fully amortized. The net carrying value of purchased intangible
assets is $2.7 million at September 30, 2002. Note 9. Segment Information The Company's chief operating decision-maker reviews financial
information presented on a consolidated basis, accompanied by disaggregated
information about revenues by geographic region for purposes of making operating
decisions and assessing financial performance. Accordingly, the Company
considers itself to be in a single industry segment, specifically the license,
implementation and support of its software applications. The Company's long-
lived assets are primarily in the United States. Geographic information on
revenue for the three and nine months ended September 30, 2002 and 2001 are as
follows (in thousands): During the three and nine months ended September 30, 2002, one customer
represented 13% and 13% of total revenues, respectively. During the three and
nine months ended September 30, 2001, no customer represented more than 10% of
total revenues. Note 10. Notes Payable and Commitments The Company maintains a $4.0 million loan facility which is secured by
all of its assets, bears interest at the bank's prime rate plus 0.25% (5.0% as
of September 30, 2002), and expires in March 2003, at which time the entire
balance under the line of credit will be due. Total borrowings as of September
30, 2002 and December 31, 2001 were approximately $1.2 million under this line
of credit. The line of credit contains a covenant that requires the Company to
maintain at least a $6.0 million balance in any account with the bank. In lieu
of this minimum balance covenant the Company may also cash-secure the facility
with funds equivalent to 115% of the outstanding debt obligation. The line of
credit also requires that the Company maintain at all times a minimum of $20.0
million as short-term unrestricted cash and cash equivalents. As of September
30, 2002, the Company was in compliance with all covenants of its line of credit
agreement. In June 2002 the Company entered into a non-recourse receivables purchase
agreement with a bank which provides for the sale of up to $5.0 million in
certain qualified receivables subject to an administrative fee and a discount
schedule ranging from the bank's prime rate of interest plus 0.50% to the bank's
prime rate of interest plus 1.50%. The Company had not sold any receivables
under this agreement as of September 30, 2002. Note 11. Discontinued Operation As of the quarter ended June 30, 2001, the Company adopted a plan to
discontinue the KANA Online business. The Company no longer seeks new business
for KANA Online, but continued to service all ongoing contractual obligations it
had to its existing customers through April 2002. Accordingly, KANA Online is
reported as a discontinued operation for the three and nine months ended
September 30, 2002 and 2001. The net liability of the discontinued operation at
September 30, 2002 consisted of a liability for leased equipment. The estimated
loss on the disposal of KANA Online was $3.7 million as of June 30, 2001,
consisting of an estimated loss on disposal of the assets of $2.6 million and a
provision of $1.1 million for the anticipated operating losses during the phase-
out period. The loss on disposal was recorded in the second quarter of 2001 and
adjusted in the second quarter of 2002, resulting in a gain of $0.4 million.
This operation has been presented as a discontinued operation for all periods
presented. The KANA Online operating results are as follows (in thousands): Note 12. Recent Accounting Pronouncements In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, Accounting for
Exit or Disposal Activities ("SFAS 146"). SFAS 146 addresses significant
issues regarding the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for under EITF No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). The scope of SFAS 146
also includes costs related to terminating a contract that is not a capital
lease and termination benefits that employees who are involuntarily terminated
receive under the terms of a one-time benefit arrangement that is not an ongoing
benefit arrangement or an individual deferred-compensation contract. SFAS 146
will be effective for exit or disposal activities that are initiated after
December 31, 2002 and early application is encouraged. The Company will adopt
SFAS 146 on January 1, 2003. The provisions of EITF No. 94-3 shall continue to
apply for an exit activity initiated under an exit plan that met the criteria of
EITF No. 94-3 prior to the adoption of SFAS 146. Adoption of SFAS 146 will
change on a prospective basis the timing of when restructuring charges are
recorded from a commitment date approach to when the liability is incurred. In November 2001, the Emerging Issues Task Force ("EITF") concluded
that reimbursements for out-of-pocket-expenses incurred should be included in
revenue in the income statement and subsequently issued EITF 01-14, Income
Statement Characterization of Reimbursements Received for `Out-of-Pocket'
Expenses Incurred in January 2002. The Company adopted EITF 01-14 effective
January 1, 2002 and has reclassified comparative financial statements for prior
periods to comply with the guidance in this EITF issue. The adoption of this
issue resulted in approximately $52,000 and $779,000 million of reimbursable
expenses reflected in both service revenue and cost of service revenue for the
three months ended September 30, 2002 and 2001, respectively, and approximately
$256,000 and $3.2 million for the nine months ended September 30, 2002 and 2001,
respectively. In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144
establishes a single accounting model, based on the framework established in
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
("SFAS 121"), for long-lived assets to be disposed of by sale, and resolves
implementation issues related to SFAS 121. The Company adopted SFAS 144
effective January 1, 2002. In July 2001, the FASB issued SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141
addresses financial accounting and reporting for business combinations and
supercedes Accounting Principals Board ("APB") No.16, Business
Combinations. The Company adopted SFAS No.141 effective July 1, 2001. The
most significant changes made by SFAS No.141 are: (1) requiring that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001, (2) establishing specific criteria for the recognition of
intangible assets separately from goodwill, and (3) requiring unallocated
negative goodwill to be written off immediately as an extraordinary gain. The Company adopted SFAS No.142 effective January 1, 2002. SFAS 142 requires
goodwill to be tested for impairment under certain circumstances and written
down when impaired, and requires purchased intangible assets other than goodwill
to be amortized over their useful lives unless these lives are determined to be
indefinite. Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations The following discussion of our financial condition and results of
operations and other parts of this report contain 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
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 report. Forward-
looking statements that were believed to be 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 report. 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. Overview We are a leading provider of enterprise Customer Relationship Management
(eCRM) software solutions that deliver integrated communication and business
applications built on a Web-architected platform. Our software helps our
customers to better service, market to, and understand their customers and
partners, while improving results and decreasing costs in contact centers and
marketing departments, by allowing them to interact with their customers and
partners through Web contact, Web collaboration, e-mail and telephone. We offer
a multi-channel customer relationship management solution that combines our KANA
eCRM Architecture with customer-focused service, marketing and commerce software
applications. Our customers range from Global 2000 companies pursuing an e-
business strategy to early stage companies. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect our reported assets, liabilities,
revenues and expenses, and our related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to revenue recognition, collectibility of receivables, goodwill and
intangible assets, contract loss reserve, product warranties, income taxes, and
restructuring. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances.
This forms the basis of judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies and the related
judgments and estimates significantly affect the preparation of our consolidated
financial statements: Revenue recognition. In addition to determining our results of
operations for a given period, our revenue recognition determines the timing of
certain expenses, such as commissions and royalties. Revenue recognition rules
for software companies are very complex, and certain judgments affect the
application of our revenue policy. The amount and timing of our revenue is
difficult to predict, and any shortfall in revenue or delay in recognizing
revenue could cause our operating results to vary significantly from quarter to
quarter and could result in future operating losses. License revenue is recognized when there is persuasive evidence of an
arrangement, delivery to the customer has occurred, provided the arrangement
does not require significant customization of the software, the fee is fixed or
determinable and collectibility is probable. In software arrangements that include rights to multiple software products
and/or services, we allocate the total arrangement fee among each of the
deliverables using the residual method, under which revenue is allocated to
undelivered elements based on vendor-specific objective evidence of fair value
of such undelivered elements with the residual amounts of revenue being
allocated to the delivered elements. Elements included in multiple element
arrangements primarily consist of software products, maintenance (which includes
customer support services and unspecified upgrades), or consulting services.
Vendor-specific objective evidence for software products and consulting services
is based on the price charged when an element is sold separately or, in the case
of an element not yet sold separately, the price established by authorized
management, if it is probable that the price, once established, will not change
before market introduction. Vendor-specific objective evidence for maintenance
is based on the residual method using stated renewal rates. Evaluating whether
vendor-specific objective evidence exists and the interpretation of such
evidence to determine the fair value of undelivered elements is subject to
judgment and estimates. Probability of collection is based upon assessment of the customer's
financial condition through review of their current financial statements or
credit reports. For follow-on sales to existing customers, prior payment history
is also considered in assessing probability of collection. Revenues from customer support services are recognized ratably over the term
of the contract, typically one year. Consulting revenues are primarily related
to implementation services performed on a time-and-materials basis or, in
certain situations, on a fixed-fee basis, under separate service arrangements.
Implementation services are periodically performed under fixed-fee arrangements
and in such cases, consulting revenues are recognized on a percentage-of-
completion basis. We will use the completed contract method when acceptance is
not assured or an ability to estimate costs is not possible. Revenues from
consulting and training services are recognized as services are performed. Reserve for Loss Contract. We are party to a contract with a customer
that provided for fixed fee payments in exchange for services upon meeting
certain milestone criteria. In order to assess whether a loss reserve was
necessary, we estimated the total expected costs of providing services necessary
to complete the contract and compared these costs to the fees expected to be
received under the contract. Based upon an analysis performed in the fourth
quarter of 2000, the costs to complete the project were expected to exceed the
associated fees, and a loss reserve of $1.4 million was recorded. As a result of
our restructuring in the third quarter of 2001, substantially all of the
remaining professional services required under the contract were being provided
by a third party, and we recorded an additional loss reserve of $6.1 million
based upon an analysis of costs to complete these services. In the second
quarter of 2002, we began discussions with the customer regarding the timing and
scope of the project deliverables, which led to an amendment to the original
contract executed in August 2002. Based upon the terms of the amendment and
associated negotiations with a third-party integrator that had been providing
implementation services to the customer, we recorded a charge of approximately
$15.6 million to cost of services revenue in the second quarter of 2002. The
amendment required that we transfer $6.9 million to an escrow account (which
included $5.8 million reported as restricted cash as of June 30, 2002) to
compensate any third party integrator for the continued implementation of the
customer's system based on our product, for which such implementation we are no
longer responsible. The charge also included $8.5 million of fees paid by us to
a third party integrator prior to the amendment and $0.2 million of related
expenditures. In addition, during the second quarter of 2002, we received a
scheduled payment of $4.0 million associated with the original agreement. This
amount was reported as deferred revenue. The $4.0 million of deferred revenues
will be recognized in future periods as revenue as we fulfill our maintenance
and training obligations. Collectibility of Receivables. A considerable amount of judgment is
required to assess the ultimate realization of receivables, including assessing
the probability of collection and the current credit-worthiness of each
customer. We recorded significant increases in the allowance for doubtful
accounts in fiscal 2001 due to the rapid downturn in the economy, particularly
in the technology sector. There is no assurance that we will not need to record
additional allowances for doubtful accounts receivable in the future. Accounting for Internal Use Software. Internal use software costs,
including fees paid to third parties to implement the software, are capitalized
beginning when we have determined various factors are present, including among
others, that technology exists to achieve the performance requirements, buy
versus internal development decisions have been made and we have authorized the
funding for the project. Capitalization of software costs ceases when the
software implementation is substantially complete and is ready for its intended
use and is amortized over its estimated useful life of generally five years
using the straight-line method. As of September 30, 2002, we had $14.4 million
of capitalized costs of internal use software, of which $7.6 million has been
subject to depreciation based upon deployment dates of the related projects. We
expect the remainder to be deployed in December 2002, at which time we will
commence depreciating these assets. When events or circumstances indicate the carrying value of internal use
software might not be recoverable, we assess the recoverability of these assets
by determining whether the amortization of the asset balance over its remaining
life can be recovered through undiscounted future operating cash flows. The
amount of impairment, if any, is recognized to the extent that the carrying
value exceeds the projected discounted future operating cash flows and is
recognized as a write down of the asset. In addition, if it is no longer
probable that computer software being developed will be placed in service, the
asset will be adjusted to the lower of its carrying value or fair value, if any,
less direct selling costs. Any such adjustment would result in an expense in the
period recorded, which could have a material adverse effect on our consolidated
statement of operations. Restructuring. During 2001, we recorded significant reserves in
connection with our restructuring program. These reserves included estimates
pertaining to contractual obligations related to excess leased facilities. We
have worked with external real estate advisors in each of the markets where the
properties are located to help us estimate the amount of the accrual. This
process involves significant judgments regarding these markets. If the real
estate market continues to worsen, additional adjustments to the reserve may be
required, which would result in additional restructuring expenses in the period
in which such determination is made. Likewise, if the real estate market
strengthens, and we are able to sublease the properties earlier or at more
favorable rates than projected, or if we are otherwise able to negotiate early
termination of obligations on favorable terms, adjustments to the reserve may be
required that would increase income in the period in which such determination is
made. Goodwill and Intangible Assets. Consideration paid in connection with
acquisitions is required to be allocated to the acquired assets, including
identifiable intangible assets, and liabilities acquired. Acquired assets and
liabilities are recorded based on our estimate of fair value, which requires
significant judgment with respect to future cash flows and discount rates. For
intangible assets, we are required to estimate the useful life of the asset and
recognize its cost as an expense over the useful life. We use the straight-line
method to expense long-lived assets, which results in an equal amount of expense
in each period. We regularly evaluate acquired businesses for potential
indicators of impairment of goodwill and intangible assets. Our judgments
regarding the existence of impairment indicators are based on market conditions,
operational performance of our acquired businesses and identification of
reporting units. Future events could cause us to conclude that impairment
indicators exist and that goodwill and other intangible assets associated with
our acquired businesses are impaired. Beginning in fiscal 2002, the methodology
for assessing potential impairments of intangibles changed based on new
accounting rules issued by the Financial Accounting Standards Board. We adopted
these new rules as of January 1, 2002. Under the transition provisions of SFAS
No. 142, there was no goodwill impairment at January 1, 2002 based upon our
analysis at that time. However, during the quarter ended June 30, 2002,
circumstances developed that indicated the goodwill was likely impaired and we
performed an impairment analysis as of June 30, 2002. This analysis resulted in
a $55.0 million impairment expense of goodwill. The circumstances that led to
the impairment included the revision of estimates of our revenues and net loss
for the second quarter of 2002 and subsequent quarters, based upon preliminary
revenue results late in the second quarter of 2002 and the reduction of
estimated revenue and cash flows. Following an announcement of these revisions
in connection with a July 2002 release of KANA's preliminary results for the
quarter ended June 30, 2002, the trading price of our common stock declined,
which reduced KANA's market capitalization below the net carrying value of
goodwill prior to the impairment charge on June 30, 2002. We determined fair
value using relevant market data, including KANA's market capitalization during
the period following the revision of estimates, to calculate an estimated fair
value and any resulting goodwill impairment. The estimated fair value was
compared to the corresponding carrying value of goodwill at June 30, 2002, which
resulted in a revaluation of goodwill as of June 30, 2002. The remaining amount
of goodwill as of September 30, 2002 was $7.4 million. Any further impairment
loss could have a material adverse impact on our financial condition and results
of operations. Warranty Allowance. We must make estimates of potential warranty
obligations. We actively monitor and evaluate the quality of our software and
analyze any historical warranty costs when we evaluate the adequacy of our
warranty allowance. Significant management judgments and estimates must be made
and used in connection with establishing the warranty allowance in any
accounting period. Material differences may result in the amount and timing of
our expenses for any period if management made different judgments or utilized
different estimates. To date our provisions for warranty allowance have been
immaterial. Income Taxes. We estimate our income taxes in each of the
jurisdictions in which we operate as part of the process of preparing our
consolidated financial statements. This process involves us estimating our
actual current tax exposure together with assessing temporary differences
resulting from differing treatment of items, such as deferred revenue, for tax
and accounting purposes. These differences result in deferred tax assets and
liabilities. We then assess the likelihood that our net deferred tax assets will
be recovered from future taxable income and to the extent we believe that
recovery is not likely, we establish a valuation allowance. We concluded that a
full valuation allowance was required for all periods presented. While we have
considered future taxable income in assessing the need for the valuation
allowance, in the event we were to determine that we would be able to realize
our deferred tax assets in the future in excess of its net recorded amount, an
adjustment to the deferred tax asset would be made, increasing income in the
period in which such determination was made. Contingencies and Litigation. We are subject to lawsuits and other
claims and proceedings. We assess the likelihood of any adverse judgments or
outcomes to these matters as well as ranges of probable losses. A determination
of the amount of loss contingency required, if any, for these matters are made
after careful analysis of each individual matter. The required loss
contingencies may change in the future as the facts and circumstances of each
matter changes. Selected Results of Operations Data The following table sets forth selected data for periods indicated
expressed as a percentage of total revenues: Three and Nine Months Ended September 30, 2002 and 2001 Revenues License revenue increased 204% and 32%, respectively, for the three and
nine months ended September 30, 2002 compared to the same periods in the prior
year. These increases were the result of license transactions with greater
average license fees in 2002 compared to 2001. As a percentage of total revenue,
license revenue comprised 49% of total revenues during the three months ended
September 30, 2002, compared to 16% for the same period last year. For the nine
months ended September 30, 2002 as a percentage of total revenue, license
revenue comprised 53% of total revenues, compared to 37% for the same period
last year. We believe the increase in license revenues, as well as the increase
in the proportion of license revenues to total revenues, was due to our decision
in the third quarter of 2001 to focus on sales of licenses and to leverage third
party integrators to provide implementation services to our customers and
recommend our products to potential customers. We anticipate license revenue
will increase as a percentage of total revenue in the future for the same
reasons. We expect this shift towards a greater proportion of license fees in
our revenue mix to improve our overall gross margin percentage in the remainder
of 2002 compared to 2001. Our overall gross margin percentage for the nine
months ended September 30, 2002 was reduced by a $15.6 million charge recorded
as cost of service revenues in the second quarter of 2002 to reflect our
estimate of costs to complete a fixed fee project as of June 30, 2002, as
discussed below. Service revenue decreased 40% for the three months and 31% for the nine
months ended September 30, 2002 compared to the same periods in the prior year.
These decreases resulted primarily from reductions in services personnel
throughout 2001 and our shift to leverage third party integrators for providing
implementation services to our customers. In November 2001, the Emerging Issues Task Force ("EITF") concluded
that reimbursements for out-of-pocket-expenses incurred should be included in
revenue in the income statement and subsequently issued EITF 01-14, "Income
Statement Characterization of Reimbursements Received for `Out-of-Pocket'
Expenses Incurred" in January 2002. We adopted EITF 01-14 effective January
1, 2002 and have reclassified comparative financial statements for prior periods
to comply with the guidance in this EITF issue. The adoption of this issue
resulted in approximately $52,000 and $779,000 of reimbursable expenses
reflected in both service revenue and cost of service revenue for the three
months ended September 30, 2002 and 2001, respectively, and approximately
$256,000 and $3.2 million for the nine months ended September 30, 2002 and 2001,
respectively. Revenues from international sales were $6.4 million and $2.5 million for the
three months ended September 30, 2002 and 2001, respectively and $20.4 million
and $9.2 million for the nine months ended September 30, 2002 and 2001,
respectively. The increase in international revenues in the 2002 periods was
primarily a result of revenues recognized from one new customer in the United
Kingdom, which accounted for approximately $5.5 million in revenue in the first
quarter of 2002 and $2.4 million in the third quarter of 2002. We expect that
the percentage of international revenues for the remainder of 2002 to be lower
than in the nine months ended September 30, 2002, but greater than in the same
periods in 2001. Cost of Revenues Cost of license revenue consists primarily of third party software
royalties, product packaging, documentation, and production and delivery costs
for shipments to customers. Cost of license revenue as a percentage of license
revenue was 6% for the three months ended September 30, 2002 compared to 17% in
the same period in the prior year. The decrease was due to an unusually high
percentage in the third quarter of 2001 which resulted from the low level of
license revenue in that period and the fixed nature of some of the license
costs. For the nine months ended September 30, 2002, cost of license revenue as
a percentage of license revenue was 8%, compared to 7% in the same period in the
prior year. The small increase in the year-to-date 2002 period compared to the
same period in 2001 was due to changes in the mix of products shipped, as well
as a decrease in the average revenue per licensed seat, particularly in the
second quarter of 2002. For instance, some of our royalty contracts for
technology that we license from third parties specify a fixed royalty amount per
licensed seat shipped, while our license revenue per seat licensed is subject to
increasing discounts based on volumes purchased. We expect that cost of license
revenue as a percentage of license revenue will continue to experience
insignificant fluctuations for the remainder of 2002 and in 2003 for these
reasons. Cost of service revenue consists primarily of salaries and related expenses
for our customer support, implementation and training services organization and
an allocation of facility costs and system costs incurred in providing customer
support. Cost of service revenue decreased to 30% of service revenue for the
three months ended September 30, 2002 compared to 137% for the same period in
the prior year. For the nine months ended September 30, 2002, cost of service
revenue decreased to 94% of service revenue, compared to 113% for the same
period in the prior year. These decreases were primarily due to the shift in
service revenue mix following our decision late in the third quarter of 2001 to
increase use of third-party integrators to provide implementation services to
our customers. As a result, support revenue, which has better margins than
training and consulting revenue, constituted a larger percentage of service
revenue. The decrease in the year-to-date 2002 period is significant,
considering the $15.6 million charge in the second quarter of 2002 relating to
an amendment to the customer contract discussed above under "-Critical
Accounting Policies-Reserve for Loss Contract". Excluding this charge, cost
of service revenues compared to service revenues improved to 39% in the nine
months ended September 30, 2002 from113% for the same period in the prior
year. We anticipate that our cost of service revenue as a percentage of service
revenue will be relatively constant over the next few quarters compared to the
third quarter of 2002. 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, lead-generation
programs and marketing materials. Sales and marketing expenses decreased 55% and
51% for the three and nine months ended September 30, 2002 compared to the same
periods in the prior year. These decreases were attributable primarily to the
net reduction of sales positions throughout 2001 as a result of our
restructuring activities. As of January 1, 2001, we had 430 personnel in sales
and marketing, compared to 112 as of September 30, 2002, a 74% reduction. We anticipate that sales and marketing expenses will decrease in absolute
dollars in the fourth quarter of 2002 compared to the same period in 2001 due to
reductions in sales positions in the third quarter of 2002, and thereafter may
increase or decrease, depending primarily on the amount of future revenues and
our assessment of market opportunities and sales channels. Research and Development. Research and development expenses consist
primarily of compensation and related costs for research and development
employees and contractors and for enhancement of existing products and quality
assurance activities. Research and development expenses decreased 38% for the
three months ended September 30, 2002 compared to the same period in the prior
year. This decrease was due to headcount reductions in research and development
positions at the end of the third quarter of 2001, following our merger with
Broadbase in June 2001. The merger resulted in 102 employees of Broadbase in
research and development joining KANA, bringing the total to 231 as of June 30,
2001. As of September 30, 2002, we had 133 employees in research and
development. Research and development expenses decreased 34% for the nine months ended
September 30, 2002 compared to the same period in the prior year. The decrease
was primarily attributable to the reductions following the merger as discussed
above, and also net reductions of research and development positions in April
2001 when 101 (39%) research and development positions were eliminated as a
result of our restructuring in that period. We anticipate that research and development expenses will not vary
significantly in absolute dollars over the next few quarters, and thereafter may
increase or decrease, depending primarily on the amount of future revenues,
customer needs, and our assessment of market demand. General and Administrative. General and administrative expenses
consist primarily of compensation and related costs for administrative
personnel, bad debt expenses, and of legal, accounting and other general
corporate expenses. General and administrative expenses decreased 64% for the
three months ended September 30, 2002 compared with the same period in the prior
year. This decrease was due to decreased headcount in general and administrative
positions following our merger with Broadbase in June 2001. The merger resulted
in 47 employees of Broadbase in general and administrative departments joining
KANA, bringing the total to 96 as of June 30, 2001. As of September 30, 2002, we
had 65 general and administrative employees. General and administrative expenses decreased by 44% in the nine months ended
September 30, 2002 compared with the same period in the prior year. This
decrease was attributable primarily to the reductions following the merger as
discussed above, and also a net reduction of general and administrative
positions in April 2001 when 32 (34%) general and administrative positions were
eliminated as a result of our restructuring in that period. We anticipate that general and administrative expenses will be slightly lower
in absolute dollars than in the third quarter of 2002 for the next two quarters
and thereafter may increase or decrease, depending primarily on the amount of
future revenues and corporate infrastructure requirements including insurance,
professional services, bad debt expense and other administrative costs. Restructuring Costs. For the three and nine months ended September 30,
2001, we incurred restructuring charges of approximately
$32.1 million and $86.4 million, respectively,
related to the reduction in workforce and costs associated with
certain excess leased facilities and asset impairments. As of September 30,
2002, $21.0 million in restructuring liabilities remain on our consolidated
balance sheet in accrued restructuring and merger costs. Cash payments for
severance and excess leased facilities during the nine months ended September
30, 2002 totaled $8.1 million. Cash received from subleases and sales of
property charged to restructuring expense in previous periods totaled $0.7
million. The following table is a summary of restructuring payments and
liabilities during the nine months ended September 30, 2002 (in thousands): Amortization of Deferred Stock-Based Compensation. We are amortizing
deferred stock-based compensation 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. As of September 30, 2002, there was
approximately $10.9 million of total deferred stock-based compensation remaining
to be amortized related to warrants and past employee stock option grants. The following table details, by operating expense, our amortization of stock-
based compensation (in thousands): Stock-based compensation charged to general and administrative expense in the
first quarter of 2002 included $4.7 million relating to warrants issued in
connection with a proposed financing. Amortization of Goodwill. Amortization of goodwill ceased as of
January 1, 2002 upon our adoption of Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). Under
SFAS 142, goodwill is no longer amortized. The following table presents comparative information showing the effects that
the non-amortization of goodwill provisions of SFAS 142 would have had on the
net loss and basic and diluted net loss per share for the periods shown (in
thousands, except per share amounts): Amortization of Identifiable Intangibles. Amortization of identifiable
intangibles for the three months ended September 30, 2002 and 2001 was $1.2
million. Amortization for the nine months ended September 30, 2002 and 2001 was
$3.6 millionThe amortization relates to $14.4 million of purchased technology
recorded as an intangible asset in connection with the merger with Silknet in
April 2000. We expect amortization of intangible assets to be $1.2 million in
each quarter of 2002 unless we purchase intangible assets in the future. Goodwill Impairment. SFAS 142 requires goodwill to be tested for
impairment under certain circumstances and written down when impaired, and
requires purchased intangible assets other than goodwill to be amortized over
their useful lives unless these lives are determined to be indefinite. We
adopted these new rules effective January 1, 2002. Under the transition
provisions of SFAS No. 142, there was no goodwill impairment at January 1, 2002
based upon our analysis at that time. However, during the quarter ended June 30,
2002, circumstances developed that indicated the goodwill was likely impaired
and we performed an impairment analysis as of June 30, 2002. This analysis
resulted in a $55.0 million impairment of goodwill. The circumstances that led
to the impairment included the revision of estimates of our revenues and net
loss for the second quarter of 2002 and subsequent quarters based upon
preliminary revenue results late in the second quarter of 2002, and the
reduction of estimated future revenues and cash flows. Following an announcement
of these revisions in connection with our July 2002 release of KANA's
preliminary results for the second quarter of 2002, the trading price of our
common stock declined, which reduced KANA's market capitalization below the net
carrying value of goodwill prior to the impairment charge on June 30, 2002. We
determined fair value using relevant market data, including KANA's market
capitalization during the period following the revision of estimates, to
calculate an estimated fair value and any resulting goodwill impairment. The
estimated fair value was compared to the corresponding carrying value of
goodwill at June 30, 2002, which resulted in a revaluation of goodwill as of
June 30, 2002. The remaining amount of goodwill as of September 30, 2002 was $7.4
million. In 2001, we performed an impairment assessment of the identifiable
intangibles and goodwill recorded in connection with the acquisition of Silknet,
under the provisions of SFAS No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed of. The assessment was
performed primarily due to the significant sustained decline in our stock price
since the valuation date of the shares issued in the Silknet acquisition which
resulted in the net book value of our assets prior to the impairment charge
significantly exceeding our market capitalization, the overall decline in the
industry growth rates, and our lower than projected operating results. As a
result, we recorded an impairment charge of approximately $603.4 million to
reduce goodwill in the first quarter of 2001. The charge was based upon the
estimated discounted cash flows over the remaining useful life of the goodwill
using a discount rate of 20%. The assumptions supporting the cash flows,
including the discount rate, were determined using our best estimates. Other Income, Net Other income consists primarily of interest income earned on cash and
investments, offset by interest expense relating to operating and capital
leases. We expect other income to fluctuate in accordance with our cash balances
as well as the prime interest rate. Provision for Income Taxes We have incurred operating losses for all periods from inception through
September 30, 2002, 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. Discontinued Operation During the quarter ended June 30, 2001, we adopted a plan to discontinue
the KANA Online business. We will no longer seek new business for KANA Online
but will continue to service all ongoing contractual obligations we have to our
existing customers. Accordingly, KANA Online is reported as a discontinued
operation. The net liability of the discontinued operation at September 30,
2002, consisted of a liability for leased equipment. The estimated loss on the
disposal of KANA Online recorded during the second quarter of 2001 was $3.7
million, consisting of an estimated loss on disposal of the business of $2.6
million and a provision of $1.1 million for the anticipated operating losses
during the phase-out period. This estimate was revised in the second quarter of
2002, resulting in a gain of $0.4 million. There was no revenue from our discontinued operation for the three and nine
months ended September 30, 2002. Revenues from our discontinued operation were
$0.2 million for the three months and $3.2 million for nine months ended
September 30, 2001. Liquidity and Capital Resources As of September 30, 2002, we had $35.1 million in cash, cash equivalents
and short-term investments, compared to $40.1 million as of December 31, 2001.
As of September 30, 2002, we had a negative working capital of $5.1 million
(positive $22.8 excluding deferred revenue). Our operating activities used $35.8 million of cash for the nine months ended
September 30, 2002, which comprised a $96.2 million loss offset by $75.1 million
in net non-cash charges, and included $17.2 million in payments relating to
merger and restructuring liabilities. Other working capital changes totaled a
net $2.6 million. Our operating activities used $97.1 million of cash for the
nine months ended September 30, 2001, which comprised a $918.7 million net loss
experienced during the period offset by $768.1 million in non-cash charges, a
$34.0 million decrease in accounts receivable and a $20.1 million increase in
accrued merger and restructuring liabilities. Other working capital changes
totaled a net $0.4 million. Our investing activities used $6.0 million of cash for the nine months ended
September 30, 2002, resulting from $11.1 million of property and equipment
purchases and a $2.8 million net increase in short-term investments, offset by
an $8.0 million increase in cash due to redemptions of restricted cash. Our
investing activities provided $39.4 million of cash for the nine months ended
September 30, 2001 from $46.7 million of net acquired cash from the acquisition
of Broadbase offset by Silknet acquisition-related costs of $13.1 million, a
$24.8 million net decrease in short-term investments, offset by $11.1 million of
purchases of property and equipment purchases and $7.8 million of transfers to
restricted cash. Our financing activities provided $33.9 million in cash for the nine months
ended September 30, 2002, primarily due to net proceeds of approximately $31.4
million from our private placement of approximately 2.9 million shares of our
common stock in February 2002. Our financing activities provided $3.9 million in
cash for the nine months ended September 30, 2001, primarily due to payments on
stockholders' notes receivable and exercises of stock options. We have a line of credit totaling $4.0 million, which is collateralized by
all of our assets, bears interest at the bank's prime rate plus 0.25% (5.0% as
of September 30, 2002), and expires in March 2003 at which time the entire
balance under the line of credit will be due. Total borrowings as of September
30, 2002 were approximately $1.2 million under this line of credit. The line of
credit requires that we maintain at least a $6.0 million dollar balance in any
account at the bank or that we provide cash collateral with funds equivalent to
115% of the outstanding debt obligation. The line of credit also requires that
we maintain at all times a minimum of $20.0 million as short-term unrestricted
cash and cash equivalents. If we default under this line of credit, including
through a violation of any of these covenants, the entire balance under the line
of credit will become immediately due and payable. As of September 30, 2002, we
were in compliance with all covenants of the line of credit agreement. Throughout 2001, to reduce our expenditures, we restructured in several
areas, including reduced staffing, expense management and capital spending. This
restructuring included net workforce reductions of approximately 772 employees,
which were implemented in order to streamline operations, eliminate redundant
positions after the merger with Broadbase, and reduce costs and bring our
staffing and structure in line with industry standards and current economic
conditions. These reductions have been significant, particularly in light of the
increase of approximately 896 employees upon our merger with Broadbase in June
of 2001. We have also reduced headcount in the third quarter of 2002 by 34
positions, primarily in sales positions in connection with our shift in strategy
to work more closely with third-party integrators. We expect our cash and cash
equivalents and short-term investments on hand will be sufficient to meet our
working capital and capital expenditure needs for the next 12 months following
September 30, 2002. Significant expected cash outflows through the remainder of
2002 include approximately $1.0 million in payments relating to accrued merger
and restructuring costs, as well as approximately $1.5 million of expenditures
on certain corporate infrastructure including internal-use software. If we
experience a decrease in demand for our products from the level experienced in
the third quarter of 2002, then we would need to reduce expenditures to a
greater degree than anticipated, or raise additional funds, if possible. Our expectations as to the amount and timing of our future cash transactions
are subject to a number of assumptions, including assumptions regarding
anticipated revenue, general economic conditions and customer purchasing and
payment patterns, many of which are beyond our control. RISKS ASSOCIATED WITH KANA'S BUSINESS AND FUTURE
OPERATING RESULTS 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. The risks described below
are not the only ones facing our company. Additional risks not presently known
to us, or that we currently deem immaterial, may become important factors that
impair our business operations. 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 report and our other public filings. 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. 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. 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. 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 based on untested assumptions. Moreover, due to our limited
operating history and evolving product offerings, our insights into trends that
may emerge and affect our business are limited. In addition, our business is
subject to a number of risks, any of which could unexpectedly harm our results
of operations. Many of these risks are discussed in the subheadings below, and
include our ability to: Our quarterly revenues and operating results may fluctuate in future
periods and we may fail to meet the expectations of investors and public market
analysts, which could 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 are uncertain. We
believe that period-to-period comparisons of our operating results may not be
meaningful and you should not rely on these comparisons as an indication of our
future performance. 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 under the
subheadings of this "Risks Associated with KANA's Business and Future Operating
Results" section as well as: We also often offer volume-based pricing, which may affect operating margins.
In addition, we experience seasonality in our revenues, with the fourth
quarter of the year typically having the highest revenue for the year. We
believe that this seasonality primarily results from customer budgeting cycles.
We expect that this seasonality will continue. Customers' decisions to purchase
our products and services are discretionary and subject to their internal
budgets and purchasing processes. Due to the continuing slowdown in the general
economy, we believe that many existing and potential customers are reassessing
or reducing their planned technology and Internet-related investments and
deferring purchasing decisions. Further delays or reductions in business
spending for information technology could have a material adverse effect on our
revenues and operating results. As a result, there is increased uncertainty with
respect to our expected revenues. Our revenues in any quarter depend on a relatively small number of
relatively large orders. Our quarterly revenues are especially subject to fluctuation because they
depend on the completion of relatively large orders for our products and related
services. The average size of our license transactions has increased in recent
periods as we have focused on larger enterprise customers and on licensing our
more comprehensive integrated products and have utilized system integrators in
our sales process. We expect the percentage of larger orders as compared to
total orders, to increase. For example, during the three and nine months ended
September 30, 2002, one customer represented 13% and 13% of total revenues,
respectively. This dependence on large orders makes our net revenue and
operating results more likely to vary from quarter to quarter, and more
difficult to predict, because the loss of any particular large order is
significant. As a result, our operating results could suffer if any large orders
are delayed or canceled in any future period. In addition, large orders, and
orders obtained through the activities of system integrators, often have longer
sales cycles, increasing the difficulty of predicting future revenues. Our
expenses are generally fixed and we will not be able to reduce these expenses
quickly if we fail to meet our revenue forecasts. Most of our expenses, such as employee compensation and rent, are
relatively fixed in the short term. Moreover, our budget is based, in part, upon
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. Accordingly, such a revenue
shortfall would have a disproportionate effect on our expected operating results
for that quarter. Our failure to complete our expected sales in any given quarter could
materially harm our operating results because of the increasingly large size of
many of our 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. Consequently, we face difficulty predicting the quarter in which sales
to expected customers will occur, which contributes to the uncertainty of our
future operating results. In recent periods, we have experienced an increase in
the size of our typical orders, and in the length of a typical sales cycle.
These trends may increase the uncertainty of our future operating results and
reduce our ability to anticipate our future revenues. 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 anywhere from 3 to 12 months in the
United States and longer in foreign countries. Consequently, we face difficulty
predicting the quarter in which expected sales will actually occur. This
contributes to fluctuations in our future operating results. 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. In the event that the current
economic downturn were to continue, the sales cycle for our products may become
longer and we may require more resources to complete sales. We have a history of losses and may not be profitable in the future and
may not be able to generate sufficient revenue to achieve and maintain
profitability. Since we began operations in 1997, our revenues have not been sufficient
to support our operations, and we have incurred substantial operating losses in
every quarter. As of September 30, 2002, our accumulated deficit was
approximately $4.2 billion. Our history of losses has previously caused some of
our potential customers to question our viability, which has in turn hampered
our ability to sell some of our products. Additionally, our revenue has been
affected by the increasingly uncertain economic conditions both generally and in
our market. As a result of these conditions, we have experienced and expect to
continue to experience difficulties in collecting outstanding receivables from
our customers and attracting new customers, which means that we may continue to
experience losses, even if sales of our products and services grow. Although we
have restructured our operations to reduce operating expenses, we will need to
increase our revenue to achieve profitability and positive cash flows, and our
revenue may decline, or fail to grow, in future periods. Our expectations as to
when we can achieve positive cash flows, and as to our future cash balances, are
subject to a number of assumptions, including assumptions regarding improvements
in general economic conditions and customer purchasing and payment patterns,
many of which are beyond our control. We reduced the size of our professional services team in 2001 and now rely
more on independent third-party providers for customer services such as product
installations and support. However, if third parties do not provide the support
our customers need, we may be required to hire subcontractors to provide these
professional services. Increased use of subcontractors would harm our revenues
and margins because it costs us more to hire subcontractors to perform these
services than to provide the services ourselves. We rely on marketing, technology and distribution relationships for the
sale, installation and support of our products that may generally be terminated
at any time, and if our current and future relationships are not successful, our
growth might be limited. We rely on marketing and technology relationships with a variety of
companies that, in part, generate leads for the sale of our products. These
marketing and technology relationships include relationships with: If we cannot maintain successful marketing and technology relationships or if
we fail to enter into additional marketing and technology relationships, we
could have difficulty expanding the sales of our products and our growth might
be limited. While some of these companies do not resell or distribute our
products, we believe that many of our direct sales are the result of leads
generated by vendors of e-business and enterprise software and we expect to
continue relying heavily on sales from these relationships in future periods.
Our marketing and technology relationships are generally not documented in
writing, or are governed by agreements that can be terminated by either party
with little or no prior notice. In addition, companies with which we have
marketing, technology or distribution relationships may promote products of
several different companies including those of our competitors. If these
companies choose not to promote our products or if they develop, market or
recommend software applications that compete with our products, our business
will be harmed. In addition, we rely on distributors, value-added resellers, systems
integrators, consultants and other third-party resellers to recommend our
products and to install and support these products. Our reduction in the size of
our professional services team in 2001 increased our reliance on third parties
for product installations and support. If the companies providing these services
fail to implement our products successfully for our customers, we might be
unable to complete implementation on the schedule required by the customers and
we may have increased customer dissatisfaction or difficulty making future sales
as a result. We might not be able to maintain these relationships and enter into
additional relationships that will provide timely and cost-effective customer
support and service. If we cannot maintain successful relationships with our
indirect sales channel partners around the world, we might have difficulty
expanding the sales of our products and our international growth could be
limited. If we fail to expand our direct and indirect sales channels, we will not
be able to increase revenues. In order to grow our business, we need to increase market awareness and sales
of our products and services. To achieve this goal, we need to increase the
size, and enhance the productivity, of our direct sales force and indirect sales
channels. If we fail to do so, this failure could harm our ability to increase
revenues. The expansion of our sales and marketing department will require the
hiring and retention of personnel for whom there is a high demand. We plan to
hire additional sales personnel, but competition for qualified sales people is
intense, and we might not be able to hire a sufficient number of qualified sales
people. Furthermore, while historically we have received substantially all of
our revenues from direct sales, we increased our reliance on sales through
indirect sales channels by selling our software through systems integrators, or
SIs. We depend on these relationships to promote our products and drive sales,
particularly in light of our reductions in direct sales personnel. Our business
depends on our ability to create and maintain relationships with SIs and any
failure to do so would impair our sales efforts and revenue growth. If systems integrators fail to adequately promote our products, our sales
and revenue would be impaired. A significant percentage of our revenues depend on the efforts of Sis and
their recommendations of our products, and we expect an increasing percentage of
our revenues to be derived from our relationships with SIs that market and sell
our products. If SIs do not successfully market our products, our operating
results will be materially harmed. In addition, many of our direct sales are to
customers that will be relying on SIs to implement our products, and if SIs are
not familiar with our technology or able to successfully implement our products,
our operating results will be materially harmed. We expect to continue building
our network of SIs and other indirect sales channels and, if this strategy is
successful, our dependence on the efforts of these third parties for revenue
growth and customer service will increase. Our reliance on third parties for
these functions will reduce our control over such activities and reduce our
ability to perform such functions internally. If we come to rely primarily on a
single SI that subsequently terminates its relationship with us, becomes
insolvent or is acquired by another company with which we have no relationship,
or decides not to support our products, we may not be able to internally
generate sufficient revenue or increase the revenues generated by our other SI
relationships to offset the resulting lost revenues. Furthermore, SIs typically
offer our solution in combination with other products and services, some of
which may compete with our solution. SIs are not required to sell any fixed
quantities of our products, are not bound to sell our products exclusively, and
may act as indirect sales channels for our competitors. Difficulties in implementing our products could harm our revenues and
margins. We generally recognize revenue from a customer sale when persuasive
evidence of an agreement exists, the product has been delivered, the arrangement
does not involve significant customization of the software, the license fee is
fixed or determinable and collection of the fee is probable. If an arrangement
requires significant customization or implementation services from KANA,
recognition of the associated license and service revenue could be delayed. The
timing of the commencement and completion of the these services is subject to
factors that may be beyond our control, as this process requires access to the
customer's facilities and coordination with the customer's personnel after
delivery of the software. In addition, customers could delay product
implementations. 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. We may incur non-cash charges resulting from acquisitions and equity
issuances, which could harm our operating results. In connection with outstanding stock options and warrants to purchase
shares of our common stock, as well as other equity rights we may issue, we are
incurring and may incur substantial charges for stock-based compensation.
Accordingly, significant increases in our stock price could result in
substantial non-cash charges and variations in our results of operations. For
example, in the first quarter of 2002, we incurred a stock-based compensation
charge of approximately $4.7 million associated with warrants issued pursuant to
an equity financing agreement that was terminated. Furthermore, we will continue
to incur charges to reflect amortization and any impairment of identified
intangible assets acquired in connection with our acquisition of Silknet, and we
may make other acquisitions or issue additional warrants, shares of common stock
or other securities in the future that could result in further accounting
charges. In addition, a new standard for accounting for goodwill acquired in a
business combination has recently been adopted. This new standard requires
recognition of goodwill as an asset but does not permit amortization of
goodwill. Instead goodwill must be separately tested for impairment. As a
result, our goodwill amortization charges ceased in 2002. However, in the
future, we may incur less frequent, but potentially larger, impairment charges
related to the goodwill already recorded, as well as goodwill arising out of any
future acquisitions. For example, we performed a goodwill impairment analysis as
of June 30, 2002, which resulted in a $55.0 million impairment expense to reduce
goodwill. Current and future accounting charges like these could result in
significant losses and delay our achievement of net income. If requirements relating to accounting treatment for employee stock
options are changed, we may be forced to change our business practices. We currently account for the issuance of stock options under APB Opinion
No. 25, "Accounting for Stock Issued to Employees." If proposals
currently under consideration by administrative and governmental authorities are
adopted, we may be required to treat the value of the stock options granted to
employees as a compensation expense. As a result, we could decide to decrease
the number of employee stock options which we would grant. This could affect our
ability to retain existing employees and attract qualified candidates, and
increase the cash compensation we would have to pay to them. In addition, such a
change could have a negative effect on our earnings. The reductions in force associated with our cost-reduction initiatives may
adversely affect the morale and performance of our personnel and our ability to
hire new personnel. In connection with our effort to streamline operations, reduce costs and
bring our staffing and structure in line with industry standards, we
restructured our organization in 2001, an effort that included substantial
reductions in our workforce. There have been and may continue to be substantial
costs associated with the workforce reductions, including severance and other
employee-related costs, and our restructuring plan may yield unanticipated
consequences, such as attrition beyond our planned reduction in workforce. As a
result of these reductions, our ability to respond to unexpected challenges may
be impaired and we may be unable to take advantage of new opportunities. We also
reduced our employees' salaries in the fourth quarter of 2001, and to a lesser
extent, in the third quarter of
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
2002 2001
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents............................. $ 17,659 $ 25,476
Short-term investments................................ 17,473 14,654
Accounts receivable, net.............................. 12,177 15,942
Prepaid expenses and other current assets............. 3,899 6,442
------------ ------------
Total current assets................................ 51,208 62,514
Restricted cash........................................ 3,051 11,018
Property and equipment, net............................ 23,532 19,382
Goodwill............................................... 7,448 58,547
Intangible assets, net................................. 2,653 6,253
Other assets........................................... 3,006 2,958
------------ ------------
Total assets....................................... $ 90,898 $ 160,672
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable...................... $ 1,310 $ 1,363
Accounts payable...................................... 7,126 6,276
Accrued liabilities................................... 13,625 25,292
Accrued restructuring and merger costs................ 6,360 21,100
Deferred revenue...................................... 27,886 22,180
------------ ------------
Total current liabilities............................ 56,307 76,211
Accrued restructuring, less current portion............ 14,890 17,514
Notes payable, less current portion.................... -- 108
------------ ------------
Total liabilities.................................. 71,197 93,833
------------ ------------
Stockholders' equity:
Common stock.......................................... 225 192
Additional paid-in capital............................ 4,273,389 4,237,325
Deferred stock-based compensation..................... (10,916) (22,209)
Notes receivable from stockholders.................... (200) (799)
Accumulated other comprehensive losses................ (184) (1,285)
Accumulated deficit................................... (4,242,613) (4,146,385)
------------ ------------
Total stockholders' equity......................... 19,701 66,839
------------ ------------
Total liabilities and stockholders' equity......... $ 90,898 $ 160,672
============ ============
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(unaudited)
Revenues:
License........................................................ $ 8,784 $ 2,891 $ 32,222 $ 24,335
Service........................................................ 9,243 15,286 28,138 40,946
--------- --------- --------- ---------
Total revenues.................................................... 18,027 18,177 60,360 65,281
--------- --------- --------- ---------
Cost of revenues:
License........................................................ 548 503 2,569 1,789
Service (excluding stock-based compensation of
$145, $311, $754 and $1,019, respectively)................ 2,762 21,003 26,560 46,288
--------- --------- --------- ---------
Total cost of revenues............................................ 3,310 21,506 29,129 48,077
--------- --------- --------- ---------
Gross profit (loss)............................................... 14,717 (3,329) 31,231 17,204
--------- --------- --------- ---------
Operating expenses:
Sales and marketing (excluding stock-based compensation
of $772, $1,653, $4,008 and $5,117, respectively)............ 8,732 19,205 29,432 59,528
Research and development (excluding stock-based compensation
of $721, $1,542, $3,741, and $2,254, respectively)........... 6,389 10,236 19,539 29,458
General and administrative (excluding stock-based compensation
of $313, $671, $6,376 and $2,149, respectively).............. 3,458 9,500 10,061 18,091
Restructuring costs............................................ -- 32,081 -- 86,338
Merger and transition-related costs............................ -- 4,841 -- 11,517
Amortization of stock-based compensation....................... 1,951 4,177 14,879 10,539
Amortization of goodwill....................................... -- 12,351 -- 110,533
Amortization of identifiable intangibles....................... 1,200 1,200 3,600 3,600
Goodwill impairment............................................ -- -- 55,000 603,446
--------- --------- --------- ---------
Total operating expenses.......................................... 21,730 93,591 132,511 933,050
--------- --------- --------- ---------
Operating loss.................................................... (7,013) (96,920) (101,280) (915,846)
Other income, net................................................. 175 858 770 908
--------- --------- --------- ---------
Loss from continuing operations................................... (6,838) (96,062) (100,510) (914,938)
Discontinued operation:
Loss from operations of discontinued operation.................. -- -- -- (125)
Gain (loss) on disposal, including provision of $1.1
million for operating losses during phase-out period.......... -- -- 381 (3,667)
Cumulative effect of accounting change related
to the elimination of negative goodwill......................... -- -- 3,901 --
--------- --------- --------- ---------
Net loss.......................................................... $ (6,838) $ (96,062) $ (96,228) $(918,730)
========= ========= ========= =========
Basic and diluted net loss per share:
Loss from continuing operations................................. $ (0.30) $ (5.33) $ (4.52) (75.53)
Income (loss) from discontinued operation....................... -- -- 0.01 (0.31)
Cumulative effect of accounting change.......................... -- -- 0.18 --
--------- --------- --------- ---------
Net loss........................................................ $ (0.30) $ (5.33) $ (4.33) (75.84)
========= ========= ========= =========
Shares used in computing basic and
diluted net loss per share...................................... 22,851 18,038 22,234 12,114
========= ========= ========= =========
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
September 30,
--------------------
2002 2001
--------- ---------
(unaudited)
Cash flows from operating activities:
Net loss.................................................... $ (96,228) $(918,730)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.............................................. 6,781 8,117
Amortization of stock-based compensation.................. 14,879 10,539
Amortization of goodwill and identifiable intangibles..... 3,600 114,133
Goodwill impairment....................................... 55,000 603,446
Elimination of negative goodwill.......................... (3,901) --
Change in allowance for doubtful accounts................. (1,521) 4,173
Other non-cash charges.................................... 212 27,646
Changes in operating assets and liabilities,
net of effects from acquisitions:
Accounts receivable................................... 6,148 33,976
Prepaid and other current assets...................... 1,597 9,043
Other assets.......................................... (48) (830)
Accounts payable and accrued liabilities.............. (10,817) 1,397
Accrued restructuring and merger...................... (17,249) 20,053
Deferred revenue...................................... 5,706 (9,794)
Other liabilities..................................... -- (233)
--------- ---------
Net cash used in operating activities..................... (35,841) (97,064)
--------- ---------
Cash flows from investing activities:
Purchases of short-term investments......................... (23,238) (38,488)
Sales of short-term investments............................. 20,419 63,240
Property and equipment purchases............................ (11,142) (11,121)
Cash acquired from acquisitions, net........................ -- 33,556
Restricted cash............................................. 7,967 (7,800)
--------- ---------
Net cash (used in) provided by investing activities... (5,994) 39,387
--------- ---------
Cash flows from financing activities:
Payments on notes payable................................... (161) (287)
Net proceeds from issuance of common stock and warrants..... 33,413 1,486
Payments on stockholders' notes receivable.................. 599 2,677
--------- ---------
Net cash provided by financing activities............. 33,851 3,876
--------- ---------
Effect of exchange rate changes on cash and cash equivalents... 167 (963)
--------- ---------
Net decrease in cash and cash equivalents...................... (7,817) (54,764)
Cash and cash equivalents at beginning of period............... 25,476 76,202
--------- ---------
Cash and cash equivalents at end of period..................... $ 17,659 $ 21,438
========= =========
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Numerator:
Loss from continuing operations before
cumulative effect of accounting change ................... $ (6,838) $ (96,062) $(100,510) $(914,938)
--------- --------- --------- ---------
Denominator:
Weighted-average shares of common stock outstanding ........ 22,865 18,098 22,253 12,285
Less weighted-average shares subject to repurchase ......... (14) (60) (19) (171)
--------- --------- --------- ---------
Denominator for basic and diluted calculation .............. 22,851 18,038 22,234 12,114
--------- --------- --------- ---------
Basic and diluted net loss per share from continuing
operations before cumulative effect of accounting change.. $ (0.30) $ (5.33) $ (4.52) $ (75.53)
========= ========= ========= =========
As of September 30,
----------------------
2002 2001
--------- -----------
Stock options and warrants .................... 8,531 4,418
Common stock subject to repurchase ............ 13 50
--------- -----------
8,544 4,468
========= ===========
Restructuring Restructuring
Accrual at Sublease Accrual at
December 31, Payments Payments September 30,
2001 Made Received 2002
------------ -------- ----------- ------------
Severance.......... $ 913 $ (695) $ -- $ 218
Facilities......... 27,418 (7,419) 737 20,736
------------ -------- ----------- ------------
Total ............. $ 28,331 $ (8,114) $ 737 $ 20,954
============ ======== =========== ============
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
--------- ----------- --------- ---------
Reported net loss................... $ (6,838) $ (96,062) $ (96,228) $(918,730)
Goodwill amortization............... -- 12,351 -- 110,533
--------- ----------- --------- ---------
Adjusted net loss................... $ (6,838) $ (83,711) $ (96,228) $(808,197)
========= =========== ========= =========
Basic and diluted net loss per share $ (0.30) $ (5.33) $ (4.33) $ (75.84)
Goodwill amortization............... -- 0.68 -- 9.12
--------- ----------- --------- ---------
Adjusted basic and diluted
net loss per share................ $ (0.30) $ (4.64) $ (4.33) $ (66.72)
========= =========== ========= =========
Shares used in computing adjusted basic
and diluted net loss per share.... 22,851 18,038 22,234 12,114
========= =========== ========= =========
Year Ended
December 31,
---------------------------------
2001 2000 1999
--------- ----------- ---------
Reported net loss................... $(942,895) $(3,070,873) $(118,743)
Goodwill amortization............... 122,860 869,675 --
--------- ----------- ---------
Adjusted net loss................... $(820,035) $(2,201,198) $(118,743)
========= =========== =========
Basic and diluted net loss per share $ (68.61) $ (395.68) $ (46.08)
Goodwill amortization............... 8.94 112.06 --
--------- ----------- ---------
Adjusted basic and diluted
net loss per share................ $ (59.67) $ (283.62) $ (46.08)
========= =========== =========
Shares used in computing adjusted basic
and diluted net loss per share.... 13,743 7,761 2,577
========= =========== =========
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- --------------------
2002 2001 2002 2001
--------- ----------- --------- ---------
United States ...................... $ 11,642 $ 15,709 $ 39,992 $ 56,047
International ...................... 6,385 2,468 20,368 9,234
--------- ----------- --------- ---------
$ 18,027 $ 18,177 $ 60,360 $ 65,281
========= =========== ========= =========
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Revenues .............................................. $ -- $ 208 $ -- $ 3,161
========= ========= ========= =========
Loss from operations of discontinued operation ........ $ -- $ -- $ -- $ (125)
Gain (loss) on disposal................................ -- -- 381 (3,667)
--------- --------- --------- ---------
Total income (loss) on discontinued operation.......... $ -- $ -- $ 381 $ (3,792)
========= ========= ========= =========
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
2002 2001 2002 2001
Revenues: ------------ ------------ ------------ -------------
License...................... $ 8,784 49 % $ 2,891 16 % $32,222 53 % $ 24,335 37 %
Service...................... 9,243 51 15,286 84 28,138 47 40,946 63
------- ---- ------- ---- ------- ---- -------- ----
Total revenues.................... 18,027 100 18,177 100 60,360 100 65,281 100
------- ---- ------- ---- ------- ---- -------- ----
Cost of revenues:
License...................... 548 3 503 3 2,569 4 1,789 3
Service...................... 2,762 15 21,003 116 26,560 44 46,288 71
------- ---- ------- ---- ------- ---- -------- ----
Total cost of revenues............ 3,310 18 21,506 118 29,129 48 48,077 74
------- ---- ------- ---- ------- ---- -------- ----
Gross profit (loss)............... 14,717 82 (3,329) -18 31,231 52 17,204 26
------- ---- ------- ---- ------- ---- -------- ----
Selected operating expenses:
Sales and marketing.......... 8,732 48 19,205 106 29,432 49 59,528 91
Research and development..... 6,389 35 10,236 56 19,539 32 29,458 45
General and administrative... 3,458 19 % 9,500 52 % 10,061 17 % 18,091 28 %
Restructuring Restructuring
Accrual at Sublease Accrual at
December 31, Payments Payments September 30,
2001 Made Received 2002
------------ -------- ----------- ------------
Severance.......... $ 913 $ (695) $ -- $ 218
Facilities......... 27,418 (7,419) 737 20,736
------------ -------- ----------- ------------
Total ............. $ 28,331 $ (8,114) $ 737 $ 20,954
============ ======== =========== ============
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
------- ------- -------- --------
Cost of service ...................... $ 145 $ 311 $ 754 $ 1,019
Sales and marketing .................. 772 1,653 4,008 5,117
Research and development ............. 721 1,542 3,741 2,254
General and administrative ........... 313 671 6,376 2,149
------- ------- -------- --------
Total ................................ $ 1,951 $ 4,177 $ 14,879 $ 10,539
======= ======= ======== ========
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
--------- ----------- --------- ---------
Reported net loss................... $ (6,838) $ (96,062) $ (96,228) $(918,730)
Goodwill amortization............... -- 12,351 -- 110,533
--------- ----------- --------- ---------
Adjusted net loss................... $ (6,838) $ (83,711) $ (96,228) $(808,197)
========= =========== ========= =========
Basic and diluted net loss per share $ (0.30) $ (5.33) $ (4.33) $ (75.84)
Goodwill amortization............... -- 0.68 -- 9.12
--------- ----------- --------- ---------
Adjusted basic and diluted
net loss per share................ $ (0.30) $ (4.64) $ (4.33) $ (66.72)
========= =========== ========= =========
Shares used in computing adjusted basic
and diluted net loss per share.... 22,851 18,038 22,234 12,114
========= =========== ========= =========