UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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.
|
|
|
|
|
|
181 Constitution Drive
Menlo Park, California 94025
(650) 614 8300
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
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 such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
[X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes
¨ No
Common Stock, $0.001 par value per share
As of June 28, 2002, the last business day of the Registrant's most recently completed second fiscal quarter, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $70,248,056 based upon the closing sales price of the Common Stock as reported on the Nasdaq Stock Market of $4.00. Shares of Common Stock held by officers, directors, and holders of more than ten percent of the outstanding Common Stock have been excluded from this calculation because such persons may be deemed to be affiliates. The determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of March 1, 2003, the Registrant had outstanding 22,981,029 shares of Common Stock.
Portions of the Registrant's Proxy Statement to be filed pursuant to Regulation 14A promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, which is anticipated to be filed within 120 days after the end of the Registrant's fiscal year ended December 31, 2002, are incorporated by reference in Part III hereof.
KANA Software, Inc.
TABLE OF CONTENTS
ANNUAL REPORT ON FORM 10-K
For The Year Ended December 31, 2002
|
Part I. |
|
Page |
|
Item 1. |
Business | |
|
Item 2. |
Properties | |
|
Item 3. |
Legal Proceedings | |
|
Item 4. |
Submission of Matters to a Vote of Security Holders | |
|
Part II. |
|
|
|
Item 5. |
Market for the Registrant's Common Equity and Related Stockholder Matters | |
|
Item 6. |
Selected Consolidated Financial Data | |
|
Item 7. |
Management's Discussion and Analysis of Financial Condition and Results of Operations | |
|
Item 7a. |
Quantitative and Qualitative Disclosures About Market Risk | |
|
Item 8. |
Financial Statements and Supplementary Data | |
|
Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |
|
Part III. |
|
|
|
Item 10. |
Directors and Executive Officers of the Registrant | |
|
Item 11. |
Executive Compensation | |
|
Item 12. |
Security Ownership of Certain Beneficial Owners and Management | |
|
Item 13. |
Certain Relationships and Related Transactions | |
|
Item 14. |
Controls and Procedures | |
|
Part IV. |
|
|
|
Item 15. |
Exhibits, Financial Statement Schedules and Reports on Form 8-K | |
|
Signatures |
| |
|
Certifications |
|
PART I
Special Note Regarding Forward Looking Statements
The following discussion of our business 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, and 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, many 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, but are not limited to, those described in "Risk Factors" and elsewhere in this report. Forward-looking statements that we believed to be true at the time we made them may ultimately prove to be incorrect or false. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect our 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.
ITEM 1. BUSINESS
Overview
We are a leading provider of enterprise Customer Relationship Management (eCRM) software solutions. These enterprise customer support and communications applications are built on a Web-architected platform incorporating our KANA eCRM architecture, which provides users with full access to the applications using a standard Web browser and without requiring them to install additional software on their individual computers. Our software helps our customers provide external-facing customer support, and to better service, market to, and understand their customers and partners, while improving results and decreasing costs in contact centers and marketing departments. Our KANA iCARE (Intelligent Customer Acquisition and Retention for the Enterprise) application suite combines our KANA eCRM architecture with customer-focused service, marketing and commerce software applications. These applications enable organizations to improve customer and partner relationships by allowing them to interact with the company over the communication channels they prefer, whether by Web contact, e- mail or telephone. We offer optimized versions of our software for several specific industries including healthcare, financial services, high technology manufacturing, and telecommunications, among others. Our customers include Global 2000 companies in healthcare, telecommunications, high technology, financial services, retail, transportation, education and the public sector, among other industries.
We were incorporated in July 1996 in California and reincorporated in Delaware in September 1999. We had no significant operations until 1997. References in this annual report on Form 10-K to "KANA," "we," "our," and "us" collectively refer to KANA Software, Inc., and our predecessor, and our subsidiaries and their predecessors. Our principal executive offices are located at 181 Constitution Drive, Menlo Park, California 94025 and our telephone number is (650) 614- 8300.
Industry Background
In today's economy, Global 2000 organizations must find a way to increase customer retention and loyalty while decreasing operating expenses. The ability to provide high quality customer interactions and experiences, and thus to establish long-term relationships and loyalty, is critical to business survival.
Until recently, relationships with customers and partners were based on costly phone or mail-based interactions. As a result, companies invested millions of dollars in expensive phone-based technologies. However, the proliferation of the Internet has fundamentally changed the way businesses communicate with customers and partners, creating a 24-by-7 environment in which customers expect immediate responses via the Web, wireless devices or e-mail. Although these new communication channels have resulted in demand for immediate service, they also provide businesses with an opportunity to dramatically decrease the cost of customer service by moving more communication to less expensive Web-based channels. By integrating all communication channels and utilizing online customer support, Global 2000 organizations and other enterprises can successfully increase customer interactions while decreasing costs in contact centers and marketing departments.
Businesses that fail to manage customer relationships effectively throughout the customer lifecycle face negative consequences, which can include loss of customers, increased difficulty in acquiring new customers and a deterioration of competitive position. In addition, without efficient and reliable management of customer and partner interactions, businesses face higher operating and information technology costs. Further, businesses may lose the opportunity to take advantage of new revenue generating opportunities by failing to capitalize upon the wealth of information conveyed through these interactions. Once a business recognizes the benefits of deploying customer relationship management software to take advantage of the benefits afforded by the Internet, it faces the challenge of finding a suitable eCRM solution. Enterprises increasingly seek eCRM solutions that are optimized for their industry, can be used across multiple departments, integrate with existing business, legacy systems and databases, and can efficiently be scaled as they add new contact channels and increase their volume of customer interactions.
Products
KANA iCARE is a comprehensive eCRM suite made up of modular applications that provides Global 2000 organizations and other enterprises with the ability to provide more intelligent, effective interactions with customers, leading to loyal and lasting customer relationships while reducing costs in the contact center.
The KANA iCARE suite is a flexible and scalable, Web-architected solution, integrated on a single platform, that supports multiple customer communication channels. KANA iCARE provides the critical link between contact centers and marketing departments, allowing organizations to have effective, efficient interactions with customers at all points of contact (including Web contact, telephone and e-mail) and throughout the enterprise. KANA iCARE employs robust analytic tools across its entire product family to allow companies to continually analyze and improve their customer and partner relationships. These features enable Global 2000 organizations and other enterprises to reduce the cost of information access for their employees, customers and partners while creating profitable customer relationships.
Our customers can deploy KANA's iCARE applications as a complete suite or as components that include:
In addition, in 2002, we introduced optimized versions of our iCARE suite optimized for several specific industries including the following:
Our applications are designed to easily integrate with other enterprise software and legacy systems. They can be installed on systems running either Unix or Microsoft Windows NT operating systems, and provides customers with capabilities for personalization, customer profile management, inquiry management, universal business rules, knowledge management and extranet workflow. They link with customers' legacy systems allowing customers to design their systems to preserve previous investments and allow rapid deployment of our products. Our eCRM architecture uses data modeling to make data located in external systems available in our application without requiring the data to be moved or replicated. KANA's applications run natively on the J2EE (Java 2 Enterprise Edition) and COM (Common Object Model) platforms, and some of our applications now run on the .Net platform.
Alliances and Partnerships
We partner with leading systems integrators that have developed significant expertise with our Web-architected eCRM applications and are able to provide customers with a wide range of consulting, implementation and systems integration services. Our systems integrator partners are involved in nearly all customer engagements, and we have significantly reduced the size of our professional services team and narrowed the scope of our professional services program to ensure that we do not compete with these key partners for professional services engagements. We believe that the support of these systems integrators for our products is increasingly important in influencing new customers' decisions to license our products. In addition, systems integrators are increasingly playing an important role as resellers of our products. KANA's systems integration partners include Accenture, Bearing Point, BusinessEdge, CSC, Deloitte Consulting and IBM Global Services. These integrators have been integral to KANA's success in selling its products to large-organizations such as Advanced Micro Devices, Blue Cross and Blue Shield of Minnesota, mmO2, Dell Computer Corp., Highmark, Sony, Sprint PCS and many others.
KANA also partners with a number of technology resellers, including Aspect Communications, BEA Systems, BroadVision, Cisco Systems, Hewlett-Packard, Microsoft and Sun Microsystems.
Services
Consulting Services. Our consulting services group provides business and technical expertise to support our partners and customers. In the second half of 2001, we streamlined our internal professional services organization and began working more closely with strategic systems integrator partners for the implementation and integration of our products. Our consulting services group works closely with partners during implementations to provide technical experience and functional knowledge of our products, as well as KANA's extensive industry knowledge, to assist them in providing our customers with high-quality, successful, enterprise-wide implementations.
Technical Support. Our technical support group uses KANA's own eCRM applications to provide multi-channel global support for our customers, including phone and e-mail support and self-service solutions via the KANA Support Web site.
Education Services. Our education services group has prepared a full set of training programs and materials for our customers and partners, including a comprehensive set of courses for end users, business consultants and developers, which are available through instructor-led, Web-based and onsite delivery. The group also provides up to date information to our customers and partners through monthly newsletters, Web site FAQ's, and regional user groups.
Sales
Our sales strategy is to focus on Global 2000 companies through a combination of our strategic alliances and our direct sales force. We maintain direct sales personnel across the United States and internationally throughout Europe, Asia-Pacific and Canada. Our direct sales force complements our system integrator and reseller alliances. As of December 31, 2002, 106 of our employees were employed in sales and marketing activities.
Customers
Our customers range from Global 2000 companies to growing companies pursuing an e-business strategy. The following is a list of customers that we believe are representative of our overall customer base:
|
Financial Services Aetna Ameritrade Axa Bank of America Barclays Citizens Bank Citigroup Credit Suisse Group E*Trade GE Capital JP Morgan Chase Kookmin Bank Standard Chartered Washington Mutual |
Communications AT&T BellCanada BellSouth BellWest Bertelsmann Cingular Wireless Comcast Dow Jones Hutchison 3G mm02 Mobile One SBC Sprint PCS Telstra Verizon |
|
Health Care Allergan Anthem Blue Cross Blue Shield Minnesota Bristol Myers Squibb Cigna Cigna Highmark Kaiser Permanente |
Government/Education City of Amsterdam The Dutch Tax Office Open University Postbus 51 State of California State of Ohio UK Inland Revenue |
|
HighTechnology Alta Vista AMD BEA Systems Dell Computer Corp. Earthlink eBay EDS Gateway, Inc. Hewlett-Packard Hotjobs IBM Microsoft NEC Palm Siemens Texas Instruments Yahoo! |
Transportation/Hospitality American Airlines Best Western International British Airways Delta Airlines KLM Northwest Airlines Priceline.com Rail Europe Travelocity United Airlines |
|
Manufacturing/Consumer Goods Adidas Canon Daimler-Chrysler Ford Honda Kodak Nissan Royal Philips Electronics Sony Computer Entertainment Taylor Made Xerox |
Retail 1-800 Flowers American Greetings BarnesandNoble.com Estee Lauder Home Depot Red Envelope Staples.com The Gap Pacfic Bell Pacfic Bell Tiffany & Co. Williams-Sonoma |
One customer accounted for 11% of our total revenues in 2002. No customer accounted for 10% or more of our total revenues in 2001 or 2000. A substantial portion of our license and service revenues in any given quarter has been, and we expect will continue to be, generated from a limited number of customers.
Research and Development
We believe that strong product development capabilities are essential to our strategy of enhancing our core technology, developing additional applications incorporating that technology and maintaining the competitiveness of our product and service offerings. We have invested significant time and resources in creating a structured process for undertaking all product development. In January 2003, we began implementing an outsourcing strategy, which involves subcontracting a significant portion of our software programming, quality assurance and technical documentation activities to development partners with staffing in India and China. As a result of the first phase of this strategy, in the first quarter of 2003 we transferred the responsibilities of 31 US-based employees to these development partners. We expect to transfer additional positions to these development partners in future quarters of 2003. As of December 31, 2002, 128 of our employees were engaged in research and development activities.
Our success depends, in part, on our ability to enhance our existing eCRM solutions and to develop new services, functionality and technology that address the increasingly sophisticated and varied needs of our prospective customers. The challenges of developing new products and enhancements require us to commit a substantial investment of resources, and we might not be able to develop or introduce new products on a timely or cost-effective basis, or at all, which could be exploited by our competitors and lead potential customers to choose alternative products.
Competition
The market for our products and services is intensely competitive, evolving and subject to rapid technological change. We currently face competition for our products from systems designed by in-house and third-party development efforts. We expect that these systems will continue to be a major source of competition for the foreseeable future. Our primary competitors for eCRM platforms are larger, more established companies such as Siebel Systems, Inc. and PeopleSoft, Inc., and to a lesser extent, Oracle and SAP. We also face competition from E.piphany, Inc., Chordiant Software, Inc., Primus Knowledge Solutions and Pegasystems, Inc. with respect to several specific applications we offer. We may face increased competition upon introduction of new products or upgrades from competitors, or if we expand our product line through acquisition of complementary businesses or otherwise. As we have combined and enhanced our product lines to offer a more comprehensive e-business software solution, we are increasingly competing with large, established providers of customer management and communication solutions as well as other competitors. Our combined product line may not be sufficient to successfully compete with the product offerings available from these companies, which could slow our growth and harm our business.
We believe that the principal competitive factors affecting our market include having a significant base of referenceable customers, the breadth and depth of a given solution, product quality and performance, customer service, product scalability and reliability, product features, ability to implement solutions, and perception of financial position. We believe that our products currently compete favorably with respect to these factors, and, in particular, that our Web-based architecture provides us with a competitive advantage because it allows for greater product scalability and rapid implementation. However, we may not be able to maintain our competitive position against current and potential competitors, especially those with greater financial, marketing, service, support, technical and other resources, and who may, for example, be able to add features or functionality to their competing products more quickly or decide to sell their products to their existing customer bases for other products.
Many of our competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, significantly greater name recognition and a larger installed base of customers than we have. In addition, many of our competitors have well-established relationships with our current and potential customers and have extensive knowledge of our industry. We may lose potential customers to competitors for various reasons, including the ability or willingness of competitors to offer lower prices and other incentives that we cannot match. It is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. We also expect that competition will increase as a result of industry consolidations. See "Risk Factors-We face substantial competition and may not be able to compete effectively."
Intellectual Property
We rely upon a combination of patent, copyright, trade secret and trademark laws, and contractual restrictions, such as confidentiality agreements and licenses, to establish and protect our proprietary rights. We currently have three issued U.S. patents and a number of U.S. patent applications pending. Our pending applications, if allowed, in conjunction with our issued patents, will cover a significant portion of the technology underlying our products and services. We have also filed international patent applications corresponding to some of our U.S. applications. In addition, we have several trademarks that are registered or pending registration in the U.S. or abroad. Although we rely on patent, copyright, trade secret and trademark law to protect our technology, we believe that factors such as the technological and creative skills of our personnel, new product developments, frequent product enhancements and reliable product maintenance are more essential to establishing and maintaining a technology leadership position. As a result, our technology is susceptible to the development efforts of our competitors, who could independently develop technology that is similar or superior to ours.
Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology or to develop products with the same functionality as our products. Policing unauthorized use of our products is difficult. Also, the laws of other countries in which we market our products may offer little or no effective protection of our proprietary technology. Reverse engineering, unauthorized copying or other misappropriation of our proprietary technology could enable third parties to benefit from our technology without paying us for it, which would significantly harm our business. In addition, some of our license agreements require us to place the source code for our products into escrow. These agreements generally provide that some parties will have a limited, non-exclusive right to use this code if there is a bankruptcy proceeding instituted by or against us, we cease to do business and have no successor, or we discontinue providing maintenance and support.
Substantial litigation regarding intellectual property rights exists in our industry. We expect that software in our industry may be increasingly subject to third-party infringement claims as the number of competitors grows and the functionality of products in different industry segments overlaps. Some of our competitors in the market for customer communications software may have filed or may intend to file patent applications covering aspects of their technology that they may claim our technology infringes. Such competitors could make a claim of infringement against us with respect to our products and technology. Third parties may currently have, or may eventually be issued, patents upon which our current or future products or technology infringe. Any of these third parties might make a claim of infringement against us. See "Risk Factors-We may become involved in litigation over proprietary rights, which could be costly and time consuming."
Employees
As of December 31, 2002, we had 365 full-time employees, of whom 61 were in our services and support group, 106 were in sales and marketing, 128 were in research and development, and 70 were in finance, administration and operations. In January 2003, we began implementing an outsourcing strategy, which involves subcontracting a significant portion of our software programming, quality assurance and technical documentation activities to development partners with staffing in India and China. As a result of the first phase of this strategy, in the first quarter of 2003 we transferred the responsibilities of 31 US-based employees to these development partners. We expect to transfer additional positions to these development partners in future quarters of 2003.
ITEM 2. PROPERTIES
Our corporate offices are located in Menlo Park, California, where we lease approximately 59,000 square feet under two leases that expire in April 2007. As of December 31, 2002, the annual base rent for these leases totaled approximately $983,000. We also lease approximately 35,000 square feet of space in Manchester, New Hampshire. This lease expires in April 2005, and we have an option to extend the lease for two additional five-year terms. The annual base rent for the New Hampshire lease totals approximately $451,000. We also lease approximately 12,000 square feet of space in Framingham, Massachusetts at an annual base rent of approximately $253,000. This lease expires in November 2007.
In addition, we lease smaller facilities and offices in several cities throughout the United States, and internationally throughout Europe, Australia, Japan, and Korea. The terms of these leases renew semi-annually unless terminated. We believe that our office space will be sufficient to meet our needs through at least the next 12 months.
We have a total of approximately 79,500 square feet of excess space available for sublease or renegotiation. Locations of the excess space include Menlo Park, California, Princeton, New Jersey and Marlow in the United Kingdom. Remaining lease commitment terms on these leases vary from eight to nine years. We are seeking to sublease or renegotiate the obligations associated with the excess space. We have $10.8 million in accrued restructuring costs as of December 31, 2002, which is our estimate, as of that date, of the exit costs of these excess facilities. However, if we determine that any of these real estate markets continues to deteriorate, additional adjustments to this accrual may be required, which would result in additional restructuring costs in the period in which such determination is made. Likewise, if any of these real estate markets strengthen, and we are able to sublease the properties earlier or at more favorable rates than projected, adjustments to the accrual may be required that would increase income in the period in which such determination is made.
ITEM 3. LEGAL PROCEEDINGS
In April 2001, Office Depot, Inc. filed a complaint against KANA in the Circuit Court for the 15th District of the State of Florida claiming that KANA 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 KANA, attorneys' fees and costs. We believe we have meritorious defenses to these claims and intend to defend the action vigorously.
The underwriters for our initial public offering, Goldman Sachs & Co., Lehman Bros, Hambrecht & Quist LLC, Wit Soundview Capital Corp as well as KANA and certain current and former officers of KANA were named as defendants in federal securities class action lawsuits filed in the United States District Court for the Southern District of New York. The parties have agreed that the claims against the current and former officers of KANA shall be dismissed without prejudice. The cases allege violations by more than 300 issuers of stock, including KANA and the underwriters of various securities laws on behalf of a class of plaintiffs who purchased KANA's stock between September 21, 1999 and December 6, 2000 in connection with our initial public offering. Specifically, the complaints allege that the underwriter defendants engaged in a scheme concerning sales of KANA's and other issuers' securities in the initial public offering and in the aftermarket. We believe we have meritorious defenses to these claims and intend to defend the action vigorously.
On April 16, 2002, Davox Corporation (now Concerto Software) filed an action against KANA in the Superior Court, Middlesex, Commonwealth of Massachusetts, asserting breach of contract, breach of implied covenant of good faith and fair dealing, unjust enrichment, misrepresentation, and unfair trade practices, in relation to an OEM Agreement between KANA and Davox under which Davox has paid a total of approximately $1.6 million in fees. 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 and has been re-filed in the Circuit Court of Cook County, Illinois. We believe we have meritorious defenses to these claims and intend to defend the action vigorously.
On February 20, 2003, Tumbleweed Communications Corp. filed suit against our customer Ameritrade, Inc., in the U.S. District Court for the Central District of California, alleging infringement of U.S. Patent No. 6,192,407, and seeking injunctive relief, damages and attorneys fees. KANA has agreed to assume defense of this case on behalf of Ameritrade. We believe we have meritorious defenses to these claims and intend to defend the action vigorously.
Other third parties have from time to time claimed, and others may claim in the future that we have infringed their past, current or future intellectual property rights. We have in the past been forced to litigate such claims. These claims, whether meritorious or not, could be time-consuming, result in costly litigation, require expensive changes in our methods of doing business or could require us to enter into costly royalty or licensing agreements, if available. As a result, these claims could harm our business.
As of December 31, 2002, approximately $700,000 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the Nasdaq Stock Market under the symbol "KANA".
The following table sets forth the range of high and low closing sales prices for each period indicated, as adjusted for the two-for-one forward stock split effective February 2000, and the one-for-ten reverse stock split effective December 2001:
|
High |
Low |
||||
|
Fiscal 2001 |
|||||
|
First Quarter |
$120.00 |
$17.19 |
|||
|
Second Quarter |
25.60 |
6.25 |
|||
|
Third Quarter |
20.40 |
3.60 |
|||
|
Fourth Quarter |
21.05 |
3.70 |
|||
|
Fiscal 2002 |
|||||
|
First Quarter |
29.16 |
11.25 |
|||
|
Second Quarter |
16.17 |
3.84 |
|||
|
Third Quarter |
3.56 |
0.80 |
|||
|
Fourth Quarter |
3.40 |
0.65 |
There were approximately 1,390 stockholders of record as of February 28, 2003. This number does not include stockholders whose shares are held in trust by other entities. The actual number of stockholders is greater than this number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. We estimate that the number of beneficial owners of shares of our common stock as of February 28, 2003 was approximately 55,000.
We have not paid any cash dividends on our capital stock. We currently intend to retain any earnings to fund the development and growth of our business and, therefore, do not anticipate paying any cash dividends in the foreseeable future. In addition, our existing credit facilities prohibit the payment of cash or stock dividends on our capital stock without the lender's prior written consent. See Item 7-"Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources."
Recent Unregistered Sales of Securities
The following table provides information about our unregistered sales of KANA securities since January 1, 2002:
|
Class of Purchasers |
Date of Sale |
Title of Securities |
Number of Securities |
Aggregate Purchase Price |
Form of Consideration |
|
20 investors |
February 8 and 11, 2002 |
Common Stock |
2,910,000 |
$34,500,000 |
Cash |
|
2 investors |
November 13, 2002 |
Warrant to Purchase Common Stock |
200,000 |
$322,000* |
Amendment to Lease Agreement |
___________
* The aggregate purchase price represents the aggregate exercise price of a warrant, and assumes the purchaser exercises the warrant in full, using cash to pay the exercise price. These warrants have not yet been exercised.
All sales were made in reliance on Section 4(2) of the Securities Act and/or Regulation D promulgated under the Securities Act. The securities were sold to a limited number of people with no general solicitation or advertising. The purchasers were sophisticated investors with access to all relevant information necessary to evaluate the investment and who represented to the issuer that the shares were being acquired for investment.
ITEM 6. SELECTEED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the consolidated financial statements and the related notes included elsewhere in this annual report on Form 10-K and in our prior annual and quarterly reports, and other information we have filed with the SEC.
The consolidated statement of operations data for each of the years in the five year period ended December 31, 2002, and the consolidated balance sheet data at December 31, 2002, 2001, 2000, 1999 and 1998 are derived from our audited consolidated financial statements. The diluted net loss per share computation excludes shares of common stock issuable upon exercise or conversion of other securities, including outstanding options to purchase common stock and common stock subject to repurchase rights, because their effect would be antidilutive. See Note 1 of "Notes to the Consolidated Financial Statements" included in this report for a detailed explanation of the determination of the shares used to compute basic and diluted net loss per share. The historical results are not necessarily indicative of results to be expected for any future period. See "Management's Discussion and Analysis of Financial Condition and Results of Operations".
Year Ended December 31,
--------------------------------------------------------
2002 2001 2000 1999 1998
--------- ---------- ----------- --------- ---------
(in thousands, except per share amounts)
Consolidated Statement of Operations Data:
Revenues:
License.................................................. $ 41,530 $ 37,963 $ 75,360 $ 10,536 $ 2,014
Service.................................................. 37,560 52,632 42,595 2,966 333
--------- ---------- ----------- --------- ---------
Total revenues........................................... 79,090 90,595 117,955 13,502 2,347
--------- ---------- ----------- --------- ---------
Cost of revenues:
License.................................................. 3,402 2,536 2,856 271 54
Service.................................................. 29,250 51,799 56,082 6,383 666
--------- ---------- ----------- --------- ---------
Total cost of revenues.................................... 32,652 54,335 58,938 6,654 720
--------- ---------- ----------- --------- ---------
Gross profit.............................................. 46,438 36,260 59,017 6,848 1,627
--------- ---------- ----------- --------- ---------
Operating expenses:
Sales and marketing...................................... 37,423 69,635 88,186 21,199 5,504
Research and development................................. 25,933 35,558 42,724 12,854 5,669
General and administrative............................... 13,053 21,215 18,945 5,018 1,826
Amortization of stock-based compensation................. 16,620 15,880 14,715 80,476 1,456
Amortization of goodwill and
identifiable intangibles................................ 4,800 127,660 873,022 -- --
Merger and transition related costs...................... -- 13,443 6,564 5,635 --
Restructuring costs...................................... (5,086) 89,047 -- --
In process research and development...................... -- -- 6,900 -- --
Goodwill impairment...................................... 55,000 603,446 2,084,841 -- --
--------- ---------- ----------- --------- ---------
Total operating expenses................................. 147,743 975,884 3,135,897 125,182 14,455
--------- ---------- ----------- --------- ---------
Operating loss............................................ (101,305) (939,624) (3,076,880) (118,334) (12,828)
Impairment of investment.................................. -- (1,000) -- -- --
Other income (expense), net............................... 913 1,521 4,834 (744) 227
--------- ---------- ----------- --------- ---------
Loss from continuing operations........................... (100,392) $ (939,103) $(3,072,046) $(119,078) $ (12,601)
Discontinued operation:
Income (loss) from operations of discontinued operation.. -- (125) 1,173 335 --
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......................................... $ (96,110) (942,895) (3,070,873) (118,743) (12,601)
========= ========== =========== ========= =========
Basic and diluted net loss per share:
Loss from continuing operations ........................ $ (4.48) $ (68.33) $ (395.83) $ (46.21) $ (20.13)
Income (loss) from discontinued operation............... 0.02 (0.28) 0.15 0.13 --
Gain on elimination of negative goodwill................ 0.17 -- -- -- --
--------- ---------- ----------- --------- ---------
Net loss ............................................... $ (4.29) $ (68.61) $ (395.68) $ (46.08) $ (20.13)
========= ========== =========== ========= =========
Shares used in computing basic and
diluted net loss per share amounts...................... 22,403 13,743 7,761 2,577 626
========= ========== =========== ========= =========
December 31,
--------------------------------------------------------
2002 2001 2000 1999 1998
--------- ---------- ----------- --------- ---------
(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and
short-term investments.................................. $ 32,498 $ 40,130 $ 76,499 $ 53,217 $ 14,035
Working capital........................................... (4,533) (13,697) 52,753 38,591 11,833
Total assets.............................................. 80,550 160,672 980,124 70,229 16,876
Total long-term debt...................................... -- 108 148 412 726
Total stockholders' equity................................ $ 21,952 $ 66,839 $ 899,452 $ 48,500 $ 12,951
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
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, and 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, many 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, but are not limited to, those described in "Risk Factors" and elsewhere in this report. Forward looking statements that we believed to be true at the time we made them may ultimately prove to be incorrect or false. Readers are cautioned not to place undue reliance on forward looking statements, which reflect our 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. These enterprise customer support and communications applications are built on a Web-architected platform incorporating our KANA eCRM architecture, which provides users with full access to the applications using a standard Web browser and without requiring them to install additional software on their individual computers. Our software helps our customers provide external-facing customer support, and to better service, market to, and understand their customers and partners, while improving results and decreasing costs in contact centers and marketing departments. We offer optimized versions of our software for several specific industries including healthcare, financial services, high technology manufacturing, and telecommunications, among others. Our KANA iCARE (Intelligent Customer Acquisition and Retention for the Enterprise) application suite combines our KANA eCRM architecture with customer- focused service, marketing and commerce software applications. These applications enable organizations to improve customer and partner relationships by allowing them to interact with the company over the communication channels they prefer, whether by Web contact, e-mail or telephone.
On June 29, 2001, we completed a merger with Broadbase. This transaction was accounted for using the purchase method of accounting. The purchase price approximated $101.4 million.
In December 2001, our our stockholders approved a one-for-ten reverse stock split of the common stock for stockholders of record on December 13, 2001. All share and per share amounts have been retroactively restated to reflect the effect of this stock split.
In 1999, we initiated our KANA Online business. Our KANA Online business provided a hosted environment of our software to customers. Our servers for this business were maintained by a third-party service provider. In the second quarter of 2001, we adopted a plan to discontinue the KANA Online business. In the second quarter of 2002, all KANA Online operations ceased. We have accounted for our KANA Online business as a discontinued operation.
Since 1997, we have incurred substantial costs to develop our products and to recruit, train and compensate personnel for our engineering, sales, marketing, client services and administration departments. As a result, we have incurred substantial losses since inception. For the twelve months ended December 31, 2002, we incurred a net loss of $96.1 million. Included in the net loss is $55.0 million related to the impairment of goodwill in 2002. As of December 31, 2002, we had an accumulated deficit of $4.2 billion, which includes approximately $2.7 billion related to goodwill impairment charges. We expect to decrease our operating losses in 2003 as a result of our restructuring activities in 2001, as well as ongoing personnel and facility cost reductions throughout 2002. 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.
As of December 31, 2002, we had 365 full-time employees, which is a decrease from 409 employees at December 31, 2001. The decrease during 2002 was based primarily upon attrition. We restructured our organization throughout 2001, with net workforce reductions of approximately 772 employees, in order to streamline operations, eliminate redundant positions after the merger with Broadbase, 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 addition of approximately 896 employees upon our merger with Broadbase in June of 2001.
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 consolidated 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. We continually evaluate our estimates, including those related to revenue recognition, collectibility of receivables, goodwill and intangible assets, contract loss reserve, income taxes, and restructuring. We base our estimates on historical experience and on various other assumptions that we believe 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 complex, and various 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 reasonably assured.
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 upon stated contractual renewal rates. Evaluating whether sufficient and appropriate vendor-specific objective evidence exists to use in allocating revenue to undelivered elements, and the interpretation of such evidence to determine the fair value of undelivered elements is subject to judgment and estimates that affect when and to what extent we may recognize revenues from a given contractual arrangement.
Probability of collection is based upon assessment of the customer's financial condition through review of their current financial statements or credit reports. For sales to existing customers, prior payment history is also considered in assessing probability of collection. We are required to exercise significant judgment in deciding whether collectibility is reasonably assured, and such judgments may materially affect the timing of our revenues and our results of operations.
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 performed under fixed-fee arrangements and are generally recognized on a percentage-of-completion basis. When acceptance is not assured or an ability to reliably estimate costs is not possible, we use the completed contract method, whereby revenues are deferred until all contractual obligations are met, and acceptance, if required in the contract, is received. Revenues from consulting and training services are recognized as services are performed.
Collectibility of Receivables. In order to recognize revenue from a transaction, collectibility must be determined by management to be reasonably assured. If collectibility is not determined to be reasonably assured, amounts billed to customers are recorded as deferred revenue. For sales to existing customers, prior payment history is a factor in assessing probability of collection.
We make judgments as to our ability to collect outstanding receivables and provide allowances for receivables that may not be collectible. A considerable amount of judgment is required to assess the ultimate realization of receivables. In assessing collectibility, we consider the age of the receivable, our historical collection experience, current economic trends, and the current credit-worthiness of each customer. In the future, additional provisions for doubtful accounts may be needed and the future results of operations could be materially affected.
Reserve for Loss Contract. We were 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 on analysis we performed in the fourth quarter of 2000, we expected the costs to complete the project to exceed the associated fees, and accordingly we recorded a loss reserve of $1.4 million in the quarter ended December 31, 2000. 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 in the quarter ended September 30, 2001, 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 in August 2002. Based on 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 and in accordance with the terms of the amendment were relieved from providing any further implementation services under the contract. The amendment required us to transfer $6.9 million to an escrow account (which included $5.8 million previously reported as restricted cash) to compensate any third party integrator for the continued implementation of the customer's system. The charge also included $8.5 million of fees which we had paid the third party integrator prior to the amendment and approximately $200,000 of related expenditures. During the second quarter of 2002, we received a scheduled payment of $4.0 million associated with the original agreement which is reported as deferred revenue. The $4.0 million will be recognized in future periods as revenue as we fulfill our maintenance and training obligations.
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, we have made a decision as to whether we will purchase the software or develop it internally and we have authorized funding for the project. Capitalization of software costs ceases when the software implementation is substantially complete and is ready for its intended use, and the capitalized costs are amortized over the software's estimated useful life (generally five years) using the straight-line method. As of December 31, 2002, we had $15.1 million of capitalized costs of internal use software, of which $14.4 million has been subject to depreciation based upon deployment dates of the related projects. The remainder was attributable to software that we deployed in January 2003, at which time we began depreciating the associated capitalized costs.
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. Based on our assessment as of December 31, 2002, we determined that no such impairment of internal-use software existed.
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.
In November of 2002, we entered into an amendment to a facility lease. In connection with this lease amendment, our evaluation of real estate market conditions relating to this and other excess leased facilities, and discussions with our other landlords, we reduced our associated restructuring reserve by approximately $9.1 million. This reduction was primarily comprised of a $4.0 million payment made in connection with the amendment, as well as approximately $5.1 million in restructuring cost savings resulting from this amendment that were reflected as a reduction in the restructuring reserve in our operating results for the quarter ended December 31, 2002.
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 other than goodwill, 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. 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"). Instead, we are now required to test goodwill for impairment under certain circumstances and write down goodwill when it is impaired. We have determined that the consolidated results of KANA comprise one reporting unit for the purpose of impairment testing throughout 2002.
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.
Under the transition provisions of SFAS No. 142, there was no goodwill impairment at January 1, 2002 based upon our analysis completed 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 to reduce goodwill. The circumstances that led to the impairment included the lower-than-previously-expected revenues and net loss for the second quarter of 2002 and the revision of estimates of our revenues and net loss for subsequent quarters, based upon financial results for the second quarter of 2002 and the reduction of estimated revenue and cash flows in future quarters. We used relevant market data, including KANA's market capitalization during the period following the announcement of preliminary results for the second quarter of 2002, to calculate an estimated fair value and the 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 December 31, 2002 was $7.4 million. Any further impairment loss could have a material adverse impact on our financial condition and results of operations.
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 valuation allowance would be made, increasing our 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.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth a summary of our unaudited quarterly operating results for each of the eight quarters in the period ended December 31, 2002. The information has been derived from our unaudited consolidated financial statements that, in management's opinion, have been prepared on a basis consistent with the audited consolidated financial statements contained elsewhere in this annual report and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this information when read in conjunction with our audited consolidated financial statements and notes thereto. The operating results for any quarter are not necessarily indicative of results for any future period.
Quarter Ended
--------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec 31, Mar. 31, June 30, Sept. 30, Dec 31,
2001 2001 2001 2001 2002 2002 2002 2002
--------- --------- --------- --------- --------- --------- --------- ---------
(in thousands, except per share amounts)
Consolidated Statement
of Operations Data:
Revenues:
License.......................... $ 11,857 $ 9,587 $ 2,891 $ 13,628 $ 15,129 $ 8,309 $ 8,784 $ 9,308
Service.......................... 11,614 14,046 15,286 11,686 10,014 8,881 9,243 9,422
--------- --------- --------- --------- --------- --------- --------- ---------
Total revenues.................. 23,471 23,633 18,177 25,314 25,143 17,190 18,027 18,730
--------- --------- --------- --------- --------- --------- --------- ---------
Cost of revenues:
License.......................... 633 653 503 747 965 1,056 548 833
Service.......................... 16,403 8,882 21,003 5,511 3,907 19,891 2,762 2,690
--------- --------- --------- --------- --------- --------- --------- ---------
Total cost of revenues............ 17,036 9,535 21,506 6,258 4,872 20,947 3,310 3,523
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit (loss)............... 6,435 14,098 (3,329) 19,056 20,271 (3,757) 14,717 15,207
--------- --------- --------- --------- --------- --------- --------- ---------
Operating expenses:
Sales and marketing.............. 26,534 13,789 19,205 10,107 10,305 10,395 8,732 7,991
Research and development......... 12,949 6,273 10,236 6,100 6,638 6,512 6,389 6,394
General and administrative....... 6,068 2,523 9,500 3,124 3,220 3,383 3,458 2,992
Amortization of stock-
based compensation.............. 4,112 2,250 4,177 5,341 9,887 3,041 1,951 1,741
Amortization of goodwill and
identifiable intangibles........ 86,852 13,730 13,551 13,527 1,200 1,200 1,200 1,200
Merger and transition
related costs................... -- 6,676 4,841 1,926 -- -- -- --
Restructuring costs.............. 19,930 34,327 32,081 2,709 -- -- -- (5,086)
Goodwill impairment.............. 603,446 -- -- -- -- 55,000 -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Total operating expenses........ 759,891 79,568 93,591 42,834 31,250 79,531 21,730 15,232
--------- --------- --------- --------- --------- --------- --------- ---------
Operating loss.................... (753,456) (65,470) (96,920) (23,778) (10,979) (83,288) (7,013) (25)
Impairment of investment.......... -- -- -- (1,000) -- -- -- --
Other income (expense), net....... 302 (252) 858 613 298 297 175 143
--------- --------- --------- --------- --------- --------- --------- ---------
Loss from continuing operations... (753,154) (65,722) (96,062) (24,165) (10,681) (82,991) (6,838) 118
Discontinued operation:
Income (loss) from operations
of discontinued operation...... 258 (383) -- -- -- -- -- --
Loss on disposal, including
provision of $1.1 million
for operating losses during
phase-out period............... -- (3,667) -- -- -- 381 -- --
Cumulative effect of accounting
change related to the elimination
of negative goodwill............. -- -- -- -- 3,901 -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Net loss................. $(752,896) $ (69,772) $ (96,062) $ (24,165) $ (6,780) $ (82,610) $ (6,838) $ 118
--------- --------- --------- --------- --------- --------- --------- ---------
Basic and diluted net
loss per share.................. (8.23) (0.76) (0.53) (1.76) (0.32) (3.63) (0.30) 0.01
--------- --------- --------- --------- --------- --------- --------- ---------
Shares used in computing
basic and diluted net
loss per share.................. 91,518 91,534 180,376 13,743 21,071 22,762 22,851 22,403
--------- --------- --------- --------- --------- --------- --------- ---------
As a Percentage of Total Revenues:
Revenues:
License.......................... 50.5 % 40.6 % 15.9 % 53.8 % 60.2 % 48.3 % 48.7 % 49.7 %
Service.......................... 49.5 59.4 84.1 46.2 39.8 51.7 51.3 50.3
--------- --------- --------- --------- --------- --------- --------- ---------
Total revenues.................. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
--------- --------- --------- --------- --------- --------- --------- ---------
Cost of revenues:
License.......................... 2.7 2.8 2.8 3.0 3.8 6.1 3.0 4.4
Service.......................... 69.9 37.6 115.5 21.8 15.5 115.7 15.3 14.4
--------- --------- --------- --------- --------- --------- --------- ---------
Total cost of
revenues....................... 72.6 40.3 118.3 24.7 19.4 121.9 18.4 18.8
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit (loss)............... 27.4 59.7 (18.3) 75.3 80.6 (21.9) 81.6 81.2
--------- --------- --------- --------- --------- --------- --------- ---------
Selected operating
expenses:
Sales and marketing.............. 113.1 58.3 105.7 39.9 41.0 60.5 48.4 42.7
Research and
development..................... 55.2 26.5 56.3 24.1 26.4 37.9 35.4 34.1
General and
administrative.................. 25.9 % 10.7 % 52.3 % 12.3 % 12.8 % 19.7 % 19.2 % 16.0 %
The amount and timing of our operating expenses generally will vary from quarter to quarter depending on our level of actual and anticipated business activities. Our revenues and operating results are difficult to forecast and will fluctuate, and we believe that period-to-period comparisons of our operating results will not necessarily be meaningful. As a result, you should not rely upon them as an indication of future performance.
Results of Operations
The following table sets forth selected data for the periods presented. Percentages are expressed as a percentage of total revenues.
Year Ended December 31,
-----------------------------------------------
2002 2001 2000
-------------- ------------- --------------
Revenues:
License....................... $ 41,530 53 % $ 37,963 42 % $ 75,360 64 %
Service....................... 37,560 47 52,632 58 42,595 36
-------- ----- -------- ---- -------- -----
Total revenues.............. 79,090 100 90,595 100 117,955 100
Cost of revenues:
License....................... 3,402 4 2,536 3 2,856 2
Service....................... 29,250 37 51,799 57 56,082 48
-------- ----- -------- ---- -------- -----
Total cost of revenues...... 32,652 41 54,335 60 58,938 50
-------- ----- -------- ---- -------- -----
Gross profit................... 46,438 59 36,260 40 59,017 50
Operating expenses:
Sales and marketing........... 37,423 47 69,635 77 88,186 75
Research and development...... 25,933 33 35,558 39 42,724 36
General and administrative.... 13,053 17 % 21,215 23 % 18,945 16 %
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2002 AND 2001
Revenues
Total revenues decreased by 13% to $79.1 million for the year ended December 31, 2002 from $90.6 million for the year ended December 31, 2001 primarily as a result of decreased service revenues.
License revenues increased by 9% to $41.5 million for the year ended December 31, 2002 from $38.0 million for 2001. This increase in license revenue was primarily due to an increase in the average selling price of licenses, particularly in Europe, as well as sales of products formerly offered by Broadbase, which were not included in our revenues prior to the June 2001 merger (license revenues recorded by Broadbase through June 2001 totaled $16.1 million). The increase in the average selling price of licenses in recent periods reflects the growth in our sales to larger organizations that often license our applications for more users and that need more functionality. We believe this growth has resulted, in significant part, from our increased use of indirect channels to market and sell our products, which allow us to market our products more effectively to Global 2000 organizations. In addition, we believe the introduction of our KANA iCARE suite in 2001, with its deployment and integration advantages, has facilitated sales of licenses for multiple applications to our customers resulting in larger transaction sizes than those involving a stand-alone application. We expect that license transactions closed in any particular quarter will continue to constitute a significant percentage of our license revenues in that quarter. One customer accounted for 11% of our total revenues in 2002.
License revenues represented 53% of total revenues in 2002 and 42% in 2001. Our license revenue increased as a percentage of total revenue mostly due to the reduction in our professional services personnel resulting from our shift during the fourth quarter of 2001 to encourage our customers to increase their use of third party integrators to provide implementation services, rather than purchase those services from us. We expect license revenues to increase moderately in absolute dollars in 2003 from 2002, primarily due to our expectations of increasing total contract value with existing and new customers. However, the market for our products is unpredictable and intensely competitive, and sales of our products are impacted by the current economic environment and the corresponding effect it has on corporate purchasing habits.
Our service revenues consist of support revenues (primarily from customer support, product maintenance and updates) and professional services revenues (primarily from consulting and implementation services). Service revenues decreased by 29% to $37.6 million for the year ended December 31, 2002 from $52.6 million for 2001. Service revenues decreased primarily due to our customers' increased use of third party integrators for implementation services as discussed above. Service revenues represented 47% of total revenues for the year ended December 31, 2002 and 58% of total revenues for 2001. We expect that service revenues in 2003 will be fairly consistent with 2002 in absolute dollars as we continue to focus on license sales and using third-party integrators for implementation services.
Revenues from international sales were $25.5 million in the year ended December 31, 2002 and $13.8 million in the year ended December 31, 2001. The increase in international sales in 2002 is primarily as a result of sales through our integration partner in the UK. Our international revenues were derived from sales in Europe, Canada, Asia Pacific and Latin America.
Cost of Revenues
Total cost of revenues decreased by 40% to $32.7 million for the year ended December 31, 2002 from $54.3 million for the year ended December 31, 2001.
Cost of license revenues consist primarily of third party software royalties, costs of product packaging, documentation, and production and delivery costs for shipments to customers. Cost of license revenues as a percentage of license revenue for 2002 was 8% compared to 7% in 2001. The slight increase was due to greater sales of certain licenses in 2002, which have higher associated royalty rates. We expect that our cost of license revenue as a percentage of sales in 2003 will be approximately the same as in 2002.
Cost of service revenues consists primarily of salaries and related expenses for our customer support, implementation and training services organization and allocation of facility costs and system costs incurred in providing customer support. Cost of service revenues decreased to 78% of service revenues for 2002 compared to 98% for the prior year. Cost of service revenues in 2002 included approximately $15.6 million, or 42% of service revenues, related to a loss contract with a customer. See "Reserve for Loss Contract" under "Critical Accounting Policies" above. The improvement in service margins was primarily due to the change in service revenues mix following our shift to have customers increase their use of third party integrators to provide implementation services, rather than purchase those services from us. As a result, support revenues comprised a larger percentage of service revenues, which have yielded better margins than training and consulting revenues due to higher utilization of customer support personnel than training and consulting personnel. Maintenance revenues comprised $30.8 million, or 39% of total revenues in 2002, compared to $27.9 million, or 31% in 2001. We anticipate that our cost of service revenues will significantly decrease in absolute dollars, and as a percentage of service revenue, in 2003 compared to 2002 as a result of the finalization of the restructuring of a contract with a customer discussed above.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of compensation and related costs for sales and marketing personnel and promotional expenditures, including public relations, advertising, trade shows and marketing materials. Sales and marketing expenses decreased by 46% to $37.4 million for the year ended December 31, 2002 from $69.6 million for the year ended December 31, 2001. This decrease was primarily attributable to reductions in sales and marketing personnel since the second half of 2001, which reduced sales and marketing-related positions from 289 positions as of June 30, 2001 to 106 positions at December 31, 2002, and related decreases in benefits, travel, and facility costs. As a percentage of total revenues, sales and marketing expenses were 47% for the year ended December 31, 2002 and 77% for the year ended December 31, 2001. We anticipate that sales and marketing expenses in 2003 will be fairly consistent with 2002 in absolute dollars, and will fluctuate as a percentage of revenues depending on the timing and amount of revenues.
Research and Development. Research and development expenses consist primarily of compensation and related costs for research and development employees and contractors and enhancement of existing products and quality assurance activities. Research and development expenses decreased by 27% to $25.9 million for the year ended December 31, 2002 from $35.6 million for the year ended December 31, 2001. This decrease was attributable primarily to the reduction of personnel since the second half of 2001, which reduced research and development-related positions from 227 as of June 30, 2001 to 128 at December 31, 2002. As a percentage of total revenues, research and development expenses were 33% for the year ended December 31, 2002 and 39% for the year ended December 31, 2001. We anticipate that research and development expenses will be slightly lower in absolute dollars in 2003 than in 2002 due to cost reductions implemented in 2002 impacting the full year in 2003 (as discussed in the "Business" section of this report under "Overview-Research and Development"), and will fluctuate as a percentage of revenues depending on the timing and amount of revenues.
General and Administrative. General and administrative expenses consist primarily of compensation and related costs for finance, legal, human resources, corporate governance, various taxes, and bad debt expense. Information technology and facilities costs are allocated among all operating departments. General and administrative expenses decreased by 38% to $13.1 million for the year ended December 31, 2002 from $21.2 million for the year ended December 31, 2001. This decrease was attributable to the reduction in bad debts charged to general and administrative expenses, from $4.2 million in 2001 to approximately $57,000 in 2002. This decrease was also attributable to the reduction of personnel since the second half of 2001, which reduced finance, legal and human resources-related positions from 52 as of June 30, 2001 to 24 at December 31, 2002. As a percentage of total revenues, general and administrative expenses were 17% for the year ended December 31, 2002 and 23% for the year ended December 31, 2001. We anticipate that general and administrative costs will be slightly lower in absolute dollars in 2003 compared to 2002, and will fluctuate as a percentage of revenues depending on the timing and amount of revenues.
Amortization of Stock-Based Compensation. In connection with our stock option grants to employees, we recorded unearned stock-based compensation charges. These charges represent the total difference between the exercise prices of stock options and the deemed fair value of the underlying common stock for accounting purposes on the date these stock options were granted. The majority of these charges relate to grants made prior to our initial public offering as well as options assumed in connection with our merger with Broadbase in 2001. In 2002, options granted with an exercise price below the fair value of the option shares on the date of grant resulted in a charge of $138,000, and cancellations of grants with previous associated charges resulted in a reversal of $1.8 million. In 2001, options granted with an exercise price below the fair value of the option shares on the date of grant resulted in a charge of $2.6 million, and cancellations of grants with previous associated charges resulted in a reversal of $3.0 million. In connection with the merger with Broadbase, we recorded unearned stock-based compensation totaling approximately $15.5 million during the year ended December 31, 2001. These amounts are included as a component of stockholders' equity and are being amortized on an accelerated basis by charges to operations over the vesting period of the options, consistent with the method described in FASB Interpretation No. 28.
In September 2000, we issued to Accenture 40,000 shares of common stock and a warrant to purchase up to 72,500 shares of our common stock at an exercise price of $371.25 per share pursuant to a stock and warrant purchase agreement in connection with our global strategic alliance. The shares of the common stock issued were fully vested, and we 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 December 31, 2002, 33,997 shares of common stock subject to the warrant were fully vested and 28,503 had been forfeited, with the remaining 10,000 warrants subject to vesting 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 term of the agreement. We will incur a stock-based compensation charge for the unvested portion of the warrant when and if annual performance goals are achieved. As of December 31, 2002, unvested shares of common stock under the warrant had a fair value of approximately $20,000 based upon the fair market value of our common stock at such date.
In June 2001, we 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 an exercise price of $40 per share pursuant to a warrant purchase agreement. 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, we issued to a customer a warrant to purchase up to 5,000 shares of common stock at an exercise price of $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. As of December 31, 2002, no such marketing criteria has been met. 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, we issued to Accenture a fully-vested warrant to purchase up to 150,000 shares of common stock at an exercise price of $3.33 per share pursuant to a warrant purchase agreement in connection with our global strategic alliance. The warrant was valued using the Black-Scholes model resulting in a charge of approximately $946,000 which is being amortized over the four-year term of the agreement. Accenture exercised this additional warrant in March 2002.
In November 2001, we issued to two investment funds warrants to purchase up to 386,118 shares of our common stock at an exercise price of $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 for an aggregate of 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, our stockholders voted against the proposed financing, which resulted in us terminating the share purchase agreement and caused the warrants to become exercisable with respect to all 386,118 shares. The warrants are exercisable until February 2004. 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 first quarter of 2002.
As of December 31, 2002, a total of approximately $8.6
million of unearned deferred stock-based compensation remained to be amortized.
We anticipate stock-based compensation expense to approximate from $6.0 million
to $7.0 million in 2003, $1.0 to $2.0 million in 2004, and the remainder in
2005. The amortization of stock-based compensation for 2002 and 2001, by
operating expense, is detailed as follows (in thousands):
Year Ended December 31,
-----------------------
2002 2001
----------- ----------
Cost of service................. $ 883 $ 1,417
Sales and marketing............. 4,697 7,230
Research and development........ 4,384 4,226
General and administrative...... 6,656 3,007
----------- ----------
Total.......................... $ 16,620 $ 15,880
=========== ==========
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):
Year Ended December 31,
-------------------------------------
2002 2001 2000
----------- ----------- -----------
Reported net loss...................... $ (96,110) $ (942,895) $(3,070,873)
Goodwill amortization.................. -- 118,060 866,328
----------- ----------- -----------
Adjusted net loss...................... $ (96,110) $ (824,835) $(2,204,545)
=========== =========== ===========
Basic and diluted net loss per share... $ (4.29) $ (68.61) $ (395.68)
Goodwill amortization.................. -- 8.59 111.63
----------- ----------- -----------
Adjusted basic and diluted
net loss per share................... $ (4.29) $ (60.02) $ (284.05)
=========== =========== ===========
Shares used in computing adjusted basic
and diluted net loss per share....... 22,403 13,743 7,761
=========== =========== ===========
Amortization of Identifiable Intangibles. We recorded $4.8 million in amortization of identifiable intangibles in both 2002 and 2001. This 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 these identifiable intangibles to conclude in April 2003. The remaining unamortized portion of identifiable intangibles is $1.5 million at December 31, 2002.
Merger and Related Cost. There were no merger-related costs incurred in 2002. In connection with the merger with Broadbase, we recorded $13.4 million of merger-related expenses in 2001. The merger costs included personnel costs of $5.6 million, and $7.8 million relating to duplicate facility and insurance costs, redundant assets, and professional fees associated with the merger. As of December 31, 2002, no accrued merger-related costs remained on the consolidated balance sheet.
Restructuring Costs. For the year ended December 31, 2002, we recorded approximately $5.1 million in restructuring cost savings related to an amendment to a facility lease, our evaluation of real estate market conditions relating to this and other excess leased facilities, and discussions with our other landlords. For the year ended December 31, 2001, we incurred restructuring charges of approximately $89.0 million primarily related to reductions in our workforce and costs associated with certain excess leased facilities and asset impairments. The restructuring charges included $26.4 million for assets disposed of or removed from operations. Assets disposed of or removed from operations consisted primarily of computer equipment and related software, office equipment, furniture and fixtures and leasehold improvements.
The restructuring charge in 2001 also included $24.4 million for severance, benefits and related costs associated with reductions in our workforce. As of December 31, 2001, we had 409 full-time employees. We restructured our organization throughout 2001, with net workforce reductions of approximately 772 employees, or 65% from December 31, 2000, in order to streamline operations, eliminate redundant positions after the merger with Broadbase, reduce costs and bring our staffing and cost structure in line with industry standards and current economic conditions.
The restructuring charge in 2001 also included $38.2 million resulting from our decision to exit and reduce some of our facilities. The estimated facility costs were based on our contractual obligations, net of estimated sublease income, based on current comparable rates for leases in the respective markets.
The following table summarizes our restructuring expenses, payments, and liabilities at and for the years ended December 31, 2002 and 2001 (in thousands):
Fixed Asset
Severance Facilities Disposals Totals
---------- ------------ ------------ --------
Restructuring reserve at 12/31/2000..... $ -- $ -- $ -- $ --
---------- ------------ ------------ --------
Restructuring charge.................... 24,426 38,168 26,453 89,047
Non-cash charges........................ (1,858) -- (26,453) (28,311)
Payments made........................... (21,655) (10,750) -- (32,405)
---------- ------------ ------------ --------
Restructuring reserve at 12/31/2001..... 913 27,418 -- 28,331
---------- ------------ ------------ --------
Non-cash reduction of restructuring..... -- (5,086) -- (5,086)
Payments made........................... (695) (12,415) -- (13,110)
Sublease payments received.............. -- 814 -- 814
---------- ------------ ------------ --------
Restructuring reserve at 12/31/2002..... $ 218 $ 10,731 $ -- $ 10,949
========== ============ ============ ========
We expect payments relating to restructuring liabilities to approximate $2.8 million in 2003, with the remainder being paid fairly evenly from 2004 until 2011.
During 2002, we realized personnel-related costs savings associated with reductions in headcount as a result of our restructuring in 2001, of approximately $36.1 million. Cost savings in 2002 relating to facilities reductions relating to our restructuring in 2001 included $814,000 in sublease payments received and $340,000 in reduced rent obligations relating to an amendment in 2002 to a facility lease. Reductions in rent obligations related to this amendment range from approximately $2.1 million in 2003 and increasing to approximately $2.8 million in 2010 and $237,000 in 2011. To the extent we are able to sublease excess facilities sooner than anticipated, or for greater dollar amounts than assumed, we will experience further cost reductions. Likewise, to the extent that our sublease expectations are not met, we may experience adjustments to our restructuring reserve in future periods which may have a material adverse effect on our financial statements.
Goodwill Impairment. On January 1, 2002, we 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. SFAS 142 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 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 to reduce goodwill. The circumstances that led to the impairment included the lower-than-previously- expected revenues and net loss for the second quarter of 2002 and the revision of estimates of our revenues and net loss for subsequent quarters, based upon financial results for the second quarter of 2002 and the reduction of estimated cash flows in future quarters. We used relevant market data, including KANA's market capitalization during the period following the revision of estimates , to calculate an estimated fair value and the 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 December 31, 2002 was $7.4 million. Any further impairment loss could have a material adverse impact on our financial condition and results of operations. The remaining goodwill balance was approximately $7.4 million at December 31, 2002.
In 2001, we performed an impairment assessment of the identifiable intangibles and goodwill recorded in connection with the Silknet merger. 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 had 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 in the first quarter of 2001 to reduce our goodwill. The charge was based upon the estimated discounted cash flows over the remaining useful life of the goodwill using a discount rate of 20%.
Impairment of Investment
In connection with the merger with Silknet, we assumed a $1.5 million investment in preferred stock of a privately held company. We recorded a $1.0 million impairment charge in the fourth quarter of 2001 in order to reduce the carrying value of the investment to $500,000. The impairment charge was based on a substantial decline in the estimated fair value of the investment based, in part, on the terms of a recent financing involving significant new investors. This investment is included under "other assets" in our consolidated balance sheet at December 31, 2002.
Other Income (Expense), net
Other income (expense), net in 2002 and 2001 consisted primarily of interest earned on cash and short-term investments offset by interest expense related to our line of credit and other non-operating expenses such as gains and losses on asset disposals. Other income (expense), net was $913,000 for the year ended December 31, 2002 and $1.5 million for the year ended December 31, 2001. The decrease in other income (expense), net related to lower amounts of interest income earned due to lower average cash balances in 2002 than in 2001.
Provision for Income Taxes
We have incurred operating losses for all periods from inception through December 31, 2002. We have recorded a valuation allowance for the full amount of our gross deferred tax assets, as the future realization of the tax benefit is not currently likely.
As of December 31, 2002, we had net operating loss carryforwards for federal and state tax purposes of approximately $388.9 million and $118.2 million, respectively. The federal net operating loss carryforwards, if not offset against future taxable income, will expire from 2011 through 2022. Under the provisions of the Internal Revenue Code of 1986, as amended, substantial changes in ownership may limit the amount of net operating loss carryforwards that could be utilized annually in the future to offset taxable income.
Discontinued Operation
During the second quarter of 2001, we adopted a plan to discontinue the KANA Online business. We no longer seek any new KANA Online business or have any remaining contractual obligations to provide KANA Online to customers. Accordingly, KANA Online is reported as a discontinued operation. 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. 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 $381,000.
This operation has been presented as a discontinued operation for all periods presented. The KANA Online operating results are as follows (in thousands):
Year Ended December 31,
----------------------------
2002 2001 2000
-------- -------- --------
Revenues ................................................. $ -- $ 3,161 $ 6,230
Income (loss) from operations of discontinued operation .. -- (125) 1,173
Gain/(loss) on disposal .................................. 381 (3,667) --
-------- -------- --------
Total income (loss) on discontinued operations ........... $ 381 $ (3,792) $ 1,173
======== ======== ========
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2001 AND 2000
Revenues
Total revenues decreased by 23% to $90.6 million for the year ended December 31, 2001 from $118.0 million for the year ended December 31, 2000 primarily as a result of decreased license revenue.
License revenues decreased by 50% to $38.0 million for the year ended December 31, 2001 from $75.4 million for 2000. This decrease in license revenue was primarily due to a decrease in the number of license transactions, resulting from a decline in economic conditions throughout 2001, and particularly in the third quarter of 2001 following the events of September 11, 2001. This decrease was partially offset in the fourth quarter by sales of products formerly offered by Broadbase which were not included in our revenues prior to the June 2001 merger (license revenues recorded by Broadbase through June 2001 totaled $16.1 million). License revenues represented 42% of total revenues in 2001 and 64% in 2000. We anticipate license revenue will increase as a percentage of total revenue in the future due to the reduction in our professional services as a result of our shift during the fourth quarter of 2001 to increase our use of third party integrators for providing implementation services to our customers.
Service revenues increased by 24% to $52.6 million for the year ended December 31, 2001 from $42.6 million for 2000. Service revenues increased primarily due to service engagements in quarters following increased licensing activity in the third and fourth quarters of 2000. Given the increase in licensing activity in 2000 compared to 1999, as well as the first quarter of 2001 compared to the first quarter of 2000, service revenue in 2001 increased from 2000. Service revenues represented 58% of total revenues for the year ended December 31, 2001 and 36% of total revenues for 2000.
Revenues from international sales were $13.8 million in the year ended December 31, 2001 and $19.5 million in the year ended December 31, 2000. Our international revenues were derived from sales in Europe, Canada, Asia Pacific and Latin America.
Cost of Revenues
Total cost of revenues decreased by 8% to $54.3 million for the year ended December 31, 2001 from $58.9 million for the year ended December 31, 2000, primarily due to the reduction in cost of services discussed below.
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 for 2001 was 7% compared to 4% in 2000. The increase was due to the reduced license revenue and fixed nature of some of the license costs, as well as an increase in certain royalty rates from 2000.
Cost of service revenue consists primarily of salaries and related expenses for our customer support, implementation and training services organization and allocation of facility costs and system costs incurred in providing customer support. Our support revenues relate to providing telephone support and product maintenance and updates. Our professional services revenues relate to providing consulting and implementation services. Cost of service revenue decreased to 98% of service revenue for 2001 compared to 132% for the same period in the prior year. This was primarily due to more consistent utilization of our professional services personnel in revenue-generating services during the first half of 2001, offset by a $7.8 million increase of the estimated costs to complete a fixed fee contract recorded in the third quarter of 2001. During the fourth quarter of 2001, service margins improved due to the change in service revenue mix following the shift to increase customers' use of third party integrators to provide implementation services, rather than to purchasing these services from us. As a result, support revenues comprised a larger percentage of service revenues, which have yielded better margins than training and consulting revenues.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of compensation and related costs for sales and marketing personnel and promotional expenditures, including public relations, advertising, trade shows and marketing collateral materials. Sales and marketing expenses decreased by 21% to $69.6 million for the year ended December 31, 2001 from $88.2 million for the year ended December 31, 2000. This decrease was attributable primarily to reductions in sales and marketing personnel during 2001, from 430 positions as of December 31, 2000 to 136 positi