SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission file number: 000-27163
KANA Software, Inc.
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181 Constitution Drive
Menlo Park, California 94025
(650) 614-8300
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b of the Exchange Act). YES [ ] NO [X]
On April 30, 2003, approximately 23,056,555 shares of the Registrant's Common Stock, $0.001 par value, were outstanding.
KANA Software, Inc.
Form 10-Q
Quarter Ended March 31, 2003
Index
| PART I. FINANCIAL INFORMATION | Page No. |
| Item 1. Financial Statements |
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Condensed Consolidated Balance Sheets at March 31, 2003 and December 31, 2002 |
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Condensed Consolidated Statements of Operations for the three months ended March 31, 2003 and 2002 |
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Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002 |
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| Notes to the Condensed Consolidated Financial Statements |
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| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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| Item 4. Disclosure Controls and Procedures |
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| PART II. OTHER INFORMATION |
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| Item 1: Legal Proceedings |
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| Item 2: Changes in Securities and Use of Proceeds |
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| Item 3: Defaults Upon Senior Securities |
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| Item 4. Submission of Matters to a Vote of Security Holders |
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| Item 5. Other Information |
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| Item 6. Exhibits and Reports on Form 8-K |
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| Signatures |
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| Certifications |
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Part I: Financial Information
Item 1: Financial Statements
KANA Software, Inc.
See accompanying notes to unaudited condensed consolidated financial statements.
KANA Software, Inc.
See accompanying notes to unaudited condensed consolidated financial statements.
KANA Software, Inc.
See accompanying notes to unaudited condensed consolidated financial statements.
KANA Software, Inc.
Note 1. Basis of Presentation The unaudited condensed consolidated financial statements have been
prepared by KANA Software, Inc. ("KANA" or the "Company"), and reflect all
normal, recurring adjustments that, in the opinion of management, are necessary
for a fair presentation of the interim financial information. The results of
operations for the interim periods presented are not necessarily indicative of
the results to be expected for any subsequent quarter or for the entire year
ending December 31, 2003. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted under the Securities and Exchange Commission's ("SEC")
rules and regulations. These unaudited condensed consolidated financial
statements and notes included herein should be read in conjunction with KANA's
audited consolidated financial statements and notes included in KANA's annual
report on Form 10-K for the year ended December 31, 2002. The consolidated financial statements include the financial statements of
KANA and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation. The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America,
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Note 2. Net Loss Per Share Basic net loss per share from continuing operations is computed using the
weighted-average number of outstanding shares of common stock, excluding common
stock subject to repurchase. Diluted net loss per share from continuing
operations is computed using the weighted-average number of outstanding shares
of common stock and, when dilutive, potential common shares from options and
warrants using the treasury stock method. The following table presents the
calculation of basic and diluted net loss per share from continuing operations
(in thousands, except net loss per share): All warrants, outstanding stock options and shares subject to repurchase by
KANA have been excluded from the calculation of diluted net loss per share as
all such securities were anti-dilutive for all periods presented. The total
number of shares excluded from the calculation of diluted net loss per share is
as follows (in thousands): The weighted average exercise price of stock options and warrants outstanding
was $21.75 and $48.50 as of March 31, 2003 and 2002, respectively. Note 3. Comprehensive Loss Comprehensive loss comprises net loss and foreign currency translation
adjustments. Comprehensive loss was $3.6 million
and $6.6 million for the three months ended
March 31, 2003 and 2002, respectively. Note 4. Stockholders' Equity (a) Warrants In September 2000, the Company issued to Accenture 40,000 shares of
common stock and a warrant to purchase up to 72,500 shares of common stock at $371.25 per share
pursuant to a stock and warrant purchase agreement in connection with its global
strategic alliance. The shares of the common stock issued were fully vested, and
the Company recorded a charge of approximately $14.8 million to be amortized
over the four-year term of the agreement. As of March 31, 2003, 33,997 shares of
common stock subject to the warrant were fully vested and 28,503 had been
forfeited, with the remaining 10,000 shares of common stock subject to the
warrant becoming vested upon the achievement of certain performance goals. The
vested portion of the warrant was valued using the Black-Scholes model resulting
in charges totaling $2.0 million of which $1.0 million is being amortized over
the remaining term of the agreement and $1.0 million was immediately expensed in
the fourth quarter of 2000. The Company will incur a charge to stock-based
compensation for the unvested portion of the warrant as performance goals are
achieved. In September 2001, the Company issued to a customer a warrant to purchase up
to 5,000 shares of common stock at $7.50 per share pursuant to a warrant purchase agreement. The
warrant fully vests in September 2006 and has a provision for acceleration of
vesting 1,250 shares annually over four years if certain marketing criteria are
met by the customer. The warrant was valued using the Black-Scholes model
resulting in a charge to stock-based compensation of approximately $29,000 which
is being amortized over the five-year term of the agreement as a reduction of
revenue. In September 2001, the Company issued to Accenture an additional warrant to
purchase up to 150,000 shares of common stock at $3.33 per share pursuant to a warrant purchase
agreement in connection with its global strategic alliance. The warrant is fully
vested and exercisable as of September 2001. 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. The warrants were
exercised in March 2002. In November 2001, the Company issued to two investment funds warrants to
purchase up to 386,118 shares of common stock at $10.00 per share in connection
with a proposed financing which was to have been completed in February 2002 upon
attaining stockholder approval. These warrants were initially exercisable for
193,059 shares. The exercisable warrants were valued using the Black-Scholes
model resulting in a charge of approximately $1.0 million to deferred stock-
based compensation. On February 1, 2002, the stockholders voted against the
proposed financing, which resulted in the Company terminating the share purchase
agreement and caused the warrants to become exercisable with respect to all
386,118 shares. The warrants are exercisable for two years from the date the
share purchase agreement was terminated. Using the Black-Scholes model, the
warrants issued in November 2001 that were initially exercisable were re-valued
as of February 1, 2002, and the warrants that became exercisable on February 1,
2002 were valued as of such date, resulting in a charge totaling approximately
$4.7 million which was reflected as amortization of stock-based compensation in
the statement of operations in the first quarter of 2002. In November 2002, the Company issued to its landlords warrants to purchase up
to 200,000 shares of common stock at $1.61 per share in connection with an
amendment to its existing facility lease. The warrant is exercisable until
November 2003. The warrants were valued using the Black-Scholes model resulting
in a charge of approximately $137,000 which was accounted for as a reduction to
the restructuring liability. (b) Stock-Based Compensation The Company accounts for its stock-based compensation arrangements with
employees using the intrinsic-value method in accordance with Accounting
Principles Board 25, Accounting for Stock Issued to Employees. Deferred stock-
based compensation is recorded on the date of grant when the deemed fair value
of the underlying common stock exceeds the exercise price for stock options or
the purchase price for the shares of common stock. Deferred stock-based compensation resulting from option grants to employees,
and warrants issued to non-employees, is amortized on an accelerated basis over
the vesting period of the individual options, generally four years, in
accordance with Financial Accounting Standards Board Interpretation No. 28,
Accounting for Stock Appreciation Rights and Other VariableStock Option or Award
Plans. As of March
31, 2003, there was approximately $6.4 million of total deferred stock-based
compensation remaining to be amortized related to warrants and past employee
stock option grants. KANA will amortize an additional $4.8 million of deferred
stock-based compensation in 2003. Amortization of deferred stock based
compensation in the years ended December 31, 2004 and 2005 will be approximately
$1.5 million and $71,000, respectively. The following table details, by operating expense, the Company's amortization
of stock-based compensation (in thousands): The Company has adopted the disclosure requirements of Statement of Financial
Accounting Standards No. 148, "Accounting for Stock-Based Compensation,
Transition and Disclosure". The following table presents what the net loss and
net loss per share would have been adjusted to the following pro forma amounts
had the Company adopted FAS 123 (in thousands, except per share
amounts): (1) Unearned deferred compensation resulting from employee and nonemployee
option grants is amortized on an accelerated basis over the vesting period of
the individual options, in accordance with FASB Interpretation No. 28.
Accordingly, the stock based compensation expense noted
above is net of the reversal of previously recorded accelerated stock based
compensation expense due to the forfeitures of those stock options prior to
vesting. Note 5. Commitments and Contingencies 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. KANA believes it has meritorious defenses to these
claims and intends to defend the action vigorously. The underwriters for KANA's 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 will be dismissed without
prejudice. The cases allege violations of various securities laws by more than
300 issuers of stock, including KANA, and the underwriters for such issuers, on
behalf of a class of plaintiffs who, in the case of KANA, purchased KANA's stock
between September 21, 1999 and December 6, 2000 in connection with KANA's
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. The
Company believes it has meritorious defenses to these claims and intends 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. The Company believes it has meritorious defenses to these
claims and intends to defend the action vigorously. On February 20, 2003, Tumbleweed Communications Corp. filed suit against
KANA's 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. The Company believes it has
meritorious defenses to these claims and intends to defend the action
vigorously. Other third parties have from time to time claimed, and others may claim in
the future that KANA has infringed its past, current or future intellectual
property rights. The Company has 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 KANA's methods of
doing business or could require KANA to enter into costly royalty or licensing
agreements, if available. As a result, these claims could harm KANA's
business. As of March 31, 2003, approximately $400,000 was accrued as KANA's 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. Guarantees. KANA has provided letters of credit that secure its
rental payments at various offices in the United States. The Company could be
required to perform under these guarantees if it were to default with respect to
any of the terms, provisions, covenants, or conditions of the lease agreement.
These guarantees are renewed annually for successive one-year terms until the
expiration of the related leases on April 30, 2007. The maximum potential
amount of future payments the Company could be required to make under these
letters of credit as of March 31, 2003 is $1.2 million. Indemnifications. Kana enters into standard indemnification
agreements in its ordinary course of business. Pursuant to these agreements,
the Company indemnifies, holds harmless, and agrees to reimburse the indemnified
party for losses suffered or incurred by the indemnified party in connection
with any U.S. patent, copyright, or other intellectual property infringement
claim by any third party with respect to its products. The term of these
indemnification agreements is generally perpetual any time after execution of
the agreement. The maximum potential amount of future payments the Company
could be required to make under these indemnification agreements is unlimited.
The Company believes the estimated fair value of these agreements is
insignificant, based upon its history. Accordingly, the Company has no liabilities recorded
for these agreements as of March 31, 2003. As permitted by Delaware law, the Company has agreements whereby it
indemnifies its officers and directors for certain events or occurrences while
the officer is, or was, serving at the Company's request in such capacity. The
term of the indemnification period is for the officer or director's lifetime.
The maximum potential amount of future payments the Company could be required to
make under these indemnification agreements is unlimited; however, the Company
has a director and officer insurance policy that limits its exposure and enables
the Company to recover a portion of any future amounts paid. As a result of the
Company's insurance policy coverage, the Company believes the estimated fair
value of these indemnification agreements is insignificant. Accordingly, the
Company has no liabilities recorded for these agreements as of March 31,
2003. The Company assesses the need for an indemnification reserve on a quarterly
basis and there can be no guarantee that an indemnification reserve will not become
necessary in the future. Warranties. The Company offers warranties on its software products.
To date, there have been no material payments or costs incurred related to
fulfilling these warranty obligations. Accordingly, the
Company has no liabilities recorded for these warranties as of March 31,
2003. The Company assesses the need for a warranty reserve on a quarterly
basis and there can be no guarantee that a warranty reserve will not become
necessary in the future. Outsourcing Arrangements. In January 2003, the Company
began implementing an outsourcing strategy, which involves subcontracting a
significant portion of its software programming, quality assurance and technical
documentation activities to development partners with staffing in India and
China. As a result of this outsourcing effort, the Company reduced its research
and development department by 31 employees in the first quarter of 2003, and
expects to reduce the size of the department further in future quarters of 2003.
The Company signed contracts with some of these development partners in March
2003, with expected payments in 2003 of approximately $3.0 million, primarily on
a time and materials basis but with minimum payments of $1.0 million in 2003.
The Company expects to sign contracts with additional development partners in
future quarters of 2003. Note 6. Restructuring costs In 2001, the Company incurred restructuring charges related to the
reductions in its workforce and costs associated with certain excess leased
facilities and asset impairments. In November 2002, the Company entered into an amendment to a facility lease.
In connection with this lease amendment, the Company's evaluation of real estate
market conditions relating to this and other excess leased facilities, and
discussions with its other landlords, the Company reduced its associated
restructuring reserve by approximately $9.1 million. This reduction in
restructuring reserve was primarily comprised of a $4.0 million payment made in
connection with the lease amendment, as well as approximately $5.1 million in
cost savings resulting from this amendment that were reflected in the Company's
operating results for the quarter ended December 31, 2002. If the real estate market continues to worsen, additional adjustments to the
reserve may be required, which would result in additional restructuring expenses
in the period in which such determination is made. Likewise, if the real estate
market strengthens, and the Company is able to sublease the properties earlier
or at more favorable rates than projected, or if the Company is otherwise able
to negotiate early termination of obligations on favorable terms, adjustments to
the reserve may be required that would impact the Company's statement of
operations in the period in which such determination is made. As of March 31, 2003, $10.3 million in restructuring liabilities remained on
the consolidated balance sheet in accrued restructuring and merger costs. Cash
payments for severance and excess leased facilities during the three months
ended March 31, 2003
totaled $0.7 million. Cash received during the three months ended March
31, 2003 from subleases and sales of property charged to restructuring expense
in previous periods totaled $25,000. The following table provides a summary of
restructuring payments and liabilities during the first three months of 2003 (in
thousands): Note 7. Internal Use Software Internal use software costs, including fees paid to third parties to
implement the software, are capitalized beginning when the Company has
determined certain factors are present, including among others, that technology
exists to achieve the performance requirements, the Company has decided whether
it will purchase the software or develop it internally, and management has
authorized the funding for the project. Capitalization of software costs ceases
when the software implementation is substantially complete and is ready for its
intended use, and the capitalized costs are amortized over the software's
estimated useful life (generally five years) using the straight-line method. As
of March 31, 2003, the Company had $15.2 million of capitalized costs of
internal use software. When events or circumstances indicate the carrying value of internal use
software might not be recoverable, the Company assesses the recoverability of
these assets by determining whether the amortization of the asset balance over
its remaining life can be recovered through undiscounted future operating cash
flows. The amount of impairment, if any, is recognized to the extent that the
carrying value exceeds the projected discounted future operating cash flows and
is recognized as a write down of the asset. In addition, if it is no longer
probable that computer software being developed will be placed in service, the
asset will be adjusted to the lower of its carrying value or fair value, if any,
less direct selling costs. Any such adjustment would result in an expense in the
period recorded, which could have a material adverse effect on the Company's
consolidated statement of operations. Note 8. Goodwill and Purchased Intangible Assets On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets ("SFAS
142"). In accordance with the provisions of SFAS No. 142, the Company
ceased amortizing goodwill as of the beginning of fiscal 2002. In addition, as
part of the adoption of SFAS No. 142, negative goodwill was eliminated and
reported as the cumulative effect of accounting change. This accounting change
amounted to approximately $3.9 million in the first quarter of 2002.
Additionally, SFAS 142 requires goodwill to be tested for impairment under
certain circumstances and written down when impaired, and requires purchased
intangible assets other than goodwill to be amortized over their useful lives
unless these lives are determined to be indefinite. Under the transition
provisions of SFAS No. 142, there was no goodwill impairment at January 1, 2002
based upon the Company's analysis at that time. However, during the quarter
ended June 30, 2002, circumstances developed that indicated the goodwill was
likely impaired and the Company performed an impairment analysis as of June 30,
2002. This analysis resulted in a $55.0 million impairment of goodwill. The
circumstances that led to the impairment included the revision of estimates of
the Company's revenues and net loss for the second quarter of 2002 and
subsequent quarters based upon preliminary revenue results late in the second
quarter of 2002, and the reduction of estimated future revenues and cash flow.
Following an announcement of these revisions in connection with the Company's
second quarter release of its preliminary results for the second quarter of
2002, the trading price of the Company's common stock declined. The Company used
relevant market data, including the Company'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 Company has continued to
assess whether potential indicators of impairment of goodwill have occurred and
has determined that no such indicators have arisen since June 30, 2002. The
remaining goodwill balance as of March 31, 2003 was approximately $7.4
million. Purchased intangible assets relate to $14.4 million of existing
technology purchased in connection with the acquisition of Silknet Software,
Inc. in April 2000 and are carried at cost less accumulated amortization.
Amortization is computed over the estimated useful lives of the asset, which is
three years. The Company reported amortization expense on purchased intangible
assets of $1.2 million for the three months ended March 31, 2003. The net
carrying value of purchased intangible assets is $0.3 million at March 31, 2003.
The purchased intangible assets will be fully amortized by
June 30, 2003. Note 9. Segment Information The Company's chief operating decision-maker reviews financial
information presented on a consolidated basis, accompanied by disaggregated
information about revenues by geographic region for purposes of making operating
decisions and assessing financial performance. Accordingly, the Company
considers itself to be in a single industry segment, specifically the license,
implementation and support of its software applications. The Company's long-
lived assets are primarily in the United States. Geographic information on
revenue for the three months ended March 31, 2003 and 2002 are as follows (in
thousands): During the three months ended March 31, 2003, two customers, Customer
A and Customer B represented 15% and 11% of total revenues,
respectively. During the three months ended March 31, 2002, Customer A
represented 22% of total revenues. Note 10. Notes Payable and Leases The Company maintains a $5.0 million loan facility which is secured by
all of its assets, bears interest at the bank's prime rate plus 0.25% (4.75% as
of March 31, 2003), and expires in November 2003, at which time the entire
balance under the line of credit will be due. Total borrowings as of March 31,
2003 were approximately $3.4 million under this line of credit. As of March 31,
2003, the Company was in compliance with all covenants of its line of credit
agreement. In June 2002 the Company entered into a non-recourse receivables purchase
agreement with a bank which provides for the sale of up to $5.0 million in
certain qualified receivables subject to an administrative fee and a discount
schedule ranging from the bank's prime rate of interest plus 0.50% to the bank's
prime rate of interest plus 1.50%. The Company had not sold any receivables
under this agreement as of March 31, 2003. Future payments due under debt and lease obligations as of March 31, 2003 are
as follows (in thousands): Note 11. Recent Accounting Pronouncements In November 2001, the Emerging Issues Task Force ("EITF")
concluded that reimbursements for out-of-pocket-expenses incurred should be
included in revenue in the income statement and subsequently issued EITF 01-14,
"Income Statement Characterization of Reimbursements Received for `Out-of-
Pocket' Expenses Incurred" in January 2002. The Company adopted EITF 01-14
effective January 1, 2002 and has reclassified comparative financial statements
for prior periods to comply with the guidance in this EITF issue. The adoption
of this issue resulted in approximately $21,000 and $107,000 of reimbursable
expenses reflected in both service revenue and cost of service revenue for the
three months ended March 31, 2003 and 2002, respectively. In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, Accounting for
Exit or Disposal Activities ("SFAS 146"). SFAS 146 addresses significant
issues regarding the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for under EITF No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). The scope of SFAS 146
also includes costs related to terminating a contract that is not a capital
lease and termination benefits that employees who are involuntarily terminated
receive under the terms of a one-time benefit arrangement that is not an ongoing
benefit arrangement or an individual deferred-compensation contract. SFAS 146 is
effective for exit or disposal activities initiated after December 31, 2002. The
Company adopted SFAS 146 effective January 1, 2003. The provisions of EITF No.
94-3 shall continue to apply for an exit activity initiated under an exit plan
that met the criteria of EITF No. 94-3 prior to the adoption of SFAS 146. The
Company's adoption of SFAS 146 will change on a prospective basis the timing of
when restructuring charges are recorded from a commitment date approach to when
the liability is incurred. In November 2002, the EITF reached a consensus on issue No. 00-21
Accounting for Revenue Arrangements with Multiple Deliverables
("EITF 00-21") on a model to be used to determine when a revenue
arrangement with multiple deliverables should be divided into separate units of
accounting and, if separation is appropriate, how the arrangement consideration
should be allocated to the identified accounting units. The EITF also reached a
consensus that this guidance should be effective for all revenue arrangements
entered into in fiscal periods beginning after June 15, 2003, which for the
Company would be the quarter ending September 30, 2003. The Company believes
that the adoption of EITF 00-21 will have no material impact on its financial
statements. In November 2002, the FASB issued Interpretation No. 45 ("FIN 45")
Guarantor's Accounting and Disclosure requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees.
It also clarifies that at the time a company issues a guarantee, the company
must recognize an initial liability for the fair value, or market value, of the
obligations it assumes under that guarantee. However, the provisions related to
recognizing a liability at inception of the guarantee for the fair value of the
guarantor's obligations do not apply to product warranties or to guarantees
accounted for as derivatives. The initial recognition and initial measurement
provisions apply on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. The adoption of FIN 45 did not have a significant impact on the Company's
financial statements. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation, Transition and Disclosure ("SFAS 148"). SFAS No. 148
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. SFAS No.
148 also requires that disclosures of the pro forma effect of using the fair
value method of accounting for stock-based employee compensation be displayed
more prominently and in a tabular format. Additionally, SFAS No. 148 requires
disclosure of the pro forma effect in interim financial statements. The
transition and annual disclosure requirements of SFAS No. 148 are effective for
fiscal years ended after December 15, 2002. The interim disclosure requirements
are effective for interim periods beginning after December 15, 2002 and have
been reflected in these footnotes. In January 2003, the FASB issued Interpretation No. 46 ("FIN 46")
Consolidation of Variable Interest Entities. Until this interpretation, a
company generally included another entity in its consolidated financial
statements only if it controlled the entity through voting interests. FIN 46
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns. Disclosure of agreements entered into after January 31, 2003 that are
covered by FIN 46 is required effectively immediately. By June 15, 2003, full
consolidation of assets and liabilities of applicable entities is required. The
Company does not expect the adoption of this Interpretation to have a material
impact on its results of operations or financial position. However, changes in
the Company's business relationships with various entities could occur in the
future and affect the Company's financial statements under the requirements of
FIN 46. Item 2: Management's Discussion and
Analysis of Financial Condition and Results of Operations The following discussion of our financial condition and results of
operations and other parts of this report contains 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,
some of which are beyond our control, are difficult to predict and could cause
actual results to differ materially from" those expressed or forecasted in
the forward-looking statements. These risks and uncertainties include those
described in "Risk Factors" and elsewhere in this report. Forward-
looking statements that were believed to be true at the time made may ultimately
prove to be incorrect or false. Readers are cautioned not to place undue
reliance on forward-looking statements, which reflect our management's view only
as of the date of this report. Except as required by law, we undertake no
obligation to update any forward-looking statement, whether as a result of new
information, future events or otherwise. Overview We are a leading provider of enterprise Customer Relationship Management
(eCRM) software solutions. 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. The discussion and analysis of our financial condition and results of
operations are based upon our unaudited condensed consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires us to make estimates and judgments that affect our
reported assets, liabilities, revenues and expenses, and our related disclosure
of contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related to revenue recognition, collectibility of
receivables, goodwill and intangible assets, contract loss reserve, product
warranties, income taxes, and restructuring. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances. This forms the basis of judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions. On June 29, 2001, we completed a merger with Broadbase Software. This
transaction was accounted for using the purchase method of accounting. The
purchase price approximated $101.4 million. 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 three months ended March 31, 2003, we recorded a net
loss of $3.9 million. We expect to experience decreased operating losses for
the remainder of 2003 as a result of our cost savings efforts, as well as
personnel and facility cost reductions throughout 2002 and into 2003. 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 March 31, 2003, we had 313 full-time employees, which is a decrease
from 365 employees at December 31, 2002. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of
operations are based upon our unaudited condensed 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, 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 unaudited
condensed 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 using the residual
method, under which revenue is allocated to undelivered elements based on
vendor-specific objective evidence of fair value of such undelivered elements
with the residual amounts of revenue being allocated to the delivered elements.
Elements included in multiple element arrangements primarily consist of software
products, maintenance (which includes customer support services and unspecified
upgrades), or consulting services. Vendor-specific objective evidence for
software products and consulting services is based on the price charged when an
element is sold separately or, in the case of an element not yet sold
separately, the price established by authorized management, if it is probable
that the price, once established, will not change before market introduction.
Vendor-specific objective evidence for maintenance is based on 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
publicly available 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 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 that we 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. During the second quarter of
2002, we received a scheduled payment of $4.0 million associated with the
original agreement which we 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 March 31, 2003, we had $15.2 million of capitalized costs of
internal use software. 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 March 31, 2003, 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 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 net restructuring cost savings resulting from our evaluation
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 through 2003. 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 reduction of
goodwill as of June 30, 2002 by $55.0 million. The remaining amount of goodwill
as of March 31, 2003 was $7.4 million. We have continued to assess whether any
potential indicators of impairment of goodwill have occurred and have determined
that no such indicators have arisen since June 30, 2002. 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 deferred tax asset 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. Selected Results of Operations Data The following table sets forth selected data for the indicated periods.
Percentages are expressed as a percentage of total revenues. Three Months Ended March 31, 2003 and 2002 Revenues License revenue decreased 38% to $9.4 million for the three months ended
March 31, 2003 from $15.1 million in the same period of the prior year. The
decrease was a result of fewer total license transactions in the first quarter
of 2003 compared to the first quarter of 2002, which resulted from customers and
potential customers delaying purchasing decisions more so during the first
quarter of 2003 compared to the same period in the prior year. As a percentage
of total revenue, license revenue comprised 52% of total revenues during the
three months ended March 31, 2003, compared to 60% for the same period last
year. We do not anticipate significant fluctuations in our quarterly license
revenue amounts for the remainder of 2003. However, the market for our products
is unpredictable and intensely competitive, and sales of our products are
affected by the current economic environment and corresponding effects it has on
corporate purchasing habits. Our service revenues consist of support services (primarily from customer
support, product maintenance and updates) and professional services revenues
(primarily from consulting and implementation services). Service revenue
decreased 13% to $8.8 million for the three months ended March 31, 2003 from
$10.0 million in the same period of the prior year. This decrease reflects our
continued effort to leverage our customers' use of third party integrators for
providing implementation services. Revenues from international sales were $5.9 million and $10.1 million for the
three months ended March 31, 2003 and 2002, respectively. The decrease in
international revenues in the 2003 periods was primarily a result of revenues
recognized from one existing customer in the United Kingdom in 2002. This
customer accounted for approximately $5.5 million of revenue in the first
quarter of 2002 compared to $2.7 million in the first quarter of 2003.
International revenues for the quarter-ended March 31, 2003 were approximately
32%. Cost of Revenues Cost of license revenue consists primarily of third party software
royalties, costs of product packaging and documentation, and production and
delivery costs for shipments to customers. Cost of license revenue as a
percentage of license revenue was 9.8% for the three months ended March 31, 2003
compared to 6.4% in the same period in the prior year. The increase in the first
quarter of 2003 compared to the same period in 2002 was due to greater sales of
certain licenses in the 2003 period, which have higher associated royalty rates.
We expect that our cost of license revenue as a percentage of sales will remain
relatively constant through the remainder of 2003. Cost of service revenue consists primarily of salaries and related expenses
for our customer support, implementation and training services organization and
an allocation of facility costs and system costs incurred in providing customer
support. Cost of service revenue, excluding stock-based compensation, decreased
to 26.9% of service revenue for the three months ended March 31, 2003 compared
to 39.0% for the same period in the prior year. These decreases were primarily
due to the continued shift in service revenue mix following our decision late in
the third quarter of 2001 to encourage our customers to increase their use of
third-party integrators to provide implementation services, rather than purchase
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. We anticipate that our cost of service revenue as a percentage of service
revenue will be relatively constant for the remainder of 2003. Operating Expenses Sales and Marketing. Sales and marketing expenses consist
primarily of compensation and related costs for sales and marketing personnel
and promotional expenditures, including public relations, lead-generation
programs and marketing materials. Sales and marketing expenses, excluding stock-
based compensation, decreased 27.8% to $7.4 million for the three months ended
March 31, 2003 from $10.3 million in the same period of the prior year. This
decrease was attributable primarily to the net reduction of sales positions
throughout 2002 as a result of our restructuring activities. As of March 31,
2003, we had 97 personnel in sales and marketing, compared to 127 as of March
31, 2002, a 23.6% reduction. We anticipate that sales and marketing expenses will be lower in absolute
dollars throughout 2003 compared to the same period in 2002 due to reductions in
sales positions in the third quarter of 2002, and thereafter may increase or
decrease, depending primarily on the amount of future revenues and our
assessment of market opportunities and sales channels. Research and Development. Research and development expenses consist
primarily of compensation and related costs for research and development
employees and contractors and for enhancement of existing products and quality
assurance activities. Research and development expenses, excluding stock-based
compensation, decreased 8.4% to $6.1 million for the three months ended March
31, 2003 from $6.6 million in the same period of the prior year. This decrease
was attributable to the reduction of internal research and development
positions, offset by the expenses of using international third party development
partners beginning in March 2003. As of March 31, 2003, we had 88 personnel in
research and development, compared to 143 as of March 31, 2002, a 38.4%
reduction. We anticipate that quarterly research and development expenses will remain
consistent with the first quarter of 2003, in absolute dollars, for the remainder
of 2003. Thereafter research and development expenses may increase or decrease, depending primarily on
the amount of future revenues, customer needs, and our assessment of market
demand. General and Administrative. General and administrative expenses
consist primarily of compensation and related costs for administrative
personnel, bad debt expenses, and legal, accounting and other general corporate
expenses. General and administrative expenses, excluding stock-based
compensation, decreased 16.8% to $2.7 million for the three months ended March
31, 2003 from $3.2 million in the same period of the prior year. The decrease in
expense was attributable primarily due to reductions in allocated facility
costs. There was no change in the number of general and administrative
personnel, compared to the same period in the prior year. We anticipate that general and administrative expenses will remain fairly
consistent in absolute dollars over the next few quarters and thereafter may
increase or decrease, depending primarily on the amount of future revenues and
corporate infrastructure requirements including insurance, professional
services, bad debt expense and other administrative costs. Restructuring Costs. As of March 31, 2003, $10.3 million in
restructuring liabilities remained on our unaudited condensed consolidated
balance sheet in accrued restructuring and merger costs. Cash payments for
severance and excess leased facilities during the three months ended March 31,
2003 totaled $0.7 million. Cash received from subleases charged to restructuring
expense in previous periods totaled $25,000. The following table is a summary of
restructuring payments and liabilities during the three months ended March 31,
2003 (in thousands): Amortization of Deferred Stock-Based Compensation. We are amortizing
deferred stock-based compensation on an accelerated basis by charges to
operations over the vesting period of the options, consistent with the method
described in FASB Interpretation No. 28. As of March 31, 2003, there was
approximately $6.4 million of total deferred stock-based compensation remaining
to be amortized related to warrants and past employee stock option grants. We
will amortize an additional $4.8 million of deferred stock-based compensation in
2003. We currently expect amortization of deferred stock based compensation in
the years ended December 31, 2004 and 2005 to be approximately $1.5 million and
$71,000, respectively. The following table details, by operating expense, our
amortization of stock-based compensation (in thousands): Amortization of Identifiable Intangibles. Amortization of identifiable
intangibles for each of the three-month periods ended March 31, 2003 and 2002
was $1.2 million. The amortization relates to $14.4 million of purchased
technology recorded as an intangible asset in connection with the merger with
Silknet in April 2000. This asset will be fully amortized by the end of the
second quarter of 2003. Other Income, Net Other income consists primarily of interest income earned on cash and
investments, offset by interest expense primarily relating to our line of
credit. We expect other income to fluctuate in accordance with our cash balances
as well as the prime interest rate. Provision for Income Taxes We have incurred operating losses for all periods from inception through
March 31, 2003, and therefore have not recorded a provision for income taxes. We
have recorded a valuation allowance for the full amount of our gross deferred
tax assets, as the future realization of the tax benefit is not currently
likely. Liquidity and Capital Resources As of March 31, 2003, we had $31.7 million in cash, cash equivalents and
short-term investments, compared to $32.5 million as of December 31, 2002. As of
March 31, 2003, we had a negative working capital of $4.0 million, compared to
$4.5 million as of December 31, 2002. Our operating activities used $0.8 million of cash for the three months ended
March 31, 2003, which included a $3.9 million net loss from continuing
operations offset by $2.4 million in depreciation, $1.4 million in amortization
of deferred stock-based compensation and $1.2 million in amortization of
identifiable intangibles. Operating activities also included $0.7 million in
payments relating to restructuring liabilities. Other working capital
changes totaled a net $1.2 million, resulting primarily from a $3.2 million
reduction in deferred revenue and a $2.0 million reduction in accounts payable
and accrued liabilities, partially offset by decreases in the accounts
receivable and prepaid and other assets balances. Our investing activities provided $8.8 million of cash for the three months
ended March 31, 2003, resulting from $9.9 million of sales of short-term
investments, offset by $0.9 million of purchases of short-term investments and
$0.2 million of property and equipment purchases. Our financing activities provided $39,000 in cash for the three months ended
March 31, 2003, primarily due to net proceeds of approximately $62,000 from the
issuance of common stock and warrants, offset by payments on capitalized lease
obligations. We have a line of credit totaling $5.0 million, which is collateralized by
all of our assets, bears interest at the bank's prime rate plus 0.25% (4.75% as
of March 31, 2003), and expires in November 2003 at which time the entire
balance under the line of credit will be due. Total borrowings as of March 31,
2003 were approximately $3.4 million under this line of credit. The line of
credit contains a covenant that requires us to maintain at least a $6.0 million
balance in any account with the bank. In lieu of this minimum balance covenant
we may also cash-secure the facility with funds equivalent to 115% of the
outstanding debt obligation. The line of credit also requires that we maintain
at all times a minimum of $20.0 million as short-term unrestricted cash and cash
equivalents. If we default under this line of credit, including through a
violation of any of these covenants, the entire balance under the line of credit
will become immediately due and payable. As of March 31, 2003, we were in
compliance with all covenants of the line of credit agreement. In June 2002, we entered into a non-recourse receivables purchase agreement
with a bank which provides for the sale of up to $5.0 million in certain
qualified receivables subject to an administrative fee and a discount schedule
ranging from the bank's prime rate of interest plus 0.50% to the bank's prime
rate of interest plus 1.50%. As of March 31, 2003, we had not sold any
receivables under this agreement. Future payments due under non-cancelable debt and lease obligations as of
March 31, 2003 are as follows (in thousands): We currently expect our cash and cash equivalents and short-term investments
on hand will be sufficient to meet our working capital and capital expenditure
needs for the next 12 months following March 31, 2003. Significant expected cash
outflows through the remainder of 2003 include approximately $2.0 million in
payments relating to accrued restructuring costs and approximately $1.0 million
of expenditures on property and equipment. Additionally, 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 this outsourcing effort, we reduced our research and
development department by 31 employees in the first quarter of 2003, and expect
to reduce the size of the department further in future quarters of 2003. We
signed contracts with some of these development partners in March 2003, with
expected payments in 2003 of approximately $3.0 million, primarily on a time and
materials basis but with minimum payments of $1.0 million in 2003. We expect to
sign contracts with additional development partners in future quarters of 2003.
If we experience a decrease in demand for our products from the level
experienced in the first quarter of 2003, then we would need to reduce
expenditures to a greater degree than anticipated, or raise additional funds, if
possible. Our expectations as to when we can achieve positive cash flows, and as to our
future cash balances are subject to a number of assumptions, including
assumptions regarding anticipated increases in our revenue, improvements in
general economic conditions and customer purchasing and payment patterns, many
of which are beyond our control. RISKS ASSOCIATED WITH KANA'S BUSINESS AND FUTURE OPERATING RESULTS Our future operating results may vary substantially from period to
period. The price of our common stock will fluctuate in the future, and an
investment in our common stock is subject to a variety of risks, including but
not limited to the specific risks identified below. The risks described below
are not the only ones facing our company. Additional risks not presently known
to us, or that we currently deem immaterial, may become important factors that
impair our business operations. Inevitably, some investors in our securities
will experience gains while others will experience losses depending on the
prices at which they purchase and sell securities. Prospective and existing
investors are strongly urged to carefully consider the various cautionary
statements and risks set forth in this report and our other public filings. Risks Related to Our Business Because we have a limited operating history, there is limited information
upon which you can evaluate our business. We are still in the early stages of our development, and our limited
operating history makes it difficult to evaluate our business and prospects. Any
evaluation of our business and prospects must be made in light of the risks and
uncertainties often encountered by early-stage companies in Internet-related
markets. We were incorporated in July 1996 and first recorded revenue in
February 1998. Thus, we have a limited operating history upon which you can
evaluate our business and prospects. Due to our limited operating history, it is
difficult or impossible to predict our future results of operations. For
example, we cannot forecast operating expenses based on our historical results
(or those of similar companies) because they are limited, and we are required to
forecast expenses in part on future revenue projections based on a number of
assumptions. Moreover, due to our limited operating history and evolving product
offerings, our insights into trends that may emerge and affect our business are
limited. In addition, our business is subject to a number of risks, any of which
could unexpectedly harm our results of operations. Many of these risks are
discussed in the subheadings below, and include our ability to: Our quarterly revenues and operating results may fluctuate in future
periods and we may fail to meet the expectations of investors and public market
analysts, which could cause the price of our common stock to decline. Our quarterly revenues and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter particularly because our
products and services are relatively new and our prospects are uncertain. We
believe that period-to-period comparisons of our operating results may not be
meaningful and you should not rely on these comparisons as an indication of our
future performance. If quarterly revenues or operating results fall below the
expectations of investors or public market analysts, the price of our common
stock could decline substantially. Factors that might cause quarterly
fluctuations in our operating results include the factors described under the
subheadings of this "Risks Factors" section as well as: In addition, we experience seasonality in our revenues, with the fourth
quarter of the year typically having the highest revenue for the year. We
believe that this seasonality primarily results from customer budgeting cycles.
We expect that this seasonality will continue. Customers' decisions to purchase
our products and services are discretionary and subject to their internal
budgets and purchasing processes. Due to the continuing slowdown in the general
economy, we believe that many existing and potential customers are reassessing
or reducing their planned technology and Internet-related investments and
deferring purchasing decisions. Further delays or reductions in business
spending for information technology could have a material adverse effect on our
revenues and operating results. As a result, there is increased uncertainty with
respect to our expected revenues. Our failure to complete our expected sales in any given quarter could
materially harm our operating results because of the increasingly large size of
many of our orders. Our quarterly revenues are especially subject to fluctuation because they
depend on the completion of relatively large orders for our products and related
services. The average size of our license transactions has increased in recent
periods as we have focused on larger enterprise customers and on licensing our
more comprehensive integrated products and have utilized system integrators in
our sales process. We expect the percentage of larger orders, as compared to
total orders, to continue to increase. For example, during the quarter-ended
March 31, 2002, one customer, IBM, represented 22% of our total revenues. During
the quarter-ended March 31, 2003, two customers, IBM and Highmark, represented
15% and 11%, respectively, of our total revenues. This dependence on large
orders makes our net revenue and operating results more likely to vary from
quarter to quarter, and more difficult to predict, because the loss of any
particular large order is significant. As a result, our operating results could
suffer if any large orders are delayed or canceled in any future period. In
addition, large orders, and orders obtained through the activities of system
integrators, often have longer sales cycles, increasing the difficulty of
predicting future revenues. We expect the concentration of revenues among fewer
customers to continue in the future, due to targeting sales opportunities with
larger customers who would be interested in purchasing our full suite of
products. Our sales cycle is subject to a number of significant risks, including
customers' budgetary constraints and internal acceptance reviews, over which we
have little or no control. Consequently, if sales expected from a specific
customer in a particular quarter are not realized in that quarter, we are
unlikely to be able to generate revenue from alternate sources in time to
compensate for the shortfall. As a result, and due to the relatively large size
of a typical order, a lost or delayed sale could result in revenues that are
lower than expected. Moreover, to the extent that significant sales occur
earlier than anticipated, revenues for subsequent quarters may be lower than
expected. Consequently, we face difficulty predicting the quarter in which sales
to expected customers will occur, which contributes to the uncertainty of our
future operating results. In recent periods, we have experienced an increase in
the size of our typical orders, and in the length of a typical sales cycle.
These trends may increase the uncertainty of our future operating results and
reduce our ability to anticipate our future revenues. Our expenses are generally fixed and we will not be able to reduce these
expenses quickly if we fail to meet our revenue forecasts. Most of our expenses, such as employee compensation and rent, are relatively
fixed in the short term. Moreover, our budget is based, in part, upon our
expectations regarding future revenue levels. As a result, if total revenues for
a particular quarter are below expectations, we could not proportionately reduce
operating expenses for that quarter. Accordingly, such a revenue shortfall would
have a disproportionate effect on our expected operating results for that
quarter. We may not be able to forecast our revenues accurately because our products
have a long and variable sales cycle. The long sales cycle for our products may cause license revenue and operating
results to vary significantly from period to period. To date, the sales cycle
for our products has taken anywhere from 3 to 12 months in the United States and
longer in foreign countries. Consequently, we face difficulty predicting the
quarter in which expected sales will actually occur. This contributes to
fluctuations in our future operating results. Our sales cycle has required pre-
purchase evaluation by a significant number of individuals in our customers'
organizations. Along with third parties that often jointly market our software
with us, we invest significant amounts of time and resources educating and
providing information to prospective customers regarding the use and benefits of
our products. Many of our customers evaluate our software slowly and
deliberately, depending on the specific technical capabilities of the customer,
the size of the deployment, the complexity of the customer's network
environment, and the quantity of hardware and the degree of hardware
configuration necessary to deploy our products. In the event that the present
economic downturn were to continue, the sales cycle for our products may become
longer and we may require more resources to complete sales. We have a history of losses and may not be profitable in the future and may
not be able to generate sufficient revenue to achieve and maintain
profitability. Since we began operations in 1997, our revenues have not been sufficient
to support our operations, and we have incurred substantial operating losses in
every quarter. As of March 31, 2003, our accumulated deficit was approximately
$4.2 billion, which includes approximately $2.7 billion related to goodwill
impairment charges. Our history of losses has previously caused some of our
potential customers to question our viability, which has in turn hampered our
ability to sell some of our products. Additionally, our revenue has been
affected by the increasingly uncertain economic conditions both generally and in
our market. As a result of these conditions, we have experienced and expect to
continue to experience difficulties in collecting outstanding receivables from
our customers and attracting new customers, which means that we may continue to
experience losses, even if sales of our products and services grow. Although we
have restructured our operations to reduce operating expenses, we continue to
commit a substantial investment of resources to sales and marketing, developing
new products and enhancements, and expanding our operations domestically and
internationally, and we will need to increase our revenue to achieve
profitability and positive cash flows. As a result, our revenue may decline, or
fail to grow, in future periods. Our expectations as to when we can achieve
positive cash flows, and as to our future cash balances, are subject to a number
of assumptions, including assumptions regarding improvements in general economic
conditions and customer purchasing and payment patterns, many of which are
beyond our control. We reduced the size of our professional services team in 2001 and now
customers rely more on independent third-party providers for customer services
such as product installations and support rather than purchasing those services
from us. However, if third parties do not provide the support our customers
need, we may be required to hire subcontractors to provide these professional
services. Increased use of subcontractors would harm our revenues and margins
because it costs us more to hire subcontractors to perform these services than
to provide the services ourselves. We rely on marketing, technology and distribution relationships for the sale,
installation and support of our products that may generally be terminated at any
time, and if our current and future relationships are not successful, our growth
might be limited. We rely on marketing and technology relationships with a variety of companies
that, in part, generate leads for the sale of our products. These marketing and
technology relationships include relationships with: If we cannot maintain successful marketing and technology relationships or if
we fail to enter into additional marketing and technology relationships, we
could have difficulty expanding the sales of our products and our growth might
be limited. While some of these companies do not resell or distribute our
products, we believe that many of our direct sales are the result of leads
generated by vendors of e-business and enterprise software and we expect to
continue relying heavily on sales from these relationships in future periods.
Our marketing and technology relationships are generally not documented in
writing, or are governed by agreements that can be terminated by either party
with little or no prior notice. In addition, companies with which we have
marketing, technology or distribution relationships may promote products of
several different companies including those of our competitors. If these
companies choose not to promote our products or if they develop, market or
recommend software applications that compete with our products, our business
will be harmed. In addition, we rely on distributors, value-added resellers, systems
integrators, consultants and other third-party resellers to recommend our
products and to install and support these products. Our reduction in the size of
our professional services team in 2001 increased our customers' reliance on
third parties for product installations and support. If the companies providing
these services fail to implement our products successfully for our customers, we
might be unable to complete implementation on the schedule required by the
customers and we may have increased customer dissatisfaction or difficulty
making future sales as a result. We might not be able to maintain these
relationships and enter into additional relationships that will provide timely
and cost-effective customer support and service. If we cannot maintain
successful relationships with our indirect sales channel partners around the
world, we might have difficulty expanding the sales of our products and our
international growth could be limited. If our international development partners do not provide us with adequate
support, our ability to respond to competition and customer demands would be
impaired, and our results of operations would be harmed. In January 2003, we began subcontracting a significant portion of our
software programming, quality assurance and technical documentation activities
to development partners with staffing in India and China. We have little prior
experience in outsourcing our product development work, and we cannot be sure
that this strategy will succeed or that it will not cause us difficulties in
responding to development challenges we may face. The operations of these
partners are based outside the US and therefore subject to risks distinct from
those that face US-based operations. For example, military action or political
upheaval in the host countries could force these partners to terminate the
services they are providing to us or to close their operations entirely. If
these partners fail, for any reason, to provide adequate and timely product
enhancements, updates and fixes to us, our ability to respond to customer or
competitive demands would be harmed and we would lose sales opportunities and
customers. In addition, the loss of research and development personnel
associated with this strategy will cause us to lose internal expertise, reducing
our ability to respond to these demands independently if the partners fail to
perform as required. As a result of the first phase of the strategy, in the
first quarter of 2003, we reduced the size of our research and development
department by 31 employees. We expect to reduce the size of our research and
development department further as we shift more development activities to these
development partners in future quarters of 2003. We have estimated our operating
costs for the year making various assumptions about the amount that we will need
to pay our development partners. Based on our limited history of working with
these partners, we cannot be sure that our cost estimates will prove correct.
Unanticipated increases in our operating expenses in any given quarter would
increase our net losses and could require us to obtain additional financing
sooner than expected. If we fail to enhance our direct and indirect sales channels, we will not
be able to increase revenues. In order to grow our business, we need to increase market awareness and sales
of our products and services. To achieve this goal, we need to enhance the
productivity of our direct sales force and indirect sales channels. If we fail
to do so, this failure could harm our ability to increase revenues. While
historically we have received substantially all of our revenues from direct
sales, we have increased our reliance on sales through indirect sales channels
by focusing on selling our software through systems integrators, or
"SI's". We depend on these relationships to promote our products and
drive sales, particularly in light of our reductions in direct sales personnel.
Our business depends on our ability to create and maintain relationships with
SI's and any failure to do so would impair our sales efforts and revenue
growth. If systems integrators fail to adequately promote our products, our sales and
revenue would be impaired. A significant percentage of our revenues depend on the efforts of SIs and
their recommendations of our products, and we expect an increasing percentage of
our revenues to be derived from our relationships with SIs that market and sell
our products. If SIs do not successfully market our products, our operating
results will be materially harmed. In addition, many of our direct sales are to
customers that will be relying on SIs to implement our products, and if SIs are
not familiar with our technology or able to successfully implement our products,
our operating results will be materially harmed. We expect to continue building
our network of SIs and other indirect sales channels and, if this strategy is
successful, our dependence on the efforts of these third parties for revenue
growth and customer service will increase. Our reliance on third parties for
these functions will reduce our control over such activities and reduce our
ability to perform such functions internally. If we come to rely primarily on a
single SI that subsequently terminates its relationship with us, becomes
insolvent or is acquired by another company with which we have no relationship,
or decides not to support our products, we may not be able to internally
generate sufficient revenue or increase the revenues generated by our other SI
relationships to offset the resulting lost revenues. Furthermore, SIs typically
offer our solution in combination with other products and services, some of
which may compete with our solution. SIs are not required to sell any fixed
quantities of our products, are not bound to sell our products exclusively, and
may act as indirect sales channels for our competitors. Difficulties in implementing our products could harm our revenues and
margins. We generally recognize revenue from a customer sale when persuasive evidence
of an agreement exists, the product has been delivered, the arrangement does not
involve significant customization of the software, the license fee is fixed or
determinable and collection of the fee is probable. Since the fourth quarter of
2001, we typically have not been providing a significant portion of the
implementation services for our products. Instead, our customers typically
purchase such services from third-party providers. However, some implementation
services may be purchased from us. If an arrangement requires significant
customization or implementation services from KANA, recognition of the
associated license and service revenue could be delayed. The timing of the
commencement and completion of the these services is subject to factors that may
be beyond our control, as this process requires access to the customer's
facilities and coordination with the customer's personnel after delivery of the
software. In addition, customers could delay product implementations.
Implementation typically involves working with sophisticated software, computing
and communications systems. If we experience difficulties with implementation or
do not meet project milestones in a timely manner, we could be obligated to
devote more customer support, engineering and other resources to a particular
project. Some customers may also require us to develop customized features or
capabilities. If new or existing customers have difficulty deploying our
products or require significant amounts of our professional services support or
customized features, our revenue recognition could be further delayed and our
costs could increase, causing increased variability in our operating
results. We may incur non-cash charges resulting from acquisitions and equity
issuances, which could harm our operating results. In connection with outstanding stock options and warrants to purchase shares
of our common stock, as well as other equity rights we may issue, we are
incurring and may incur substantial charges for stock-based compensation.
Accordingly, significant increases in our stock price could result in
substantial non-cash charges and variations in our results of operations. For
example, in the first quarter of 2002, we incurred a stock-based compensation
charge of approximately $4.7 million associated with warrants issued pursuant to
an equity financing agreement that was terminated. Furthermore, we will continue
to incur charges to reflect amortization and any impairment of identified
intangible assets acquired in connection with our acquisition of Silknet, and we
may make other acquisitions or issue additional warrants, shares of common stock
or other securities in the future that could result in further accounting
charges. In addition, a new standard for accounting for goodwill acquired in a
business combination has recently been adopted. This new standard requires
recognition of goodwill as an asset but does not permit amortization of
goodwill. Instead goodwill must be separately tested for impairment. As a
result, our goodwill amortization charges ceased in 2002. However, in the
future, we may incur less frequent, but potentially larger, impairment charges
related to the goodwill already recorded, as well as goodwill arising out of any
future acquisitions. For example, we performed a goodwill impairment analysis as
of June 30, 2002, which resulted in a $55.0 million impairment expense to reduce
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
2003 2002
----------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents............................. $ 30,163 $ 21,962
Short-term investments................................ 1,530 10,536
Accounts receivable, net.............................. 6,879 10,269
Prepaid expenses and other current assets............. 2,948 3,184
----------- -----------
Total current assets................................ 41,520 45,951
Restricted cash........................................ 448 448
Property and equipment, net............................ 20,169 22,293
Goodwill............................................... 7,448 7,448
Intangible assets, net................................. 253 1,453
Other assets........................................... 2,600 2,957
----------- -----------
Total assets....................................... $ 72,438 $ 80,550
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable...................... $ 3,446 $ 3,469
Accounts payable...................................... 4,532 3,908
Accrued liabilities................................... 11,249 13,881
Accrued restructuring................................. 3,109 2,834
Deferred revenue...................................... 23,201 26,392
----------- -----------
Total current liabilities............................ 45,537 50,484
Accrued restructuring, less current portion............ 7,148 8,114
----------- -----------
Total liabilities.................................. 52,685 58,598
----------- -----------
Stockholders' equity:
Common stock.......................................... 195 195
Additional paid-in capital............................ 4,272,307 4,273,029
Deferred stock-based compensation..................... (6,432) (8,602)
Accumulated other comprehensive losses................ 43 (175)
Accumulated deficit................................... (4,246,360) (4,242,495)
----------- -----------
Total stockholders' equity......................... 19,753 21,952
----------- -----------
Total liabilities and stockholders' equity......... $ 72,438 $ 80,550
=========== ===========
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three Months Ended
March 31,
--------------------
2003 2002
--------- ---------
(unaudited)
Revenues:
License........................................................ $ 9,351 $ 15,129
Service........................................................ 8,758 10,014
--------- ---------
Total revenues.................................................... 18,109 25,143
--------- ---------
Cost of revenues:
License........................................................ 918 965
Service (excluding stock-based compensation of
$103 and $383, respectively).............................. 2,362 3,907
--------- ---------
Total cost of revenues............................................ 3,280 4,872
--------- ---------
Gross profit ..................................................... 14,829 20,271
--------- ---------
Operating expenses:
Sales and marketing (excluding stock-based compensation
of $549 and $2,033, respectively)............................ 7,437 10,305
Research and development (excluding stock-based compensation
of $513 and $1,897, respectively)............................ 6,080 6,638
General and administrative (excluding stock-based compensation
of $222 and $5,574, respectively)............................ 2,680 3,220
Amortization of stock-based compensation....................... 1,387 9,887
Amortization of identifiable intangibles....................... 1,200 1,200
--------- ---------
Total operating expenses.......................................... 18,784 31,250
--------- ---------
Operating loss.................................................... (3,955) (10,979)
Other income, net................................................. 90 298
--------- ---------
Loss from operations.............................................. (3,865) (10,681)
Cumulative effect of accounting change related
to the elimination of negative goodwill......................... -- 3,901
--------- ---------
Net loss.......................................................... $ (3,865) $ (6,780)
========= =========
Basic and diluted net loss per share:
Loss from operations............................................ $ (0.17) $ (0.51)
Cumulative effect of accounting change.......................... -- 0.19
--------- ---------
Net loss........................................................ $ (0.17) $ (0.32)
========= =========
Shares used in computing basic and
diluted net loss per share...................................... 22,958 21,071
========= =========
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
March 31,
--------------------
2003 2002
--------- ---------
(unaudited)
Cash flows from operating activities:
Net loss.................................................... $ (3,865) $ (6,780)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.............................................. 2,360 2,264
Amortization of stock-based compensation.................. 1,387 9,887
Amortization of identifiable intangibles.................. 1,200 1,200
Elimination of negative goodwill.......................... -- (3,901)
Change in allowance for doubtful accounts................. -- 280
Changes in operating assets and liabilities:
Accounts receivable................................... 3,390 (3,174)
Prepaid and other current assets...................... 236 (1,485)
Other assets.......................................... 357 119
Accounts payable and accrued liabilities.............. (2,008) (8,044)
Accrued restructuring and merger...................... (691) (13,639)
Deferred revenue...................................... (3,191) 2,229
--------- ---------
Net cash used in operating activities..................... (825) (21,044)
--------- ---------
Cash flows from investing activities:
Purchases of short-term investments......................... (862) (3,969)
Sales of short-term investments............................. 9,868 2,295
Property and equipment purchases............................ (236) (2,152)
Decrease in restricted cash................................. -- 167
--------- ---------
Net cash provided by (used in) investing activities... 8,770 (3,659)
--------- ---------
Cash flows from financing activities:
Payments on capital lease obligations....................... (23) (72)
Net proceeds from issuance of common stock and warrants..... 62 33,477
Payments on stockholders' notes receivable.................. -- 591
--------- ---------
Net cash provided by financing activities............. 39 33,996
--------- ---------
Effect of exchange rate changes on cash and cash equivalents... 217 151
--------- ---------
Net increase in cash and cash equivalents...................... 8,201 9,444
Cash and cash equivalents at beginning of period............... 21,962 25,476
--------- ---------
Cash and cash equivalents at end of period..................... $ 30,163 $ 34,920
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest...................... $ 59 $ 18
========= =========
Cash paid during the period for income taxes.................. $ 4 $ 72
========= =========
Noncash activities:
Issuance of warrants to non-employees ....................... $ -- $ 4,749
========= =========
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Three Months Ended
March 31,
--------------------
2003 2002
--------- ---------
Numerator:
Loss from continuing operations before
cumulative effect of accounting change ................... $ (3,865) $ (10,681)
--------- ---------
Denominator:
Weighted-average shares of common stock outstanding ........ 22,964 21,096
Less weighted-average shares subject to repurchase ......... (6) (25)
--------- ---------
Denominator for basic and diluted calculation .............. 22,958 21,071
--------- ---------
Basic and diluted net loss per share from continuing
operations before cumulative effect of accounting change.. $ (0.17) $ (0.51)
========= =========
As of March 31,
----------------------
2003 2002
--------- -----------
Stock options and warrants ......... 9,394 6,632
Common stock subject to repurchase . 1 22
--------- -----------
9,395 6,654
========= ===========
Three Months Ended
March 31,
2003 2002
------- -------
Cost of service ...................... $ 103 $ 383
Sales and marketing .................. 549 2,033
Research and development ............. 513 1,897
General and administrative ........... 222 5,574
------- -------
Total ................................ $ 1,387 $ 9,887
======= =======
Three Months Ended March 31,
-----------------------
2003 2002
--------- ---------
As Reported:
Net loss......................................... $ (3,865) $ (6,780)
Basic and diluted net loss per share............. $ (0.17) $ (0.32)
Compensation expense included in net loss (1)...... $ 1,387 $ 9,887
Compensation expense if FAS 123 had been adopted (1) $ 1,200 $ 19,968
Pro Forma:
Net loss......................................... $ (3,678) $ (16,861)
Basic and diluted net loss per share............. $ (0.16) $ (0.80)
Restructuring Restructuring
Accrual at Sublease Accrual at
December 31, Payments Payments March 31,
2002 Made Received 2003
------------ -------- ----------- ------------
Severance.......... $ 218 $ (33) $ -- $ 185
Facilities......... 10,731 (684) 25 10,072
------------ -------- ----------- ------------
Total ............. $ 10,949 $ (717) $ 25 $ 10,257
============ ======== =========== ============
Three Months Ended
March 31,
----------------------
2003 2002
--------- -----------
United States ...................... $ 12,221 $ 15,088
United Kingdom...................... 3,451 7,338
Other .............................. 2,437 2,717
--------- -----------
$ 18,109 $ 25,143
========= ===========
Obligations Non-
Under cancelable
Line of Capital Operating
Year Ending December 31, Credit Leases (1) Leases (2) Total
-------------------------- --------- ---------- ---------- ---------
2003....................... $ 3,427 $ 20 $ 3,962 $ 7,409
2004....................... -- -- 4,918 4,918
2005....................... -- -- 4,087 4,087
2006....................... -- -- 3,830 3,830
2007....................... -- -- 3,096 3,096
2008 & Thereafter.......... -- -- 6,781 6,781
--------- ---------- ---------- ---------
Total mimimum lease payment $ 3,427 $ 20 $ 26,674 $ 30,121
========= ========== ========== =========
(1) Throughout the remainder of 2003, the Company will make interest payments
in relation to the obligations under capital
leases; this interest component is included in the commitment schedule
above.
(2) Includes leases previously subject to abandonment and included in the
restructuring charge.
Three Months Ended
March 31,
---------------------------
2003 2002
Revenues: ------------ ------------
License.............................. $ 9,351 52 % $15,129 60 %
Service.............................. 8,758 48 10,014 40
------- ---- ------- ----
Total revenues............................ 18,109 100 % 25,143 100 %
------- ---- ------- ----
Cost of revenues:
License.............................. 918 5 % 965 4 %
Service*............................. 2,362 13 3,907 15
------- ---- ------- ----
Total cost of revenues.................... 3,280 18 % 4,872 19 %
------- ---- ------- ----
Gross profit.............................. 14,829 82 % 20,271 81 %
------- ---- ------- ----
Selected operating expenses*:
Sales and marketing.................. 7,437 41 % 10,305 41 %
Research and development............. 6,080 34 % 6,638 26 %
General and administrative........... 2,680 15 % 3,220 13 %
* Excludes amortization of deferred stock based compensation
Restructuring Restructuring
Accrual at Sublease Accrual at
December 31, Payments Payments March 31,
2002 Made Received 2003
------------ -------- ----------- ------------
Severance.......... $ 218 $ (33) $ -- $ 185
Facilities......... 10,731 (684) 25 10,072
------------ -------- ----------- ------------
Total ............. $ 10,949 $ (717) $ 25 $ 10,257
============ ======== =========== ============
Three Months Ended
March 31,
2003 2002
------- -------
Cost of service ...................... $ 103 $ 383
Sales and marketing .................. 549 2,033
Research and development ............. 513 1,897
General and administrative ........... 222 5,574
------- -------
Total ................................ $ 1,387 $ 9,887
======= =======
Obligations Non-
Under cancelable
Line of Capital Operating
Year Ending December 31, Credit Leases (1) Leases (2) Total
-------------------------- --------- ---------- ---------- ---------
2003....................... $ 3,427 $ 20 $ 3,962 $ 7,409
2004....................... -- -- 4,918 4,918
2005....................... -- -- 4,087 4,087
2006....................... -- -- 3,830 3,830
2007....................... -- -- 3,096 3,096
2008 & Thereafter.......... -- -- 6,781 6,781
--------- ---------- ---------- ---------
Total mimimum lease payment $ 3,427 $ 20 $ 26,674 $ 30,121
========= ========== ========== =========
(1) Throughout the remainder of 2003, the Company will make interest payments
in relation to the obligations under capital
leases; this interest component is included in the commitment schedule
above.
(2) Includes leases previously subject to abandonment and included in the
restructuring charge.