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 June 30, 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 July 31, 2003, approximately 23,364,254 shares of the Registrant's Common Stock, $0.001 par value, were outstanding.
KANA Software, Inc.
Form 10-Q
Quarter Ended June 30, 2003
Index
| PART I. FINANCIAL INFORMATION | Page No. |
| Item 1. Financial Statements |
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Condensed Consolidated Balance Sheets at June 30, 2003 and December 31, 2002 |
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Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2003 and 2002 |
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Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 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. 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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Part I: Financial Information
Item 1: Financial Statements
KANA Software, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
2003 2002
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(unaudited)
ASSETS
Current assets:
Cash and cash equivalents............................. $ 25,703 $ 21,962
Short-term investments................................ 64 10,536
Accounts receivable, net.............................. 5,365 10,269
Prepaid expenses and other current assets............. 2,353 3,184
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Total current assets................................ 33,485 45,951
Restricted cash........................................ 462 448
Property and equipment, net............................ 18,237 22,293
Goodwill............................................... 7,448 7,448
Intangible assets, net................................. -- 1,453
Other assets........................................... 2,619 2,957
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Total assets....................................... $ 62,251 $ 80,550
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable...................... $ 3,442 $ 3,469
Accounts payable...................................... 4,378 3,908
Accrued liabilities................................... 11,585 13,881
Accrued restructuring................................. 3,716 2,834
Deferred revenue...................................... 20,886 26,392
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Total current liabilities............................ 44,007 50,484
Accrued restructuring, less current portion............ 5,881 8,114
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Total liabilities.................................. 49,888 58,598
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Stockholders' equity:
Common stock.......................................... 195 195
Additional paid-in capital............................ 4,272,812 4,273,029
Deferred stock-based compensation..................... (4,650) (8,602)
Accumulated other comprehensive income (loss)......... 260 (175)
Accumulated deficit................................... (4,256,254) (4,242,495)
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Total stockholders' equity......................... 12,363 21,952
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Total liabilities and stockholders' equity......... $ 62,251 $ 80,550
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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. The Company believes that its existing cash balances and anticipated cash
flows from operations will be sufficient to meet its anticipated capital
requirements for the next 12 months. However, failure to increase future orders
and revenues beyond the level achieved in the second quarter of 2003 might
require the Company to seek additional capital to meet its working capital needs
during or beyond the next twelve months if the Company is unable to reduce
expenses to the degree necessary to avoid incurring losses. If the Company
has a need for additional capital resources, it may be required to sell
additional equity or debt securities, secure additional lines of credit or
obtain other third party financing. The timing and amount of such capital
requirements cannot be determined at this time and will depend on a number of
factors, including demand for the Company's products and services. There can be
no assurance that such additional financing will be available on satisfactory
terms when needed, if at all. Failure to raise such additional financing,
if needed, may result in the Company not being able to achieve its long-term
business objectives. Note 2. Recent Accounting Pronouncements In January 2003, the Financial Accounting Standards Board ("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. FIN 46 applies immediately to
variable interest entities created after January 31, 2003, and applies in the
first year or interim period beginning after June 15, 2003 to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. The adoption of this interpretation did not have a
material impact on the Company's 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. In May 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." This statement establishes
standards for how an issuer classifies and measures in its statement of
financial position certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies an obligation of the
issuer. This statement is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of nonpublic entities. It is to be implemented
by reporting the cumulative effect of a change in an accounting principle for
financial instruments created before the issuance date of the statement and
still existing at the beginning of the interim period of adoption. The Company
has not determined the impact that the adoption of SFAS No. 150 will have on its
financial position or results of operations. Note 3. 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, shares of common stock issuable upon
exercise of options and warrants deemed outstanding 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 $21.37 and $76.88 as of June 30, 2003 and 2002, respectively. Note 4. Comprehensive Loss Comprehensive loss comprises net loss and foreign currency translation
adjustments. Comprehensive loss was $9.7 million
and $81.5 million for the three months
ended June 30, 2003 and 2002, respectively. Comprehensive
loss was $13.3 million and $88.2 million for the six months ended June 30, 2003
and 2002, respectively. Note 5. 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
June 30, 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 with an assumed interest rate of 6.0% and volatility of 100%,
which resulted 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 as an operating expense. 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 Accenture an additional warrant to
purchase up to 150,000 shares of common stock pursuant to a warrant purchase
agreement in connection with its global strategic alliance. The warrant was
fully vested and exercisable as of September 2001. The warrant was valued using
the Black-Scholes model with an assumed interest rate of 4.9% and volatility of
100%, which resulted 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 September 2001, the Company issued to a customer a warrant to purchase up
to 5,000 shares of common stock 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 with
an assumed interest rate of 4.9% and volatility of 100%, which resulted 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 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 with an assumed interest rate of 6.0% and volatility of 100%, which
resulted 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 with an
assumed interest rate of 6.0% and volatility of 100%, which
resulted in a charge of approximately $137,000 which was accounted for as
a reduction to the Company's restructuring liability in the fourth quarter of
2002. (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. The Company accounts for stock-based compensation arrangements with non-
employees in accordance with EITF Abstract No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services. Accordingly, unvested options and
warrants held by non-employees are subject to revaluation at each balance sheet
date based on the then current fair market value. 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 June 30, 2003, there was approximately $4.7 million of total deferred
stock-based compensation remaining to be amortized related to warrants and past
employee stock option grants. The Company currently expects amortization of
deferred stock-based compensation in the years ending December 31, 2004 and 2005
to 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 SFAS No. 148,
"Accounting for Stock-Based Compensation, Transition and Disclosure". SFAS No.
148 provides alternative methods of transition for a voluntary change to the
fair-value based method of accounting for stock-based compensation. The
following table presents pro forma amounts had the Company adopted SFAS No. 123,
accounting for stock-based compensation using the fair-value based method (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,
Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans ("FIN 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 6. 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. The Company 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 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. In July 2003, KANA decided to join in a settlement
negotiated by representatives of a coalition of issuers named as defendants in
this action and their insurers. Although KANA believes that the plaintiffs'
claims have no merit, it has decided to accept the settlement proposal to avoid
the cost and distraction of continued litigation. Because the settlement will be
funded entirely by KANA's insurers, KANA does not believe that the settlement
will have any effect on its financial condition, results of operations or cash
flows. The proposed settlement agreement is subject to final approval by the
court. Should the court fail to approve the settlement agreement, KANA believes
it has meritorious defenses to these claims and would 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 assumed defense of
this case on behalf of Ameritrade and settled the matter with Tumbleweed in the
second quarter of 2003. The amount of the settlement was consistent with the
amounts accrued by KANA. 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. KANA 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. The ultimate outcome of any litigation is uncertain, and either unfavorable
or favorable outcomes could have a material negative impact on KANA's results of
operations, consolidated balance sheet and cash flows, due to defense costs,
diversion of management resources and other factors. Guarantees. The Company 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 June 30, 2003 is $1.2 million. Indemnifications. The Company 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 the Company's 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. Accordingly, the Company has no liabilities recorded for these
agreements as of June 30, 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 such amounts. 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 June 30,
2003. 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 June 30, 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 transitioning these activities offshore, the Company
reduced its research and development department by 53 employees in the first
half of 2003, and expects to continue to transition these activities in future
quarters of 2003. The Company signed contracts with some of these development
partners in 2003, with expected payments in 2003 of approximately $4.0 million,
primarily on a time and materials basis but with minimum payments of $1.0
million in 2003. The Company expects to incur additional obligations with
respect to this outsourcing arrangement in the second half of 2003. Note 7. 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 affect the Company's statement of
operations in the period in which such determination is made. As of June 30, 2003, $9.6 million in restructuring liabilities remained on
the Company's consolidated balance sheet in accrued restructuring and merger
costs. Cash payments for severance and excess leased facilities during the six
months ended June 30, 2003
totaled $1.6 million. Cash received during the six months ended June 30,
2003 from subleases and sales of property charged to restructuring expense in
previous periods totaled $228,000. The following table provides a summary of
restructuring payments and liabilities during the first six months of 2003 (in
thousands): Note 8. Goodwill and Purchased Intangible Assets On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets. 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 June 30, 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 $0.3
million and $1.5 million for the three months and six months ended June 30,
2003. The purchased intangible assets have been fully amortized as of 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 and six months ended June 30, 2003 and 2002 are as follows
(in thousands): (1) Represents sales to customers located primarily in Europe. During the three and six months ended June 30, 2003, one customer represented
5% and 11%, respectively, of total revenues. During the three and six months
ended June 30, 2002, the same customer represented 2% and 14%, respectively, of
total revenues. Note 10. Notes Payable and Commitments 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% (4.5% as
of June 30, 2003), and expires in November 2003, at which time the entire
balance under the line of credit will be due. Total borrowings as of June 30,
2003 were approximately $3.4 million under this line of credit. As of June 30,
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 which expired on June 27, 2003. Future payments due under the Company's debt and lease obligations as of June
30, 2003 are as follows (in thousands): In addition to these debt and lease obligations, 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 transitioning these activities offshore, the Company
reduced its research and development department by 53 employees in the first
half of 2003, and expects to continue to transition these activities in future
quarters of 2003. The Company signed contracts with some of these development
partners in 2003, with expected payments in 2003 of approximately $4.0 million,
primarily on a time and materials basis but with minimum payments of $1.0
million in 2003. The Company expects to incur additional obligations with
respect to this outsourcing arrangement in the second half of 2003. Note 11. Discontinued Operations As of the quarter ended June 30, 2001, the Company adopted a plan to
discontinue the KANA Online business. The Company no longer seeks new business
but continued to service all ongoing contractual obligations it had to its
existing customers through April 2002. Accordingly, KANA Online was reported as
a discontinued operation for the three and six months ended June 30, 2002 and
2001. The estimated loss on the disposal of KANA Online was $3.7 million as of
June 30, 2001, consisting of an estimated loss on disposal of the assets of $2.6
million and a provision of $1.1 million for the anticipated operating losses
during the phase-out period. The loss on disposal was recorded in the second
quarter of 2001 and adjusted in the second quarter of 2002, resulting in a gain
of $0.4 million. This operation has been presented as a discontinued operation
for all periods presented. 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,
many of which are beyond our control, are difficult to predict and could cause
actual results to differ materially from" those expressed or forecasted in
the forward-looking statements. These risks and uncertainties include 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 and six months ended June 30,
2003, we recorded a net loss of $9.9 million and $13.8 million, respectively.
We expect to experience decreased operating losses for the remainder of 2003
compared to the second quarter of 2003, as a result of our cost savings efforts,
as well as personnel and facility cost reductions in 2003. However, such
expectations 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. As of June 30, 2003, we had 292 full-time employees, which
represents a decrease from 313 employees at March 31, 2003. 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 June 30, 2003, we had $12.6 million of capitalized costs of
internal use software, net of $2.5 million accumulated depreciation. 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 June 30, 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. 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 June 30, 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 and Six Months Ended June 30, 2003 and 2002 Revenues License revenue decreased 62% and 47%, respectively, for the three and
six months ended June 30, 2003 compared to the same periods in the prior year.
License revenue constituted 26% of total revenues during the three months ended
June 30, 2003, compared to 48% for the same period last year. For the six months
ended June 30, 2003, license revenues constituted 42% of total revenues,
compared to 55% for the same period last year. These decreases were the result
of fewer license transactions in 2003 compared to 2002. We believe the slowdown
in sales was primarily due to lengthening sales cycles in the current uncertain
economic environment. We anticipate license revenue will increase as a
percentage of total revenue in the second half of 2003 as a result of our
continued effort to focus on sales of licenses, and plan to continue to leverage
third party integrators for providing implementation services to our customers.
We expect this shift towards a greater proportion of license fees in our revenue
mix to also improve our overall gross margin percentage in the second half of
2003 compared to the second half of 2002. While we are focused on increasing
license revenue throughout the remainder of 2003, we are unable to predict such
revenue with any degree of accuracy as 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 service (primarily from customer
support, product maintenance and updates) and professional services revenue
(primarily from consulting and implementation services). Service revenue
remained flat for the three months and decreased 7% for the six months ended
June 30, 2003 compared to the same periods in the prior year. The decrease
during the six-month period resulted primarily from our shift to leverage third
party integrators for providing implementation services to our customers. Revenue from international sales was $3.0 million and $4.0 million for the
three months ended June 30, 2003 and 2002, respectively, and $8.9 million and
$14.1 million for the six months ended June 30, 2003 and 2002, respectively. We
believe the decrease in international revenues in 2003 was primarily a result of
lengthening sales cycles and decreased information technology spending by both
our customers and potential customers. For the remainder of 2003, we expect
international revenue, as a percentage of overall revenue, to remain relatively
consistent with the first half of 2003. Cost of Revenues Cost of license revenue consists primarily of third party software
royalties, and to a lesser extent, 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 16% for the three months ended
June 30, 2003 compared to 13% in the same period in the prior year. For the six
months ended June 30, 2003, cost of license revenue as a percentage of license
revenue was 11%, compared to 9% in the same period in the prior year.
The increase in cost of license revenues in the 2003 periods
compared to the same periods in 2002 was due to the decrease in license revenue
in 2003 while certain royalty expenses remain constant due to the fixed nature
of some of the fees in our royalty agreements. Additionally, there was a change
in the product mix, with a greater proportion of sales in 2003 of KANA Response
product licenses 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 decreased to 31% of service revenue for the
three months ended June 30, 2003 compared to 224% for the same period in the
prior year. For the six months ended June 30, 2003, cost of service revenue
decreased to 29% of service revenue, compared to 126% for the same period in the
prior year. These decreases were primarily due to the $15.6 million charge
relating to an amendment executed in August 2002, relating to an original
contract with a customer - see discussion under "-Critical Accounting
Policies-Reserve for Loss Contract". In addition, we experienced a 61%
decrease in implementation and training costs in the 2003 periods primarily as a
result of a 26% year over year decrease in personnel in these departments. 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 decreased 24% for
the three months and 26% for the six months ended June 30, 2003 compared to the
same periods in the prior year. This decrease was attributable primarily to the
net reduction of sales positions throughout 2003 as a result of our
restructuring activities in prior years. As of June 30, 2003, we had 95
personnel in sales and marketing, compared to 135 as of June 30, 2002, a 29.6%
reduction. We anticipate that sales and marketing expenses will remain relatively
constant in absolute dollars throughout the second half of 2003 compared to the
same period in 2002. Thereafter, sales and marketing expenses may increase or
decrease, depending primarily on the amount of future revenues and our
assessment of market opportunities and sales channels. Research and Development. Research and development expenses consist
primarily of compensation and related costs for research and development
employees and contractors and for enhancement of existing products and quality
assurance activities. Research and development expenses decreased by 9% for the
three and six months ended June 30, 2003 compared to the same periods in the
prior year. These decreases were attributable to the
transitioning of research, development and quality assurance activities to our
international third party development partners beginning in March 2003. As of
June 30, 2003, we had 76 personnel in research and development, compared to 140
as of June 30, 2002, a 45.7% reduction. We anticipate that quarterly research and development expenses will decrease
in absolute dollars throughout the remainder of 2003 as a result of further
transitioning research, development and quality assurance activities to our
development partners. 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 decreased 12% for the three months
and 14% for the six months ended June 30, 2003 compared to the same periods in
the prior year. The decrease in expense was primarily attributable to a
reduction of approximately $750,000 in bad debt expense in the first half of
2003. 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 June 30, 2003, $9.6 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 six months ended June 30, 2003
totaled $1.6 million. Cash received from subleases charged to restructuring
expense in previous periods totaled $0.2 million. The following table is a
summary of restructuring payments and liabilities during the six months ended
June 30, 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 FIN 28. As of June 30, 2003, there was approximately $4.7 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
$3.0 million of deferred stock-based compensation in 2003. We currently expect
amortization of deferred stock based compensation in the years ending December
31, 2004 and 2005 to be approximately $1.5 million and $71,000, respectively.
Amortization may be reduced in future periods to the extent employees are
terminated prior to vesting. The following table details, by operating expense,
our amortization of stock-based compensation (in thousands): Amortization of Identifiable Intangibles. Amortization of identifiable
intangibles for the three months ended June 30, 2003 was $0.3 million compared
to $1.2 million in the same period in the prior year. Amortization for the six
months ended June 30, 2003 was $1.5 million compared to $2.4 million in the same
period in the prior year. The amortization recorded in the current and prior
year relates to $14.4 million of purchased technology recorded as an intangible
asset in connection with the merger with Silknet. The decrease in amortization
over the same periods in the prior year is a result of us completing the
amortization of purchased intangibles in April 2003. As a result of our
adoption of SFAS No. 142, effective January 1, 2002, goodwill is no longer
amortized, but is tested for impairment under certain circumstances and written
down when impaired. No such indicators have occurred during the six months ended
June 30, 2003. Goodwill Impairment. On January 1, 2002, we adopted SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS No. 142 requires goodwill to
be tested for impairment under certain circumstances and written down when
impaired. SFAS No. 142 requires purchased intangible assets other than goodwill
to be amortized over their useful lives unless these lives are determined to be
indefinite. Under the transition provisions of SFAS No. 142, there was no
goodwill impairment at January 1, 2002 based upon our analysis 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 cash flows in future quarters. We
used relevant market data, including KANA's market capitalization during the
period following the revision of estimates, to calculate an estimated fair value
and the resulting goodwill impairment. The estimated fair value was compared to
the corresponding carrying value of goodwill at June 30, 2002, which resulted in
a reduction of goodwill as of June 30, 2002 by $55.0 million. The remaining
goodwill balance was approximately $7.4 million at June 30, 2003. 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, 2003. Any further impairment loss could have a material adverse impact on
our financial condition and results of operations. 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
June 30, 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 more likely than not
to occur. Cumulative Effect of Accounting Change 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 six months ended June 30,
2002. Liquidity and Capital Resources As of June 30, 2003, we had $25.8 million in cash, cash equivalents and
short-term investments, compared to $32.5 million at December 31, 2002.
As of June 30, 2003, we had a negative working capital of $10.5
million, compared to negative $4.5 million as of December 31, 2002. Our operating activities used $7.3 million of cash for the six months ended
June 30, 2003, which included a $13.8 million net loss from continuing
operations offset by non-cash charges of $4.5 million in depreciation, $3.1
million in amortization of deferred stock-based compensation and $1.5 million in
amortization of identifiable intangibles. Operating activities also included
$1.4 million in payments relating to restructuring liabilities. Other working
capital changes totaled a net $1.3 million, resulting primarily from a $7.4
million decrease in accounts receivable, offset by $5.5 million reduction in
deferred revenue and a $1.8 million reduction in accounts payable and accrued
liabilities. Our investing activities provided $10.0 million of cash for the six months
ended June 30, 2003, resulting from $11.7 million of maturities of short-term
investments, offset by $1.3 million of purchases of short-term investments and
$0.5 million of property and equipment purchases. Upon maturity of our
investments, we transferred the funds to cash and cash equivalents. Our financing activities provided $0.6 million in cash for the six months
ended June 30, 2003, primarily due to net proceeds of approximately $0.6 from
the issuance of common stock pursuant to our employee incentive plans. 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% (4.5% as of June 30,
2003), and expires in November 2003 at which time the entire balance under the
line of credit will be due. Total borrowings as of June 30, 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 $8.0 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 June 30, 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 June 30, 2003, we had not sold any
receivables under this agreement. Future payments due under our non-cancelable debt and lease obligations as of
June 30, 2003 are as follows (in thousands): In addition to those described in the table above, our significant expected
cash outflows through the remainder of 2003 include approximately $1.7 million
in payments relating to accrued restructuring costs and approximately $0.7
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 transitioning these activities
offshore, we reduced our research and development department by 53 employees in
the first half of 2003, and expect to continue to transition these activities in
future quarters of 2003. We signed contracts with some of these development
partners in March 2003, with expected payments in 2003 of approximately $4.0
million, primarily on a time and materials basis but with minimum payments of
$1.0 million in 2003. If we experience a decrease in demand for our products
from the level experienced in the first half of 2003, then we would need to
reduce expenditures to a greater degree than anticipated, or raise additional
funds, if possible. While we believe that our existing cash balances and anticipated cash flows
from operations will be sufficient to meet our anticipated capital requirements
for the next 12 months, failure to increase future orders and revenues beyond
the level achieved in the second quarter of 2003 would require us to seek
additional capital to meet our working capital needs during or beyond the next
twelve months if we are unable to reduce expenses to the degree necessary to
avoid incurring losses. If we have a need for additional capital resources, we
may be required to sell additional equity or debt securities, secure additional
lines of credit or obtain other third party financing. The timing and amount of
such capital requirements cannot be determined at this time and will depend on a
number of factors, including demand for our products and services. There
can be no assurance that such additional financing will be available on
satisfactory terms when needed, if at all. Failure to raise such additional
financing, if needed, may result in us not being able to achieve our long-term
business objectives. To the extent that additional capital is raised through the
sale of additional equity or convertible debt securities, the issuance of such
securities would result in additional dilution to our shareholders.
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. 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 recently-established companies
in Internet-related markets. We first recorded revenue in February 1998 and our
revenue mix and operating structure have changed substantially since then. 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 accurately
forecast operating expenses based on our historical results (or those of similar
companies) because historical results are limited, and we 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. As a result, 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: 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
software 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 in future quarters. For example, during
the six months ended June 30, 2003, one customer, IBM, represented 11% of our
total revenues. During the six months ended June 30, 2002, IBM represented 14%
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 our efforts to target 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 forecast 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. If the present economic downturn
continues, 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 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 June 30, 2003, our accumulated deficit was approximately
$4.3 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. 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. If our operations require more cash than anticipated, failure to obtain
needed financing could affect our ability to maintain current operations and
pursue future growth, and the terms of any financing we obtain may impair the
rights of our existing stockholders. In the future, we may be required to seek additional financing to fund our
operations or growth. Our operating activities used $42.2 million of cash in
2002 and $7.3 million of cash in the six months ended June 30, 2003. Failure to
increase future orders and revenues beyond the level achieved in the second
quarter of 2003 would require us to seek additional capital to meet its working
capital needs if we are unable to reduce expenses to the degree necessary to
avoid incurring losses. Factors such as the commercial success of our
existing products and services, the timing and success of any new products and
services, the progress of our research and development efforts, our results of
operations, the status of competitive products and services, and the timing and
success of potential strategic alliances or potential opportunities to acquire
or sell technologies or assets may require us to seek additional funding sooner
than we expect. In the event that we require additional cash, we may not be able
to secure additional financing on terms that are acceptable to us, especially in
the uncertain market climate, and we may not be successful in implementing or
negotiating such other arrangements to improve our cash position. If we raise
additional funds through the issuance of equity or convertible debt securities,
the percentage ownership of our stockholders would be reduced and the securities
we issue might have rights, preferences and privileges senior to those of our
current stockholders. If adequate funds were not available on acceptable terms,
our ability to achieve or sustain positive cash flows, maintain current
operations, fund any potential expansion, take advantage of unanticipated
opportunities, develop or enhance products or services, or otherwise respond to
competitive pressures would be significantly limited. 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, among other things, generate leads for the sale of our products and
provide our customers with implementation and ongoing support. These include
relationships with: If we cannot maintain successful marketing and technology relationships or if
we fail to enter into additional such 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, we might have
difficulty expanding the sales of our products and our growth could be
limited. Our efforts to outsource service and development functions could result in
unexpected cost increases. For example, the reductions to our professional
services team in 2001 shifted responsibility for customer services such as
product installations and support to independent third-party providers. If such
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 margins because it costs us more to hire
subcontractors to perform these services than to provide the services
ourselves. If systems integrators fail to adequately promote our products, our sales
and revenue would be impaired. A significant percenta
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(unaudited)
Revenues:
License........................................................ $ 3,183 $ 8,309 $ 12,534 $ 23,438
Service........................................................ 8,872 8,881 17,630 18,895
--------- --------- --------- ---------
Total revenues.................................................... 12,055 17,190 30,164 42,333
--------- --------- --------- ---------
Cost of revenues:
License........................................................ 507 1,056 1,425 2,021
Service (excluding stock-based compensation of
$124, $226, $227 and $609, respectively).................. 2,708 19,891 5,070 23,798
--------- --------- --------- ---------
Total cost of revenues............................................ 3,215 20,947 6,495 25,819
--------- --------- --------- ---------
Gross profit (loss)............................................... 8,840 (3,757) 23,669 16,514
--------- --------- --------- ---------
Operating expenses:
Sales and marketing (excluding stock-based compensation
of $664, $1,203, $1,214 and $3,236, respectively)............ 7,887 10,395 15,324 20,700
Research and development (excluding stock-based compensation
of $621, $1,123, $1,134 and $3,020, respectively)............ 5,943 6,512 12,023 13,150
General and administrative (excluding stock-based compensation
of $269, $489, $490 and $6,063, respectively)................ 2,990 3,383 5,670 6,603
Amortization of stock-based compensation....................... 1,678 3,041 3,065 12,928
Amortization of identifiable intangibles....................... 253 1,200 1,453 2,400
Goodwill impairment............................................ -- 55,000 -- 55,000
--------- --------- --------- ---------
Total operating expenses.......................................... 18,751 79,531 37,535 110,781
--------- --------- --------- ---------
Operating loss.................................................... (9,911) (83,288) (13,866) (94,267)
Other income, net................................................. 17 297 107 595
--------- --------- --------- ---------
Loss from continuing operations................................... (9,894) (82,991) (13,759) (93,672)
Gain on disposal of discontinued operation........................ -- 381 -- 381
Cumulative effect of accounting change related
to the elimination of negative goodwill......................... -- -- -- 3,901
--------- --------- --------- ---------
Net loss.......................................................... $ (9,894) $ (82,610) $ (13,759) $ (89,390)
========= ========= ========= =========
Basic and diluted net loss per share:
Loss from continuing operations................................. $ (0.43) $ (3.65) $ (0.60) $ (4.27)
Income from discontinued operation.............................. -- 0.02 -- 0.02
Cumulative effect of accounting change.......................... -- -- -- 0.17
--------- --------- --------- ---------
Net loss........................................................ $ (0.43) $ (3.63) $ (0.60) $ (4.08)
========= ========= ========= =========
Shares used in computing basic and
diluted net loss per share...................................... 23,201 22,762 23,088 21,921
========= ========= ========= =========
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
June 30,
----------------------
2003 2002
--------- -----------
(unaudited)
Cash flows from operating activities:
Net loss.................................................... $ (13,759) $ (89,390)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.............................................. 4,522 4,486
Amortization of stock-based compensation.................. 3,065 12,928
Amortization of identifiable intangibles.................. 1,453 2,400
Goodwill impairment....................................... -- 55,000
Elimination of negative goodwill.......................... -- (3,901)
Other non-cash charges.................................... -- 212
Change in allowance for doubtful accounts................. (2,500) (72)
Changes in operating assets and liabilities:
Accounts receivable................................... 7,404 (1,200)
Prepaid and other current assets...................... 831 1,830
Other assets.......................................... 338 157
Accounts payable and accrued liabilities.............. (1,826) 2,317
Accrued restructuring and merger...................... (1,351) (15,282)
Deferred revenue...................................... (5,506) 8,712
--------- -----------
Net cash used in operating activities..................... (7,329) (21,803)
--------- -----------
Cash flows from investing activities:
Purchases of short-term investments......................... (1,267) (33,670)
Sales of short-term investments............................. 11,739 22,186
Property and equipment purchases............................ (466) (7,658)
Restricted cash............................................. (14) 2,167
--------- -----------
Net cash provided by (used in) investing activities... 9,992 (16,975)
--------- -----------
Cash flows from financing activities:
Payments on capital lease obligations....................... (27) (110)
Net proceeds from issuance of common stock and warrants..... 674 33,409
Payments on stockholders' notes receivable.................. -- 606
--------- -----------
Net cash provided by financing activities............. 647 33,905
--------- -----------
Effect of exchange rate changes on cash and cash equivalents... 431 278
--------- -----------
Net increase (decrease) in cash and cash equivalents........... 3,741 (4,595)
Cash and cash equivalents at beginning of period............... 21,962 25,476
--------- -----------
Cash and cash equivalents at end of period..................... $ 25,703 $ 20,881
========= ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest...................... $ 99 $ 41
========= ===========
Cash paid during the period for income taxes.................. $ 53 $ 195
========= ===========
Noncash activities:
Issuance of warrants to non-employees ....................... $ -- $ 4,749
========= ===========
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------- ----------
2003 2002 2003 2002
--------- --------- -------- --------
Numerator:
Loss from continuing operations before
cumulative effect of accounting change ................... $ (9,894) $ (82,991) $(13,759) $ (93,672)
--------- --------- -------- --------
Denominator:
Weighted-average shares of common stock outstanding ........ 23,201 22,781 23,094 21,943
Less: weighted-average shares subject to repurchase ........ -- (19) (6) (22)
--------- --------- -------- --------
Denominator for basic and diluted calculation .............. 23,201 22,762 23,088 21,921
--------- --------- -------- --------
Basic and diluted net loss per share from continuing
operations before cumulative effect of accounting change.. $ (0.43) $ (3.65) $ (0.60) $ (4.27)
========= ========= ======== ========
As of June 30,
----------------------
2003 2002
--------- -----------
Stock options and warrants ........... 8,849 7,511
Common stock subject to repurchase ... -- 16
--------- -----------
8,849 7,527
========= ===========
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
------- ------- ------- -------
Cost of service ...................... $ 124 $ 226 $ 227 $ 609
Sales and marketing .................. 664 1,203 1,214 3,236
Research and development ............. 621 1,123 1,134 3,020
General and administrative ........... 269 489 490 6,063
------- ------- ------- -------
Total ................................ $ 1,678 $ 3,041 $ 3,065 $12,928
======= ======= ======= =======
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- --------------------
2003 2002 2003 2002
--------- --------- --------- ---------
As Reported:
Net loss............................................ $ (9,894) $ (82,610) $ (13,759) $ (89,390)
Basic and diluted net loss per share................ $ (0.43) $ (3.63) $ (0.60) $ (4.08)
Compensation expense included in net loss (1)......... $ 1,678 $ 3,041 $ 3,065 $ 12,928
Compensation expense if FAS 123 had been adopted (1).. $ (3,179) $ (12,895) $ (4,379) $ (32,863)
Pro Forma:
Net loss............................................ $ (11,395) $ (92,464) $ (15,073) $(109,325)
Basic and diluted net loss per share................ $ (0.49) $ (4.06) $ (0.65) $ (4.99)
Restructuring Restructuring
Accrual at Sublease Accrual at
December 31, Payments Payments June 30,
2002 Made Received 2003
------------ -------- ----------- ------------
Severance.......... $ 217 $ (32) $ -- $ 185
Facilities......... 10,731 (1,547) 228 9,412
------------ -------- ----------- ------------
Total ............. $ 10,948 $ (1,579) $ 228 $ 9,597
============ ======== =========== ============
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
2003 2002 2003 2002
--------- ----------- ---------- ---------
United States ...................... $ 9,063 $ 13,262 $ 21,284 $ 28,253
United Kingdom...................... 1,245 1,117 4,696 8,455
Other (1) .......................... 1,747 2,811 4,184 5,625
--------- ----------- ---------- ---------
$ 12,055 $ 17,190 $ 30,164 $ 42,333
========= =========== ========== =========
Obligations Non-
Under cancelable
Line of Capital Operating
Year Ending December 31, Credit Leases (1) Leases (2) Total
-------------------------- --------- ---------- ---------- ---------
2003....................... $ 3,427 $ 14 $ 2,937 $ 6,378
2004....................... -- -- 4,664 4,664
2005....................... -- -- 3,686 3,686
2006....................... -- -- 3,455 3,455
2007....................... -- -- 2,721 2,721
2008 & Thereafter.......... -- -- 6,932 6,932
--------- ---------- ---------- ---------
Total mimimum lease payment $ 3,427 $ 14 $ 24,395 $ 27,836
========= ========== ========== =========
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2003 2002 2003 2002
Revenues: ------------ ------------- ------------ -------------
License..................... $ 3,183 26 % $ 8,309 48 % $12,534 42 % $ 23,438 55 %
Service..................... 8,872 74 8,881 52 17,630 58 18,895 45
------- ---- ------- ----- ------- ---- -------- ----
Total revenues................... 12,055 100 17,190 100 30,164 100 42,333 100
------- ---- ------- ----- ------- ---- -------- ----
Cost of revenues:
License..................... 507 4 1,056 6 1,425 5 2,021 5
Service*.................... 2,708 22 19,891 116 5,070 17 23,798 56
------- ---- ------- ----- ------- ---- -------- ----
Total cost of revenues........... 3,215 27 20,947 122 6,495 22 25,819 61
------- ---- ------- ----- ------- ---- -------- ----
Gross profit (loss).............. 8,840 73 (3,757) (22) 23,669 78 16,514 39
------- ---- ------- ----- ------- ---- -------- ----
Selected operating expenses*:
Sales and marketing......... 7,887 65 10,395 60 15,324 51 20,700 49
Research and development.... 5,943 49 6,512 38 12,023 40 13,150 31
General and administrative.. 2,990 25 3,383 20 5,670 19 6,603 16
* Excludes amortization of deferred stock based compensation.
Restructuring Restructuring
Accrual at Sublease Accrual at
December 31, Payments Payments June 30,
2002 Made Received 2003
------------ -------- ----------- ------------
Severance.......... $ 217 $ (32) $ -- $ 185
Facilities......... 10,731 (1,547) 228 9,412
------------ -------- ----------- ------------
Total ............. $ 10,948 $ (1,579) $ 228 $ 9,597
============ ======== =========== ============
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
------- ------- ------- -------
Cost of service ...................... $ 124 $ 226 $ 227 $ 609
Sales and marketing .................. 664 1,203 1,214 3,236
Research and development ............. 621 1,123 1,134 3,020
General and administrative ........... 269 489 490 6,063
------- ------- ------- -------
Total ................................ $ 1,678 $ 3,041 $ 3,065 $12,928
======= ======= ======= =======
Obligations Non-
Under cancelable
Line of Capital Operating
Year Ending December 31, Credit Leases (1) Leases (2) Total
-------------------------- --------- ---------- ---------- ---------
2003....................... $ 3,427 $ 14 $ 2,937 $ 6,378
2004....................... -- -- 4,664 4,664
2005....................... -- -- 3,686 3,686
2006....................... -- -- 3,455 3,455
2007....................... -- -- 2,721 2,721
2008 & Thereafter.......... -- -- 6,932 6,932
--------- ---------- ---------- ---------
Total mimimum lease payment $ 3,427 $ 14 $ 24,395 $ 27,836
========= ========== ========== =========