SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 3, 2003, approximately 23,600,990 shares of the Registrant's Common Stock, $0.001 par value, were outstanding.
KANA Software, Inc.
Form 10-Q
Quarter Ended September 30, 2003
Index
| PART I. FINANCIAL INFORMATION | Page No. |
| Item 1. Financial Statements |
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Condensed Consolidated Balance Sheets at September 30, 2003 and December 31, 2002 |
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Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2003 and 2002 |
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Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 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.
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 third 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 December 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. To
date, the impact of the effective provisions of SFAS No. 150 has not had a
material impact on the Company's results of operations, financial position or
cash flows. While the effective date of certain elements of SFAS No. 150 has
been deferred, the adoption of SFAS No. 150 when finalized is not expected to
have a material impact on the Company's financial position, results of
operations or cash flows. Note 3. 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
September 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 through
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 Emerging Issues Task Force 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 FASB Interpretation No. 28, Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans ("FIN 28"). As of September 30, 2003, there was approximately $3.0 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 (unaudited)): 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 provided for
by SFAS No. 123, "Accounting for Stock Based Compensation". The
following table presents pro forma amounts had the Company adopted SFAS No. 123
and accounted for stock-based compensation using the fair-value based method (in
thousands, except per share amounts (unaudited)): (1) Unearned deferred compensation resulting from employee and non-employee
option grants is amortized on an accelerated basis over the vesting period of
the individual options, in accordance with 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 4. 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 (unaudited): All warrants and outstanding stock options 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 was (in thousands (unaudited)): The weighted average exercise price of stock options and warrants outstanding
was $18.23 and $33.59 as of September 30, 2003 and 2002, respectively. Note 5. Comprehensive Loss Comprehensive loss is comprised of net loss and foreign currency
translation adjustments. The total changes in comprehensive loss during the
three and nine months ended September 30, 2003 and 2002 were as follows (in
thousands (unaudited)): 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 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. 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 September 30, 2003 is $1.1 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 September 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's 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 September 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 September 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 the first quarter of 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 78 employees during the nine
months ended September 30, 2003. The Company signed contracts with development
partners in 2003, with expected payments in 2003 of approximately $5.2 million,
primarily on a time and materials basis. In addition, a cancellation fee ranging
from $28,000 to $640,000 could be incurred if one agreement is terminated prior
to July 2004. 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. As of September 30, 2003, $9.1 million in restructuring liabilities remained
on the Company's unaudited consolidated balance sheet in accrued restructuring
costs. Cash payments for severance and excess leased facilities during the nine
months ended September 30, 2003
totaled $2.1 million. Cash received during the nine months ended
September 30, 2003 from subleases charged to restructuring expense in previous
periods totaled $269,000. The following table provides a summary of
restructuring payments and liabilities during the first nine months of 2003 (in
thousands (unaudited)): If the real estate market continues to decline, 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. 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 an 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 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 the Company's revenues and net loss for subsequent
quarters based upon financial results for the second quarter of 2002 and the
reduction of estimated cash flows for future quarters. 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
reduction of goodwill as of June 30, 2002 by $55.0 million. The remaining
goodwill balance as of September 30, 2003 was approximately $7.4 million. 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. 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
purchased intangible assets have been fully amortized as of April 2003 and no
amortization expense on purchased intangible assets was incurred during the
three months ended September 30, 2003. The Company reported amortization expense
on purchased intangible assets of $1.2 million for the three months ended
September 30, 2002 and $1.5 million and $3.6 million for the nine months ended
September 30, 2003 and September 30, 2002, respectively. 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. The following table provides
geographic information on revenue for the three and nine months ended September
30, 2003 and 2002 (in thousands, (unaudited)): (1) Represents sales to customers located primarily in Europe, other than
the United Kingdom During the three and nine months ended September 30, 2003, one customer,
Customer A, represented 13% and 4%, respectively, of total revenues. During the
three and nine months ended September 30, 2002, a second customer, Customer B,
represented 13% and 13%, respectively, of total revenues. Note 10. Notes Payable The Company maintains a $5.0 million loan facility, which is
collateralized by all of the Company's assets, bears interest at the bank's
prime rate (4.25% as of September 30, 2003) plus 0.25%, and expires in November
2003 at which time the entire balance under the line of credit will be due.
Total borrowings as of September 30, 2003 were approximately $3.4 million under
this line of credit. The line of credit contains a covenant that requires the
Company to maintain at least a $8.0 million balance in any account with the
bank. In lieu of this minimum balance covenant the Company may also cash-secure
the facility with funds equivalent to 115% of the outstanding debt obligation.
The line of credit also requires that the Company maintain at all times a
minimum of $20.0 million as short-term unrestricted cash and cash equivalents.
In the event that the Company defaults on this agreement, including through a
violation of any of these covenants, the entire balance under the line of credit
will become immediately due and payable. As of September 30, 2003, the Company
was in compliance with all covenants of the line of credit agreement. Future payments due under the Company's debt and lease obligations as of
September 30, 2003 are as follows (in thousands (unaudited)): 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. 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 estimated
loss on disposal was recorded in the second quarter of 2001 and adjusted in the
second quarter of 2002, resulting in a gain of $381,000 in the nine months ended
September 30, 2002. The operation has been presented as a discontinued operation
for all periods presented. Note 12. Subsequent Event On November 5, 2003 the Company announced the underwritten public
offering of 4,080,000 shares of its common stock at a price to the public of
$3.00 per share. The common stock was offered by KANA under its shelf
registration statement. The offering closed on November 10, 2003. The
underwriter has a 30-day option to purchase a maximum of 612,000 additional
shares to cover over-allotments of shares, if any. The proceeds from the
offering, net of expenses, will be approximately $11.4 million, and
approximately $13.1 million if the underwriter's over-allotment option is
exercised in full. 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 "anticipate," "believe,"
"estimate," "expecs," "intend," "plan,"
"will" 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. 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 nine months ended
September 30, 2003, we recorded a net loss of $4.1 million and $17.8 million,
respectively. As of September 30, 2003, we had 233 full-time employees, which
represents a decrease from 292 employees at June 30, 2003. On November 5, 2003 we announced the underwritten public offering of
4,080,000 shares of our common stock at a price to the public of $3.00 per
share. We offered the common stock under our shelf registration statement. The
offering closed on November 10, 2003. The underwriter has a 30-day option to
purchase a maximum of 612,000 additional shares to cover over-allotments of
shares, if any. The proceeds from the offering, net of expenses, will be
approximately $11.4 million, and approximately $13.1 million if the
underwriter's over-allotment option is exercised in full. 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 performed under fixed-fee arrangements 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 and related costs are deferred until all
contractual obligations are met, and acceptance, if required in the contract, is
received. Revenues from 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 is
being recognized as license 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 September 30, 2003, we had $11.9 million of capitalized costs
of internal use software, net of $3.3 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 September 30, 2003, we
determined that no such impairment of internal-use software existed. Restructuring. During 2001, we recorded significant liabilities 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 accrual 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 accrual 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
September 30, 2003. We regularly evaluate all 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 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 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 September 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 (in thousands). Three and Nine Months Ended September 30, 2003 and 2002 Revenues License revenue decreased 42% and 45%, respectively, for the three and
nine months ended September 30, 2003 compared to the same periods in the prior
year. License revenue constituted 37% of total revenues during the three months
ended September 30, 2003, compared to 40% for the same period last year. For the
nine months ended September 30, 2003, license revenues constituted 40% of total
revenues, compared to 53% 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 license sales was primarily due to lengthening sales cycles in
the current uncertain economic environment. We expect that both license and
service revenue in the fourth quarter of 2003 will be lower than they were in
the fourth quarter 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 information technology
spending. Our service revenues consist of support service revenue (primarily from
customer support, product maintenance and updates) and professional services
revenue (primarily from consulting and implementation services). Service revenue
decreased 5% for the three months and decreased 6% for the nine months ended
September 30, 2003 compared to the same periods in the prior year. The decreases
resulted primarily from our shift to leverage third party integrators for
providing implementation services to our customers. Revenues from domestic sales decreased $3.2 million, or 28%, from $11.6
million for the three months ended September 30, 2002 to $8.4 million for the
three months ended September 30, 2003, and decreased by $10.3 million, or 26%,
from $39.9 million for the nine months ended September 30, 2002 to $29.7 million
for the nine months ended September 30, 2003. Revenues from international sales
decreased $1.0 million, or 14%, from $6.4 million for the three months ended
September 30, 2002 to $5.4 million for the three months ended September 30,
2003, and decreased by $6.1 million, or 30%, from $20.4 for the nine months
ended September 30, 2002 to $14.3 million for the nine months ended September
30, 2003. The decrease in both domestic and international revenues in 2003 was
primarily a result of lengthening sales cycles and decreased information
technology spending experienced worldwide, by both our customers and potential
customers. For the three months ended September 30, 2003, the percentage
decrease in revenue from international sales is lower than the decrease in
revenue from domestic sales due to a relatively large transaction with a
customer in Europe which represented 13% of total revenue during the third
quarter. For the remainder of 2003, we expect international revenue, as a
percentage of overall revenue, to remain relatively consistent with the first
nine months 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 11% for the three months ended
September 30, 2003 compared to 6% for the same period in the prior year. For the
nine months ended September 30, 2003, cost of license revenue as a percentage of
license revenue was 11%, compared to 8% for the same period in the prior year.
The increase in cost of license revenues as a percentage of license revenue 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 remained constant due to
the fixed nature of some of the fees in our royalty agreements with third party
suppliers. Additionally, a greater proportion of sales in 2003 were of our 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, but that it may vary slightly based on
changes in the mix of products we sell. 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 27% of service revenue for the
three months ended September 30, 2003 compared to 30% for the same period in the
prior year. This decrease was associated with the change in mix of service
revenues, since maintenance revenue yields a higher gross margin than other
professional service revenues. Maintenance revenue comprised 90% of service
revenues in the three months ended September 30, 2003 compared to 82% for the
same period in the prior year. For the nine months ended September 30, 2003,
cost of service revenue decreased to 28% of service revenue, compared to 94% for
the same period in the prior year. This decrease was 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 22% for
the three months and 25% for the nine months ended September 30, 2003 compared
to the same periods in the prior year. This decrease was attributable primarily
to the lower sales commissions expense associated with the decrease in license
sales during the same periods, as well as a net reduction of sales positions
throughout 2003 as a result of our restructuring activities in prior years and a
reduction in facilities. As of September 30, 2003, we had 77 personnel in sales
and marketing, compared to 112 as of September 30, 2002, a 31% reduction. We anticipate that sales and marketing expenses will be lower in absolute
dollars for the remainder 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 26% for the
three months and 14% for the nine months ended September 30, 2003 compared to
the same periods in the prior year. These decreases were
attributable to the transitioning of our software programming, quality assurance
and technical documentation activities to our international third party
development partners beginning in the first quarter of 2003, which resulted in
reductions to research and development headcount. As of September 30, 2003, we
had 50 personnel in research and development, compared to 133 as of September
30, 2002, a 62% reduction. We anticipate that quarterly research and development expenses will be lower
in absolute dollars for the remainder of 2003 compared to the same period in
2002 as a result of the transitioning of these activities. 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 43% for the three months
and 24% for the nine months ended September 30, 2003 compared to the same
periods in the prior year. These decreases were primarily attributable to a
reduction in general and administrative headcount and $1.2 million net
reductions to bad debt expense during the nine months ended September 30, 2003.
As of September 30, 2003, we had 29 general and administrative personnel,
compared to 65 as of September 30, 2002, a 55% reduction. 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 September 30, 2003, $9.1 million in
restructuring liabilities remained on our unaudited condensed consolidated
balance sheet in accrued restructuring costs. Cash payments for severance and
excess leased facilities during the nine months ended September 30, 2003 totaled
$2.1 million. Cash received during the nine months ended September 30, 2003 from
subleases of excess leased facilities totaled $269,000. The following table is a
summary of restructuring payments and liabilities during the first nine months
of 2003 (in thousands): Amortization of Deferred Stock-Based Compensation. We amortize
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 September 30, 2003, there was approximately $3.0
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 $1.4 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. The amortization of
identifiable intangible assets recorded in the current and prior year relates to
$14.4 million of purchased technology recorded as an intangible asset acquired
in connection with the merger with Silknet. Such amortization was completed in
April 2003. Therefore, no amortization expense was recorded during the three
months ended September 30, 2003. Amortization of identifiable intangibles for
the three months ended September 30, 2002 was $1.2 million. Amortization for the
nine months ended September 30, 2003 was $1.5 million compared to $3.6 million
in the same period in the prior year. 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 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 September 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, 2002. 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
September 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 unlikely 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 an accounting change. This accounting
change amounted to approximately $3.9 million in the nine months ended September
30, 2002. Liquidity and Capital Resources As of September 30, 2003, we had $22.3 million in cash, cash equivalents
and short-term investments, compared to $32.5 million at December 31, 2002. As
of September 30, 2003, we had a negative working capital of $11.9 million,
compared to negative $4.5 million as of December 31, 2002. On November 5, 2003
we announced the underwritten public offering of 4,080,000 shares of our common
stock at a price to the public of $3.00 per share under our shelf registration
statement. The offering closes on November 10, 2003. The
underwriter has a 30-day option to purchase a maximum of 612,000 additional
shares to cover over-allotments of shares, if any. The proceeds from the
offering, net of expenses, will be approximately $11.4 million, and
approximately $13.1 million if the underwriter's over-allotment option is
exercised in full. Our operating activities used $10.5 million of cash for the nine months ended
September 30, 2003, which included a $17.8 million net loss from continuing
operations offset by non-cash charges of $6.4 million in depreciation, $4.4
million in amortization of deferred stock-based compensation and $1.5 million in
amortization of identifiable intangibles. Operating activities also included
$1.9 million in net payments relating to restructuring liabilities. Other
working capital changes totaled a net $3.1 million, resulting primarily from a
$7.1 million decrease in accounts receivable, offset by a $2.9 million reduction
in the allowance for doubtful accounts, $5.3 million reduction in deferred
revenue and $3.3 million reduction in accounts payable and accrued
liabilities. Our investing activities provided $9.6 million of cash for the nine months
ended September 30, 2003, resulting from $11.7 million of maturities of short-
term investments, offset by $1.2 million of purchases of short-term investments
and $0.9 million of property and equipment purchases. Upon maturity of our
investments, we transferred the funds to cash and cash equivalents. Our financing activities provided $0.8 million in cash for the nine months
ended September 30, 2003, primarily due to net proceeds of approximately $0.8
million from the issuance of common stock pursuant to our employee incentive
plans. We also 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
(4.25% as of September 30, 2003) plus 0.25%, and expires in November 2003 at
which time the entire balance under the line of credit will be due. Total
borrowings as of September 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
September 30, 2003, we were in compliance with all covenants of the line of
credit agreement. Future payments due under our non-cancelable debt and lease obligations as of
September 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 $0.8 million
in payments relating to accrued restructuring costs and approximately $0.4
million of expenditures on property and equipment. In the first quarter of 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 78 employees
during the nine months ended September 30, 2003. We signed contracts with these
development partners in 2003, with expected payments in 2003 of approximately
$5.2 million, primarily on a time and materials basis. In addition, a
cancellation fee ranging from $28,000 to $640,000 could be incurred if one
agreement is terminated prior to July 2004.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 and
third quarters of 2003 would likely require us to seek additional capital to
meet our working capital needs during or beyond the next 12 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, general economic
conditions and customer purchasing and payment patterns, many of which are
beyond our control. There can be no assurance that additional financing
will be available on satisfactory terms when needed, if at all. 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. In addition, such securities may be
sold at a discount from the market price of our common stock, and may include
rights, preferences or privileges senior to those of our common stock. Failure
to raise such additional financing, if needed, may result in us not being able
to achieve our long-term business objectives. 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 December 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 our results of operations or financial position.
However, changes in our business relationships with various entities could occur
in the future and affect our 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. To
date, the impact of the effective provisions of SFAS No. 150 has not had a
material impact on our results of operations, financial position or cash flows.
While the effective date of certain elements of SFAS No. 150 has been deferred,
the adoption of SFAS No. 150 when finalized is not expected to have a material
impact on our financial position, results of operations or cash flows. 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 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
other 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, requiring additional
evaluations and levels of internal approval for software investment and
lengthening their purchase cycles. 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 relatively 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 is generally large
relative to our total revenue in any quarter, particularly as we have focused on
larger enterprise customers and on licensing our more comprehensive integrated
products and have involved system integrators in our sales process. For example,
during the nine months ended September 30, 2003, one customer, IBM, represented
9% of our total revenues. During the nine months ended September 30, 2002, IBM
represented 13% 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. Contributing to the risk that anticipated sales may not occur on the
expected time frame, if at all, 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 increases in the length of a typical sales cycle. This trend may add
to the uncertainty of our future operating results and reduce our ability to
anticipate our future revenues. We may not be able to forecast our revenues accurately because our products
have a long and variable sales cycle. The long sales cycle for our products may cause license revenue and operating
results to vary significantly from period to period. To date, the sales cycle
for our products has taken anywhere from 3 to 12 months. Furthermore, selling
our products in conjunction with our systems integrators who are proposing their
implementation services of our products can involve a particularly long sales
cycle, as it typically takes more time for the prospective customer to evaluate
proposals from multiple vendors. 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. The present economic downturn
has led to a significant increase in the time required for this process and if
the downturn continues, the sales cycle for our products may become even longer
and we may require more resources to complete sales. 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. If we fail to generate sufficient revenues to support our business and
require additional financing, failure to obtain such financing would affect our
ability to maintain our operations and to grow our business, 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 $10.5 million of cash in the nine months ended September 30, 2003.
Failure to increase future orders and revenues beyond the level achieved in the
second and third quarters of 2003 would likely require us to seek additional
capital to meet our 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. Because we have a limited operating history, there is limited information
upon which you can evaluate our business. 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 and significant changes in our business over the
past four years, 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 reflect different products, costs and business models,
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. 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 September 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. 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. 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,
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
2003 2002
----------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents................................ $ 22,268 $ 21,962
Short-term investments................................... -- 10,536
Accounts receivable, net................................. 6,167 10,269
Prepaid expenses and other current assets................ 2,202 3,184
----------- -----------
Total current assets................................... 30,637 45,951
Restricted cash........................................... 457 448
Property and equipment, net............................... 16,784 22,293
Goodwill.................................................. 7,448 7,448
Intangible assets, net.................................... -- 1,453
Other assets.............................................. 2,572 2,957
----------- -----------
Total assets.......................................... $ 57,898 $ 80,550
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and capital lease obligations.............. $ 3,442 $ 3,469
Accounts payable......................................... 3,287 3,908
Accrued liabilities...................................... 11,228 13,881
Accrued restructuring.................................... 3,539 2,834
Deferred revenue......................................... 21,070 26,392
----------- -----------
Total current liabilities............................... 42,566 50,484
Accrued restructuring, less current portion............... 5,553 8,114
----------- -----------
Total liabilities..................................... 48,119 58,598
----------- -----------
Stockholders' equity:
Common stock............................................. 196 195
Additional paid-in capital............................... 4,272,693 4,273,029
Deferred stock-based compensation........................ (3,001) (8,602)
Accumulated other comprehensive income (loss)............ 199 (175)
Accumulated deficit...................................... (4,260,308) (4,242,495)
----------- -----------
Total stockholders' equity............................ 9,779 21,952
----------- -----------
Total liabilities and stockholders' equity............ $ 57,898 $ 80,550
=========== ===========
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30
-------------------- --------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(unaudited)
Revenues:
License........................................................ $ 5,083 $ 8,784 $ 17,617 $ 32,222
Service........................................................ 8,750 9,243 26,380 28,138
--------- --------- --------- ---------
Total revenues.................................................... 13,833 18,027 43,997 60,360
--------- --------- --------- ---------
Cost of revenues:
License........................................................ 578 548 2,003 2,569
Service (excluding stock-based compensation of
$98, $145, $325 and $754, respectively)................... 2,381 2,762 7,451 26,560
--------- --------- --------- ---------
Total cost of revenues............................................ 2,959 3,310 9,454 29,129
--------- --------- --------- ---------
Gross profit...................................................... 10,874 14,717 34,543 31,231
--------- --------- --------- ---------
Operating expenses:
Sales and marketing (excluding stock-based compensation
of $522, $772, $1,736 and $4,008, respectively).............. 6,854 8,732 22,178 29,432
Research and development (excluding stock-based compensation
of $488, $721, $1,622 and $3,741, respectively).............. 4,718 6,389 16,741 19,539
General and administrative (excluding stock-based compensation
of $272, $313, $762 and $6,376, respectively)................ 1,981 3,458 7,651 10,061
Amortization of stock-based compensation....................... 1,380 1,951 4,445 14,879
Amortization of identifiable intangibles....................... -- 1,200 1,453 3,600
Goodwill impairment............................................ -- -- -- 55,000
--------- --------- --------- ---------
Total operating expenses.......................................... 14,933 21,730 52,468 132,511
--------- --------- --------- ---------
Operating loss.................................................... (4,059) (7,013) (17,925) (101,280)
Other income, net................................................. 5 175 112 770
--------- --------- --------- ---------
Loss from continuing operations................................... (4,054) (6,838) (17,813) (100,510)
Gain on disposal of discontinued operation........................ -- -- -- 381
Cumulative effect of accounting change related
to the elimination of negative goodwill......................... -- -- -- 3,901
--------- --------- --------- ---------
Net loss.......................................................... $ (4,054) $ (6,838) $ (17,813) $ (96,228)
========= ========= ========= =========
Basic and diluted net loss per share:
Loss from continuing operations................................. $ (0.17) $ (0.30) $ (0.77) $ (4.52)
Income from discontinued operation.............................. -- -- -- 0.01
Cumulative effect of accounting change.......................... -- -- -- 0.18
--------- --------- --------- ---------
Net loss........................................................ $ (0.17) $ (0.30) $ (0.77) $ (4.33)
========= ========= ========= =========
Shares used in computing basic and
diluted net loss per share...................................... 23,396 22,851 23,220 22,234
========= ========= ========= =========
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
September 30,
----------------------
2003 2002
--------- -----------
(unaudited)
Cash flows from operating activities:
Net loss.................................................... $ (17,813) $ (96,228)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.............................................. 6,402 6,781
Amortization of stock-based compensation.................. 4,445 14,879
Amortization of identifiable intangibles.................. 1,453 3,600
Goodwill impairment....................................... -- 55,000
Elimination of negative goodwill.......................... -- (3,901)
Other non-cash charges.................................... 212
Change in allowance for doubtful accounts................. (2,992) (1,521)
Changes in operating assets and liabilities:
Accounts receivable................................... 7,094 6,148
Prepaid and other current assets...................... 982 1,597
Other assets.......................................... 385 (48)
Accounts payable and accrued liabilities.............. (3,274) (10,817)
Accrued restructuring and merger...................... (1,856) (17,249)
Deferred revenue...................................... (5,322) 5,706
--------- -----------
Net cash used in operating activities..................... (10,495) (35,841)
--------- -----------
Cash flows from investing activities:
Purchases of short-term investments......................... (1,267) (23,238)
Sales of short-term investments............................. 11,803 20,419
Property and equipment purchases............................ (893) (11,142)
Restricted cash............................................. (9) 7,967
--------- -----------
Net cash provided by (used in) investing activities... 9,634 (5,994)
--------- -----------
Cash flows from financing activities:
Payments on capital lease obligations....................... (27) (161)
Net proceeds from issuance of common stock and warrants..... 824 33,413
Payments on stockholders' notes receivable.................. -- 599
--------- -----------
Net cash provided by financing activities............. 797 33,851
--------- -----------
Effect of exchange rate changes on cash and cash equivalents... 370 167
--------- -----------
Net increase (decrease) in cash and cash equivalents........... 306 (7,817)
Cash and cash equivalents at beginning of period............... 21,962 25,476
--------- -----------
Cash and cash equivalents at end of period..................... $ 22,268 $ 17,659
========= ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest...................... $ 135 $ 80
========= ===========
Cash paid during the period for income taxes.................. $ 129 $ 329
========= ===========
Noncash activities:
Issuance of warrants to non-employees ....................... $ -- $ 4,749
========= ===========
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
------- ------- ------- -------
Cost of service ...................... $ 98 $ 145 $ 325 $ 754
Sales and marketing .................. 522 772 1,736 4,008
Research and development ............. 488 721 1,622 3,741
General and administrative ........... 272 313 762 6,376
------- ------- ------- -------
Total ................................ $ 1,380 $ 1,951 $ 4,445 $ 14,879
======= ======= ======= =======
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- --------------------
2003 2002 2003 2002
--------- --------- --------- ---------
As Reported:
Net loss......................................... $ (4,054) $ (6,838) $ (17,813) $ (96,228)
Compensation expense included in net loss (1)...... $ 1,380 $ 1,951 $ 4,445 $ 14,879
Compensation expense if FAS 123 had been adopted .. $ (3,122) $ (6,829) $ (7,501) $ (39,692)
Pro Forma:
Net loss......................................... $ (5,796) $ (11,716) $ (20,869) $(121,041)
Basic and diluted net loss per share
As reported...................................... $ (0.17) $ (0.30) $ (0.77) $ (4.33)
Pro forma........................................ $ (0.25) $ (0.51) $ (0.90) $ (5.44)
Three Months Ended Nine Months Ended
September 30, September 30
-------------------- --------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Numerator:
Loss from continuing operations before
cumulative effect of accounting change ................... $ (4,054) $ (6,838) $(17,813) $(100,510)
--------- --------- --------- ---------
Denominator:
Weighted-average shares of common stock outstanding ........ 23,396 22,865 23,226 22,253
Less: weighted-average shares subject to repurchase ........ -- (14) (6) (19)
--------- --------- --------- ---------
Denominator for basic and diluted calculation .............. 23,396 22,851 23,220 22,234
--------- --------- --------- ---------
Basic and diluted net loss per share from continuing
operations before cumulative effect of accounting change.. $ (0.17) $ (0.30) $ (0.77) $ (4.52)
========= ========= ========= =========
As of September 30,
----------------------
2003 2002
--------- -----------
Stock options and warrants .......... 8,798 8,531
Common stock subject to repurchase .. -- 13
--------- -----------
8,798 8,544
========= ===========
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
------- --------- --------- ---------
Net loss....................... $(4,054) $ (6,838) $ (17,813) $ (96,228)
Other comprehensive income (loss):
Foreign currency translation
adjustments................ (61) (111) 374 1,101
------- --------- --------- ---------
Net change in other
comprehensive income (loss).. (61) (111) 374 1,101
------- --------- --------- ---------
Comprehensive loss............. $(4,115) $ (6,949) $ (17,439) $ (95,127)
======= ========= ========= =========
Restructuring Restructuring
Accrual at Sublease Accrual at
December 31, Payments Payments September 30,
2002 Made Received 2003
------------ -------- ----------- ------------
Severance.......... $ 217 $ (33) $ -- $ 184
Facilities......... 10,731 (2,092) 269 8,908
------------ -------- ----------- ------------
Total ............. $ 10,948 $ (2,125) $ 269 $ 9,092
============ ======== =========== ============
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
2003 2002 2003 2002
--------- ----------- ---------- ---------
United States ...................... $ 8,395 $ 11,643 $ 29,679 $ 39,992
United Kingdom...................... 3,524 3,651 8,220 12,106
Other (1) .......................... 1,914 2,733 6,098 8,262
--------- ----------- ---------- ---------
$ 13,833 18,027 43,997 60,360
========= =========== ========== =========
Obligations Non-
Under cancelable
Line of Capital Operating
Year Ending December 31, Credit Leases (1) Leases (2) Total
--------------------_------ --------- ---------- ---------- ---------
2003........................ $ 3,427 $ 15 $ 1,368 $ 4,810
2004........................ -- -- 4,733 4,733
2005........................ -- -- 3,850 3,850
2006........................ -- -- 3,546 3,546
2007........................ -- -- 2,959 2,959
2008 & Thereafter........... -- -- 6,655 6,655
--------- ---------- ---------- ---------
Total mimimum lease payments $ 3,427 $ 15 $ 23,111 $ 26,553
========= ========== ========== =========
(1) Throughout the remainder of 2003, the Company will make interest payments in
relation to the obligations under capital leases; this interest component is
included in the commitment schedule above.
(2) Includes leases previously subject to abandonment and included in accrued
restructuring on the balance sheet, net of scheduled sublease income.
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
2003 2002 2003 2002
Revenues: ------------ ------------- ------------- -------------
License.............................. $ 5,083 37 % $ 8,784 49 % $17,617 40 % $ 32,222 53 %
Service.............................. 8,750 63 9,243 51 26,380 60 28,138 47
------- ---- ------- ----- ------- ----- -------- ----
Total revenues............................ 13,833 100 18,027 100 43,997 100 60,360 100
------- ---- ------- ----- ------- ----- -------- ----
Cost of revenues:
License.............................. 578 4 548 3 2,003 4 2,569 4
Service*............................. 2,381 17 2,762 15 7,451 17 26,560 44
------- ---- ------- ----- ------- ----- -------- ----
Total cost of revenues.................... 2,959 21 3,310 18 9,454 21 29,129 48
------- ---- ------- ----- ------- ----- -------- ----
Gross profit.............................. 10,874 79 14,717 82 34,543 79 31,231 52
------- ---- ------- ----- ------- ----- -------- ----
Selected operating expenses*:
Sales and marketing.................. 6,854 50 8,732 48 22,178 50 29,432 49
Research and development............. 4,718 34 6,389 35 16,741 38 19,539 32
General and administrative........... 1,981 14 % 3,458 19 % 7,651 17 % 10,061 17 %
* Excludes amortization of deferred stock based compensation
Restructuring Restructuring
Accrual at Sublease Accrual at
December 31, Payments Payments September 30,
2002 Made Received 2003
------------ -------- ----------- ------------
Severance.......... $ 217 $ (33) $ -- $ 184
Facilities......... 10,731 (2,092) 269 8,908
------------ -------- ----------- ------------
Total ............. $ 10,948 $ (2,125) $ 269 $ 9,092
============ ======== =========== ============
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
------- ------- ------- -------
Cost of service ...................... $ 98 $ 145 $ 325 $ 754
Sales and marketing .................. 522 772 1,736 4,008
Research and development ............. 488 721 1,622 3,741
General and administrative ........... 272 313 762 6,376
------- ------- ------- -------
Total ................................ $ 1,380 $ 1,951 $ 4,445 $14,879
======= ======= ======= =======
Obligations Non-
Under cancelable
Line of Capital Operating
Year Ending December 31, Credit Leases (1) Leases (2) Total
--------------------------- --------- ---------- ---------- ---------
2003........................ $ 3,427 $ 15 $ 1,368 $ 4,810
2004........................ -- -- 4,733 4,733
2005........................ -- -- 3,850 3,850
2006........................ -- -- 3,546 3,546
2007........................ -- -- 2,959 2,959
2008 & Thereafter........... -- -- 6,655 6,655
--------- ---------- ---------- ---------
Total mimimum lease payments $ 3,427 $ 15 $ 23,111 $ 26,553
========= ========== ========== =========