UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20012002
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: 000-26287000-27163
KANA Software, Inc.
(Exact name of Registrant as Specified in its Charter)
181 Constitution Drive
Menlo Park, California 94025
(Address of Principal Executive Offices including Zip Code)
(650) 614 8300
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value per share
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ¨ No x
As of FebruaryJune 28, 2002, the last business day of the Registrant's most recently completed second fiscal quarter, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $272,539,789$70,248,056 based upon the closing sales price of the Common Stock as reported on the Nasdaq Stock Market on such date.of $4.00. Shares of Common Stock held by officers, directors, and holders of more than ten percent of the outstanding Common Stock have been excluded from this calculation because such persons may be deemed to be affiliates. The determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of February 28, 2002,March 1, 2003, the Registrant had outstanding 22,486,78122,981,029 shares of Common Stock.
Portions of the Registrant's Proxy Statement to be filed pursuant to Regulation 14A promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, which is anticipated to be filed within 120 days after the end of the Registrant's fiscal year ended December 31, 2002, are incorporated by reference in Part III hereof.
KANA Software, Inc.
TABLE OF CONTENTS
ANNUAL REPORT ON FORM 10-K
For The Year Ended December 31, 20012002
Part I. |
| Page |
Item 1. | Business | |
Item 2. | Properties | |
Item 3. | Legal Proceedings | |
Item 4. | Submission of Matters to a Vote of Security Holders | |
Part II. |
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Item 5. | Market for the Registrant's Common Equity and Related Stockholder Matters | |
Item 6. | Selected Consolidated Financial Data | |
Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
Item 7a. | Quantitative and Qualitative Disclosures About Market Risk | |
Item 8. | Financial Statements and Supplementary Data | |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |
Part III. |
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Item 10. | Directors and Executive Officers of the Registrant | |
Item 11. | Executive Compensation | |
Item 12. | Security Ownership of Certain Beneficial Owners and Management | |
Item 13. | Certain Relationships and Related Transactions | |
Item 14. | Controls and Procedures | |
Part IV. |
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Item | Exhibits, Financial Statement Schedules and Reports on Form 8-K | |
Signatures |
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Certifications |
PART I
Special Note Regarding Forward Looking Statements
The following containsdiscussion of our business and other parts of this report contain forward-looking statements within the meaningthat are not historical facts but rather are based on current expectations, estimates and projections about our business and industry, and our beliefs and assumptions. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates" and variations of Section 21ethese words and similar expressions identify forward-looking statements. These statements are not guarantees of the Securities Exchange Actfuture performance and are subject to risks, uncertainties and other factors, many of 1934. Ourwhich are beyond our control, are difficult to predict and could cause actual results and timing of certain events couldto differ materially from those anticipatedexpressed or forecasted in thesethe forward-looking statements. These risks and uncertainties include, but are not limited to, those described in "Risk Factors" and elsewhere in this report. Forward-looking statements that we believed to be true at the time we made them may ultimately prove to be incorrect or false. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect our view only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of certain factors, including, but not limited to, those set forth under "Risk Factors," elsewhere in this report and in our other public filings.new information, future events or otherwise.
ItemITEM 1. BusinessBUSINESS
Overview
We are a leading provider of enterprise Customer Relationship Management (eCRM) software solutions that deliver integrated communicationsolutions. These enterprise customer support and businesscommunications applications are built on a Web-architectured platform.Web-architected platform incorporating our KANA eCRM architecture, which provides users with full access to the applications using a standard Web browser and without requiring them to install additional software on their individual computers. Our software helps our customers provide external-facing customer support, and to better service, market to, and understand their customers and partners, while improving results and decreasing costs in contact centers and marketing departments. We offer a multi-channel customer relationship management solution thatOur KANA iCARE (Intelligent Customer Acquisition and Retention for the Enterprise) application suite combines our KANA eCRM Architecturearchitecture 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 theirthe company over the communication channels they prefer, whether by Web contact, e- mail or telephone. We offer optimized versions of our software for several specific industries including healthcare, financial services, high technology manufacturing, and telecommunications, among others. Our customers include Global 2000 companies in healthcare, telecommunications, high technology, financial services, retail, transportation, education and partners through web contact, web collaboration, e-mail and telephone.the public sector, among other industries.
We were incorporated in July 1996 in California and were reincorporated in Delaware in September 1999. We had no significant operations until 1997. In February 1998, we released the first commercially available version of the KANA platform. To date, we have derived substantially all of our revenues from licensing our software and related services, and we have sold our products worldwide primarily through our direct sales force.
Our customers range from Global 2000 companies pursuing an e-business strategy to growing companies.
References in this annual report on Form 10-K to "KANA," "we," "our," and "us" collectively refer to KANA Software, Inc., a Delaware corporation, and itsour predecessor, and itsour subsidiaries and their predecessors. Our principal executive offices are located at 181 Constitution Drive, Menlo Park, California 94025 and our telephone number is (650) 614-8300.
Recent Developments
At a special meeting held on February 1, 2002, our stockholders voted against the proposed issuance of up to $45 million of a Series A convertible preferred stock to two investment funds. Immediately following the stockholder vote, we elected to terminate the share purchase agreement with the investment funds. The stockholder vote followed an announcement on January 14, 2002 of the decision by our Board of Directors to withdraw its recommendation that our stockholders vote in favor of the proposed preferred stock transaction. In connection with the proposed transaction and its termination, the investment funds have received two-year warrants to purchase a total of approximately 386,000 shares of KANA's common stock at an exercise price of $10.00 per share. The issuance of these warrants will result in approximately $4.7 million of stock-based compensation expense in the first quarter of 2002. The warrants were valued using the Black-Scholes model.
On February 12, 2002, we completed the sale of an aggregate of approximately 2,910,000 shares of our common stock to institutional investors in a private placement, for gross proceeds of approximately $34.5 million, before transaction-related costs.614- 8300.
Industry Background
In today's economy, Global 2000 organizations must find a way to increase customer retention and loyalty while decreasing operating expenses. The ability to provide a high quality interactioncustomer interactions and experience,experiences, and thus to establish long-term relationships and loyalty, is critical to business survival.
Until recently, relationships with customers and partners were based on interactions in-person, by telephonecostly phone or by letter. In order to respond to these typesmail-based interactions. As a result, companies invested millions of inquiries more effectively, many companies have invested substantial resourcesdollars in expensive call centers and traditional direct marketing initiatives. Call centers typically employ costly technology and do not scale effectively. Traditional direct marketing usually involves poorly targeted communications and substantial administrative effort and is therefore expensive and inefficient in conversion and response rates. Withphone-based technologies. However, the adventproliferation of the Internet andhas fundamentally changed the proliferation of electronic communications, the manner through whichway businesses communicate is undergoingwith customers and partners, creating a fundamental change:24-by-7 environment in which customers partners, and suppliers are now demanding that businesses be accessible anytime and through a variety of channels, includingexpect immediate responses via the Web, wireless devices e-mail, telephone, and storefronts.
Global 2000 organizationsor e-mail. Although these new communication channels have concluded that,resulted in orderdemand for immediate service, they also provide businesses with an opportunity to retain high-value customers they must provide superiordramatically decrease the cost of customer service - regardless of the customer contact channel.by moving more communication to less expensive Web-based channels. By integrating all communication channels and utilizing online channels for customer support, Global 2000 organizations have beenand other enterprises can successfully increasingincrease customer interactions while decreasing costs in contact centers and marketing departments.
Businesses that fail to manage customer interactionsrelationships effectively oftenthroughout the customer lifecycle face negative consequences, which can include loss of customers, increased difficulty in acquiring new customers and a deterioration of competitive position. In addition, without efficient and reliable management of customer and partner interactions, businesses face higher operating and information technology costs. Perhaps most significantly,Further, businesses may lose the opportunity to take advantage of new revenue-generatingrevenue generating opportunities by failing to capitalize upon the wealth of information conveyed through these interactions. While addressing these challenges, businesses must alsoOnce a business recognizes the benefits of deploying customer relationship management software to take advantage of the benefits afforded by the Internet, it faces the challenge of finding a suitable eCRM solution. Enterprises increasingly seek eCRM solutions that are optimized for their industry, can be able to deploy an enterprise eCRM solutionused across multiple departments, to integrate the solution with existing business, and legacy systems and databases, and to scale the solutioncan efficiently be scaled as they add new contact channels and increase their volume of customer interactions.
Products
KANA iCARE (Intelligent Customer Acquisition and Retention for the Enterprise) is a comprehensive eCRM solutionsuite made up of modular applications that provides Global 2000 organizations and other enterprises with the ability to createprovide more intelligent, more effective interactions that leadwith customers, leading to loyal and lasting customer relationships.relationships while reducing costs in the contact center.
Built with KANA'sThe KANA iCARE suite is a flexible and scalable, web-architected J2EE (Java Two Enterprise Edition platform) and COM (Common Object Model) applications, KANA iCARE is anWeb-architected solution, integrated solutionon a single platform, that spans acrosssupports multiple customer communication channels. KANA iCARE provides the critical link between contact centers and marketing departments, allowing organizations to have effective, efficient interactions with customers at all points of contact (web collaboration, the phone, e-mail, live chat)(including Web contact, telephone and e-mail) and throughout the enterprise. The KANA iCARE suite leverages intelligence about both the customer and the enterprise to give contact center representatives and marketing departments the information they need to deliver effective customer interactions. KANA iCARE also employs robust analyticsanalytic tools across its entire product family to allow companies to continually analyze and improve their customer and partner relationships. These features enable Global 2000 organizations and other enterprises to lowerreduce the cost of information access for their employees, customers and partners while creating profitable customer relationships.
Our customers can deploy KANA's iCARE applications as a complete solution suitessuite or as components that include:
In addition, in 2002, we introduced optimized versions of our iCARE suite optimized for several specific industries including the following:
Alliances and Partnerships
We partner with leading systems integrators that have developed significant expertise with our web-architectedWeb-architected eCRM solutionsapplications and are able to provide our customers with a wide range of consulting, implementation and systems integration services. Our systems integrator partners are involved in an increasing numbernearly all customer engagements, and we have significantly reduced the size of our customer's deployments,professional services team and bynarrowed the fourth quarter of 2001, a substantial majorityscope of our new customers were relying on systems integrators in their deployment of our products.professional services program to ensure that we do not compete with these key partners for professional services engagements. We believe that the support of these systems integrators for our products is increasingly important in influencing new customers' decisions to license our products. In addition, systems integrators are increasingly playinganplaying an important role as resellers of our products. KANAKANA's systems integration partners including both systems integrator partners and resellers, include Accenture, Aspect, BEA Systems, Broadvision, Cisco,Bearing Point, BusinessEdge, CSC, Deloitte Consulting and IBM Global Services. These integrators have been integral to KANA's success in selling its products to large-organizations such as Advanced Micro Devices, Blue Cross and Blue Shield of Minnesota, mmO2, Dell Computer Corp., Highmark, Sony, Sprint PCS and many others.
KANA also partners with a number of technology resellers, including Aspect Communications, BEA Systems, BroadVision, Cisco Systems, Hewlett-Packard, IBM, KPMG Consulting, Microsoft and Sun Microsystems and WorldCom.Microsystems.
Services
Consulting Services. Our consulting services group provides a wide range of business and technical expertise to support our partners and customers. WithIn the releasesecond half of the iCARE suite of products in September 2001, we streamlined our internal professional services organization and began working more closely with strategic systems integrator partners for the implementation integration, service and maintenanceintegration of our products. Our consulting services group works closely with partners during implementations to provide deeptechnical experience and functional and industry knowledge of our products, as well as technical capabilities thatKANA's extensive industry knowledge, to assist our partnersthem in providing our customers with high-quality, successful, enterprise-wide eCRM implementations and customer satisfaction.implementations.
Technical Support. Our technical support group providesuses KANA's own eCRM applications to provide multi-channel global support for our customers, through a number of channels, including phone and e-mail as well as access tosupport and self-service solutions via the KANA Support Web site.
Education Services. Our education services group delivershas prepared a full set of training programs and materials for our customers and partners, including a comprehensive set of learning trackscourses for end users, business consultants and developers, which are available through instructor-led, Web-based and onsite delivery. The group also provides up-to-dateup to date information to our customers and partners through monthly newsletters, Web site FAQ's, and regional user groups.
Sales
Our sales strategy is to pursuefocus on Global 2000 companies through a combination of our strategic alliances and our direct sales force. We maintain direct sales personnel across the United States and internationally throughout Europe, Canada, SingaporeAsia-Pacific and Japan.Canada. Our direct sales force complements our system integrator and reseller alliances. As of December 31, 2001, 1362002, 106 of our employees were employed in sales and marketing activities.
Customers
Our customers range from Global 2000 companies to growing companies pursuing an e-business strategy to growing companies. As of December 31, 2001, we have licensed our solution to more than 1,200 customers in a variety of industries worldwide.strategy. The following is a list of customers that we believe are representative of our overall customer base:
Financial Services Standard Chartered Washington Mutual | Communications
|
Health Care | Government/Education
|
| HighTechnology
| Transportation/Hospitality
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Manufacturing/Consumer Goods | Retail
|
One customer accounted for 11% of our total revenues in 2002. No customer accounted for 10% or more of our total revenues in 2001 2000 or 1999. However, a2000. A substantial portion of our license and service revenues in any given quarter has been, and is expected towe expect will continue to be, generated from a limited number of customers.
Research and Development
We believe that strong product development capabilities are essential to our strategy of enhancing our core technology, developing additional applications incorporating that technology and maintaining the competitiveness of our product and service offerings. We have invested significant time and resources in creating a structured process for undertaking all product development. This processIn January 2003, we began implementing an outsourcing strategy, which involves several functional groups at all levels withinsubcontracting a significant portion of our organizationsoftware programming, quality assurance and is designedtechnical documentation activities to providedevelopment partners with staffing in India and China. As a framework for defining and addressingresult of the activities required to bring product concepts and development projects to market successfully. In addition, we have recruited key engineers and software developers with experiencefirst phase of this strategy, in the customer communications and internetworking markets and have complementedfirst quarter of 2003 we transferred the responsibilities of 31 US-based employees to these individuals by hiring senior management with experiencedevelopment partners. We expect to transfer additional positions to these development partners in enterprise application development, sales and deployment.
future quarters of 2003. As of December 31, 2001, 1362002, 128 of our employees were engaged in research and development activities. We restructured our organization throughout 2001, in order to streamline operations, eliminate redundant positions after the merger with Broadbase, reduce costs and bring our staffing and structure in line with industry standards and current economic conditions. In connection with this restructuring, we had a net reduction of 179 employees engaged in research and development activities. These net reductions have been significant, particularly in light of the personnel added with our merger with Broadbase Software in June 2001.
Our success depends, in part, on our ability to enhance our existing customer interactionseCRM solutions and to develop new services, functionality and technology that address the increasingly sophisticated and varied needs of our prospective customers. Delays in bringing to marketThe challenges of developing new products and enhancements require us to commit a substantial investment of resources, and we might not be able to develop or their enhancements, or the existence of defects inintroduce new products on a timely or enhancements,cost-effective basis, or at all, which could be exploited by our competitors. If we werecompetitors and lead potential customers to lose market share as a result of lapses in our product management, our business would suffer.choose alternative products.
Competition
The market for our products and services is intensely competitive, evolving and subject to rapid technological change. We currently face competition for our products from systems designed by in-house and third-party development efforts. We expect that these systems will continue to be a major source of competition for the foreseeable future. Our primary competitors for eCRM platforms are larger, more established companies such as Siebel Systems, Inc., and PeopleSoft, Inc., and to a lesser extent, Oracle and SAP. We also face competition from E.piphany, Inc. Furthermore,, Chordiant Software, Inc., Primus Knowledge Solutions and Pegasystems, Inc. with respect to several specific applications we offer. We may face increased competition shouldupon introduction of new products or upgrades from competitors, or if we expand our product line through acquisition of complementary businesses or otherwise. As we have combined and enhanced our product lines to offer a more comprehensive e-business software solution, we are increasingly competing with large, established providers of customer management and communication solutions as well as other competitors. Our combined product line may not be sufficient to successfully compete with the product offerings available from these companies, which could slow our growth and harm our business.
We believe that the principal competitive factors affecting our market include having a significant base of referenceable customers, the breadth and depth of a given solution, product quality and performance, customer service, core technology, product scalability and reliability, product features, and the ability to implement solutions.solutions, and perception of financial position. We believe that our solutionproducts currently competescompete favorably with respect to these factors, and, in particular, that KANA'sour Web-based architecture provides itus with a competitive advantage.advantage because it allows for greater product scalability and rapid implementation. However, we may not be able to maintain our competitive position against current and potential competitors, especially those with significantly greater financial, marketing, service, support, technical and other resources.resources, and who may, for example, be able to add features or functionality to their competing products more quickly or decide to sell their products to their existing customer bases for other products.
Many of our competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, significantly greater name recognition and a larger installed base of customers than do we.we have. In addition, many of our competitors have well-established relationships with our current and potential customers and have extensive knowledge of our industry. We may lose potential customers to competitors for various reasons, including the ability or willingness of competitors to offer lower prices and other incentives that we cannot match. It is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. We also expect that competition will increase as a result of industry consolidations. See "Risk Factors-We face substantial competition and may not be able to compete effectively."
Intellectual Property
We rely upon a combination of patent, copyright, trade secret and trademark laws, and contractual restrictions, such as confidentiality agreements and licenses, to establish and protect our intellectual property.proprietary rights. We currently have onethree issued U.S. patentpatents and a number of U.S. patent applications pending. Our pending applications, if allowed, in conjunction with our issued patent,patents, will cover a materialsignificant portion of the technology underlying our products and services. We have also filed international patent applications corresponding to some of our U.S. applications.
In addition, we have several trademarks that are registered or pending registration in the U.S. or abroad. Although we rely on patent, copyright, trade secret and trademark law to protect our technology, we believe that factors such as the technological and creative skills of our personnel, new product developments, frequent product enhancements and reliable product maintenance are more essential to establishing and maintaining a technology leadership position. Others mayAs a result, our technology is susceptible to the development efforts of our competitors, who could independently develop technologiestechnology that areis similar or superior to our technology.ours.
We generally enter into confidentiality or license agreements with our employees, consultants and alliance partners, and generally control access to and distribution of our software, documentation and other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology or to develop products with the same functionality as our products. Policing unauthorized use of our products is difficult, anddifficult. Also, the laws of other countries in which we cannot be certain that the steps we have taken will preventmarket our products may offer little or no effective protection of our proprietary technology. Reverse engineering, unauthorized copying or other misappropriation of our proprietary technology particularly in foreign countries where the laws may not protect proprietary rights as fully as do the laws of the United States.could enable third parties to benefit from our technology without paying us for it, which would significantly harm our business. In addition, some of our license agreements require us to place the source code for our products into escrow. These agreements generally provide that some parties will have a limited, non-exclusive right to use this code if:
·if there is a bankruptcy proceeding instituted by or against us;
·us, we cease to do business without a successor;and have no successor, or
· we discontinue providing maintenance and support.
Substantial litigation regarding intellectual property rights exists in theour industry. We expect that software industry. Our software productsin our industry may be increasingly subject to third- partythird-party infringement claims as the number of competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Some of our competitors in the market for customer communications software may have filed or may intend to file patent applications covering aspects of their technology that they may claim our technology infringes. Some of theseSuch competitors maycould make a claim of infringement against us with respect to our products and technology. For example, weThird parties may currently have, been contacted byor may eventually be issued, patents upon which our current or future products or technology infringe. Any of these third parties might make a company that has asked us to evaluate the need for a licenseclaim of certain patents that this company holds, relating to certain call-center applications.infringement against us. See "Risk Factors-We may become involved in litigation over proprietary rights, which could be costly and time consuming."
Employees
As of December 31, 2001,2002, we had 409365 full-time employees, 78 of whom 61 were in our services and support group, 136106 were in sales and marketing, 136128 were in research and development, and 5970 were in finance, administration and operations. We have restructuredIn January 2003, we began implementing an outsourcing strategy, which involves subcontracting a significant portion of our organization throughout 2001,software programming, quality assurance and technical documentation activities to development partners with net workforce reductions of approximately 772 employees,staffing in order to streamline operations, eliminate redundant positions after the merger with Broadbase,India and reduce costs and bring our staffing and structure in line with industry standards and current economic conditions. These reductions have been significant, particularly in lightChina. As a result of the increasefirst phase of approximately 896 employees upon our merger with Broadbase in June 2001.
Our future performance depends in significant part upon the continued service of our key technical, sales and marketing, and senior management personnel, none of whom is bound by an employment agreement requiring service for any defined period of time. The loss of the services of one or more of our key employees could harm our business.
Our future success also depends on our continuing ability to attract, train and retain highly qualified technical, sales and managerial personnel. Competition for these personnel is intense, particularlythis strategy, in the San Francisco Bay Area wherefirst quarter of 2003 we are headquartered. Due totransferred the limited numberresponsibilities of people available with the necessary technical skills and understanding of the Internet, we may not be able to retain or attract these key personnel in the future. None of our employees are represented by a labor union. We have not experienced any work stoppages and consider our relations with our31 US-based employees to be good. See "Risk Factors-We may be unablethese development partners. We expect to hire and retain the skilled personnel necessarytransfer additional positions to develop and grow," "-We may face difficultiesthese development partners in hiring and retaining qualified sales personnel to sell our products and services, which could impair our growth," and "-Our cost reduction initiatives may adversely affect the morale and performancefuture quarters of our personnel and our ability to hire new personnel."2003.
ItemITEM 2. PropertiesPROPERTIES
Our corporate offices are located in Menlo Park, California, where we lease approximately 80,00059,000 square feet under 3two leases that expire in July 2002 and April 2007. As of December 31, 2001,2002, the annual base rent for these facilitiesleases totaled approximately $1.7 million. Also, we$983,000. We also lease approximately 35,000 square feet of space in Manchester, New Hampshire. TheThis lease expires in April 2005, and we have an option to extend the lease for two additional five- yearfive-year terms. The annual base rent for the New Hampshire lease totals approximately $451,000. We also lease approximately 12,000 square feet of space in Framingham, Massachusetts at an annual base rent of approximately $253,000. This lease expires in November 2007.
In addition, we lease smaller facilities and offices in several cities throughout the United States, and internationally throughout Europe, Australia, Japan, and Singapore.Korea. The terms of these leases renew semi-annually unless terminated. We believe that our office space will be sufficient to meet our needs through at least the next 12 months.
In addition, weWe have a total of approximately 161,00079,500 square feet of excess space available for disposition.sublease or renegotiation. Locations of the excess space include Menlo Park, and San Francisco, California, Natick, Massachusetts, Princeton, New Jersey and Marlow in the United Kingdom. Remaining lease commitment terms on these leases vary from threeeight to eightnine years. We are seeking to dispose ofsublease or renegotiate the obligations associated with the excess space. We have $27.4$10.8 million in accrued restructuring and merger costs as of December 31, 20012002, which is our estimate, as of that date, of the dispositionexit costs of these excess facilities. However, if we determine that any of these real estate markets continues to deteriorate, additional adjustments to this accrual may be required, which would result in additional restructuring costs in the period in which such determination is made. Likewise, if any of these real estate markets strengthen, and we are able to sublease the properties earlier or at more favorable rates than projected, adjustments to the accrual may be required that would increase income in the period in which such determination is made.
ItemITEM 3. Legal ProceedingsLEGAL 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 has breached its license agreement with Office Depot. Office Depot is seeking relief in the form of a refund of license fees and maintenance fees paid to KANA, attorneys' fees and costs. The litigation is currently in its early stages. We believe we have meritorious defenses to these claims and intend to defend this claim vigorously and do not expect it to have a material impact on our results of operations. However, the ultimate outcome of any litigation is uncertain, and either unfavorable or favorable outcomes could have a material negative impact on our results from operations, consolidated balance sheet and cash flows, due to defense costs, diversion of management resources and other factors.action vigorously.
The underwriters for our initial public offering, Goldman Sachs & Co., Lehman Bros, Hambrecht & Quist LLC, Wit Soundview Capital Corp as well as KANA and certain current and former officers of KANA have beenwere named as defendants in federal securities class action lawsuits filed in the United States District Court for the Southern District of New York. The parties have agreed that the claims against the current and former officers of KANA shall be dismissed without prejudice. The cases allege violations by more than 300 issuers of Section 11, 12(a)(2)stock, including KANA and Section 15the underwriters of the Securities Act of 1933 and violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934,various securities laws on behalf of a class of plaintiffs who purchased KANA's stock between September 21, 1999 and December 6, 2000 in connection with KANA'sour initial public offering. Specifically, the complaints allegedallege 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. Discovery against the issuers such as KANA and against the individuals such as the current and former officers of KANA has been stayed by order of the Court pending further developments with respect to the claims against the underwriters. We believe we have goodmeritorious defenses to these claims and intend to defend the action vigorously.
On April 16, 2002, Davox Corporation (now Concerto Software) filed an action against KANA in the Superior Court, Middlesex, Commonwealth of Massachusetts, asserting breach of contract, breach of implied covenant of good faith and fair dealing, unjust enrichment, misrepresentation, and unfair trade practices, in relation to an OEM Agreement between KANA and Davox under which Davox has paid a total of approximately $1.6 million in fees. Davox seeks actual and punitive damages in an amount to be determined at trial, and award of attorneys' fees. This action is in its early stages and has been re-filed in the Circuit Court of Cook County, Illinois. We believe we have meritorious defenses to these claims and intend to defend the action vigorously.
On February 20, 2003, Tumbleweed Communications Corp. filed suit against our customer Ameritrade, Inc., in the U.S. District Court for the Central District of California, alleging infringement of U.S. Patent No. 6,192,407, and seeking injunctive relief, damages and attorneys fees. KANA has agreed to assume defense of this case on behalf of Ameritrade. We believe we have meritorious defenses to these claims and intend to defend the action vigorously.
Other third parties have from time to time claimed, and others may claim in the future that we have infringed their past, current or future intellectual property rights. We have in the past been forced to litigate such claims. These claims, whether meritorious or not, could be time-consuming, result in costly litigation, require expensive changes in our methods of doing business or could require us to enter into costly royalty or licensing agreements, if available. As a result, these claims could harm our business.
As of December 31, 2002, approximately $700,000 was accrued as our estimate of costs related to the above legal proceedings. The ultimate outcome of any litigation is uncertain, and either unfavorable or favorable outcomes could have a material negative impact on the results from operations, consolidated balance sheet and cash flows, due to defense costs, diversion of management resources and other factors.
ItemITEM 4. Submission of Matters to a Vote of Security HoldersSUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 11, 2001, we held a special stockholders' meeting to vote on an amendment to our Certificate of Incorporation to authorize our board of directors to effect a reverse split of our outstanding common stock at an exchange ratio of one-for-ten. The votes cast for and against this action were 14,104,502 and 559,227, respectively, with 18,358 votes abstaining.Not applicable.
PART II
ItemITEM 5. Market for the Registrant's Common Equity and Related Stockholder MattersMARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the Nasdaq Stock Market under the Symbolsymbol "KANA".
The following table sets forth the range of high and low closing sales prices for each period indicated, as adjusted for the two-for-one forward stock split effective February 2000, and the one-for-ten reverse stock split effective December 2001:
High | Low | High | Low | |||||||
Fiscal 2000 | ||||||||||
First Quarter | $1,698.10 | $680.00 | ||||||||
Second Quarter | 618.80 | 296.30 | ||||||||
Third Quarter | 722.50 | 220.00 | ||||||||
Fourth Quarter | 283.60 | 88.40 | ||||||||
Fiscal 2001 | ||||||||||
First Quarter | 120.00 | 17.19 | $120.00 | $17.19 | ||||||
Second Quarter | 25.60 | 6.25 | 25.60 | 6.25 | ||||||
Third Quarter | 20.40 | 3.60 | 20.40 | 3.60 | ||||||
Fourth Quarter | 21.05 | 3.70 | 21.05 | 3.70 | ||||||
Fiscal 2002 | ||||||||||
First Quarter | 29.16 | 11.25 | ||||||||
Second Quarter | 16.17 | 3.84 | ||||||||
Third Quarter | 3.56 | 0.80 | ||||||||
Fourth Quarter | 3.40 | 0.65 | ||||||||
There were approximately 1,5571,390 stockholders of record as of February 28, 2002.2003. This number does not include stockholders whose shares are held in trust by other entities. The actual number of stockholders is greater than this number of record holders, of record.and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. We estimate that the number of beneficial stockholdersowners of the shares of our common stock as of February 28, 20022003 was approximately 60,000.55,000.
We have not paid any cash dividends on our capital stock. We currently intend to retain ourany earnings to fund the development and growth of our business and, therefore, do not anticipate paying any cash dividends in the foreseeable future. In addition, our existing credit facilities prohibit the payment of cash or stock dividends on our capital stock without the lender's prior written consent. See Item 7-"Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources."
Recent Unregistered Sales of Securities
The following table provides information about our unregistered sales of KANA securities since January 1, 2001.2002:
Class of Purchasers | Date of Sale | Title of Securities | Number of Securities | Aggregate Purchase Price* | Form of Consideration | Date of Sale | Title of Securities | Number of Securities | Aggregate Purchase Price | Form of Consideration |
1 investor | August 7, 2001 | Warrant to Purchase Common Stock | 25,000 | $1,000,000 | Execution of Amendment to License Agreement | |||||
1 investor | August 9, 2001 | Warrant to Purchase Common Stock | 150,000 | $99,750 | Performance of Master Alliance Agreement | |||||
1 investor | September 5, 2001 | Warrant to Purchase Common Stock | 5,000 | $7,500 | Agreement to refer customers | |||||
20 investors | February 8 and 11, 2002 | Common Stock | 2,910,000 | $34,500,000 | Cash | |||||
2 investors | November 29, 2001 | Warrants to Purchase Common Stock | 386,118 | $3,861,180 | Execution of Share Purchase Agreement with investors | November 13, 2002 | Warrant to Purchase Common Stock | 200,000 | $322,000* | Amendment to Lease Agreement |
20 investors | February 8 and 11, 2002 | Common Stock | 2,910,000 | $34,500,000 | Cash | |||||
___________
* The aggregate purchase price represents the aggregate exercise price of a warrant, and assumes the purchaser exercises the warrant in full, using cash to pay the exercise price. None of the purchasers paid any cash consideration to receive warrants.
These warrants have not yet been exercised.
All sales were made in reliance on Section 4(2) of the Securities Act and/or Regulation D promulgated under the Securities Act. The securities were sold to a limited number of people with no general solicitation or advertising. The purchasers were sophisticated investors with access to all relevant information necessary to evaluate the investment and who represented to the issuer that the shares were being acquired for investment.
ItemITEM 6. Selected Consolidated Financial DataSELECTEED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" andOperations," the consolidated financial statements of KANA Software, Inc. and the related notes to consolidated financial statements included elsewhere in this annual report on Form 10-K.10-K and in our prior annual and quarterly reports, and other information we have filed with the SEC.
The consolidated statement of operations data for each of the years in the five-yearfive year period ended December 31, 2001,2002, and the consolidated balance sheet data at December 31, 2002, 2001, 2000, 1999 1998 and 19971998 are derived from our audited consolidated financial statements. The diluted net loss per share computation excludes potential shares of common stock (preferred stock,issuable upon exercise or conversion of other securities, including outstanding options to purchase common stock and common stock subject to repurchase rights, held by us), sincebecause their effect would be antidilutive. See Note 1 of Notes"Notes to the Consolidated Financial StatementsStatements" included in this report for a detailed explanation of the determination of the shares used to compute basic and diluted net loss per share. The historical results are not necessarily indicative of results to be expected for any future period. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."Operations".
YearsYear Ended December 31,
---------------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
1997
--------- ---------- ----------- --------- --------- ---------
(in thousands, except per share amounts)
Consolidated Statement of Operations Data:
Revenues:
License.....................................License.................................................. $ 41,530 $ 37,963 $ 75,360 $ 10,536 $ 2,014
$ --
Service..................................... 48,907 37,657Service.................................................. 37,560 52,632 42,595 2,966 333
617
--------- ---------- ----------- --------- ---------
---------
Total revenues.............................. 86,870 113,017revenues........................................... 79,090 90,595 117,955 13,502 2,347
617
--------- ---------- ----------- --------- --------- ---------
Cost of revenues:
License.....................................License.................................................. 3,402 2,536 2,856 271 54
--
Service..................................... 48,074 51,144Service.................................................. 29,250 51,799 56,082 6,383 666
253
--------- ---------- ----------- --------- --------- ---------
Total cost of revenues....................... 50,610 54,000revenues.................................... 32,652 54,335 58,938 6,654 720
253
--------- ---------- ----------- --------- ---------
---------
Gross profit.................................profit.............................................. 46,438 36,260 59,017 6,848 1,627
364
--------- ---------- ----------- --------- --------- ---------
Operating expenses:
Sales and marketing.........................marketing...................................... 37,423 69,635 88,186 21,199 5,504
512
Research and development....................development................................. 25,933 35,558 42,724 12,854 5,669
971
General and administrative..................administrative............................... 13,053 21,215 18,945 5,018 1,826
378
Amortization of stock-based compensation....compensation................. 16,620 15,880 14,715 80,476 1,456 113
Amortization of goodwill and
identifiable intangibles...................intangibles................................ 4,800 127,660 873,022 -- -- --
Merger and transition related costs.........costs...................... -- 13,443 6,564 5,635 --
--
Restructuring costs.........................costs...................................... (5,086) 89,047 -- --
In process research and development.........development...................... -- -- 6,900 -- --
--
Goodwill impairment.........................impairment...................................... 55,000 603,446 2,084,841 -- --
--
--------- ---------- ----------- --------- --------- ---------
Total operating expenses....................expenses................................. 147,743 975,884 3,135,897 125,182 14,455
1,974
--------- ---------- ----------- --------- ---------
---------
Operating loss...............................loss............................................ (101,305) (939,624) (3,076,880) (118,334) (12,828)
(1,610)
Impairment of investment.....................investment.................................. -- (1,000) -- -- -- --
Other income (expense), net..................net............................... 913 1,521 4,834 (744) 227
57
--------- ---------- ----------- --------- --------- ---------
Loss from continuing operations..............operations........................... (100,392) $ (939,103) $(3,072,046) $(119,078) $ (12,601) $ (1,553)
Discontinued operation:
Income (loss) from operations of discontinued operation....................operation.. -- (125) 1,173 335 -- --
Loss on disposal, including provision of $1.1 million
for operating losses during phase-out period...................period............ 381 (3,667) -- -- --
Cumulative effect of accounting change related
to the elimination of negative goodwill................. 3,901 -- -- -- --
--------- ---------- ----------- --------- ---------
---------
Net loss............................ $(942,895)loss......................................... $ (96,110) (942,895) (3,070,873) (118,743) (12,601)
(1,553)
========= ========== =========== ========= ========= =========
Basic and diluted net loss per share:
Loss from continuing operations ................................... $ (4.48) $ (68.33) $ (395.83) $ (46.21) $ (20.13)
$ (3.74)
Income (loss) from discontinued operation..operation............... 0.02 (0.28) 0.15 0.13 --
Gain on elimination of negative goodwill................ 0.17 -- -- -- --
--------- ---------- ----------- --------- --------- ---------
Net loss ................................................................................. $ (4.29) $ (68.61) $ (395.68) $ (46.08) $ (20.13)
$ (3.74)
========= ========== =========== ========= ========= =========
Shares used in computing basic and
diluted net loss per share amounts.........amounts...................... 22,403 13,743 7,761 2,577 626
415
========= ========== =========== ========= ========= =========
December 31,
---------------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
1997
--------- ---------- ----------- --------- --------- ---------
(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and
Short-term investments......................short-term investments.................................. $ 32,498 $ 40,130 $ 76,499 $ 53,217 $ 14,035
$ 5,594
Working capital..............................capital........................................... (4,533) (13,697) 52,753 38,591 11,833
5,364
Total assets.................................assets.............................................. 80,550 160,672 980,124 70,229 16,876
6,158Total long-term debt...................................... -- 108 148 412 726
Total stockholders' equity...................equity................................ $ 21,952 $ 66,839 $ 899,452 $ 48,500 $ 12,951
$ 5,684
ITEM 7. MANAGEMENT'S DISCLOSUREDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
The following discussion of our financial condition and results of operations and other parts of this report contain forward-lookingforward looking statements that are not historical facts but rather are based on current expectations, estimates and projections about our business and industry, and our beliefs and assumptions. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates" and variations of these words and similar expressions are intended to identify forward-lookingforward looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, somemany of which are beyond our control, are difficult to predict and could cause actual results to differ materially from"from those expressed or forecasted in the forward-lookingforward looking statements. These risks and uncertainties include, but are not limited to, those described in "Risk Factors" and elsewhere in this report. Forward-lookingForward looking statements that werewe believed to be true at the time we made them may ultimately prove to be incorrect or false. Readers are cautioned not to place undue reliance on forward-lookingforward 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-lookingforward looking statement, whether as a result of new information, future events or otherwise.
OverviewOVERVIEW
We are a leading provider of enterprise Customer Relationship Management (eCRM) software solutions that deliver integrated communicationsolutions. These enterprise customer support and businesscommunications applications are built on a Web-architectured platform.Web-architected platform incorporating our KANA eCRM architecture, which provides users with full access to the applications using a standard Web browser and without requiring them to install additional software on their individual computers. Our software helps our customers provide external-facing customer support, and to better service, market to, and understand their customers and partners, while improving results and decreasing costs in contact centers and marketing departments. We offer multi-channel customer relationship management thatoptimized versions of our software for several specific industries including healthcare, financial services, high technology manufacturing, and telecommunications, among others. Our KANA iCARE (Intelligent Customer Acquisition and Retention for the Enterprise) application suite combines our KANA eCRM Architecturearchitecture with several enterprisecustomer- focused service, marketing and commerce software applications. Our customer-focused service and marketing softwareThese applications enable organizations to improve customer and partner relationships by allowing them to interact with their customers and partners through webthe company over the communication channels they prefer, whether by Web contact, web collaboration, e-mail andor telephone.
In 1999, we completed mergers with Connectify, Business Evolution and netDialog pursuant to which these companies became our wholly-owned subsidiaries. We issued an aggregate of approximately 999,303 shares of our common stock in exchange for all outstanding shares and warrants of the acquired companies and reserved 41,669 shares of common stock for issuance upon the exercise of Connectify options and warrants. The mergers were each accounted for as a pooling of interests.
On April 19, 2000, we completed a merger with Silknet under which Silknet became our wholly-owned subsidiary. The transaction was accounted for using the purchase method of accounting. The purchase price approximated $3.8 billion. In connection with the merger, we recorded goodwill and intangible assets of approximately $3.8 billion, which we were amortizing over a period of three years. During the quarters ended March 31, 2001 and December 31, 2000, we performed an impairment assessment of the identifiable intangibles and goodwill recorded in connection with the acquisition of Silknet. As a result of our review, we recorded impairment charges of $603.4 million and $2.1 billion, respectively, relating to goodwill.
On June 29, 2001, we completed a merger with Broadbase. This transaction was accounted for using the purchase method of accounting. The purchase price approximated $101.4 million.
In December 2001, our Board of Directors recommended and our stockholders approved a one-for-ten reverse stock split of the common stock for stockholders of record on December 13, 2001. All share and per share amounts have been retroactively restated to reflect the effect of this stock split.
In 1999, we initiated our KANA Online business. Our KANA Online business provided a hosted environment of our software to customers. Our servers for this business arewere maintained by a third-party service provider. In the second quarter of 2001, we adopted a plan to discontinue the KANA Online business. In the second quarter of 2002, all KANA Online operations ceased. We have accounted for our KANA Online business as a discontinued operation.
We derive our revenues from the sale of software product licenses and from professional services including implementation, consulting, training and maintenance. License revenue is recognized when persuasive evidence of an agreement exists, the product has been delivered, the arrangement does not involve significant customization of the software by us, the license fee is fixed or determinable and collection of the fee is reasonably assured. If the arrangement involves significant customization of the software by us, the fee, excluding the portion attributable to maintenance, is recognized using the percentage-of-completion method. Service revenue includes revenues from maintenance contracts, implementation, training and consulting services. Revenue from maintenance contracts is recognized ratably over the term of the contract. Revenue from implementation, training, and consulting services is recognized as the services are provided.
Since 1997, we have incurred substantial costs to develop our products and to recruit, train and compensate personnel for our engineering, sales, marketing, client services and administration departments. As a result, we have incurred substantial losses since inception. For the twelve months ended December 31, 2001,2002, we incurred a net loss of $942.9$96.1 million. Included in the net loss is approximately $603.4$55.0 million related to the impairment of goodwill in 2001.2002. As of December 31, 2001,2002, we had an accumulated deficit of $4.1 billion.$4.2 billion, which includes approximately $2.7 billion related to goodwill impairment charges. We expect to decrease our operating losses in 2003 as a result of our restructuring activities in 2001, as well as ongoing personnel and facility cost reductions throughout 2002. We expect our cash and cash equivalents and short-term investments on hand will be sufficient to meet our working capital and capital expenditure needs for the next 12 months.
As of December 31, 2001,2002, we had 365 full-time employees, which is a decrease from 409 full-time employees.employees at December 31, 2001. The decrease during 2002 was based primarily upon attrition. We have restructured our organization throughout 2001, with net workforce reductions of approximately 772 employees, in order to streamline operations, eliminate redundant positions after the merger with Broadbase, reduce costs and bring our staffing and structure in line with industry standards and current economic conditions. These reductions have been significant, particularly in light of the increaseaddition of approximately 896 employees upon our merger with Broadbase in June of 2001.
We believe that our prospects must be considered in light of the risks, expenses and difficulties frequently experienced by companies in early stages of development, particularly companies in new and rapidly evolving markets like ours. Although we have experienced revenue growth in the past, our revenues have declined in recent periods, and we may not be able to achieve revenue growth in the future, particularly in light of increasing competition in our markets, the weak economy, and declining expenditures on enterprise software products. Furthermore, we may not achieve or maintain profitability in the future.
Critical Accounting Policies and EstimatesCRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.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. On an on-going basis, weWe continually evaluate our estimates, including those related to revenue recognition, collectibility of receivables, goodwill and intangible assets, contract loss reserve, product warranties, income taxes, and restructuring. We base our estimates on historical experience and on various other assumptions that are believedwe believe to be reasonable under the circumstances. This forms the basis of judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies and the related judgments and estimates significantly affect the preparation of our consolidated financial statements:
Revenue Recognition. In addition to determining our results of operations for a given period, our revenue recognition determines the timing of certain expenses, such as commissions and royalties. Revenue recognition rules for software companies are very complex, and certainvarious judgments affect the application of our revenue policy. The amount and timing of our revenue is difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter and could result in future operating losses.
License revenue is recognized when there is persuasive evidence of an arrangement, delivery to the customer has occurred, provided the arrangement does not require significant customization of the software, the fee is fixed or determinable and collectibility is reasonably assured.
In software arrangements that include rights to multiple software products and/or services, we allocate the total arrangement fee among each of the deliverables using the residual method, under which revenue is allocated to undelivered elements based on vendor-specific objective evidence of fair value of such undelivered elements andwith the residual amounts of revenue arebeing allocated to the delivered elements. Elements included in multiple element arrangements couldprimarily 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. DeterminingVendor-specific objective evidence for maintenance is based upon stated contractual renewal rates. Evaluating whether sufficient and appropriate vendor-specific objective evidence exists to use in allocating revenue to undelivered elements, and the interpretation of such evidence to determine the fair value of undelivered elements is subject to judgment and resulting fair values used in determining the value of undelivered elements is also subjectestimates that affect when and to judgment and estimates.
what extent we may recognize revenues from a given contractual arrangement.
Probability of collection is based upon the assessment of the customer's financial condition through the review of their current financial statements or credit reports. For follow-on sales to existing customers, prior payment history is also used to evaluateconsidered in assessing probability of collection. We are required to exercise significant judgment in deciding whether collectibility is reasonably assured, and such judgments may materially affect the timing of our revenues and our results of operations.
Revenues from customer support services are recognized ratably over the term of the contract, typically one year. Consulting revenues are primarily related to implementation services performed on a time-and-materials basis or, in certain situations, on a fixed-fee basis, under separate service arrangements. Implementation services are periodically performed under fixed-fee arrangements and in such cases, consulting revenues are generally recognized on a percentage-of- completionpercentage-of-completion basis. When acceptance is not assured or an ability to reliably estimate costs is not possible, we use the completed contract method, whereby revenues are deferred until all contractual obligations are met, and acceptance, if required in the contract, is received. Revenues from consulting and training services are recognized as services are performed.
Collectibility of Receivables. In order to recognize revenue from a transaction, collectibility must be determined by management to be reasonably assured. If collectibility is not determined to be reasonably assured, amounts billed to customers are recorded as deferred revenue. For sales to existing customers, prior payment history is a factor in assessing probability of collection.
We make judgments as to our ability to collect outstanding receivables and provide allowances for receivables that may not be collectible. A considerable amount of judgment is required to assess the ultimate realization of receivables. In assessing collectibility, we consider the age of the receivable, our historical collection experience, current economic trends, and the current credit-worthiness of each customer. In the future, additional provisions for doubtful accounts may be needed and the future results of operations could be materially affected.
Reserve for Loss Contract. We arewere party to a contract with a customer that involves aprovided for fixed fee as paymentpayments in exchange for services upon meeting certain milestone criteria. We estimateIn order to assess whether a loss reserve was necessary, we estimated the total expected costs of providing services necessary to complete the contract and comparecompared 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 recent restructuring in the third quarter of 2001, substantially all of the remaining professional services arerequired under the contract were being provided by a third party. Sinceparty, and we recorded an additional loss reserve of $6.1 million in the quarter ended September 30, 2001, based upon an analysis of costs are expected to exceedcomplete 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 fees received, loss reserves arenegotiations with a third-party integrator that had been providing implementation services to the customer, we recorded and expensed ina charge of approximately $15.6 million to cost of service revenues. Estimates of applicable costs are subject to revision and could vary materially from estimates, resulting in either increases or decreasesservices revenue in the estimated loss reservesecond quarter of 2002 and in accordance with the terms of the amendment were relieved from providing any further implementation services under the contract. The amendment required us to transfer $6.9 million to an escrow account (which included $5.8 million previously reported as restricted cash) to compensate any third party integrator for the continued implementation of the customer's system. The charge also included $8.5 million of fees which could havewe had paid the third party integrator prior to the amendment and approximately $200,000 of related expenditures. During the second quarter of 2002, we received a material impact on costscheduled payment of service revenues$4.0 million associated with the original agreement which is reported as deferred revenue. The $4.0 million will be recognized in future periods.
Collectibility of Receivables. A considerable amount of judgment is required to assess the ultimate realization of receivables, including assessing the probability of collectionperiods as revenue as we fulfill our maintenance and the current credit-worthiness of each customer. We have recorded significant increases in the allowance for doubtful accounts in fiscal 2001 due to the rapid downturn in the economy, and in the technology sector in particular. There is no assurance that we will not need to record increases to the allowance in the future.training obligations.
Accounting for Internal UseInternal-Use Software. Software developmentInternal-use software costs, including costs incurredfees paid to purchase third partyparties to implement the software, are capitalized beginning when we have determined various factors are present, including among others, that technology exists to achieve the performance requirements, buy versus internal development decisionswe have been made a decision as to whether we will purchase the software or develop it internally and the we have authorized the funding for the project. Capitalization of software costs ceases when the software implementation is substantially complete and is ready for its intended use, and isthe capitalized costs are amortized over itsthe software's estimated useful life of generally three years(generally five years) using the straight-line method. As of December 31, 2001,2002, we had $4.8$15.1 million of capitalized costs of internal use software.software, of which $14.4 million has been subject to depreciation based upon deployment dates of the related projects. The remainder was attributable to software that we deployed in January 2003, at which time we began depreciating the associated capitalized costs.
When events or circumstances indicate the carrying value of internal use software might not be recoverable, we will assess the recoverability of these assets by determining whether the amortization of the asset balance over its remaining life can be recovered through undiscounted future operating cash flows. The amount of impairment, if any, is recognized to the extent that the carrying value exceeds the projected discounted future operating cash flows and is recognized as a write down of the asset. In addition, if it is no longer probable that computer software being developed will be placed in service, the asset will be adjusted to the lower of its carrying value or fair value, if any, less direct selling costs. Any such adjustment would result in an expense in the period recorded, which could have a material adverse effect on our consolidated statement of operations. Based on our assessment as of December 31, 2002, we determined that no such impairment of internal-use software existed.
Restructuring. During 2001, we recorded significant reserves in connection with our restructuring program. These reserves includeincluded 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 so that we mayto help us estimate the amount of the accrual. This process involves significant judgments regarding these markets. If the real estate market continues to worsen, additional adjustments to the reserve may be required, which would result in additional restructuring expenses in the period in which such determination is made. Likewise, if the real estate market strengthens, and we are able to sublease the properties earlier or at more favorable rates than projected, or if we are otherwise able to negotiate early termination of obligations on favorable terms, adjustments to the reserve may be required that would increase income in the period in which such determination is made.
In November of 2002, we entered into an amendment to a facility lease. In connection with this lease amendment, our evaluation of real estate market conditions relating to this and other excess leased facilities, and discussions with our other landlords, we reduced our associated restructuring reserve by approximately $9.1 million. This reduction was primarily comprised of a $4.0 million payment made in connection with the amendment, as well as approximately $5.1 million in restructuring cost savings resulting from this amendment that were reflected as a reduction in the restructuring reserve in our operating results for the quarter ended December 31, 2002.
Goodwill and Intangible Assets. Consideration paid in connection with acquisitions is required to be allocated to the acquired assets, including identifiable intangible assets, and liabilities acquired. Acquired assets and liabilities are recorded based on our estimate of fair value, which requires significant judgment with respect to future cash flows and discount rates. For intangible assets other than goodwill, we are required to estimate the useful life of the asset and recognize its cost as an expense over the useful life. We use the straight-line method to expense long-lived assets, which results in an equal amount of expense in each period. Amortization of goodwill ceased as of January 1, 2002 upon our adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). Instead, we are now required to test goodwill for impairment under certain circumstances and write down goodwill when it is impaired. We have determined that the consolidated results of KANA comprise one reporting unit for the purpose of impairment testing throughout 2002.
We regularly evaluate acquired businesses for potential indicators of impairment of goodwill and intangible assets. Our judgments regarding the existence of impairment indicators are based on market conditions, operational performance of our acquired businesses and identification of reporting units. Future events could cause us to conclude that impairment indicators exist and that goodwill and other intangible assets associated with our acquired businesses are impaired. Beginning
Under the transition provisions of SFAS No. 142, there was no goodwill impairment at January 1, 2002 based upon our analysis completed at that time. However, during the quarter ended June 30, 2002, circumstances developed that indicated the goodwill was likely impaired and we performed an impairment analysis as of June 30, 2002. This analysis resulted in fiscala $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 methodologyrevision of estimates of our revenues and net loss for assessing potential impairmentssubsequent quarters, based upon financial results for the second quarter of intangibles changed based on new accounting rules issued by2002 and the Financial Accounting Standards Board.reduction of estimated revenue and cash flows in future quarters. We used relevant market data, including KANA's market capitalization during the period following the announcement of preliminary results for the second quarter of 2002, to calculate an estimated fair value and the resulting goodwill impairment. The estimated fair value was compared to the corresponding carrying value of goodwill at June 30, 2002, which resulted in a revaluation of goodwill as of June 30, 2002. The remaining amount of goodwill as of December 31, 2002 was $7.4 million. Any resultingfurther impairment loss could have a material adverse impact on our financial condition and results of operations.
Warranty Allowance.Income Taxes. We must make estimates of potential warranty obligations. We actively monitor and evaluate the quality of our software and analyze any historical warranty costs when we evaluate the adequacy of our warranty allowance. Significant management judgments and estimates must be made and used in connection with establishing the warranty allowance in any accounting period. Material differences may result in the amount and timing of our expenses for any period if management made different judgments or utilized different estimates. To date our provisions for warranty allowance have been immaterial.
Income taxes. We are required to 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 must 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 must 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 assetvaluation allowance would be made, increasing our income in the period in which such determination was made.
Contingencies and Litigation. We are subject to proceedings, lawsuits and other claims.claims and proceedings. We assess the likelihood of any adverse judgments or outcomes to these matters as well as ranges of probable losses. A determination of the amount of loss contingency required, if any, for these matters are made after careful analysis of each individual matter. The required loss contingencies may change in the future as the facts and circumstances of each matter changes.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth a summary of our unaudited quarterly operating results for each of the eight quarters in the period ended December 31, 2001.2002. The information has been derived from our unaudited consolidated financial statements that, in management's opinion, have been prepared on a basis consistent with the audited consolidated financial statements contained elsewhere in this annual report and include all adjustments, consisting only of only normal recurring adjustments, necessary for a fair presentation of this information when read in conjunction with our audited consolidated financial statements and notes thereto. The operating results for any quarter are not necessarily indicative of results for any future period.
Quarter Ended
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec 31, Mar. 31, June 30, Sept. 30, Dec 31,
2000 2000 2000 2000 2001 2001 2001 2001 2002 2002 2002 2002
--------- --------- --------- -------------------- --------- --------- --------- ---------
(in thousands)thousands, except per share amounts)
Consolidated Statement
of Operations Data:
Revenues:
License......................... $ 7,329 $ 15,574 $ 23,730 $ 28,727License.......................... $ 11,857 $ 9,587 $ 2,891 $ 13,628 Service......................... 2,505 8,280 15,312 11,560 10,656 12,542 14,507 11,202$ 15,129 $ 8,309 $ 8,784 $ 9,308
Service.......................... 11,614 14,046 15,286 11,686 10,014 8,881 9,243 9,422
--------- --------- --------- -------------------- --------- --------- --------- ---------
Total revenues................. 9,834 23,854 39,042 40,287 22,513 22,129 17,398 24,830revenues.................. 23,471 23,633 18,177 25,314 25,143 17,190 18,027 18,730
--------- --------- --------- -------------------- --------- --------- --------- ---------
Cost of revenues:
License......................... 143 658 918 1,137License.......................... 633 653 503 747 Service......................... 3,413 9,438 14,824 23,469 15,445 7,378 20,224 5,027965 1,056 548 833
Service.......................... 16,403 8,882 21,003 5,511 3,907 19,891 2,762 2,690
--------- --------- --------- -------------------- --------- --------- --------- ---------
Total cost of revenues...................... 3,556 10,096 15,742 24,606 16,078 8,031 20,727 5,774revenues............ 17,036 9,535 21,506 6,258 4,872 20,947 3,310 3,523
--------- --------- --------- -------------------- --------- --------- --------- ---------
Gross profit (loss).............. 6,278 13,758 23,300 15,681............... 6,435 14,098 (3,329) 19,056 20,271 (3,757) 14,717 15,207
--------- --------- --------- -------------------- --------- --------- --------- ---------
Operating expenses:
Sales and marketing............. 11,210 21,338 25,749 29,889marketing.............. 26,534 13,789 19,205 10,107 10,305 10,395 8,732 7,991
Research and development.................... 5,239 11,059 12,993 13,433development......... 12,949 6,273 10,236 6,100 6,638 6,512 6,389 6,394
General and administrative................. 1,835 3,747 6,347 7,016administrative....... 6,068 2,523 9,500 3,124 3,220 3,383 3,458 2,992
Amortization of stock-
based compensation............. 3,320 3,593 3,790 4,012compensation.............. 4,112 2,250 4,177 5,341 9,887 3,041 1,951 1,741
Amortization of goodwill and
identifiable intangibles.................... -- 247,043 312,865 313,114intangibles........ 86,852 13,730 13,551 13,527 1,200 1,200 1,200 1,200
Merger and transition
related costs.................. -- 6,564 -- --costs................... -- 6,676 4,841 1,926 Restructuring costs............. -- -- -- --
Restructuring costs.............. 19,930 34,327 32,081 2,709 In process research and
development.................... -- 6,900-- -- (5,086)
Goodwill impairment.............. 603,446 -- -- -- -- -- --
Goodwill impairment............. -- -- -- 2,084,841 603,446 --55,000 -- --
--------- --------- --------- -------------------- --------- --------- --------- ---------
Total operating expenses....... 21,604 300,244 361,744 2,452,305expenses........ 759,891 79,568 93,591 42,834 31,250 79,531 21,730 15,232
--------- --------- --------- -------------------- --------- --------- --------- ---------
Operating loss................... (15,326) (286,486) (338,444) (2,436,624)loss.................... (753,456) (65,470) (96,920) (23,778) (10,979) (83,288) (7,013) (25)
Impairment of investment.........investment.......... -- -- -- (1,000) -- -- -- --
-- -- -- (1,000)
Other income (expense), net...... 644 1,247 2,039 904net....... 302 (252) 858 613 298 297 175 143
--------- --------- --------- -------------------- --------- --------- --------- ---------
Loss from continuing operations . (14,682) (285,239) (336,405) (2,435,720)operations... (753,154) (65,722) (96,062) (24,165) (10,681) (82,991) (6,838) 118
Discontinued operation:
Income (loss) from operations
of discontinued operation..... 237 295 71 570operation...... 258 (383) -- -- -- -- -- --
Loss on disposal, including
provision of $1.1 million
for operating losses during
phase-out period..............period............... -- (3,667) -- -- -- 381 -- --
Cumulative effect of accounting
change related to the elimination
of negative goodwill............. -- -- -- -- 3,901 -- (3,667) -- --
--------- --------- --------- -------------------- --------- --------- --------- ---------
Net loss................ $ (14,445) $(284,944) $(336,334) $(2,435,150)loss................. $(752,896) $ (69,772) $ (96,062) $ (24,165) ========= ========= ========= =========== ========= ========= ========= =========$ (6,780) $ (82,610) $ (6,838) $ 118
--------- --------- --------- --------- --------- --------- --------- ---------
Basic and diluted net
loss per share.................. (8.23) (0.76) (0.53) (1.76) (0.32) (3.63) (0.30) 0.01
--------- --------- --------- --------- --------- --------- --------- ---------
Shares used in computing
basic and diluted net
loss per share.................. 91,518 91,534 180,376 13,743 21,071 22,762 22,851 22,403
--------- --------- --------- --------- --------- --------- --------- ---------
As a Percentage of Total Revenues:
Revenues:
License......................... 74.5License.......................... 50.5 % 65.340.6 % 60.815.9 % 71.353.8 % 52.760.2 % 43.348.3 % 16.648.7 % 54.949.7 %
Service......................... 25.5 34.7 39.2 28.7 47.3 56.7 83.4 45.1Service.......................... 49.5 59.4 84.1 46.2 39.8 51.7 51.3 50.3
--------- --------- --------- -------------------- --------- --------- --------- ---------
Total revenues.................revenues.................. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
--------- --------- --------- -------------------- --------- --------- --------- ---------
Cost of revenues:
License......................... 1.5 2.8 2.4License.......................... 2.7 2.8 2.8 3.0 2.93.8 6.1 3.0 Service......................... 34.7 39.6 38.0 58.3 68.6 33.3 116.2 20.24.4
Service.......................... 69.9 37.6 115.5 21.8 15.5 115.7 15.3 14.4
--------- --------- --------- -------------------- --------- --------- --------- ---------
Total cost of
revenues...................... 36.2 42.3revenues....................... 72.6 40.3 61.1 71.4 36.3 119.1 23.3118.3 24.7 19.4 121.9 18.4 18.8
--------- --------- --------- -------------------- --------- --------- --------- ---------
Gross profit (loss).............. 63.8 57.7............... 27.4 59.7 38.9 28.6 63.7 (19.1) 76.7(18.3) 75.3 80.6 (21.9) 81.6 81.2
--------- --------- --------- -------------------- --------- --------- --------- ---------
Selected operating
expenses:
Sales and marketing............. 114.0 89.5 66.0 74.2 117.9 62.3 110.4 40.7marketing.............. 113.1 58.3 105.7 39.9 41.0 60.5 48.4 42.7
Research and
development.................... 53.3 46.4 33.3 33.3 57.5 28.3 58.8 24.6development..................... 55.2 26.5 56.3 24.1 26.4 37.9 35.4 34.1
General and
administrative................. 18.7administrative.................. 25.9 % 15.710.7 % 16.352.3 % 17.412.3 % 27.012.8 % 11.419.7 % 54.619.2 % 12.616.0 %
The amount and timing of our operating expenses generally will vary from quarter to quarter depending on our level of actual and anticipated business activities. Our revenues and operating results are difficult to forecast and will fluctuate, and we believe that period-to-period comparisons of our operating results will not necessarily be meaningful. As a result, you should not rely upon them as an indication of future performance.
Results of Operations
The following table sets forth selected data for the periods presentedpresented. Percentages are expressed as a percentage of total revenues.
YearsYear Ended December 31,
----------------------------------------------------------------------------------
2002 2001 2000
1999
---------- ----------- ------------------------ ------------- --------------
Revenues:
License................................................ 43.7License....................... $ 41,530 53 % 66.7$ 37,963 42 % 78.0$ 75,360 64 %
Service................................................ 56.3 33.3 22.0
---------- ----------- ----------Service....................... 37,560 47 52,632 58 42,595 36
-------- ----- -------- ---- -------- -----
Total revenues....................................... 100.0 100.0 100.0
---------- ----------- ----------revenues.............. 79,090 100 90,595 100 117,955 100
Cost of revenues:
License................................................ 2.9 2.5 2.0
Service................................................ 55.4 45.3 47.3
---------- ----------- ----------License....................... 3,402 4 2,536 3 2,856 2
Service....................... 29,250 37 51,799 57 56,082 48
-------- ----- -------- ---- -------- -----
Total cost of revenues............................... 58.3 47.8 49.3
---------- ----------- ----------revenues...... 32,652 41 54,335 60 58,938 50
-------- ----- -------- ---- -------- -----
Gross profit............................................ 41.7 52.2 50.7
Selected operatingprofit................... 46,438 59 36,260 40 59,017 50
Operating expenses:
Sales and marketing.................................... 80.2 78.0 157.0marketing........... 37,423 47 69,635 77 88,186 75
Research and development............................... 40.9 37.8 95.2development...... 25,933 33 35,558 39 42,724 36
General and administrative............................. 24.4 16.8 37.2administrative.... 13,053 17 % 21,215 23 % 18,945 16 %
COMPARISON OF THE YEARS ENDED DECEMBER 31, 20012002 AND 20002001
Revenues
Total revenues decreased by 23%13% to $86.9$79.1 million for the year ended December 31, 2002 from $90.6 million for the year ended December 31, 2001 from $113.0primarily as a result of decreased service revenues.
License revenues increased by 9% to $41.5 million for the year ended December 31, 2000 primarily as a result of decreased license revenue as discussed below.
License revenues decreased by 50% to2002 from $38.0 million for the year ended December 31, 2001 from $75.4 million for 2000.2001. This decreaseincrease in license revenue was primarily due to a decreasean increase in the numberaverage selling price of license transactions, resulting from the weakness in the economy throughout 2001, andlicenses, particularly in the third quarter of 2001 following the events of September 11, 2001. This decrease was partially offset in the fourth quarter byEurope, as well as sales of products formerly offered by Broadbase, which were not included in our revenues prior to the June 2001 merger. merger (license revenues recorded by Broadbase through June 2001 totaled $16.1 million). The increase in the average selling price of licenses in recent periods reflects the growth in our sales to larger organizations that often license our applications for more users and that need more functionality. We believe this growth has resulted, in significant part, from our increased use of indirect channels to market and sell our products, which allow us to market our products more effectively to Global 2000 organizations. In addition, we believe the introduction of our KANA iCARE suite in 2001, with its deployment and integration advantages, has facilitated sales of licenses for multiple applications to our customers resulting in larger transaction sizes than those involving a stand-alone application. We expect that license transactions closed in any particular quarter will continue to constitute a significant percentage of our license revenues in that quarter. One customer accounted for 11% of our total revenues in 2002.
License revenues represented 44%53% of total revenues in 20012002 and 67%42% in 2000. We anticipate2001. Our license revenue will increaseincreased as a percentage of total revenue in the futuremostly due to the reduction in our professional services as a result ofpersonnel resulting from our shift during the fourth quarter of 2001 to encourage our customers to increase ourtheir use of third party integrators for providingto provide implementation services, to our customers.rather than purchase those services from us. We expect license revenues to increase moderately in absolute dollars in 2003 from 2002, from 2001.primarily due to our expectations of increasing total contract value with existing and new customers. However, the market for our products inis unpredictable and intensely competitive, and sales of our products are subject to fluctuations inimpacted by the economycurrent economic environment and the corresponding effect it has on corporate purchasing habits.
Our service revenues consist of support revenues (primarily from customer support, product maintenance and updates) and professional services revenues (primarily from consulting and implementation services). Service revenues increaseddecreased by 30%29% to $48.9$37.6 million for the year ended December 31, 20012002 from $37.7$52.6 million for 2000.2001. Service revenues increaseddecreased primarily due to service engagements in quarters followingour customers' increased licensing activity. Given the increase in licensing activity in 2000 compared to 1999, as well as the first quarter of 2001 compared to the first quarter of 2000, service revenue in 2001 increased from 2000. However, during the third and fourth quarters of 2001, service revenues began to decline slightly from the same periods in 2000. We expect that service revenues in 2002 will be lower than the comparative periods in 2001 due to the shift in the fourth quarter of 2001 to increase the use of third party integrators for providing implementation services to our customers.as discussed above. Service revenues represented 56%47% of total revenues for the year ended December 31, 20012002 and 33%58% of total revenues for 2000.2001. We expect that service revenues in 2003 will be fairly consistent with 2002 in absolute dollars as we continue to focus on license sales and using third-party integrators for implementation services.
Revenues from international sales were $25.5 million in the year ended December 31, 2002 and $13.8 million in the year ended December 31, 2001 and $19.5 million2001. The increase in international sales in 2002 is primarily as a result of sales through our integration partner in the year ended December 31, 2000.UK. Our international revenues were derived from sales in Europe, Canada, Asia Pacific and Latin America.
Cost of Revenues
Total cost of revenues decreased by 6%40% to $50.6$32.7 million for the year ended December 31, 20012002 from $54.0$54.3 million for the year ended December 31, 2000, primarily due to decreased cost of service revenues as discussed below.2001.
Cost of license revenue consistsrevenues consist primarily of third party software royalties, costs of product packaging, documentation, and production and delivery costs for shipments to customers. Cost of license revenuerevenues as a percentage of license revenue for 20012002 was 7%8% compared to 4%7% in 2000.2001. The slight increase was due to the reduced license revenue and fixed naturegreater sales of some of the license costs, as well as an increasecertain licenses in royalties from 2000.2002, which have higher associated royalty rates. We expect that our cost of license revenue as a percentage of sales in 20022003 will be approximately the same as in 2001.2002.
Cost of service revenuerevenues consists primarily of salaries and related expenses for our customer support, implementation and training services organization and allocation of facility costs and system costs incurred in providing customer support. Cost of service revenuerevenues decreased to 98%78% of service revenuerevenues for 20012002 compared to 136%98% for the same period in the prior year. ThisCost of service revenues in 2002 included approximately $15.6 million, or 42% of service revenues, related to a loss contract with a customer. See "Reserve for Loss Contract" under "Critical Accounting Policies" above. The improvement in service margins was primarily due to more consistent utilization of our professional services personnel in revenue-generating services during the first half of 2001, offset by an increase of the estimated costs to complete a fixed fee contract recorded in the third quarter of 2001. During the fourth quarter of 2001, service margins improved due to the shiftchange in service revenuerevenues mix following theour shift to have customers increase their use of third party integrators to provide implementation services, to our customers.rather than purchase those services from us. As a result, support revenues comprised a larger percentage of service revenues, which have yielded better margins than training and consulting revenues.
revenues due to higher utilization of customer support personnel than training and consulting personnel. Maintenance revenues comprised $30.8 million, or 39% of total revenues in 2002, compared to $27.9 million, or 31% in 2001. We anticipate that our cost of service revenuerevenues will significantly decrease in absolute dollars, in the future due to reductions in services personnel because of the shift to increase use of third party integrators made in the third and fourth quarters of 2001. Asas a percentage of service revenue, we expect costin 2003 compared to 2002 as a result of services to be lower in 2002 than in 2001 due to an increase in the support portionfinalization of service revenues, which realizes higher gross margins than our professional services. Our support revenues relate to providing telephone support and product maintenance and updates. Our professional services revenues relate to providing consulting and implementation services.the restructuring of a contract with a customer discussed above.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of compensation and related costs for sales and marketing personnel and promotional expenditures, including public relations, advertising, trade shows and marketing collateral materials. Sales and marketing expenses decreased by 21%46% to $37.4 million for the year ended December 31, 2002 from $69.6 million for the year ended December 31, 2001 from $88.2 million for the year ended December 31, 2000.2001. This decrease was primarily attributable primarily to reductions in sales and marketing personnel since the second half of 2001, which reduced sales and marketing-related positions from 289 positions as of June 30, 2001 to a lesser extent,106 positions at December 31, 2002, and related decreases in sales commissions associated with decreased revenuesbenefits, travel, and decreases in marketing costs, primarily in advertising and promotional activities.facility costs. As a percentage of total revenues, sales and marketing expenses were 80%47% for the year ended December 31, 20012002 and 78%77% for the year ended December 31, 2000.2001. We anticipate that sales and marketing expenses in 2003 will be lowerfairly consistent with 2002 in absolute dollars, and will fluctuate as a percentage of revenue in 2002 than in 2001 due to decreased personnelrevenues depending on the timing and promotional expenditures.amount of revenues.
Research and Development. Research and development expenses consist primarily of compensation and related costs for research and development employees and contractors and enhancement of existing products and quality assurance activities. Research and development expenses decreased by 17%27% to $25.9 million for the year ended December 31, 2002 from $35.6 million for the year ended December 31, 2001 from $42.7 million for the year ended December 31, 2000.2001. This decrease was attributable primarily to the reduction of personnel since the second half of 2001, which reduced research and related benefits and facility costs.development-related positions from 227 as of June 30, 2001 to 128 at December 31, 2002. As a percentage of total revenues, research and development expenses were 41%33% for the year ended December 31, 20012002 and 38%39% for the year ended December 31, 2000.2001. We anticipate that research and development expenses will be slightly lower in absolute dollars in 20022003 than in 2001,2002 due to cost reductions implemented in 2002 impacting the full year in 2003 (as discussed in the "Business" section of this report under "Overview-Research and Development"), and will fluctuate as a percentage of revenuerevenues depending on the timing and amount of revenue.revenues.
General and Administrative. General and administrative expenses increasedconsist primarily of compensation and related costs for finance, legal, human resources, corporate governance, various taxes, and bad debt expense. Information technology and facilities costs are allocated among all operating departments. General and administrative expenses decreased by 12%38% to $13.1 million for the year ended December 31, 2002 from $21.2 million for the year ended December 31, 2001 from $18.9 million for2001. This decrease was attributable to the year ended December 31, 2000. The increase resulted from higher overallreduction in bad debts charged to general and administrative costsexpenses, from $4.2 million in 2001 to approximately $57,000 in 2002. This decrease was also attributable to the first quarterreduction of personnel since the second half of 2001, comparedwhich reduced finance, legal and human resources-related positions from 52 as of June 30, 2001 to the same period in 2000 due to internal growth, the acquisition and integration of Broadbase, as well as higher bad debt expense throughout 2001 compared to 2000.24 at December 31, 2002. As a percentage of total revenues, general and administrative expenses were 24% for the year ended December 31, 2001 and 17% for the year ended December 31, 2000.2002 and 23% for the year ended December 31, 2001. We anticipate that general and administrative costs will be slightly lower in absolute dollars in 20022003 compared to 2001 due to general and administrative staff reductions in the second half of 2001. We anticipate general and administrative expenses will be lower in 2002, as a percentage of revenue compared to 2001, and will fluctuate as a percentage of revenuerevenues depending on the timing and amount of revenue.revenues.
Amortization of Stock-Based Compensation.InCompensation. In connection with the granting ofour stock optionsoption grants to our employees, we recorded unearned stock-based compensation charges. These charges represent the total difference between the exercise prices of stock options and the deemed fair market value of the underlying common stock for accounting purposes on the date these stock options were granted. The majority of these charges relate to grants made prior to our initial public offering.offering as well as options assumed in connection with our merger with Broadbase in 2001. In 2002, options granted with an exercise price below the fair value of the option shares on the date of grant resulted in a charge of $138,000, and cancellations of grants with previous associated charges resulted in a reversal of $1.8 million. In 2001, options granted with an exercise price below the fair market value of the option shares on the date of grant resulted in a charge of $2.6 million, and cancellations of grants with previous associated charges resulted in a reversal of $3.0 million. In connection with the merger with Broadbase, we recorded unearned stock-based compensation totaling approximately $15.5 million during the year ended December 31, 2001. These amounts are included as a component of stockholders' equity and are being amortized on an accelerated basis by charges to operations over the vesting period of the options, consistent with the method described in FASB Interpretation No. 28.
In September 2000, we issued to Accenture 40,000 shares of common stock and a warrant to purchase up to 72,500 shares of our common stock at an exercise price of $371.25 per share pursuant to a stock and warrant purchase agreement in connection with our global strategic alliance. The shares of the common stock issued were fully vested, and we recorded a deferred stock-based compensation charge of approximately $14.8 million to be amortized over the four-year term of the agreement. As of December 31, 2001, 33,0772002, 33,997 shares of common stock subject to the warrant were fully vested and 19,423 shares28,503 had been forfeited, with the remainderremaining 10,000 warrants subject to become vestedvesting upon the achievement of certain performance goals. The vested portion of the warrant was valued using the Black-Scholes model resulting in charges totaling $2.0 million of which $1.0 million is being amortized over the remaining term of the agreement and $1.0 million was immediately expensed in the fourth quarter of 2000.2000 and $1.0 million is being amortized over the term of the agreement. We will incur a charge to stock-based compensation charge for the unvested portion of the warrant when and if annual performance goals are achieved. As of December 31, 2001,2002, unvested shares of common stock under the warrant had a fair value of approximately $389,000$20,000 based upon the fair market value of our common stock at such date.
In June 2001, we entered into an agreement to issue to a customer a fully vested and exercisable warrant to purchase up to 25,000 shares of common stock at an exercise price of $40 per share pursuant to a warrant purchase agreement. We have recordedThe warrant was valued using the Black-Scholes model, resulting in a deferred stock-based compensation charge of $330,000, for the warrant using the Black-Scholes model. This amount is beingwhich was fully amortized as a reduction to revenue.of revenue in 2001.
In September 2001, we issued to a customer a warrant to purchase up to 5,000 shares of common stock at an exercise price of $7.50 per share pursuant to a warrant purchase agreement. The warrant will become fully vestsvested in September 2006 and has a provision for acceleration of vesting by 1,250 shares annually over four years if certain marketing criteria are met by the customer. As of December 31, 2002, no such marketing criteria has been met. The warrant was valued using the Black-Scholes model, resulting in a deferred stock-based compensation charge of approximately $29,000, which is being amortized over the five-yearfour-year term of the agreement.
In September 2001, we issued to Accenture an additionala fully-vested warrant to purchase up to 150,000 shares of common stock at an exercise price of $3.33 per share pursuant to a warrant purchase agreement in connection with our global strategic alliance. The warrant is fully vested and exercisable as of September 2001. The warrant was valued using the Black-Scholes model resulting in a charge of approximately $946,000 which is being amortized over the remainingfour-year term of the agreement. Accenture exercised this additional warrant in March 2002.
In November 2001, we issued to two investment funds warrants to purchase up to 386,118 shares of our common stock at an exercise price of $10.00 per share in connection with a proposed financing which was to have been completed in February 2002 upon attaining stockholder approval. These warrants were initially exercisable for an aggregate of 193,059 shares. The exercisable warrants were valued using the Black-Scholes model resulting in a charge of approximately $1.0 million to deferred stock-based compensation. On February 1, 2002, our stockholders voted against the proposed financing, which resulted in us terminating the share purchase agreement and caused the warrants to become exercisable with respect to all 386,118 shares. The warrants are exercisable until February 2004. Using the Black-Scholes model, the warrants issued in November 2001 that were initially exercisable were re-valued as of February 1, 2002, and the warrants that became exercisable on February 1, 2002 were valued as of such date, resulting in a charge totaling approximately $4.7 million which was reflected as amortization of stock-based compensation in the first quarter of 2002.
As of December 31, 2002, a total of approximately $8.6 million of unearned deferred stock-based compensation remained to be amortized. We anticipate stock-based compensation expense to approximate from $6.0 million to $7.0 million in 2003, $1.0 to $2.0 million in 2004, and the remainder in 2005. The amortization of stock-based compensation for 2002 and 2001, by operating expense, is detailed as follows (in thousands):
Year Ended December 31,
-----------------------
2002 2001
----------- ----------
Cost of service................. $ 883 $ 1,417
Sales and marketing............. 4,697 7,230
Research and development........ 4,384 4,226
General and administrative...... 6,656 3,007
----------- ----------
Total.......................... $ 16,620 $ 15,880
=========== ==========
Amortization of Goodwill. Amortization of goodwill ceased as of January 1, 2002 upon our adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). Under SFAS 142, goodwill is no longer amortized.
The following table presents comparative information showing the effects that the non-amortization of goodwill provisions of SFAS 142 would have had on the net loss and basic and diluted net loss per share for the periods shown (in thousands, except per share amounts):
Year Ended December 31,
-------------------------------------
2002 2001 2000
----------- ----------- -----------
Reported net loss...................... $ (96,110) $ (942,895) $(3,070,873)
Goodwill amortization.................. -- 118,060 866,328
----------- ----------- -----------
Adjusted net loss...................... $ (96,110) $ (824,835) $(2,204,545)
=========== =========== ===========
Basic and diluted net loss per share... $ (4.29) $ (68.61) $ (395.68)
Goodwill amortization.................. -- 8.59 111.63
----------- ----------- -----------
Adjusted basic and diluted
net loss per share................... $ (4.29) $ (60.02) $ (284.05)
=========== =========== ===========
Shares used in computing adjusted basic
and diluted net loss per share....... 22,403 13,743 7,761
=========== =========== ===========
Amortization of Identifiable Intangibles.We recorded $4.8 million in amortization of identifiable intangibles in both 2002 and 2001. This amortization relates to $14.4 million of purchased technology recorded as an intangible asset in connection with the merger with Silknet in April 2000. We expect amortization of these identifiable intangibles to conclude in April 2003. The remaining unamortized portion of identifiable intangibles is $1.5 million at December 31, 2002.
Merger and Related Cost.There were no merger-related costs incurred in 2002. In connection with the merger with Broadbase, we recorded $13.4 million of merger-related expenses in 2001. The merger costs included personnel costs of $5.6 million, and $7.8 million relating to duplicate facility and insurance costs, redundant assets, and professional fees associated with the merger. As of December 31, 2002, no accrued merger-related costs remained on the consolidated balance sheet.
Restructuring Costs. For the year ended December 31, 2002, we recorded approximately $5.1 million in restructuring cost savings related to an amendment to a facility lease, our evaluation of real estate market conditions relating to this and other excess leased facilities, and discussions with our other landlords. For the year ended December 31, 2001, we incurred restructuring charges of approximately $89.0 million primarily related to reductions in our workforce and costs associated with certain excess leased facilities and asset impairments. The restructuring charges included $26.4 million for assets disposed of or removed from operations. Assets disposed of or removed from operations consisted primarily of computer equipment and related software, office equipment, furniture and fixtures and leasehold improvements.
The restructuring charge in 2001 also included $24.4 million for severance, benefits and related costs associated with reductions in our workforce. As of December 31, 2001, we had 409 full-time employees. We restructured our organization throughout 2001, with net workforce reductions of approximately 772 employees, or 65% from December 31, 2000, in order to streamline operations, eliminate redundant positions after the merger with Broadbase, reduce costs and bring our staffing and cost structure in line with industry standards and current economic conditions.
The restructuring charge in 2001 also included $38.2 million resulting from our decision to exit and reduce some of our facilities. The estimated facility costs were based on our contractual obligations, net of estimated sublease income, based on current comparable rates for leases in the respective markets.
The following table summarizes our restructuring expenses, payments, and liabilities at and for the years ended December 31, 2002 and 2001 (in thousands):
Fixed Asset
Severance Facilities Disposals Totals
---------- ------------ ------------ --------
Restructuring reserve at 12/31/2000..... $ -- $ -- $ -- $ --
---------- ------------ ------------ --------
Restructuring charge.................... 24,426 38,168 26,453 89,047
Non-cash charges........................ (1,858) -- (26,453) (28,311)
Payments made........................... (21,655) (10,750) -- (32,405)
---------- ------------ ------------ --------
Restructuring reserve at 12/31/2001..... 913 27,418 -- 28,331
---------- ------------ ------------ --------
Non-cash reduction of restructuring..... -- (5,086) -- (5,086)
Payments made........................... (695) (12,415) -- (13,110)
Sublease payments received.............. -- 814 -- 814
---------- ------------ ------------ --------
Restructuring reserve at 12/31/2002..... $ 218 $ 10,731 $ -- $ 10,949
========== ============ ============ ========
We expect payments relating to restructuring liabilities to approximate $2.8 million in 2003, with the remainder being paid fairly evenly from 2004 until 2011.
During 2002, we realized personnel-related costs savings associated with reductions in headcount as a result of our restructuring in 2001, of approximately $36.1 million. Cost savings in 2002 relating to facilities reductions relating to our restructuring in 2001 included $814,000 in sublease payments received and $340,000 in reduced rent obligations relating to an amendment in 2002 to a facility lease. Reductions in rent obligations related to this amendment range from approximately $2.1 million in 2003 and increasing to approximately $2.8 million in 2010 and $237,000 in 2011. To the extent we are able to sublease excess facilities sooner than anticipated, or for greater dollar amounts than assumed, we will experience further cost reductions. Likewise, to the extent that our sublease expectations are not met, we may experience adjustments to our restructuring reserve in future periods which may have a material adverse effect on our financial statements.
Goodwill Impairment.On January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assets("SFAS 142"). SFAS 142 requires goodwill to be tested for impairment under certain circumstances and written down when impaired. SFAS 142 requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. Under the transition provisions of SFAS No. 142, there was no goodwill impairment at January 1, 2002 based upon our analysis at that time. However, during the quarter ended June 30, 2002, circumstances developed that indicated the goodwill was likely impaired and we performed an impairment analysis as of June 30, 2002. This analysis resulted in a $55.0 million impairment expense to reduce goodwill. The circumstances that led to the impairment included the lower-than-previously- expected revenues and net loss for the second quarter of 2002 and the revision of estimates of our revenues and net loss for subsequent quarters, based upon financial results for the second quarter of 2002 and the reduction of estimated cash flows in future quarters. We used relevant market data, including KANA's market capitalization during the period following the revision of estimates , to calculate an estimated fair value and the resulting goodwill impairment. The estimated fair value was compared to the corresponding carrying value of goodwill at June 30, 2002, which resulted in a revaluation of goodwill as of June 30, 2002. The remaining amount of goodwill as of December 31, 2002 was $7.4 million. Any further impairment loss could have a material adverse impact on our financial condition and results of operations. The remaining goodwill balance was approximately $7.4 million at December 31, 2002.
In 2001, we performed an impairment assessment of the identifiable intangibles and goodwill recorded in connection with the Silknet merger. The assessment was performed primarily due to the significant sustained decline in our stock price since the valuation date of the shares issued in the Silknet acquisition (which had resulted in the net book value of our assets prior to the impairment charge significantly exceeding our market capitalization), the overall decline in the industry growth rates, and our lower than projected operating results. As a result, we recorded an impairment charge of approximately $603.4 million in the first quarter of 2001 to reduce our goodwill. The charge was based upon the estimated discounted cash flows over the remaining useful life of the goodwill using a discount rate of 20%.
Impairment of Investment
In connection with the merger with Silknet, we assumed a $1.5 million investment in preferred stock of a privately held company. We recorded a $1.0 million impairment charge in the fourth quarter of 2001 in order to reduce the carrying value of the investment to $500,000. The impairment charge was based on a substantial decline in the estimated fair value of the investment based, in part, on the terms of a recent financing involving significant new investors. This investment is included under "other assets" in our consolidated balance sheet at December 31, 2002.
Other Income (Expense), net
Other income (expense), net in 2002 and 2001 consisted primarily of interest earned on cash and short-term investments offset by interest expense related to our line of credit and other non-operating expenses such as gains and losses on asset disposals. Other income (expense), net was $913,000 for the year ended December 31, 2002 and $1.5 million for the year ended December 31, 2001. The decrease in other income (expense), net related to lower amounts of interest income earned due to lower average cash balances in 2002 than in 2001.
Provision for Income Taxes
We have incurred operating losses for all periods from inception through December 31, 2002. We have recorded a valuation allowance for the full amount of our gross deferred tax assets, as the future realization of the tax benefit is not currently likely.
As of December 31, 2002, we had net operating loss carryforwards for federal and state tax purposes of approximately $388.9 million and $118.2 million, respectively. The federal net operating loss carryforwards, if not offset against future taxable income, will expire from 2011 through 2022. Under the provisions of the Internal Revenue Code of 1986, as amended, substantial changes in ownership may limit the amount of net operating loss carryforwards that could be utilized annually in the future to offset taxable income.
Discontinued Operation
During the second quarter of 2001, we adopted a plan to discontinue the KANA Online business. We no longer seek any new KANA Online business or have any remaining contractual obligations to provide KANA Online to customers. Accordingly, KANA Online is reported as a discontinued operation. The estimated loss on the disposal of KANA Online recorded during the second quarter of 2001 was $3.7 million, consisting of an estimated loss on disposal of the business of $2.6 million and a provision of $1.1 million for the anticipated operating losses during the phase-out period. The loss on disposal was recorded in the second quarter of 2001 and adjusted in the second quarter of 2002, resulting in a gain of $381,000.
This operation has been presented as a discontinued operation for all periods presented. The KANA Online operating results are as follows (in thousands):
Year Ended December 31,
----------------------------
2002 2001 2000
-------- -------- --------
Revenues ................................................. $ -- $ 3,161 $ 6,230
Income (loss) from operations of discontinued operation .. -- (125) 1,173
Gain/(loss) on disposal .................................. 381 (3,667) --
-------- -------- --------
Total income (loss) on discontinued operations ........... $ 381 $ (3,792) $ 1,173
======== ======== ========
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2001 AND 2000
Revenues
Total revenues decreased by 23% to $90.6 million for the year ended December 31, 2001 from $118.0 million for the year ended December 31, 2000 primarily as a result of decreased license revenue.
License revenues decreased by 50% to $38.0 million for the year ended December 31, 2001 from $75.4 million for 2000. This decrease in license revenue was primarily due to a decrease in the number of license transactions, resulting from a decline in economic conditions throughout 2001, and particularly in the third quarter of 2001 following the events of September 11, 2001. This decrease was partially offset in the fourth quarter by sales of products formerly offered by Broadbase which were not included in our revenues prior to the June 2001 merger (license revenues recorded by Broadbase through June 2001 totaled $16.1 million). License revenues represented 42% of total revenues in 2001 and 64% in 2000. We anticipate license revenue will increase as a percentage of total revenue in the future due to the reduction in our professional services as a result of our shift during the fourth quarter of 2001 to increase our use of third party integrators for providing implementation services to our customers.
Service revenues increased by 24% to $52.6 million for the year ended December 31, 2001 from $42.6 million for 2000. Service revenues increased primarily due to service engagements in quarters following increased licensing activity in the third and fourth quarters of 2000. Given the increase in licensing activity in 2000 compared to 1999, as well as the first quarter of 2001 compared to the first quarter of 2000, service revenue in 2001 increased from 2000. Service revenues represented 58% of total revenues for the year ended December 31, 2001 and 36% of total revenues for 2000.
Revenues from international sales were $13.8 million in the year ended December 31, 2001 and $19.5 million in the year ended December 31, 2000. Our international revenues were derived from sales in Europe, Canada, Asia Pacific and Latin America.
Cost of Revenues
Total cost of revenues decreased by 8% to $54.3 million for the year ended December 31, 2001 from $58.9 million for the year ended December 31, 2000, primarily due to the reduction in cost of services discussed below.
Cost of license revenue consists primarily of third party software royalties, product packaging, documentation, and production and delivery costs for shipments to customers. Cost of license revenue as a percentage of license revenue for 2001 was 7% compared to 4% in 2000. The increase was due to the reduced license revenue and fixed nature of some of the license costs, as well as an increase in certain royalty rates from 2000.
Cost of service revenue consists primarily of salaries and related expenses for our customer support, implementation and training services organization and allocation of facility costs and system costs incurred in providing customer support. Our support revenues relate to providing telephone support and product maintenance and updates. Our professional services revenues relate to providing consulting and implementation services. Cost of service revenue decreased to 98% of service revenue for 2001 compared to 132% for the same period in the prior year. This was primarily due to more consistent utilization of our professional services personnel in revenue-generating services during the first half of 2001, offset by a $7.8 million increase of the estimated costs to complete a fixed fee contract recorded in the third quarter of 2001. During the fourth quarter of 2001, service margins improved due to the change in service revenue mix following the shift to increase customers' use of third party integrators to provide implementation services, rather than to purchasing these services from us. As a result, support revenues comprised a larger percentage of service revenues, which have yielded better margins than training and consulting revenues.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of compensation and related costs for sales and marketing personnel and promotional expenditures, including public relations, advertising, trade shows and marketing collateral materials. Sales and marketing expenses decreased by 21% to $69.6 million for the year ended December 31, 2001 from $88.2 million for the year ended December 31, 2000. This decrease was attributable primarily to reductions in sales and marketing personnel during 2001, from 430 positions as of December 31, 2000 to 136 positions at December 31, 2001. We also experienced decreases in sales commissions associated with decreased revenues and decreases in marketing costs, primarily in advertising and promotional activities. As a percentage of total revenues, sales and marketing expenses were 77% for the year ended December 31, 2001 and 75% for the year ended December 31, 2000.
Research and Development. Research and development expenses consist primarily of compensation and related costs for research and development employees and contractors and enhancement of existing products and quality assurance activities. Research and development expenses decreased by 17% to $35.6 million for the year ended December 31, 2001 from $42.7 million for the year ended December 31, 2000. This decrease was attributable primarily to the reduction of personnel during 2001, from 315 positions December 31, 2000 to 136 at December 31, 2001. As a percentage of total revenues, research and development expenses were 39% for the year ended December 31, 2001 and 36% for the year ended December 31, 2000.
General and Administrative. General and administrative expenses consist primarily of compensation and related costs for finance, legal, human resources, corporate governance, various taxes, and bad debt expense. Information technology and facilities costs are allocated among all operating departments. General and administrative expenses increased by 12% to $21.2 million for the year ended December 31, 2001 from $18.9 million for the year ended December 31, 2000. The increase resulted from higher overall general and administrative costs in the first quarter of 2001 compared to the same period in 2000 due to internal growth, and the acquisition and integration of Broadbase in the second quarter of 2001. As a percentage of total revenues, general and administrative expenses were 23% for the year ended December 31, 2001 and 16% for the year ended December 31, 2000.
Amortization of Stock-Based Compensation. As of December 31, 2001, approximately $22.2 million of total unearned deferred stock-based compensation remained to be amortized.
At a special meeting held on February 1, 2002, our stockholders voted against the proposed issuance of up to $45 million of a Series A convertible preferred stock to two investment funds. Immediately following the stockholder vote, we elected to terminate the share purchase agreement with the investment funds. The stockholder vote followed an announcement on January 14, 2002 of the decision by our Board of Directors to withdraw its recommendation that our stockholders vote in favor of the proposed preferred stock transaction. In connection with the proposed transaction and its termination, the investment funds have received two-year warrants to purchase a total of approximately 386,000 shares of KANA's common stock at an exercise price of $10.00 per share. The issuance of these warrants will result in approximately $4.7 million of stock-based compensation expense in the first quarter of 2002. The warrants were valued using the Black- Scholes model.
The amortization of stock-based compensation by operating expense, for 2001 and 2000, is detailed as follows (in thousands):
Year Ended December 31,
-----------------------------------------------
2001 2000
----------- ---------------------
Cost of service.....................service................. $ 1,417 $ 2,816
Sales and marketing.................marketing............. 7,230 8,078
Research and development............development........ 4,226 2,831
General and administrative..........administrative...... 3,007 990
----------- -----------
Total..............................----------
Total.......................... $ 15,880 $ 14,715
=========== =====================
Amortization of Goodwill and Identifiable Intangibles.We recorded $127.7 million in amortization in 2001 compared to$873.0 $873.0 million in 2000. The decrease was due to the impairments of goodwill recorded in 2000 and 2001, as well as the amortization of negative goodwill recorded in connection with the Broadbase merger in 2001. As a result of our merger with Silknet in April 2000, $3.8 billion was allocated to goodwill and identifiable intangibles. This amount was being amortized on a straight-line basis over a period of three years from the date of acquisition in 2000. The goodwill amount was reduced upon recording impairment charges of approximately $603.4 million in the first quarter of 2001 and $2.1 billion in the fourth quarter of 2000.
We are required to adopt SFAS No. 142 effective January 1, 2002, which will result in us no longer amortizing our existing goodwill. In addition, we will be required to measure goodwill for impairment effective January 1, 2002 as part of the transition provisions. Any impairment resulting from the transition provisions will be recorded as of January 1, 2002 and will be recognized as the effect of a change in accounting principle. We will not be able to determine if an impairment will be required until completion of such impairment test. In addition, at December 31, 2001, negative goodwill approximated $3.9 million. We will be required as part of the adoption of SFAS No. 142 to immediately recognize the unamortized negative goodwill that exists on January 1, 2002. This adjustment will be recognized as the effect of a change in accounting principle.
Merger and Transition RelatedMerger-Related Cost.In connection with the merger with Broadbase, we recorded $13.4 million of transition costs and merger-related integration expenses in 2001. The merger costs include transitionalincluded personnel costs of $5.6 million, and $7.8 million relating to duplicate facility and insurance costs, redundant assets, and professional fees associated with the merger. As of December 31, 2001, $10.3 million remains in accrued merger- related costs on the consolidated balance sheet in accrued restructuring and merger costs.
In connection with the Silknet merger, we recorded $6.6 million of transaction costs and merger-related integration expenses in 2000. These amounts consisted primarily of merger-related advertising and announcements of $4.5 million and duplicate facility costs of $1.0 million.
Restructuring Costs. ForAs discussed above under "Comparison of the year endedYears Ended December 31, 2001,2002 and 2001", we incurred restructuring charges of approximately $89.0 million for the year ended December 31, 2001, primarily related to reductions in our workforce and costs associated with certain excess leased facilities and asset impairments. The restructuring charge included $26.4 million for assets disposed of or removed from operations. Assets disposed of or removed from operations consisted primarily of leasehold improvements, computer equipment and related software, office equipment, furniture and fixtures.
The restructuring charge also included $24.4 million for severance, benefits and related costs due to reductions in our workforce. As of December 31, 2001, we had 409 full-time employees. We restructured our organization throughout 2001, with net workforce reductions of approximately 772 employees, or 65% from December 31, 2000, in order to streamline operations, eliminate redundant positions after the merger with Broadbase, reduce costs and bring our staffing and structure in line with industry standards and current economic conditions.
The restructuring charge also included $38.2 million resulting from our decision to exit and reduce certain facilities. The estimated facility costs were based on our contractual obligations, net of assumed sublease income based on current comparable rates for leases in the respective markets. Should facilities operating lease rental rates continue to decrease in these markets or should it take longer than expected to find a suitable tenant to sublease these facilities, the actual loss could exceed this estimate. Future cash outlays are anticipated through December 2010 unless we negotiate to exit the leases at an earlier date.
A summary of restructuring expenses, payments, and liabilities for the year ended and as at December 31, 2001 is as follows (in thousands):
Fixed Asset
Severance Facilities Disposals Totals
---------- ------------ ------------ --------
Restructuring Expensereserve at 12/31/2000..... $ -- $ -- $ -- $ --
---------- ------------ ------------ --------
Restructuring charge.................... 24,426 38,168 26,453 89,047
Non-cash charges........................ (1,858) -- (26,453) (28,311)
Payments Accrual
---------made........................... (21,655) (10,750) -- (32,405)
---------- ------------ ------------- ------------ Severance......... $ 24,426 $ 1,858 $ 21,655--------
Restructuring reserve at 12/31/2001..... $ 913 Facilities........ 38,168$ 27,418 $ -- 10,750 27,418
Asset disposals... 26,453 26,453 -- --
--------- ------------ ------------- ------------
Total ............ $ 89,047 $ 28,311 $ 32,405 $ 28,331
=================== ============ ============= ============ ========
In Process Research and Development.In connection with the Silknet merger, net intangibles of $6.9 million were allocated to in-process research and development in 2000. The fair value allocation to in-process research and development was determined by identifying the research projects for which technological feasibility had not been achieved and which had no alternative future use at the merger date, assessing the stage and expected date of completion of the research and development effort at the merger date, and calculating the net present value of the cash flows expected to result from the successful deployment of the new technology resulting from the in-process research and development effort.
The stages of completion were determined by estimating the costs and time incurred to date relative to the costs and time incurred to develop the in- process technology into a commercially viable technology or product, while considering the relative difficulty of completing the various tasks and obstacles necessary to attain technological feasibility. As of the date of the acquisition, Silknet had two projects in process that were 90% complete. These projects have since been completed.
The estimated net present value of cash flows was based on incremental future cash flows from revenues expected to be generated by the technologies in the process of development, taking into account the characteristics and applications of the technologies, the size and growth rate of existing and future markets and an evaluation of past and anticipated technology and product life cycles. Estimated net future cash flows included allocations of operating expenses and income taxes but excluded the expected completion costs of the in-process projects, and were discounted at a rate of 20% to arrive at a net present value. The discount rate included a factor that took into account the uncertainty surrounding the successful deployment of in-process technology projects. This net present value was allocated to in-process research and development based on the percentage of completion at the merger date.
Goodwill Impairment.WeImpairment.In 2000 and, as discussed above under "Comparison of the Years Ended December 31, 2002 and 2001," in 2001, we performed impairment assessments of the identifiable intangibles and goodwill recorded in connection with the Silknet merger. The assessments were performed primarily due to the significant sustained decline in our stock price since the valuation date of the shares issued in the Silknet acquisition, resulting in our net book value of our assets prior to the impairment charge significantly exceeding our market capitalization, the overall decline in the industry growth rates, and our lower than projected operating results. As a result, we recorded impairment charges of approximately $603.4 million in the first quarter of 2001 and $2.1 billion in the fourth quarter of 2000 to reduce our goodwill. The charges were based upon the estimated discounted cash flows over the remaining useful life of the goodwill using a discount rate of 20%.
The remaining goodwill balance, excluding negative goodwill recorded in connection with the merger with Broadbase, was approximately $68.7 million at December 31, 2001.
Impairment of Investment
InAs discussed above under "Comparison of the Years Ended December 31, 2002 and 2001," in connection with the merger with Silknet, we assumed a $1.5 million investment in preferred stock of a privately held company. Wecompany and recorded a $1.0 million impairment charge in the fourth quarter of 2001 in order to reduce the carrying value of the investment to $500,000. The impairment charge was based on a substantial decline in the estimated fair value of the investment based, in part, on the terms of a recent proposed financing.financing involving significant new investors. This investment iswas included under "other assets" in other assets in theour consolidated balance sheet at December 31, 2001.2002.
Other Income (Expense), net
Other income (expense), net in 2001 and 2000 consisted primarily of interest earned on cash and short-term investments offset by interest expense related to our line of credit and other expenses.non-operating expenses such as gains and losses on asset disposals. Other income (expense), net was $1.5 million for the year ended December 31, 2001 and $4.8 million for the year ended December 31, 2000. The decrease in other income (expense), net related to lower amounts of interest income earned due to lower average cash balances in 2001 than in 2000.
Provision for Income Taxes
We have incurred operating losses for all periods from inception through December 31, 2001, and therefore have not recorded a provision for income taxes. We have recorded a valuation allowance for the full amount of our gross deferred tax assets, as the future realization of the tax benefit is not currently likely.
As of December 31, 2001, we had net operating loss carryforwards for federal tax purposes of approximately $408.2 million. The federal net operating loss carryforwards, if not offset against future taxable income, will expire from 2011 through 2021.2022. Under the provisions of the Internal Revenue Code of 1986, as amended, substantial changes in ownership may limit the amount of net operating loss carryforwards that could be utilized annually in the future to offset taxable income.
Discontinued Operation
During the second quarter of 2001, we adopted a plan to discontinue the KANA Online business. We will no longer seek new business but will continue to service all ongoing contractual obligations we have to our existing customers. Accordingly, KANA Online is reported as a discontinued operation. Net assets of the discontinued operation at December 31, 2001, consisted primarily of computers and servers. The estimated loss on the disposal of KANA Online recorded during the second quarter of 2001 was $3.7 million, consisting of an estimated loss on disposal of the business of $2.6 million and a provision of $1.1 million for the anticipated operating losses during the phase-out period. Revenues from our discontinued operationKANA Online for the year ended December 31, 2001 were $3.2 million compared to $6.2 million in 2000.
Net Loss
Our net loss was $942.9 million and $3.1 billion for the years ended December 31, 2001, and 2000, respectively. In the past, we have experienced substantial increases in our expenditures since our inception consistent with growth in our operations and personnel through the first quarter of 2001 and expenses related to merger and transition costs and restructuring costs. In addition, goodwill impairment, amortization of goodwill and identifiable intangibles and stock-based compensation charges have contributed to the significant net loss during 2001 and 2000. Although we anticipate that our expenditures will decrease in the future due to our cost reduction initiatives, we cannot be certain that we will attain profitability.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2000LIQUIDITY AND 1999
Revenues
Total revenues increased by 737% to $113.0 million for the year ended December 31, 2000 from $13.5 million for the year ended December 31, 1999 primarily as a result of increased license revenue. License revenues increased by 615% to $75.4 million for the year ended December 31, 2000 from $10.5 million for 1999. This increase in license revenue was due primarily to increased market acceptance of our products, expansion of our product line and increased sales generated by our expanded sales force and the acquisition of Silknet. License revenue represented 67% of total revenues for the year ended December 31, 2000 and 78% of total revenues for 1999.
Service revenues increased by 1,170% to $37.7 million for the year ended December 31, 2000 from $3.0 million for 1999. Service revenue increased primarily due to increased licensing activity described above, resulting in increased revenue from customer implementations, system integration projects, maintenance contracts and hosted service. Service revenue represented 33% of total revenues for the year ended December 31, 2000 and 22% of total revenues for 1999.
Revenues from international sales were $19.5 million and $1.4 million in the years ended December 31, 2000 and 1999. Our international revenues were derived from sales in Europe, Canada, Asia Pacific and Latin America.
Cost of Revenues
Total cost of revenues increased by 712% to $54.0 million for the year ended December 31, 2000 from $6.7 million for the year ended December 31, 1999, primarily due to increased cost of service revenues. Cost of license revenues increased by 954% to $2.9 million for the year ended December 31, 2000 from $271,000 for the year ended December 31, 1999, the increase mainly associated with increased license revenues and new third party software royalties. As a percentage of license revenues, cost of license revenues was 4% for the year ended December 31, 2000 and 3% for the year ended December 31, 1999. Cost of license revenues includes third party software royalties, product packaging, documentation, production and delivery costs for shipments to customers.
Cost of service revenues consists primarily of salaries and related expenses for our customer support, implementation and training services organization and allocation of facility costs and system costs incurred in providing customer support. Cost of service revenues increased by 701% to $51.1 million for the year ended December 31, 2000 from $6.4 million for the year ended December 31, 1999. The growth in cost of service revenues was attributable to an increase in personnel dedicated to support our growing number of customers and related recruiting, travel, related facility and system costs and third party consulting expenses. Additional increases are attributable to our acquisition of Silknet and the inclusion of its cost of service revenues from the effective date of the merger. As a percentage of service revenues, cost of service revenues was 136% in 2000 and 215% in 1999.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of compensation and related costs for sales and marketing personnel and promotional expenditures, including public relations, advertising, trade shows, and marketing collateral materials. Sales and marketing expenses increased by 316% to $88.2 million for the year ended December 31, 2000 from $21.2 million for the year ended December 31, 1999. This increase was attributable primarily to the addition of sales and marketing personnel from internal growth and the Silknet acquisition, the expansion of our international sales offices, an increase in sales commissions associated with increased revenues and higher marketing costs due to expanded advertising and promotional activities. As a percentage of total revenues, sales and marketing expenses were 78% for the year ended December 31, 2000 and 157% for the year ended December 31, 1999. This decrease in sales and marketing expense as a percent of total revenues was due primarily to the increase in total revenues over the prior period.
Research and Development. Research and development expenses consist primarily of compensation and related costs for research and development employees and contractors and enhancement of existing products and quality assurance activities. Research and development expenses increased by 232% to $42.7 million for the year ended December 31, 2000 from $12.9 million for the year ended December 31, 1999. This increase was attributable primarily to the addition of personnel, due to internal growth and the Silknet acquisition, product development and related benefits, and consulting expenses. As a percentage of total revenues, research and development expenses were 38% for the year ended December 31, 2000 and 95% for the year ended December 31, 1999. This decrease in research and development expense as a percent of total revenues was due primarily to the increase in total revenues over the prior period.
General and Administrative. General and administrative expenses increased by 278% to $18.9 million for the year ended December 31, 2000 from $5.0 million for the year ended December 31, 1999, due primarily to increased personnel from internal growth and the Silknet acquisition, increase in allowance for doubtful accounts, increase in legal and other professional service provider fees. As a percentage of total revenues, general and administrative expenses were 17% for the year ended December 31, 2000 and 37% for the year ended December 31, 1999. This decrease in general and administrative expenses as a percent of total revenues was due primarily to the proportionately greater increase in total revenues than general and administrative expenses over the prior period.
Amortization of Stock-Based Compensation.In connection with the granting of stock options to our employees, we recorded unearned stock-based compensation totaling approximately $101.0 million through December 31, 2000. This amount represents the total difference between the exercise prices of stock options and the deemed fair market value of the underlying common stock for accounting purposes on the date these stock options were granted. This amount is included as a component of stockholders' equity and is being amortized on an accelerated basis by charges to operations over the vesting period of the options, consistent with the method described in FASB Interpretation No. 28.
In September 2000, we issued to Accenture 40,000 shares of common stock and a warrant to purchase up to 72,500 shares of common stock pursuant to a stock and warrant purchase agreement in connection with our global strategic alliance. The shares of the common stock issued were fully vested, and we have recorded a charge of approximately $14.8 million to be amortized over the four-year term of the agreement. The warrant to purchase up to 72,500 shares of common stock was immediately vested and exercisable with respect to 12,500 shares of common stock, with the remainder becoming vested upon the achievement of certain performance goals. The vested shares were valued using the Black-Scholes model resulting in a charge of $1.0 million to be amortized over the four-year term of the agreement. We will incur a charge to stock-based compensation for the unvested portion of the warrant when performance goals are achieved.
On December 31, 2000, Accenture earned and became vested in an additional 12,163 shares of common stock subject to the warrant. This vesting of shares resulted in a stock-based charge to operations of $968,000 during the quarter ended December 31, 2000.
The amortization of stock-based compensation by operating expense is detailed as follows (in thousands):
Years Ended December 31, ------------------------ 2000 1999 ----------- ----------- Cost of service..................... $ 2,816 $ 19,752 Sales and marketing................. 8,078 34,000 Research and development............ 2,831 19,864 General and administrative.......... 990 6,860 ----------- ----------- Total.............................. $ 14,715 $ 80,476 =========== ===========
Amortization of Goodwill and Identifiable Intangibles.In April 2000, we completed a merger with Silknet. As a result of the merger, $3.8 billion was allocated to goodwill and identifiable intangibles. This amount was being amortized on a straight-line basis over a period of three years from the date of acquisition. We recorded$873.0million in amortization for the year ended December 31, 2000.
In Process Research and Development. In connection with the merger of Silknet, net intangibles of $6.9 million were allocated to in process research and development in 2000. The fair value allocation to in-process research and development was determined by identifying the research projects for which technological feasibility has not been achieved and which have no alternative future use at the merger date, assessing the stage and expected date of completion of the research and development effort at the merger date, and calculating the net present value of the cash flows expected to result from the successful deployment of the new technology resulting from the in-process research and development effort.
Acquisition Related Costs.In connection with the Silknet merger, we recorded $6.6 million of transaction costs and merger-related integration expenses in 2000. These amounts consisted primarily of merger-related advertising and announcements of $4.5 million and duplicate facility costs of $1.0 million.
Goodwill Impairment.During the quarter ended December 31, 2000, we performed an impairment assessment of the identifiable intangibles and goodwill recorded in connection with the acquisition of Silknet. As a result of our review, we recorded a $2.1 billion impairment charge to reduce our goodwill. The assumptions supporting our cash flows including the discount rate were determined using our best estimates as of such date. The remaining goodwill balance of approximately $800.0 million will be amortized over its remaining useful life until January 1, 2002 upon the adoption of SFAS No. 142 as discussed above.
Other Income (Expense), net
Other income (expense), net in 2000 consists primarily of interest earned on cash and short-term investments and in 1999, interest expense related to warrants issued to convertible debt holders offset by interest income. Other income (expense), net was income of $4.8 million for the year ended December 31, 2000 and expense of $744,000 for the year ended December 31, 1999. The increase in other income (expense), net was primarily interest income earned on higher average cash balances and lower interest expense paid on debt.
Provision for Income Taxes
We have incurred operating losses for all periods from inception through December 31, 2000, and therefore have not recorded a provision for income taxes. We have recorded a valuation allowance for the full amount of our gross deferred tax assets, as the future realization of the tax benefit is not currently likely.CAPITAL RESOURCES
As of December 31, 2000 and December 31, 1999,2002, we had net operating loss carryforwards for federal and state tax purposes of approximately $175.8 million and $78.6 million, respectively. These federal and state loss carryforwards are available to reduce future taxable income. The federal loss carryforwards expire at various dates into the year 2020. Under the provisions of the Internal Revenue Code of 1986, as amended, substantial changes in ownership may limit the amount of net operating loss carryforwards that could be utilized annually in the future to offset taxable income.
Liquidity and Capital Resources
In September 1999, we completed the initial public offering of our common stock and realized net proceeds from the offering of approximately $51.1 million. Prior to the initial public offering, we had financed our operations primarily from private sales of convertible preferred and common stock totaling $40.8 million and, to a lesser extent, from bank borrowings and lease financing.
InJune 2000, we completed the private placement of 250,000 shares of our common stock, raising net proceeds of approximately $120.0 million.
In November 2001, we sold 1,000,000 shares of our common stock for net proceeds of $10.0 million in a private placement transaction, and an additional 10,000 shares for net proceeds of $100,000 to the same investor in December 2001.
In February 2002, we sold 2,910,000 shares of our common stock for gross proceeds of approximately $34.5 million, prior to associated transactions costs, in a private placement transaction.
As of December 31, 2001, we had $40.1$32.5 million in cash, cash equivalents and short-term investments, and acompared to $40.1 million as of December 31, 2001. As of December 31, 2002, we had negative working capital of $13.7$4.5 million. In addition, as of December 31, 2001, we had $11.0 million in restricted cash. This is comprised of amounts related to a letter of credit totaling $5.8 million and $2.0
Our operating activities used $42.2 million of cash escrowedfor the year ended December 31, 2002. These expenditures were primarily attributable to the net loss we experienced during 2002, as well as $22.3 million in orderpayments relating to fulfill certain contractual obligations. In addition, restricted cash included $3.2 million deposited as collateral on our leased facilitiesrestructuring and other long-term deposits.
merger liabilities, offset in part by non-cash charges primarily relating to goodwill impairment, depreciation and amortization of intangibles and stock-based compensation. Our operating activities used $112.4 million of cash for the year ended December 31, 2001. These expenditures were primarily attributable to the net loss experienced during 2001 including restructuring and merger costs, offset in part by non-cash charges. Our operating activities used $90.7 million of cash for the year ended December 31, 2000 and $25.7 million of cash for the year ended December 31, 1999.2000. These expenditures were primarily attributable to net losses experienced during these periods, offset in part by non-cash charges.
Our investing activities provided $2.4 million of cash for the year ended December 31, 2002, and consisted primarily of reductions of restricted cash of $10.6 million and transfers of short-term investments to cash totaling $4.1million, offset by purchases of property and equipment of $12.3 million. Our investing activities provided $49.6 million of cash for the year ended December 31, 2001, and consisted primarily of net salestransfers of short-term investments to cash, and cash acquired from the acquisition of Broadbase, offset by purchases of computer equipment, furniture, fixtures and leasehold improvements of $16.8 million, and a transfer of $7.8 million of cash to restricted cash. Our investing activities provided $22.4 million of cash for the year ended December 31, 2000, which was primarily due net salestransfers of short-term investments and cash acquired from the acquisition of Silknet, offset by purchases of computer equipment, furniture, fixtures and leasehold improvements of $35.6 million.million.
Our investingfinancing activities used $44.4provided $36.1 million ofin cash for the year ended December 31, 1999, which was2002, primarily due to purchasesnet proceeds of short-term investments and computer equipment, furniture, fixtures and leasehold improvements.
approximately $31.4 million from our private placement of approximately 2.9 million shares of our common stock in February 2002. Our financing activities provided $13.0 million in cash for the year ended December 31, 2001, primarily due to net proceeds of $10.1 million from thea private placement of 1,010,000approximately 1.0 million shares of our common stock, which raised net proceeds of $10.1 million.stock. Our financing activities provided $126.2 million for the year ended December 31, 2000, primarily from thedue to net proceeds of approximately $120.0 million from oura private placement of 250,000 shares of our common stock, which raised net proceeds of approximately $120.0 million. Our financing activities provided $75.0 million for the year ended December 31, 1999, primarily from the net proceeds of our initial public offering and notes payable and issuances of convertible preferred stock.
At December 31, 2001, we hadWe have a line of credit totaling $3.0$5.0 million, which was collateralized by all of our assets, bore interest at the bank's prime rate plus 0.5% (5.25% as of December 31, 2001), and expired on March 1, 2002. The bank did not require any financial covenants as of December 31, 2001. Total borrowings as of December 31, 2001 and 2000 were $1,187,000 under this line of credit. Effective March 1, 2002, we replaced this line of credit with a $4.0 million facility which is collateralized by all of our assets, bears interest at the bank's prime rate plus 0.25% (4.5% as of December 31, 2002), and expires in MarchNovember 2003 at which time the entire balance under the line of credit iswill be due. Total borrowings as of December 31, 2002 and 2001 were $3.4 million and $1.2 million, respectively, under this line of credit. The line of credit requires that we maintain at least a $6.0an $8.0 million dollar balance in any account at the bank or that we provide cash collateral with funds equivalent to 115% of the outstanding debt obligation. The line of credit also requires that we maintain at all times a minimum of $20.0 million as short-term unrestricted cash, cash equivalents and cash equivalents.investments with a maturity within twelve months. If we default under this line of credit, including through a violation of this covenant,any of these covenants, the entire balance under the line of credit will become immediately due and payable. As of December 31, 2002, we were in compliance with all covenants of the line of credit agreement.
In June 2002, we entered into a non-recourse receivables purchase agreement with a bank which provides for the sale of up to $5.0 million in certain qualified receivables subject to an administrative fee and a discount schedule ranging from the bank's prime rate of interest plus 0.50% to the bank's prime rate of interest plus 1.50%. As of December 31, 2002, we had not sold any receivables under this agreement.
Future payments due under debt and lease obligations as of December 31, 20012002 are as follows (in thousands):
Obligations Non-cancelable
Line of Under Capital Operating
Year Ending December 31, Credit (1) Leases (2) Leases (3) Total
-------------------------- ------------------- ------------ ------------- ------------ 2002...................--------
2003........................... $ 1,1873,427 $ 18217 $ 10,2055,539 $ 11,574
2003................... -- 131 8,407 8,538
2004................... -- 12 7,961 7,973
2005...................8,983
2004........................... -- -- 6,512 6,512
2006...................4,917 4,917
2005........................... -- -- 5,586 5,586
Thereafter.............4,087 4,087
2006........................... -- -- 16,662 16,662
---------3,830 3,830
2007........................... -- -- 3,096 3,096
Thereafter..................... -- -- 6,782 6,782
---------- ------------ ------------- ------------ --------
$ 1,1873,427 $ 32517 $ 55,33328,251 $ 56,845
=========31,695
========== ============ ============= ============ ========
(1) In MarchNovember 2002, we replacedrenewed our line of credit with a $4.0$5.0 million facility. BorrowingsAs of December 31, 2002, total borrowings under this facility total $1,187,000 as of March 1, 2002 and are due in 2003.line were $3.4 million.
(2) During 2002, 2003, and 2004, we will make interest payments totaling $41,000$2,000 in relation to the Obligationsobligations under Capital Leases;capital leases; this interest component is included in the commitment schedule above.
In(3) Includes leases previously subject to abandonment and included in the past,restructuring charge.
As a result of our restructuring activities in 2001, as well as personnel and facility cost reductions throughout 2002, we have experienced substantial increases in expenditures consistent with growth in our operations and personnel. To reduce our expenditures, we restructured in several areas, including reduced staffing, expense management and capital spending. We have restructured our organization throughout 2001 with net workforce reductions of approximately 772 employees, in order to streamline operations, eliminate redundant positions after the merger with Broadbase, and reduce costs and bring our staffing and structure in line with industry standards and current economic conditions. These reductions have been significant, particularly in light of the increase of approximately 896 employees upon our merger with Broadbase in June of 2001. Our most recent reduction in force which reduced staff by approximately 365 positions across all departments was announced on September 28, 2001. In addition, we have raised approximately $34.5 million of gross proceeds, prior to transaction costs, in a private placement of approximately 2.9 million shares of common stock, completed on February 12, 2002. We expect our cash and cash equivalents and short-term investments on hand will be sufficient to meet our working capital and capital expenditure needs for the next 12 months.through December 31, 2003. Significant expected cash outflows in addition to our operating expenses through the first half of 20022003 include approximately $15$2.0 million in lease payments relating to accrued merger and restructuring costs as well asand approximately $10$1.5 million of capital expenditures on certain corporate infrastructure. In addition, althoughAdditionally, in January 2003, we expectbegan implementing an outsourcing strategy, which involves subcontracting a significant portion of our software programming, quality assurance and technical documentation activities to experience overall positive cash flowsdevelopment partners with staffing in India and China. As a result of the first phase of this strategy, in the first quarter of 2002 as a result2003 we transferred the responsibilities of the private placement, we31 US-based employees to these development partners. We expect to continuetransfer additional positions to experience negative cash flows from operations throughthese development partners in future quarters of 2003. We signed contracts with some of these development partners in March 2003, with expected payments in 2003 of approximately $3.0 million dollars, primarily on a time and materials basis, but with minimum payments of $1.0 million in 2003. We expect to sign contracts with additional development partners in the firstsecond quarter of 2002. 2003.
If we experience a decrease in demand for our products from the level experienced in the fourth quarter of 2001,2002, then we would need to reduce expenditures to a greater degree than anticipated, or raise additional funds if possible.anticipated.
Our expectations as to when we can achieve positive cash flows, and as to our future cash balances, are subject to a number of assumptions, including assumptions regarding anticipated increases in our revenue, improvements in general economic conditions and customer purchasing and payment patterns, many of which are beyond our control.
Recent Accounting PronouncementsRECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, Business Combinations, and SFAS No. 142 Goodwill and Other Intangible Assets. SFAS No. 141 addresses financial accounting and reporting for business combinations and supercedes Accounting Principals Board ("APB") No.16, Business Combinations. The provisions of SFAS No.141 were adopted July 1, 2001. The most significant changes made by SFAS No.141 are: (1) requiring that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, (2) establishing specific criteria for the recognition of intangible assets separately from goodwill, and (3) requiring unallocated negative goodwill to be written off immediately as an extraordinary gain.
SFAS No.142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition and supercedes APB No.17, No. 17,Intangible Assets.Assets. The provisions of SFAS No. 142 are required to bewere adopted as of January 1, 2002 for calendar year entities. The most significant changes made by SFAS No. 142 are: (1) goodwill and indefinite lived intangible assets will no longer be amortized, (2) goodwill will be tested for impairment at least annually at the reporting unit level, (3) intangible assets deemed to have an indefinite life will be tested for impairment at least annually, and (4) the amortization period of intangible assets with finite lives will no longer be limited to forty years.
We adopted SFAS No.141 effective July 1, 2001 which willAs a result in us accounting for any business combination consummated on or after that date under the purchase method of accounting. We will also apply the non-amortization provisions of SFAS No. 142 for any business combination consummated on or after July 1, 2001. Theour adoption of SFAS No. 141 will not change the method of accounting used in previous business combinations.
We are required to adopt SFAS No. 142, effective January 1, 2002, which will result in uswe no longer amortizing ouramortize existing goodwill. At December 31, 2001, net goodwill was $64.8$58.6 million and goodwill amortization expense was $127.7$122.9 million for the year ended December 31, 2001. We will beIn addition, we were required to measure goodwill for impairment effective January 1, 2002 as part of the transition provisions. Any impairmentImpairment resulting from the transition provisions will bewas recorded as of January 1, 2002 and will bewas recognized as the effect of a change in accounting principle. We will not be able to determine if an impairment will be required until completion of such impairment test. In addition, atAt December 31, 2001, negative goodwill approximated $3.9 million. We will bewere also required as part of the adoption of SFAS No. 142 to immediately recognize the unamortized negative goodwill that existsexisted on January 1, 2002. This adjustment will bewas recognized as the effect of a change in accounting principle.
In October 2001,June 2002, the FASB issued SFAS 146,Accounting for Exit or Disposal Activities("SFAS"). SFAS 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for under EITF No. 144, "Accounting94-3,Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The scope of SFAS 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS 146 will be effective for exit or disposal activities that are initiated after December 31, 2002 and early application is encouraged. The provisions of EITF No. 94-3 shall continue to apply for an exit activity initiated under an exit plan that met the criteria of EITF No. 94-3 prior to the adoption of SFAS 146. The effect on adoption of SFAS 146 will change on a prospective basis the timing of when restructuring charges are recorded from a commitment date approach to when the liability is incurred.
In November 2002, the EITF reached a consensus on issue No. 00-21Accounting for Revenue Arrangements with Multiple Deliverables ("EITF 00-21") on a model to be used to determine when a revenue arrangement with multiple deliverables should be divided into separate units of accounting and, if separation is appropriate, how the arrangement consideration should be allocated to the identified accounting units. The EITF also reached a consensus that this guidance should be effective for all revenue arrangements entered into in fiscal periods beginning after June 15, 2003, which for us would be the quarter ending September 30, 2003. We believe that the adoption of EITF 00-21 will have no material impact on our financial statements.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45")Guarantor's Accounting and Disclosure requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the Impairmentfair value, or Disposalmarket value, of Long-Lived Assets", which is requiredthe obligations it assumes under that guarantee. However, the provisions related to be applied starting with fiscal years beginningrecognizing a liability at inception of the guarantee for the fair value of the guarantor's obligations does not apply to product warranties or to guarantees accounted for as derivatives. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2001. SFAS No. 144 requires, among other things, the application of one accounting model for long-lived assets that are impaired or to be disposed of by sale.2002. The adoption of SFAS No. 144 isFIN 45 did not expected to have a significant impact on our financial statements.
In December 2002, the FASB issued SFAS No. 148,Accounting for Stock-Based Compensation, Transition and Disclosure("SFAS 148"). SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in interim financial statements. The transition and annual disclosure requirements of SFAS No. 148 are effective for fiscal years ended after December 15, 2002. The interim disclosure requirements are effective for interim periods beginning after December 15, 2002. We believe that the adoption of this standard will have no material impact on our financial statements.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46")Consolidation of Variable Interest Entities. Until this interpretation, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns. Disclosure of any newly created agreements after January 31, 2003 which apply under FIN 46 is required effectively immediately. By June 15, 2003, full consolidation of assets and liabilities of applicable entities is required. We do not expect the adoption of this Interpretation to have a material impact to our results of operations.operations or financial position. However, changes in our business relationships with various entities could occur which may impact our financial statements under the requirements of FIN 46.
RISK FACTORS
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..filings.
Risks Related to Our Business
Because we have a limited operating history, there is limited information upon which you can evaluate our business.
We are still in the early stages of our development, and our limited operating history makes it difficult to evaluate our business and prospects. Any evaluation of our business and prospects must be made in light of the risks and uncertainties often encountered by early-stage companies in Internet-related markets. We were incorporated in July 1996 and first recorded revenue in February 1998. Thus, we have a limited operating history upon which you can evaluate our business and prospects. Due to our limited operating history, it is difficult or impossible to predict future results of operations. For example, we cannot forecast operating expenses based on our historical results (or those of similar companies) because they are limited, and we are required to forecast expenses in part on future revenue projections.projections based on assumptions. Moreover, due to our limited operating history and evolving product offerings, our insights into trends that may emerge and affect our business are limited. In addition, in June 2001, we completed our merger with Broadbase. Because we have limited experience operating as a combined company, our business is even more difficultsubject to evaluate.a number of risks, any of which could unexpectedly harm our results of operations. Many of these risks are discussed in the subheadings below, and include our ability to:
Our quarterly revenues and operating results may fluctuate in future periods and we may fail to meet the expectations of investors and public market analysts, which could cause the price of our common stock to decline.
Our quarterly revenues and operating results are difficult to predict and may fluctuate significantly from quarter to quarter particularly because our products and services are relatively new and our prospects are uncertain. We believe that period-to-period comparisons of our operating results may not be meaningful and you should not rely on these comparisons as an indication of our future performance. If quarterly revenues or operating results fall below the expectations of investors or public market analysts, the price of our common stock could decline substantially. Factors that might cause quarterly fluctuations in our operating results include the factors described under the subheadings of this "Risks Associated with KANA's Business and Future Operating Results"Factors" section as well as:
We also often offer volume-based pricing, which may affect operating margins. Broadbase, whichIn addition, we recently acquired, has experiencedexperience seasonality in itsour revenues, with the fourth quarter of the year typically having the highest revenue for the year. We believe that this seasonality primarily results from customer budgeting cycles. We expect that this seasonality will continue, and could increase. In addition, the average size of our license transactions has increased in recent periods as we have focused on larger enterprise customers and on licensing our more comprehensive integrated products, and as our revenues become dependent on fewer transactions, they become less predictable.continue. Customers' decisions to purchase our products and services are discretionary and subject to their internal budgets and purchasing processes. Due to the continuing slowdown in the general economy, and the uncertainties resulting from recent acts of terrorism, we believe that many existing and potential customers are reassessing or reducing their planned technology and Internet-related investments and deferring purchasing decisions. Further delays or reductions in business spending for information technology could have a material adverse effect on our revenues and operating results. As a result, there is increased uncertainty with respect to our expected revenues.
Our expenses are generally fixed and we will not be able to reduce these expenses quickly if we fail to meet our revenue forecasts.
Most of our expenses, such as employee compensation and rent, are relatively fixed in the short term. Moreover, our budget is based, in part, on 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.
Some of our customers are emerging companies that represent credit risks.
We expect to continue to derive a portion of our revenues from sales to emerging companies. Many of these companies have limited operating histories and have limited cash reserves and limited access to additional capital. We have in some cases experienced difficulties collecting outstanding accounts receivable and we may continue to have these difficulties in the future. These difficulties may increase as a result of a recent downturn in economic activity and reductions in funding for emerging companies from public capital markets and private venture capital and equity sources. If any significant part of our customer base experiences commercial difficulties or is unable or unwilling to pay for any reason, our business will suffer
We have a history of losses and may not be profitable in the future and may not be able to generate sufficient revenue to achieve and maintain profitability.
Since we began operations in 1997, our revenues have not been sufficient to support our operations, and we have incurred substantial operating losses in every quarter. As of December 31, 2001, our accumulated deficit was approximately $4.1 billion. Our history of losses has previously caused some of our potential customers to question our viability, which has in turn hampered our ability to sell some of our products. Although this concern has been mitigated by our recently completed financing in February 2002, we may continue to encounter such customer concerns in the future. Our revenue has been affected by the increasingly uncertain economic conditions both generally and in our market. Although our revenues grew significantly in 2000, we experienced a significant decline in sales for the fiscal year ended December 31, 2001. Although we have restructured our operations to reduce operating expenses, we will need to increase our revenue to achieve profitability and positive cash flows, and our revenue may decline, or fail to grow, in future periods. Our expectations as to when we can achieve positive cash flows, and as to our future cash balances, are subject to a number of assumptions, including assumptions regarding improvements in general economic conditions and customer purchasing and payment patterns, many of which are beyond our control.
As a result of uncertainties in our business and the general economic slowdown, we have experienced and expect to continue to experience difficulties in collecting outstanding receivables from our customers and attracting new customers. As a result, we may continue to experience losses, even if sales of our products and services grow. We reduced the size of our professional services team in 2001 and, as a result, expect to rely more on independent third-party providers for customer services such as product installations and support. However, if third parties do not provide the support our customers need, we may be required to hire subcontractors to provide these professional services. Increased use of subcontractors would harm our revenues and margins because it costs us more to hire subcontractors to perform these services than to provide the services ourselves.
If we fail to expand our direct and indirect sales channels, we will not be able to increase revenues.
In order to grow our business, we need to increase market awareness and sales of our products and services. To achieve this goal, we need to increase the size, and enhance the productivity, of our direct sales force and indirect sales channels. If we fail to do so, this failure could harm our ability to increase revenues. The expansion of our sales and marketing department will require the hiring and retention of personnel for whom there is a high demand. We plan to hire additional sales personnel, but competition for qualified sales people is intense, and we might not be able to hire a sufficient number of qualified sales people. See "-We may face difficulties in hiring and retaining qualified sales personnel to sell our products and services, which could impair our revenue growth." Furthermore, while historically we have received substantially all of our revenues from direct sales, we intend to increase sales through indirect sales channels by selling our software through systems integrators, or SIs. These SIs offer our software products to their customers together with consulting and implementation services or integrate our software solutions with other software. We expect to increase our reliance on SIs and other indirect sales channels in licensing our products. If this strategy is successful, our dependence on the efforts of third parties will increase. Our reliance upon third parties for these functions will reduce our control over such activities andcould make us dependentupon them. SIs are not bound to sell our products exclusively, and may act asindirect sales channelsfor our competitors. In addition, SIs are not required to sell any fixed quantities of our products. If for some reason our SI partners do not adequately promote our products, we will lack a sufficient internal sales infrastructure to do so ourselves, andour product visibility, sales and revenues would decline.
Our failure to complete our expected sales in any given quarter could dramaticallymaterially harm our operating results because of the increasingly large size of typicalmany of our orders.
Our quarterly revenues are especially subject to fluctuation because they depend on the completion of relatively large orders for our products and related services. The average size of our license transactions has increased in recent periods as we have focused on larger enterprise customers and on licensing our more comprehensive integrated products and have utilized system integrators in our sales process. We expect the percentage of larger orders, as compared to total orders, to increase. For example, during 2002, one customer, IBM, represented 11% of our total revenues. This dependence on large orders makes our net revenue and operating results more likely to vary from quarter to quarter, and more difficult to predict, because the loss of any particular large order is significant. As a result, our operating results could suffer if any large orders are delayed or canceled in any future period. In addition, large orders, and orders obtained through the activities of system integrators, often have longer sales cycles, increasing the difficulty of predicting future revenues. We expect the concentration of revenues among fewer customers to continue in the future, due to targeting sales opportunities with larger customers who would be interested in purchasing our full suite of products.
Our sales cycle is subject to a number of significant risks, including customers' budgetary constraints and internal acceptance reviews, over which we have little or no control. Consequently, if sales expected from a specific customer in a particular quarter are not realized in that quarter, we are unlikely to be able to generate revenue from alternate sources in time to compensate for the shortfall. As a result, and due to the relatively large size of a typical order, a lost or delayed sale could result in revenues that are lower than expected. Moreover, to the extent that significant sales occur earlier than anticipated, revenues for subsequent quarters may be lower than expected. Consequently, we face difficulty predicting the quarter in which sales to expected customers will occur. Thisoccur, which contributes to the uncertainty of our future operating results. In recent periods, we have experienced an increase in the size of our typical orders, and in the length of a typical sales cycle. These trends may increase the uncertainty of our future operating results and reduce our ability to anticipate our future revenues.
Our expenses are generally fixed and we will not be able to reduce these expenses quickly if we fail to meet our revenue forecasts.
Most of our expenses, such as employee compensation and rent, are relatively fixed in the short term. Moreover, our budget is based, in part, upon our expectations regarding future revenue levels. As a result, if total revenues for a particular quarter are below expectations, we could not proportionately reduce operating expenses for that quarter. Accordingly, such a revenue shortfall would have a disproportionate effect on our expected operating results for that quarter.
We may not be able to forecast our revenues accurately because our products have a long and variable sales cycle.
The long sales cycle for our products may cause license revenue and operating results to vary significantly from period to period. To date, the sales cycle for our products has taken anywhere from 3 to 12 months in the United States and longer in foreign countries. Consequently, we face difficulty predicting the quarter in which expected sales will actually occur. This contributes to fluctuations in our future operating results. Our sales cycle has required pre-purchasepre- purchase evaluation by a significant number of individuals in our customers' organizations. Along with third parties that often jointly market our software with us, we invest significant amounts of time and resources educating and providing information to prospective customers regarding the use and benefits of our products. Many of our customers evaluate our software slowly and deliberately, depending on the specific technical capabilities of the customer, the size of the deployment, the complexity of the customer's network environment, and the quantity of hardware and the degree of hardware configuration necessary to deploy our products. In the event that the currentpresent economic downturn were to continue, the sales cycle for our products may become longer and we may require more resources to complete sales.
We have a history of losses and may not be profitable in the future and may not be able to generate sufficient revenue to achieve and maintain profitability.
Since we began operations in 1997, our revenues have not been sufficient to support our operations, and we have incurred substantial operating losses in every quarter. As of December 31, 2002, our accumulated deficit was approximately $4.2 billion, which includes approximately $2.7 billion related to goodwill impairment charges. Our history of losses has previously caused some of our potential customers to question our viability, which has in turn hampered our ability to sell some of our products. Additionally, our revenue has been affected by the increasingly uncertain economic conditions both generally and in our market. As a result of these conditions, we have experienced and expect to continue to experience difficulties in collecting outstanding receivables from our customers and attracting new customers, which means that we may continue to experience losses, even if sales of our products and services grow. Although we have restructured our operations to reduce operating expenses, we continue to commit a substantial investment of resources to sales and marketing, developing new products and enhancements, and expanding our operations domestically and internationally, and we will need to increase our revenue to achieve profitability and positive cash flows. As a result, our revenue may decline, or fail to grow, in future periods. Our expectations as to when we can achieve positive cash flows, and as to our future cash balances, are subject to a number of assumptions, including assumptions regarding improvements in general economic conditions and customer purchasing and payment patterns, many of which are beyond our control.
We reduced the size of our professional services team in 2001 and now customers rely more on independent third-party providers for customer services such as product installations and support rather than purchasing those services from us. However, if third parties do not provide the support our customers need, we may be required to hire subcontractors to provide these professional services. Increased use of subcontractors would harm our revenues and margins because it costs us more to hire subcontractors to perform these services than to provide the services ourselves.
We rely on marketing, technology and distribution relationships for the sale, installation and support of our products that may generally be terminated at any time, and if our current and future relationships are not successful, our growth might be limited.
We rely on marketing and technology relationships with a variety of companies that, in part, generate leads for the sale of our products. These marketing and technology relationships include relationships with:
If we cannot maintain successful marketing and technology relationships or if we fail to enter into additional marketing and technology relationships, we could have difficulty expanding the sales of our products and our growth might be limited. While some of these companies do not resell or distribute our products, we believe that many of our direct sales are the result of leads generated by vendors of e-business and enterprise software and we expect to continue relying heavily on sales from these relationships in future periods. Our marketing and technology relationships are generally not documented in writing, or are governed by agreements that can be terminated by either party with little or no prior notice. In addition, companies with which we have marketing, technology or distribution relationships may promote products of several different companies including those of our competitors. If these companies choose not to promote our products or if they develop, market or recommend software applications that compete with our products, our business will be harmed.
In addition, we rely on distributors, value-added resellers, systems integrators, consultants and other third-party resellers to recommend our products and to install and support these products. Our reduction in the size of our professional services team in 2001increased our customers' reliance on third parties for product installations and support. If the companies providing these services fail to implement our products successfully for our customers, we might be unable to complete implementation on the schedule required by the customers and we may have increased customer dissatisfaction or difficulty making future sales as a result. We might not be able to maintain these relationships and enter into additional relationships that will provide timely and cost-effective customer support and service. If we cannot maintain successful relationships with our indirect sales channel partners around the world, we might have difficulty expanding the sales of our products and our international growth could be limited.
If we fail to expand our direct and indirect sales channels, we will not be able to increase revenues.
In order to grow our business, we need to increase market awareness and sales of our products and services. To achieve this goal, we need to increase the size, and enhance the productivity, of our direct sales force and indirect sales channels. If we fail to do so, this failure could harm our ability to increase revenues. The expansion of our sales and marketing department will require the hiring and retention of personnel for whom there is a high demand. We plan to hire additional sales personnel, but competition for qualified sales people is intense, and we might not be able to hire a sufficient number of qualified sales people. Furthermore, while historically we have received substantially all of our revenues from direct sales, we increased our reliance on sales through indirect sales channels by selling our software through systems integrators, or "SI's". We depend on these relationships to promote our products and drive sales, particularly in light of our reductions in direct sales personnel. Our business depends on our ability to create and maintain relationships with SI's and any failure to do so would impair our sales efforts and revenue growth.
If systems integrators fail to adequately promote our products, our sales and revenue would be impaired.
A significant percentage of our revenues depend on the efforts of SIs and their recommendations of our products, and we expect an increasing percentage of our revenues to be derived from our relationships with SIs that market and sell our products. If SIs do not successfully market our products, our operating results will be materially harmed. In addition, many of our direct sales are to customers that will be relying on SIs to implement our products, and if SIs are not familiar with our technology or able to successfully implement our products, our operating results will be materially harmed. We expect to continue building our network of SIs and other indirect sales channels and, if this strategy is successful, our dependence on the efforts of these third parties for revenue growth and customer service will increase. Our reliance on third parties for these functions will reduce our control over such activities and reduce our ability to perform such functions internally. If we come to rely primarily on a single SI that subsequently terminates its relationship with us, becomes insolvent or is acquired by another company with which we have no relationship, or decides not to support our products, we may not be able to internally generate sufficient revenue or increase the revenues generated by our other SI relationships to offset the resulting lost revenues. Furthermore, SIs typically offer our solution in combination with other products and services, some of which may compete with our solution. SIs are not required to sell any fixed quantities of our products, are not bound to sell our products exclusively, and may act as indirect sales channels for our competitors.
Difficulties in implementing our products could harm our revenues and margins.
We generally recognize revenue from a customer sale when persuasive evidence of an agreement exists, the product has been delivered, the arrangement does not involve significant customization of the software, the license fee is fixed or determinable and collection of the fee is probable. Since the fourth quarter of 2001, we typically do not provide a significant portion of implementation services to our customers. Instead, our customers typically purchase such services from third-party providers. However, some implementation services may be purchased from us. If an arrangement requires significant customization or implementation services from KANA, recognition of the associated license and service revenue could be delayed. The timing of the commencement and completion of the these services is subject to factors that may be beyond our control, as this process requires access to the customer's facilities and coordination with the customer's personnel after delivery of the software. In addition, customers could delay product implementations. Implementation typically involves working with sophisticated software, computing and communications systems. If we experience difficulties with implementation or do not meet project milestones in a timely manner, we could be obligated to devote more customer support, engineering and other resources to a particular project. Some customers may also require us to develop customized features or capabilities. If new or existing customers have difficulty deploying our products or require significant amounts of our professional services support or customized features, our revenue recognition could be further delayed and our costs could increase, causing increased variability in our operating results.
We may incur non-cash charges resulting from acquisitions and equity issuances, which could harm our operating results.
In connection with outstanding stock options and warrants to purchase shares of our common stock, as well as other equity rights we may issue, we are incurring and may incur substantial charges for stock-based compensation. Accordingly, significant increases in our stock price could result in substantial non-cash charges and variations in our results of operations. For example, in the first quarter of 2002, we incurred a stock-based compensation charge of approximately $4.7 million associated with warrants issued pursuant to an equity financing agreement that was terminated - see "Recent Developments" in Item 1.terminated. Furthermore, we will continue to incur charges to reflect amortization and any impairment of identified intangible assets acquired in connection with our acquisition of Silknet, and we may make other acquisitions or issue additional warrants, shares of common stock or other securities in the future that could result in further accounting charges. In addition, a new standard for accounting for goodwill acquired in a business combination has recently been adopted. This new standard requires recognition of goodwill as an asset but does not permit amortization of goodwill. Instead goodwill must be separately tested for impairment. As a result, our goodwill amortization charges ceased in 2002. However, in the future, we may incur less frequent, but potentially larger, impairment charges related to the goodwill already recorded, as well as goodwill arising out of any future acquisitions. For example, we performed a goodwill impairment analysis as of June 30, 2002, which resulted in a $55.0 million impairment expense to reduce goodwill. Current and future accounting charges like these could result in significant losses and delay our achievement of net income.profitability.
Our cost reductionThe reductions in workforce associated with our cost-reduction initiatives may adversely affect the morale and performance of our personnel and our ability to hire new personnel.
In connection with our effort to streamline operations, reduce costs and bring our staffing and cost structure in line with industry standards, we restructured our organization throughoutin 2001,with an effort that included substantial reductions in our workforce. In addition, in January 2003, we began implementing an outsourcing strategy, which involves subcontracting a significant portion of our software programming, quality assurance and technical documentation activities to development partners with staffing in India and China. As a result of the first phase of this strategy, in the first quarter of 2003 we transferred the responsibilities of 31 US-based employees to these development partners. We expect to transfer additional positions to these development partners in future quarters of 2003. There have been and may continue to be substantial costs associated with the workforce reductions, including severance and other employee-related costs, and our restructuring plan may yield unanticipated consequences, such as attrition beyond our planned reduction in workforce. As a result of these staff reductions, our ability to respond to unexpected challenges may be impaired and we may be unable to take advantage of new opportunities. We also reduced our employees' salaries in the fourth quarter of 2001, and to a lesser extent, in the third quarter of 2002, in order to bring employee compensation in-line with current market conditions. If market conditions change, we may find it necessary to raise salaries in the future beyond the anticipated levels, or issue additional stock-based compensation, which would be dilutive to shareholders.
In addition, many of the employees who were terminated possessed specific knowledge or expertise that may prove to have been important to our operations. In that case, their absence may create significant difficulties. This personnel reduction may also subject us to the risk of litigation, which may adversely impact our ability to conduct our operations and may cause us to incur significant expense.
We may be unable to hire and retain the skilled personnel necessary to develop and grow our business.
Our recent reductions in force and salary levels may reduce employee morale and may create concern among existing employees about job security, which maycould lead to increased turnover and reduce our ability to meet the needs of our current and future customers. As a result of the reductions in force, we may also need to increase our staff to support new customers and the expanding needs of our existing customers, without compromising the quality of our customer service. Although a number of technology companies have recently implemented lay-offs, substantial competition for experienced personnel remains, particularly in the San Francisco Bay Area, where we are headquartered, due to the limited number of people available with the necessary technical skills.customers. Because our stock price has recently suffered a significant decline, stock-based compensation, including options to purchase our common stock, may have diminished effectiveness as employee hiring and retention devices. If we are unable to retain qualified personnel, that are critical to the successful integration of the companies, we could face disruptions to operations, loss of key information, expertise or know-how and unanticipated additional recruitment and training costs. If employee turnover increases, our ability to provide client service and execute our strategy would be negatively affected.
We may face difficulties in hiring and retaining qualified sales personnel to sell our products and services, which could impair our revenue growth.
Our ability to increase revenues in the future depends considerably upon our success in recruiting, training and retaining additional direct sales personnel and the success of our direct sales force. We might not be successful in these efforts. Our products and services require sophisticated sales efforts. There is a shortage of sales personnel with the requisite qualifications, and competition for such qualified personnel is intense in our industry. Also, it may take a new salesperson a number of months to become a productive member of our sales force. Our business will be harmed if we fail to hire or retain qualified sales personnel, or if newly hired salespeople fail to develop the necessary sales skills or develop these skills more slowly than anticipated.
We rely on marketing, technology and distribution relationships for the sale, installation and support of our products that may generally be terminated at any time, and if our current and future relationships are not successful, our growth might be limited.
We rely on marketing and technology relationships with a variety of companies that, in part, generate leads for the sale of our products. These marketing and technology relationships include relationships with:
If we cannot maintain successful marketing and technology relationships or if we fail to enter into additional marketing and technology relationships, we could have difficulty expanding the sales of our products and our growth might be limited. While some of these companies do not resell or distribute our products, we believe that many of our direct sales are the result of leads generated by vendors of e-business and enterprise and we expect to continue relying heavily on sales from these relationships in future periods. Our marketing and technology relationships are generally not documented in writing, or are governed by agreements that can be terminated by either party with little or no prior notice. In addition, companies with which we have marketing, technology or distribution relationships may promote products of several different companies including those of our competitors. If these companies choose not to promote our products or if they develop, market or recommend software applications that compete with our products, our business will be harmed.
In addition, we rely on distributors, value-added resellers, systems integrators, consultants and other third-party resellers to recommend our products and to install and support these products. Our reduction in the size of our professional services team in 2001 increased our reliance on third parties for product installations and support. If the companies providing these services fail to implement our products successfully for our customers, we might be unable to complete implementation on the schedule required by the customers and we may have increased customer dissatisfaction or difficulty making future sales as a result. We might not be able to maintain these relationships and enter into additional relationships that will provide timely and cost-effective customer support and service. If we cannot maintain successful relationships with our indirect sales channel partners around the world, we might have difficulty expanding the sales of our products and our international growth could be limited.
If our relationships with systems integrators are unsuccessful, our ability to market and sell our product will be limited.
We expect a significant percentage of our revenues to be derived from our relationships with domestic and international systems integrators, or SIs, that market and sell our products. If these SIs do not successfully market our products, our operating results will be materially harmed. Because our relationships with SIs are relatively new, we cannot predict the degree to which the SIs will succeed in marketing and selling our solution. In addition, because the SI model for selling software is relatively new and unproven in the eCRM industry, we cannot predict the degree to which our potential customers will accept this delivery model. If the SIs fail to deliver and support our solution, end-users could decide not to subscribe, or cease subscribing, for our solution. The SIs typically offer our solution in combination with other products and services, some of which may compete with our solution.
We face substantial competition and may not be able to compete effectively.
The market for our products and services is intensely competitive, evolving and subject to rapid technological change. In recent periods, some of our competitors reduced the prices of their products and services (substantially in certain cases) in order to obtain new customers. Competitive pressures could make it difficult for us to acquire and retain customers and could require us to reduce the price of our products. Our customers' requirements and the technology available to satisfy those requirements are continually changing. Therefore, we must be able to respond to these changes in order to remain competitive. Changes in our products may also make it more difficult for our sales force to sell effectively. In addition, changes in customers' perceived needsdemand for the specific products, product features and services of other companies' products may result in our products becoming uncompetitive. We expect the intensity of competition to increase in the future. Increased competition may result in price reductions, reduced gross margins and loss of market share. We may not be able to compete successfully against current and future competitors, and competitive pressures may seriously harm our business.
Our competitors vary in size and in the scope and breadth of products and services offered. We currently face competition for our products from systems designed by in-house and third-party development efforts. We expect that these systems will continue to be a principalmajor source of competition for the foreseeable future. Our primary competitors include a number of companies offering one or more products for the e-business communications and relationship management market, some of which compete directly with our products. For example, our competitors include companies providing stand-alone point solutions, including Accrue Software, Inc., Annuncio,Inc., AskJeeves, Inc., Avaya, Inc., Brightware, Inc.(which was acquired by Firepond, Inc.), Digital Impact, Inc., eGain Communications Corp., E.piphany, Inc., Inference Corp., Live Person, Inc., Marketfirst Software, Inc., and Responsys, Inc. In addition, we compete witheCRM platforms are larger, more established companies providing customer management and communications solutions, such as Clarify Inc. (which was acquired by Amdocs Limited), Alcatel, Oracle Corporation, Siebel Systems, Inc. and PeopleSoft, Inc. (which acquired Vantive Corporation). The level, and to a lesser extent, Oracle and SAP. We also face competition from E.piphany, Inc., Chordiant Software, Inc., Primus Knowledge Solutions and Pegasystems, Inc. with respect to specific applications we offer. We may face increased competition upon introduction of competitionnew products or upgrades from competitors, or if we encounter has increased as a result ofexpand our product line through acquisition of Broadbase.complementary businesses or otherwise.. As we have combined and enhanced the KANA and Broadbaseour product lines to offer a more comprehensive e-businesse- business software solution, we are increasingly competing with large, established providers of customer management and communication solutions such as Siebel Systems, Inc. as well as other competitors. Our combined product line may not be sufficient to successfully compete with the product offerings available from these companies, which could slow our growth and harm our business.
Many of our competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, significantly greater name recognition and a larger installed base of customers than we have. In addition, many of our competitors have well-established relationships with our current and potential customers and have extensive knowledge of our industry. We may lose potential customers to competitors for various reasons, including the ability or willingness of competitors to offer lower prices and other incentives that we cannot match. Accordingly, itIt is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. We also expect that competition will increase as a result of recent industry consolidations, as well as anticipated future consolidations.
Our stock price has been highly volatile and has experienced a significant decline, and may continue to be volatile and decline.
The trading price of our common stock has fluctuated widely in the past and is expected to continue to do so in the future, as a result of a number of factors, many of which are outside our control, such as:
In addition, the stock market, particularly the Nasdaq National Market, has experienced extreme price and volume fluctuations that have affected the market prices of many technology and computer software companies, particularly Internet-related companies. Such fluctuations have often been unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations could adversely affect the market price of our common stock. In the past, following periods of volatility in the market price of a particular company's securities, securities class action litigation has often been brought against that company. Securities class action litigation could result in substantial costs and a diversion of our management's attention and resources.
Since our common stock began trading publiclybecoming a publicly-traded security listed on Nasdaq in September 1999, our common stock has reached a closing high of $1,698.10 per share and traded asclosing low as $3.60of $0.65 per share through March 27, 2002.share. The last reported salessale price of our shares on March 28, 200227, 2003 was $18.00$3.68 per share. Under Nasdaq's listing maintenance standards, if the closing bid price of our common stock is under $1.00 per share for 30 consecutive trading days, Nasdaq may choose to notify us that it may delist our common stock from the Nasdaq National Market. If the closing bid price of our common stock does not thereafter regain compliance for a minimum of 10 consecutive trading days during the 90-days following notification by Nasdaq, Nasdaq may delist our common stock from trading on the Nasdaq National Market. There can be no assurance that our common stock will remain eligible for trading on the Nasdaq National Market. If our stock were delisted, the ability of our shareholders to sell any of our common stock at all would be severely, if not completely, limited, causing our stock price to continue to decline.
Our business depends on the acceptance of our products and services, and it is uncertain whether the market will accept our products and services.
Our ability to achieve increased revenue depends on overall demand for e- business software and related services, and in particular for customer- relationship applications. We expect that our future growth will depend significantly on revenue from licenses of our e-business applications and related services. Market acceptance of these products will depend on the growth of the market for e-business solutions. ThisOur assumptions regarding the size and growth might not occur. Moreover, our target customers might not widely adoptof this market are based on assumptions that both companies and deploy our productstheir customes will increasingly elect to communciate via the Internet and, consequently, that companies doing business on the Internet will demand real- time sales and customer service technology and related services. Our future financial performance will depend on the growth of Internet customer interactions, and on successful development, introduction and customer acceptance of new and enhanced versions of our products and services. In the future, we may not be successful in marketing our products and services, including any new or enhanced products.
The effectivenessdemand for of our products also depends in part on the widespread adoption and use of these products by customer support personnel. Some of our customers who have made initial purchases of this software have deferred or suspended implementation of these products due to slower than expected rates of internal adoption by customer support personnel. If more customers decide to defer or suspend implementation of these products in the future, our ability to increase our revenue from these customers through additional licenses or maintenance agreements will also be impaired, and our financial position could be seriously harmed.
We depend on increased business from new customers, and if we fail to grow our customer base or generate repeat business, our operating results could be harmed.
Our business model generally depends on the sale of our products to new customers as well as on expanded use of our products within our customers' organizations. If we fail to grow our customer base or generate repeat and expanded business from our current and future customers, our business and operating results will be seriously harmed. In some cases, our customers initially make a limited purchase of our products and services for pilot programs. These customers may not purchase additional licenses to expand their use of our products. If these customers do not successfully develop and deploy initial applications based on our products, they may choose not to purchase deployment licenses or additional development licenses.
In addition, as we introduce new versions of our products or new product lines, our current customers might not require the functionality of our new products and might not ultimately license these products. Because the total amount of maintenance and support fees we receive in any period depends in large part on the size and number of licenses that we have previously sold, any downturn in our software license revenue would negatively affect our future services revenue. In addition, if customers elect not to renew their maintenance agreements, our services revenue could decline significantly. Further, some of our customers are Internet-based companies, which have been forced to significantly reduce their operations in light of limited access to sources of financing and the current economic slowdown. If customers were unable to pay for their current products or are unwilling to purchase additional products, our revenues would decline.
If we fail to respond to changing customer preferences in our market, demand for our products and our ability to enhance our revenues will suffer.
If we do not continue to improve our products and develop new products that keep pace with competitive product introductions and technological developments, satisfy diverse and rapidly evolving customer requirements and achieve market acceptance, we might be unable to attract new customers. The development of proprietary technology and necessary service enhancements entails significant technical and business risks and requires substantial expenditures and lead-time.lead- time. We might not be successful in marketing and supporting recently released versions of our products, or developing and marketing other product enhancements and new products that respond to technological advances and market changes, on a timely or cost-effective basis. In addition, even if these products are developed and released, they might not achieve market acceptance. We have experienced delays in releasing new products and product enhancements in the past and could experience similar delays in the future. These delays or problems in the installation or implementation of our new releases could cause us to lose customers.
Our failure to manage multiple technologies and technological change could reduce demand for our products.
Rapidly changing technology and operating systems, changes in customer requirements, and evolving industry standards might impede market acceptance of our products. Our products are designed based upon currently prevailing technology to work on a variety of hardware and software platforms used by our customers. However, our software may not operate correctly on evolving versions of hardware and software platforms, programming languages, database environments and other systems that our customers use. If new technologies emerge that are incompatible with our products, or if competing products emerge that are based on new technologies or new industry standards and that perform better or cost less than our products, our key products could become obsolete and our existing and potential customers could seek alternatives to our products. We must constantly modify and improve our products to keep pace with changes made to these platforms and to database systems and other back-office applications and Internet-related applications. For example, our analytics products were designed to work with databases such as Oracle and Microsoft SQL Server. Any changes to those databases, or increasing popularity of other databases, could require us to modify our analytics products, and could cause us to delay releasing future products and enhancements. Furthermore, software adapters are necessary to integrate our analytics products with other systems and data sources used by our customers. We must develop and update these adapters to reflect changes to these systems and data sources in order to maintain the functionality provided by our products. As a result, uncertainties related to the timing and nature of new product announcements, introductions or modifications by vendors of operating systems, databases, customer relationship management software, web servers and other enterprise and Internet-based applications could delay our product development, increase our product development expense or cause customers to delay evaluation, purchase and deployment of our analytics products. If we fail to modify or improve our products in response to evolving industry standards, our products could rapidly become obsolete.
Failure to license necessary third party software incorporated in our products could cause delays or reductions in our sales.
We license third party software that we incorporate into our products. These licenses may not continue to be available on commercially reasonable terms or at all. Some of this technology would be difficult to replace. The loss of any such license could result in delays or reductions of our applications until we identify, license and integrate or develop equivalent software. If we are required to enter into license agreements with third parties for replacement technology, we could face higher royalty payments and our products may lose certain attributes or features. In the future, we might need to license other software to enhance our products and meet evolving customer needs. If we are unable to do this, we could experience reduced demand for our products.
Failure to develop new products or enhancements to existing products on a timely basis would hurt our sales and damage our reputation.
To be competitive, we must develop and introduce on a timely basis new products and product enhancements for companies with significant e-business customer interactions needs. Our ability to deliver competitive products may be negatively affected by the diversion of resources to development of theour suite of products, and responding to changes in competitive products and in the demands of our customers. If we experience product delays in the future, we may face:
Furthermore, delays in bringing to market new products or their enhancements to market can result, for example, from potential difficulties with managing outsourced research and development, including overseeing such activities occurring in India and China or from loss of institutional knowledge through reductions in force, or the existence of defects in new products or their enhancements, could be exploited by our competitors.enhancements. The developmentchallenges of developing new products in response to these risks wouldand enhancements require us to commit a substantial investment of resources, and we might not be able to develop or introduce new products on a timely or cost-effective basis, or at all, which could be exploited by our competitors and lead potential customers to choose alternative products.
Our pending patents may never be issued and, even if issued, may provide little protection.
Our success and ability to compete depend to a significant degree upon the protection of our software and other proprietary technology rights. We regard the protection of patentable inventions as important to our future opportunities. We currently have onethree issued U.S. patentpatents and multiple U.S. patent applications pending relating to our software. Although we have filed international patent applications corresponding to some of our U.S. patent applications, none of our technology is patented outside of the United States. It is possible that:
We rely upon trademarks, copyrights and trade secrets to protect our proprietary rights, which may not be sufficient to protect our intellectual property.
We also rely on a combination of laws, such as copyright, trademark and trade secret laws, and contractual restrictions, such as confidentiality agreements and licenses, to establish and protect our proprietary rights. However, despite the precautions that we have taken:
Also, the laws of other countries in which we market our products may offer little or no effective protection of our proprietary technology. Reverse engineering, unauthorized copying or other misappropriation of our proprietary technology could enable third parties to benefit from our technology without paying us for it, which would significantly harm our business.
We may become involved in litigation over proprietary rights, which could be costly and time consuming.
Substantial litigation regarding intellectual property rights exists in our industry. We expect that software in our industry may be increasingly subject to third-party infringement claims as the number of competitors grows and the functionality of products in different industry segments overlaps. Some of our competitors in the market for customer communications software may have filed or may intend to file patent applications covering aspects of their technology that they may claim our technology infringes. Such competitors could make a claim of infringement against us with respect to our products and technology. Third parties may currently have, or may eventually be issued, patents upon which our current or future products or technology infringe. Any of these third parties might make a claim of infringement against us. For example, we have been contacted by a company that has asked us to evaluate the need for a license of certain patents that this company holds, relating to certain call-center applications. Although the patent holder has not filed any claims against us, we cannot assure you that it will not do so in the future. The patent holder may also have applications on file in the United States covering related subject matter, which are confidential until the patent or patents, if any, are issued. Many of our software license agreements require us to indemnify our customers from any claim or finding of intellectual property infringement. We periodically receive notices from customers regarding patent license inquiries they have received which may or may not implicate our indemnity obligations, and currently we are assuming defense of a recently filed patent infringement case against one such customer. This case was filed subsequent to December 31, 2002 and we intend to defend it vigorously. As an additional example, Tumbleweed Communications Corp. filed suit against our customer Ameritrade, Inc. alleging infringement of a patent, and seeking injunctive relief, damages and attorneys fees. Any litigation, brought by others, or us could result in the expenditure of significant financial resources and the diversion of management's time and efforts. In addition, litigation in which we are accused of infringement might cause product shipment delays, require us to develop non-infringing technology or require us to enter into royalty or license agreements, which might not be available on acceptable terms, or at all. If a successful claim of infringement were made against us and we could not develop non-infringing technology or license the infringed or similar technology on a timely and cost-effective basis, our business could be significantly harmed.
We may face higher costs and lost sales if our software contains errors.
We face the possibility of higher costs as a result of the complexity of our products and the potential for undetected errors. Due to the mission- critical nature of many of our products and services, errors are of particular concern. In the past, we have discovered software errors in some of our products after their introduction. We have only a few "beta" customers that test new features and functionality of our software before we make these features and functionalities generally available to our customers. If we are not able to detect and correct errors in our products or releases before commencing commercial shipments, we could face:
We may face liability claims that could result in unexpected costs and damages to our reputation.
Our licenses with customers generally contain provisions designed to limit our exposure to potential product liability claims, such as disclaimers of warranties and limitations on liability for special, consequential and incidental damages. In addition, our license agreements generally cap the amounts recoverable for damages to the amounts paid by the licensee to us for the product or service giving rise to the damages. However, all domestic and international jurisdictions may not enforce these contractual limitations on liability. We may be subject to claims based on errors in our software or mistakes in performing our services including claims relating to damages to our customers' internal systems. A product liability claim could divert the attention of management and key personnel, could be expensive to defend and could result in adverse settlements and judgments.
In April 2001, Office Depot, Inc. filed a complaint against KANA claiming that KANA has breached its license agreement with Office Depot. Office Depot is seeking relief in the form of a refund of license fees and maintenance fees paid to KANA, attorneys' fees and costs. The litigation is currently in its early stages. We believe we have meritorious defenses to these claims and intend to defend this claim vigorously and do not expect it to have a material impact onthe action vigorously.
Growth in our results of operations. However, the ultimate outcome of any litigation is uncertain, and either unfavorable or favorable outcomes could have a material negative impact due to defense costs, diversion of management resources and other factors.
Our international operations exposes us to additional risks.
Sales outside North America represented 17% of our total revenues in 2000, 15% of our total revenues in the 2001, and 32% of our revenues in 2002. We have established offices in the United Kingdom, Germany, Japan, the Netherlands, France, Belgium, Australia, Hong Kong and South Korea. Sales outside North America could divert management attention and present financial issues.
Our international operations are located throughout Europe, Australia, and Asia, and,increase as a percentage of total revenues as we attempt to date, have been limited. We may expand our existing international operations and establish additional facilities in other parts of the world. We may face difficulties in accomplishing this expansion, including finding adequate staffing and management resources for our international operations. TheAny expansion of our existing international operations and entry into additional international markets will require significant management attention and financial resources. In addition, in order to expand our international sales operations,resources, as well as additional support personnel. For any such expansion, we will also need to, among other things:
Our investments in establishing facilities in other countries may not produce desired levels of revenues. Even if we are able to expand our In addition, as international operations successfully, we may not be able to maintain or increase international market demand for our products. In addition, we have only licensed our products internationally since January 1999 and have limited experience in developing localized versionsbecome a larger part of our softwarebusiness, we could encounter, on average, greater difficulty with collecting accounts receivable, longer sales cycles and marketingcollection periods, greater seasonal reductions in business activity and distributing them internationally. Localizingincreases in our products may take longer than we anticipate due to difficulties in translation and delays we may experience in recruiting and training international staff.
Our growth could be limited if we fail to execute our plan to expand internationally.
Sales outside North America represented 17% of our total revenues in 2000 and 16% of our total revenues in the 2001. As a result of our acquisition of Broadbase, we expect sales outside North America to increase as a percentage of total revenues. We have established offices in the United Kingdom, Germany, Japan, Holland, France, Austria, Belgium, Australia, Hong Kong and South Korea. As a result, we face risks from doing business on an international basis, any of which could impair our international revenues. Ourtax rates. Furthermore, products must be localized, or customized to meet the needs of local users, before they can be sold in particular foreign countries. Developing localized versions of our products for foreign markets is difficult and can take longer than we anticipate. We have only licensed our products internationally since January 1999 and have limited experience in localizingdeveloping localized versions of our productssoftware and marketing and distributing them internationally. Our investments in testing whether these localized products will be acceptedestablishing facilities in the targeted countries. Our localization effortsother countries may not produce desired levels of revenues. Even if we are able to expand our international operations successfully, we may not be successful. In addition, we could, in the future, encounter greater difficulty with collecting accounts receivable, longer sales cycles and collection periodsable to maintain or seasonal reductions in business activity. In addition,increase international market demand for our international operations could cause our average tax rate to increase. Any of these events could harm our international sales and results of operations.products.
International laws and regulations may expose us to potential costs and litigation.
Our international operations increase our exposure to international laws and regulations. If we cannot comply with foreign laws and regulations, which are often complex and subject to variation and unexpected changes, we could incur unexpected costs and potential litigation. For example, the governments of foreign countries might attempt to regulate our products and services or levy sales or other taxes relating to our activities. In addition, foreign countries may impose tariffs, duties, price controls or other restrictions on foreign currencies or trade barriers, any of which could make it more difficult for us to conduct our business. The European Union has enacted its own privacy regulations that may result in limits on the collection and use of certain user information, which, if applied to the sale of our products and services, could negatively impact our results of operations.
We may suffer foreign exchange rate losses.
Our international revenues and expenses are denominated in local currency. Therefore, a weakening of other currencies compared to the U.S. dollar could make our products less competitive in foreign markets and could negatively affect our operating results and cash flows. We do not currently engage in currency hedging activities. We have not yet experienced, but may in the future experience, significant foreign currency transaction losses, especially because we do not engage in currency hedging. As the international component of our revenues grows, our results of operations will become more sensitive to foreign exchange rate fluctuations.
FailureIf our operations require more cash than anticipated, failure to obtain needed financing could affect our ability to maintain current operations and pursue future growth, and the terms of any financing we obtain may impair the rights of our existing stockholders.
We expect thatIn the future, we may be required to seek additional financing to fund our cash, cash equivalents and short term investments will be sufficient to meet our working capital and capital expenditure needs for the next 12 months. To reduce our expenditures, we restructured in several areas, including reduced staffing and capital spending. In 2001, we reduced our workforce by approximately 772 net positions in order to streamline operations eliminate redundant positions after the merger with Broadbase, and reduce costs by bringing our employment structure in line with industry standards.or growth. Our most recent reduction in force was announced to employees on September 28, 2001, in which we reduced our staff by approximately 365 positions across all departments. We expect to continue to experience negative cash flows from operations through the first quarter of 2002. Significant expected negative cash flows through the second quarter of 2002 include approximately $15 million in payments relating to accrued merger and restructuring costs, as well as approximately $10operating activities used $42.2 million of expenditures on corporate infrastructure.
On February 12, 2002, we completed a sale of an aggregate of 2,910,000 sharescash in 2002. Factors such as the commercial success of our common stockexisting 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 several institutional investors for gross proceeds of approximately $34.5 million, exclusive of associated transaction costs.
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. For example, in November 2001, we sold approximately 1,000,000 shares of our common stock at a price per share of $10.00 (representing a discount from the price per share at which our common stock was then trading). This issuance represented approximately 5.2% of our outstanding stock (based on 19,399,113 shares outstanding as of December 31, 2001). 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. In addition, our expectations as to when
If we can achieve positive cash flows, and as to our future cash balances,acquire companies, products or technologies, we may face risks associated with those acquisitions.
If we are subject to a number of assumptions, including assumptions regarding anticipated increasespresented with appropriate opportunities, we may make other investments in our revenue, improvements in general economic conditions and customer purchasing and payment patterns, many of which are beyond our control.
We have completed a number of mergers, and those mergers may result in disruptions to our business and management due to difficulties in assimilating personnel and operations.
complementary companies, products or technologies. We may not realize the anticipated benefits from the significant mergersof any other acquisition or investment. If we have completed. In August 1999, we acquired Connectify, in December 1999, we acquired netDialog and Business Evolution, and in April 2000, we acquired Silknet. In June 2001, we completed our merger with Broadbase. Similarly, prior to its merger with us, Broadbase also acquired several companies, including Rubric, Servicesoft, Decisionism and Panopticon. We may not be able to successfully assimilate the additional personnel, operations, acquired technology and products into our business. In particular,acquire another company, we will need to assimilatelikely face risks, uncertainties and retain key professional services, engineering and marketing personnel. This is particularly difficultdisruptions associated with Business Evolution, Servicesoft and Silknet, since their operations are located on the East coast and we are headquartered on the West coast. Key personnel from the acquired companies haveintegration process, including, among other things, difficulties in certain instances decided, and they may in the future decide, that they do not want to work for us. In addition, products of these companies will have to be integrated into our products, and it is uncertain whether we may accomplish this easily or at all.
The integration of acquired companies has been and will continue to be a complex, time consuming and expensive process and might disrupt our business if not completed efficiently or in a timely manner. We must demonstrate to customers and suppliers that these recent acquisitions will not result in adverse changes in customer service standards, or dilution of or distraction to our business focus. The difficulties of integrating other businesses could be greater than we anticipate, and could disrupt our ongoing business, disrupt our management and employees and increase our expenses. Acquisitions are inherently risky and we may also face unexpected costs, which may adversely affect operating results in any quarter.
If we do not successfully complete the integration of the operations, of Broadbase, we may not achieve the benefits we expect from that merger.
The integrationtechnologies and services of the productsacquired company, the diversion of our management's attention from other business concerns and technologies of Broadbase with those of KANA continues to be a complex, time consuming and expensive process. Integration may take longer than expected, and we may be required to expend more resources on integration than anticipated. The need to expend additional resources on integration would reduce the resources that would otherwise be spent on developing our products and technologies. If we cannot successfully integrate Broadbase's products and technologies with our own, or if this integration takes longer than anticipated, we may not be able to operate efficiently or realize the expected benefits of the merger. In addition, failure to complete the integration successfully could result in thepotential loss of key personnel and customers.
To achieve the anticipated benefitsemployees of the Broadbase acquisition,acquired businesses. If we must develop and introduce new productsfail to successfully integrate other companies that usewe may acquire, our business could be harmed. Furthermore, we may have to incur debt or issue equity securities to pay for any additional future acquisitions or investments, the assetsissuance of both companies.
We expectwhich could be dilutive to develop and introduce new products, and enhanced versionsour existing stockholders or us. In addition, our operating results may suffer because of our currently existing analytic and eCRM products, that interoperate as a single platform. In particular, we planacquisition-related costs or amortization expenses or charges relating to increase the level of integration of KANA's and Broadbase's products so that they function as a unified solution from a common database. The timely development and introduction of new products and versions that work effectively together and allow customers to achieve the benefits of a broader product offering presents significant technological, marketacquired goodwill and other obstacles in addition to the risks inherent in the development and introduction of new products.
We may not be able to overcome these obstacles. In addition, because our market is characterized by rapidly shifting customer requirements, we may not be able to assess these requirements accurately, or our joint products may not sufficiently satisfy these requirements or achieve market acceptance. Further, the introduction of these anticipated new products and versions may result in longer sales cycles and product implementations, which may cause revenue and operating income to fluctuate and fail to meet expectations.
In addition, we intend to offer products owned by KANA prior to the merger to customers owning products purchased from Broadbase, and we intend to offer products acquired from Broadbase to our customers. The customers of either company may not have an interest in the other company's products and services. The failure of cross-marketing efforts would diminish our ability to achieve the benefits of the merger.intangible assets.
The role of acquisitions in our future growth may be limited, which could seriously harm our continued operations.
In the past, acquisitions have been an important part of the growth strategy for us. To gain access to key technologies, new products and broader customer bases, we have acquired companies in exchange for shares of our common stock. Because the recent trading prices of our common stock have been significantly lower than in the past, the role of acquisitions in our growth may be substantially limited. If we are unable to acquire companies in exchange for our common stock, we may not have access to new customers, needed technological advances or new products and enhancements to existing products. This would substantially impair our ability to respond to market opportunities.
If we acquire additional companies, products or technologies, we may face risks similar to those faced in our other mergers.
If we are presented with appropriate opportunities, we intend to make other investments in complementary companies, products or technologies. We may not realize the anticipated benefits of any other acquisition or investment. If we acquire another company, we will likely face the same risks, uncertainties and disruptions as discussed above with respect to our other completed mergers. Furthermore, we may have to incur debt or issue equity securities to pay for any additional future acquisitions or investments, the issuance of which could be dilutive to our existing stockholders or us. In addition, our profitability may suffer because of acquisition-related costs or amortization costs for acquired goodwill and other intangible assets.
We have adopted anti-takeover defenses that could delay or prevent an acquisition of the company.
Our board of directors has the authority to issue up to 500,0005,000,000 shares of preferred stock. Without any further vote or action on the part of the stockholders, the board of directors has the authority to determine the price, rights, preferences, privileges and restrictions of the preferred stock. This preferred stock, if issued, might have preference over and harm the rights of the holders of common stock. Although the issuance of this preferred stock will provide us with flexibility in connection with possible acquisitions and other corporate purposes, this issuance may make it more difficult for a third party to acquire a majority of our outstanding voting stock. We currently have no plans to issue preferred stock.
Our certificate of incorporation, bylaws and equity compensation plans include provisions that may deter an unsolicited offer to purchase us. These provisions, coupled with the provisions of the Delaware General Corporation Law, may delay or impede a merger, tender offer or proxy contest involving us. Furthermore, our board of directors is divided into three classes, only one of which is elected each year. Directors are removable by the affirmative vote of at least 66 2/3% of all classes of voting stock. These factors may further delay or prevent a change of control of us.
Risks Related to Our Industry
If the Internet and web-basedWeb-based communications fail to grow and be accepted as media of communication, demand for our products and services will decline.
We sell our products and services primarily to organizations that receive large volumes of e-mail and web-basedWeb-based communications. Consequently, our future revenues and profits, if any, substantially depend upon the continued acceptance and use of the Internet and e-mail, which are evolving as media of communication. Rapid growth in the use of the Internet and e-mail is a recent phenomenon and may not continue. As a result, a broad base of enterprises that use e-mail as a primary means of communication may not develop or be maintained. In addition, the market may not accept recently introduced products and services that process e-mail, including our products and services. Moreover, companies that have already invested significant resources in other methods of communications with customers, such as call centers, may be reluctant to adopt a new strategy that may limit or compete with their existing investments.
Consumers and businesses might reject the Internet as a viable commercial medium, or be slow to adopt it, for a number of reasons, including potentially inadequate network infrastructure, slow development of enabling technologies, concerns about the security of transactions and confidential information and insufficient commercial support. The Internet infrastructure may not be able to support the demands placed on it by increased Internet usage and bandwidth requirements. In addition, delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity, or increased governmental regulation, could cause the Internet to lose its viability as a commercial medium. If these or any other factors cause use of the Internet for business to decline or develop more slowly than expected, demand for our products and services will be reduced. Even if the required infrastructure, standards, protocols or complementary products, services or facilities are developed, we might incur substantial expenses adapting our products to changing or emerging technologies.
Future regulation of the Internet may slow our growth, resulting in decreased demand for our products and services and increased costs of doing business.
State, federal and foreign regulators could adopt laws and regulations that impose additional burdens on companies that conduct business online. These laws and regulations could discourage communication by e-mail or other web-based communications, particularly targeted e-mail of the type facilitated by our products, which could reduce demand for our products and services.
The growth and development of the market for online services may prompt calls for more stringent consumer protection laws or laws that may inhibit the use of Internet-based communications or the information contained in these communications. The adoption of any additional laws or regulations may decrease the expansion of the Internet. A decline in the growth of the Internet, particularly as it relates to online communication, could decrease demand for our products and services and increase our costs of doing business, or otherwise harm our business. Any new legislation or regulations, application of laws and regulations from jurisdictions whose laws do not currently apply to our business, or application of existing laws and regulations to the Internet and other online services could increase our costs and harm our growth.
The imposition of sales and other taxes on products sold by our customers over the Internet could have a negative effect on online commerce and the demand for our products and services.
The imposition of new sales or other taxes could limit the growth of Internet commerce generally and, as a result, the demand for our products and services. Recent federal legislation limits the imposition of state and local taxes on Internet-related sales until November 1, 2003. Congress may choose not to renew this legislation, in which case state and local governments would be free to impose taxes on electronically purchased goods. We believe that most companies that sell products over the Internet do not currently collect sales or other taxes on shipments of their products into states or foreign countries where they are not physically present. However, one or more states or foreign countries may seek to impose sales or other tax collection obligations on out- of-jurisdictionout-of-jurisdiction companies that engage in e-commerce within their jurisdiction. A successful assertion by one or more states or foreign countries that companies that engage in e-commerce within their jurisdiction should collect sales or other taxes on the sale of their products over the Internet, even though not physically in the state or country, could indirectly reduce demand for our products.
Privacy concerns relating to the Internet are increasing, which could result in legislation that negatively affects our business, in reduced sales of our products, or both.
Businesses using our products capture information regarding their customers when those customers contact them on-line with customer service inquiries. Privacy concerns could cause visitors to resist providing the personal data necessary to allow our customers to use our software products most effectively. More importantly, even the perception of privacy concerns, whether or not valid, may indirectly inhibit market acceptance of our products. In addition, legislative or regulatory requirements may heighten these concerns if businesses must notify Web site users that the data captured after visiting certain Web sites may be used by marketing entities to unilaterally direct product promotion and advertising to that user. If consumer privacy concerns are not adequately resolved, our business could be harmed.Government regulation that limits our customers' use of this information could reduce the demand for our products. A number of jurisdictionshave adopted,, or are considering adopting, laws that restrict the use of customer information from Internet applications. TheEuropean Union has required that its member states adopt legislation that imposes restrictions on the collection and use of personal data, and that limits the transfer of personally-identifiable data tocountries that donot impose equivalent restrictions. In the United States, the Childrens' Online Privacy Protection Act was enacted in October 1998. This legislation directs the Federal Trade Commission to regulate the collection of data from children on commercial websites. In addition, the Federal Trade Commission has begun investigations into the privacy practices of businesses that collect information on the Internet. These andotherprivacy-related initiatives could reduce demand for some of the Internet applications with which our products operate, and could restrict the use of these products in some e-commerce applications. This could, in turn, reduce demand for these products.
Our security could be breached, which could damage our reputation and deter customers from using our services.
We must protect our computer systems and network from physical break-ins, security breaches and other disruptive problems caused by the Internet or other users. Computer break-ins could jeopardize the security of information stored in and transmitted through our computer systems and network, which could adversely affect our ability to retain or attract customers, damage our reputation and subject us to litigation. We have been in the past, and could be in the future, subject to denial of service, vandalism and other attacks on our systems by Internet hackers. Although we intend to continue to implement security technology and establish operational procedures to prevent break-ins, damage and failures, these security measures may fail. Our insurance coverage in certain circumstances may be insufficient to cover losses that may result from such events.
ItemITEM 7A. Quantitative and Qualitative Disclosures About Market RiskQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in the United States and sell these products in North America, Europe, Asia, Australia and Latin America. In 2002, revenues from customers outside of the United States approximated 28% of total revenues. Generally, our sales are made in local currency. As a result, our financial results and cashflowscash flows could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. We do not currently use derivative instruments to hedge against foreign exchange risk.
Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. OurThe primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. At December 31, 2002, our investments consist primarily of short-term municipals and commercial paper, which have a weighted average fixed yield rate of 4.4%. These all mature within seven months. We do not consider our cash equivalents to be subject to interest rate risk due to their short maturities.
We are exposed to market risk from fluctuations in foreign currency exchange rates, principally from the exchange rate between the US dollar and the Euro and British pound. We manage exposure to variability in foreign currency exchange rates primarily through the use of natural hedges, as both liabilities and assets are denominated in the local currency. However, different durations in our funding obligations and assets may expose us to the risk of foreign exchange rate fluctuations. We have not entered into any derivative instrument transactions to manage this risk. Based on our overall foreign currency rate exposure at December 31, 2002, we do not believe that a hypothetical 10% change in foreign currency rates would materially adversely affect our financial position.
ItemITEM 8. Financial Statements and Supplementary DataFINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements, together with related notes and the reportsreport of PricewaterhouseCoopers LLP, and KPMG LLP, independent accountants, are set forth on the pages indicated in Item 14,15, and incorporated herein by this reference.
ItemITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial DisclosureCHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ItemITEM 10. Directors and Executive Officers of the RegistrantDIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding our continuing executive officers and directors (including their ages as of December 31, 2001)March 20, 2003):
Name | Age | Position |
Chuck Bay |
| Chief Executive Officer |
Tom Doyle |
| Chief Operating Officer and President |
|
| Chief Financial Officer |
Chris Maeda |
| Chief Technology Officer |
|
|
|
|
|
|
James C. Wood. |
| Chairman of the Board of Directors |
|
| Director |
Kevin Harvey |
| Director |
Massood Zarrabian. |
| Director |
Chuck Bay. Mr. Bay has been our Chief Executive Officer President and a member of the board of directors since the merger with Broadbase in June 2001.2001, and President until March 26, 2003. Mr. Bay was formerly Chief Executive Officer of Broadbase, which he joined as Chief Financial Officer and General Counsel in January 1998. Mr. Bay also served as Executive Vice President of Operations of Broadbase. From July 1997 to January 1998, Mr. Bay served as Chief Financial Officer and General Counsel for Reasoning, Inc., a software company. From January 1995 to August 1997, Mr. Bay served as Chief Financial Officer and General Counsel, for Pure Atria Software, Inc., a software company. From April 1994 to January 1995, Mr. Bay served as President and Chief Financial Officer of Software Alliance Corporation, a software company. Mr. Bay holds a B.S. degree in business administrationBusiness Administration from Illinois State University and a J.D. degree from the University of Illinois.
Tom Doyle. Mr. Doyle has been our Chief Operating Officer since the merger with Broadbase in June 2001. Previously,2001, and became our President effective March 26, 2003. From 1996 to April 1999, Mr. Doyle served first as Executive Vice President of Sales and then as Chief Operating Officer of Broadbase. Prior to joining Broadbase, Mr. Doyle was Senior Vice President of Worldwide Sales at Reasoning Inc., joining Reasoning in 1996 from Tandem Computers where he was Director of North American Sales Operations. At Tandem, he held numerous sales and sales management positions in Houston, Texas, Atlanta, Georgia and Cupertino, California. Before joining Tandem, Mr. Doyle participated in the start-up operations and initial channel development with Fortune Systems. Mr. Doyle serves on the board of directors of Privia, Inc. Mr. Doyle obtained his B.S. in Finance from the University of Missouri.
Brett White.John Huyett. Mr. WhiteHuyett has been our Executive Vice President and Chief Financial Officer since the merger with Broadbase, where he alsoJune 2002. Previously, Mr. Huyett served as President and Chief Executive Officer of Clickmarks, Inc. from August 2000 through March 2002. From March 1998 to July 2000 Mr. Huyett was Chief Financial Officer since May 2001.and subsequently Chief Executive Officer at Magellan Corporation. Before joining Magellan, Mr. Huyett was Chief Financial Officer, Treasurer and VP of Financial and Administrative Services at Avant!. Previously, from February 1999 to February 2000, Mr. WhiteHuyett was the Managing Executive Vice President of Field Financial Operations for marchFIRST. He also served as Executive Partnera partner at KPMG where he was in charge of Finance and Operations forKPMG's high technology practice in the professional services firm of USWeb/CKS before it merged with marchFIRST. His experience also includes 10 years of executive level positions at Oracle including Vice President of Finance for Worldwide Consulting Services and Vertical Markets.Carolinas. Mr. White holds aHuyett obtained his B. A.S. degree in Business EconomicsAdministration from the University of California, Santa Barbara.North Carolina at Chapel Hill.
Chris Maeda.Dr. Maeda has been our Chief Technology Officer since the merger with Broadbase in June 2001, where he served as Chief Technology Officer after joining Broadbase as Executive Vice President of Engineering. Dr. Maeda was co-founder of Rubric and served as Rubric's Chief Technology Officer from March 1997 to January 2000. Rubric was acquired by Broadbase in February of 2000. From May 1995 to February 1997, Dr. Maeda held various positions at the Xerox Palo Alto Research Center. Dr. Maeda holds a B.S. degree in computer science from the Massachusetts Institute of Technology, and M.S. and Ph.D. degrees in computer scienceComputer Science from Carnegie Mellon University.
Harold K.(Bud) Michael.Tom Pesut. Mr. Michael joinedPesut has been our Executive Vice President, Worldwide Sales since January 2003. Prior to joining KANA, upon the merger with Broadbase in June 2001 asMr. Pesut was Senior Vice President Worldwide Sales for Merant from September 2000 to July 2001 where he was responsible for the field operations of Products. He currently serves as Executive Vice President, Products & Marketing. Previously, since December 2000, Mr. Michael served as Senior Vice President, Product Management for Broadbase.the company's three software divisions. From January 1999 to DecemberAugust 2000, he served as Vice President Global Accounts for Equant Network Services. In 1998 Mr. MichaelPesut also served as the President and Chief Operating Officer of Melita International, a supplier of CRM systems. Previously, Mr. Pesut has held various senior management positions, at Decisionism, including eight years with Novell serving in positions including General Manager of the position ofCanadian subsidiary, Area Director and Senior Vice President of Business-to- Business Markets. Previously, Mr. Michael held executive positions with technology companies including Intel, Tandem Computer, Sequent Computers, Client Systems, LLC and RSA Companies, Inc. Mr. MichaelAmericas. He began his career at Xerox where he gained his early sales management experience. Tom holds a B.S. in EconomicsB.A. from StanfordWayne State University.
Vicki Amon-Higa.Ms. Amon-Higa joined KANA upon the merger with Broadbase in June 2001 as Vice President, Integration. She currently serves as Vice President of Corporate Development & Human Resources. Previously, from October 1999 to January 2001, Ms. Amon-Higa headed worldwide business operations for the AppleCare division of Apple Computer. From July 1996 to September 1999, she worked as an independent consultant for clients such as Pixar Animation Studios and Apple Computer. Previously,Ms. Amon-Higa held various quality and management positions with ADPgsi, NeXT Computer, Hughes Aircraft and Florida Power & Light. Ms. Amon-Higa holds a B. A. in Asian Studies from the University of California and a Master's in International Management from the American Graduate School of International Management, Thunderbird Campus.
James C. Wood. Mr. Wood joined us in April 2000 as a director in connection with our acquisition of Silknet and served as our President from May 2000 until he was appointed as our Chief Executive Officer and Chairman of the Board of Directors in January 2001. Mr. Wood founded Silknet in March 1995 and served as its Chairman of the Board, President and Chief Executive Officer. From January 1988 until November 1994, Mr. Wood served as President and Chief Executive Officer of CODA Incorporated, a subsidiary of CODA Limited, a financial accounting software company. Mr. Wood also served as a director of CODA Limited from November 1988 until November 1994. Mr. Wood holds a B.S. in Electrical Engineering from Villanova University.
Robert W. Frick. Mr. Frick has served as one of our directors since August 1999. From 1976 until his retirement in 1998, Mr. Frick served in various capacities including Vice Chairman of the Board, Chief Financial Officer and head of the World Banking Group for Bank of America, Managing Director of BankAmerica International, and President of Bank of America's venture capital subsidiary. Mr. Frick previously served as a director of Connectify, Inc. from its founding to its acquisition by us, and he currently serves onTom Galvin.Mr. Galvin joined the board of directors in December 2002. Mr. Galvin is currently Director of six private companies.Compensation and Benefits for Intel Corporation. Employed with Intel since 1979, he has served the company in Finance, Business Development, Marketing, and Human Resources. In Finance, he last served as Controller for Worldwide Sales, Marketing, and Advertising, with financial responsibility for Intel's brand investments including the Intel Inside® program. Immediately prior to managing the company's Compensation and Benefits group, Mr. FrickGalvin was director of Market Development for Intel's consumer software programs in support of the Pentium®brand family of microprocessors. Mr. Galvin holds a B.S. in Civil EngineeringMathematics and anEconomics from Miami University (Ohio), and a M.B.A. from Washington University in St. Louis, Missouri.the Kellogg School of Management at Northwestern University.
Kevin Harvey. Mr. Harvey has served as a member of the board of directors of Broadbase sincefrom January 1996, and joined our board of directors upon the acquisition ofmerger with Broadbase in June 2001. Mr. Harvey has been a general partner of Benchmark Capital, a venture capital firm, since it was founded in January 1995May 1995. Mr. Harvey is also a director of several privately held companies. Mr. Harvey holds a B.S. degree in electrical engineering from Rice University.
Massood Zarrabian. Mr. Zarrabian has served as a member of the board of directors of Broadbase since weit acquired Servicesoft, Inc. in December 2000.2000, and joined our board of directors upon the merger with Broadbase in June 2001. Mr. Zarrabian is currently the President and Chief Executive Officerof Outstart, Inc. He formerly served as President, E-Service Division for Broadbase from December 2000 through his departure in April 2001. From July 1999 to December 2000, Mr. Zarrabian was Chief Executive Officer and President of Servicesoft, Inc. Prior to Servicesoft, Mr. Zarrabian served as the Vice President Development Operations at Lewtan Technologies Inc. Before joining Lewtan, he held the position of Chief Operating Officer at Cayenne Software, Inc. Mr. Zarrabian has also held a number of executive management positions at Bachman Information Systems and Computervision Corporation. Mr. Zarrabian holds a B.S. in Civil Engineering from the Massachusetts Institute of Technology.
Section 16(a) Beneficial Ownership Reporting Compliance
The members of theour board of directors, our executive officers and persons who hold more than 10% of our outstanding common stock are subject to the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934, as amended, which require them to file reports with respect to their ownership of the common stock and their transactions in such common stock. Based upon (i) the copies of Section 16(a) reports which we received from such persons for their 20012002 transactions in the common stock and their common stock holdings and (ii) the written representations received from one or more of such persons that no annual Form 5 reports were required to be filed by them for 2001,2002, we believe that theour executive officers and the board members complied withhave filed, on a timely basis, all their reporting requirementsreports required under Section 16(a) for 2001 except as follows: except for certain gifts of shares made by Mr. Bay aggregating less than 7,000 shares which were not reported on a Form 5 by the deadline for such filing.2002.
ItemITEM 11. ExecutiveEXECUTIVE COMPENSATION
We will furnish to the Securities and Exchange Commission a definitive Proxy Statement (the "Proxy Statement") not later than 120 days after the close of the fiscal year ended December 31, 2002. Certain information required by this item is incorporated herein by reference to the Proxy Statement.
Summary Compensation
SUMMARY COMPENSATION TABLE Table
The following table sets forth certain information concerning compensation earned for the year ended December 31, 2001 by (1) individuals who served as and 2002, by:
The listed individuals are referred to in this report as the Named Executive Officers. None of the Named Executive Officers were employed by KANA until its merger with Broadbase in June 2001. Accordingly, in each case where we have reported 2001 annual compensation, such compensation reflects only compensation paid since the merger, while the 2002 figure represents a full year of compensation.
The salary figures include amounts the employees invested into our tax- qualified plan pursuant to Section 401(k) of the Internal Revenue Code. However, compensation in the form of perquisites and other personal benefits that constituted less than the lesser of either $50,000 or 10% of the total annual salary and bonus of each of the Named Executive Officers in 20012002 is excluded. The option grants reflected in the table below for 20012002 were made under our 1999 Stock Option IssuanceIncentive Plan.
Annual Compensation All Other Long-Term Compensation Awards Securities Underlying Name and Principal Position Year Salary ($) Bonus ($) Compensation ($) Options (#) Chuck Bay (1) 2001 101,150 - - 746,651 (2) Chief Executive Officer, President and Director James C. Wood (3) 2001 25,345 - - 40,000 Former Chief Executive Officer 2000 141,667 75,000 - 10 Michael J. McCloskey (4) 2001 20,193 - - - Former Chief Executive Officer 2000 150,000 - - 37,510 (5) 1999 81,250 - - 186,667 Bud Michael (6) 2001 92,783 235,557 - 250,300 (2) Executive Vice President, Marketing & Engineering William R. Phelps (7) 2001 79,335 45,000 50,000 - Former Vice President, Professional Services 2000 200,000 60,000 - 19,510 (8) 1999 130,000 56,000 - 41,333 Nigel K. Donovan (9) 2001 155,804 - - 50,000 Former Chief Operations Officer 2000 127,500 100,000 - 20,010 Tom Doyle (10) 2001 100,483 - - 295,750 (2) Chief Operating Officer Brett White (11) 2001 92,673 - - 120,250 (2) Chief Financial Officer Chris Maeda (12) 2001 71,363 - - 132,153 (2) Chief Technology Officer Annual Compensation All Other Long-Term Compensation Awards Securities Underlying Name and Principal Position Year Salary ($) Bonus ($) Compensation ($) Options (#) Chuck Bay 2002 129,196 100,000 - 556,625 Chief Executive Officer and Director 2001 101,150 - - 746,651 (1) Tom Doyle 2002 153,333 100,000 - 225,000 Chief Operating Officer and President 2001 100,483 29,167 - 295,750 (1) John Huyett (2) 2002 94,000 40,000 40,000 359,647 Chief Financial Officer Harold (Bud) Michael (3) 2002 169,000 25,000 - 116,000 Former Executive Vice President, Products & Marketing 2001 92,783 235,557 - 250,300 (1) Chris Maeda 2002 126,750 10,000 - 59,500 Chief Technology Officer 2001 71,363 - - 132,153 (1) Brett White (4) 2002 64,154 - 184,000 6,000 Former Chief Financial Officer 2001 92,673 - - 120,250 (1)
______________
Option Grants in Last Fiscal Year
The following table sets forth information with respect to stock options granted to each of the Named Executive Officers in 2001.2002. We granted options to purchase up to a total of approximately 7,120,0003,563,236 shares to employees during the year (including grants made by Broadbase in 2001 which were assumed by KANA upon the Broadbase merger), and the table's percentage column shows how much of that total was granted to the Named Executive Officers. No stock appreciation rights were granted to the Named Executive Officers during 2001.2002.
The table includes the potential realizable value over the 10-year term of the options, based on assumed rates of stock price appreciation of 0%, 5%, and 10%, compounded annually. The potential realizable value is calculated based on the closing price of the common stock on the date of grant, assuming that price appreciates at the indicated rate for the entire term of the option and that the option is exercised and sold on the last day of its term at the appreciated price. All options listed have a term of 10 years. The stock price appreciation rates of 0%, 5%, and 10% are assumed pursuant to the rules of the Securities and Exchange Commission. We can give no assurance that the actual stock price will appreciate over the 10-year option term at the assumed levels or at any other defined level. Actual gains, if any, on stock option exercises will be dependent on the future performance of our common stock. Unless the market price of the common stock appreciates over the option term, no value will be realized from the option grants made to the Named Executive Officers.
% of Total Potential Realizable
Number of Options Individual Grant Potential Realizable Value at Assumed Annual
Securities Granted to ---------------------- Assumed Annual Rates of Stock Price
Underlying Employees Exercise Price Appreciation for Option Term
Options in Fiscal Price Expiration -----------------------------------------------------------
Name Granted (#) Year ($/Sh) Date 0% ($) 5% ($) 10% ($)
----------- ---------- --------- ----------- --------- ---------------------- -----------
Chuck Bay ................. 241,5006,625 *% $9.48 05/01/2012 $39,498 $100,095
550,000 15.40 1.63 08/01/2012 563,804 1,428,790
Tom Doyle.................. 5,000 * 9.48 05/01/2012 29,810 75,543
220,000 6.20 1.63 08/01/2012 225,522 571,516
John Huyett................ 304,647 8.50 4.55 06/03/2012 871,378 2,209,156
55,000 1.50 1.63 08/01/2012 56,380 142,879
Harold (Bud) Michael....... 6,000 * 9.48 05/01/2012 (1) 3.40 8.76 04/11/201135,772 90,652
110,000 3.10 1.63 08/01/2012 (1) 112,761 285,758
Chris Maeda................ 4,500 * 9.48 05/01/2012 26,829 67,989
55,000 1.50 1.63 08/01/2012 56,380 142,879
Brett White................ 6,000 * 9.48 05/01/2012 (2) -- 1,330,452 3,371,626
3,313 * 0.10 10/12/2011 22,197 36,365 58,102
1,838 * 3.40 12/11/2011 24,997 44,647 74,795
500,000 (2) 7.00 14.41 12/13/2011 -- 4,531,186 11,482,914
James C. Wood ............. 40,000 * 12.40 04/26/2011 -- 188,136 593,372
Michael J. McCloskey ..... -- * N/A N/A N/A N/A N/A
Harold K. (Bud) Michael ... 4,725 * 54.76 01/31/2011 -- 162,721 412,367
12,075 * 8.76 04/11/2011 -- 66,523 168,581
10,500 * 18.76 06/28/2011 -- 123,880 313,935
20,000 * 3.70 10/01/2011 -- 46,538 117,937
3,000 * 0.10 10/12/2011 20,100 32,929 52,612
200,000 (1) 2.80 14.41 12/13/2011 -- 1,812,474 4,593,166
William R. Phelps ......... -- * N/A N/A N/A N/A N/A
Nigel K. Donovan ......... 50,000 * 12.40 04/26/2011 -- 235,170 741,715
Tom Doyle ................. 42,000 * 8.76 04/11/2011 -- 231,383 586,370
3,750 * 0.10 10/12/2011 25,125 41,162 65,765
250,000 (1) 3.50 14.41 12/13/2011 -- 2,265,593 5,741,457
Brett White ............... 47,250 (3) * 8.76 05/18/2011 -- 260,306 659,666
3,000 * 0.10 10/12/2011 20,100 32,929 52,612
70,000 (1) 1.00 14.41 12/13/2011 -- 634,366 1,607,608
Chris Maeda ............... 10,500 * 28.87 03/06/2011 -- 190,640 483,119
43,300 * 8.76 04/11/2011 -- 238,545 604,519
2,250 * 0.10 10/12/2011 15,075 24,697 39,459
1,103 * 3.40 12/11/2011 15,001 26,793 44,885
75,000 (1) 1.10 14.41 12/13/2011 -- 679,678 1,722,437
______________
* Denotes less than one percent (1%).
(1) In connection with the termination of Mr. Michael's employment, his options stopped vesting as of March 25, 2003, and any unexercised options will be canceled as of June 25, 2003.
(2) In connection with the termination of Mr. White's employment, his options stopped vesting as of July 8, 2002, and were canceled as of October 8, 2002.
Aggregated Option Exercises and Fiscal Year-End Values
The following table sets forth the number of shares underlying exercisable and unexercisable options held by the Named Executive Officers at the end of 2001,2002, and the value of such options. Four of the Named Executive Officers exercised options during 2002. None of the Named Executive Officers exercised any options during 2001, other than Mr. Donovan. None of them exercised any stock appreciation rights during 2001, and none held any stock appreciation rights at the end of the year.
The value realized is based on the fair market value of our common stock on the date of exercise, minus the exercise price payable for the shares, except in the event of a same day sale transaction, in which case the actual sale price is used.
Number of Shares Acquired on | Value | # of Securities Underlying Unexercised Options/SARs | Value of Unexercised in-the-Money Options/SARs | Number of Shares Acquired on | Value | # of Securities Underlying Unexercised Options/SARs at Fiscal Year-End | Value of Unexercised in-the-Money Options/SARs | |||||||||||||||||||||
Name | Exercise (#) | Realized ($) | Exercisable | Unexercisable | Exercisable | Unexercisable | Exercise | Realized | Exercisable | Unexercisable | Exercisable | Unexercisable | ||||||||||||||||
Chuck Bay | Chuck Bay | -- | -- | 40,288 | 706,416 | 431,053 | 4,772,182 | Chuck Bay | - | $ - | 283,288 | 1,020,041 | 21,779 | $171,417 | ||||||||||||||
James C. Wood | -- | -- | 10,137 | 34,023 | 47,069 | 235,331 | ||||||||||||||||||||||
Michael J. McCloskey | -- | -- | -- | -- | -- | -- | ||||||||||||||||||||||
Harold K. (Bud) Michael | -- | -- | 6,136 | 240,489 | 62,342 | 1,467,927 | ||||||||||||||||||||||
William R. Phelps | -- | -- | -- | -- | -- | -- | ||||||||||||||||||||||
Nigel K. Donovan | 30,000 | 485,538 | 35,342 | 4,999 | 315,362 | -- | ||||||||||||||||||||||
Tom Doyle | Tom Doyle | -- | -- | 27,758 | 305,565 | 406,383 | 1,978,213 | Tom Doyle | 20,000 | 287,552 | 120,458 | 417,865 | 13,246 | 68,567 | ||||||||||||||
John Huyett | John Huyett | - | - | 46,731 | 312,916 | 1,558 | 17,142 | |||||||||||||||||||||
Harold (Bud) Michael | Harold (Bud) Michael | 5,504 | 63,983 | 79,610 | 277,511 | 8,727 | 34,283 | |||||||||||||||||||||
Chris Maeda | Chris Maeda | 8,000 | 70,142 | 57,895 | 133,238 | 5,766 | 17,142 | |||||||||||||||||||||
Brett White | Brett White | -- | -- | 6,891 | 113,359 | 73,734 | 843,421 | Brett White | 3,000 | 13,650 | - | - | - | - | ||||||||||||||
Chris Maeda | -- | -- | 17,536 | 122,097 | 147,399 | 830,286 | ||||||||||||||||||||||
EMPLOYMENT ARRANGEMENTS, TERMINATION OF EMPLOYMENT ARRANGEMENTS AND CHANGE IN CONTROL ARRANGEMENTSEmployment Arrangements, Termination of Employment Arrangements and Change in Control Arrangements
In June 1999, we entered into an employment arrangement with Mr. McCloskey, our former Chief Executive Officer. In connection with this arrangement, we granted Mr. McCloskey an option to purchase 186,667 shares of common stock, which Mr. McCloskey exercised in June 1999. Of these shares, 111,910 were subject to a right of repurchase granted to us which would have allowed us to repurchase those shares at the option exercise price paid per share, to the extent those shares are unvested at the time of his termination of service. Under the stock purchase agreement and the terms of Mr. McCloskey's employment arrangement, the unvested shares vested in a series of 48 successive equal monthly installments upon his completion of each month of service over the 48-month period measured from June 17, 1999. Michael McCloskey resigned as CEO in January 2001. In March 2001, Mr. McCloskey resigned as an employee of our company. In addition, the Board of Directors approved the accelerated vesting of the 87,111 shares that remained unvested under such option grant.
In connection with our merger with Broadbase, we assumed terms stated in offer letters to Mr. Bay and Mr. Doyle which state that in the event of a change of control and involuntary termination, 50% of any unvested options will immediately vest.
In connection with our merger with Broadbase, we assumed terms stated in an offer letter to Mr. White providing that in the event of a change of control, in conjunction with his involuntary termination, 50% of any unvested options would immediately vest, and that Mr. White would be entitled to one year's severance, including option vesting, in the event of a termination without cause or a change in control coupled with his termination.
Certain optionsOptions held by our continuing Named Executive Officers provide for full acceleration of some or all of the unvested shares upon certain circumstances involving a change of control as described above inof 50% or more of the table underoutstanding stock of KANA, and following such change the heading "Option Grants in Last Fiscal Year".
Generally, our option grants to employees, other than those under the 1999 Special Stock Option Plan, provide that if we are acquired by merger or asset sale and the employeeExecutive Officer is not offered employment bya similar position of the successorcombined entity then 25%as held prior to the change of anycontrol.
Upon Mr. White's departure effective July 2002, pursuant to a separation agreement between KANA and Mr. White, we paid severance payments totaling $184,000 and an additional 33,979 unvested shares subject to options held by that individual will vestMr. White became fully vested. Mr. White did not choose to exercise his options within the time-period for exercise under his option agreements, and no longer be subject to repurchase.they were canceled in October 2002.
Compensation Committee Interlocks and Insider Participation
During 2001,2002, our compensation committee consisted of Messrs. Beirne and Hahn through June 2001, and then Messrs. Frick and Harvey thereafter.Harvey. Mr. Galvin replaced Mr. Frick on the compensation committee when Mr. Frick resigned in December 2002. No members of the compensation committee were also employees of usKANA or ourits subsidiaries during 2001or2002 or at any time prior to 2001.2002. None of our executive officers serves on the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee.
Director Compensation
We currently do not compensate any non-employee member of the board.board, other than through option grants. Directors who are also our employees do not receive additional compensation for serving as directors.
Non-employee directors are eligible to receive discretionary option grants and stock issuances under the 1999 Stock Incentive Plan. In February 2002, Messrs. Frick and Harvey were each granted options to purchase 100,000 shares of common stock, with exercise prices of $11.45 per share. In September of 2002, Mr. Zarrabian was granted options to purchase 100,000 shares at $1.15 per share. In December 2002, Mr. Galvin was granted options to purchase 100,000 shares at $2.10 per share. In January 2003, Mr. Wood was granted options to puchase 100,000 shares at $3.51 per share. All of the above grants were granted under the Kana 1999 Stock Incentive Plan, each of which will vest and become exercisable, for as long as the individual is serving as a director to KANA, as to 1/48th of the total shares granted each month. In the event of a change in control of at least 50% of the voting stock of the Company, in conjunction with an involuntary termination of the optionee's service to the Company (and/or its successor) as a director, then the remaining unvested shares shall immediately vest. In addition, under the 1999 Stock Incentive Plan, each new non-employee director will receivereceives an automatic option grant for 4,000 shares upon his or her initial appointment or election to the board, and continuing non-employee directors will receive an automatic option grant for 1,000 shares on the date of each annual meeting of stockholders.
ItemITEM 12. SECURITY OWNERHSIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners and Management
The table below sets forth information regarding the beneficial ownership of our common stock as of March 1, 2002,2003, by the following individuals or groups:
· each person or entity who is known by us to own beneficially more than five percent of our outstanding stock;
· each of the Named Executive Officers;
· each of our directors; and
· all current directors and executive officers as a group.
Applicable percentage ownership in the following table is based on 22,487,66222,981,029 shares of common stock outstanding as of March 1, 20022003, as adjusted to include all options exercisable within 60 days of March 1, 20022003 held by the particularindicated stockholder and that are included in the first column.or stockholders.
Unless otherwise indicated, the principal address of each of the stockholders below is c/o KANA Software, Inc., 181 Constitution Drive, Menlo Park, CA 94025. Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock held by them.
Name and Address of Beneficial Owner | Number of Shares | Percentage | ||||
Executive Officers and Directors: | ||||||
Chuck Bay (1) | 131,806 | * | ||||
Kevin Harvey (2) | 1,043,775 | 4.6 | ||||
James C. Wood (3) | 257,877 | 1.0 | ||||
Massood Zarrabian (4) | 95,608 | * | ||||
Chris Maeda (5) | 59,379 | * | ||||
Tom Doyle (6) | 40,956 | * | ||||
Robert W. Frick (7) | 20,828 | * | ||||
Brett White (8) | 19,661 | * | ||||
Harold K. (Bud) Michael (9) | 24,016 | * | ||||
Vicki Amon-Higa(10) | 12,322 | * | ||||
All current directors and executive officers as a group (10 persons) (11) | 1,706,228 | 7.6 | ||||
5% Stockholder: | ||||||
Amerindo Investment Advisors, Inc. (12) | 1,421,964 | 6.3 | ||||
Name and Address of Beneficial Owner | Number of Shares | Percentage | ||||
Executive Officers and Directors: | ||||||
Chuck Bay (1) | 411,426 | 1.8 | ||||
Tom Doyle (2) | 181,018 | * | ||||
John Huyett(3) | 92,565 | * | ||||
Harold (Bud) Michael (4) | 104,931 | * | ||||
Chris Maeda (5) | 109,273 | * | ||||
Brett White (6) | 597 | * | ||||
James C. Wood (7) | 284,697 | 1.2 | ||||
Tom Galvin (8) | 8,105 | * | ||||
Kevin Harvey (9) | 1,073,934 | 4.7 | ||||
Massood Zarrabian (10) | 110,189 | * | ||||
All current directors and executive officers as a group (9 persons) (11) | 2,271,207 | 9.9 | ||||
5% Stockholders: | ||||||
Amerindo Investment Advisors, Inc. (12) | 2,547,338 | 11.1 | ||||
RS Investement Management Co. LLC (13) | 2,026,600 | 8.8 | ||||
_______________
* Less than one percent.
Securities Authorized For Issuance Under Equity Compensation Plans
The following table summarizes our equity compensation plans as of December 31, 2002:
Plan category | (a) | (b) | (c) | ||||
Equity compensation plans approved by security holders(1) | 3,819,387 | $ | 34.48 | 3,488,568 | |||
Equity compensation plans not approved by security holders(2) | 2,204,676 | 8.60 | 2,391,257 | ||||
Total | 6,024,063 | $ | 25.01 | 5,887,940 | |||
(1) Under the terms of our Kana 1999 Stock Incentive Plan, on the first trading day of January of each year, the aggregate number of shares of our Common Stock reserved for issuance thereunder is increased automatically by a number of shares equal to 4.25% of the total number of shares of our outstanding common stock on the last trading day in December of the immediately preceding calendar year, up to a maximum of 1,000,000 shares per year. Under the terms of our 1999 Employee Stock Purchase Plan, on the first trading day of January of each year, the aggregate number of shares of our Common Stock reserved for issuance thereunder is increased automatically by a number of shares equal to 0.75% of the total number of shares of our outstanding common stock on the last trading day in December of the immediately preceding calendar year, up to a maximum of 400,000 shares per year.
(2) Please see Note 7 of our Notes to Consolidated Financial Statements for a description of our equity compensation plans which do not require the approval of, and have not been approved by, our stockholders. In addition, we have assumed all the outstanding options of Broadbase Software, Silknet Software, and other companies in connection with the acquisition of those companies. As of December 31, 2002 there remained outstanding assumed options to purchase a total of approximately 1,180,790 shares of our common stock with a weighted exercise price of $27.47 per share. These options have been converted into options to purchase our shares on the terms specified in the relevant acquisition agreements. Statistics regarding these assumed options are not included in the table above. ) Under the terms of our Broadbase 1999 Stock Incentive Plan, on the first trading day of January of each year, the aggregate number of shares of our Common Stock reserved for issuance thereunder is increased automatically by a number of shares equal to 5% of the total number of shares of our outstanding common stock on the last trading day in December of the immediately preceding calendar year.
ItemITEM 13. Certain Relationships and Related Transactions
Sales of Securities
In June 2001, we closed a merger with Broadbase. In connection with the merger, each share of Broadbase common stock outstanding immediately prior to the consummation of the merger was converted into the right to receive .105 shares of KANA common stock (the "Exchange Ratio") and KANA assumed Broadbase's outstanding stock options and warrants based on the Exchange Ratio, issuing approximately 8.7 million shares of KANA common stock and assuming options and warrants to acquire approximately 2.7 million shares of KANA common stock. In December 2001, we sold 10,000 shares of our common stock for net proceeds of $100,000 to Amerindo Investment Advisors, a holder of more than 5% of our outstanding common stock.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Loans to and Other Arrangements with Officers and Directors
In connection with the option exercises described under "Employment Arrangements, Termination of Employment Arrangements and Change of Control Arrangements," Mr. Frick delivered a five-year full recourse promissory note in 1999 in the amount of $299,997 and bearing interest at an annual rate of 6.0%. The balance of $342,898 at December 31, 2001 was fully repaid in January 2002.
We entered into an employment arrangement with Mr. McCloskey, our former Chief Executive Officer. See "Employment Arrangements, Termination of Employment Arrangements and Change in Control Arrangements."
We have granted options to our executive officers and directors and we have assumed options granted by Broadbase. See "Management-Director Compensation" and "-Executive Compensation."
We have entered into an indemnification agreement with each of our executive officers and directors containing provisions that may require us, among other things, to indemnify our executive officers and directors against liabilities that may arise by reason of our status or service as executive officers or directors (other than liabilities arising from willful misconduct of a culpable nature) and to advance expenses incurred as a result of any proceeding against them as to which they could be indemnified.
Related Party TransactionTransactions
During 2001,2002, we provided products and consultingsupport services to a company that is affiliated with Massood Zarrabian, a director of KANA. We recognized approximately $547,000$59,400 in revenue related to the company in the year ended December 31, 2001. 2002.
In addition, we purchased software productsand support services from this company in 20012002 totaling $1,034,000.$239,100. The purchase cost of the software isand support was included in fixed assets in 2001.and prepaid maintenance. Management believes that this contract has rates and terms that are comparable with those entered into with independent third parties.
ITEM 14. DISCLOSURE CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Regulations under the Securities Exchange Act of 1934 require public companies to maintain "disclosure controls and procedures," which are defined to mean a company's controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Our Chief Executive Officer and our Chief Financial Officer, based on their evaluation of our disclosure controls and procedures within 90 days before the filing date of this report, concluded that our disclosure controls and procedures were effective for this purpose.
Changes in Internal Controls. There were no significant changes in our internal controls or to our knowledge, in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced above.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements:
Page | |||
Report of Independent Accountants |
| ||
| |||
Consolidated Balance Sheets as of December 31, | |||
Consolidated Statements of Operations and Comprehensive Loss for the | |||
Consolidated Statements of Stockholders' Equity for the Years ended | |||
Consolidated Statements of Cash Flows for the Years ended
| |||
Notes to Consolidated Financial Statements | |||
2. Financial Statement Schedules:
Schedule | Title | Page | |||||
|
| ||||||
II | Valuation and Qualifying Accounts | ||||||
Schedules not listed above have been omitted because they are not applicable, not required, or the information required to be set forth therein is included in the consolidated financial statements or notes thereto.
3. Exhibits:
Incorporated by Reference | ||||||
Exhibit Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | Filed Herewith |
2.01 | Agreement and Plan of Reorganization, dated February 6, 2000, by and among the Registrant, Pistol Acquisition Corp. and Silknet Software, Inc. | 13D | 99.1 | 2/16/00 | ||
2.02 | Agreement and Plan of Reorganization, dated April 9, 2001, by and among the Registrant, Arrow Acquisition Corp. and Broadbase Software, Inc. | 13D | Ex.-1 | 3/18/01 | ||
3.01 | Second Amended and Restated Certificate of Incorporation, as amended by the Certificate of Amendment dated April 18, 2000. | 8-K | 3.01 | 5/4/00 | ||
3.03 | Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation, as amended by the Certificate of Amendment dated April 18, 2001 | S-8 | 333-64552 | 4.02 | 7/3/01 | |
3.04 | Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation, as amended by the Certificate of Amendment dated April 18, 2001, filed with the Delaware Secretary of State on December 11, 2001 | S-3 | 333-77068 | 4.03 | 1/18/02 | |
3.05 | Amended and Restated Bylaws, as amended October 12, 2001. | X | ||||
4.01 | Form of Registrant's Specimen Common Stock Certificate | S-1/A | 333- 82587 | 4.01 | 9/21/99 | |
4.02 | Fourth Amended and Restated Investors' Rights Agreement dated August 13, 1999 by and among Kana Communications, Inc. and parties listed on Schedule A therein. | S-1/A | 333- 82587 | 4.02 | 8/16/99 | |
4.03 | Form of amendment to Fourth Amended and Restated Investors' Rights Agreement. | S-4/A | 333- 32428 | 4.02 | 3/22/00 | |
4.04 | Registration Rights Agreement, dated June 7, 2000, by and among the Registrant and the parties listed on Exhibit A thereto. | 8-K | 10.02 | 6/15/00 | ||
4.05 | Fourth Amended and Restated Investors' Rights Agreement, dated June 30, 1999, between Broadbase Software, Inc. and the shareholders named therein. | S-1 | 333-82251 | 4.02 | 7/02/99 | |
10.01 | Registrant's 1997 Stock Option/Stock Issuance Plan. | S-1 | 333- 82587 | 10.01 | 7/ 9/99 | |
10.02 | Registrant's Amended and Restated 1999 Stock Incentive Plan. | S-4/A | 333-59754 | 10.22 | 5/18/01 | |
10.03 | Registrant's Amended and Restated 1999 Employee Stock Purchase Plan. | S-4/A | 333-59754 | 10.23 | 5/18/01 | |
10.04 | Registrant's 1999 Special Stock Option Plan. | S-8 | 333-32460 | 99.01 | 3/14/00 | |
10.05 | Registrant's 1999 Special Stock Option Plan-Form of Nonstatutory Stock Option Agreement-4-year vesting. | S-8 | 333-32460 | 99.02 | 3/14/00 | |
10.06 | Registrant's 1999 Special Stock Option Plan-Form of Nonstatutory Stock Option Agreement-30-month vesting. | S-8 | 333-32460 | 99.03 | 3/14/00 | |
10.07 | Letter of Credit, dated July 9, 1999, with Silicon Valley Bank and the Registrant. | S-1 | 333- 82587 | 10.06 | 7/ 9/99 | |
10.08 | Lease, dated May 1998, by and between Encina Properties and the Registrant. | S-1 | 333- 82587 | 10.07 | 7/ 9/99 | |
10.09 | Office/R&D Lease, dated June 18, 1999, by and between Chestnut Bay LLC and the Registrant. | S-1/A | 333- 82587 | 10.08 | 8/16/99 | |
10.10 | Form of Registrant's Kana Online Service Agreement. | S-1/A | 333- 82587 | 10.09 | 8/16/99 | |
10.11 | Form of Registrant's Restricted Stock Purchase Agreement. | S-1/A | 333- 82587 | 10.10 | 8/16/99 | |
10.12 | Lease, dated February 11, 2000, by and between Veterans Self- Storage, LLC and the Registrant. | S-4 | 333- 32428 | 10.12 | 12/14/00 | |
10.13 | Lease, dated November 15, 1999, by and between 1848 Associates and Silknet, Inc. | S-1 | 333- 40338 | 10.18 | 6/28/00 | |
10.14 | Sublease, dated June 1, 1998, between Broadbase and SaRonix. | S-1 | 333-82251 | 10.05 | 7/02/99 | |
10.15 | Lease Agreement, dated December 23, 1999, between Broadbase and Bohannon Trusts Partnership II. | 10-Q | 10.03 | 5/11/00 | ||
10.16 | Lease Agreement, dated August 11, 2000, between Broadbase and J. Robert S. Wheatley and Roger A. Fields, d.b.a. R & R Properties. | 10-Q | 10.04 | 11/13/00 | ||
10.17 | Connectify, Inc. 1998 Stock Plan. | S-8 | 333- 92159 | 99.01 | 12/6/99 | |
10.18 | Connectify, Inc. 1998 Stock Plan Form of Incentive Stock Option Agreement. | S-8 | 333- 92159 | 99.02 | 12/6/99 | |
10.19 | Connectify, Inc. 1998 Stock Plan Form of Nonstatutory Stock Option Agreement. | S-8 | 333- 92159 | 99.03 | 12/6/99 | |
10.20 | Form of Option Assumption Agreement. | S-8 | 333- 92159 | 99.04 | 12/6/99 | |
10.21 | Business Evolution, Inc. 1999 Stock Plan. | S-8 | 333- 93591 | 99.01 | 12/23/99 | |
10.22 | Business Evolution, Inc. Form of Stock Option Agreement. | S-8 | 333- 93591 | 99.02 | 12/23/99 | |
10.23 | Form of Option Assumption Agreement-12 Months Acceleration (Business Evolution Option Shares). | S-8 | 333- 93591 | 99.03 | 12/23/99 | |
10.24 | Form of Option Assumption Agreement-24 Months Acceleration (Business Evolution Option Shares). | S-8 | 333- 93591 | 99.04 | 12/23/99 | |
10.25 | netDialog, Inc. 1997 Stock Plan. | S-8 | 333- 93591 | 99.05 | 12/23/99 | |
10.26 | netDialog, Inc. Form of Stock Option Agreement. | S-8 | 333- 93591 | 99.06 | 12/23/99 | |
10.27 | Form of Option Assumption Agreement (netDialog Option Shares). | S-8 | 333- 93591 | 99.07 | 12/23/99 | |
10.28 | Silknet Software, Inc. 1999 Employee Stock Purchase Plan. | S-8 | 333- 35730 | 99.01 | 4/27/00 | |
10.29 | Silknet Software, Inc. 1999 Stock Option and Stock Incentive Plan. | S-8 | 333- 35730 | 99.02 | 4/27/00 | |
10.30 | Silknet Software, Inc. 1999 Non-Employee Director Stock Option Plan. | S-8 | 333- 35730 | 99.03 | 4/27/00 | |
10.31 | Silknet Software, Inc. Employee Stock Option Plan. | S-8 | 333- 35730 | 99.04 | 4/27/00 | |
10.32 | Insite Marketing Technology, Inc. 1997 Stock Option Plan. | S-8 | 333- 35730 | 99.05 | 4/27/00 | |
10.33 | Form of Option Assumption Agreement (Silknet Option Shares). | S-8 | 333- 35730 | 99.06 | 4/27/00 | |
10.34 | Form of Option Assumption Agreement-Acceleration (Silknet Option Shares). | S-8 | 333- 35730 | 99.07 | 4/27/00 | |
10.35 | Broadbase Software, Inc. 1996 Equity Incentive Plan, amended as of June 28, 1999 and related forms of agreements. | S-1 | 333-82251 | 10.02 | 8/12/99 | |
10.36 | Broadbase Software, Inc. 1999 Equity Incentive Plan, amended as of November 2, 2000. | S-4 | 333-48696 | 4.09 | 11/09/00 | |
10.37 | Related forms of agreements for Broadbase Software, Inc. 1999 Equity Incentive Plan. | S-1 | 333-82251 | 10.03 | 8/30/99 | |
10.38 | Broadbase Software, Inc. 1999 Employee Stock Purchase Plan, amended as of November 2, 2000. | S-4 | 333-48696 | 4.11 | 11/09/00 | |
10.39 | Related forms of agreements for Broadbase Software, Inc. 1999 Employee Stock Purchase Plan. | S-1 | 333-82251 | 10.04 | 8/30/99 | |
10.40 | Broadbase Software, Inc. 2000 Stock Incentive Plan, adopted on May 3, 2000, and related forms of agreements. | S-8 | 333-38480 | 4.09 | 6/02/00 | |
10.41 | Non-Plan Stock Option Agreement, dated January 4, 2000, between Broadbase and Greg Martin. | S-8 | 333-32120 | 4.12 | 3/10/00 | |
10.42 | Aperio, Inc., 1998 Incentive and Nonqualified Stock Option Plan and related forms of agreements. | S-8 | 333-40206 | 4.09 | 6/26/00 | |
10.43 | Panopticon, Inc., 1999 Stock Plan and related forms of agreements. | S-8 | 333-46652 | 4.08 | 9/26/00 | |
10.44 | Rubric, Inc., 1997 Stock Option Plan, as amended. | S-1 | 333-95125 | 10.15 | 2/14/00 | |
10.45 | Servicesoft Technologies, Inc. 1994 Amended and Restated Stock Option Plan and related forms of agreements. | S-8 | 333-52198 | 4.05 | 12/19/00 | |
10.46 | Servicesoft Technologies, Inc. 1999 Stock Option and Grant Plan and related forms of agreements. | S-8 | 333-52198 | 4.06 | 12/19/00 | |
10.47 | Amendment No. 1 to the Servicesoft, Inc. 1999 Stock Option and Grant Plan. | S-8 | 333-52198 | 4.07 | 12/19/00 | |
10.48 | Amendment No. 2 to the Servicesoft, Inc. 1999 Stock Option and Grant. | S-8 | 333-52198 | 4.08 | 12/19/00 | |
10.49 | Form of Rosh Intelligent Systems, Inc., Incentive Stock Option Agreement. | S-8 | 333-52198 | 4.11 | 12/19/00 | |
10.50 | Warrant to purchase Common Stock, dated September 6, 2000 between Kana Communications, Inc. and Andersen Consulting LLP. | S-3 | 333- 46624 | 4.06 | 9/26/00 | |
10.51 | Warrant to purchase Common Stock, dated August 9, 2001 between Kana Communications, Inc. and Accenture LLP. | S-3 | 333-77068 | 4.11 | 1/18/02 | |
10.52 | Warrant to purchase Common Stock, dated August 7, 2001 between Kana Communications, Inc. and General Electric Capital Corporation. | S-3 | 333-77068 | 4.12 | 1/18/02 | |
10.53 | Warrant to purchase Common Stock, dated September 5, 2001 between Kana Communications, Inc. and Banca 121. | S-3 | 333-77068 | 4.13 | 1/18/02 | |
10.54 | Share Purchase Agreement dated November 28, 2001 between the Registrant and the Investors named therein | 8-K/A | 99.01 | 12/13/01 | ||
10.55 | Form of Contingent Warrant to purchase Common Stock issued in conjunction with the Share Purchase Agreement dated November 28, 2001 between the Registrant and the Investors named therein. | 8-K/A | 99.02 | 12/13/01 | ||
10.56 | Form of Commitment Warrant to purchase Common Stock issued in conjunction with the Share Purchase Agreement dated November 28, 2001 between the Registrant and the Investors named therein. | 8-K/A | 99.03 | 12/13/01 | ||
10.57 | Purchase Agreement dated February 5, 2002 between the Registrant and the purchasers named therein | S-3/A | 333-77068 | 4.13 | 2/11/02 | |
10.58 | Letter regarding offer of employment to Brett White, dated May 4, 2002. | X | ||||
16.1 | Letter from KPMG LLP, dated March 30, 2000. | 10-K | 3/30/01 | |||
21.01 | List of subsidiaries of Registrant. | X | ||||
23.1 | Consent of PricewaterhouseCoopers LLP, Independent Accountants. | X | ||||
23.2 | Consent of KPMG LLP, Independent Auditors. | X | ||||
24.01 | Power of Attorney (see signature page following Item 14). | X | ||||
Incorporated by Reference | ||||||
Exhibit Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | Filed Herewith |
2.01 | Agreement and Plan of Reorganization, dated April 9, 2001, by and among the Registrant, Arrow Acquisition Corp. and Broadbase Software, Inc. | 13D | Ex.-1 | 3/18/01 | ||
3.01 | Second Amended and Restated Certificate of Incorporation, as amended by the Certificate of Amendment dated April 18, 2000. | 8-K | 3.01 | 5/4/00 | ||
3.03 | Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation dated April 18, 2001 | S-8 | 333-64552 | 4.02 | 7/3/01 | |
3.04 | Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation, as amended by the Certificate of Amendment dated April 18, 2001, filed with the Delaware Secretary of State on December 11, 2001 | S-3 | 333-77068 | 4.03 | 1/18/02 | |
3.05 | Amended and Restated Bylaws, as amended October 12, 2001. | X | ||||
4.01 | Form of Registrant's Specimen Common Stock Certificate | S-1/A | 333- 82587 | 4.01 | 9/21/99 | |
10.01 | Registrant's Amended and Restated 1999 Stock Incentive Plan. | S-4/A | 333-59754 | 10.22 | 5/18/01 | |
10.02 | Registrant's Amended and Restated 1999 Employee Stock Purchase Plan. | S-4/A | 333-59754 | 10.23 | 5/18/01 | |
10.03 | Registrant's 1999 Special Stock Option Plan. | S-8 | 333-32460 | 99.01 | 3/14/00 | |
10.04 | Registrant's 1999 Special Stock Option Plan-Form of Nonstatutory Stock Option Agreement-4-year vesting. | S-8 | 333-32460 | 99.02 | 3/14/00 | |
10.05 | Registrant's 1999 Special Stock Option Plan-Form of Nonstatutory Stock Option Agreement-30-month vesting. | S-8 | 333-32460 | 99.03 | 3/14/00 | |
10.06 | Letter of Credit, dated July 9, 1999, with Silicon Valley Bank and the Registrant. | S-1 | 333- 82587 | 10.06 | 7/ 9/99 | |
10.07 | Lease Agreement, dated December 23, 1999, between Broadbase and Bohannon Trusts Partnership II. | 10-Q | 10.03 | 5/11/00 | ||
10.08 | Lease Agreement, dated August 11, 2000, between Broadbase and J. Robert S. Wheatley and Roger A. Fields, d.b.a. R & R Properties. | 10-Q | 10.04 | 11/13/00 | ||
10.09 | Broadbase Software, Inc. 2000 Stock Incentive Plan, adopted on May 3, 2000, and related forms of agreements. | S-8 | 333-38480 | 4.09 | 6/02/00 | |
10.10 | Warrant to purchase Common Stock, dated September 6, 2000 between Kana Communications, Inc. and Andersen Consulting LLP. | S-3 | 333- 46624 | 4.06 | 9/26/00 | |
10.11 | Warrant to purchase Common Stock, dated August 9, 2001 between Kana Communications, Inc. and Accenture LLP. | S-3 | 333-77068 | 4.11 | 1/18/02 | |
10.12 | Warrant to purchase Common Stock, dated August 7, 2001 between Kana Communications, Inc. and General Electric Capital Corporation. | S-3 | 333-77068 | 4.12 | 1/18/02 | |
10.13 | Warrant to purchase Common Stock, dated September 5, 2001 between Kana Communications, Inc. and Banca 121. | S-3 | 333-77068 | 4.13 | 1/18/02 | |
10.14 | Share Purchase Agreement dated November 28, 2001 between the Registrant and the Investors named therein | 8-K/A | 99.01 | 12/13/01 | ||
10.15 | Form of Contingent Warrant to purchase Common Stock issued in conjunction with the Share Purchase Agreement dated November 28, 2001 between the Registrant and the Investors named therein. | 8-K/A | 99.02 | 12/13/01 | ||
10.16 | Form of Commitment Warrant to purchase Common Stock issued in conjunction with the Share Purchase Agreement dated November 28, 2001 between the Registrant and the Investors named therein. | 8-K/A | 99.03 | 12/13/01 | ||
10.17 | Purchase Agreement dated February 5, 2002 between the Registrant and the purchasers named therein | S-3/A | 333-77068 | 4.13 | 2/11/02 | |
10.18 | Loan Modification Agreement dated March 22, 2002 between the Registrant and Silicon Valley Bank | 10-Q | 10.01 | 5/15/02 | ||
10.19 | Loan Modification Agreement dated November 22, 2002 between the Registrant and Silicon Valley Bank | X | ||||
10.20 | Assignment Agreement and First Amendment of Lease dated November 11, 2002 between the Registrant and J Robert S. Wheatley and Roger A. Fields, d.b.a. R & R Properties | 8-K | 99.1 | 11/21/02 | ||
10.21 | Separation Agreement and General Release of Claims dated May 8, 2002 between the Registrant and Brett White | 10-Q | 10.02 | 5/15/02 | ||
16.01 | Letter from KPMG LLP, dated March 30, 2000. | 10-K | 16.1 | 3/30/01 | ||
21.01 | List of subsidiaries of Registrant. | X | ||||
23.01 | Consent of PricewaterhouseCoopers LLP, Independent Accountants. | X | ||||
(b) Reports on Form 8-K.
None.On November 21, 2002, we filed a Current Report on Form 8-K reporting under Item 5 that had entered into an amendment to a facility lease originally entered into by our subsidiary, Broadbase Software, reducing the rent in exchange for our assumption of the lease and payments and a warrant we granted to the landlord.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
KANA Software, Inc.
In our opinion, the consolidated financial statements listed in the accompanying index appearing under Item 14(a)15 (a)(1) on page 5254 present fairly, in all material respects, the financial position of KANA Software, Inc., previously Kana Communications, Inc., and its subsidiaries at December 31, 20012002 and 2000,2001, and the results of their operations and their cash flows for the each of the three years thenin the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 1415 (a)(2)(1)) on page 5254 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 4 to the Consolidated Financial Statements, effective January 1, 2002, the Company changed its method of accounting for goodwill in accordance with Statement of Financial Accounting Standards No.142, "Goodwill and Other Intangible Assets."
/s/ PricewaterhouseCoopers LLP
San Jose, California
January 22, 2002, except for Note 12, which is as of February 12, 20022003
INDEPENDENT AUDITORS' REPORT
The Board of Directors and StockholdersKana Communications, Inc.:
We have audited the accompanying consolidated statements of operations and comprehensive loss, stockholders' equity, and cash flows of Kana Communications, Inc. and subsidiary for the year ended December 31, 1999. The consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Kana Communications, Inc. and subsidiary for the year ended December 31, 1999 in conformity with accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
Mountain View, CaliforniaJanuary 20, 2000
KANA SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
------------------------
2002 2001 2000
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 25,47621,962 $ 76,20225,476
Short-term investments........................................ 10,536 14,654 297
Accounts receivable, less allowance for doubtful
accounts of $4,815 in 2002 and $6,844 in 2001 and $1,966 in 2000................2001................ 10,269 15,942 43,393
Prepaid expenses and other current assets..................... 3,184 6,442 13,385
----------- -----------
Total current assets.......................................... 45,951 62,514 133,277
Restricted cash................................................ 448 11,018 --
Property and equipment, net.................................... 22,293 19,382
40,095
Goodwill and intangible assets, net............................ 64,800 800,000Goodwill....................................................... 7,448 58,547
Identifiable intangibles, net.................................. 1,453 6,253
Other assets................................................... 2,957 2,958 6,752
----------- -----------
Total assets................................................. $ 160,67280,550 $ 980,124160,672
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable.............................. $ 1,3633,469 $ 1,4561,363
Accounts payable.............................................. 3,908 6,276 17,980
Accrued liabilities........................................... 13,881 25,292 22,299
Accrued restructuring and merger costs........................ 2,834 21,100 13,547
Deferred revenue.............................................. 26,392 22,180 25,242
----------- -----------
Total current liabilities.................................... 50,484 76,211 80,524
Accrued restructuring, less current portion.................... 8,114 17,514 --
Notes payable, less current portion............................ -- 108 148
----------- -----------
Total liabilities............................................ 58,598 93,833 80,672
----------- -----------
Commitments and contingencies (Note 8)6)
Stockholders' equity:
Convertible preferredPreferred stock, $0.001 par value; 500,0005,000,000
shares authorized; no shares issued and outstanding......... -- --
Common stock, $0.001 par value; 100,000,000 shares authorized;
19,399,11322,939,872 and 9,405,18419,399,113 shares issued and outstanding......outstanding..... 195 192 94
Additional paid-in capital.................................... 4,273,029 4,237,325 4,130,231
Deferred stock-based compensation............................. (8,602) (22,209) (21,639)
Notes receivable from stockholders............................ -- (799) (5,367)
Accumulated other comprehensive losses........................ (175) (1,285) (377)
Accumulated deficit........................................... (4,242,495) (4,146,385) (3,203,490)
----------- -----------
Total stockholders' equity................................... 21,952 66,839 899,452
----------- -----------
Total liabilities and stockholders' equity................... $ 160,67280,550 $ 980,124160,672
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
KANA SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTSSTATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share data)
YearsYear Ended December 31,
-----------------------------------------------------------------------
2002 2001 2000
1999
---------- ----------- ---------------------
Revenues:
License................................................License.................................................. $ 41,530 $ 37,963 $ 75,360
$ 10,536
Service................................................ 48,907 37,657 2,966Service.................................................. 37,560 52,632 42,595
---------- ----------- ---------------------
Total revenues....................................... 86,870 113,017 13,502revenues......................................... 79,090 90,595 117,955
---------- ----------- ---------------------
Cost of revenues:
License................................................License.................................................. 3,402 2,536 2,856 271
Service, excluding amortization of stock-based
compensation of $883, $1,417 $2,816 and $19,752........... 48,074 51,144 6,383$2,816................ 29,250 51,799 56,082
---------- ----------- ---------------------
Total cost of revenues............................... 50,610 54,000 6,654revenues................................. 32,652 54,335 58,938
---------- ----------- ---------------------
Gross profit............................................profit.............................................. 46,438 36,260 59,017
6,848
---------- ----------- ---------------------
Operating expenses:
Sales and marketing, excluding amortization of
stock-based compensation of $4,697, $7,230
and $8,078, and $34,000, respectively............................respectively................................ 37,423 69,635 88,186 21,199
Research and development, excluding
amortization of stock-based compensation
of $4,384, $4,226 and $2,831, and $19,864, respectively...........respectively.............. 25,933 35,558 42,724 12,854
General and administrative, excluding
amortization of stock-based compensation
of $6,656, $3,007 and $990, and $6,860, respectively..............respectively................ 13,053 21,215 18,945 5,018
Amortization of stock-based compensation...............compensation................. 16,620 15,880 14,715
80,476
Amortization of goodwill andgoodwill................................. -- 122,860 869,675
Amortization of identifiable intangibles.. 127,660 873,022 --intangibles................. 4,800 4,800 3,347
Merger and transition related costs....................costs...................... -- 13,443 6,564
5,635
Restructuring costs....................................costs...................................... (5,086) 89,047 -- --
In-process research and development....................development...................... -- -- 6,900
--
Goodwill impairment....................................impairment...................................... 55,000 603,446 2,084,841
--
---------- ----------- ---------------------
Total operating expenses.............................expenses............................... 147,743 975,884 3,135,897
125,182
---------- ----------- ---------------------
Operating loss..........................................loss............................................ (101,305) (939,624) (3,076,880)
(118,334)
Impairment of investment................................investment.................................. -- (1,000) -- --
Other income (expense), net.............................net............................... 913 1,521 4,834
(744)
---------- ----------- ---------------------
Loss from continuing operations .................................................. (100,392) (939,103) (3,072,046) (119,078)
Discontinued operation:
Income (loss) from operations of discontinued operationoperation.. -- (125) 1,173 335
Loss on disposal, including provision of $1.1 million
for operating losses during phase-out period.........period............ 381 (3,667) --
Cumulative effect of accounting change related
to the elimination of negative goodwill................. 3,901 -- --
---------- ----------- ---------------------
Net loss.......................................loss......................................... $ (96,110) $ (942,895) $(3,070,873)
$ (118,743)
---------- ----------- ---------------------
Other comprehensive loss:
Net unrealized gain (loss) on available
for sale securities...................................securities..................................... 22 (26) 26
Foreign currency translation adjustments...............adjustments................. 1,110 (930) (276)
(96)
---------- ----------- ---------------------
Total other comprehensive loss.......................loss......................... 1,110 (908) (302)
(70)
---------- ----------- ---------------------
Comprehensive loss...................................loss..................................... $ (95,000) $ (943,803) $(3,071,175)
$ (118,813)
========== =========== =====================
Basic and diluted net loss per share:
Loss from continuing operations .............................................. $ (4.48) $ (68.33) $ (395.83)
$ (46.21)
Income (loss) from discontinued operation.............operation............... 0.02 (0.28) 0.15
0.13Cumulative effect of accounting change related
to the elimination of negative goodwill............... 0.17 -- --
---------- ----------- ---------------------
Net loss ............................................................................................ $ (4.29) $ (68.61) $ (395.68)
$ (46.08)
========== =========== ==========---------- ----------- -----------
Shares used in computing basic and diluted
net loss per share.....................................share....................................... 22,403 13,743 7,761
2,577
=========== =========== =====================
The accompanying notes are an integral part of these consolidated financial statements.
KANA SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Deferred Notes Accumulated
Stock- Receivable Other Total
Preferred Stock Common Stock Additional Based from Compre- Stock-
-------------------
------------------- Paid-In Compen- Stock- hensive Accumulated holders'
Shares Amount Shares Amount Capital sation holders Losses Deficit Equity
----------- ------
----------- ------ ---------- --------- --------- --------- ----------- -----------
Balances,
December 31, 1998.... 1,251,264 $ 13 1,927,452 $ 19 $ 29,246 $ (2,284) $ (164) $ (5) $ (13,874) $ 12,951
Issuance of
common stock
upon exercise of
stock options
and warrants, net
of repurchases....... -- -- 574,936 6 6,393 -- (6,544) -- -- (145)
Issuance of
Series D convertible
preferred stock...... 83,847 -- -- -- 10,169 -- -- -- -- 10,169
Conversion of
convertible
preferred stock
to common stock...... (1,335,111) (13) 2,670,221 27 (14) -- -- -- -- --
Issuance of
common stock of
pooled companies..... -- -- 96,496 1 5,790 -- -- -- -- 5,791
Issuance of
common stock in
exchange for
services............. -- -- 531 -- 60 -- -- -- -- 60
Issuance of
common stock in
conjunction with
initial public
offering, net........ -- -- 759,000 8 51,058 -- -- -- -- 51,066
Conversion of
debt, accrued
interest, and
warrants to
common stock......... -- -- 48,029 -- 5,058 -- -- -- -- 5,058
Payments on
notes receivable
from stockholders.... -- -- -- -- -- -- 501 -- -- 501
Interest
receivable from
notes receivable
from stockholders.... -- -- -- -- -- -- (173) -- -- (173)
Interest expense
from warrants
issued in connection
with bridge loans.... -- -- -- -- 1,559 -- -- -- -- 1,559
Deferred stock-based
compensation......... -- -- -- -- 93,154 (93,154) -- -- -- --
Amortization of
deferred stock-based
compensation......... -- -- -- -- -- 80,476 -- -- -- 80,476
Other comprehensive
loss................. -- -- -- -- -- -- -- (70) -- (70)
Net loss............. -- -- -- -- -- -- -- -- (118,743) (118,743)
----------- ------ ----------- ------ ---------- --------- --------- --------- ----------- -----------
Balances,
December 31, 1999.... -- -- 6,076,665 61 202,473 (14,962) (6,380) (75) (132,617) 48,500
Issuance of
common stock
upon exercise of
stock options
and warrants,
net of
repurchases.......... -- -- 69,632 -- 3,462 408 320 -- -- 4,190
Issuance of
common stock for
Employee Stock
Purchase Plan........ -- -- 50,213 1 4,606 -- -- -- -- 4,607
Issuance of
common stock
related to
Silknet
Software, Inc.
acquisition.......... -- -- 2,918,674 29 3,778,318 -- -- -- -- 3,778,347
Issuance of
common stock and
warrants related
to Accenture
agreement............ -- -- 40,000 1 16,778 (16,779) -- -- -- --
Issuance of
common stock
related to private
placement, net....... -- -- 250,000 2 119,573 -- -- -- -- 119,575
Deferred stock-
based
compensation......... -- -- -- -- 5,021 (5,021) -- -- -- --
Amortization of
deferred stock-
based
compensation......... -- -- -- -- -- 14,715 -- -- -- 14,715
Payments on
notes receivable
from
stockholders.........stockholders, net
of interest.......... -- -- -- -- 693 -- -- 945 -- -- 945
Other
comprehensive
loss................. -- --693
Foreign currency
translation
adjustment........... -- -- -- -- -- (302) -- (302)
Interest on
notes receivable
from
stockholders......... -- -- -- -- -- -- (252) -- -- (252)
Net loss............. -- -- -- -- -- -- -- -- (3,070,873) (3,070,873)
----------- ------
----------- ------ ---------- --------- --------- --------- ----------- -----------
Balances,
December 31, 2000.... -- -- 9,405,184 94 4,130,231 (21,639) (5,367) (377) (3,203,490) 899,452
Issuance of
common stock
upon exercise of
stock options
net of
repurchases.......... -- -- 249,624 1 1,132 2,372 -- -- 3,505
Issuance of
common stock for
Employee Stock
Purchase Plan........ -- -- 66,407 -- 245 -- -- -- -- 245
Issuance of
common stock
related to
Broadbase
Software, Inc.
acquisition.......... -- -- 8,667,898 87 93,977 (15,485) -- -- -- 78,579
Issuance of
common stock
related to
private
placement, net....... -- -- 1,010,000 10 10,090 -- -- -- -- 10,100
Deferred stock-
based
compensation,net .... -- --compensation......... -- -- 1,650 (965) -- -- -- 685
Amortization of
deferred stock-
based
compensation......... -- -- -- -- -- 15,880 -- -- -- 15,880
Payments on
notes receivable
from
stockholders.........stockholders, net
of interest.......... -- -- -- -- 2,196 -- -- 2,087 -- -- 2,087
Other
comprehensive
loss................. -- --2,196
Foreign currency
translation
adjustment........... -- -- -- -- -- (908) -- (908)
Interest on
notes receivable
from
stockholders......... -- -- -- -- -- -- 109 -- -- 109
Net loss............. -- -- -- -- -- -- -- -- (942,895) (942,895)
----------- ------
----------- ------ ---------- --------- --------- --------- ----------- -----------
Balances,
December 31, 2001.... -- $ -- 19,399,113 $ 192 $4,237,325 $ (22,209) $ (799) $ (1,285) $(4,146,385) $ 66,839
=========== ======Issuance of
common stock
upon exercise of
stock options and
warrants, net of
repurchases.......... 416,232 -- 1,819 -- -- -- -- 1,819
Issuance of
common stock
for Employee Stock
Purchase Plan........ 73,364 -- 241 -- -- -- -- 241
Amortization of
deferred stock-based
compensation......... -- -- -- 16,620 -- -- -- 16,620
Deferred
stock-based comp..... -- -- (1,734) 1,734 -- -- -- --
Equity investment
received............. 2,910,000 3 31,394 -- -- -- -- 31,397
Issuance of Warrants. -- -- 3,869 (4,747) -- -- -- (878)
Exercise of warrants. 110,284 -- -- -- -- -- -- --
Issuance of stock
for services......... 9,800 -- 115 -- -- -- -- 115
Shares released
from escrow.......... 21,079 -- -- -- -- -- -- --
Payments on notes
receivable from
stockholders, net
of interest.......... -- -- -- -- 594 -- -- 594
Foreign currency
translation
adjustment........... -- -- -- -- -- 1,110 -- 1,110
Reserve for notes
receivable from
stockholders......... -- -- -- -- 205 -- -- 205
Net loss............. -- -- -- -- -- -- (96,110) (96,110)
Balances, ----------- ------ ---------- --------- --------- --------- ----------- -----------
December 31, 2002.... 22,939,872 $ 195 $4,273,029 $ (8,602) $ -- $ (175) $(4,242,495) $ 21,952
=========== ====== ========== ========= ========= ========= =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
KANA SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the YearsYear Ended December 31,
-----------------------------------------------------------------------
2002 2001 2000
1999
---------- ----------- ---------------------
Cash flows from operating activities:
Net loss....................................................loss..................................................... $ (96,110) $ (942,895) $(3,070,873) $ (118,743)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation expense.......................................expense........................................ 9,130 10,072 9,010
1,531
Amortization of stock-based compensation,
goodwill and identifiable intangibles...... 127,660 873,022 --
Amortization of stock-based compensation................... 15,880 14,715 80,536
In process research and development........................ -- 6,900 --intangible assets................ 21,420 143,540 887,737
Goodwill impairment........................................impairment......................................... 55,000 603,446 2,084,841
Provision for doubtful accounts............................. (2,028) 4,878 1,600
Non-cash portion of restructuring charge.................... 212 26,453
Reduction of restructuring reserve.......................... (5,086) -- Noncash interest (income) expense.......................... (90) (252) 1,644--
Other non-cash charges..................................... 30,545 -- --charges...................................... (3,697) 4,002 6,648
Changes in operating assets and liabilities,
net of effects fromthrough acquisitions:
Accounts receivable........................................ 41,653 (30,691) (3,807)receivable......................................... 8,563 36,775 (32,291)
Prepaid expenses and other current assets.................. 12,807assets........................... 2,313 14,477 (13,706) (1,831)
Other assets............................................... 1,670 -- --
Accounts payable and accrued liabilities...................liabilities.................... (13,779) (28,145) 19,014 9,274
Accrued restructuring and merger...........................merger............................ (22,328) 26,909 --
--
Deferred revenue...........................................revenue............................................ 4,212 (11,720) 17,273
5,691
Other liabilities..........................................liabilities........................................... -- (233) -- --
---------- ----------- ---------------------
Net cash used in operating activities......................activities....................... (42,178) (112,441) (90,747)
(25,705)
---------- ----------- ---------------------
Cash flows from investing activities:
Sales (purchases) of short-term investments, net............ 40,587investments.............................. 36,657 114,468 34,225
(35,981)Purchases of short-term investments.......................... (32,540) (73,881)
Purchases of property and equipment.........................equipment.......................... (12,252) (16,780) (35,637)
(8,418)
Cash acquired from acquisitions.............................through acquisitions........................... -- 33,556 23,806
--
Restricted cash.............................................Expiration/(purchase) of restricted cash..................... 10,570 (7,800) -- --
---------- ----------- ---------------------
Net cash provided by (used in) investing activities........activities................... 2,435 49,563 22,394
(44,399)
---------- ----------- ---------------------
Cash flows from financing activities:
Borrowings on notes payable.................................. 1,998 -- --
Payments on notes payable...................................payable.................................... -- (579) (3,155) (2,151)
Net proceeds from issuance of common stock and warrants.....warrants...... 33,458 11,478 128,372 56,711
Payments on stockholders' notes receivable..................receivable................... 594 2,087 945
501
Net proceeds from issuance of convertible preferred stock... -- -- 10,169
Proceeds from notes payable and convertible notes payable... -- -- 9,790
---------- ----------- ---------------------
Net cash provided by financing activities..................activities................... 36,050 12,986 126,162
75,020
---------- ----------- ---------------------
Effect of exchange rate changes on cash and cash equivalents.equivalents.. 179 (834) (302)
(96)
---------- ----------- ---------------------
Net change in cash and cash equivalents......................equivalents....................... (3,514) (50,726) 57,507 4,820
Cash and cash equivalents at beginning of year...............year................ 25,476 76,202 18,695
13,875
---------- ----------- ---------------------
Cash and cash equivalents at end of year.....................year...................... $ 21,962 $ 25,476 $ 76,202
$ 18,695
========== =========== =====================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest......................interest....................... $ 100 $ 147 $ 242
$ 131
========== =========== ===========
Cash paid during the year for income taxes................... $ 117 $ -- $ --
========== =========== ===========
Noncash activities:
Issuance of common stock and assumption of options
and warrants related to acquisitions ........................................... $ -- $ 94,064 $ 3,778,347
$ --
========== =========== ==========
Issuance of warrants and common stock to non-employees .... $ 2,357 $ 15,800 --
========== ===========
==========
Grant of options to purchase common stock with
an exercise price below fair market value................. $ 2,599 $ 5,021 $ 93,154
========== =========== ==========
Issuance (repurchase) of common stock in
exchange for notes receivable from stockholders........... $ (2,372) $ (320) $ 6,544
========== =========== ==========
Issuance of common stock upon conversion of
convertible note payable.................................. $ -- $ -- $ 4,800
========== =========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
KANA SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
KANA Software, Inc., previously Kana Communications, Inc., and its subsidiaries (the Company("the Company" or KANA)"KANA") develop, market and support customer communications software products and services for e-Businesses. The Company sells its products primarily in the United States and Europe, and to a lesser extent, in Europe and Asia, through its direct sales force and third party integrators.
(b)Reincorporation and Stock Splits
The Board of Directors recommended and the stockholders approved a one- for-ten reverse stock split of the common stock for stockholders of record on December 13, 2001. In April 2000, the Board of Directors approved the increase of authorized number of shares of common stock to 100,000,000. The Board of Directors approved a two-for-one stock split of the common stock for stockholders of record on January 28, 2000. In September 1999, KANA reincorporated into the State of Delaware, effected a two-for-three reverse stock split of KANA's common stock and preferred stock.
The accompanying consolidated financial statements have been retroactively restated to reflect the effect of this reincorporation and these stock splits.
(c) Principles of Consolidation
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. Certain reclassifications have been made to the prior year's financial statements to conform with the current year's presentation. These reclassifications had no effect on prior year's stockholders' equity or results of operations.
(d) Basis of Presentation and Liquidity
Since its inception, the Company has incurred substantial losses and negative cash flows from operations in every fiscal year. As of December 31, 2002, the Company had an accumulated deficit of $4.2 billion. For the year ended December 31, 2002, the Company incurred a loss from operations of $100.4 million, and negative cash flows from operations of $42.2 million, which includes $22.3 million in payments related to restructuring.
As a result of our restructuring activities in 2001, as well as personnel and facility cost reductions throughout 2002, management expects cash and cash equivalents and short-term investments on hand will be sufficient to meet our working capital and capital expenditure needs through December 31, 2003. If the Company experiences a decrease in demand for its products from the level experienced in 2002, then the Company would need to reduce expenditures to a greater degree than anticipated. Alternatively, the Company may need to seek additional financing. In the event the Company needs additional financing, there is no assurance that funds would be available to the Company or, if available, under terms that would be acceptable to the Company.
(e) Use of Estimates
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.
(e)(f) Foreign Currency Translation
The functional currency for the Company's international subsidiaries is the local currency of the country in which it operates. Assets and liabilities are translated using the exchange rate at the balance sheet date. Revenues, expenses, gains, and losses are translated at the average exchange rates prevailing during the year. Any translation adjustments are included in other comprehensive loss.
(f)(g) Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments with an original maturity or reset date of three months or less to be cash equivalents. The Company has classified its cash equivalents and short-term investments as "available for sale." These items are carried at fair value, based on the quoted market prices, and unrealized gains and losses, are reported as a separate component of accumulated other comprehensive losses in stockholders' equity. All short- term investments mature in less than one year. To date, realized gains or losses have not been material.
(g)(h) Fair value of financial instruments
The carrying values of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and notes payable approximates their fair values due to their relatively short maturities.
(h)(i) Concentration of Credit Risk
Financial instruments subjecting the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments and trade accounts receivable. The Company maintains cash and cash equivalents with four domestic financial institutions. From time to time, the Company's cash balances with its financial institutions may exceed Federal Deposit Insurance Corporation insurance limits.
The Company's customers are currently concentrated in the United States.States and Europe. The Company performs ongoing credit evaluations, generally does not require collateral and establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of customers, historical trends and other information. As of December 31, 20012002 and 2000,2001 no customer represented more than 10% of total accounts receivable.
(i)(j) Restricted Cash
As of December 31, 2002, the Company maintained $0.4 million in restricted cash, primarily as collateral on the Company's leased facilities and other long- term deposits.
As of December 31, 2001, the Company maintained $11.0 million in restricted cash. During the year ended December 31, 2001, the Company provided forApproximately $5.8 million of restricted cash supports a letter of credit totaling $5.8 million and also transferred $2.0 million of cash into anis in escrow account to fulfill certain contractual obligations. In addition, restricted cash includesas of December 31, 2001 included $3.2 million as collateral on the Company's leased facilities and other long-term deposits.
(j)(k) Internal Use Software
Software development costs for internal use, including costs incurred to purchase third party software, are capitalized beginning when the Company has determined certain factors are present, including among others, that technology exists to achieve the performance requirements, buy versus internal development decisions have been made and the Company's management has authorized the funding of the project. Capitalization of software costs ceases when the software is substantially complete and is ready for its intended use and is amortized over its estimated useful life using the straight-line method.
When events or circumstances indicate the carrying value of internal use software might not be recoverable, the Company will 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, when it is no longer probable that computerthe software being developed will be placed in service, the asset will be recorded at the lower of its carrying value or fair value, if any, less direct selling costs.
(k)(l) Investments
Investments are included in other assets and consist of a minority investment in preferred stock of a privately held company in which the Company holds less than a 20% interest. The private investment is carried at original cost, less reductions related to other-than-temporary declines in value. The Company assesses the recoverability of investments on a regular basis. Factors that the Company considers which could trigger an other-than-temporary decline include, but are not limited to, the likelihood that the related company would have insufficient cash flows to operate for the next twelve months, proposed financing, significant changes in the operating performance or business model, and changes in market conditions. The Company recorded a charge related to an other-than-temporary decline in the value of its investment of $1.0 million in 2001.
(l)(m) Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets, generally three to five years. Leasehold improvements are amortized over the lesser of the related lease term or the life of the improvement. Depreciation expense for the years ended December 31, 2002, 2001 and 2000 and 1999 was $9.1 million, $10.1 million $9.0 million and $1.5$9.0 million, respectively.
The Company evaluates property and equipment for impairment whenever changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts exceed the fair values of the assets. Assets to be disposed of are reported at the lower of carrying values or fair values, less costs of disposal.
(m)(n) Goodwill and Identifiable Intangible assets
Goodwill and identifiable intangibles are carried at cost less accumulated amortization. The Companyamortization and impairments. Identifiable intangibles are amortized goodwill and other identifiable intangibles on a straight-line basis over their estimated useful lives, which is three years.
The On January 1, 2002, the Company assesses the impairment of identifiable intangibles and related goodwill periodically in accordance with the provisions ofadopted Statement of Financial Accounting Standards ("SFAS") No. 121,142,Accounting for the Impairment of Long-Lived AssetsGoodwill and for Long-LivedOther Intangible Assets to Be Disposed of.The Company also assesses the impairment of enterprise level goodwill periodically in accordance with the provision of Accounting Principles Board ("APB"("SFAS 142") Opinion No. 17,Intangible Assets.An impairment review is performed whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important which could trigger an impairment review include, but are not limited to, significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, a significant decline in its stock price for a sustained period, and its market capitalization relative to net book value. When the Company determines that the carrying value of goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company measures any impairment based on a projected discounted cash flow method using a discount rate commensurate with the risk inherent in our current business model.
The Company performed an impairment assessment of the identifiable intangibles and goodwill recorded in connection with the acquisition of Silknet. The assessment was performed primarily due to the significant sustained decline in the Company's stock price since the valuation date of the shares issued in the Silknet acquisition resulting in the Company's net book value of its assets prior to the impairment charge significantly exceeding the Company's market capitalization, the overall decline in the industry growth rates, and the Company's lower fourth quarter of 2000 actual and projected operating results. As a result, the Company recorded a $603.4 million and $2.1 billion impairment charge in the first quarter of 2001 and fourth quarter of 2000, respectively, to reduce goodwill. The charges were based upon the estimated discounted cash flows over the remaining useful life of the goodwill using a discount rate of 20%. The assumptions supporting the cash flows, including the discount rate, were determined using the Company's best estimates asimpact of such date.
The Company is required to adopt SFAS No. 142 effective January 1, 2002, which will result in the Company no longer amortizing its existing goodwill. At December 31, 2001, net goodwill was $64.8 million and goodwill amortization expense was $127.7 million for the year ended December 31, 2001. The Company will be required to measure goodwill for impairment effective January 1, 2002 as part of the transition provisions. Any impairment resulting from the transition provisions will be recorded as of January 1, 2002 and will be recognized as the effect of a change in accounting principle. The Company will not be able to determine if an impairment will be required until completion of such impairment test. In addition, at December 31, 2001, negative goodwill approximated $3.9 million. The Company will be required as part of the adoption of SFAS No. 142 to immediately recognize the unamortized negative goodwill that exists on January 1, 2002. This adjustment will be recognized as the effect of a changeis discussed in accounting principle.Note 4.
(n)(o) Revenue Recognition
The Company generally recognizes revenue in accordance with Statement of Position ("SOP") 97-2, Software Revenue Recognition and SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions. Revenue recognized from software arrangements is allocated to each element of the arrangement based on the relative fair values of the elements, such as software products, upgrades, enhancements, post contract customer support, installation, or training. The determination of fair value is based on objective evidence that is specific to the vendor. If evidence of fair value for the undelivered elements of the arrangement does not exist, all revenue from the arrangement is deferred until such time as evidence of fair value does exist or until all elements of the arrangement are delivered.
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. Ifprobable.
In software arrangements that include rights to multiple software products and/or services, the fees from the total arrangement involves significant customizationare allocated among each of the software, the fees, excluding the portion attributable to maintenance are recognizeddeliverables using the percentage-of- completion method. Revenueresidual method, under which revenue is allocated to undelivered elements based on vendor-specific objective evidence of fair value of such undelivered elements with the residual amounts of revenue being allocated to the delivered elements. Elements included in multiple element arrangements primarily consist of software products, maintenance (which includes customer support services and unspecified upgrades), or consulting services. Vendor-specific objective evidence for software products and consulting services is based on the price charged when an element is sold separately or, in the case of an element not yet sold separately, the price established by authorized management, if it is probable that the price, once established, will not change before market introduction. Vendor-specific objective evidence for maintenance is based on the residual method generally using stated contractual renewal rates.
Probability of collection is based upon assessment of the customer's financial condition through review of their current financial statements or credit reports. For sales to existing customers, prior payment history is also considered in assessing probability of collection. The Company is 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 maintenance contracts iscustomer support services are recognized ratably over the term of the maintenance contract, typically one year. Consulting revenues are primarily related to implementation services performed on a straight-linetime-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. Service revenue, consisting primarilyWhen acceptance is not assured or an ability to reliably estimate costs is not possible, the Company uses the completed contract method, whereby revenues are deferred until all contractual obligations are met, and acceptance, if required in the contract, is received. Revenues from consulting and training services are recognized as services are performed.
For contracts requiring significant services, in order to assess whether a loss reserve is necessary, the Company estimates the total expected costs of consulting, implementation,providing services necessary to complete the contract and hostingcompares these costs to the fees expected to be received under the contract. If the costs are expected to exceed the fees to be received, an accrual is generally recognizedmade to record the loss at the time of assessment.
In November 2001, the service is performed. ProvisionsEmerging Issues Task Force ("EITF") concluded that reimbursements for estimated contract losses are recognizedout-of-pocket-expenses incurred should be included in revenue in the periodincome statement and subsequently issued EITF 01-14,Income Statement Characterization of Reimbursements Received for `Out-of-Pocket' Expenses Incurred in whichJanuary 2002. The Company adopted EITF 01-14 effective January 1, 2002 and has reclassified comparative financial statements for prior periods to comply with the loss becomes probableguidance in this EITF issue. The adoption of this issue resulted in approximately $362,000, $3.7 million, and can be reasonably estimated.$4.9 million of reimbursable expenses reflected in both service revenue and cost of service revenue for the years ended December 31, 2002, 2001, and 2000, respectively.
(o)(p) Software Development Costs
Software development costs are expensed as incurred until technological feasibility of the underlying software product is achieved. After technological feasibility is established, software development costs are capitalized. Capitalized costs are then amortized on a straight-line basis over the estimated product life, or based on the ratio of current revenue to total projected product revenue, whichever is greater. To date, technological feasibility and general availability of such software have occurred simultaneously and software development costs qualifying for capitalization have been insignificant. Accordingly, the Company has not capitalized any software development costs.
(p)(q) Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense was $0.7 million, $2.4 million, $7.4 million, and $2.6$7.4 million, for the years ended December 31, 2002, 2001 2000 and 1999,2000, respectively.
(q)(r) Stock-Based Compensation
The Company accounts for its stock-based compensation arrangements with employees using the intrinsic-value method.method in accordance with Accounting Principles Board 25,Accounting for Stock Issued to Employees. Deferred stock-based compensation is recorded on the date of grant when the deemed fair value of the underlying common stock exceeds the exercise price for stock options or the purchase price for the shares of common stock.
Deferred stock-based compensation resulting from option grants to employees, and warrants issued to non-employees, is amortized on an accelerated basis over the vesting period of the individual options, generally four years, in accordance with Financial Accounting Standards Board Interpretation No. 28.28,Accounting for Stock Appreciation Rights and Other VariableStock Option or Award Plans.
(r)The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation, Transition and Disclosure". The following table presents what the net loss and net loss per share would have been adjusted to the following pro forma amounts had the Company adopted FAS 123 (in thousands, except per share amounts):
Year Ended December 31,
---------------------------------
2002 2001 2000
--------- --------- -----------
As Reported:
Net loss.......................................... $ (96,110) $(942,895) $(3,070,873)
Basic and diluted net loss per share.............. $ (4.29) $ (68.61) $ (395.68)
Compensation expense included in net loss........... $ 6,687 $ 11,885 $ 11,413
Compensation expense if FAS 123 had been adopted.... $ 39,345 $ (34,038) $ 119,162
Pro Forma:
Net loss.......................................... $(128,768) $(896,972) $(3,178,622)
Basic and diluted net loss per share.............. $ (5.75) $ (65.27) $ (409.56)
(s) Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is recorded to reduce deferred tax assets to an amount whose realization is more likely than not.
(s)(t) Comprehensive Income (Loss)
Other comprehensive income (loss) recorded by the Company for the years ended December 31, 2002, 2001 2000 and 19992000 was primarily attributable to foreign currency translation adjustments.
(t)(u) Net Loss Per Share
Basic net loss per share from continuing operations is computed using the weighted-average number of outstanding shares of common stock, excluding common stock subject to repurchase. Diluted net loss per share from continuing operations is computed using the weighted-average number of outstanding shares of common stock and, when dilutive, potential common shares from options and warrants to purchase common stock and common stock subject to repurchase using the treasury stock method, and convertible securities using the as-if converted basis.method.
The following table presents the calculation of basic and diluted net loss per share from continuing operations:
YearsYear Ended December 31,----------------------------------------------------------------------- 2002 2001 20001999---------- -------------------------------- (in thousands, except per share amounts) Numerator: Net loss from continuingoperations....................operations before cumulative effect of accounting change.................. $ (100,392) $ (939,103) $(3,072,046)$ (119,078)---------- -------------------------------- Denominator: Weighted-average shares of common stockoutstanding.....................................outstanding....................................... 22,420 13,880 8,3063,487Less weighted-average shares subject torepurchase.........................................repurchase........................................... (17) (137) (545)(910)---------- -------------------------------- Denominator for basic and dilutedcalculation..........calculation............ 22,403 13,743 7,7612,577========== ================================ Basic and diluted net loss per common share from continuingoperations................operations before cumulative effect of accounting change............ $ (4.48) $ (68.33) $ (395.83)$ (46.21)========== ================================
All convertible preferred stock, warrants, outstanding stock options and shares subject to repurchase by KANA have been excluded from the calculation of diluted net loss per share because all such securities arewere anti-dilutive for all periods presented. The total number of shares excluded from the calculation of diluted net loss per share are as follows (in thousands):
YearsYear Ended December 31,----------------------------------------------------------------------- 2002 2001 20001999---------- -------------------------------- Stock options andwarrants..............................warrants................................ 7,917 6,753 2,554377Common stock subject torepurchase......................repurchase........................ 18 28 389910---------- -------------------------------- 7,935 6,781 2,9431,287========== ================================
(u)The weighted average exercise price of stock options and warrants outstanding was $26.38, $50.05 and $386.72 as of December 31, 2002, 2001 and 2000, respectively.
(v) Segment Reporting
KANA'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, KANA considers itself to be in a single industry segment, specifically the license, implementation and support of its software applications. KANA's long-lived assets are primarily in the United States. Geographic information on revenue for the years ended December 31, 2002, 2001, 2000, and 19992000 are as follows (in thousands):
YearsYear Ended December 31, ------------------------------------- 2002 2001 20001999----------- ----------- ----------- United States................................ $73,06953,589 $93,52376,794 $12,11798,461 International................................ 25,501 13,801 19,4941,385----------- ----------- ----------- $86,87079,090 $113,01790,595 $13,502117,955 =========== =========== ===========
During the year ended December 31, 2002, one customer represented 11% of total revenues. During the years ended December 31, 2001 2000 and 1999,2000, no customer represented more than 10% of total revenues. Revenue from the United Kingdom accounted for approximately 16.9% and 11% of total revenues in the yearyears ended December 31, 2000.2002 and 2000, respectively. Revenue to any one foreign country did not exceed 10% of total revenue in 2001.
Geographic information on KANA's long-lived assets is as follows (in thousands):
Year Ended December 31,
----------------------
2002 2001
or 1999.---------- ----------
United States........ $ 32,416 $ 85,039
International........ 1,735 2,100
---------- ----------
$ 34,151 $ 87,139
========== ==========
(v)(w) Recent Accounting Pronouncements
In July 2001,June 2002, the FASB issued Statement of Financial Accounting Standards Board ("FASB"SFAS") issued146,Accounting for Exit or Disposal Activities. SFAS 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for under EITF No. 141, Business Combinations, and SFAS No. 142, Goodwill94-3,Liability Recognition for Certain Employee Termination Benefits and Other Intangible Assets.Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The scope of SFAS 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002 and early application is encouraged.
In November 2002, the EITF reached a consensus on issue No. 141 addresses financial00-21,Accounting for Revenue Arrangements with Multiple Deliverables ("EITF 00-21") on a model to be used to determine when a revenue arrangement with multiple deliverables should be divided into separate units of accounting and, reporting for business combinations and supercedes Accounting Principals Board ("APB") No.16, Business Combinations.if separation is appropriate, how the arrangement consideration should be allocated to the identified accounting units. The provisions of SFAS No.141 were adopted July 1, 2001. The most significant changes made by SFAS No.141 are: (1) requiringEITF also reached a consensus that the purchase method of accountingthis guidance should be used foreffective all business combinations initiated
revenue arrangements entered into in fiscal periods beginning after June 30, 2001, (2) establishing specific criteria15, 2003, which for the recognition of intangible assets separately from goodwill, and (3) requiring unallocated negative goodwill tocompany would be written off immediately as an extraordinary gain.
SFAS No.142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition and supercedes APB No.17, Intangible Assets. The provisions of SFAS No. 142 are required to be adopted as of January 1, 2002 for calendar year entities. The most significant changes made by SFAS No. 142 are: (1) goodwill and indefinite lived intangible assets will no longer be amortized, (2) goodwill will be tested for impairment at least annually at the reporting unit level, (3) intangible assets deemed to have an indefinite life will be tested for impairment at least annually, and (4) the amortization period of intangible assets with finite lives will no longer be limited to forty years.
quarter ending September 30, 2003. The Company adopted SFAS No.141 effective July 1, 2001 which will result in the Company accounting for any business combination consummated on or afterbelieves that date under the purchase method of accounting. The Company will also apply the non-amortization provisions of SFAS No. 142 for any business combination consummated on or after July 1, 2001. The adoption of SFAS No. 141 will not change the method of accounting used in previous business combinations.
The Company is required upon adoption of SFAS No. 142 effective January 1, 2002, which will result in the Company no longer amortizing its existing goodwill. At December 31, 2001, net goodwill was $64.8 million and goodwill amortization expense was $127.7 million for the year ended December 31, 2001. In addition, the Company will be required to measure goodwill for impairment effective January 1, 2002 as part of the transition provisions. Any impairment resulting from the transition provisions will be recorded as of January 1, 2002 and will be recognized as the effect of a change in accounting principle. The Company will not be able to determine if an impairment will be required until completion of such impairment test. At December 31, 2001, negative goodwill approximated $3.9 million. The Company will be required as part of the adoption of SFAS No. 142 to immediately recognize the unamortized negative goodwill that exists on January 1, 2002. This adjustment will be recognized as the effect of a change in accounting principle.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which is required to be applied starting with fiscal years beginning after December 15, 2001. SFAS No. 144 requires, among other things, the application of one accounting model for long-lived assets that are impaired or to be disposed of by sale. The adoption of SFAS No. 144this issue is not expected to have a significantmaterial impact on its financial statements.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45")Guarantor's Accounting and Disclosure requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee. However, the provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor's obligations does not apply to product warranties or to guarantees accounted for as derivatives. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods beginning after December 15, 2002. The adoption of FIN 45 has not had a material impact on the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148,Accounting for Stock-Based Compensation, Transition and Disclosure. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in interim financial statements. The transition and annual disclosure requirements of SFAS No. 148 are effective for fiscal years ended after December 15, 2002. The interim disclosure requirements are effective for interim periods beginning after December 15, 2002. The Company believes that the adoption of this standard will not have a material impact on its financial statements.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46")Consolidation of Variable Interest Entities. Until this interpretation, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or resultsentitled to receive a majority of operations.the entity's residual returns. FIN 46 applies immediately to variable interest entities created after January 31, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company believes that the adoption of this standard will not have a material impact on its financial statements. However, changes in the Company's business relationships with various entities could occur which may impact its financial statements under the requirements of FIN 46.
2. Business Combinations
In June 2001, the Company finalized the acquisition of Broadbase. In connection with the merger, each share of Broadbase common stock outstanding immediately prior to the consummation of the merger was converted into the right to receive .105 shares of KANA common stock (the "Exchange Ratio") and KANA assumed Broadbase's outstanding stock options and warrants based on the Exchange Ratio, issuing approximately 8.7 million shares of KANA common stock and assuming options and warrants to acquire approximately 2.7 million shares of KANA common stock. The transaction was accounted for using the purchase method of accounting.
The allocation of the purchase price at December 31, 2001 to assets acquired and liabilities assumed is as follows (in thousands):
Tangible assets acquired.................................. $ 125,144
Deferred compensation .................................... 15,485
Liabilities assumed ...................................... (34,975)
Deferred credit - negative goodwill ...................... (4,282)
-----------
Net assets acquired...................................... $ 101,372
===========
Deferred compensation recorded in connection with the merger will be amortized over a four-year period. Negative goodwill willwas to be amortized over its estimated useful life of three years untilyears. However, due to the Company's adoption of SFAS No. 142 on January 1, 2002.2002, negative goodwill was eliminated in the first quarter of 2002 resulting in a gain of $3.9 million.
The estimated purchase price was approximately $101.4 million, measured as the average fair market value of KANA's outstanding common stock from April 7 to April 11, 2001, two trading days before and after the merger agreement was announced plus the Black-Scholes calculated value of the options and warrants of Broadbase assumed by KANA in the merger, and other costs directly related to the merger is as follows (in thousands):
Fair market value of commonstock......................................stock..........................$ 81,478 Fair market value of options and warrantsassumed......................assumed........... 12,586 Acquisition-relatedcosts..............................................costs................................... 7,308 -----------Total..................................................................Total......................................................$ 101,372 ===========
In connection with the Broadbase merger, KANA recorded $13.4 million of merger-related integration expenses and transition costs during the year ended December 31, 2001. These amounts consisted primarily of transitional personnel costs of $5.6 million and duplicate facility and insurance costs, redundant assets, and professional fees associated with the merger of $7.8 million. As of December 31, 2001, the Company had approximately $10.3 million remaining in accrued merger-related costs on the consolidated balance sheet in accrued restructuring and merger costs.costs, which were paid in 2002.
The following unaudited pro forma net revenues, net loss and net loss per share data for the year ended December 31, 2001 and 2000 are based on the respective historical financial statements of the Company and Broadbase. The pro forma data reflects the consolidated results of operations as if the merger with Broadbase occurred at the beginning of each of the periods indicated and includes the amortization of the resulting negative goodwill and deferred compensation. The pro forma results include the results of pre-acquisition periods for companies acquired by Broadbase prior to its acquisition by KANA. The pro forma financial data presented are not necessarily indicative of the Company's results of operations that might have occurred had the transaction been completed at the beginning of the periods specified, and do not purport to represent what the Company's consolidated results of operations might be for any future period.
(Unaudited Pro forma)Forma)
For the Year Ended
December 31,
------------------------
2001 2000
----------- -----------
(In thousands, except
per share amounts)
------------------------
Net revenues ............................................. $ 113,347 $ 196,174
Net loss ................................................. $(1,965,075) $(3,247,880)
Basic and diluted net loss per share ..................... $ (108.92) $ (188.29)
Shares used in basic and diluted net loss
per share calculation .................................. 18,042 17,249
In April 2000, the Company acquired Silknet Software, Inc. ("Silknet"). In connection with the merger, each share of Silknet common stock was converted into the right to receive .166 shares of the Company's common stock (the "Exchange Ratio") and the Company assumed Silknet's outstanding stock options and warrants based on the Exchange Ratio, issuing approximately 2.9 million shares of common stock and assuming options and warrants to acquire approximately 400,000 shares of the Company's common stock. The transaction was accounted for using the purchase method of accounting.
As of the acquisition date, the Company recorded the fair market value of Silknet's assets and liabilities. The resulting goodwill and intangible assets acquired in connection with the merger are being amortized over a three-year period. The allocation of the purchase price to assets acquired and liabilities assumed is as follows (in thousands):
Tangible assets acquired.................................. $ 60,074
Identifiable intangibles acquired:
In process research and development...................... 6,900
Existing technology...................................... 14,400
In-place workforce....................................... 6,600
Goodwill................................................. 3,736,835
Liabilities assumed....................................... (13,562)
-----------
Net assets acquired...................................... $ 3,811,247
===========
The purchase price was determined using the average fair market value of the Company's common stock from January 31, 2000 to February 14, 2000, five trading days before and after the merger agreement was announced. The purchase price is summarized as follows (in thousands):
Fair market value of commonstock......................................stock..........................$ 3,373,425 Fair market value of options and warrantsassumed......................assumed.......... 404,922 Acquisition-relatedcosts..............................................costs.................................. 32,900 -----------Total..................................................................Total......................................................$ 3,811,247 ===========
In connection with the merger of Silknet, net intangibles of $6.9 million were allocated to in process research and development. The fair value allocation to in-process research and development was determined by identifying the research projects for which technological feasibility has not been achieved and which have no alternative future use at the merger date, assessing the stage and expected date of completion of the research and development effort at the merger date, and calculating the net present value of the cash flows expected to result from the successful deployment of the new technology resulting from the in-process research and development effort.
The stages of completion were determined by estimating the costs and time incurred to date relative to the costs and time incurred to develop the in- process technology into a commercially viable technology or product, while considering the relative difficulty of completing the various tasks and obstacles necessary to attain technological feasibility. As of the date of the acquisition, Silknet had two projects in process that were 90% complete. These projects have beenwere completed as of December 31, 2001.
The estimated net present value of cash flows was based on incremental future cash flows from revenues expected to be generated by the technologies in the process of development, taking into account the characteristics and applications of the technologies, the size and growth rate of existing and future markets and an evaluation of past and anticipated technology and product life cycles. Estimated net future cash flows included allocations of operating expenses and income taxes but excluded the expected completion costs of the in-process projects, and were discounted at a rate of 20% to arrive at a net present value. The discount rate included a factor that took into account the uncertainty surrounding the successful deployment of in-process technology projects. This net present value was allocated to in-process research and development based on the percentage of completion at the merger date.
In connection with the Silknet merger, the Company recorded $6.6 million of transaction costs and merger-related integration expenses. These amounts consisted primarily of merger-related advertising and announcements of $4.5 million and duplicate facility costs of $1.0 million.
The following unaudited pro forma net revenues, net loss and net loss per share data for the year ended December 31, 1999 is based on the respective historical financial statements of the Company and Silknet. The pro forma data reflects the consolidated results of operations as if the merger with Silknet occurred at the beginning of the period indicated and includes the amortization of the resulting goodwill and other intangible assets. The pro forma financial data presented are not necessarily indicative of the Company's results of operations that might have occurred had the transaction been completed at the beginning of the periods specified, and do not purport to represent what the Company's consolidated results of operations might be for any future period.
(Unaudited Pro forma) Year Ended December 31, 1999 ----------- (In thousands, except per share amounts) ----------- Net revenues ............................................. $ 36,032 Net loss ................................................. $(1,385,313) Basic and diluted net loss per share ..................... $ (305.20) Shares used in basic and diluted net loss per share calculation .................................. 4,539
As discussed in Note 1, the Company recorded a $2.1 billion impairment charge to reduce the value of goodwill resulting from the Silknet acquisition. Such amountThis impairment charge is not includedreflected in the above unaudited pro forma information.
On August 13, 1999, the Company issued 698,254 shares of its common stock to the shareholders of Connectify in exchange for all of the outstanding capital stock of Connectify. Prior to the consummation of the merger, 509,582 shares of the outstanding KANA preferred stock were converted to 1,019,164 shares of KANA common stock. As a result of the conversion, the Company created a controlling class of common stock.
On December 3, 1999, in connection with the acquisition of Business Evolution, Inc. ("BEI"), 193,521 shares of KANA common stock were issued or reserved for issuance for all outstanding shares, warrants and options of BEI. On the same date, in connection with the acquisition of netDialog, Inc. ("netDialog"), 124,406 shares of KANA common stock were issued or reserved for issuance for all outstanding shares, warrants, convertible notes and options of netDialog.
The mergers in 1999 have been accounted for as poolings of interests, and, accordingly, the Company's consolidated financial statements have been restated for all periods prior to the merger to include the results of operations, financial position, and cash flows of the acquired companies. No significant adjustments were required to conform the accounting policies of the Company and the acquired companies.
In connection with the merger with Connectify, KANA recorded a charge for merger integration costs of $1.2 million consisting primarily of transaction fees for attorneys and accountants of approximately $390,000 and employee severance benefits and facility related costs of $780,000.
In connection with the mergers with BEI and netDialog, the Company recorded a nonrecurring charge for merger integration costs of $4.5 million, consisting primarily of transaction fees for attorneys and accountants of approximately $1.5 million, merger-related advertising and announcements of $1.7 million incurred by December 31, 1999, charges for the elimination of duplicate facilities of approximately $840,000 and severance costs and certain other related costs of approximately $433,000.
Certain results of operations data for the separate companies and the combined amounts presented in the consolidated financial statements were as follows (in thousands):
Nine Months Ended September 30, 1999 ----------- (Unaudited) Revenues: Kana.................................................... $ 7,174 Connectify(1)........................................... -- BEI..................................................... 361 NetDialog............................................... 72 ----------- $ 7,607 =========== Nine Months Ended September 30, 1999 ----------- (Unaudited) Net Loss: Kana.................................................... $ (16,828) Connectify(1)........................................... (2,627) BEI..................................................... (2,404) NetDialog............................................... (6,288) ----------- $ (28,147) ===========
3. Financial Statement Detail
Cash equivalents consisted of the following (in thousands):
December 31,
------------------------
2002 2001 2000
----------- -----------
Money market funds........................... $ 21,9928,514 $ 7,225
Commercial paper............................. -- 25,72221,992
Municipal securities......................... 1,853 --
31,901Certificate of Deposit......................... 114 --
----------- -----------
$ 21,99210,481 $ 64,84821,992
=========== ===========
Short-term investments consisted of the following (in thousands):
December 31,
------------------------
2002 2001 2000
----------- -----------
Municipal securities......................... $ 13,6363,784 $ --13,636
Corporate notes / bonds...................... 6,752 1,018 --
Certificates of deposit...................... -- 297
----------- -----------
$ 14,65410,536 $ 29714,654
=========== ===========
Unrealized gains and losses on available-for-sale securities at December 31, 2001 and 2000 were immaterial in both years.
Property and equipment, net consisted of the following (in thousands):
December 31,
------------------------
2002 2001 2000
----------- -----------
Computer equipment........................... $ 28,02422,692 $ 38,58228,024
Furniture and fixtures....................... 2,898 2,784 5,743
Leasehold improvements....................... 4,058 3,762
6,611Internal use software........................ 15,116 --
----------- -----------
44,764 34,570 50,936
Less accumulated depreciation and amortization...............................amortizatio (22,471) (15,188) (10,841)
----------- -----------
$ 19,38222,293 $ 40,09519,382
=========== ===========
Accrued liabilities consisted of the following (in thousands):
December 31,
------------------------
2002 2001 2000
----------- -----------
Accrued payroll and related expenses......... $ 5,1973,851 $ 8,4705,197
Accrued commissions.......................... 2,067 3,238 2,372
Other accrued liabilities.................... 7,963 16,857 11,457
----------- -----------
$ 25,29213,881 $ 22,29925,292
=========== ===========
Other income (expense), net consisted of the following (in thousands):
Year Ended December 31,
-------------------------------------
2002 2001 2000 1999
----------- ----------- -----------
Interest income.............................. $ 965 $ 2,266 $ 5,991
$ 1,419
Interest expense............................. 107 (152) (242)
(520)
Interest expense from warrants issued
in connection with bridge loans............ -- -- (1,559)
Other........................................ (159) (593) (915) (84)
----------- ----------- -----------
$ 913 $ 1,521 $ 4,834 $ (744)
=========== =========== ===========
4. Goodwill
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 the Company's estimate of fair value, which requires significant judgment with respect to future cash flows and discount rates. For intangible assets other than goodwill, the Company is required to estimate the useful life of the asset and recognize its cost as an expense over the useful life. The Company uses 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 the Company's adoption of Statement of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assets ("SFAS 142"). Instead, the Company is now required to test goodwill for impairment under certain circumstances, write down goodwill when it is impaired.
The Company regularly evaluates acquired businesses for potential indicators of impairment of goodwill and intangible assets. The Company's 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 the Company to conclude that impairment indicators exist and that goodwill and other intangible assets associated with the Company's acquired businesses are impaired.
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. 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 revenue and cash flows in future quarters. The Company used relevant market data, including KANA's market capitalization during the period following the revision of estimates, to calculate an estimated fair value and the resulting goodwill impairment. The estimated fair value was compared to the corresponding carrying value of goodwill at June 30, 2002, which resulted in a revaluation of goodwill as of June 30, 2002. The remaining amount of goodwill as of December 31, 2002 was $7.4 million. Any further impairment loss could have a material adverse impact on the Company's financial condition and results of operations.
In 2001, the Company also performed an impairment assessment of the identifiable intangibles and goodwill recorded in connection with the acquisition of Silknet, under the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of. The assessment was performed primarily due to the significant and sustained decline in the Company's stock price since the valuation date of the shares issued in the Silknet acquisition which resulted in the net book value of the Company's assets prior to the impairment charge significantly exceeding its market capitalization, the overall decline in the industry growth rates, and the Company's lower-than-projected operating results. As a result, the Company recorded an impairment charge of approximately $603.4 million to reduce goodwill in the quarter ended March 31, 2001. The charge was based upon the estimated discounted cash flows over the remaining useful life of the goodwill using a discount rate of 20%. The assumptions supporting the cash flows, including the discount rate, were determined using the Company's best estimates as of such date.
The Company ceased amortizing goodwill as of the beginning of fiscal 2002. The following table presents comparative information showing the effects that the non-amortization of goodwill provisions of SFAS 142 would have had on the net loss and basic and diluted net loss per share for the periods shown (in thousands, except per share amounts):
Year Ended December 31,
-------------------------------------
2002 2001 2000
----------- ----------- -----------
Reported net loss...................... $ (96,110) $ (942,895) $(3,070,873)
Goodwill amortization.................. -- 118,060 866,328
----------- ----------- -----------
Adjusted net loss...................... $ (96,110) $ (824,835) $(2,204,545)
=========== =========== ===========
Basic and diluted net loss per share... $ (4.29) $ (68.61) $ (395.68)
Goodwill amortization.................. -- 8.59 111.63
----------- ----------- -----------
Adjusted basic and diluted
net loss per share................... $ (4.29) $ (60.02) $ (284.05)
=========== =========== ===========
Shares used in computing adjusted basic
and diluted net loss per share....... 22,403 13,743 7,761
=========== =========== ===========
The components of goodwill and other intangibles are as follows (in thousands):
December 31,
------------------------
2002 2001
----------- -----------
Goodwill............................... $ 3,085,207 $ 3,135,925
Less: impairment charges............... (1,536,395) (1,481,395)
Less: accumulated amortization......... (1,541,364) (1,595,983)
----------- -----------
Goodwill, net.......................... 7,448 58,547
----------- -----------
Purchased technology................... 14,400 14,400
Less: accumulated amortization......... (12,947) (8,147)
----------- -----------
Intangibles, net....................... 1,453 6,253
----------- -----------
Goodwill and intangibles, net.......... $ 8,901 $ 64,800
=========== ===========
The changes in the carrying amount of goodwill are as follows (in thousands):
Goodwill, net, as of December 31, 2001... $ 58,547
Write-off of negative goodwill........... 3,901
Impairment............................... (55,000)
-----------
Goodwill, net, as of December 31, 2002... $ 7,448
===========
5. Notes Payable
At December 31, 2001,2002, the Company maintained a line of credit totaling $3.0$5.0 million, which was collateralized by all of its assets, bore interest at the bank's prime rate plus .5% (5.25% as of December 31, 2001), and expired in February 2002.The bank did not require any financial covenants as of December 31, 2001. Total borrowings as of December 31, 2001 and 2000 were $1.2 million under this line of credit.In March 2002, the Company renewed its line of credit with a $4.0 million facility which is collateralized by all of its assets and bears interest at the bank's prime rate plus .25%, (4.5% as of December 31, 2002 and 5.25% as of December 31, 2001). The line of credit expires in MarchNovember 2003, at which time the entire balance underof the line of credit iswill be due. Total borrowings as of December 31, 2002 and 2001 were $3.4 and $1.2 million under this line of credit. The line of credit contains a financial covenant that requires the Company to maintain at least a $6.0$8.0 million dollar balance in any accountcash or cash equivalents with the bank.bank at all times. 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 maintains at all times a minimum of $20.0 million as short-term unrestricted cash and cash equivalents. As of December 31, 2002, the Company was in compliance with all financial covenants.
In June 2002, the Company entered into a non-recourse receivables purchase agreement with a bank which provides for the sale of up to $5.0 million in certain qualified receivables subject to an administrative fee and a discount schedule ranging from the bank's prime rate of interest plus 0.50% to the bank's prime rate of interest plus 1.50%. The Company had not sold any receivables under this agreement as of December 31, 2002.
Included in notes payable are the Company's capital lease obligations at December 31, 20012002, totaling $284,000 which bear interest at 14.5% and$15,100. All capital leases will be fully repaid by 2004.during 2003 and are therefore classified as current liabilities. As of December 31, 2000,2001, the Company's capital lease obligations totaled $417,000.obligation was $284,000.
6. Commitments and Contingencies
(a) Lease Obligations
The Company leases its facilities under noncancelable operating leases with various expiration dates through December 2010. In connection with its existing leases, the Company entered into letters of credit totaling $868,000 expiring in 2003 through 2010. The letters of credit are supported by either restricted cash or the Company's line of credit.
Future minimum lease payments under noncancelable operating leases are as follows (in thousands):
Year Ending December 31,2002.........................................-------------------------- 2003...................................... $182 2003......................................... 131 2004......................................... 12 -----------5,539 2004...................................... 4,917 2005...................................... 5,087 2006...................................... 3,830 2007...................................... 3,096 Thereafter................................ 6,782 ---------- Total minimum leasepayments................. 325 Lesspayments.............. $ 29,251 ==========
Rent expense for properties in use, net of sublease payments, was approximately $4.2 million, $8.7 million and $8.0 million for the years ended December 31, 2002, 2001 and 2000, respectively. Restructuring expense related to restructured properties was a gain of $5.1 million and $38.2 million for the years ended December 31, 2002 and 2001, respectively. Sublease payments were approximately $814,000, $637,000 and $324,000 in the years ended December 31, 2002, 2001 and 2000, respectively.
(b) Litigation
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. Management believes we have 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 Capital Corp as well as KANA and certain current and former officers of KANA were named as defendants in federal securities class action lawsuits filed in the United States District Court for the Southern District of New York. The parties have agreed that the claims against the current and former officers of KANA shall be dismissed without prejudice. The cases allege violations by more than 300 issuers of stock, including KANA and the underwriters of various securities laws on behalf of a class of plaintiffs who purchased KANA's stock between September 21, 1999 and December 6, 2000 in connection with the Company'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. Management believes we have meritorious defenses to these claims and intends to defend the action vigorously.
On April 16, 2002, Davox Corporation (now Concerto Software) filed an action against the Company 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 the Company 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 representing interest............ (41)
-----------
Present valueto be determined at trial, and award of capital lease obligations... 284
Lessattorneys' fees. This action is in its early stages and has been re-filed in the Circuit Court of Cook County, Illinois. Management believes the Company has meritorious defenses to these claims and intends to defend the action vigorously.
On February 20, 2003, Tumbleweed Communications Corp. filed suit against the Company's customer, Ameritrade, Inc., in the U.S. District Court for the Central District of California, alleging infringement of U.S. Patent No. 6,192,407, and seeking injunctive relief, damages and attorneys fees. The Company has agreed to assume defense of this case on behalf of Ameritrade. Management believes the Company 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 the Company has infringed their past, current portion......................... (176)
-----------
Long-term portionor future intellectual property rights. The Company has in the past been forced to litigate such claims. These claims, whether meritorious or not, could be time- consuming, result in costly litigation, require expensive changes in our methods of capital lease obligations $ 108
===========
doing business or could require the Company to enter into costly royalty or licensing agreements, if available. As a result, these claims could harm the Company's business.
5.As of December 31, 2002, approximately $700,000 was accrued as the Company's estimate of costs related to the above legal proceedings. The ultimate outcome of any litigation is uncertain, and either unfavorable or favorable outcomes could have a material negative impact on the results from operations, consolidated balance sheet and cash flows, due to defense costs, diversion of management resources and other factors.
7. Stockholders' Equity
(a) Private Placement and Initial Public Offering
On February 12, 2002, the Company completed the sale of an aggregate of approximately 2.9 million shares of its common stock to institutional investors in a private placement, for gross proceeds of approximately $34.5 million (before transaction-related costs of $3.1 million).
In November 2001, the Company sold 1,000,000 shares of its common stock for gross and net proceeds of $10.0 million in a private placement transaction, and an additional 10,000 shares for gross and net proceeds of $100,000 to the same investor in December 2001.
In June 2000, the Company sold 250,000 shares of common stock at $500.00 per share in a private placement transaction. KANA received approximately $120.0 million in net proceeds.
In September 1999, KANA consummated its initial public offering in which it sold 759,000 shares of common stock at $75.00 per share. KANA received approximately $51.0 million in cash, net of underwriting discounts, commissions and other offering costs.
(b) Convertible Preferred Stock
Since inception, KANA issued 1,335,111 shares of convertible preferred stock. During 1999, 1,158,138 shares were converted to common stock at the time of the Connectify merger and 176,973 shares were converted to common stock at the initial public offering at a ratio of 1 share of preferred stock for 2 shares of common stock.
(c) Common Stock
TheAs an incentive for continued employment, the Company has issued to founders 1,099,440 shares of common stock, which are subject to repurchase on termination of employment. Such repurchase rights lapse in a series of equal monthly installments over a four-year period ending in June 2003.2000. As of December 31, 2000, all shares were vested.
Certain option holders have exercised options to purchase shares of restricted common stock in exchange for four-year full recourse promissory notes. The notes bear interest at 5.7% and expire on various dates through 2003. The Company has the right to repurchase all unvested shares purchased by the notes at the original exercise price in the event of employee termination. The number of shares subject to this repurchase right decreases as the shares vest under the original option terms, generally over four years. As of December 31, 2001,2002, there were approximately 28,40010,900 shares subject to repurchase. These options were exercised at prices ranging from $0.25$01.45 to $45.00$33.75 with a weighted- average exercise price of $11.55$5.77 per share.
(d) Stock Compensation Plans
The KANA 1999 Employee Stock Purchase Plan ("1999KANA ESPP") allows eligible employees to purchase common stock through payroll deductions of up to 15% of an employee's compensation. Each offering period will have a maximum duration of 24 months and will consist of four six-month purchase periods. The purchase price of the common stock will be equal to 85% of the fair market value per share on the participant's entry date into the offering period, or, if lower, 85% of fair market value per share on each semi-annual purchase date. The 1999KANA ESPP qualifies as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended. As of December 31, 2001, 89,9272002, 93,950 shares were issued from the 1999KANA ESPP.
Upon the merger with Broadbase in June 2001, the Company assumed Broadbase's 1999 Employee Stock Purchase Plan (the "Broadbase ESPP"). The Broadbase ESPP has terms similar terms asto the 1999KANA ESPP. As of December 31, 2001, 94,7832002, 155,691 shares were issued under the Broadbase ESPP. This plan expires with the purchase June 30, 2003.
The Company's 1999 Stock Incentive Plan (the "1999 Plan"), as successor to the 1997 Stock Option/Stock Issuance Plan (the "1997 Plan"), provides for a total of 5,081,9475,804,120 shares of the Company's common stock to be granted to employees, independent contractors, officers, and directors. Options are generally granted at an exercise price equivalent to the estimatedclosing fair market value per share aton the date of grant, as determined by the Company's Board of Directors.grant. All options are granted at the discretion of the Company's Board of Directors and have a term not greater than 10 years from the date of grant. Options are immediately exercisable and generally vest monthly over four years, 25% one year after the grant date and the remainder at a rate of 1/36 per6 month thereafter.cliff. Plans of acquired companies have similar terms as those of the 1999 Plan. Outstanding options under all these plans were assumed in the respective merger or acquisition.
Upon the merger with Broadbase in June 2001, the Company assumed Broadbase's existing 1999 and 2000 Stock Incentive Plans (Broadbase Incentive Plans). These Broadbase Incentive Plans have similar terms as the 1999 Plan. Upon the date of the merger, 2,515,984 and 5,251,061 options were outstanding and available for grant, respectively, under the Broadbase Incentive Plans.
In December 1999, the board of directors approved the 1999 Special Stock Option Plan and 100,000 shares of common stock were reserved for issuance under this plan. The Special Stock Option Plan has similar terms as those of the 1999 Plan, except that options may be granted with an exercise price less than, equal to, or greater than the fair market value of the option shares on the grant date. As of December 31, 2000, 90,401 shares have been granted and 15,377 shares have been cancelled. This plan expired upon the merger with Broadbase in June 2001, resulting in the expiration of 24,976 options available for grant. There are 72,599 outstanding options under this plan at December 31, 2001.
A summary of stock option activity for all plans follows:
Options Outstanding
-----------------------
Weighted
Shares Average
Available Number of Exercise
for Grant Shares Price
----------- ----------- ----------
Balances, December 31, 1998.......... 498,260 77,632 $ 1.90
Additional shares authorized....... 1,197,631 -- --
Options granted.................... (939,474) 939,474 62.40
Options exercised.................. -- (609,624) 10.10
Options canceled................... 30,370 (30,370) 148.80
----------- -----------
Balances, December 31, 1999.......... 786,787 377,112 $ 127.10
Additional shares authorized....... 1,258,310 -- --
Options assumed.................... -- 342,199 168.70
Options granted.................... (2,151,300) 2,151,300 521.30
Options exercised.................. -- (103,637) 41.20
Options canceled and retired....... 279,235 (284,800) 788.80
----------- ----------- ----------
Balances, December 31, 2000.......... 173,032 2,482,174 397.80
Additional shares authorized....... 1,500,000 -- --
Option plan assumed................ 5,251,061 2,515,984 131.97
Options granted.................... (4,636,083) 4,636,083 13.81
Options exercised.................. -- (537,314) 4.81
Options canceled and retired....... 1,399,025 (2,802,287) 208.82
----------- ----------- ----------
Balances, December 31, 2001.......... 3,687,035 6,294,640 48.63
Additional shares authorized....... 2,133,745 --
Options granted.................... (3,563,236) 3,563,236 5.05
Options exercised.................. -- (426,422) 4.06
Options canceled and retired....... 2,186,628 (2,226,601) 62.84
----------- ----------- ----------
Balances, December 31, 2002.......... 4,444,172 7,204,853 $ 48.6325.42
=========== =========== ==========
The following table summarizes information about fixed stock options outstanding at December 31, 2001:2002:
Options Outstanding Options Exercisable
--------------------------------- ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
of shares Life Price of shares Price
----------- ---------- --------- ----------- ---------
$0.00--$0.10--$0.10....... 362,647 9.81.15....... 548,591 9.5 $ 0.10 6,0080.82 191,258 $ 0.05
$0.16--0.30
$1.19--$3.70....... 318,545 8.3 3.26 147,035 2.87
$4.07--1.63....... 1,223,960 9.5 1.62 211,232 1.61
$2.05--$8.76....... 1,185,549 9.1 8.54 366,485 8.29
$9.52--1,592,480 8.7 5.97 560,760 6.80
$9.48--$12.40...... 683,181 9.1 11.85 290,618 11.611,097,358 9.0 10.44 692,531 10.08
$13.80--$14.41..... 2,660,370 9.92,021,057 9.0 14.41 1,000518,679 14.41
$14.57--$18.90..... 388,038 9.5 18.53 60,793 18.71
$19.00--$75.00..... 132,370 8.1 47.29 78,672 48.61421,628 8.5 22.21 167,334 26.26
$90.40--$1,494.00.. 563,940 8.4 416.72 323,713 420.801,395.00.. 299,779 7.3 404.41 192,983 425.59
----------- ---------- --------- ----------- 6,294,640 9.4---------
7,204,853 8.9 $ 48.63 1,274,32425.42 2,534,777 $ 116.2441.50
=========== ========== ========= =========== =========
The weighted average exercise price of stock options outstanding was $48.63 and $397.80 as of December 31, 2000.2001 and December 31, 2000, respectively. With the exception of grants for which the charges are referred to below, the fair value of stock options granted equaled the exercise price on the date of grant.
The Company uses the intrinsic-value method in accounting for its stock-based compensation plans. Accordingly, compensation cost has been recognized in the financial statements for those options issued with exercise prices at less than fair value at date of grant. In 2001, optionsOptions granted with an exercise price below the fair market value resulted in a charge of $1.5 million in 2002 and $2.6 million and cancellationsin 2001. Cancellations of grants with previous associated charges resulted in a reversal of compensation expense of $1.2 million in 2002 and $3.0 million.million in 2001. In connection with the merger with Broadbase, the Company recorded unearned stock-based compensation totaling approximately $15.5 million during the year ended December 31, 2001. These amounts are included as a component of stockholders' equity and are being amortized on an accelerated basis by charges to operations over the vesting period of the options, consistent with the method described in FASB Interpretation No. 28.
Subsequent to the consummation of the BEI and netDialog acquisitions, the Company granted 69,826 under the 1999 Special Stock Option Plan options to certain employees hired from the acquired companies for an exercise price below the fair market value of the common stock. These options were immediately vested on the date of grant and 50% of the options can be exercised 15 months after the grant date and the remaining 50% of the options can be exercised 30 months after the grant date, provided the individual remains an employee of the Company. If the employee is terminated prior to these dates, the options can be exercised after 9.5 years. The difference between the fair market value of the underlying common stock and the exercise price of the options was recorded as compensation expense in the fourth quarter of 1999 in the amount of approximately $60.4 million.
Had compensation cost for the Company's plans been determined consistent with the fair value approach in SFAS No. 123, the Company's net loss and net loss per share would have been as indicated below (in thousands, except per share amounts):
Year Ended December 31,
-------------------------------------------------------------------------
2002 2001 2000
1999
--------------------- ----------- -----------
Net loss:
As reported............................ $ (96,110) $ (942,895) $(3,070,873) $ (118,743)
Pro forma.............................. $ (908,188) $(3,190,035)(128,768) $ (124,603)(896,972) $(3,178,622)
Basic and diluted net loss per share:
As reported............................ $ (4.29) $ (68.61) $ (395.68)
$ (46.08)
Pro forma.............................. $ (66.08)(5.75) $ (411.03)(65.27) $ (48.35)(409.56)
The fair value of the Company's stock-based awards was estimated assuming no expected dividends and the following weighted average assumptions:
Options ESPP
------------------------------ ------------------------------
Interest Interest
Rate Term Volatility Rate Term Volatility
--------- --------- ---------- --------- --------- ----------
2002................ 3.02% 3 yrs 127% 1.27% 6 mths 127%
2001............... 3.62% 3 yrs 100% 1.82% 6 mths 100%
2000............... 6.16% 3 yrs 100% 5.30% 9 mths 100%
1999--Post IPO..... 5.45% 3 yrs 100% 5.14% 6 mths 100%
1999--Pre IPO...... 5.30% 3 yrs -- -- -- --
The weighted average fair value of the employee stock purchase rights granted under the 1999 ESPP during 2002, 2001 and 2000 was $5.71, $18.31, and 1999 was $18.31, $4.99 and $6.55, respectively.
The weighted average fair value and exercise price of the options granted are as follows:
Weighted Average Exercise PricePri Weighted Average Fair Value
------------------------------- ----------------------------------------------------------- ----------------------------
2002 2001 2000 19992002 2001 2000
1999
--------- --------- --------- --------- --------- ----------------- -------- -------- -------- -------- --------
Exercise price does not exceed fair value on grant date.. $ 5.05 $ 14.01 $ 512.20 $ 246.703.64 $ 11.30 $ 334.90 $ 159.40
Exercise price exceeds fair value on grant date....date.......... $ -- $ 12.51 $ 811.20 $ 27.10-- $ 7.56 $ 526.90
Total options............................................ $ 128.30
Total options......................................5.05 $ 13.81 $ 521.30 $ 62.403.64 $ 10.79 $ 342.00
$ 133.90
(e) Warrants
In connection with its convertible debt offerings, netDialog issued warrants to purchase preferred stock. The warrants were initially exercisable into an amount of preferred stock equal to 10% of the value of the convertible debt outstanding. As long as the convertible debt remained outstanding, the amount of preferred stock into which the warrants could be exercised increased in tranches of 3.33% of the value of the debt every two or three months following the initial grant date up to a maximum of an additional 10% of the debt value.
The fair value of each tranche of warrants was measured at each date the exercise terms of the warrants changed. The fair value of the warrants was treated as a discount on the convertible debt and recorded as interest expense. In connection with the acquisition of netDialog, all warrants issued under the arrangement were converted into approximately 7,400 shares of KANA common stock at an exercise price of $121.30 per share, of which, approximately 1,000 shares of KANA common stock were surrendered back to the Company in lieu of paying cash. The full value of the warrants of approximately $1.6 million was expensed during the year ended December 31, 1999.
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 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 December 31, 2001,2002, warrants to purchase 33,07733,997 shares of common stock are fully vested and 19,42328,503 have been forfeited, with the remainder becoming vested upon the achievement of certain performance goals. The vested warrants were valued using the Black-Scholes model resulting in charges totaling $2.0 million of which $1.0 million is being amortized over the remaining term of the agreement and $1.0 million was immediately expensed in the fourth quarter of 2000. The Company will incur a charge to stock-based compensation for the unvested portion of the warrant when performance goals are achieved. As of December 31, 2001,2002, shares of common stock under the warrant which were unvested had a fair value of approximately $389,000$20,000 based upon the fair market value of the Company's common stock at such date.
In June 2001, the Company entered into an agreement to issue to a customer a fully vested and exercisable warrant to purchase up to 25,000 shares of common stock pursuant to a warrant purchase agreement. The Company has recorded deferred stock-based compensation of $330,000 for the warrant using the Black- Scholes model. This amount is beingwas amortized as a reduction to revenue.of revenue in 2001.
In September 2001, the Company issued to a customer a warrant to purchase up to 5,000 shares of common stock 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 warrants were valued using the Black-Scholes model resulting in a charge to stock-based compensation of approximately $29,000 which is being amortized over the five-year term of the agreement.
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 is fully vested and exercisable as of September 2001. The warrants were valued using the Black-Scholes model resulting in a charge of approximately $946,000 which is being amortized over the four-year term of the agreement.
In DecemberNovember 2001, the Company issued to two investment funds warrants to purchase up to 193,059386,118 shares of common stock pursuant toat $10.00 per share in connection with a proposed financing expectedwhich was to be funded upon stockholder approvalhave been completed in February 2002.2002 upon attaining stockholder approval. These warrants were initially exercisable into 193,059 shares. The exercisable warrants were valued using the Black-Scholes model resulting in a charge of approximately $1.0 million to deferred stock- based compensation. On February 1, 2002, the stockholders voted against the proposed financing, which resulted in the Company terminating the share purchase agreement and caused the warrants to become exercisable with respect to all 386,118 shares. The warrants are exercisable for two years from the date the share purchase agreement was terminated. Using the Black-Scholes model, the warrants issued in November 2001 that were initially exercisable were re-valued as of February 1, 2002, and the warrants that became exercisable on February 1, 2002 were valued as of such date, resulting in a charge totaling approximately $1.0 million. This amount has been recorded$4.7 million which was reflected as prepaid financing costs at December 31, 2001 and will be recorded asamortization of stock-based compensation expense in 2002 upon terminationthe statement of operations in the financing agreement as discussed in Note 12.first quarter of 2002.
As of December 31, 2001,2002, there was approximately $22.2$8.6 million of total unearned deferred stock-based compensation remaining to be amortized.amortized, of which $6.3 million is associated with warrants issued.
6.8. Restructuring Costs
In November of 2002, the Company 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 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.
In the past, the Company has experienced substantial increases in expenditures consistent with growth in its operations and personnel. To reduce its expenditures, the Company restructured in several areas, including reduced staffing, expense management and capital spending. In 2001, the Company incurred restructuring charges of approximately $89.0 million related to the reductions in its workforce and costs associated with certain excess leased facilities and asset impairments. Included in the $89.0 million are non-cash charges totaling $28.3 million primarily related to disposals of fixed assets. Cash payments in 2001 totaled $32.4 million and $28.3 million in restructuring liabilities remain on the consolidated balance sheet in accrued restructuring and merger costs at December 31, 2001.
The restructuring costs in 2001 include $26.4 million for assets disposed of or removed from operations. Assets disposed of or removed from operations consisted primarily of leasehold improvements, computer equipment and related software, office equipment, furniture and fixtures.fixtures, and leasehold improvements.
The restructuring costs in 2001 also include $24.4 million, for severance, benefits and related costs due to the reduction in workforce. As of December 31, 2001, the Company had 409 full-time employees. The Company has restructured the organization throughout 2001 with net workforce reductions of approximately 772 employees, or 65% from December 31, 2000, in order to streamline operations, eliminate redundant positions after the merger with Broadbase, and reduce costs and bring staffing and structure in line with industry standards and current economic conditions. These reductions have been significant, particularly in light of the increase of approximately 896 employees upon the acquisition of Broadbase Software in June of 2001.
The restructuring costs in 2001 also include $38.2 million due to the Company's decision to exit and reduce certain facilities. The estimated facility costs are based on the Company's contractual obligations, net of assumed sublease income based on current comparable rates for leases in the respective markets. Should facilities operating lease rental rates continue to decrease in these markets or should it take longer than expected to find a suitable tenant to sublease these facilities, the actual loss could exceed this estimate. Future cash outlays are anticipated through December 2010 unless the Company negotiates to exit the leases at an earlier date.
A summary of restructuring expenses, payments, and liabilities for the yearyears ended and as at December 31, 2001 and 2002 is as follows (in thousands):
Fixed Asset
Severance Facilities Disposals Totals
---------- ------------ ------------ --------
Restructuring Expensereserve at 12/31/2000..... $ -- $ -- $ -- $ --
---------- ------------ ------------ --------
Restructuring charge.................... 24,426 38,168 26,453 89,047
Non-cash charges........................ (1,858) -- (26,453) (28,311)
Payments Accrual
---------made........................... (21,655) (10,750) -- (32,405)
---------- ------------ ------------- ------------ Severance.............--------
Restructuring reserve at 12/31/2001..... 913 27,418 -- 28,331
---------- ------------ ------------ --------
Non-cash reduction of restructuring..... -- (5,086) -- (5,086)
Payments made........................... (695) (12,415) -- (13,110)
Sublease payments received.............. -- 814 -- 814
---------- ------------ ------------ --------
Restructuring reserve at 12/31/2002..... $ 24,426218 $ 1,85810,731 $ 21,655-- $ 913
Facilities............ 38,168 -- 10,750 27,418
Asset disposals....... 26,453 26,453 -- --
--------- ------------ ------------- ------------
Total ................ $ 89,047 $ 28,311 $ 32,405 $ 28,331
=========10,949
========== ============ ============= ============ ========
7.9. Retirement Plan
The Company has a 401(k) retirement plan, which covers substantially all employees. Eligible employees may make salary deferral (before tax) contributions up to a specified amount. The Company, at its discretion, may make additional matching contributions on behalf of the participants of the retirement plan. No contributions were made by the Company for the years ended December 31, 2002, 2001 2000 and 1999.2000.
8. Commitments and Contingencies
(a) Lease Obligations
The Company leases its facilities under noncancelable operating leases with various expiration dates through December 2010. In connection with its existing leases, the Company entered into letters of credit totaling $3.1 million expiring in 2002 through 2010. The letters of credit are supported by restricted cash.
Future minimum lease payments under noncancelable operating leases are as follows (in thousands):
Year Ending December 31, -------------------------- 2002...................................... $ 10,205 2003...................................... 8,407 2004...................................... 7,961 2005...................................... 6,512 2006...................................... 5,586 Thereafter................................ 16,662 ---------- Total mimimum lease payments.............. $ 55,333 ==========
Rent expense, net of sublease payments, was approximately $13.6 million, $8.0 million and $1.6 million for the years ended December 31, 2001, 2000 and 1999, respectively. Sublease payments were approximately $637,000, $324,000 and $212,000 in the years ended December 31, 2001, 2000 and 1999, respectively. Rent expense in 2001 includes $4.9 million of expense related to vacant facilities and is included in restructuring costs.
(b) Litigation
In April 2001, Office Depot, Inc. filed a complaint against the Company claiming that the Company has breached its license agreement with Office Depot. Office Depot is seeking relief in the form of a refund of license fees and maintenance fees paid to the Company, attorneys' fees and costs. The litigation is currently in its early stages. The Company intends to defend this claim vigorously and does not expect it to have a material impact on the results of operations. However, the ultimate outcome of any litigation is uncertain, and either unfavorable or favorable outcomes could have a material negative impact on the results from operations, consolidated balance sheet and cash flows, due to defense costs, diversion of management resources and other factors.
The underwriters for our initial public offering, Goldman Sachs & Co., Lehman Bros, Hambrecht & Quist LLC, Wit Capital Corp as well as the Company and certain current and former officers of the Company have been named as defendants in federal securities class action lawsuits filed in the United States District Court for the Southern District of New York. The cases allege violations of Section 11, 12(a)(2) and Section 15 of the Securities Act of 1933 and violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, on behalf of a class of plaintiffs who purchased the Company's stock between September 21, 1999 and December 6, 2000 in connection with the Company's initial public offering. Specifically, the complaints alleged that the underwriter defendants engaged in a scheme concerning sales of the Company 's securities in the initial public offering and in the aftermarket. These cases are stayed pending selection of lead counsel for the plaintiff class. The Company believes it has good defenses to these claims and intend to defend the action vigorously.
9.10. Income Taxes
The 2002, 2001 2000 and 19992000 income tax benefit differed from the amounts computed by applying the U.S. federal income tax rate of 34% to pretax loss as a result of the following (in thousands):
Year Ended December 31,
-----------------------------------------------------------------------
2002 2001 2000
1999
---------- ----------- ---------------------
Federal tax benefit at statutory rate.......... $ (31,659) $ (320,272) $(1,040,940) $ (40,372)
Stock-based compensation ...................... -- 379 3,861
27,222
Merger-based costs............................. -- 2,584 7,564 726
Net operating losses and temporary
differences, no tax benefit recognized...... 12,160 68,302 26,517 12,382
Goodwill amortization and impairment........... 19,006 248,447 1,005,673 --
Other permanent differences.................... 493 560 (2,675)
42
---------- ----------- ---------------------
Total tax expense.............................. $ -- $ -- $ --
========== =========== =====================
The types of temporary differences that give rise to significant portions of the Company's deferred tax assets and liabilities are set as follows (in thousands):
December 31,
-----------------------
2002 2001
2000---------- ----------- ----------
Deferred tax assets:
Accruals and reserves...................................reserves....................... $ 2,010 $ 4,604
$ 3,017
Property and equipment..................................equipment...................... 4,170 8,379 1,131
Stock option deduction..................................deduction...................... 42,009 35,183
--
Credit carryforwards.................................... -- 1,126
Other...................................................Other....................................... 4,940 967 --
Net operating loss......................................loss.......................... 139,576 149,041
44,869---------- ----------- ----------
Gross deferred tax assets.................................assets..................... 192,705 198,174
50,143
Valuation allowance.......................................allowance........................... (192,705) (198,174)
(50,143)---------- ----------- ----------
Net deferred tax assets (liabilities)...................assets..................... $ -- $ --
========== =========== ==========
The net change in the valuation allowance for the year ended December 31, 20012002 was an increasea decrease of approximately $102.6$5.5 million. Management believes that sufficient uncertainty exists as to whether the deferred tax assets will be realized, and accordingly, a valuation allowance is required.
As of December 31, 2001,2002, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $408.2 million.$388.9 million and $118.2 million, respectively. The federal net operating loss carryforwards, if not offset against future taxable income, will expire from 2011 through 2021.2022.
UnderPursuant to the Tax Reform Act of 1986,Internal Revenue Code, the amounts of and benefits from net operating loss carryforwards may be impaired or limited in certain circumstances. A portion of the net operating loss carryforward and tax credit carryforwards are not included in the deferred tax asset based on these rules. Events which cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50%, as defined, over a three year period. A portion of the net operating loss and tax credit carryforwards subject to potential expiration has not been included in deferred tax assets.
10.A portion of deferred tax assets relating to net operating losses pertain to net operating loss carryforwards resulting from the exercise of employee stock options. When recognized, the tax benefit of these loss and credit carryforwards are accounted for as a credit to additional paid-in-capital rather than a reduction of income tax provision.
11. Discontinued Operation
DuringAs of the quarter ended June 30, 2001, the Company adopted a plan to discontinue the KANA Online business. The Company is no longer seekingseeks new business for KANA Online, but will continuecontinued to service all ongoing contractual obligations it has to its existing customers.customers through April 2002. Accordingly, KANA Online is reported as a discontinued operation for the years ended December 31, 2002, 2001 2000 and 1999. Net assets of the discontinued operation at December 31, 2001, consisted primarily of computers and servers.2000. The estimated loss on the disposal of KANA Online iswas $3.7 million as of June 30, 2001, consisting of an estimated loss on disposal of the assets of $2.6 million and a provision of $1.1 million for the anticipated operating losses during the phase-out period. The loss on disposal was recorded in the second quarter of 2001 and adjusted in the second quarter of 2002, resulting in a gain of $0.4 million.
This operation has been presented as a discontinued operation for all periods presented. The KANA Online operating results are as follows (in thousands):
Year Ended December 31,
-----------------------------------------------------------
2002 2001 2000
1999
--------- --------- ----------------- -------- --------
Revenues ...................................................................................................... $ -- $ 3,161 $ 6,230 $ 562
Income (loss) from operations of discontinued operation ........ -- (125) 1,173
335
LossGain/(loss) on disposal ............................................................................... 381 (3,667) --
--
--------- --------- ----------------- -------- --------
Total income (loss) on discontinued operations .......................... $ 381 $ (3,792) $ 1,173
$ 335
========= ========= ================= ======== ========
11.12. Related Party TransactionTransactions
During 2001,2002, the Company provided products and consultingsupport services to a company that is affiliated with a director of KANA. The Company recognized approximately $547,000$59,400 in revenue related to the company in the year ended December 31, 2001. 2002.
In addition, the Company purchased software productsand support services from this company in 20012002 totaling approximately $1.0 million.$239,100. The purchase cost of the software isand support was included in fixed assets in 2001. Thisand prepaid maintenance. Management believes that this contract has rates and terms that management believes are comparable with those entered into with independent third parties.
12. Subsequent Events
At a special meeting of the Company's stockholders held on February 1, 2002, the stockholders voted against a proposed issuance of up to $45 million of a Series A convertible preferred stock to two investment funds. Immediately following the stockholder vote, the Company elected to terminate the share purchase agreement with the investment funds. The stockholder vote followed an announcement on January 14, 2002 of the decision by the Company's Board of Directors to withdraw its recommendation that its stockholders vote in favor of the proposed preferred stock transaction. In connection with the proposed transaction and its termination, the investment funds have received warrants, which expire in two years, to purchase a total of approximately 386,000 shares of KANA's common stock at an exercise price of $10.00 per share. The issuance of these warrants will result in approximately $4.7 million of stock-based compensation expense in the first quarter of 2002. The warrants were valued using the Black-Scholes model.
On February 12, 2002, the Company completed the sale of an aggregate of approximately 2.9 million shares of its common stock to institutional investors in a private placement, for gross proceeds of approximately $34.5 million (before transaction-related costs).
INDEPENDENT AUDITORS REPORT ON SCHEDULE
The Board of Directors and StockholdersKana Communications, Inc.:
The audit referred to in our report included herein dated January 20, 2000 included the accompanying financial statement schedule for the year ended December 31, 1999. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audit. In our opinion, the accompanying financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ KPMG LLP
Mountain View, CaliforniaJanuary 20, 2000
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
KANA COMMUNICATIONS, INC.
Balance Additions
at Charged to Balance
Beginning CostsRevenues and at End
of Year Expenses Deductions of Year
--------- -------------------- --------- ---------
Allowance for Doubtful Accounts:
Year ended December 31, 2002....... $ 6,844 $ 57 $ (2,086) $ 4,815
Year ended December 31, 2001....... $ 1,966 13,970 (9,092) $ 6,844
Year ended December 31, 2000....... 366 1,962 (362) 1,966
Additions
Balance Charged to
at Deferred Balance
Beginning Tax Asset at End
of Year Valuation Deductions of Year
--------- ----------- --------- ---------
Deferred Tax Asset Valuation Allowance:
Year ended December 31, 1999....... 110 2562002....... $ 198,174 $ -- 366$ 1,092 $ 197,082
Year ended December 31, 2001....... 50,143 148,031 -- 198,174
Year ended December 31, 2000....... 20,469 29,674 -- 50,143
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Menlo Park, state of California, on the 2928th day of March, 2002.2003.
KANA Software, Inc. | |
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| /s/ CHUCK BAY Chuck Bay
Chief Executive Officer
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KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Chuck Bay, Brett White and Eric Willgohs, and each of them, as such person's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for such person and in such person's name, place and stead, in any and all capacities, to sign any and all amendments to this report on Form 10-K, and to file same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: March 28, 2003 By /s/ CHUCK BAY Chuck Bay
Chief Executive Officer and
Director (Principal Executive Officer)
Date: March 28, 2003 By /s/ JOHN HUYETT John Huyett
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 28, 2003 By /s/ JAMES C. WOOD James C. Wood Chairman of the Board of Directors Date: March 28, 2003 By /s/ TOM GALVIN Tom Galvin Director Date: March 28, 2003 By /s/ KEVIN HARVEY Kevin Harvey Director Date: March 28, 2003 By /s/ MASSOOD ZARRABIAN Massood Zarrabian Director CERTIFICATIONS I,Chuck Bay, certify that: 1. I have reviewed this annual report on Form 10-K of Kana Software, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
I,John Huyett, certify that: 1. I have reviewed this annual report on Form 10-K of Kana Software, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
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