SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarter Ended March 31, 2001
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File number 000-27163
Kana Communications, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 77-0435679
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
740 Bay Road
Redwood City, California 94063
------------------------------
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (650) 298-9282
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
---- ----
On April 30, 2001, approximately 94,612,549 shares of the Registrant's Common
Stock, $0.001 par value, were outstanding.
Kana Communications, Inc.
Form 10-Q
Quarter Ended March 31, 2001
Index
Part I: Financial Information
Item 1: Financial Statements
Unaudited Condensed Consolidated Balance Sheets at March 31, 2001 and December 31, 2000 3
Unaudited Condensed Consolidated Statements of Operations for the Three months ended 4
March 31, 2001 and 2000
Unaudited Condensed Consolidated Statements of Cash Flows for the Three months ended 5
March 31, 2001 and 2000
Notes to the Unaudited Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition and Results of 9
Operations
Item 3: Quantitative and Qualitative Disclosures About Market Risk 30
Part II: Other Information
Item 1. Legal Proceedings 31
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 32
2
Part I: Financial Information
Item 1: Financial Statements
KANA COMMUNICATIONS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
2001 2000
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 20,724 $ 76,202
Short-term investments 275 297
Accounts receivable, net 27,141 43,393
Prepaid expenses and other current assets 12,914 14,866
----------- -----------
Total current assets 61,054 134,758
Property and equipment, net 37,048 40,095
Goodwill and identifiable intangibles, net 109,777 800,000
Other assets 5,258 5,271
----------- -----------
Total assets $ 213,137 $ 980,124
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable $ 1,466 $ 1,456
Accounts payable 11,327 17,980
Accrued liabilities 26,019 35,846
Deferred revenue 23,325 25,242
----------- -----------
Total current liabilities 62,137 80,524
Notes payable, less current portion 75 148
----------- -----------
Total liabilities 62,212 80,672
----------- -----------
Stockholders' equity:
Common stock 94 94
Additional paid-in capital 4,130,391 4,130,231
Deferred stock-based compensation (17,527) (21,639)
Notes receivable from stockholders (4,524) (5,367)
Accumulated other comprehensive loss (1,123) (377)
Accumulated deficit (3,956,386) (3,203,490)
----------- -----------
Total stockholders' equity 150,925 899,452
----------- -----------
Total liabilities and stockholders' equity $ 213,137 $ 980,124
=========== ===========
See accompanying notes to unaudited condensed consolidated financial statements.
3
KANA COMMUNICATIONS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three Months Ended March 31,
-----------------------------------------
2001 2000
--------- --------
Revenues:
License $ 11,857 $ 7,329
Service 12,298 3,359
--------- --------
Total revenues 24,155 10,688
--------- --------
Cost of revenues:
License 633 143
Service (excluding stock-based
compensation of $431 and $815, respectively) 16,829 4,032
--------- --------
Total cost of revenues 17,462 4,175
--------- --------
Gross profit 6,693 6,513
--------- --------
Operating expenses:
Sales and marketing (excluding stock-based
compensation of $1,865 and $1,403,respectively) 26,534 11,210
Research and development (excluding
stock-based compensation of $434
and $819, respectively) 12,949 5,239
General and administrative (excluding
stock-based compensation of $1,382
and $283, respectively) 6,068 1,835
Restructuring costs 19,930 --
Amortization of stock-based compensation 4,112 3,320
Amortization of goodwill and identifiable intangibles 86,852 --
Goodwill impairment 603,446 --
--------- --------
Total operating expenses 759,891 21,604
--------- --------
Operating loss (753,198) (15,091)
Other income & expense, net 302 643
--------- --------
Net loss $(752,896) $(14,448)
========= ========
Basic and diluted net loss per share $ (8.23) $ (0.27)
========= ========
Shares used in computing basic and diluted
net loss per share 91,518 52,550
========= ========
See accompanying notes to unaudited condensed consolidated financial statements.
4
KANA COMMUNICATIONS, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended March 31,
-----------------------------------------
2001 2000
--------- --------
Cash flows from operating activities:
Net loss $(752,896) $(14,448)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 3,911 996
Other non-cash charges 701,712 3,320
Changes in operating assets and liabilities:
Accounts receivable 16,177 (4,940)
Prepaid and other current assets 1,965 (2,323)
Accounts payable and accrued liabilities (3,382) 1,502
Deferred revenue (1,917) 6,273
--------- --------
Net cash used in operating activities (34,430) (9,620)
--------- --------
Cash flows from investing activities:
Sales of short-term investments 22 17,268
Property and equipment purchases (8,166) (5,413)
Acquisition related costs (13,098) --
--------- --------
Net cash (used in) provided by investing
activities (21,242) 11,855
--------- --------
Cash flows from financing activities:
Payments on notes payable (63) (2,846)
Proceeds from issuance of common stock and
warrants 160 75
Payments on stockholders' notes receivable 843 266
--------- --------
Net cash provided by (used in) financing
activities 940 (2,505)
--------- --------
Effect of exchange rate changes on cash and cash
equivalents (746) (11)
--------- --------
Net decrease in cash and cash equivalents (55,478) (281)
Cash and cash equivalents at beginning of period 76,202 18,695
--------- --------
Cash and cash equivalents at end of period $ 20,724 $ 18,414
========= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 45 $ 90
========= ========
See accompanying notes to unaudited condensed consolidated financial statements.
5
KANA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation and Liquidity
The unaudited condensed consolidated financial statements have been prepared
by Kana Communications, Inc. ("Kana" or the "Company") and reflect all
adjustments (all of which are normal and recurring in nature) that, in the
opinion of management, are necessary for a fair presentation of the interim
financial information. The results of operations for the interim periods
presented are not necessarily indicative of the results to be expected for any
subsequent quarter or for the entire year ending December 31, 2001. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted under the Securities and Exchange Commission's ("SEC")
rules and regulations. These unaudited condensed consolidated financial
statements and notes included herein should be read in conjunction with Kana's
audited consolidated financial statements and notes included in Kana's annual
report on Form 10-K for the year ended December 31, 2000.
The Company's consolidated financial statements have been presented on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
incurred a consolidated net loss of approximately $753 million for the three
months ended March 31, 2001. Included in the aggregate net loss is approximately
$603 million related to the long-lived asset impairment for the three months
ended March 31, 2001.
In February 2001, the Company restructured its operations and reduced its
workforce by 25% of its employee base. In April 2001, the Company again
restructured its operations and reduced its workforce by 40% of its then
employee base. As described in Note 10, in April 2001, the Company entered into
a definitive merger agreement with Broadbase Software, Inc. ("Broadbase").
The Company may need additional capital to fund operations. In addition, as
discussed in Note 8, the Company is not in compliance with financial covenants
under its debt agreements. There can be no assurance, however, that such
financing would be available when needed, if at all, or on favorable terms and
conditions. If results of operations for the remainder of 2001 do not meet
management's expectations, the proposed merger with Broadbase is not
consummated, or additional capital is not available, management believes it has
the ability to reduce certain expenditures. The precise amount and timing of the
funding needs cannot be determined accurately at this time, and will depend on a
number of factors, including the market demand for the Company's services and
products, the quality of product development efforts, management of working
capital, and continuation of normal payment terms and conditions for purchase of
services. The Company is uncertain whether its cash balances and cash flow from
operations will be sufficient to fund its operations for the next twelve months.
If the Company is unable to substantially increase revenues, reduce
expenditures, generate cash flows from operations, or consummate the proposed
Broadbase merger, then the Company will need to raise additional funding to
continue as a going concern.
Note 2. Net Loss per Share
Basic net loss per share is computed using the weighted-average number of
outstanding shares of common stock, excluding common stock subject to
repurchase. Diluted net loss per share 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. The following table
presents the calculation of basic and diluted net loss per share:
Three Months Ended March 31,
-----------------------------------------
2001 2000
--------- --------
(in thousands, except per share amounts)
Numerator:
Net loss............................................................ $(752,896) $(14,448)
========= ========
Denominator:
Weighted-average shares of common stock outstanding.................. 94,232 60,865
Less weighted-average shares subject to repurchase................... (2,714) (8,315)
--------- --------
Denominator for basic and diluted calculation........................ 91,518 52,550
========= ========
Basic and diluted net loss per common share........................... $ (8.23) $ (0.27)
========= ========
All 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 are 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):
Three Months Ended March 31,
-----------------------------------------
2001 2000
--------- --------
Stock options and warrants........................................... 21,335 3,646
Common stock subject to repurchase................................... 2,395 6,803
--------- --------
23,730 10,449
========= ========
The weighted average exercise price of stock options outstanding was $39.00
and $12.89 as of March 31, 2001 and 2000, respectively.
6
Note 3. Comprehensive Loss
Comprehensive loss comprises the net loss and foreign currency translation
adjustments. Comprehensive loss was $753.6 million and $14.5 million for the
three months ended March 31, 2001 and 2000, respectively.
Note 4. Stock-Based Compensation
On September 6, 2000, the Company issued to Accenture 400,000 shares of
common stock and a warrant to purchase up to 725,000 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 has recorded a charge of approximately $14.8 million which is being
amortized over the four-year term of the agreement. The portion of the warrant
to purchase 125,000 shares of common stock is fully vested with the remainder
becoming vested upon the achievement of certain performance goals. The vested
warrants were valued using the Black-Scholes model resulting in a charge of $1.0
million which is being amortized over the four-year term of the agreement. The
Company will incur a charge to stock-based compensation for the unvested portion
of the warrant when performance goals are achieved. As of March 31, 2001,
430,000 shares of common stock under the warrant which are unvested had a fair
value of approximately $833,000 based upon the fair market value of our common
stock at such date.
Note 5. Restructuring costs
For the quarter ended March 31, 2001, the Company incurred a restructuring
charge of approximately $20.0 million related to certain excess leased
facilities and a reduction in its workforce. The estimated costs include $14.5
million to exit three leased facilities. The Company intends to terminate or
sublease all or part of these three facilities. The estimated facility costs
are 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 February 2011 unless the Company negotiates
to exit the leases at an earlier date. On February 28, 2001, the Company
restructured its operations by reducing its workforce by approximately 300
employees, or 25% of its employee base. All functional areas of the Company were
affected by the reduction. The affected employees were provided severance and
other benefits. The Company recorded a charge of $5.4 million related to
employee termination costs primarily related to severance. For the quarter
ended March 31, 2001, a charge of approximately $8.0 million was made against
the reserve.
In April 2001, the Company executed a plan to restructure its operations by
effecting a reduction in the workforce by approximately 350 people, or 40% of
its employee base. All functional areas of the Company were affected by the
reduction. The affected employees were provided severance and other benefits. As
of April 30, 2001, the Company has recorded a charge of approximately $4.2
million in connection with this restructuring.
Note 6. Goodwill impairment
The Company has 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 than projected operating results. As a result, the Company
recorded approximately $603 million impairment charge 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 remaining goodwill balance of approximately $110.0 million will be
amortized over its remaining useful life.
7
Note 7. Segment Information
The Company's chief operating decision maker reviews financial information
presented on a consolidated basis, accompanied by disaggregated information
about revenues by geographic region for purposes of making operating decisions
and assessing financial performance. Accordingly, the Company considers itself
to be in a single industry segment, specifically the license, implementation and
support of its software applications. The Company's long-lived assets are
primarily in the United States. Geographic information on revenue for the three
months ended March 31, 2001 and 2000 are as follows (in thousands):
Three Months Ended March 31,
-----------------------------------------
2001 2000
--------- --------
United States $ 20,708 $ 9,578
International 3,447 1,110
--------- --------
$ 24,155 $ 10,688
========= ========
During the three months ended March 31, 2001, one customer represented more
than 10% of total revenues. During the three months ended March 31, 2000, no
customer represented more than 10% of total revenues.
Note 8. Notes Payable
The Company maintained a line of credit providing for borrowings of up to
$10,000,000 as of March 31, 2001, to be used for qualified equipment purchases
or working capital needs. Borrowings under the line of credit are collateralized
by all of the Company's assets and bear interest at the bank's prime rate (8.00%
as of March 31, 2001). The line of credit contains certain financial covenants
such as: a quick asset ratio of at least 1.75 and a tangible net worth of at
least $60,000,000. As of March 31, 2001, the Company was not in compliance with
its financial covenants. As per the agreement, the bank may, without notice or
demand, declare all obligations immediately due and payable. The Company is
currently in negotiations with the bank to obtain a forbearance agreement. There
is no assurance that these negotiations will be successful. Total borrowings as
of March 31, 2001 were $1,187,000. The entire balance under this line of credit
is due on the expiration date, July 31, 2001.
On May 18, 1999, the Company entered into two term loan obligations
totaling $685,000 of which $354,000 was outstanding at March 31, 2001. The loans
bear interest at a fixed rate of approximately 14.5% and mature in June 2002. As
of April 30, 2001, the Company was not in compliance with the financial covenant
which requires a certain level of unrestricted cash to be maintained.
Note 9. Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". SFAS 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities and is effective in the first quarter of 2001. The
adoption of SFAS 133 did not have any material effect on the Company's results
of operations or financial position.
Note 10. Recent Development
On April 9, 2001, the Company entered into a definitive merger agreement
with Broadbase Software, Inc. ("Broadbase"). Under the terms of the agreement,
shareholders of Broadbase will receive 1.05 shares of the Company's common
stock for each share of Broadbase common stock exchanged. The transaction will
be recorded using the purchase method of accounting for business combinations.
The purchase price of the merger is estimated to be approximately $105 million
using the average fair market value of the Company's common stock for the five
trading days surrounding the date the merger was announced, plus the value of
the estimated options and warrants to be issued by the Company in the merger,
and other costs directly related to the merger. The final purchase price is
dependent on the actual number of shares of common stock exchanged, the actual
number of options and warrants assumed, and actual acquisition related costs.
The final purchase price will be determined upon completion of the merger.
Completion of this merger is expected no later than the third quarter of 2001
and is subject to obtaining all necessary stockholder and regulatory approvals
and to other customary closing conditions. In addition, in connection with the
merger agreement, Broadbase entered into a revolving loan agreement with the
Company under which Broadbase, under certain conditions, agreed to loan up to
$20 million to the Company to fund its operating activities. Revenues and net
loss for Broadbase for the year ended December 31, 2000 were $48.3 million and
$193 million, respectively. Finalization of the revolving loan agreement is
pending consent of the Company's current lender.
8
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Except for historical information contained or incorporated by reference in this
section, the following discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ significantly
from those discussed herein. Factors that could cause or contribute to these
differences include, but are not limited to, those discussed herein with this
quarterly report on Form 10-Q, our annual report on Form 10-K, and our
registration statements on Form S-4, Form S-1 and Form S-3 filed with the
Securities and Exchange Commission. Any forward-looking statements speak only as
of the date such statements are made.
Overview
We are a leading provider of enterprise Relationship Management (eRM)
software solutions that deliver integrated communication and business
applications built on a Web-architectured platform. 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.
In April 2000, we acquired Silknet Software, Inc. and the transaction was
accounted for using the purchase method of accounting.
We derive our revenues from the sale of software product licenses and from
professional services including implementation, consulting, hosting 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, acceptance has occurred, the
license fee is fixed and determinable and collection of the fee is probable. If
the arrangement involves significant customization of the software, the fee,
excluding the portion attributable to maintenance, is recognized using the
percentage-of-completion method. Service revenue includes revenues from
maintenance contracts, implementation, consulting and hosting services. Revenue
from maintenance contracts is recognized ratably over the term of the contract.
Revenue from implementation, consulting and hosting services is recognized as
the services are provided. Revenue under arrangements where multiple products or
services are sold together is allocated to each element based on their relative
fair values.
Our cost of license revenue includes royalties due to third parties for
technology integrated into some of our products, the cost of product
documentation, the cost of the media used to deliver our products and shipping
costs. Cost of service revenue consists primarily of personnel-related expenses,
subcontracted consultants, travel costs, equipment costs and overhead associated
with delivering professional services to our customers.
Our operating expenses are classified into three general categories: sales
and marketing, research and development, and general and administrative. We
classify all charges to these operating expense categories based on the nature
of the expenditures. Although each category includes expenses that are unique to
the category, some expenditures, such as compensation, employee benefits,
recruiting costs, equipment costs, travel and entertainment costs, facilities
costs and third-party professional services fees, occur in each of these
categories.
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 and, for the three months
ended March 31, 2001, incurred a net loss of approximately $753 million. As of
March 31, 2001, we had an accumulated deficit of approximately $4.0 billion.
We believe our future success is contingent upon providing superior customer
service, increasing our customer base and developing our products.
In order to streamline operations, reduce costs and bring our staffing
and structure in line with industry standards, we restructured our
organization in the first quarter of 2001 with workforce reductions of
approximately 300 employees. Additionally, in April 2001, we again reduced our
workforce by approximately 350
9
employees. As of April 30, 2001, we had approximately 570 full-time employees.
As part of these restructurings, we are significantly reducing our facilities
commitments to be more in line with the needs of our reduced workforce.
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, this trend may not continue,
particularly in light of increasing competition in our markets, the worsening
economic outlook and declining expenditures on enterprise software products.
Furthermore, we may not achieve or maintain profitability in the future.
On April 9, 2001, we entered into a definitive merger agreement with
Broadbase Software, Inc. Under the terms of the agreement, stockholders of
Broadbase will receive 1.05 shares of our common stock for each share of
Broadbase common stock exchanged. The transaction will be recorded using the
purchase method of accounting for business combinations. The estimated purchase
price of the merger is estimated to be approximately $105 million using the
average fair market value of our common stock for the five trading days
surrounding the date the merger was announced, plus the value of the estimated
options and warrants to be issued by us in the merger, and other costs directly
related to the merger. The final purchase price is dependent on the actual
number of shares of common stock exchanged, the actual number of options and
warrants assumed, and upon completion of the merger. The final purchase price
will be determined upon completion of the merger. Completion of this merger is
expected no later than the third quarter of 2001 and is subject to obtaining all
necessary stockholder and regulatory approvals and to other customary closing
conditions. Revenues and net loss for Broadbase for the year ended December 31,
2000 were $48.3 million and $193 million, respectively.
We have recently made the decision to terminate our Kana Online service. We
may face increased costs, customer dissatisfaction, negative publicity, loss of
revenues, and legal action by customers resulting from the lack of availability
of the Kana Online service. In addition, our future revenue may be adversely
impacted by our elimination of the Kana Online service.
10
Selected Results of Operations Data
The following table sets forth selected data for periods indicated expressed
as a percentage of total revenues.
Three Months Ended March 31,
-----------------------------------------
2001 2000
--------- --------
Revenues:
License............................................... 49% 69%
Service............................................... 51 31
--------- --------
Total revenues...................................... 100 100
--------- --------
Cost of revenues:
License............................................... 3 1
Service............................................... 70 38
--------- --------
Total cost of revenues.............................. 73 39
--------- --------
Gross profit............................................ 27 61
Selected operating expenses:
Sales and marketing................................... 110 105
Research and development.............................. 54 49
General and administrative............................ 25% 17%
Three Months Ended March 31, 2001 and 2000
Revenues
License revenue increased due primarily to increased market acceptance of our
products, expansion of our product line and increased sales generated by our
expanded sales force from the comparable period. As a percentage of revenue,
license revenue decreased due to the overall decrease in our license business
and higher service revenue.
Service revenue increased from prior periods primarily due to increased
licensing activity, resulting in increased revenue from customer
implementations, system integration projects, maintenance contracts and hosted
service.
Revenues from international sales were $3.4 million and $1.1 million in the
three months ended March 31, 2001 and 2000. Our international revenues were
derived from sales in Europe, Canada, Asia Pacific and Latin America.
Cost of Revenues
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 increased due primarily to third
party software royalties, due to the increased license revenue.
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. Cost of service revenue increased primarily due 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. We anticipate that cost of service revenue will be relatively stable
in absolute dollars in future periods.
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 primarily
to the addition of sales and marketing personnel from internal growth, the
expansion of our international sales offices, an increase in sales commissions
11
associated with increased revenues and higher marketing costs due to expanded
advertising and promotional activities. We anticipate that sales and marketing
expenses will be relatively stable in absolute dollars, but will vary as a
percentage of total revenues from period to 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 primarily due to the
addition of personnel, product development and related benefits, and consulting
expenses. We expect to continue to make investments in research and development,
but anticipate that research and development expenses will be relatively stable
in absolute dollars, and will vary as a percentage of total revenues from period
to period.
General and Administrative. General and administrative expenses consist
primarily of compensation and related costs for administrative personnel, legal,
accounting and other general corporate expenses. General and administrative
expenses increased primarily due to increased personnel from internal growth,
additional allowances for doubtful accounts and increases in legal and other
professional service provider fees. We anticipate that general and
administrative expenses will be relatively stable in absolute dollars, but will
vary as a percentage of total revenues from period to period.
Amortization of Stock-Based Compensation. The Company is amortizing deferred
stock-based compensation on an accelerated basis by charges to operations over
the vesting period of the options, consistent with the method described in FASB
Interpretation No. 28.
As of March 31, 2001, there was approximately $18.0 million of total unearned
deferred stock-based compensation remaining to be amortized.
The amortization of stock-based compensation by operating expense is detailed
as follows (in thousands):
Three Months
Ended March 31,
-----------------------------
2001 2000
-----------------------------
Cost of service.................................................. $ 431 $ 815
Sales and marketing.............................................. 1,865 1,403
Research and development......................................... 434 819
General and administrative....................................... 1,382 283
-----------------------------
Total.......................................................... $4,112 $3,320
=============================
Restructuring Costs. For the quarter ended March 31, 2001, we incurred a
restructuring charge of approximately $20.0 million related to certain excess
leased facilities and a reduction in our workforce. The estimated costs include
$14.5 million to exit three leased facilities. We intend to terminate or
sublease all or part of these three facilities. The estimated facility costs
are 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 February 2011 unless we negotiate to exit
the leases at an earlier date. On February 28, 2001, we restructured our
operations by reducing our workforce by approximately 300 employees, or 25% of
our employee base. All functional areas were affected by the reduction. The
affected employees were provided severance and other benefits. We recorded a
charge of $5.4 million related to employee termination costs primarily related
to severance. For the quarter ended March 31, 2001, a charge of approximately
$8.0 million was made against the reserve.
In April 2001, we executed a plan to restructure our operations by reducing
our workforce by approximately 350 people, or 40% of our employee base. All
functional areas were affected by the reduction.
Goodwill Impairment. We have 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 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
approximately $603 million impairment charge 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 our best estimates
12
as of each date. The remaining goodwill balance of approximately $110.0 million
will be amortized over its remaining useful life.
Other Income (Expense), Net. Other income (expense), net during the quarter
ended March 31, 2001 consists primarily of interest earned on cash and short-
term investments.
Provision for Income Taxes. We have incurred operating losses for all periods
from inception through March 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.
Net Loss. Our net loss was approximately $753.0 million for the three
months ended March 31, 2001 and approximately $4.0 billion since inception. We
have experienced substantial increases in our expenditures since our inception
consistent with growth in our operations and personnel. In addition, goodwill
impairment, amortization of goodwill and identifiable intangibles and stock
based compensation charges have contributed to the significant increase in net
loss. We anticipate that our expenditures will continue to increase in the
future. Although our revenue has grown in recent quarters, we cannot be certain
that we can sustain this growth or that we will generate sufficient revenue to
attain profitability.
Liquidity and Capital Resources
Our operating activities used $34.4 million of cash for the three months
ended March 31, 2001, primarily due to net loss experienced during the period.
Our investing activities used $21.2 million of cash consisting primarily of
payments for Silknet acquisition related costs and purchases of computer
equipment, software and leasehold improvements for the three months ended March
31, 2001.
Our financing activities provided $0.9 million in cash for the three months
ended March 31, 2001, primarily due to proceeds from payments on stockholders'
notes receivable.
We have a line of credit totaling $10.0 million, which is secured by all of
our assets, bears interest at the bank's prime rate (8.0% as of March 31, 2001),
and expires on July 31, 2001. The line of credit contains certain financial
covenants including: a quick asset ratio of at least 1.75 and a tangible net
worth of at least $60,000,000. As of March 31, 2001, we were not in compliance
with our financial covenants. As per the agreement, the bank may, without notice
or demand, declare all obligations immediately due and payable. We are currently
in negotiations with the bank to obtain a forbearance agreement. There is no
assurance that these negotiations will be successful. Total borrowings as of
March 31, 2001 were $1,187,000 under this line of credit. The entire balance
under this line of credit is due on the expiration date, July 31, 2001.
Additionally, we have two term loan obligations totaling $354,000 at March 31,
2001. With respect to this borrowing, as of April 30, 2001, we were not in
compliance with the financial covenant which requires a certain level of
unrestricted cash to be maintained. We have entered into a revolving loan
agreement with Broadbase concurrently with entering into the merger agreement.
Broadbase has agreed to loan up to $20 million to us to fund our operating
activities and has agreed to deposit the entire $20 million in an escrow account
to fund our obligations under the revolving loan agreement. Finalization of the
revolving loan agreement is pending the bank's consent.
We have experienced substantial increases in expenditures since our inception
consistent with growth in our operations and personnel, and we anticipate that
our expenditures will continue to increase in the future. To reduce our
expenditures, we recently restructured in several areas, including reduced
staffing, expense management and capital spending. In the first quarter of 2001,
we reduced our workforce by approximately 25%, in order to streamline
operations, reduce costs and bring our staffing and structure in line with
industry standards. Our estimated quarterly cost savings for this reduction in
workforce is expected to be approximately $9-$11 million and will begin in the
quarter ending June 30, 2001. In addition, we reduced our workforce by
approximately 40% in April 2001. This reduction is expected to create an
estimated quarterly cost savings of approximately $10-$12 million for the
quarter ending September 30, 2001. However, these actions will not be sufficient
for us to obtain a positive cash flow. Our auditors have included a paragraph in
their report for the year ended December 31, 2000, indicating that substantial
doubt exists as to our ability to continue as a going concern. We are uncertain
whether our cash balance, collections on our accounts receivable and funding
from projected operations will be sufficient to meet our working capital and
operating resource expenditure requirements for the next 12 months and believe
it will be necessary for us to substantially increase revenues and reduce
expenditures. If the merger with Broadbase does not close and we are unable to
substantially increase revenues, reduce expenditures and
13
collect upon accounts receivable or if we incur unexpected expenditures, then we
will need to raise additional funds in order to continue as a going concern.
Especially in light of our declining stock price and the extreme volatility in
the technology capital markets, additional funding may not be available on
favorable terms or at all. In addition, although there are no present
understandings, commitments or agreements with respect to any acquisition of
other businesses, products or technologies, other than the definitive merger
agreement to acquire Broadbase Software, Inc., we may, from time to time,
evaluate potential acquisitions of other businesses, products and technologies.
In order to consummate potential acquisitions, we may issue additional
securities or need additional equity or debt financing and any financing may be
dilutive to existing investors.
14
RISKS ASSOCIATED WITH KANA'S BUSINESS AND FUTURE OPERATING RESULTS
Our future operating results may vary substantially from period to period.
The price of our common stock will fluctuate in the future, and an investment in
our common stock is subject to a variety of risks, including but not limited to
the specific risks identified below. 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.
This report contains forward-looking statements that are not historical facts
but rather are based on current expectations, estimates and projections about
our business and industry, 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-looking statements. These statements are not guarantees of future
performance and are subject to risks, uncertainties and other factors, some of
which are beyond our control, are difficult to predict and could cause actual
results to differ materially from those expressed or forecasted in the forward-
looking statements. These risks and uncertainties include those described in
this "Risk Factors Associated with Kana's Business and Future Operating Results"
and elsewhere in this report. Forward-looking statements that were true at the
time made may ultimately prove to be incorrect or false. Readers are cautioned
not to place undue reliance on forward-looking statement, which reflect our
management's view only as of the date of this report. Except as required by
law, we undertake no obligation to update any forward-looking statement, whether
as a result of new information, future events or otherwise.
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. 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 because they are
limited, and we are required to forecast expenses in part on future revenue
projections. Moreover, due to our limited operating history, 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. Many of
these risks are discussed in the subheadings below, and include our ability to:
. attract more customers;
. implement our sales, marketing and after-sales service initiatives, both
domestically and internationally;
. execute our product development activities;
. anticipate and adapt to the changing Internet market;
. attract, retain and motivate qualified personnel;
. respond to actions taken by our competitors;
continue to build an infrastructure to effectively manage growth and
handle any future increased usage; and
integrate acquired businesses, technologies, products and services.
If we are unsuccessful in addressing these risks or in executing our business
strategy, our business, results of operations and financial condition would be
materially and adversely affected.
15
Our quarterly revenues and operating results may fluctuate in future periods and
we may fail to meet expectations, which may 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. 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 in the subheadings below as well as:
. the evolving and varying demand for customer communication software
products and services for e-businesses, particularly our products and
services;
. budget and spending decisions by information technology departments of our
customers;
. costs associated with integrating Broadbase and our other recent
acquisitions, and costs associated with any future acquisitions;
. our ability to manage our expenses;
. the timing of new releases of our products;
. the discretionary nature of our customers' purchasing and budgetary
cycles;
. changes in our pricing policies or those of our competitors;
. the timing of execution of large contracts that materially affect our
operating results;
. the mix of sales channels through which our products and services are
sold;
. the mix of our domestic and international sales;
. costs related to the customization of our products;
. our ability to expand our operations, and the amount and timing of
expenditures related to this expansion;
. decisions by customers and potential customers to delay purchasing our
products; and
. global economic conditions, as well as those specific to large enterprises
with high e-mail volume.
We also often offer volume-based pricing, which may affect operating margins.
Most of our expenses, such as employee compensation and rent, are relatively
fixed in the short term. Moreover, our expense levels are 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. Therefore, this revenue shortfall would
have a disproportionate effect on our expected operating results for that
quarter. In addition, because our service revenue is largely correlated with our
license revenue, a decline in license revenue could also cause a decline in
service revenue in the same quarter or in subsequent quarters.
Due to the foregoing factors, we believe that quarter-to-quarter comparisons
of our operating results are not a good indication of our future performance.
We have a history of losses and may not be profitable in the future and may not
be able to generate sufficient revenue or funding to continue as a going concern
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 a result of accumulated operating losses, we have a
significant accumulated deficit. This has caused some of our potential customers
to question our viability, which has in turn hampered our ability to sell some
of our products. Since inception, we have funded our business primarily through
selling our stock, not from cash generated by our business. Our growth in recent
periods has been from a limited base of customers, and we may not be able to
increase revenues sufficiently to keep pace with our growing expenditures. We
may not be able to increase our revenue growth in the future. Specifically, as a
result of uncertainties in our business, we have experienced and expect to
continue to experience difficulties in collecting outstanding receivables from
our customers and
16
attracting new customers. As a result, we expect to continue to experience
losses and negative cash flows, even if sales of our products and services
continue to grow, and we may not generate sufficient revenues to achieve
profitability in the future. If we do achieve profitability, we may not be able
to sustain or increase any profitability on a quarterly or annual basis in the
future. Accordingly, we plan to reduce our operating expenses and may require
additional financing. There can be no assurance that we will be able to achieve
expense reductions or that any such financing would be available on acceptable
terms, if at all. With the decline in our stock price, any such financing is
likely to be dilutive to existing stockholders. Our auditors have included a
paragraph in their report for the year ended December 31, 2000 indicating that
substantial doubt exists as to our ability to continue as a going concern.
We may incur non-cash charges related to issuances of our equity which could
harm our operating results
In connection with the issuance of 400,000 shares of our common stock and a
warrant to purchase up to 725,000 shares of our common stock to Accenture
pursuant to a stock and warrant purchase agreement dated September 6, 2000, we
will incur substantial charges to stock-based compensation. With respect to the
400,000 shares of common stock, we recorded $14.8 million of deferred stock-
based compensation which is being amortized over the four-year term of our
alliance with Accenture based upon the fair market value of our common stock on
September 6, 2000, the date of closing, of $37.125 per share. With respect to
the warrant, 125,000 shares of common stock were fully vested and exercisable
under the warrant and were valued on September 6, 2000 using the Black-Scholes
model and are being amortized over four years. On the unearned portion of the
warrant, we will incur a charge to stock-based compensation when certain
performance goals are achieved. This charge will be measured using the Black-
Scholes valuation model and the fair market value of our common stock at the
time of achievement of these goals. Accordingly, significant increases in our
stock price could result in substantial non-cash accounting charges and
variations in our results of operations. In addition, we may issue additional
warrants in the future that may result in adverse accounting charges.
We may be unable to hire and retain the skilled personnel necessary to develop
our engineering, professional services and support capabilities in order to
continue to grow
We may increase our sales, marketing, engineering, professional services and
product management personnel in the future. Competition for these individuals is
intense, and we may not be able to attract, assimilate or retain highly
qualified personnel in the future. Our business cannot continue to grow if we
cannot attract qualified personnel. Our failure to attract and retain the highly
trained personnel that are integral to our product development and professional
services group, which is the group responsible for implementation and
customization of, and technical support for, our products and services, may
limit the rate at which we can develop and install new products or product
enhancements, which would harm our business. We may 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. Since our inception, a
number of employees have left or have been terminated, and we expect to lose
more employees in the future. Recently, we restructured our organization and
terminated a significant number of employees in the process. Hiring qualified
professional services personnel, as well as sales, marketing, administrative and
research and development personnel, is very competitive in our industry,
particularly in the San Francisco Bay Area, where we are headquartered, due to
the limited number of people available with the necessary technical skills. We
face greater difficulty attracting these personnel with equity incentives as a
public company than we did as a privately held company. 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. In addition, we recently terminated an
offer to allow some of our employees with out-of-the-money stock options to
obtain new options with a lower exercise price. If our retention efforts are
ineffective, employee turnover could increase and our ability to provide client
service and execute our strategy would be negatively affected.
17
Our workforce reduction and financial performance 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 structure in line with industry standards, we recently
restructured our organization in the first four months of 2001 with reductions
in our workforce by approximately 650 employees. There have been and may
continue to be substantial costs associated with the workforce reduction related
to 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 reductions, our ability to respond to
unexpected challenges may be impaired and we may be unable to take advantage of
new opportunities. In addition, many of the employees who were terminated
possessed specific knowledge or expertise, and that knowledge or expertise may
prove to have been important to our operations. In that case, their absence may
create significant difficulties. Further, the reduction in workforce may reduce
employee morale and may create concern among existing employees about job
security, which may lead to increased turnover. This headcount reduction may
subject us to the risk of litigation. In addition, recent trading levels of our
common stock have decreased the value of the stock options granted to employees
pursuant to our stock option plans. As a result of these factors, our remaining
personnel may seek employment with larger, more established companies or
companies they perceive as having less volatile stock prices.
We may face difficulties in hiring and retaining qualified sales personnel to
sell our products and services, which could harm our ability to increase our
revenues in the future
Our financial success depends to a large degree on the ability of our direct
sales force to increase sales to a level required to adequately fund marketing
and product development activities. Therefore, 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 the direct sales
force. Also, it may take a new salesperson a number of months before he or she
becomes 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 we anticipate.
We have appointed a new chief executive officer, a new president, a new interim
chief financial officer, and a new chief operating officer, and the integration
of these officers may interfere with our operations
In February 2001, we announced the appointment of Art. M. Rodriguez as our
interim chief financial officer, replacing Brian K. Allen, our former chief
financial officer. In January 2001, we announced the appointment of James C.
Wood as our new chief executive officer and chairman of the board, in connection
with the January 2001 resignation of our former chief executive officer and
chairman of the board, Michael J. McCloskey, for health reasons. We also
announced the appointment of David B. Fowler as our new president and Nigel K.
Donovan as our new chief operating officer. The transitions of Messrs.
Rodriguez, Wood, Fowler and Donovan have resulted and will continue to result in
disruption to our ongoing operations, and these transitions may materially harm
the way that the market perceives our company and the price of our common stock.
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 addition, changes in the perceived
needs of customers for specific products, features and services 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 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 principal source of competition for the foreseeable future. Our
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 Annuncio, Inc.,
AskJeeves, Inc., Brightware, Inc., Digital Impact, Inc., eGain Communications
Corp., E.piphany, Inc., Inference
18
Corp., Marketfirst, Inc., Live Person, Inc., Avaya, Inc. and Responsys.com. In
addition, we compete with companies providing traditional, client-server based
customer management and communications solutions, such as Clarify Inc. (which
was acquired by Northern Telecom), Alcatel, Cisco Systems, Inc., Lucent
Technologies, Inc., Message Media, Inc., Oracle Corporation, Pivotal
Corporation, Siebel Systems, Inc. and Vantive Corporation (which was acquired by
PeopleSoft, Inc.). Changes in our products may also impact the ability of our
sales force to effectively sell. Furthermore, we may face increased competition
should we expand our product line, through acquisition of complementary
businesses such as Broadbase or otherwise.
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, 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 recently-announced industry consolidations, as well as future
consolidations.
We may not be able to compete successfully against current and future
competitors, and competitive pressures may seriously harm our business.
Our failure to consummate our expected sales in any given quarter could
dramatically harm our operating results because of the large size of typical
orders
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.
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 3 to 12 months in the United States and longer in
foreign countries. Our sales cycle has required pre-purchase evaluation by a
significant number of individuals in our customers' organizations. Along with
third parties that often jointly market our software with us, we invest
significant amounts of time and resources educating and providing information to
prospective customers regarding the use and benefits of our products. Many of
our customers evaluate our software slowly and deliberately, depending on the
specific technical capabilities of the customer, the size of the deployment, the
complexity of the customer's network environment, and the quantity of hardware
and the degree of hardware configuration necessary to deploy our products. In
the event that the current economic downturn were to continue, the sales cycle
for our products may become longer and we may require more resources to complete
sales.
Our stock price has been highly volatile and has experienced a significant
decline, particularly because our business depends on the Internet, 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. In addition, the stock 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, and that 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
19
and a diversion of our management's attention and resources. Our common stock
reached a high of $175.50 and traded as low as $0.50 through April 30, 2001. The
last reported sales price of the shares on May 14, 2001 was $1.66.
Future sales of stock could affect our stock price
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and warrants and shares
to be issued in connection with the merger with Broadbase, in the public market,
the market price of our common stock could fall. These sales also might make it
more difficult for us to sell equity or equity-related securities in the future
at a time and price that we deem appropriate.
Difficulties in implementing our products could harm our revenues and margins
Forecasting our revenues depends upon the timing of implementation of our
products. This 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.
Our business depends on the acceptance of our products and services, and it is
uncertain whether the market will accept our products and services
We are not certain that our target customers will widely adopt and deploy our
products and services. Our future financial performance will depend on the
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.
A failure to manage our internal operating and financial functions could lead to
inefficiencies in conducting our business and subject us to increased expenses
Our ability to offer our products and services successfully in a rapidly
evolving market requires an effective planning and management process. We have
limited experience in managing rapid growth. We have experienced a period of
growth in connection with the mergers we have completed that has placed a
significant strain on our managerial, financial and personnel resources. In
August 1999, we acquired Connectify, and in December 1999, we acquired netDialog
and Business Evolution. On April 19, 2000, we completed our merger with Silknet
Software, Inc. Our business will suffer if we fail to manage this growth
successfully. Moreover, we will need to assimilate substantially all of
Broadbase's operations into our operations if the merger with Broadbase is
completed. Any additional growth will further strain our management, financial,
personnel, internal training and other resources. To manage any future growth
effectively, we must improve our financial and accounting systems, controls,
reporting systems and procedures, integrate new personnel and manage expanded
operations. Any failure to do so could negatively affect the quality of our
products, our ability to respond to our customers and retain key personnel, and
our business in general.
Delays in the development of new products or enhancements to existing products
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
impacted by the resources we have to devote to the suite of products, the rate
of change of competitive products and required company responses to changes in
the demands of our customers. Any failure to do so could harm our business. If
we experience product delays in the future, we may face:
. customer dissatisfaction;
20
. cancellation of orders and license agreements;
. negative publicity;
. loss of revenues;
. slower market acceptance; and
. legal action by customers.
In the future, our efforts to remedy this situation may not be successful and
we may lose customers as a result. Delays in bringing to market new products or
their enhancements, or the existence of defects in new products or their
enhancements, could be exploited by our competitors. If we were to lose market
share as a result of lapses in our product management, our business would
suffer.
We may face increased costs or customer disputes as a result of our recent
decision to eliminate our Kana Online service and our future revenue may be
adversely impacted by our elimination of the Kana Online service
We have recently decided to eliminate our Kana Online service and as a
result, we may face customer dissatisfaction, negative publicity, loss of
revenues, and legal action by customers resulting from the lack of availability
of the Kana Online service. Our Kana Online agreements with customers generally
contain provisions designed to limit our exposure to potential claims, such as
disclaimers of warranties and limitations on liability for special,
consequential and incidental damages. In addition, our Kana Online 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,
any claim by a Kana Online customer, whether or not successful, could harm our
business by increasing our costs, damaging our reputation and distracting our
management. In addition, we may face additional costs resulting from the
termination of the Kana Online service including costs related to the
termination of employees, the disposition of hardware and the termination of our
service contracts related to the Kana Online service. In addition, we may not
be able to obtain additional revenue from our current Kana Online customers
which may reduce our future revenue.
Technical problems with either our internal or outsourced computer and
communications systems could interrupt the Kana Online service
Until such time that we eliminate our Kana Online service, the success of the
Kana Online service will depend on the recruitment and retainment of qualified
staff as well as the efficient and uninterrupted operation of our own and
outsourced computer and communications hardware and software systems. These
systems and operations are vulnerable to damage or interruption from human
error, natural disasters, telecommunications failures, break-ins, sabotage,
computer viruses, intentional acts of vandalism and similar adverse events. We
have entered into an Internet-hosting agreement with two data centers. Exodus
Communications, Inc.'s data center in Santa Clara, California services our west
coast customers and UUNET's data center in Princeton, New Jersey services our
east coast customers. Our operations depend on both Exodus' and UUNET's
ability to protect its and our systems in Exodus' and UUNET's data center
against damage or interruption. Neither data center guarantees that our
Internet access will be uninterrupted, error-free or secure. We have no formal
disaster recovery plan in the event of damage or interruption, and our insurance
policies may not adequately compensate us for any losses that we may incur. Any
system failure that causes an interruption in our service or a decrease in
responsiveness could harm our relationships with customers and result in reduced
revenues.
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 one issued U.S. patent and eight U.S. patent
applications pending relating to our software. Although we have filed four
international patent applications corresponding to four of our U.S. patent
applications, none of our technology is patented outside of the United States.
It is possible that:
. our pending patent applications may not result in the issuance of patents;
21
. any patents issued may not be broad enough to protect our proprietary
rights;
. any issued patent could be successfully challenged by one or more third
parties, which could result in our loss of the right to prevent others
from exploiting the inventions claimed in those patents;
. current and future competitors may independently develop similar
technology, duplicate our products or design around any of our patents;
and
. effective patent protection may not be available in every country in which
we do business.
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. In the United
States, we currently have a registered trademark, "Kana," and seven pending
trademark applications, including trademark applications for our logo and "KANA
COMMUNICATIONS and Design." Outside of the United States, we have two trademark
registrations in the European Union, one trademark registration in Australia,
and we have additional trademark applications pending in Australia, Canada, the
European Union, India, Japan, South Korea and Taiwan. However, despite the
precautions that we have taken:
. laws and contractual restrictions may not be sufficient to prevent
misappropriation of our technology or deter others from developing similar
technologies;
. current federal laws that prohibit software copying provide only limited
protection from software "pirates," and effective trademark, copyright and
trade secret protection may be unavailable or limited in foreign
countries;
. other companies may claim common law trademark rights based upon state or
foreign laws that precede the federal registration of our marks; and
. policing unauthorized use of our products and trademarks is difficult,
expensive and time-consuming, and we may be unable to determine the extent
of this unauthorized use.
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. Third parties
may currently have, or may eventually be issued, patents upon which our products
or technology infringe. Any of these third parties might make a claim of
infringement against us. Many of our software license agreements require us to
indemnify our customers from any claim or finding of intellectual property
infringement. Any litigation, brought by us or others, 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 our products and services, undetected errors are of particular
concern. We have only a few "beta" customers that test new
22
features and functionality of our software before we make these features and
functionalities generally available to our customers. If our software contains
undetected errors or we fail to meet customers' expectations in a timely manner,
we could experience:
. loss of or delay in revenues expected from the new product and an
immediate and significant loss of market share;
. loss of existing customers that upgrade to the new product and of new
customers;
. failure to achieve market acceptance;
. diversion of development resources;
. injury to our reputation;
. increased service and warranty costs;
. legal actions by customers; and
. increased insurance costs.
We may face liability claims that could result in unexpected costs and damage 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, these contractual
limitations on liability may not be enforceable and 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, whether or not successful, could harm our business by
increasing our costs, damaging our reputation and distracting our management.
Our international operations could divert management attention and present
financial issues
Our international operations are located throughout Europe, Australia, Japan,
Singapore and Brazil, and, 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. The 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, we will need to, among other things:
. expand our international sales channel management and support
organizations;
. customize our products for local markets; and
. develop relationships with international service providers and additional
distributors and system integrators.
Our investments in establishing facilities in other countries may not produce
desired levels of revenues. Even if we are able to expand our 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 versions of our software and marketing and distributing
them internationally. Localizing 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
For the three month periods ended March 31, 2001 and March 31, 2000, we
derived approximately 14% and 10%, respectively, of our total revenues from
sales outside North America. We have established offices in the United Kingdom,
Australia, Germany, Japan, Holland, France, Spain, Sweden, Singapore and Brazil.
As a result, we face risks from doing business on an international basis, any of
which could impair our international revenues. We
23
could, in the future, encounter greater difficulty with collecting accounts
receivable, longer sales cycles and collection periods or seasonal reductions in
business activity. In addition, our international operations could cause our
average tax rate to increase. Any of these events could harm our international
sales and results of operations.
International laws and regulations may expose us to potential costs and
litigation
Our international operations will 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, but may in the future, experience
significant foreign currency transaction losses, especially to the extent that
we do not engage in currency hedging.
Our prospects for obtaining additional financing, if required, are uncertain and
failure to obtain needed financing could affect our ability to pursue future
growth
If we fail to complete the merger with Broadbase, we may need to raise
additional funds to develop or enhance our products or services, to fund
expansion, to respond to competitive pressures or to acquire complementary
products, businesses or technologies. We do not have a long enough operating
history to know with certainty whether our existing cash and expected revenues
will be sufficient to finance our anticipated growth. Additional financing may
not be available on terms that are acceptable to us. If we raise additional
funds through the issuance of equity or convertible debt securities, the
percentage ownership of our stockholders would be reduced and these securities
might have rights, preferences and privileges senior to those of our current
stockholders. If adequate funds are not available on acceptable terms, our
ability to fund any potential expansion, take advantage of unanticipated
opportunities, develop or enhance products or services, or otherwise respond to
competitive pressures would be significantly limited.
We have completed four mergers, and those mergers may result in disruptions to
our business and management due to difficulties in assimilating personnel and
operations
We may not realize the benefits from the significant mergers we have
completed. In August 1999, we acquired Connectify, and in December 1999, we
acquired netDialog and Business Evolution. On April 19, 2000, we completed our
merger with Silknet Software, Inc. We may not be able to successfully assimilate
the additional personnel, operations, acquired technology and products into our
business. In particular, we will need to assimilate and retain key professional
services, engineering and marketing personnel. This is particularly difficult
with Business Evolution 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 have 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. These difficulties could
disrupt our ongoing business, distract management and employees or increase
expenses. Acquisitions are inherently risky and we may also face unexpected
costs, which may adversely affect operating results in any quarter.
24
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 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 company or our existing stockholders. In addition, our profitability may
suffer because of acquisition-related costs or amortization costs for acquired
goodwill and other intangible assets.
Our executive officers and directors can exercise significant influence over
stockholder voting matters
As of April 9, 2001, our executive officers and directors, and their
affiliates together control approximately 20.4% of our outstanding common stock,
including shares issuable upon exercise of options that were exercisable within
60 days of April 9, 2001. As a result, these stockholders, if they act together,
will have a significant impact on all matters requiring approval of our
stockholders, including the election of directors and significant corporate
transactions. This concentration of ownership may delay, prevent or deter a
change in control of our company, could deprive our stockholders of an
opportunity to receive a premium for their common stock as part of a sale of our
company or our assets and might affect the market price of our common stock.
We have adopted anti-takeover defenses that could delay or prevent an
acquisition of our company
Our board of directors has the authority to issue up to 5,000,000 shares of
preferred stock. Moreover, 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 our company.
These provisions, coupled with the provisions of the Delaware General
Corporation Law, may delay or impede a merger, tender offer or proxy contest
involving our company. 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 our company.
Risks Related to our Proposed Merger with Broadbase Software, Inc.
We may not achieve the benefits we expect from our proposed merger with
Broadbase
On April 9, 2001, we entered into the merger agreement with Broadbase. We
expect that our merger with Broadbase will result in significant benefits.
Achieving the benefits of the merger depends on the timely, efficient and
successful execution of a number of post-merger events. Key events include:
. integrating the operations and personnel and eliminating redundancies of
the two companies;
. integrating the products and technologies of the two companies;
. offering the existing products and services of each company to the other
company's customers; and
. developing new products and services that utilize the assets of both
companies.
25
We will need to overcome significant issues, however, in order to realize any
benefits or synergies from the merger. The successful execution of these post-
merger events will involve considerable risk and may not be successful. In
general, we cannot assure you that we can successfully integrate or realize the
anticipated benefits of the merger.
Failure to complete the merger could harm our cash position
We also entered into a revolving loan agreement with Broadbase concurrently
with entering into the merger agreement. Pursuant to the terms of the loan
agreement, Broadbase has agreed to make available to us a revolving credit
facility up to an aggregate principal amount of $20.0 million. In addition, we
agreed upon a form of convertible promissory note that we would issue to
Broadbase in exchange for loans under the credit facility. If the merger is
terminated, Broadbase will no longer be obligated to make loans to us, and
Broadbase may declare any of our obligations under the loan agreement to be due
and payable in 30 to 90 days, depending on the reason for the termination, which
may harm our cash position.
Failure to complete the merger could negatively impact our stock price and our
future business and operations
If the merger is not completed for any reason, we may be subject to a number
of material risks, including the following:
. we may be required under certain circumstances to pay to Broadbase a
termination fee of $2.5 million and reimburse Broadbase for expenses
incurred to collect that fee;
. the price of our common stock may decline to the extent that the current
market price of our common stock reflects a market assumption that the
merger will be completed; and
26
. costs incurred by us related to the merger, such as legal, accounting and
a portion of financial advisor fees, must be paid even if the merger is
not completed.
Announcement of the merger may delay or defer customer and supplier decisions
concerning us, which may negatively affect our business
Our customers and suppliers, in response to the announcement of the merger,
may delay or defer decisions concerning us. In addition, our customers or
channel partners may seek to change existing agreements they have with us as a
result of the merger. Any delay or deferral in those decisions or changes in
contracts by our customers or suppliers could have a material adverse effect on
our business, regardless of whether the merger is ultimately completed.
Similarly, current and prospective employees may experience uncertainty about
their future roles with us until the strategies with regard to are announced or
executed. This may adversely affect our ability to attract and retain key
management, sales, marketing and technical personnel.
We have entered into agreements with Broadbase that would severely limit our
ability to combine with a third party if the merger is not completed
If the merger is terminated and our board of directors determines to seek
another merger or business combination, there can be no assurance that we will
be able to find a partner willing to enter into an equivalent or more attractive
agreement than the merger agreement. In addition, while the merger agreement is
in effect and subject to very narrowly defined exceptions, we are prohibited
from soliciting, initiating or encouraging or entering into certain
extraordinary transactions, such as a merger, sale of assets or other business
combination, with any party other than Broadbase. These factors could also
adversely affect our stock price.
The stock option we have granted to Broadbase under the stock option
agreement gives Broadbase the right to purchase up to 19.9% of our common stock
at a favorable price, less any amounts previously converted under the revolving
loan agreement with Broadbase. The stock option is exercisable by Broadbase upon
certain events associated with a competing transaction between us and a third
party. The distribution and license agreement between us and Broadbase gives
Broadbase a worldwide license to all of our intellectual property at a favorable
royalty, including the right under certain circumstances to receive our source
code, currently being held in escrow, and does not terminate upon the
termination of the merger agreement. The revolving loan agreement between us and
Broadbase must be repaid within 30 days of specified events, including events
relating to breach of the non-solicitation provisions of the merger agreement.
The terms of the revolving loan agreement, the stock option and the distribution
and license agreement, either alone or in combination with each other, will make
it substantially more difficult for us to pursue a competing transaction with a
third party because of the obstacles posed by these agreements to a potential
third party suitor. For example, a third party who proposed to merge with us in
an alternate transaction might have to negotiate with a 19.9% stockholder
opposed to the alternate transaction who holds a license to all of our
intellectual property and might have to agree to pay our outstanding debt under
the revolving loan agreement.
Our company and Broadbase have both acquired several companies in the recent
past and our ability to successfully integrate those companies or Broadbase may
be negatively impacted by the merger
In the past 18 months, Broadbase has acquired Rubric, Inc., Aperio, Inc.,
Panopticon, Inc., Decisionism, Inc. and Servicesoft, Inc. and Broadbase needs to
complete the assimilation of these companies' operations into its operations. In
the past 18 months, we have acquired Silknet Software, Inc., Business Evolution,
Inc., netDialog, Inc. and Connectify, Inc. and we need to complete the
assimilation of these companies' operations into our operations. Our merger of
with Broadbase will require that we assimilate the operations of Broadbase into
our operations and in addition may complicate our ability to complete the
assimilation of the operations of Rubric, Aperio, Panopticon, Decisionism,
Servicesoft, Silknet, Business Evolution, netDialog and Connectify. Any failure
to successfully assimilate any of these operations could
27
negatively affect the quality of our products, our ability to respond to our
customers and retain key personnel, and our business in general.
The merger may go forward even though material adverse changes result from the
announcement of the merger, the economy as a whole, industry-wide changes and
other causes
In general, either party can refuse to complete the merger if there is a
material adverse change affecting the other party before the closing. But
certain types of changes will not prevent the merger from going forward, even if
they would have a material adverse effect on us. Changes affecting the economy
as a whole, industry-wide changes, changes in trading prices or volume for
either company's stock and changes resulting from the announcement of the merger
will not allow either party to walk away from the merger. In addition, short
term variations in revenue for either company and consequences of the headcount
reductions implemented by both companies are expressly exempted from changes
that will allow one or both parties to abandon the merger. If adverse changes
occur but we must still complete the merger, our stock price may suffer. This in
turn may reduce the value of the merger to our stockholders.
The market price of our common stock may decline as a result of the merger
The market price of our common stock may decline as a result of the merger
if:
. the integration of the two companies is unsuccessful;
. we do not achieve the perceived benefits of the merger as rapidly or to
the extent anticipated by financial or industry analysts or investors; or
. the effect of the merger on our financial results is not consistent with
the expectations of financial or industry analysts or investors.
The market price of our common stock could also decline as a result of
factors related to the merger which may currently be unforeseen.
Our failure to comply with Nasdaq's listing standards could result in our
delisting by Nasdaq from the Nasdaq National Market and severely limit your
ability to sell any of our common stock
Our stock is currently traded on the Nasdaq National Market. 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 will
notify us that we may be delisted 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, which is a condition
to closing the merger with Broadbase. In addition, if our stock is delisted
after the merger, you would not be able to sell our common stock on the Nasdaq
National Market and your ability to sell any of our common stock at all would be
severely, if not completely, limited. Our common stock has reached a high of
$175.50 and traded as low as $0.50 through May 14, 2001.
The role of acquisitions in our growth may be limited, which could seriously
harm our continued operations
In the past, acquisitions have been an important part of our growth strategy.
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 price of our common stock has 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, which could adversely affect our
operating results and financial condition.
28
Risks Related to Our Industry
Our failure to manage multiple technologies and technological change could harm
our future product demand
Future versions of hardware and software platforms embodying new technologies
and the emergence of new industry standards could render our products obsolete.
The market for enterprise relationship management software is characterized by:
. rapid technological change;
. frequent new product introductions;
. changes in customer requirements; and
. evolving industry standards.
Our products are designed 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. For example, the
server component of the current version of our products runs on the Windows NT
operating system from Microsoft, and we may be forced to ensure that all
products and services are compatible with UNIX and other operating systems to
meet the demands of our customers. If we cannot successfully develop these
products in response to customer demands, our business could suffer. Also, 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. This may result in uncertainty relating to
the timing and nature of new product announcements, introductions or
modifications, which may cause confusion in the market and harm our business. If
we fail to modify or improve our products in response to evolving industry
standards, our products could rapidly become obsolete, which would harm our
business.
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
We must continually improve the performance, features and reliability of our
products, particularly in response to competitive offerings. Our success
depends, in part, on our ability to enhance our existing software and to develop
new services, functionality and technology that address the increasingly
sophisticated and varied needs of our prospective customers. If we do not
properly identify the feature preferences of prospective customers, or if we
fail to deliver features that meet the requirements of these customers, our
ability to market our products successfully and to increase our revenues could
be impaired. The development of proprietary technology and necessary service
enhancements entails significant technical and business risks and requires
substantial expenditures and lead time.
If the Internet and web-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-based communications. Many of our customers have
business models that are based on the continued growth of the Internet.
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 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. If
businesses do not continue to accept the Internet and e-mail as media of
communication, our business will suffer.
29
Future regulation of the Internet may slow our growth, resulting in decreased
demand for our products and services and increased costs of doing business
Due to the increasing popularity and use of the Internet, it is possible that
state, federal and foreign regulators could adopt laws and regulations that
impose additional burdens on those 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 Kana
Connect product, 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. Our costs could increase and our growth could be harmed by
any new legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the Internet and other online
services.
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.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
As of March 31, 2001, we maintained cash and cash equivalents and short-term
investments of $21 million. We also have a line of credit and notes payable
totaling $1.5 million. Our exposure to market rate risk for changes in interest
rates relates primarily to our investment portfolio. Our investments consist
primarily of short-term municipal bonds, which have an average fixed yield rate
of 5.3%. These all mature within three months. Kana does not consider its cash
equivalents or short-term investments to be subject to interest rate risk due to
their short maturities.
We are exposed to financial market risk from fluctuations in foreign currency
exchange rates. We manage our exposure to these risks through our regular
operating and financing activities.
We develop products in the United States and sell these products in North
America, Europe, Asia, Australia and Latin America. Generally, our sales are
made in local currency. At March 31, 2001 and December 31, 2000, our primary
net foreign currency market exposures were in Japanese yen, Euros and British
pounds. As a result, our financial results 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 our
foreign exchange risk.
Foreign currency rate fluctuations can impact the U.S. dollar translation of
our foreign operations in our consolidated financial statements. In 2000 and
1999, these fluctuations have not been material to our operating results.
30
Part II: Other Information
Item 1. Legal Proceedings.
The Company is not currently a party to any material legal proceedings.
Item 6. Exhibits and Reports on Form 8-K.
(a) Reports on Form 8-K:
1) On January 22, 2001, we filed a current report on Form 8-K,
reporting under Items 5 and 7, regarding the appointment of the
CEO and Chairman of the Board.
2) On January 22, 2001, we filed a current report on Form 8-K,
reporting under Item 7, regarding the unaudited pro forma
condensed financial statement with Silknet Software, Inc.
3) On February 1, 2001, we filed a current report on Form 8-K,
reporting under Items 5 and 7, regarding a change in management.
4) On February 21, 2001, we filed a current report on Form 8-K,
reporting under Item 5, regarding the 2001 annual shareholders
meeting.
31
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.
May 15, 2001 Kana Communications, Inc.
/s/ James C. Wood
------------------
James C. Wood
Chief Executive Officer and Chairman of the Board
(Principal Executive Officer)
/s/ Art M. Rodriguez
---------------------
Art M. Rodriguez
Interim Chief Financial Officer
(Principal Financial and Accounting Officer)
32