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,June 30, 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,Software, 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,Identification No.)
181 Constitution Drive
Menlo Park, California 94063
------------------------------94025
----------------------------
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (650) 298-9282614-8300
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ------- ---
On April 30,July 31, 2001, approximately 94,612,549180,893,919 shares of the Registrant's Common
Stock, $0.001 par value, were outstanding.
Kana Communications,Software, Inc.
Form 10-Q
Quarter Ended March 31,June 30, 2001
Index
Part I: Financial Information
Item 1: Financial Statements
Unaudited Condensed Consolidated Balance Sheets at March 31,June 30, 2001 and December 31, 2000 3
Unaudited Condensed Consolidated Statements of Operations for the Three months and Six
months ended 4
March 31,June 30, 2001 and 2000 4
Unaudited Condensed Consolidated Statements of Cash Flows for the ThreeSix months ended June 5
March 31,30, 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 12
Item 3: Quantitative and Qualitative Disclosures About Market Risk 3037
Part II: Other Information
Item 1. Legal Proceedings 3138
Item 4. Submission of Matters to a Vote of Security Holders 38
Item 6. Exhibits and Reports on Form 8-K 3139
Signatures 3240
2
Part I: Financial Information
Item 1: Financial Statements
KANA COMMUNICATIONS,SOFTWARE, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31,June 30, December 31,
2001 2000
----------- -----------
ASSETS------------
ASSETS
Current assets:
Cash and cash equivalents $ 20,72440,358 $ 76,202
Short-term investments 27555,219 297
Accounts receivable, net 27,14136,527 43,393
Prepaid expenses and other current assets 12,91413,341 14,866
----------- -----------
Total current assets 61,054145,445 134,758
Property and equipment, net 37,04813,961 40,095
Goodwill and identifiable intangibles, net 109,77786,715 800,000
Other assets 5,2587,365 5,271
----------- -----------
Total assets $ 213,137253,486 $ 980,124
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable $ 1,4661,505 $ 1,456
Accounts payable 11,32715,791 17,980
Accrued liabilities 26,01951,198 35,846
Deferred revenue 23,32525,761 25,242
----------- -----------
Total current liabilities 62,13794,255 80,524
Notes payable, less current portion 75361 148
----------- -----------
Total liabilities 62,21294,616 80,672
----------- -----------
Stockholders' equity:
Common stock 94179 94
Additional paid-in capital 4,130,3914,223,591 4,130,231
Deferred stock-based compensation (17,527)(35,842) (21,639)
Notes receivable from stockholders (4,524)(1,814) (5,367)
Accumulated other comprehensive loss (1,123)(1,086) (377)
Accumulated deficit (3,956,386)(4,026,158) (3,203,490)
----------- -----------
Total stockholders' equity 150,925158,870 899,452
----------- -----------
Total liabilities and stockholders' equity $ 213,137253,486 $ 980,124
=========== ===========
See accompanying notes to unaudited condensed consolidated financial statements.
3
KANA COMMUNICATIONS,SOFTWARE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTSSTATEMENT OF OPERATIONS
(In thousands, except per share amounts)data)
Three Months Ended March 31,
-----------------------------------------Six Months Ended
June 30, June 30,
------------------------------------ -----------------------------------
2001 2000 --------- --------2001 2000
--------------- ---------------- --------------- ---------------
Revenues:
License $ 11,8579,587 $ 7,32915,574 $ 21,444 $ 22,903
Service 12,298 3,35912,542 8,280 23,198 10,785
-------- --------- ----------------- ---------
Total revenues 24,155 10,68822,129 23,854 44,642 33,688
-------- --------- ----------------- ---------
Cost of revenues:
License 633 143653 658 1,286 801
Service (excluding stock-based compensation of
$431$277, $875, $708 and $815,$1,690, respectively) 16,829 4,0327,378 9,438 22,823 12,851
-------- --------- ----------------- ---------
Total cost of revenues 17,462 4,1758,031 10,096 24,109 13,652
-------- --------- ----------------- ---------
Gross profit 6,693 6,51314,098 13,758 20,533 20,036
-------- --------- ----------------- ---------
Operating expenses:
Sales and marketing (excluding stock-based
compensation of $1,865$1,599, $1,522, $3,464 and
$1,403,$2,925, respectively) 26,534 11,21013,789 21,338 40,323 32,548
Research and development (excluding stock-based
compensation of $434$278, $880, $712 and $819,$1,699,
respectively) 12,949 5,2396,273 11,059 19,222 16,298
General and administrative (excluding stock-based
compensation of $1,382$96, $316, $1,478 and $283,$599,
respectively) 6,068 1,8352,523 3,747 8,591 5,582
Restructuring costs 19,93034,327 -- 54,257 --
Amortization of deferred stock-based compensation 4,112 3,3202,250 3,593 6,362 6,913
Amortization of goodwill and identifiable
intangibles 86,852 --13,730 247,043 100,582 247,043
Goodwill impairment -- -- 603,446 --
In process research and development -- 6,900 -- 6,900
Merger and transition related costs 6,676 6,564 6,676 6,564
-------- --------- ----------------- ---------
Total operating expenses 759,891 21,60479,568 300,244 839,459 321,848
-------- --------- ----------------- ---------
Operating loss (753,198) (15,091)(65,470) (286,486) (818,926) (301,812)
Other income & expense,(expense), net 302 643(252) 1,247 50 1,891
-------- --------- --------- ---------
Loss from continuing operations (65,722) (285,239) (818,876) (299,921)
Discontinued operation:
Income (loss) from operations of discontinued
operation (383) 295 (125) 532
Loss on disposal, including provision of $1.1
million for operating losses during
phase-out period (3,667) -- (3,667) --
-------- --------- --------- ---------
Net loss $(752,896) $(14,448)$(69,772) $(284,944) $(822,668) $(299,389)
======== ========= ================= =========
Basic and diluted net loss per shareshare:
Loss from continuing operations $ (8.23)(0.72) $ (0.27)(3.58) $ (8.95) $ (4.54)
======== ========= ========= =========
Income (loss) from discontinued operation $ (0.04) $ 0.00 $ (0.04) $ 0.01
======== ========= ========= =========
Net Loss $ (0.76) $ (3.58) $ (8.99) $ (4.53)
======== ========= ========= =========
Shares used in computing basic and diluted net loss
per share 91,518 52,55091,534 79,509 91,526 66,030
======== ========= ================= =========
See accompanying notes to unaudited condensed consolidated financial statements.
4
KANA COMMUNICATIONS,SOFTWARE, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
ThreeSix Months Ended
March 31,
-----------------------------------------June 30,
2001 2000
--------- ------------------
Cash flows from operating activities:
Net loss $(752,896) $(14,448)$(822,668) $ (299,389)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 3,911 9965,878 2,968
Other non-cash charges 701,712 3,320734,509 260,856
Changes in operating assets and liabilities:liabilities,
net of effects from acquisitions:
Accounts receivable 16,177 (4,940)20,845 (17,944)
Prepaid and other current assets 1,965 (2,323)6,372 (7,136)
Accounts payable and accrued liabilities (3,382) 1,502(6,271) 6,294
Deferred revenue (1,917) 6,273(8,139) 12,164
--------- ------------------
Net cash used in operating activities (34,430) (9,620)(69,474) (42,187)
--------- ------------------
Cash flows from investing activities:
Sales of short-term investments 22 17,26831,433
Property and equipment purchases (8,166) (5,413)
Acquisition related costs (13,098) --(4,238) (11,742)
Acquisitions, net of cash acquired 36,107 43,135
--------- ------------------
Net cash (used in) provided by investing activities (21,242) 11,85531,891 62,826
--------- ------------------
Cash flows from financing activities:
Payments on notes payable (63) (2,846)(417) (3,034)
Proceeds from issuance of common stock and
warrants 160 75504 123,355
Payments on stockholders' notes receivable 843 2662,361 406
--------- ------------------
Net cash provided by (used in) financing activities 940 (2,505)2,448 120,727
--------- ------------------
Effect of exchange rate changes on cash and cash
equivalents (746) (11)(709) (301)
--------- ------------------
Net decreaseincrease (decrease) in cash and cash equivalents (55,478) (281)(35,844) 141,065
Cash and cash equivalents at beginning of period 76,202 18,695
--------- ------------------
Cash and cash equivalents at end of period $ 20,72440,358 $ 18,414159,760
========= ==================
Supplemental disclosure of cash flow information:
Cash paid during the periodyear for interest $ 45102 $ 90130
========= ==================
Issuance of common stock and assumption of options
and warrants related to acquisitions $ 94,064 $3,778,347
========= ==========
See accompanying notes to unaudited condensed consolidated financial statements.
5
KANA COMMUNICATIONS,SOFTWARE, 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,Software, Inc. ("Kana" or the "Company"), previously Kana
Communications, Inc. 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$823 million for the threesix
months ended March 31,June 30, 2001. Included in the aggregate net loss is an impairment
charge to reduce goodwill of approximately $603 million related towhich was recorded in
the long-lived asset impairment forfirst quarter of the three months
ended March 31, 2001.
In February 2001,year.
With the Company restructured its operations and reduced its
workforce by 25%acquisition 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 whetherexpects its cash balances and cash flow from
operationsequivalents and short-term investments on hand will be
sufficient to fundmeet its operationsworking capital and capital expenditure needs for the
next twelve12 months. The Company is evaluating various initiatives to improve its
cash position, including raising additional funds to finance its business,
implementing further restrictions on spending, negotiating the early release of
certain restricted cash, and other cash flow initiatives. Additional financing
may not be available on terms that are acceptable to the Company, especially in
the uncertain market climate, and the Company may not be successful in
implementing or negotiating such other arrangements to improve its cash
position. If the Company raises additional funds through the issuance of equity
or convertible debt securities, the percentage ownership of its stockholders
would be reduced and these securities might have rights, preferences and
privileges senior to those of its current stockholders. With the decline in its
stock price, any such financing is unablelikely to substantially increase revenues, reduce
expenditures, generate cash flows frombe dilutive to existing
stockholders. If adequate funds are not available on acceptable terms, the
Company's ability to maintain current operations, fund any potential expansion,
take advantage of unanticipated opportunities, develop or consummate the proposed
Broadbase merger, then the Company will needenhance products or
services, or otherwise respond to raise additional funding to
continue as a going concern.competitive pressures would be significantly
limited.
Note 2. Investments
The Company considers all investments with an original maturity greater than
three months and less than one year to be short-term investments. All
investments with maturities greater than one year are categorized as long-term
investments.
Note 3. 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:
6
Three Months Ended March 31,
-----------------------------------------Six Months Ended
June 30, June 30,
-------- --------
2001 2000 2001 2000
-------- --------- ----------------- ---------
(in thousands, except per share amounts)
Numerator:
Net loss............................................................ $(752,896) $(14,448)Loss from continuing operations $(65,722) $(285,239) $(818,876) $(299,921)
======== ========= ================= =========
Denominator:
Weighted-average shares of common stock outstanding.................. 94,232 60,865outstanding 93,338 85,420 93,785 72,185
Less weighted-average shares subject to repurchase................... (2,714) (8,315)repurchase 1,804 5,911 2,259 6,155
-------- --------- ----------------- ---------
Denominator for basic and diluted calculation........................ 91,518 52,550calculation 91,534 79,509 91,526 66,030
======== ========= ================= =========
Basic and diluted net loss per common share...........................share $ (8.23)(0.72) $ (0.27)(3.58) $ (8.95) $ (4.54)
======== ========= ================= =========
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):
ThreeSix Months Ended
March 31,
-----------------------------------------June 30,
----------------------------
2001 2000
--------- -------------------- ------------
Stock options and warrants........................................... 21,335 3,64649,042 14,624
Common stock subject to repurchase................................... 2,395 6,803
--------- --------
23,730 10,449
========= ========752 5,645
------------ ------------
49,794 20,269
============ ============
The weighted average exercise price of stock options outstanding was $39.00$11.69
and $12.89$58.33 as of March 31,June 30, 2001 and 2000, respectively.
6
Note 3.4. Comprehensive Loss
Comprehensive loss comprises the net loss and foreign currency translation
adjustments. Comprehensive loss was $753.6$69.7 million and $14.5$285.2 million for the
three months ended March 31,June 30, 2001 and 2000, respectively. Comprehensive loss was
$823.4 million and $299.7 million for the six months ended June 30, 2001 and
2000, respectively.
Note 4.5. Stock-Based Compensation
In June 2001, the Company entered into an agreement to issue to a customer a
fully vested and exercisable warrant to purchase up to 250,000 shares of common
stock pursuant to a warrant purchase agreement. The Company has recorded a
charge of $330,000 for the warrant using the Black-Scholes model. This amount is
being amortized as service is rendered as a reduction to revenue.
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,June 30, 2001, 430,000
shares of common stock under the warrant which are unvested had a fair value of
approximately $833,000$877,000 based upon the fair market value of ourthe Company's common
stock at such date.
7
Note 5.6. Legal Proceedings
Kana Software, Inc. and Michael J. McCloskey and Joseph D. McCarthy and
Goldman Sachs & Co., Lehman Bros, Hambrecht & Quist LLC and Wit Capital Corp.
have been named as defendants in federal securities class action lawsuits filed
in the United States District Court for the Southern District of New York. The
cases allege violations of Section 11, 12(a)(2) and Section 15 of the Securities
Act of 1933 and violations of Section 10(b) and Rule 10b-5 of the Securities
Exchange Act of 1934, on behalf of a class of plaintiffs who purchased the
Company's stock between September 21, 1999 and December 6, 2000 in connection
with the Company's initial public offering. Specifically, the complaints alleged
that the underwriter defendants engaged in a scheme concerning sales of Kana's
securities in the initial public offering and in the aftermarket. These cases
are stayed pending selection of lead counsel for the plaintiff class. Although
the Company is in the early stages of analyzing the claims alleged against Kana
and the individual defendants, the Company believes that it has good and valid
defenses to these claims. The Company intends to defend the action vigorously.
On April 24, 2001, Office Depot, Inc. ("Office Depot") filed a complaint
against Kana in the Circuit Court for the 15th District of the State of Florida
claiming that Kana has breached its license agreement with Office Depot. Office
Depot is seeking relief in the form of a refund of license fees and maintenance
fees paid to Kana, attorneys' fees and costs. The litigation is currently in
its early stages and the Company has not received material information or
documentation. Kana intends to defend itself from this claim vigorously and does
not expect it to materially impact our results from operations.
Kana is not currently a party to any other material legal proceedings.
Note 7. Restructuring costs
For the quarterthree and six months ended March 31,June 30, 2001, the Company incurred a
restructuring charge of approximately $20.0$34.3 million and $54.3 million,
respectively, related to the reduction in its workforce and certain excess
leased facilities and a reduction in its workforce. Theasset impairments.
For the three and six months ended June 30, 2001, the estimated costs were
approximately $17.1 million for the assets disposed of or removed from
operations. Assets disposed of or removed from operations consisted primarily
of leasehold improvements, computer equipment and related software, office
equipment, furniture and fixtures. For the three and six months ended June 30,
2001, the estimated costs include $14.5$12.1 million and $17.6 million, respectively,
for severance, benefits and related costs due to the reduction of its workforce.
For the six months ended June 30, 2001, the Company has reduced its workforce by
approximately 770 people, or 65% of its employee base. All functional areas
have been affected by the reductions. For the three and six months ended June
30, 2001, the estimated costs include $5.1 million and $19.6 million,
respectively, due to the Company's decision to exit three leased facilities. The Company intends to terminate or
sublease all or part of these threeand reduce its 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,For the six months ended June 30, 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$54.3 million charge, $24.5
million relates to non-cash charges, cash payments totaled $24.4 million and
other benefits. The Company recorded a charge of
$5.4 million related to
employee termination costs primarily related to severance. Forin restructuring liabilities remain at June 30, 2001. The
restructuring liability is included on 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 reductionbalance sheet 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.accrued liabilities.
Note 6.8. 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 an impairment charge of approximately $603 million impairment charge to reduce goodwill
in the quarter ended March 31, 2001. The charge
8
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$96.2 million will beis being amortized over its remaining useful life.
7
Note 7.9. Segment Information
The Company's chief operating decision maker reviews financial information
presented on a consolidated basis, accompanied by disaggregated information
about revenues by geographic region for purposes of making operating decisions
and assessing financial performance. Accordingly, the Company considers itself
to be in a single industry segment, specifically the license, implementation and
support of its software applications. The Company's long-lived assets are
primarily in the United States. Geographic information on revenue for the three
months and six months ended March 31,June 30, 2001 and 2000 are as follows (in
thousands):
Three Months Ended March 31,
-----------------------------------------Six Months Ended
June 30, June 30,
-------- ---------
2001 2000 --------- --------2001 2000
------- ------- ------- -------
United States $ 20,708 $ 9,578$18,810 $20,921 $37,876 $29,670
International 3,447 1,110
--------- --------
$ 24,155 $ 10,688
========= ========3,319 2,933 6,766 4,018
------- ------- ------- -------
$22,129 $23,854 $44,642 $33,688
======= ======= ======= =======
During the three and six months ended March 31,June 30, 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 8.10. Notes Payable
The Company maintainedhas a line of credit providing for borrowings of up to $10,000,000$5,000,000
as of March 31,June 30, 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(6.75% of March 31,June
30, 2001). The line of credit contains certain financial covenants such as:
maintaining a quick asset ratio of at least 1.75 and a tangible net worth of at
least $60,000,000. As of March 31,June 30, 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,June 30, 2001 were $1,187,000.$1,187,000 and
the line of credit also supported letters of credit totaling $1.3 million. This
line of credit expires on September 30, 2001. The entire balance underCompany is in discussions with
the bank regarding the renewal of this line of credit, is due on the expiration date, July 31, 2001.
On May 18, 1999,and Kana currently
believes that it will be available for renewal should the Company entered into two term loan obligations
totaling $685,000so desire.
However, there can be no assurance the bank will renew the line of which $354,000 was outstanding at March 31, 2001. The loans
bear interest at a fixed rate of approximately 14.5%credit and mature inno
guarantee the terms will be acceptable to the Company.
Note 11. Discontinued Operation
During the quarter ended June 2002. As
of April 30, 2001, the Company was not in compliance withadopted a plan to
discontinue the financial covenant
which requiresKana Online business. The Company will no longer seek new
business but will continue to service all ongoing contractual obligations it has
to its existing customers. Accordingly, Kana Online is reported as a
certain leveldiscontinued operation for the three and six months ended June 30, 2001 and
2000. Net assets of unrestricted cash to be maintained.
Note 9. Recent Accounting Pronouncement
Inthe discontinued operation at June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments30, 2001, consisted
primarily of computers 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.servers. The adoption of SFAS 133 did not have any material effectestimated loss on the Company'sdisposal of Kana
Online is $3.7 million, consisting of an estimated loss on disposal of the
assets of $2.6 million and a provision of $1.1 million for the anticipated
operating losses during the phase-out period. This operation has been presented
as a discontinued operation for all periods presented. The Kana Online
operating results are as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2001 2000 2001 2000
------- ------ ------- ------
Revenues $ 1,311 $1,629 $ 2,953 $2,485
======= ====== ======= ======
Income (loss) from operations of discontinued operation $ (383) $ 295 $ (125) $ 532
Loss on disposal (3,667) -- (3,667) --
------- ------ ------- ------
Total income (loss) on discontinued operations $(4,050) $ 295 $(3,792) $ 532
======= ====== ======= ======
9
Note 12. Acquisition of operations or financial position.
Note 10. Recent DevelopmentBroadbase
On April 9,June 29, 2001, the Company entered into a definitivefinalized the acquisition of Broadbase. In
connection with the 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.outstanding
immediately prior to the consummation of the merger was converted into the right
to receive 1.05 shares of Kana common stock (the "Exchange Ratio") and Kana
assumed Broadbase's outstanding stock options and warrants based on the Exchange
Ratio, issuing approximately 86.7 million shares of Kana common stock and
assuming options and warrants to acquire approximately 26.6 million shares of
Kana common stock. The transaction will
be recordedwas accounted for using the purchase method
of accounting for business combinations.accounting.
The preliminary allocation of the purchase price ofto assets acquired and
liabilities assumed is as follows (in thousands):
Tangible assets acquired............................. $125,144
Deferred compensation................................ 20,234
Liabilities assumed.................................. (36,761)
Deferred credit - negative goodwill.................. (9,446)
--------
Net assets acquired............................... $ 99,171
========
Deferred compensation acquired in connection with the merger iswill be
amortized over a four-year period. Negative goodwill will be amortized over its
estimated to beuseful life of three years.
The estimated purchase price was approximately $105$99.2 million, usingmeasured as the
average fair market value of the Company'sKana's outstanding common stock for the fivefrom April 7 to
April 11, 2001, two trading days surroundingbefore and after the date the merger agreement was
announced plus the Black-Scholes calculated value of the estimated options and warrants to be issuedof
Broadbase assumed by the CompanyKana 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.as follows (in thousands):
Fair market value of common stock.................... $ 81,478
Fair market value of options and warrants assumed.... 12,586
Acquisition-related costs............................ 5,107
--------
Total................................................ $ 99,171
========
In addition, in connection with the Broadbase merger, agreement, Broadbase entered into a revolving loan agreement with the
Company under which Broadbase, under certain conditions, agreed to loan up to
$20Kana recorded $6.7 million to the Company to fund its operating activities. Revenuesof
merger-related integration expenses and transition costs. These amounts
consisted primarily of transitional personnel of $2.2 million and duplicate
facility costs and redundant assets of $4.5 million.
The following unaudited pro forma net revenues, net loss and net loss for Broadbaseper
share data for the yearsix months ended December 31,June 30, 2001 and 2000 were $48.3 million and
$193 million, respectively. Finalizationare based on the
respective historical financial statements of the revolving loan agreement is
pending consentCompany and Broadbase. The pro
forma data reflects the consolidated results of operations as if the merger with
Broadbase occurred at the beginning of each of the periods indicated and
includes the amortization of the resulting negative goodwill and deferred
compensation. The pro forma results include the results of preacquisition
periods for companies acquired by Broadbase prior to its acquisition by Kana.
The pro forma financial data presented are not necessarily indicative of the
Company's current lender.
8results of operations that might have occurred had the transaction
been completed at the beginning of the periods specified, and do not purport to
represent what the Company's consolidated results of operations might be for any
future period.
(Unaudited Pro forma)
Six Months Ended
June 30,
--------
2001 2000
----------- ---------
(In thousands, except per share amounts)
Net revenues $ 71,119 $ 75,740
Net loss $(1,826,311) $(743,801)
Basic and diluted net loss per share $ (10.41) $ (4.87)
Shares used in basic and diluted net loss per share calculation 175,499 152,709
10
Note 13. Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 addresses financial accounting and reporting for business
combinations and supercedes Accounting Principals Board ("APB") No.16, Business
Combinations. The provisions of SFAS No.141 are required to be adopted July 1,
2001. The most significant changes made by SFAS No.141 are: (1) requiring that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001, (2) establishing specific criteria for the
recognition of intangible assets separately from goodwill, and (3) requiring
unallocated negative goodwill to be written off immediately as an extraordinary
gain.
SFAS No.142 primarily addresses the accounting for goodwill and intangible
assets subsequent to their acquisition and supercedes APB No.17, Intangible
Assets. The provisions of SFAS No. 142 are required to be adopted as of January
1, 2002 for calendar year entities. The most significant changes made by SFAS
No. 142 are: (1) goodwill and indefinite lived intangible assets will no longer
be amortized, (2) goodwill will be tested for impairment at least annually at
the reporting unit level, (3) intangible assets deemed to have an indefinite
life will be tested for impairment at least annually, and (4) the amortization
period of intangible assets with finite lives will no longer be limited to forty
years.
The Company will adopt SFAS No.141 effective July 1, 2001 which will result
in the Company accounting for any business combination consummated on or after
that date under the purchase method of accounting. The Company will also apply
the non-amortization provisions of SFAS No. 142 for any business combination
consummated on or after July 1, 2001. The adoption of SFAS No. 141 will not
change the method of accounting used in previous business combinations.
The Company is required upon adoption of SFAS No. 142 effective January 1,
2002, which will result in the Company no longer amortizing its existing
goodwill. At June 30, 2001, goodwill approximated $96.2 million and goodwill
amortization approximated $13.7 million and $100.6 million for the three and
six-months ended June 30, 2001, respectively. In addition, the Company will be
required to measure goodwill for impairment effective January 1, 2002 as part of
the transition provisions. Any impairment resulting from the transition
provisions will be recorded as of January 1, 2002 and will be recognized as the
effect of a change in accounting principle. The Company will not be able to
determine if an impairment will be required until completion of such impairment
test. In addition, at June 30, 2001, negative goodwill approximated $9.4
million. The Company will be required as part of the adoption of SFAS No. 142
to write off the unamortized negative goodwill that exists on January 1, 2002.
This write off will be recognized as the effect of a change in accounting
principle.
11
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 discussionThis report contains forward-looking statements that involveare 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 and uncertainties. Ouruncertainties, some of which are beyond
our control, are difficult to predict and could cause actual results couldto differ
significantlymaterially from those discussed herein.expressed or forecasted in the forward-looking statements.
These risks and uncertainties include those described in under the heading "Risk
Factors Associated with Kana's Business and Future Operating Results" and
elsewhere in this report. Forward-looking statements that could causewere true at the time
made may ultimately prove to be incorrect or contributefalse. Readers are cautioned not to
these
differences include, but are not limited to, those discussed herein with this
quarterly reportplace undue reliance on Form 10-Q,forward-looking statement, which reflect 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 speakmanagement's view only as of the date such statements are made.of this report. Except as required by
law, we undertake no obligation to update any forward-looking statement, whether
as a result of new information, future events or otherwise.
Overview
We are a leading provider of enterprise Customer Relationship Management
(eRM)(eCRM) 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.
On June 29, 2001, we completed a merger with Broadbase under which Broadbase
became our wholly-owned subsidiary. Broadbase is a leading provider of software
solutions that enable companies to conduct highly effective, intelligent
customer interactions through the Internet and traditional business channels,
thereby providing the basis for businesses to improve their customer
acquisition, retention and profitability. Broadbase's web-based product suite
combines operational marketing and service applications with customer analytics.
In connection with the merger, each share of Broadbase common stock
outstanding immediately prior to the consummation of the merger was converted
into the right to receive 1.05 shares of Kana common stock (the "Exchange
Ratio") and Kana assumed Broadbase's outstanding stock options and warrants
based on the Exchange Ratio, issuing approximately 86.7 million shares of Kana
common stock and assuming options and warrants to acquire approximately 26.6
million shares of Kana common stock. The transaction was accounted for using
the purchase method of accounting.
In April 2000, we acquired Silknet Software, Inc. and the transaction was
accounted for using the purchase method of accounting.
In the third quarter of 1999, we initiated our Kana Online business. Our
Kana Online business provided a hosted environment of our software to customers.
Our servers for this business are maintained by third-party service providers.
In the second quarter of 2001, we adopted a plan to discontinue the Kana Online
business. We have accounted for our Kana Online business as a discontinued
operation.
We derive our revenues from the sale of software product licenses and from
professional services including implementation, consulting, 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
12
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.expenses, as well as
noncash charges. As a result, we have incurred substantial losses since
inception and, for the threesix months ended March 31,June 30, 2001, incurred a net loss of
approximately $753$823 million. As of March 31,June 30, 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 and second quarter of 2001 with workforce reductions of approximately
300770 employees. Additionally, in April 2001,With the acquisition of Broadbase, we again reduced our
workforce byadded approximately 350
9
400
employees. As of AprilJune 30, 2001, we had approximately 570 full-time800 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 trendin the past, we may not continue,be
able to do so in the future, particularly in light of increasing competition in
our markets, the worsening
economic outlookweakening economy 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.
1013
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,
-----------------------------------------Six Months Ended
June 30, June 30,
---------------------------------------------------
2001 2000 2001 2000
--------- ----------------- --------- ---------
Revenues:
License............................................... 49% 69%
Service............................................... 51 31License................................ 43% 65% 48% 68%
Service................................ 57 35 52 32
--------- ----------------- --------- ---------
Total revenues......................................revenues....................... 100 100 100 100
--------- ----------------- --------- ---------
Cost of revenues:
License...............................................License................................ 3 1
Service............................................... 70 383 3 2
Service................................ 33 40 51 39
--------- ----------------- --------- ---------
Total cost of revenues.............................. 73 39revenues............... 36 43 54 41
--------- ----------------- --------- ---------
Gross profit............................................ 27 61profit............................. 64 57 46 59
Selected operating expenses:
Sales and marketing................................... 110 105marketing.................... 62 89 90 97
Research and development.............................. 54 49development............... 28 46 43 48
General and administrative............................ 25% 17%administrative............. 11% 16% 19% 16%
Three and Six Months Ended March 31,June 30, 2001 and 2000
Revenues
License revenue increaseddecreased for the three months ended June 30, 2001 compared
to the same period in the prior year due primarily to increaseda decrease in license
transactions. We believe this is due to the overall weakness in the economy and
external market acceptancefactors. The related revenue of our
products, expansionBroadbase is included as of our product line and increased sales generated by our
expanded sales force from the
comparable period.effective date of the merger. For the six months ended June 30, 2001 compared
to the same period in the prior year, license revenue decreased slightly. As a
percentage of total revenue, license revenue decreased due to the overall
decrease in our license business and higher service revenue. We anticipate
revenue will increase as a result of our recent acquisition.
Service revenue increased from the same period in the prior periodsyear primarily
due to increased
licensing activity, resulting in increased revenue from customer implementations, system integration
projects and maintenance contracts and hosted
service.contracts. The related revenue of Broadbase is included
from the effective date of the merger.
Revenues from international sales were $3.4$3.3 million and $1.1$2.9 million in the
three months ended March 31,June 30, 2001 and 2000 and $6.8 million and $4.0 million for
the six months ended June 30, 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 increasedwas relatively flat for the
three months and slightly higher for the six months ended June 30, 2001 compared
to the corresponding periods in the prior year, with the slight increase in the
six-month period due primarily to additional third party software royalties
due toassociated with license revenue. The related expenses of Broadbase are included
as of the increased license revenue.effective date of the merger.
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 increaseddecreased for the three months ended June 30,
2001 compared to the corresponding period in the prior year primarily due to an increasea
reduction in personnel dedicated to supportwho were part of our growing number of customerscustomer advocate
14
program and services organization and related recruiting, travel, related facility and
system costs and third party consulting expenses. Cost of service revenue
increased for the six months ended June 30, 2001 compared to the corresponding
period in the prior period due to higher personnel costs and third party
consulting expenses, particularly in the first three months of 2001. We
anticipate that cost of service revenue will be relatively stable
in absolute dollars in future periods.increase as a result of our recent
acquisition.
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 primarilydecreased for the
three months ended June 30, 2001 compared to the additionsame period in the prior year
primarily as a result of reduction of sales and marketing personnel, from internal growth, the
expansionreductions
of our international sales personnel and offices, an increasedecreases in sales commissions
11
associated with increaseddecreased revenues and higherdecreases in marketing costs, due to expandedprimarily
in advertising and promotional activities. The related expenses of Broadbase are
included as of the effective date of the merger. Sales and marketing expenses
were higher for the six months ended June 30, 2001 compared to the same period
in the prior year due to higher personnel and operating costs in the first three
months of the current period. We anticipate that sales and marketing expenses
will be relatively stableincrease in absolute dollars,the short term as a result of our recent acquisition 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 increaseddecreased for the three months
ended June 30, 2001 compared to the same period in the prior year primarily due
to the additionreduction of personnel product development and related benefits and consulting
expenses.facility costs. The
related expenses of Broadbase are included as of the effective date of the
merger. Research and development expenses were higher for the six months ended
June 30, 2001 compared to the same period in the prior year due to higher
personnel and operating costs in the first three months of the current period.
We expect to continue to make investments in research and development, but
anticipate that research and development expenses will be relatively stableincrease in absolute dollars,the short
term as a result of our recent acquisition in the short term 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, and of
legal, accounting and other general corporate expenses. The related expenses of
Broadbase are included as of the effective date of the merger. General and
administrative expenses increaseddecreased for the three months ended June 30, 2001
compared with the same period in the prior year primarily due to increasedthe reduction
of personnel from internal growth,
additional allowances for doubtful accounts and increasesdecreases in legalrecruiting and other professional service provider fees. General
and administrative expenses were higher for the six months ended June 30, 2001
compared to the same period in the prior year due to higher personnel and
operating costs in the first three months of the current period. We anticipate
that general and administrative expenses will be relatively stableincrease in absolute dollars,the short term as a
result of our recent acquisition, 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 quarterthree and six months ended March 31,June 30, 2001, we
incurred a restructuring charge of approximately $20.0$34.3 million and $54.3
million, respectively, related to the reduction in its workforce and certain
excess leased facilities and a reduction in our workforce. Theasset impairments.
For the three and six months ended June 30, 2001, the estimated costs were
approximately $17.1 million for the assets disposed of or removed from
operations. Assets disposed of or removed from operations consisted primarily
of leasehold improvements, computer equipment and related software, office
equipment, furniture and fixtures. For the three and six months ended June 30,
2001, the estimated costs include $14.5$12.1 million and $17.6 million, respectively,
for severance, benefits and related costs due to the reduction of its workforce.
For the six months ended June 30, 2001, we reduced our workforce by
approximately 770 people, or 65% of its employee base. All functional areas
have been affected by the reductions. For the three and six months ended June
30, 2001, the estimated costs include $5.1 million and $19.6 million,
respectively, due to the decision to exit three leased facilities. We intend to terminate or
sublease all or part of these threeand reduce its 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
15
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,For the six months ended June 30, 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$54.3 million charge, $24.5
million relates to non-cash charges, cash payments totaled $24.4 million and other benefits. We recorded a
charge of
$5.4 million relatedin restructuring liabilities remain at June 30, 2001. The
restructuring liability is included on the balance sheet in accrued liabilities.
Amortization of Stock-Based Compensation. We are amortizing deferred stock-
based compensation on an accelerated basis by charges to employee termination costsoperations over the
vesting period of the options, consistent with the method described in FASB
Interpretation No. 28.
As of June 30, 2001, there was approximately $35.8 million of total unearned
deferred stock-based compensation remaining to be amortized.
The amortization of stock-based compensation by operating expense is detailed
as follows (in thousands):
Three Months Six Months
Ended June 30, Ended June 30,
------------------- -------------------
2001 2000 2001 2000
------- ------- ------- -------
Cost of service..................................................$ 277 $ 875 $ 708 $ 1,690
Sales and marketing.............................................. 1,599 1,522 3,464 2,925
Research and development......................................... 278 880 712 1,699
General and administrative....................................... 96 316 1,478 599
------------------- -------------------
Total..........................................................$ 2,250 $ 3,593 $ 6,362 $ 6,913
=================== ===================
Amortization of Goodwill and Identifiable Intangibles. Amortization of
goodwill and identifiable intangibles for the three months ended June 30, 2001
were $13.7 million compared to $247.0 million in the same period in the prior
year. Amortization for the six months ended June 30, 2001 were $100.6 million
compared to $247.0 million in the same period in the prior year. This decrease
is primarily related to severance. For the impairment charges to goodwill in the fourth 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%2000 and first quarter of our employee base. All
functional areas were affected by the reduction.2001.
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 an impairment charge
of 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.estimates. The remaining goodwill balance, excluding
negative goodwill, of approximately $110.0$96.2 million will beis being amortized over its
remaining useful life.
In Process Research and Development. In connection with the merger of
Silknet, net intangibles of $6.9 million were allocated to in process research
and development for the three and six months ended June 30, 2000.
Merger and Transition Related Costs. In connection with the Broadbase merger,
for the three and six months ended June 30, 2001, we recorded $6.7 million of
transition costs and merger-related integration expenses. These amounts
consisted primarily of transitional personnel costs of $2.2 million and
duplicate facility costs and redundant assets of $4.5 million. For the three and
six months ended June 30, 2000, in connection with the Silknet merger, we
recorded $6.6 million of merger-related integration expenses. These amounts
consisted primarily of merger-related advertising and announcements of $4.5
million and duplicate facility costs of $1.0 million.
Other Income (Expense), Net. Other income (expense), net during the quarterthree and
six months ended March 31,June 30, 2001 consists primarily of interest paid on operating
and capital leases offset by interest income earned. Other income (expense),
net during the three and six months ended June 30, 2000, consisted primarily of
interest earned on cash and short-
term investments.short-term investments, offset by interest expense.
Provision for Income Taxes. We have incurred operating losses for all periods
from inception through March 31,June 30, 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.
16
Discontinued Operation. During the quarter ended June 30, 2001, we adopted a
plan to discontinue the Kana Online business. We will no longer seek new
business but will continue to service all ongoing contractual obligations we
have to our existing customers. Accordingly, Kana Online is reported as a
discontinued operation for the three and six months ended June 30, 2001 and
2000. Net assets of the discontinued operation at June 30, 2001, consisted
primarily of computers and servers. The estimated loss on the disposal of Kana
Online is $3.7 million, consisting of an estimated loss on disposal of the
business of $2.6 million and a provision of $1.1 million for the anticipated
operating losses during the phase-out period.
Revenues from our discontinued operation for the three months ended June 30,
2001, were $1.3 million compared to $1.6 million in the same period in the prior
year. Revenues for the six months ended June 30, 2001 were $3.0 million
compared to $2.5 million in the same period in the prior year.
Net Loss. Our net loss was approximately $753.0$69.8 million for the three months
ended March 31,June 30, 2001 and approximately $4.0 billion since inception. WeIn the past,
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, restructuring costs and
stock
basedstock-based compensation charges have contributed to the significant increase in
net loss. We anticipate that our expenditures will continueincrease due to increasethe recent
acquisition, but will remain relatively stable 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$69.5 million of cash for the threesix months ended
March 31,June 30, 2001, primarily due to the net loss experienced during the period.period
offset by the increase in non-cash charges.
Our investing activities used $21.2provided $31.9 million of cash consisting primarilyresulting from a net
of payments for$49.2 million of acquired cash from the acquisition of Broadbase offset by
Silknet acquisition related costs of $13.1 million and $4.2 million from
purchases of computerproperty and equipment software and leasehold improvements for the threesix months ended March
31,June 30, 2001.
Our financing activities provided $0.9$2.4 million in cash for the threesix months
ended March 31,June 30, 2001, primarily due to proceeds from payments on stockholders'
notes receivable.
At June 30, 2001, we had cash and cash equivalents aggregating $40.3
million and short-term investments totaling $55.2 million. We have a line of
credit totaling $10.0$5.0 million, which is secured by all of our assets, bears
interest at the bank's prime rate (8.0%(6.75% as of March 31,June 30, 2001),
and expires on July 31, 2001.. The line of
credit contains certain financial covenants including: maintaining a quick
asset ratio of at least 1.75 and a tangible net worth of at least $60,000,000.
As of March 31,June 30, 2001, we were not in compliance with our financialthe 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,June 30, 2001 were $1,187,000 under thisand supported letters of credit
totaling $1.3 million. This line of credit. The entire balance
undercredit expires on September 30, 2001. We
are in discussions with the bank regarding the renewal of this line of credit,
is due onand we currently believe that it will be available for renewal should we so
desire. However, there can be no assurance the expiration date,bank will renew the line of
credit and no guarantee the terms will be acceptable to us. In 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 requiresissued a certain levelletter 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 $20credit totaling $5.8 million in an escrow account
to fund our obligations underconnection with a
contractual arrangement.
In the revolving loan agreement. Finalization of the
revolving loan agreement is pending the bank's consent.
Wepast, 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.personnel. To reduce our
expenditures, we recently restructured in several areas, including reduced staffing,
expense management and capital spending. InFor the first quarter of 2001,six months, we reduced
our workforce by approximately 25%65%, 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
whetherWith our acquisition of Broadbase, we expect
our cash balance, collectionsand cash equivalents and short-term investments on our accounts receivable and funding
from projected operationshand will be
sufficient to meet our working capital and operating resourcecapital expenditure requirementsneeds for the
next 12 monthsmonths. We expect to continue to experience negative cash flows
through the remainder of 2001, achieving positive cash flows from operations
in the first quarter of 2002 and believe
it willoverall positive cash flows in the second
quarter of 2002. Specifically, we currently expect that cash and cash
equivalents including short-term investments could reach approximately $30 to
$40 million by the end of 2001, and could be necessary for usslightly lower during the first
half of 2002. We are evaluating various initiatives to substantially increase revenuesimprove our cash
position, including raising additional funds to finance our business,
implementing further restrictions on spending, negotiating the early release
of certain restricted cash and reduce
expenditures.other cash flow initiatives. If the merger with Broadbase does not close and we are unablenot
successful in negotiating early release of certain restricted cash, we expect
our restricted cash balances to substantially increase revenues, reduce expenditures and
13over the short term.
17
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 fundingAdditional financing may not be available on favorable terms or at all. In addition, although therethat are no present
understandings, commitments or agreements with respectacceptable to any acquisition of
other businesses, products or technologies, other thanus,
especially in the definitive merger
agreement to acquire Broadbase Software, Inc.,uncertain market climate, and we may from timenot be successful in
implementing or negotiating such other arrangements to time,
evaluate potential acquisitionsimprove our cash
position. If we raise additional funds through the issuance of other businesses, products and technologies.
In order to consummate potential acquisitions, we may issue additional
securities or need additional 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. With the decline in our stock
price, any such financing and any financing mayis likely to be dilutive to existing investors.
14stockholders. If
adequate funds were not available on acceptable terms, our ability to achieve or
sustain positive cash flows, maintain current operations, fund any potential
expansion, take advantage of unanticipated opportunities, develop or enhance
products or services, or otherwise respond to competitive pressures would be
significantly limited.
18
RISKS ASSOCIATED WITH KANA'S BUSINESS AND FUTURE OPERATING RESULTS
Our future operating results may vary substantially from period to period.
The price of our common stock will fluctuate in the future, and an investment in
our common stock is subject to a variety of risks, including but not limited to
the specific risks identified below. The risks described below are not the only
ones facing our company. Additional risks not presently known to us, or that we
currently deem immaterial, may become important factors that impair our business
operations. Inevitably, some investors in our securities will experience gains
while others will experience losses depending on the prices at which they
purchase and sell securities. Prospective and existing investors are strongly
urged to carefully consider the various cautionary statements and risks set
forth in this report and our other public filings. 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 inIn particular, this "Risk
Factors Associated with Kana's Business and Future Operating Results" and elsewherecontains
cautionary statements that identify important factors that could cause actual
results to differ materially from those anticipated in the forward-looking
statements 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 businessbusiness.
We are still in the early stages of our development, and our limited
operating history makes it difficult to evaluate our business and prospects.
Any evaluation of our business and prospects must be made in light of the risks
and uncertainties often encountered by early-stage companies in Internet-related
markets. We were incorporated in July 1996 and first recorded revenue in
February 1998. Thus, we have a limited operating history upon which you can
evaluate our business and prospects. Due to our limited operating history, it
is difficult or impossible to predict future results of operations. For
example, we cannot forecast operating expenses based on our historical results
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 evaluationand
evolving product offerings, our insights into trends that may emerge and affect
our business are limited. In addition, in June 2001, we completed our
acquisition of Broadbase, which substantially expanded the scale of our
operations. Because we have limited experience operating as a combined company,
our business and prospects must be made in light of the risks and uncertainties
often encountered by early-stage companies in Internet-related markets.is even more difficult to evaluate. 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 maycould cause the price of our common
stock to declinedecline.
Our quarterly revenues and operating results are difficult to predict and may
fluctuate significantly from quarter to quarter particularly because our
products and services are relatively new and our prospects are uncertain. We
believe that period-to-period comparisons of our operating results may not be
meaningful and you should not rely on these comparisons as an indication of our
future performance. If quarterly revenues or operating results fall below the
expectations of investors or public market analysts, the price of our common
stock could decline
19
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;
. uncertainty regarding the timing of the implementation cycle for our
products;
. changes in the level of sales of professional services as compared to
product licenses;
. 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;
. a trend of continuing consolidation in our industry; and
. global economic conditions, as well as those specific to large enterprises
with high e-mail volume.our
customers or our industry.
We also often offer volume-based pricing, which may affect operating margins.
Broadbase, which we recently acquired, has experienced seasonality in its
revenues, with the fourth quarter of the year typically having the highest
revenue for the year. We believe that this seasonality results primarily from
customer budgeting cycles. We expect that this seasonality will continue, and
could increase. In addition, customers' decisions to purchase our products and
services are discretionary and subject to their internal budgets and purchasing
processes. Due to current slowdowns in the general economy, we believe that
many existing and potential customers are reassessing or reducing their planned
technology and internet-related investments and deferring purchasing decisions.
As a result, there is increased uncertainty with respect to our expected
revenues in the remainder of 2001 and in 2002, and further delays or reductions
in business spending for information technology could have a material adverse
effect on our revenues and operating results.
Our expenses are generally fixed and we will not be able to reduce these
expenses quickly if we fail to meet our revenue forecasts.
Most of our expenses, such as employee compensation and rent, are relatively
fixed in the short term. Moreover, our 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
20
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
concernconcern.
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 June 30, 2001, our accumulated operatingdeficit was approximately
$4.0 billion. Our history of 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 fundedAlthough our business primarily through
sellingrevenues grew significantly in 2000, our stock,growth
has not from cash generated by our business.continued at the same rate in 2001. Our revenue growth in recent
periods has been from a limited base of customers,affected
by the increasingly uncertain economic conditions both generally and we may not be able to
increase revenues sufficiently to keep pace within our
growing expenditures. We
may not be able to increase our revenue growth in the future. Specifically, asmarket. 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 or sustain profitability or positive cash flows in the future. If weWe
recently reduced the size of our professional services team and, as a result,
expect to rely more on independent third-party providers for customer services
such as product installations and support. However, if third-parties do achieve profitability,not
provide the support our customers need, we may not be ablerequired to sustain or increase any profitability on a quarterly or annual basis inhire
subcontractors to provide these professional services. Increased use of
subcontractors would harm our revenues and margins because it costs us more to
hire subcontractors to perform these services than to provide the future. Accordingly,services
ourselves. Although we planhave restructured our operations to reduce our operating
expenses, we will need to significantly increase our revenue to achieve
profitability. Our expectations as to when we can achieve positive cash flows,
and as to our future cash balances, are subject to a number of assumptions,
including assumptions regarding general economic conditions and customer
purchasing and payment patterns, many of which are beyond our control. In
addition we may require additional financing. There can be no assurance that we will be able to achieve
expense reductions or that any such financing, wouldwhich might not 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 consummatecomplete our expected sales in any given quarter could
dramatically harm our operating results because of the large size of typical
ordersorders.
Our sales cycle is subject to a number of significant risks, including
customers' budgetary constraints and internal acceptance reviews, over which we
have little or no control. Consequently, if sales expected from a specific
customer in a particular quarter are not realized in that quarter, we are
unlikely to be able to generate revenue from alternate sources in time to
compensate for the shortfall. As a result, and due to the relatively large size
of a typical order, a lost or delayed sale could result in revenues that are
lower than expected. Moreover, to the extent that significant sales occur
earlier than anticipated, revenues for subsequent quarters may be lower than
expected. Consequently, we face difficulty predicting the quarter in which
sales to expected customers will occur. This contributes to the uncertainty of
our future operating results.
We may not be able to forecast our revenues accurately because our products have
a long and variable sales cyclecycle.
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. Consequently, we face difficulty predicting the quarter in
which sales to expected customers will occur. This contributes to fluctuations
in our future operating results. Our sales cycle has required pre-purchase
evaluation by a significant number of individuals in our customers'
organizations. Along with third parties that often jointly market our software
with us, we invest significant amounts of time and resources educating and
providing information to prospective customers regarding the use and benefits of
our products. Many of our customers evaluate our software slowly and
deliberately, depending on the specific technical capabilities of the customer,
the size of the deployment, the complexity of the customer's network
environment, and the quantity of hardware and the degree of hardware
configuration necessary to deploy our products. In the event that the 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 marginsmargins.
21
Forecasting our revenues depends upon the timing of implementation of our
products. This implementationproducts and services. In most sales, we are involved in the installation of our
products at the customer site. We generally recognize revenue from a customer
sale when persuasive evidence of an agreement exists, the product has been
delivered, the arrangement does not involve significant customization of the
software, acceptance has occurred, the license fee is fixed and determinable and
collection of the fee is probable. However, the timing of the commencement and
completion of the installation process is subject to factors that may be beyond
our control, as this process requires access to the customer's facilities and
coordination with the customer's personnel after delivery of the software. In
addition, customers could delay product implementations. Implementation
typically involves working with sophisticated software, computing and
communications systems. If we experience difficulties with implementation or do
not meet project milestones in a timely manner, we could be obligated to devote
more customer support, engineering and other resources to a particular project.
Some customers may also require us to develop customized features or
capabilities. If new or existing customers have difficulty deploying our
products or require significant amounts of our professional services support or
customized features, our revenue recognition could be further delayed and our
costs could increase, causing increased variability in our operating results.
We may incur non-cash charges resulting from acquisitions and equity issuances,
which could harm our operating results.
In connection with the issuance of warrants to purchase up to 725,000 shares
of our common stock to Accenture in September 2000 and warrants to purchase up
to 250,000 shares of our common stock to a customer in June 2001, as well as
other equity rights we may issue, we are incurring substantial charges for
stock-based compensation. Accordingly, significant increases in our stock price
could result in substantial non-cash accounting charges and variations in our
results of operations. Furthermore, we will continue to incur charges to reflect
amortization and any impairment of goodwill and other intangible assets acquired
in connection with our acquisition of Silknet in April 2000, and we may make
other acquisitions or issue additional stock or other securities in the future
that could result in further accounting charges. In particular, a new standard
for accounting for goodwill acquired in a business combination has recently been
adopted. This new standard, which we will adopt for 2002, requires recognition
of goodwill as an asset but does not permit amortization of goodwill. Instead
goodwill must be separately tested for impairment. As a result, our goodwill
amortization charges will cease in 2002. However, it is possible that in the
future, we would incur less frequent, but larger, impairment charges related to
the goodwill already recorded, as well as goodwill arising out of any future
acquisitions. Current and future accounting charges like these could delay our
achievement of net income.
We have appointed an entirely new executive team, and the integration of these
officers may interfere with our operations.
As a result of the merger, most of Broadbase's executives have been appointed
to corresponding positions with us, replacing most of our executive team. We
appointed Chuck Bay as Chief Executive Officer and President, replacing James C.
Wood and David B. Fowler, respectively, both of whom were appointed to their
respective positions in January 2001. We also appointed Brett White as Chief
Financial officer, replacing Art M. Rodriguez who was appointed in February
2001. In addition to Chuck Bay and Brett White, our current management team
consists of Tom Doyle as Chief Operating Officer and Executive Vice President,
Worldwide Sales, Nigel Donovan as Executive Vice President, Services, Fabio
Angelillis as Executive Vice President, Engineering, Chris Maeda as Chief
Technology Officer, Vicki Amon-Higa as Vice President, Organizational
Development, and Bud Michael as Executive Vice President, Marketing, all of whom
other than Mr. Donovan were employees and officers of Broadbase. The transitions
of Mssrs. Bay, White and the other executive team have resulted and will
continue to result in disruption to our ongoing operations. These transitions
may materially harm the way that the market perceives us, which could cause a
decline in the price of our common stock.
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, Kana and
Broadbase restructured their organizations in the first four months of 2001 with
substantial reductions in their collective workforce. 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
22
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 that may prove to have been important to our operations. In that
case, their absence may create significant difficulties. This personnel
reduction may also subject us to the risk of litigation which may adversely
impact our ability to conduct our operations and may cause us to incur
significant expense.
We may be unable to hire and retain the skilled personnel necessary to develop
and grow our business.
Recently, we restructured our organization and terminated a significant
number of employees in the process. This reduction in force may reduce employee
morale and may create concern among existing employees about job security, which
may lead to increased turnover and reduce our ability to meet the needs of our
current and future customers. As a result of the reduction in force, we may
also need to increase our staff to support new customers and the expanding needs
of our existing customers, without compromising the quality of our customer
service. Although a number of technology companies have recently implemented
lay-offs, there remains substantial competition for experienced personnel,
particularly in the San Francisco Bay Area, where we are headquartered, due to
the limited number of people available with the necessary technical skills.
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. Further, our
ability to hire and retain qualified personnel might be diminished as a result
of the acquisition of Broadbase. Employees may experience uncertainty about
their future role with us until post-merger personnel strategies are executed.
Kana and Broadbase have different corporate cultures, and employees of either
company may not want to work for us as a combined company. In addition,
competitors may recruit employees during our integration of Broadbase, as is
common in high technology mergers. If we are unable to retain personnel that
are critical to the successful integration of the companies, we could face
disruptions to operations, loss of key information, expertise or know-how and
unanticipated additional recruitment and training costs. If employee turnover
increases, our ability to provide client service and execute our strategy would
be negatively affected.
We may face difficulties in hiring and retaining qualified sales personnel to
sell our products and services, which could impair our revenue growth.
Our ability to increase revenues in the future depends considerably upon our
success in recruiting, training and retaining additional direct sales personnel
and the success of the direct sales force. We might not be successful in these
efforts. Our products and services require sophisticated sales efforts. There
is a shortage of sales personnel with the qualifications, and competition for
qualified personnel is intense in our industry. Also, it may take a new
salesperson a number of months to become a productive member of our sales force.
Our business will be harmed if we fail to hire or retain qualified sales
personnel, or if newly hired salespeople fail to develop the necessary sales
skills or develop these skills more slowly than anticipated.
We rely on marketing, technology and distribution relationships for the sale of
our products that may generally be terminated at any time, and if our current
and future relationships are not successful, our growth might be limited.
We rely on marketing and technology relationships with a variety of companies
that, in part, generate leads for the sale of our products. These marketing and
technology relationships include relationships with:
. system integrators and consulting firms;
. vendors of e-commerce and Internet software;
. vendors of software designed for customer relationship management or
for management of organizations' operational information;
. vendors of key technology and platforms; and
. demographic data providers.
23
If we cannot maintain successful marketing and technology relationships or if
we fail to enter into additional marketing and technology relationships, we
could have difficulty expanding the sales of our products and our growth might
be limited. While some of these companies do not resell or distribute our
products, we believe that many of our direct sales are the result of leads
generated by vendors of e-business and enterprise applications and we expect to
continue relying heavily on sales from these relationships in future periods.
Our marketing and technology relationships are generally not documented in
writing, or are governed by agreements that can be terminated by either party
with little or no prior notice. In addition, companies with which we have
marketing, technology or distribution relationships may promote products of
several different companies including those of our competitors. If these
companies choose not to promote our products or if they develop, market or
recommend software applications that compete with our products, our business
will be harmed.
In addition, we rely on distributors, value-added resellers, systems
integrators, consultants and other third-party resellers to recommend our
products and to install and support these products. Our recent reduction in the
size of our professional services team increases our reliance on third parties
for product installations and support. If the companies providing these
services fail to implement our products successfully for our customers, we might
be unable to complete implementation on the schedule required by the customers
and we may have increased customer dissatisfaction or difficulty making future
sales as a result. We might not be able to maintain these relationships and
enter into additional relationships that will provide timely and cost-effective
customer support and service. If we cannot maintain successful relationships
with our indirect sales channel partners around the world, we might have
difficulty expanding the sales of our products and our international growth
could be limited.
We face substantial competition and may not be able to compete effectively.
The market for our products and services is intensely competitive, evolving
and subject to rapid technological change. In recent periods, some of our
competitors reduced the prices of their products and services (substantially in
certain cases) in order to obtain new customers. Competitive pressures could
make it difficult for us to acquire and retain customers and could require us to
reduce the price of our products. Our customers' requirements and the
technology available to satisfy those requirements are continually changing.
Therefore, we must be able to respond to these changes in order to remain
competitive. Changes in our products may also impact the ability of our sales
force to sell effectively. 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 may not be able to compete
successfully against current and future competitors, and competitive pressures
may seriously harm our business.
Our competitors vary in size and in the scope and breadth of products and
services offered. We currently face competition for our products from systems
designed by in-house and third-party development efforts. We expect that these
systems will continue to be a 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 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.).
The level of competition we encounter may increase as a result of our
acquisition of Broadbase. As we combine and enhance the Kana and Broadbase
product lines to offer a more comprehensive e-Business software solution, we
will increasingly compete with large, established
24
providers of customer management and communication solutions such as Siebel
Systems, Inc. as well as other competitors. Our combined product line may not be
sufficient to successfully compete with the product offerings available from
these companies, which could slow our growth and harm our business.
Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition and a larger installed base of customers than we have.
In addition, many of our competitors have well-established relationships with
our current and potential customers and have extensive knowledge of our
industry. We may lose potential customers to competitors for various reasons,
including the ability or willingness of competitors to offer lower prices and
other incentives that we cannot match. Accordingly, 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 recent industry consolidations, as well as future consolidations.
Our stock price has been highly volatile and has experienced a significant
decline, and may continue to be volatile and decline.
The trading price of our common stock has fluctuated widely in the past and
is expected to continue to do so in the future, as a result of a number of
factors, many of which are outside our control, such as:
. variations in our actual and anticipated operating results;
. changes in our earnings estimates by analysts;
. the volatility inherent in stocks within the emerging sector within
which we conduct business; and
. the volume of trading in our common stock, including sales of
substantial amounts of common stock issued upon the exercise of
outstanding options and warrants.
The trading price of our common stock may decline as a result of our
acquisition of Broadbase if, for example, 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
In addition, the stock market, particularly the Nasdaq National Market, has
experienced extreme price and volume fluctuations that have affected the market
prices of many technology and computer software companies, particularly
Internet-related companies, 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 and a diversion of our management's attention and resources.
Since our common stock began trading publicly in September 1999, our common
stock reached a high of $175.50 per share and traded as low as $0.50 per share
through August 9, 2001. The last reported sales price of our shares on August 9,
2001 was $1.33 per share.
Our business depends on the acceptance of our products and services, and it is
uncertain whether the market will accept our products and services.
Our ability to achieve increased revenue depends on overall demand for e-
Business software and related services, and in particular for customer-focused
applications. We expect that our future growth will depend significantly on
revenue from licenses of our e-business applications and related services.
There are significant risks inherent in introducing Internet-based systems
applications. Market acceptance of these products will depend on the growth of
the market for e-business solutions. This growth might not certain thatoccur. Moreover,
our target customers willmight not 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.
25
The effectiveness of our products depends in part on the widespread adoption
and use of these products by customer support personnel. Some of our customers
who have made initial purchases of this software have deferred or suspended
implementation of these products due to slower than expected rates of internal
adoption by customer support personnel. If more customers decide to defer or
suspend implementation of these products in the future, our ability to increase
our revenue from these customers through additional licenses or maintenance
agreements will also be impaired, and our financial position could be seriously
harmed.
A failure to manage our internal operating and financial functions could lead to
inefficiencies in conducting our business and subject us to increased expensesexpenses.
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 completedFor
example, as a result of our merger with Silknet
Software, Inc.Broadbase in June 2001, we increased our
total number of full-time employees by approximately 400 people. Our business
will suffer if we fail to manage this growth successfully. Moreover, we will needsuccessfully or to assimilate
substantially all of Broadbase's operations into our operations if the merger with Broadbase is
completed.operations. 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.
We depend on increased business from new customers, and if we fail to grow our
customer base or generate repeat business, our operating results could be
harmed.
Our business model generally depends on the sale of our products to new
customers as well as on expanded use of our products within our customers'
organizations. If we fail to grow our customer base or generate repeat and
expanded business from our current and future customers, our business and
operating results will be seriously harmed. In some cases, our customers
initially make a limited purchase of our products and services for pilot
programs. These customers may not purchase additional licenses to expand their
use of our products. If these customers do not successfully develop and deploy
initial applications based on our products, they may choose not to purchase
deployment licenses or additional development licenses.
In addition, as we introduce new versions of our products or new products,
our current customers might not require the functionality of our new products
and might not ultimately license these products. Because the total amount of
maintenance and support fees we receive in any period depends in large part on
the size and number of licenses that we have previously sold, any downturn in
our software license revenue would negatively affect our future services
revenue. In addition, if customers elect not to renew their maintenance
agreements, our services revenue could decline significantly. Further, some of
our customers are Internet- based companies, which have been forced to
significantly reduce their operations in light of limited access to sources of
financing and the current economic slowdown. If customers were unable to pay
for their current products or are unwilling to purchase additional products, our
revenues would decline.
If we fail to respond to changing customer preferences in our market, demand for
our products and our ability to enhance our revenues will suffer.
If we do not continue to improve our products and develop new products that
keep pace with competitive product introductions and technological developments,
satisfy diverse and rapidly evolving customer requirements and achieve market
acceptance, we might be unable to attract new customers. The development of
proprietary technology and necessary service enhancements entails significant
technical and business risks and requires substantial expenditures and lead-
time. We might not be successful in marketing and supporting recently released
versions of our products, or developing and marketing other product enhancements
and new products that respond to technological advances and market changes, on a
timely or cost-effective basis. In addition, even if these products are
developed and released, they might not achieve market acceptance. We have in
the past experienced delays in releasing new products
26
and product enhancements and could experience similar delays in the future.
These delays or problems in the installation or implementation of our new
releases could cause customers to forego purchases of our products.
Our failure to manage multiple technologies and technological change could
reduce demand for our products.
Rapidly changing technology and operating systems, changes in customer
requirements, and evolving industry standards might impede market acceptance of
our products. Our products are designed based upon currently prevailing
technology to work on a variety of hardware and software platforms used by our
customers. However, our software may not operate correctly on evolving versions
of hardware and software platforms, programming languages, database environments
and other systems that our customers use. If new technologies emerge that are
incompatible with our products, or if competing products emerge that are based
on new technologies or new industry standards and that perform better or cost
less than our products, our key products could become obsolete and our existing
and potential customers could seek alternatives to our products. We must
constantly modify and improve our products to keep pace with changes made to
these platforms and to database systems and other back-office applications and
Internet-related applications. For example, our analytics products were
designed to work with databases such as Oracle and Microsoft SQL Server. Any
changes to those databases, or increasing popularity of other databases, could
require us to modify our analytics products, and could cause us to delay
releasing future products and enhancements. Furthermore, software adapters are
necessary to integrate our analytics products with other systems and data
sources used by our customers. We must develop and update these adapters to
reflect changes to these systems and data sources in order to maintain the
functionality provided by our products. As a result, uncertainties related to
the timing and nature of new product announcements, introductions or
modifications by vendors of operating systems, databases, customer relationship
management software, web servers and other enterprise and Internet-based
applications could delay our product development, increase our product
development expense or cause customers to delay evaluation, purchase and
deployment of our analytics products. If we fail to modify or improve our
products in response to evolving industry standards, our products could rapidly
become obsolete.
Failure to successfully develop versions and updates of our products that run on
the operating systems used by our current and prospective customers could reduce
our sales.
Many of our products currently run only on the Windows NT operating system.
Any change to our customers' operating systems could require us to modify our
products and could cause us to delay product releases. In addition, any decline
in the market acceptance of the Windows NT operating system may force us to
ensure that all of our products and services are compatible with other operating
systems to meet the demands of our customers. If potential customers do not
want to use the Windows NT operating system, we will need to develop more
products that run on other operating systems such as Windows 2000, the successor
to Windows NT, or any of the UNIX based systems. If we cannot successfully
develop these products in response to customer demands, our business could
suffer. The development of new products in response to these risks would
require us to commit a substantial investment of resources, and we might not be
able to develop or introduce new products on a timely or cost-effective basis,
or at all, which could lead potential customers to choose alternative products.
Failure to license necessary third party software incorporated in our products
could cause delays or reductions in our sales.
We license third party software that we incorporate into our products. These
licenses may not continue to be available on commercially reasonable terms or at
all. Some of this technology would be difficult to replace. The loss of any
such license could result in delays or reductions of our applications until we
identify, license and integrate or develop equivalent software. If we are
required to enter into license agreements with third parties for replacement
technology, we could be subject to higher royalty payments and a loss of product
differentiation. In the future, we might need to license other software to
enhance our products and meet evolving customer needs. If we are unable to do
this, we could experience reduced demand for our products.
27
Delays in the development of new products or enhancements to existing products
would hurt our sales and damage our reputationreputation.
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 serviceservice.
We have recently decided to eliminateeliminated 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
customer 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 customer 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
protectionprotection.
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 eightmultiple U.S.
patent applications pending relating to our software. Although we have filed
four
international patent applications corresponding to foursome 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;
28
. 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 propertyproperty.
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 sevenseveral pending
trademark applications, including trademark applications for our logo and "KANA
COMMUNICATIONS and Design."applications. Outside of the United States, we have two trademark
registrations and pending applications 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 consumingconsuming.
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 usothers, or others,us could result in the
expenditure of significant financial resources and the diversion of management's
time and efforts. In addition, litigation in which we are accused of
infringement might cause product shipment delays, require us to develop non-
infringing technology or require us to enter into royalty or license agreements,
which might not be available on acceptable terms, or at all. If a successful
claim of infringement were made against us and we could not develop non-
infringing technology or license the infringed or similar technology on a timely
and cost-effective basis, our business could be significantly harmed.
We may face higher costs and lost sales if our software contains errorserrors.
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-criticalmission- critical
nature of our products and services,
undetected29
errors are of particular concern. In the past, we have discovered software
errors in some of our products after their introduction. We have only a few
"beta" customers that test new
22
features and functionality of our software before
we make these features and functionalities generally available to our customers.
If we are not able to detect and correct errors in our software contains
undetected errorsproducts or we failreleases
before commencing commercial shipments, Kana could divert the attention of
management and key personnel, could be expensive to meet customers' expectationsdefend and could result in
a timely manner,
we could experience:adverse settlements and judgments.
. 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 damagedamages
to our reputationreputation.
Our licenses with customers generally contain provisions designed to limit
our exposure to potential product liability claims, such as disclaimers of
warranties and limitations on liability for special, consequential and
incidental damages. In addition, our license agreements generally cap the
amounts recoverable for damages to the amounts paid by the licensee to us for
the product or service giving rise to the damages. However, all domestic and
international jurisdictions may not enforce these contractual limitations on
liability may not be enforceable and weliability. 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 whethercould divert the
attention of management and key personnel, could be expensive to defend and
could result in adverse settlements and judgments.
In April 2001, Office Depot, Inc. filed a complaint against Kana claiming
that Kana has breached its license agreement with Office Depot. Office Depot
is seeking relief in the form of a refund of license fees and maintenance fees
paid to Kana, attorneys' fees and costs. The litigation is currently in its
early stages and we have not received material information or documentation. We
intend to defend this claim vigorously and do not successful,expect it to materially impact
our results from operations. However, the ultimate outcome of any litigation is
uncertain, and either unfavorable or favorable outcomes could harm our business by
increasing ourhave a material
negative impact due to defense costs, damaging our reputationdiversion of management resources and
distracting our management.other factors.
Our international operations could divert management attention and present
financial issuesissues.
Our international operations are located throughout Europe, Australia, Japan,
Singapore and
Brazil,Asia, 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:things
30
. 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,internationally.
Sales outside North America represented 16% of our total revenues fromin 2000 and
15% of our total revenues in the first six months of 2001. As a result of our
acquisition of Broadbase, we expect sales outside North America.America to increase as a
percentage of total revenues. We have established offices in the United
Kingdom, Australia, Germany, Japan, Holland, France, Spain, Sweden, Singapore
and Brazil.South Korea. As a result, we face risks from doing business on an
international basis, any of which could impair our international revenues. Our
products must be localized, or customized to meet the needs of local users,
before they can be sold in particular foreign countries. Developing localized
versions of our products for foreign markets is difficult and can take longer
than we anticipate. We 23
have limited experience in localizing our products and
in testing whether these localized products will be accepted in the targeted
countries. Our localization efforts may not be successful. In addition, we
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
litigationlitigation.
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 itsour 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 losseslosses.
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.
31
Our prospects for obtaining additional financing, if required, are uncertain and
failure to obtain needed financing could affect our ability to maintain current
operations and pursue future growth
If we fail to complete the merger with Broadbase, we may need to raise
additional funds to develop or enhancegrowth.
We expect 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 revenuescash equivalents and short term investments on hand
will be sufficient to meet our working capital and capital expenditure needs for
the next 12 months. We expect to continue to experience negative cash flows
through the remainder of 2001, achieving positive cash flows from operations in
the first quarter of 2002 and overall positive cash flows in the second quarter
of 2002. Specifically, we currently expect that cash and cash equivalents could
reach approximately $30 to $40 million by the end of 2001, and could be
slightly lower during the first half of 2002. We are evaluating various
initiatives to improve our cash position, including raising additional funds to
finance our anticipated growth.business, implementing further restrictions on spending, negotiating
the early release of certain restricted cash, the early payment of certain large
receivables, and delayed payment of certain large payables. If we are not
successful in negotiating early release of certain restricted cash, we expect
our restricted cash balances to increase over the short term. Additional
financing may not be available on terms that are acceptable to us.us, especially in
the uncertain market climate, and we may not be successful in implementing or
negotiating such other arrangements to improve our cash position. If we raise
additional funds through the issuance of equity or convertible debt securities,
the percentage ownership of our stockholders would be reduced and these
securities might have rights, preferences and privileges senior to those of our
current stockholders. With the decline in our stock price, any such financing
is likely to be dilutive to existing stockholders. If adequate funds arewere not
available on acceptable terms, our ability to achieve or sustain positive cash
flows, maintain current operations, fund any potential expansion, take advantage
of unanticipated opportunities, develop or enhance products or services, or
otherwise respond to competitive pressures would be significantly limited.
We have completed foura number of mergers, and those mergers may result in
disruptions to our business and management due to difficulties in assimilating
personnel and operationsoperations.
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. OnEvolution, and in April 19, 2000, we acquired
Silknet. In June 2001, we completed our merger with Silknet Software, Inc.Broadbase. Similarly,
prior to its acquisition by us, Broadbase also acquired several companies,
including Rubric, Servicesoft, Decisionism and Panopticon. We may not be able
to successfully assimilate the additional personnel, operations, acquired
technology and products into our business. In particular, we will need to
assimilate and retain key professional services, engineering and marketing
personnel. This is particularly difficult with Business Evolution, Servicesoft
and Silknet, since their operations are located on the east coast and we are
headquartered on the westWest 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.
TheseThe integration of acquired companies has been and will continue to be a
complex, time consuming and expensive process and might disrupt our business if
not completed efficiently or in a timely manner. We must demonstrate to
customers and suppliers that these recent acquisitions will not result in
adverse changes in customer service standards, or dilution of or distraction to
our business focus. The difficulties of integrating other businesses could be
greater than we anticipate, and could disrupt our ongoing business, distractdisrupt our
management and employees orand increase our expenses. Acquisitions are inherently
risky and we may also face unexpected costs, which may adversely affect
operating results in any quarter.
24If we do not successfully integrate the operations of Broadbase in a timely
manner, we may not achieve the benefits we expect from that merger.
The integration of Broadbase into our business will be a complex, time
consuming and expensive process and may disrupt our business if not completed in
a timely and efficient manner. We must operate as a combined organization
utilizing common information and communication systems, operating procedures,
financial controls and human resources practices. In addition, we must
integrate Broadbase's product development operations, products and
32
technologies with our own. We may encounter substantial difficulties, costs and
delays involved in integrating Broadbase's operations into our own, including:
. potential conflicts in distribution, marketing or other important
relationships;
. difficulties in coordinating different development and engineering
teams;
. potential incompatibility of business cultures;
. perceived adverse changes in business focus; and
. the loss of key employees and diversion of the attention of
management from other ongoing business concerns.
The merger may also have the effect of disrupting customer relationships.
Our customers may not continue their current buying patterns. Customers may
defer purchasing decisions as they evaluate the likelihood of successful
integration of Broadbase's products and services with ours, and our future
product and service strategy. Also, because of the broader product and service
offering that we will now offer as a result of the merger, some of our customers
may view us as more of a direct competitor than they did Kana or Broadbase as
independent companies, and may therefore cancel or fail to place additional
orders.
Integration may take longer than expected, and we may be required to expend
more resources on integration than anticipated. The need to expend additional
resources on integration would reduce the resources that would otherwise be
spent on developing our products and technologies. If we cannot successfully
integrate Broadbase's operations, products and technologies with our own, or if
this integration takes longer than anticipated, we may not be able to operate
efficiently or realize the expected benefits of the merger. In addition,
failure to complete the integration successfully could result in the loss of key
personnel and customers.
To achieve the anticipated benefits of the Broadbase acquisition, we must
develop and introduce new products that use the assets of both companies.
We expect to develop and introduce new products, and enhanced versions of our
currently existing analytic and eCRM products, that interoperate as a single
platform. The timely development and introduction of new products and versions
that work effectively together and allow customers to achieve the benefits of a
broader product offering presents significant technological, market and other
obstacles in addition to the risks inherent in the development and introduction
of new products. For example, our products have historically operated on a
variety of operating platforms, including UNIX and Windows NT, while most of
Broadbase's products have historically operated only on Windows NT. This may
create integration issues between the technologies and challenges in selling the
combined product line. We may not be able to overcome these obstacles. In
addition, because our market is characterized by rapidly shifting customer
requirements, we may not be able to assess these requirements accurately, or our
joint products may not sufficiently satisfy these requirements or achieve market
acceptance. Further, the introduction of these anticipated new products and
versions may result in longer sales cycles and product implementations, which
may cause revenue and operating income to fluctuate and fail to meet
expectations.
In addition, we intend to offer our current products to Broadbase customers,
and Broadbase's current products to our existing customers. The customers of
either company may not have an interest in the other company's products and
services. The failure of cross-marketing efforts would diminish our ability to
achieve the benefits of the merger.
The role of acquisitions in our future growth may be limited, which could
seriously harm our continued operations.
In the past, acquisitions have been an important part of the growth strategy
for us. To gain access to key technologies, new products and broader customer
bases, we have acquired companies in exchange for shares of our common stock.
Because the recent trading prices of our common stock have been significantly
lower than in the past, the role of acquisitions in our
33
growth may be substantially limited. If we are unable to acquire companies in
exchange for our common stock, we may not have access to new customers, needed
technological advances or new products and enhancements to existing products.
This would substantially impair our ability to respond to market opportunities.
If we acquire additional companies, products or technologies, we may face risks
similar to those faced in our other mergersmergers.
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 companyexisting stockholders or our existing stockholders.us. 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 companythe company.
Our board of directors has the authority to issue up to 5,000,000 shares of
preferred stock. Moreover, withoutWithout 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.us. These
provisions, coupled with the provisions of the Delaware General Corporation Law,
may delay or impede a merger, tender offer or proxy contest involving our company.us.
Furthermore, our board of directors is divided into three classes, only one of
which is elected each year. Directors are removable by the affirmative vote of
at least 66 2/3% of all classes of voting stock. These factors may further
delay or prevent a change of control of 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.us.
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 yourthe ability to sell
any of our common stockstock.
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 weit 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, ifMarket. If our stock iswere 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.
OurSince our common stock hasbegan trading publicly in September 1999, our common
stock reached a high of $175.50 per share and traded as low as $0.50 per share
through May 14,July 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 tradinglast reported sales 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 workshares 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.August 9,
2001 was $1.33 per share.
If the Internet and web-based communications fail to grow and be accepted as
media of communication, demand for our products and services will declinedecline.
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 the Internet and e-mail
is a recent phenomenon and may not continue. As a result, a broad base of
enterprises that use e-mail as a primary means of communication may not develop
or be maintained. In addition,
34
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.
IfConsumers and businesses do not continue to acceptmight reject the Internet as a viable commercial
medium, or be slow to adopt it, for a number of reasons, including potentially
inadequate network infrastructure, slow development of enabling technologies,
concerns about the security of transactions and e-mailconfidential information and
insufficient commercial support. The Internet infrastructure may not be able to
support the demands placed on it by increased Internet usage and bandwidth
requirements. In addition, delays in the development or adoption of new
standards and protocols required to handle increased levels of Internet
activity, or increased governmental regulation, could cause the Interest to lose
our viability as mediaa commercial medium. If these or any other factors cause use
of communication,the Internet for business to decline or develop more slowly than expected,
demand for our businessproducts and services will suffer.
29
be reduced. Even if the required
infrastructure, standards, protocols or complementary products, services or
facilities are developed, we might incur substantial expenses adapting our
products to changing or emerging technologies.
Future regulation of the Internet may slow our growth, resulting in decreased
demand for our products and services and increased costs of doing business
Due to the increasing popularity and use of the Internet, it is possible that
state,business.
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
anyAny new legislation or regulation, theregulations, 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 could increase our costs and harm our growth.
Regulation of the collection and use of personal data could reduce demand for
our Broadbase products.
Many of our Broadbase products connect to and analyze data from various
applications, including Internet applications, that enable businesses to capture
and use information about their customers. Government regulation that limits
Broadbase's customers' use of this information could reduce the demand for
Broadbase's products. A number of jurisdictions have adopted, or are
considering adopting, laws that restrict the use of customer information from
Internet applications. The European Union has required that its member states
adopt legislation that imposes restrictions on the collection and use of
personal data, and that limits the transfer of personally-identifiable data to
countries that do not impose equivalent restrictions. In the United States, the
Childrens Online Privacy Protection Act was enacted in October 1998. This
legislation directs the Federal Trade Commission to regulate the collection of
data from children on commercial websites. In addition, the Federal Trade
Commission has begun investigations into the privacy practices of businesses
that collect information on the Internet. These and other privacy-related
initiatives could reduce demand for some of the Internet applications with which
our Broadbase products operate, and could restrict the use of these products in
some e-commerce applications. This could reduce demand for some Broadbase
products.
The imposition of sales and other taxes on products sold by our customers over
the Internet could have a negative effect on online commerce and the demand for
our products and services.
The imposition of new sales or other taxes could limit the growth of Internet
commerce generally and, as a result, the demand for our products and services.
Recent federal legislation limits the imposition of state and local taxes on
Internet-related sales. Congress may choose not
35
to renew this legislation in 2001, in which case state and local governments
would be free to impose taxes on electronically purchased goods. We believe that
most companies that sell products over the Internet do not currently collect
sales or other taxes on shipments of their products into states or foreign
countries where they are not physically present. However, one or more states or
foreign countries may seek to impose sales or other tax collection obligations
on out-of-jurisdiction companies that engage in e-commerce. A successful
assertion by one or more states or foreign countries that companies that engage
in e-commerce should collect sales or other taxes on the sale of their products
over the Internet, even though not physically in the state or country, could
indirectly reduce demand for our products.
Privacy concerns relating to the Internet are increasing, which could result in
legislation that negatively affects our business, in reduced sales of our
products, or both.
Businesses using our products capture information regarding their customers
when those customers contact them on-line with customer service inquiries.
Privacy concerns could cause visitors to resist providing the personal data
necessary to allow our customers to use our software products most effectively.
More importantly, even the perception of privacy concerns, whether or not valid,
may indirectly inhibit market acceptance of our products. In addition,
legislative or regulatory requirements may heighten these concerns if businesses
must notify Web site users that the data captured after visiting certain Web
sites may be used by marketing entities to unilaterally direct product promotion
and advertising to that user. While we are not aware of any such legislation or
regulatory requirements currently in effect in the United States, other
countries and political entities, such as the European Union, have adopted such
legislation or regulatory requirements and the United States may do so as well.
If consumer privacy concerns are not adequately addressed, our business could be
harmed.
Our security could be breached, which could damage our reputation and deter
customers from using our servicesservices.
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.
36
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
primarilyThe primary objective of short-termour investment activities
is to preserve principal while at the same time maximizing yields without
significantly increasing risk. At June 30, 2001, our portfolio included money
market funds, commercial paper, municipal bonds, which have angovernment agency bonds, and
corporate bonds. The diversity of the portfolio helps us to achieve our
investment objective. At June 30, 2001, the weighted average fixed yield ratematurity 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.our
portfolio was 102 days.
We are exposed to financial market risk from fluctuations in foreign currency exchange
rates. We manage our exposure to these risksvariability in foreign currency exchange rates
primarily through the use of natural hedges, as both liabilities and assets are
denominated in the local currency. However, different durations in our regular
operatingfunding
obligations and financing activities.assets may expose us to the risk of foreign exchange rate
fluctuations. We have not entered into any derivative instrument transactions to
manage this risk. Based on our overall foreign currency rate exposure at June
30, 2001, we do not believe that a hypothetical 10% change in foreign currency
rates would materially adversely affect our financial position.
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,June 30, 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.
3037
Part II: Other Information
Item 1. Legal Proceedings.
Kana Software, Inc. and Michael J. McCloskey and Joseph D. McCarthy and
variously Goldman Sachs & Co., Lehman Bros, Hambrecht & Quist LLC and Wit
Capital Corp. have been named as defendants in federal securities class action
lawsuits filed in the United States District Court for the Southern District of
New York. The Companycases allege violations of Section 11, 12(a)(2) and Section 15 of
the Securities Act of 1933 and violations of Section 10(b) and Rule 10b-5 of the
Securities Exchange Act of 1934, on behalf of a class of plaintiffs who
purchased our stock between September 21, 1999 and December 6, 2000 in
connection with our initial public offering. Specifically, the complaints
alleged that the underwriter defendants engaged in a scheme concerning sales of
our securities in the initial public offering and in the aftermarket. These
cases are stayed pending selection of lead counsel for the plaintiff class.
Although we are in the early stages of analyzing the claims alleged against us
and the individual defendants, we believe that we have good and valid defenses
to these claims. We intend to defend the action vigorously.
On April 24, 2001, Office Depot, Inc. ("Office Depot") filed a complaint
against Kana in the Circuit Court for the 15th District of the State of Florida
claiming that Kana has breached its license agreement with Office Depot. Office
Depot is seeking relief in the form of a refund of license fees and maintenance
fees paid to Kana, attorneys' fees and costs. The litigation is currently in its
early stages and we have not received material information or documentation.
Kana intends to defend itself from this claim vigorously and does not expect it
to materially impact our results from operations. Kana is not currently a party
to any other material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
An Annual Meeting of Stockholders was held on June 18, 2001 to act on the
following matters:
1. To approve the issuance of common stock pursuant to the merger agreement
among Kana Communications, Inc., Broadbase Software, Inc., and Arrow
Acquisition Corp. The votes cast for and against this action were
40,042,220 and 185,587, respectively, with 56,388 votes abstaining and
54,287,178 broker non-votes.
2. To approve an amendment to our second amended and restated certificate of
incorporation to change our name to "Kana Software, Inc." The votes cast
for and against this action were 76,853,843 and 288,948, respectively, with
258,243 votes abstaining and 17,170,339 broker non-votes.
3. To approve an amendment to the Kana 1999 Stock Incentive Plan to increase
the plan by an additional 15,000,000 shares and to increase the limitation
on the maximum number of shares by which the share reserve under the plan
is to increase each year pursuant to the automatic share increase
provisions of the plan from 6,000,000 to 10,000,000 shares. The votes cast
for and against this action were 33,294,915 and 6,604,269, respectively,
with 385,011 votes abstaining and 54,287,178 broker non-votes.
4. To approve an amendment and restatement of the Kana 1999 Employee Stock
Purchase Plan to:
. increase the number of shares of common stock issuable under the
1999 Employee Stock Purchase Plan by an additional 10,000,000
shares of common stock, from 2,122,507 shares to 12,122,507
shares;
. increase the limit on the maximum number of shares by which the
share reserve under the 1999 Employee Stock Purchase Plan may
automatically increase each calendar year from 666,666 shares to
4,000,000 shares, effective for all calendar years after the 2001
calendar year; and
. revise certain provisions of the plan document in order to
facilitate administration of the 1999 Employee Stock Purchase
Plan.
38
The votes cast for and against this action were 34,290,864 and 5,595,226,
respectively, with 398,105 votes abstaining and 54,287,178 broker non-
votes.
5. To elect two directors to serve for a three-year term ending in 2004 and
until their successors are duly elected and qualified. The votes cast for
and withheld from Robert W. Frick were 77,023,150 and 377,884,
respectively. The votes cast for and withheld from Kevin Harvey were
77,101,487 and 299,547, respectively.
Based on the voting results, each of these actions was approved and the
nominated directors were elected to the board.
Item 6. Exhibits and Reports on Form 8-K.
(a) Reports on Form 8-K:
1) On January 22, 2001,April 12, 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.
31acquisition of Broadbase Software, Inc.
39
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,August 14, 2001 Kana Communications,Software, Inc.
/s/ James C. Wood
------------------
James C. WoodChuck Bay
--------------------------------
Chuck Bay
Chief Executive Officer and Chairman of the Board
(Principal Executive Officer)
/s/ Art M. Rodriguez
---------------------
Art M. Rodriguez
InterimBrett White
--------------------------------
Brett White
Chief Financial Officer
(Principal Financial and Accounting Officer)
3240