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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001 or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from__________ to__________
Commission file number 000-27389
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INTERWOVEN, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0523543
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
803 11/th/ Avenue, Sunnyvale, CA 94089
(Address of principal executive offices)
(408) 774-2000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value;
Registered on the Nasdaq National Market
(Title of Class)
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 11, 2002 was approximately $750,282,351 (based on the
last reported sale price of $8.14 on March 11, 2002 on the Nasdaq Stock Market).
The number of shares of Common Stock outstanding as of March 11, 2002 was
104,689,798.
Certain sections of Registrant's definitive proxy statement for the 2002
Annual Meeting of Stockholders to be held on June 6, 2002, are incorporated by
reference in Part III of this Annual Report on Form 10-K to the extent stated
herein.
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INTERWOVEN, INC.
2001 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1. Business.............................................................................. 3
Item 2. Properties............................................................................ 13
Item 3. Legal Proceedings..................................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders................................... 13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................. 14
Item 6. Selected Financial Data............................................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................ 37
Item 8. Financial Statements and Supplementary Data........................................... 38
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.. 41
PART III
Item 10. Directors and Executive Officers of the Registrant.................................... 42
Item 11. Executive Compensation................................................................ 44
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters............................................................................... 44
Item 13. Certain Relationships and Related Transactions........................................ 44
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K.......... 45
Exhibit Index......................................................................... 45
Signatures............................................................................ 48
Financial Statements.................................................................. 49
Interwoven, TeamSite, OpenDeploy, MetaTagger and other product names,
taglines, logos and service marks are trademarks of Interwoven, Inc., which may
be registered in certain jurisdictions. All other trademarks are owned by their
respective owners.
2
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this report constitute forward-looking
statements that involve substantial risks and uncertainties. In some cases, you
can identify these statements by forward-looking words such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate" or "continue"
and variations of these words or comparable words. In addition, any statements
which refer to expectations, projections or other characterizations of future
events or circumstances are forward-looking statements. Our Management's
Discussion and Analysis of Financial Condition and Results of Operations
contain many such forward-looking statements. These forward-looking statements
involve known and unknown risks, uncertainties and situations that may cause
our or our industry's actual results, level of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by these statements.
The risk factors contained in this report, as well as any other cautionary
language in this report, provide examples of risks, uncertainties and events
that may cause our actual results to differ from the expectations described or
implied in our forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. You should not place undue reliance on
these forward-looking statements, which apply only as of the date of this
report. Except as required by law, we do not undertake to update or revise any
forward-looking statement, whether as a result of new information, future
events or otherwise.
PART I
ITEM 1. BUSINESS
Overview
Interwoven provides software products and services that help customers
automate the process of developing, managing and deploying content used in
business applications. The information technology industry refers to this
process as "enterprise content management." Our products are designed to allow
content contributors within an organization to create, manage and deploy
content assets, such as documents, XML/HTML, rich media, database content and
application code. We offer a comprehensive enterprise content management
product that can scale from a few users to an entire global enterprise. Our
enterprise content management offerings consists of three product lines:
TeamSite--Content Management, which is our enterprise content management
system; MetaTagger--Content Intelligence, which is our automated platform for
tagging, summarizing and reusing content; and OpenDeploy--Content Distribution,
which is used for content replication, distribution and syndication. Our
products incorporate widely accepted industry standards that support a wide
variety of applications, application servers and authoring tools.
Interwoven was incorporated in California in 1995 and reincorporated in
Delaware in 1999. We released our first product, TeamSite, in 1997, followed by
OpenDeploy in 1998 and MetaTagger in 2001.
Products and Services
Our enterprise content management suite offerings consists of three product
lines: TeamSite--Content Management; MetaTagger--Content Intelligence; and
OpenDeploy--Content Distribution. Additional modules include: TeamXML,
TeamTurbo, TeamSite Global Report Center and OpenSyndicate. We generally
license our products on a per-server basis and occasionally license them on an
enterprise or site license basis. We also provide services, including
professional services, maintenance and support.
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TeamSite--Content Management
Our flagship product, TeamSite, provides a highly scalable infrastructure to
manage corporate content including documents, rich media, database content,
application code and web content. It is designed to increase the rapid
deployment of major eBusiness initiatives, including portals, customer
relationship management, Intranet/Internet web sites, web application
management, and eCommerce initiatives.
Enterprise Content Management. TeamSite is designed to collaboratively
create, manage and version various content asset types within an enterprise. It
allows large numbers of contributors to add content, in parallel, in a
carefully managed process. TeamSite is compatible with leading applications,
application servers and authoring tools, allowing businesses to leverage
existing investments in information technology systems, content and expertise.
TeamSite captures and stores the history of content modifications. These
content histories, or versions, are managed and tracked for individual files
and for whole web sites. TeamSite also enables non-technical content
contributors to add content through customer-specific style templates, thereby
allowing users to leverage a preferred look and feel where desired.
Workflow. TeamSite is designed to allow diverse groups of users, including
non-technical and technical users, to participate in building and contributing
content. To facilitate the management of these contributors, TeamSite automates
workflow processes such as task assignment, resource scheduling, content
routing, content approval and content tracking through the entire production
lifecycle.
Ease of Use. Our SmartContext Editing feature provides non-technical users
with a simple and efficient interface for contributing content as they browse
through their work environment. With SmartContext Editing, non-technical
contributors are only required to be familiar with a web browser. For web sites
with many content contributors, TeamSite offers an easy-to-use, sophisticated
technique for tracking multiple content changes and merging them to a single
file.
Concurrent Development. TeamSite supports multiple contributors working on
a single project, and multiple teams working on many projects simultaneously,
by utilizing a technique we refer to as branching. A development branch
typically consists of many work areas connected to one staging area. Branches,
for example, might represent a company's Intranet and extranet sites. When
required, the content within these independent branches can be synchronized.
Collaboration Through Work Areas, Staging Areas and Editions. TeamSite
provides a virtual work area for each contributor. A virtual work area is a
local, desktop representation that appears to a contributor as a complete,
fully functioning web site. This provides web developers and contributors with
the ability to see changes instantaneously in the development environment as
they would appear in the actual production site. This approach improves quality
by promoting individual accountability, allowing developers to discover costly
bugs and helping contributors prevent deployment of inaccurate content to the
production site. Users submit revised content from work areas to a common
staging area, a pre-production version of the web site that consolidates
changes. After the consolidated changes in the staging area are approved, the
next edition of the production site can be authorized and deployed. This
content management process makes site-level rollbacks, site recovery and site
audits possible.
Content Versioning. TeamSite captures the history of modifications to
content within each contributor's work area as well as the content within the
common staging area. Our comprehensive content versioning technology allows
customers to record and manage web content modifications and capture complete
histories of all files. Our optional TeamSite Global Report software module can
then be used to audit and report on historical changes made to a web site's
files and supporting data files.
Web Application Development. TeamSite provides programmers with a software
development system that accommodates their choice of software development
tools. TeamSite's file versioning features allow
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programmers to track software code modifications. Using TeamSite, programmers
can reduce the time required to build, install and test the developed software
code by working in a copy of the running web site.
Interoperability. The architecture of TeamSite enables businesses to
implement it without making significant changes to their existing content or
systems architecture, resulting in rapid implementation. Additionally,
TeamSite's open architecture allows customers to use their preferred content
authoring software and application servers. TeamSite currently operates on Sun
Solaris, Microsoft Windows NT and Microsoft Windows 2000 operating systems.
TeamSite was first shipped in May 1997. We first shipped the current version of
TeamSite, TeamSite 5.5.1, in February 2002.
MetaTagger--Content Intelligence
MetaTagger provides enterprises with an automated, highly advanced metadata
capability, enabling them to re-use and re-purpose content across various types
of initiatives. Through a systematic and automated process, MetaTagger reduces
the tedious, error prone task of classifying and tagging content, while
ensuring consistency through the use of controlled vocabularies and business
rules. It automatically generates content summaries for use in portals,
personalization, search e-mail and data warehousing. MetaTagger enables domain
experts and business users alike to classify and add metadata, or data about
data, to their own content.
The user interface enables users to select appropriate tags from pre-defined
vocabularies and refine suggested metadata in place. Users have the option of
using MetaTagger in a fully automated mode, to leverage the value of their
legacy content. MetaTagger works in conjunction with TeamSite as part of the
standard publishing workflow. This integration ensures that metadata is
captured, stored, versioned, managed and deployed to the output destination.
MetaTagger operates on Sun Solaris, Microsoft Windows NT and Microsoft Windows
2000 operating systems. We first shipped MetaTagger in May 2001, and shipped
the current version, MetaTagger 3.0, in December 2001.
OpenDeploy--Content Distribution
OpenDeploy allows users to distribute and replicate content generated during
development and testing stages in a customers' production cycle to multi-tiered
production servers that are located around the world. OpenDeploy ensures that
content is distributed and replicated to target destinations in a timely
fashion, securely, accurately and reliably. OpenDeploy enables content to be
replicated and distributed in a transactional manner, which ensures content
integrity across all target systems. OpenDeploy's graphical user interface
allows information technology managers to administer, control and monitor
content deployments from remote locations. OpenDeploy allows the cross-platform
content transfer between UNIX and NT operating environments. The OpenDeploy
architecture uses open standards and is scalable to numerous dispersed
servers.
Our customers have traditionally licensed OpenDeploy with TeamSite, but it
may be used on a stand-alone basis. OpenDeploy encrypts content for secure
transfer over Transactional Control Protocol/Internet Protocol (TCP/IP). The
domestic version of OpenDeploy uses 128-bit Secure Sockets Layer (SSL)
encryption; the international version does not have this feature due to export
regulations. OpenDeploy operates on Sun Solaris, Microsoft Windows NT,
Microsoft Windows 2000, IBM AIX, Hewlett Packard UX and Linux operating
systems. We first shipped OpenDeploy in January 1998, and shipped the current
version, OpenDeploy 5.5.1, in February 2002.
Optional Add-on Modules
We also license optional software add-on modules for TeamSite, MetaTagger
and OpenDeploy that provide a comprehensive product suite for complex
enterprise initiatives. Our optional modules include TeamTurbo, TeamXML,
TeamSite Global Report Center and OpenSyndicate. TeamTurbo enables customers to
manage dynamic content such as applications, personalization rules and
targeting rules, thereby enhancing an enterprise's
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ability to share content across its business and leverage content from one
initiative to many others initiatives. TeamXML extends TeamSite's capability to
manage XML components for advanced data reuse. TeamSite Global Report Center
enables TeamSite administrators to generate reports on content management
activities. OpenSyndicate enables customers to profile, share and exchange
content between enterprises in a secure environment.
The following table highlights some of the features of our products:
Product Description Features
- ------------------------------------ --------------------------------------------------------------------------
PRODUCT LINES
TeamSite--Content Management . Provides an environment for managing content contributors' work with
Server-based enterprise content concurrent development capabilities;
management software . Provides multiple users with a means to store, collaborate and manage
critical information across multiple business applications and web
initiatives;
. Allows multiple developers and contributors to add content to a web
site;
. Provides multiple user interface applications including:
WebDesk Interface
XML Template-Based Publishing
Email-based Approval
SmartContext Editing
. Provides integrated authoring interfaces for: Microsoft Office,
Windows Explorer, Macromedia Dreamweaver, and Adobe GoLive;
. Interoperates with leading applications, application servers and
authoring tools;
. Allows direct edits to web site content through a browser interface with
Smart Context Editing;
. Provides a robust XML platform for content publishing and multi-
channel delivery;
. Provides access to content whether in a file system or database;
. Supports simultaneous eBusiness application development and
deployment;
. Offers real-time testing capability and comprehensive workflow
processes;
. Facilitates collaboration amongst multiple independent teams working
in parallel on multiple projects;
. Offers comprehensive versioning of file content, database content and
whole-web sites; and
. Upgradeable with optional software modules and editions.
MetaTagger--Content Intelligence . Automates the capture of complete and consistent metadata to enable
Server-based software for key eBusiness initiatives;
intelligent tagging, searching and . Classifies content simultaneously into one or multiple taxonomies or
categorization categorization schemes;
. Provides for critical eBusiness initiatives such as portals,
personalization, search and syndication;
. Leverages controlled vocabularies and flexible rules;
. Provides MetaSource Editor to create new or existing corporate
taxonomies;
. Provides automated and semi-automated metadata capture;
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Product Description Features
- ----------------------------------- ---------------------------------------------------------------------------
. Provides categorization and recognition services;
. Applies multiple metadata schemes;
. Automates vocabulary discovery and building; and
. Summarizes documents using keywords and summarization engine.
OpenDeploy--Content . Distributes and replicates different types of content to multi-tiered
Distribution production servers that are dispersed in multiple geographic locations;
Server-based software for . Offers a graphic user interface to control, schedule, administer and
replication, distribution and monitor deployments;
syndication of content . Provides user authentication and deployment authorization;
. Enables content to be distributed and replicated in a transactional
manner;
. Supports multi-tiered deployment topologies including chain
deployments;
. Provides job scheduling capabilities for timed deployments or recurring
intervals; and
. Provides deployment logging for archival and logging purposes.
OPTIONAL ADD-ON MODULES
TeamTurbo . Provides enterprise-wide management and deployment of web
Web application management applications by connecting TeamSite with leading content servers such
software as IBM's WebSphere, BEA Systems' WebLogic and Art Technology
Group's Dynamo;
. Allows users to preview the latest application in secure development
work areas; and
. Provides a standard set of functionality integration points including
management of dynamic content and personalization rules.
TeamXML . Provides next generation XML component management with advanced
XML content services software data reuse and document management services;
for management and data reuse . Provides category-based storage and organization of XML as objects
for content editing, reviewing and publishing;
. Enables virtual document assembly and support for defining a
collection of reusable XML objects for transformation, reuse,
publication, and syndication;
. Provides advanced search capabilities for precise, accurate results with
XML-based indexing; and
. Simplifies migration path to XML through a flexible architecture for
controlled migration of XML content and ongoing changes to XML
document definitions
TeamSite Global Report Center . Allows administrators to monitor system activity; and
Reporting and auditing software . Delivers reporting and auditing functionality.
OpenSyndicate . Allows TeamSite users to profile content using file patterns, regular
Server-based software for content expressions and standard SQL queries to select appropriate content;
exchange between organizations . Provides creation and management capability for subscription services;
and businesses . Provides a graphical user interface that allows the publisher to control
subscribers and subscription status; and
. Provides subscription status and delivery reporting.
Interwoven Services
Our worldwide professional services organization provides implementation
consulting and other technical services to our license customers. We provide
our customers with the services necessary to install, integrate and
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deploy our solutions. As of December 31, 2001, our services organization
consisted of 251 professionals. These services professionals utilize a
comprehensive methodology to deliver our enterprise content management products
to our customers and configure our products to meet the specific needs of the
customer. We sell services in conjunction with licenses of our software
products. These services include:
. strategic needs analysis;
. software installation and configuration support;
. project management;
. workflow mapping;
. content release management; and
. education and training.
Customer Support and Training
We offer a comprehensive array of customer support programs that are
designed to ensure successful implementation and customer satisfaction. These
programs include maintenance, technical support and professional services, as
well as educational offerings. Our educational offerings include technical
training and end user training. In addition, we offer various levels of product
maintenance to our customers. Maintenance services are typically subject to an
annual, renewable contract and are typically priced as a percentage of product
license fees.
Technology
We believe that our technology offers our customers and partners a
highly-scalable enterprise content management solution implemented through an
open architecture that incorporates widely accepted industry standards and
supports a wide variety of software applications. Our customers typically use
our technology as the platform to manage their enterprise-wide content
operations. In 2001, we upgraded the internal systems architecture to take
advantage of operating system improvements and new design features. As a
result, access times and content throughput have increased significantly.
Disaster recovery, multi-storage and web services interface additions have also
strengthened diverse applications at customers sites.
Our architecture incorporates widely accepted industry standards and
supports a wide variety of software applications to integrate into our
customers' heterogeneous environments. As a result, TeamSite integrates with
commercially available authoring tools and application servers that adhere to
industry standards. This allows our customers' content contributors to use
their favorite software applications. For example, to add content to a site, a
graphics designer may use Adobe Photoshop, a layout expert may use Macromedia
Dreamweaver, and a non-technical contributor may use Microsoft Office 2000. In
addition, TeamSite's browser interface has been developed primarily in Java and
JavaScript, two highly compatible programming languages.
Scalability, Performance and Availability
Scalability and Performance. TeamSite uses a multi-threaded approach to
promote faster server performance through parallel software code execution. It
also uses C++ and object-oriented programming to promote scalability and
performance. In addition, OpenDeploy can distribute content to a single or to
multiple productions application servers simultaneously. This content
replication functionality meets the requirements for the most demanding content
infrastructures that are often located on geographically dispersed servers.
Availability. Our design promotes reliability and availability by allowing
customers to employ their normal data backup and recovery tools. In addition,
critical data is duplicated, providing the necessary redundancy for data
recovery to minimize the potential for data loss.
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Industry Standards
We participate in various technology standards bodies including: W3C, a web
standards body; OASIS, an industry standards body promoting XML standards;
PRISM, a metadata standards body; and IDE Alliance, a digital asset standards
body.
Open to Many Files, Tools and Applications. Unlike proprietary, closed
implementations, our products have been developed to accommodate
industry-leading technologies, such as XML and Java, and other evolving
industry standards. The TeamSite server presents its content through popular
file management systems such as Unix Network File System and Microsoft Windows
Network File System.
eXtensible Markup Language. XML provides customers with the ability to
integrate new applications and data with other XML-compliant technologies and
legacy applications. Our products supports the use of XML for data and content
exchange. Our technology accelerates the adoption of XML by our customers,
enabling them to reuse and re-purpose individual assets, which reduces
redundant content within an organization.
Customers
Our products and services are marketed and sold to a diverse group of
customers operating in a broad range of industries. Our customers include both
established companies migrating their operations online, new companies formed
specifically to deliver products and services over the Internet and companies
whose objective is to deploy and manage critical business content across their
organization. These customers typically consider the web and their web
operations to be critical to their future success. As of December 31, 2001,
over 932 companies had licensed our products. In 2001, no customer accounted
for ten percent or more of our total revenues. Our sales of products and
services in the United States accounted for 100%, 81% and 66% of our total
revenues in 1999, 2000 and 2001, respectively.
Technology Vendors and Service Providers
Technology Vendors
To ensure that our products are well integrated with related compatible
technologies, we work with vendors of authoring tools such as Marcromedia's
Dreamweaver, Microsoft's Officer 2000, Adobe's Photoshop and Corel's Xmetal,
among others. We also work with leading application servers, portal servers and
application vendors including BEA Systems, IBM, Oracle, Peoplesoft, Plumtree,
SAP, Siebel and Sun Microsystems. Authoring tools, such as Macromedia's
Dreamweaver, Microsoft's Office 2000 and Adobe's Photoshop, provide the content
that we manage. Our products are resold by Accenture, EDS, IBM Global Services
and Sybase, among others.
Service Providers
We work with leading systems integrators, such as Accenture, Cap Gemini
Ernst & Young, Computer Sciences Corporation, EDS, IBM Global Services, KPMG
Consulting, PricewaterhouseCoopers and with Internet professional services
firms such as Agency.com, Sapient and Scient. Our prospective customers
frequently retain the services of these firms for the delivery and
implementation of eBusiness applications, and these firms may recommend a
content management solution as part of the eBusiness application they deliver.
We intend to devote significant resources to develop and maintain these
relationships.
We believe that our relationships with these entities are critical to our
success as we seek to integrate our products with current and future
technologies and to deploy and implement our solutions at customer sites. As
the economy may cause demand for consulting services to implement our
technology and integrate our products to decline, we anticipate that the
revenue from services provided by us may decline significantly as systems
integrators that we work with aggressively promote their services to our
customers. Our relationships with technology providers and service providers
can be terminated at any time.
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Sales and Marketing
To date, we have sold our products and services primarily through our direct
sales force in North America, Europe and the Asia Pacific region. As of
December 31, 2001, we had 299 professionals in our direct sales force, of which
186 were located in the United States, 38 located in Asia Pacific, 74 were
located in Europe, and one sales representative located in Latin America. We
intend to increase the size of our direct sales force and to establish
additional sales offices in the United States and abroad. In May 1999, we
opened our first international sales office in the United Kingdom to support
the management of direct and indirect sales channels in Europe. To date, we
have opened 11 offices in major cities throughout the United States and 17
offices abroad.
We currently have operations in Australia, Brazil, Canada, France, Germany,
Hong Kong, Italy, Japan, Mexico, Netherlands, Norway, Singapore, South Korea,
Spain, Sweden, Taiwan, the United Kingdom and the United States. We intend to
introduce localized versions of our applications for the major European and
Asian markets. We also intend to expand our global sales and marketing
capabilities by increasing the size of our direct sales and marketing
organizations in major markets, and by continuing to develop our channel
partner relationships. As market conditions warrant, we intend to increase our
direct sales and marketing activities worldwide.
We are developing our indirect sales channel by expanding our relationships
with leading technology vendors, technology professional services firms and
systems integrators that recommend and resell our products. Our ability to
achieve significant revenue growth in the future will depend in large part on
how successfully we recruit, train and retain sufficient direct sales,
technical and customer support personnel, and how well we continue to establish
and maintain relationships with our strategic partners. We believe that the
large-scale deployments anticipated by our customers will require a number of
highly trained customer support personnel.
We believe that demand is increasing for enterprise content management
solutions such as those we sell. We may not be able to expand our sales and
marketing staff, either domestically or internationally, to take advantage of
any increase in demand for those solutions. Our failure to expand our sales and
marketing organization or other distribution channels could have a materially
adverse affect on our business. See "Factors Affecting Future Results--We must
attract and retain qualified personnel, which is particularly difficult for us
because we compete with other technology-related companies and are located in
the San Francisco Bay area, where there is competition for personnel."
Research and Development
We invest significantly in research and development to enhance our current
products, and develop new products. Our research and development expenses were
$4.2 million in 1999, $17.7 million in 2000 and $31.6 million in 2001. We
expect that we will increase our product development expenditures in the
future. As of December 31, 2001, 177 employees were engaged in research and
development activities and we plan to continue to hire additional engineers to
further our research and development activities. Our business could be harmed
if we are not able to hire and retain a sufficient number of engineers. See
"Factors Affecting Future Results--We must attract and retain qualified
personnel, which is particularly difficult for us because we compete with other
technology-related companies and are located in the San Francisco Bay area,
where there is competition for personnel."
We may fail to complete our product development efforts within our
anticipated schedules, and even if completed, the products developed may not
have the features necessary to make them successful in the marketplace. Future
delays or problems in the development or marketing of product enhancements or
new products could harm our business. See "Factors Affecting Future
Results--Difficulties in introducing new products and upgrades in a timely
manner will make market acceptance of our products less likely."
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Acquisitions
In July 1999, we acquired Lexington Software Associates, a software
consulting company, to help support our existing customer base and to help
attract and retain new customers. In July 2000, we acquired Neonyoyo, a
developer of wireless technology that delivers targeted XML content rendered
appropriately, regardless of device type, to support content management
initiatives, including wireless initiatives, for our customer base. In October
2000, we acquired Ajuba Solutions, a software development company with
expertise in XML, Java and eBusiness integration, to expand our research and
development staff to handle our XML-based initiatives, especially our wireless
and business-to-business initiatives. Additionally, in November 2000 we
acquired Metacode Technologies, a content tagging and taxonomy software
developer, to enhance our product offerings. This functionality is referred to
as metatagging enabling the use of metadata, or data about data, which provides
enhanced personalization and search capabilities.
Competition
The market for enterprise content management solutions is rapidly emerging
and is characterized by intense competition. We expect existing competition and
competition from new market entrants to increase dramatically. A growing number
of companies are vying to provide enterprise content management solutions. In
addition, existing or potential customers may develop, or may have developed,
in-house solutions, which might make it more difficult for us to sell products
to them. In this market for enterprise content management solutions, new
products are frequently introduced and existing products are often enhanced.
Also, new companies, or alliances among existing companies, may be formed that
may rapidly achieve a significant market position.
We compete with software companies who provide a variety of products and
services in the areas of enterprise content management, document management,
software configuration management, and content-based applications such as:
Documentum, Divine, Filenet, Microsoft, Rational, Stellent and Vignette. We
also compete with providers of workgroup solutions, content publishing
application providers, and current or potential customers who may develop
in-house solutions. We may face increased competition from these providers in
the future. Other potential competitors include client/server software vendors
that are developing or extending existing products, which address our market.
In addition, although we currently partner with a number of companies that
provide complementary products such as web tools, enterprise document
repositories and web servers, these partners may introduce competitive products
in the future. Other large software companies, such as Oracle and IBM, may also
introduce competitive products. Some of our existing and potential competitors
have greater technical, marketing and financial resources than we do.
We believe that competitive factors in the enterprise content management
industry include:
. the quality, scalability and reliability of software;
. functionality that enables a broad base of contributors to add and modify
content;
. functionality that enables the management of different types of content;
. interoperability with all leading web authoring tools and web application
servers based on industry standards;
. functionality that enables advanced workflow;
. the ability to leverage existing information technology infrastructure;
. adherence to emerging industry standards, including XML; and
. expandability and scalability of enterprise content repository.
We believe our products compete favorably on each of these factors.
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Successful Customer Implementations
Our success depends on our customers' successful implementations of our
products and services. We actively support customer deployment efforts by
providing Internet based and telephone technical support, providing
comprehensive instructor led training, and by assigning to each customer an
account management team that includes a sales representative, a technical
account manager and an executive sponsor.
Proprietary Rights and Licensing
Our success depends upon our ability to maintain the proprietary aspects of
our technology and operate without infringing the proprietary rights of others.
We rely on a combination of patent, trademark, trade secret and copyright law,
and contractual restrictions to protect the proprietary aspects of our
technology. We seek to protect our source code for our software, documentation
and other written materials under trade secret and copyright laws. These legal
protections afford only limited protection for our technology. We currently do
not have any issued United States or foreign patents, but we have applied for
several U.S. patents. It is possible that patents will not be issued from our
currently pending patent applications.
Our license agreements impose restrictions on our customers' ability to use
our software. We also seek to protect our intellectual property by requiring
employees and consultants with access to our proprietary information to execute
confidentiality agreements with us and by restricting access to our source
code. There can be no assurance that all employees or consultants have signed
or could sign these agreements. Due to the rapid pace of technological change,
we believe that to establish and maintain a technology leadership position,
developing the technological and creative skills of our personnel, and
enhancing new product developments are as important to our business as the
various legal protections of our technology.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our software exists, software piracy can be expected to be a persistent
problem. Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets, to determine the validity and
scope of the proprietary rights of others, or to defend against claims of
infringement or invalidity. However, the laws of many countries do not protect
our proprietary rights to as great an extent as do the laws of the United
States.
Any litigation could result in substantial costs and diversion of resources
and could harm our business, operating results and financial condition. There
can be no assurance that our means of protecting our proprietary rights will be
adequate or that our competitors will not independently develop similar
technology. Any failure by us to meaningfully protect our property could
seriously harm our business, operating results and financial condition.
To date, we have not been notified that our products directly infringe upon
the proprietary rights of third parties, but there can be no assurance that
third parties will not claim infringement by us with respect to our current or
future products. We expect that developers of web-based commerce software
products will increasingly be subject to infringement claims as the number of
products and competitors in our industry segment grows, and as the
functionality of products in different segments of the software industry
increasingly overlaps. Any claims, with or without merit, could be
time-consuming to defend, result in costly litigation, divert management's
attention and resources, cause product shipment delays, or require us to enter
into royalty or licensing agreements. These royalty or licensing agreements, if
required, may not be available on terms acceptable to us or at all. A
successful infringement claim against us and our inability to license the
infringed technology or develop or license technology with comparable
functionality could seriously harm our business, financial condition and
operating results. See "Factors Affecting Future Results--We might not be able
to protect and enforce our intellectual property rights, a loss of which could
harm our business."
12
Seasonality
Our business has experienced seasonality, in part due to customer buying
patterns. In recent years, we have generally had weaker demand in the quarter
ending in March when compared to the quarters ending in June, September and
December. We expect this pattern to continue.
Employees
As of December 31, 2001, we employed 918 persons, including 377 in sales and
marketing, 251 in professional services, 177 in research and development and
113 in general and administrative. Of our employees, 61 were located in the
Asia Pacific region, 136 were located in Europe, one was located in Latin
America and 720 were located in North America. Our future success will depend
in part on our continued ability to attract, hire and retain qualified
personnel. Competition for such personnel is intense, and there can be no
assurance that we will be able to identify, attract and retain such personnel
in the future. None of our employees is represented by a labor union (other
than statutory unions required by law in certain European countries). We have
not experienced any work stoppages and consider our relations with our
employees to be good. "Factors Affecting Future Results--We must attract and
retain qualified personnel, which is particularly difficult for us because we
compete with other technology-related companies and are located in the San
Francisco Bay Area, where there is competition for personnel."
ITEM 2. PROPERTIES
Our headquarters occupies approximately 175,000 square feet in Sunnyvale,
California, under leases that expire in 2007. We also lease sales and service
offices in the metropolitan areas of Atlanta, Austin, Boston, Chicago,
Columbus, Dallas, Los Angeles, New York City, San Francisco, Seattle and
Washington, D.C. Outside the United States, we have sales and service offices
in Australia, Brazil, Canada, France, Germany, Hong Kong, Italy, Japan, Mexico,
Netherlands, Norway, Singapore, South Korea, Spain, Sweden, Taiwan and the
United Kingdom.
We believe that our existing facilities are adequate for our current needs.
ITEM 3. LEGAL PROCEEDINGS
On November 8, 2001, we and certain of our officers and directors, together
with certain investment banking firms, were named as defendants in a purported
securities class-action lawsuit filed in the United States District Court,
Southern District of New York. The complaint asserts that the prospectuses for
our October 8, 1999 initial public offering and our January 26, 2000 follow-on
public offering failed to disclose certain alleged actions by the underwriters
for the offering. The complaint alleges claims under Section 11 and 15 of the
Securities Act of 1933 against us and certain of our officers and directors.
The plaintiff seeks damages in an unspecified amount. We believe this lawsuit
is without merit and we intend to defend ourselves vigorously. An unfavorable
resolution of such suit could significantly harm our business, operating
results and financial condition.
In addition to the matters mentioned, we have been named as a defendant in
various lawsuits which have arisen in the ordinary course of business. In the
opinion of management, the outcome of such lawsuits will not have a material
effect on our financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Price Range of Common Stock
Our common stock has been quoted on the Nasdaq National Market under the
symbol "IWOV" since our initial public offering on October 8, 1999. Before
then, there was no public market for our common stock. The following table
shows, for the periods indicated, the high and low sales prices per share of
our common stock. The prices indicated below have been adjusted to give
retroactive effect to all stock splits that have occurred since our inception.
Year Ended
--------------------------
December 31, December 31,
2000 2001
------------- ------------
Quarter High Low High Low
------- ------ ------ ------ -----
First.................................. $50.00 $27.13 $38.63 $8.66
Second................................. $31.16 $10.41 $24.14 $5.84
Third.................................. $68.47 $27.44 $18.95 $3.11
Fourth................................. $67.69 $20.72 $11.57 $3.60
On March 11, 2002 the closing sale price of our common stock was $8.14 per
share. On that date, there were 640 holders of record. This does not include
the number of persons whose stock is in nominee or "street name" accounts
through brokers.
Dividends
We have never declared or paid cash dividends on our common stock or other
securities, and we do not anticipate paying a cash dividend in the foreseeable
future. Our line of credit currently prohibits the payment of dividends.
Recent Sales of Unregistered Securities
None.
14
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data is qualified in its
entirety by, and should be read in conjunction with, our consolidated financial
statements and the notes thereto, and Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations. The selected
consolidated statements of operations and consolidated balance sheet data as of
and for each of the five years in the period ended, and as of December 31,
2001, have been derived from our audited consolidated financial statements. The
supplemental consolidated financial data for each of the five years ended
December 31, 2001 have been derived from our unaudited results of operations,
excluding stock-based compensation, facilities relocation charges and
acquisition-related charges. All share and per share amounts have been adjusted
to give retroactive effect to stock splits that have occurred since our
inception.
Year Ended December 31,
------------------------------------------------
1997 1998 1999 2000 2001
------- -------- -------- -------- ---------
(in thousands, except per share amounts)
Consolidated Statement of Operations Data:
Revenues.............................................. $ 168 $ 4,003 $ 16,806 $132,129 $ 202,721
Gross profit.......................................... 73 2,670 10,049 92,488 141,822
Total operating expenses.............................. 2,933 9,165 27,065 135,988 278,037
Loss from operations.................................. (2,860) (6,495) (17,016) (43,500) (136,215)
Net loss.............................................. $(2,948) $ (6,344) $(15,655) $(32,055) $(129,175)
Basic and diluted net loss per share attributable to
common stockholders................................. $ (0.34) $ (0.71) $ (0.95) $ (0.35) $ (1.29)
Weighted average shares--basic and diluted............ 9,424 10,532 30,472 91,979 99,940
Supplemental Consolidated Financial Data
(unaudited):
Net loss as reported.................................. $(2,948) $ (6,344) $(15,655) $(32,055) $(129,175)
Add back of certain non-cash and acquisition charges:
Amortization of deferred stock-based
compensation........................................ -- -- 3,686 7,522 14,225
Amortization of acquired intangible assets............ -- -- 377 22,318 88,318
In-process research and development................... -- -- -- 1,824 --
Facilities relocation charges......................... -- -- -- -- 22,166
------- -------- -------- -------- ---------
Net loss before stock-based compensation, goodwill
and intangible amortization, in-process research and
development and facilities relocation charges....... $(2,948) $ (6,344) $(11,592) $ (391) $ (4,466)
======= ======== ======== ======== =========
Diluted net loss per share before stock-based
compensation, goodwill and intangible amortization,
in-process research and development and facilities
relocation charges.................................. $ (0.34) $ (0.71) $ (0.38) $ (0.00) $ (0.04)
======= ======== ======== ======== =========
Year Ended December 31,
------------------------------------------------
1997 1998 1999 2000 2001
------- -------- -------- -------- ---------
(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments..... $ 1,019 $ 9,022 $ 55,648 $222,284 $ 219,968
Working capital....................................... 792 8,844 54,413 199,484 175,426
Total assets.......................................... 1,384 13,908 83,079 524,209 439,145
Long-term debt and capital lease obligations, less
current portion..................................... 87 1,257 -- -- --
Mandatorily redeemable convertible preferred stock.... 4,627 20,464 -- -- --
Total stockholders' equity (deficit).................. (3,734) (10,752) 75,340 454,351 352,005
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with Item 6, Selected Financial Data,
as well as the quarterly financial data, and our consolidated financial
statements and notes appearing elsewhere in this Form 10-K. This discussion
includes forward-looking statements, such as our projections about future
results of operations which are inherently uncertain. Our actual results could
differ materially from those anticipated in our forward-looking statements as a
result of many factors, including but not limited to those discussed in
"Factors Affecting Future Results" in this document.
Overview
Interwoven was incorporated in March 1995, to provide software products and
services for enterprise content management. The information technology industry
refers to this process as "enterprise content management." Our software
products and services help customers automate the process of developing,
managing and deploying content used in business applications. Our products are
designed to allow all content contributors within an organization to create,
manage and deploy content assets, such as documents, XML/HTML, rich media,
database content and application code. From March 1995 through March 1997, we
were a development- stage company conducting research and development for our
initial products. In May 1997, we shipped the first version of our principal
product, TeamSite. We have subsequently developed and released enhanced
versions of TeamSite and have introduced related products to compliment our
enterprise content management offerings. As of December 31, 2001, we had sold
our products and services to over 932 customers. We market and sell our
products primarily through a direct sales force and augment our sales efforts
through relationships with systems integrators and other strategic partners. We
are headquartered in Sunnyvale, California and maintain additional offices in
the metropolitan areas of Atlanta, Austin, Boston, Chicago, Columbus, Dallas,
Los Angeles, New York City, San Francisco, Seattle and Washington, D.C. Our
revenues to date have been derived primarily from accounts in North America. In
addition, we have offices in Australia, Brazil, Canada, France, Germany, Hong
Kong, Italy, Japan, Mexico, Netherlands, Norway, Singapore, South Korea, Spain,
Sweden, Taiwan and the United Kingdom. We had 918 employees as of December 31,
2001.
We have incurred substantial costs to develop our technology and products,
to recruit and train personnel for our engineering, sales and marketing and
services organizations, and to establish our administrative organization. As a
result, we incurred net losses through December 31, 2001 and had an accumulated
deficit of $187.2 million as of December 31, 2001. We experienced a sequential
decline in our revenues during 2001 due to the current economic slowdown that
has resulted in a substantial reduction in overall spending in information
technology initiatives. We expect the current economic slowdown to affect our
business through the first half of 2002 and perhaps longer. Due to our effort
to align our revenues with our expenses, we will continue to make a concerted
effort to manage such costs. In light of the current economic slowdown and as a
result of these cost management efforts, we do not anticipate a significant
increase in our expenses in the foreseeable future. Additionally, due to our
limited operating history and the weakness of the current economic environment
generally, the prediction of future results of operations over the long-term is
difficult and, accordingly, there can be no assurance that we will achieve or
sustain profitability; however, we anticipate only moderate growth, if any, in
our overall revenues in 2002. We have generally made business decisions with
reference to net profit metrics excluding non-cash charges, for example,
acquisition and stock-based compensation charges. We expect to continue to make
acquisitions, incur stock based compensation and intangible amortization
charges, which will increase our losses inclusive of these non-cash expenses.
We provide supplemental consolidated financial information within our
related filings with Securities and Exchange Commission, earnings releases and
investor conference calls. The supplemental consolidated financial information
excludes from our earnings and earnings per share the effects of certain
expenses such as the amortization of goodwill and intangibles, stock-based
compensation, the write-off of in-process research and development and a
special charge associated with the relocation of our facilities. This
supplemental consolidated financial information is reported as pro forma
earnings and earnings per share in addition to information that is
16
reported based on generally accepted accounting principles in the United States
("GAAP"). We believe that such pro forma operating results better reflects our
operational performance as it provides a more meaningful measure of our ongoing
operations. However, we urge readers to review and consider carefully the GAAP
financial information contained within our filings with the SEC and in our
earnings releases.
Critical Accounting Policies and Judgments
Revenue Recognition
We derive revenues from the license of our software products and from
services that we provide to our customers.
To date, we have derived the majority of our license revenues from licenses
of TeamSite. We recognize revenue using the residual method in accordance with
Statement of Position 97-2 (SOP 97-2), "Software Revenue Recognition," as
amended by SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition
with Respect to Certain Transactions." Based on these accounting standards, we
recognize revenue under what is commonly referred to as the "residual method".
Under the residual method, for agreements that have multiple deliverables
"multiple element arrangements" (e.g. software products, services, support,
etc.), revenue is recognized based on Company specific objective evidence of
fair value for all of the delivered elements. Our specific objective evidence
of fair value is determined by consistent pricing and collections of an item
when it has been sold separately in the past. Once we have established the fair
value of each of the undelivered elements, the dollar value of the arrangement
is allocated to the undelivered elements first and the residual of the amount
is then allocated to the delivered elements. At the outset of the arrangement
with the customer, we defer revenue for the fair value of its undelivered
elements (e.g., maintenance, consulting, and training) and recognize revenue
for the remainder of the arrangement fee attributable to the elements initially
delivered in the arrangement (i.e., software product) when the basic criteria
in SOP 97-2 have been met. If such evidence of fair value for each undelivered
element of the arrangement does not exist, all revenue from the arrangement is
deferred until such time that evidence of fair value does exist or until all
elements of the arrangement are delivered.
Under SOP 97-2, revenue attributable to an element in a customer arrangement
is recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed or determinable, collectibility is probable, and the
arrangement does not require services that are essential to the functionality
of the software.
At the outset of the customer arrangement, if we determine that the
arrangement fee is not fixed or determinable, we recognize revenue when the
arrangement fee becomes due and payable. We assess whether the fee is fixed or
determinable based on the payment terms associated with each transaction. If a
significant portion of a fee is due beyond our normal payments terms, which are
30 to 180 days from the invoice date, we do not consider the fee to be fixed or
determinable. In these cases, we recognize revenue as the fees become due. We
do not offer product return rights to resellers or end users. From inception
through the fourth quarter of 2000, the limited collection history and infancy
of our international sales infrastructure led us to defer revenue until cash
collection for sales occurring outside the United States. We now believe that a
more mature sales infrastructure coupled with a history of collections in
several geographic regions allows us to ascertain that collectibility is
probable in Northern Europe and Australia. Therefore, beginning on January 1,
2001, we began to recognize revenue upon the signing of the contract and
shipment of the product in these regions, assuming all other revenue
recognition criteria have been met. We will continue to assess the
appropriateness of revenue recognition on sales agreements in other geographic
locations once we have developed an adequate infrastructure and collection
history in those regions.
Services revenues consist of professional services and maintenance fees.
Professional services primarily consist of software installation and
integration, business process consulting and training. Professional services
are predominantly billed on a time and materials basis and revenues are
recognized as the services are performed.
17
Maintenance agreements are typically priced based on a percentage of the
product license fee and have a one-year term, renewable annually. Services
provided to customers under maintenance agreements include technical product
support and unspecified product upgrades. Deferred revenues from advanced
payments for maintenance agreements are recognized ratably over the term of the
agreement, which is typically one year.
Facilities Relocation Charges
During 2001, we recorded a $22.2 million charge associated with costs of
relocation of our facilities. This charge included $16.7 million in lease
abandonment charges relating to the consolidation of our three facilities in
the Silicon Valley into a single corporate location, as well as costs
associated with abandoned leased facilities in Austin. These charges include
the remaining lease commitments of these facilities reduced by the estimated
sublease income throughout the duration of the lease term. To determine the
estimated sublease income associated with these abandoned facilities, we
received independent appraisals from real estate brokers to estimate such
amounts. Additionally, we evaluated operating equipment and leasehold
improvements associated with the abandoned facilities to identify those assets
that had suffered an impairment in their economic useful lives as a result of
the relocation. Based on these evaluations, we incurred charges of $3.5 million
consisting of the write-down of certain operating equipment and leasehold
improvements associated with the abandoned facilities. We also incurred $2.0
million, through December 31, 2001, as a result of duplicate lease costs
associated with the dual occupation of our current and our abandoned
facilities. The relocation charges are an estimate as of December 31, 2001 and
may change as we obtain subleases for the abandoned facilities and the actual
sublease income is known. At December 31, 2001, payments of $2.8 million had
been made in connection with these charges. At December 31, 2001, $15.9 million
had been accrued and is payable through 2007.
Amortization of Intangibles
We acquired a total of four corporations in 1999 and 2000: Lexington
Software Associates, Inc.; Neonyoyo, Inc.; Ajuba Solutions Inc.; and Metacode
Technologies, Inc. Under U.S. generally accepted accounting principles, we have
accounted for the four business combinations using the purchase method of
accounting and recorded the market value of our common stock and options issued
in connection with them and the amount of direct transaction costs as the cost
of acquiring these entities. That cost is allocated among the individual assets
acquired and liabilities assumed, including various identifiable intangible
assets such as goodwill, in-process research and development, acquired
technology, acquired workforce and covenants not to compete, based on their
respective fair values. We allocated the excess of the purchase price over the
fair value of the net assets to goodwill. The impact of purchase accounting on
our results of operations has been significant. Amortization of goodwill and
intangibles assets associated with business acquisitions was $377,000 in 1999,
$22.3 million in 2000 and $88.3 million in 2001.
We assess the impairment of identifiable intangibles, long-lived assets and
related goodwill whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors we consider important which
could trigger an impairment include the following:
. significant underperformance of operating results relative to the
expected historical or projected future operating results;
. significant changes in the manner of the use of the acquired assets or
the strategy for our overall business;
. significant negative industry or economic trends;
. significant decline in our stock price for a sustained period of time; and
. our market capitalization relative to our net book value.
When we determine that the carrying value of intangibles, long-lived assets
and related goodwill may not be recoverable based on the existence of one or
more of the above factors, we measure any impairment based on a
18
projected discounted cash flow method using a discount rate determined by
management to be commensurate with the risk inherent in our current business
model. Net intangibles, long-lived assets and goodwill amounted to $154.4
million as of December 31, 2001.
During September 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill
and Other Intangible Assets", which became effective for us on January 1, 2002.
As a result of the issuance of SFAS No. 142, we will cease to amortize $148.2
million of goodwill as of January 1, 2002. In lieu of amortization of goodwill,
we are required to perform an initial impairment test of our goodwill in 2002
and annual impairment test thereafter. We expect to complete our initial review
during the second quarter of 2002. We currently do not expect to record an
impairment charge upon the completion of the initial impairment test. However,
there can be no assurances that at the time the test is completed, a material
impairment charge will not be recorded.
Stock Based Compensation
We have recorded deferred compensation liabilities related to options
assumed and shares issued to effect business combinations, options granted
below fair market value associated with our initial public offering in October
1999 and compensation associated with fully vested awards granted to
non-employees in the amount of $7.3 million in 1999 and $30.4 million in 2000.
The following table reflects the prospective impact of all deferred
compensation costs and the annual amortization of purchased intangibles (other
than goodwill) attributable to our mergers and acquisitions that have occurred
since our inception (in thousands):
2002 2003 2004
------- ------ ------
Intangible assets (other than goodwill).......... $ 3,499 $1,478 1,163
Stock-based compensation......................... 6,884 3,055 1,187
------- ------ ------
$10,383 $4,533 $2,350
======= ====== ======
The future amortization expense related to the intangible assets acquired
may be accelerated in the future if we reassess the value and or reduce the
estimated useful life of the intangible assets.
Accounts Receivable
Accounts receivable are recorded net of allowance for doubtful accounts in
the amount of $564,000 and $1.1 million at December 31, 2000 and 2001,
respectively. We regularly review the adequacy of our allowance for doubtful
accounts through identification of specific receivables where we expect that
payment will not be received, and we have established a general reserve policy
that is applied to all amounts that are not specifically identified. In
determining specific receivables where collection may not be received, we
review past due receivables and give consideration to prior collection history,
changes in the customer's overall business condition and the potential risk
associated with the customer's industry among other factors. We establish a
general reserve for all receivable amounts that have not been specifically
identified, by applying a graduated percentage to each invoice's relative aging
category. The allowance for doubtful accounts reflects our best estimate as of
the reporting dates. Changes may occur in the future, which may make us
reassess the collectibility of amounts and at which time we may need to provide
additional allowances in excess of that currently provided.
Results of Operations
Some of the statements contained in this report constitute forward-looking
statements that involve substantial risks and uncertainties. In some cases, you
can identify these statements by forward-looking words such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate" or "continue"
and
19
variations of these words or comparable words. In addition, any statements
which refer to expectations, projections or other characterizations of future
events or circumstances are forward-looking statements. Our Management's
Discussion and Analysis of Financial Condition and Results of Operations
contain many such forward-looking statements. These forward-looking statements
involve known and unknown risks, uncertainties and situations that may cause
our or our industry's actual results, level of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by these statements.
The risk factors contained in this report, as well as any other cautionary
language in this report, provide examples of risks, uncertainties and events
that may cause our actual results to differ from the expectations described or
implied in our forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. You should not place undue reliance on
these forward-looking statements, which apply only as of the date of this
report. Except as required by law, we do not undertake to update or revise any
forward-looking statement, whether as a result of new information, future
events or otherwise.
The following table sets forth, as a percentage of total revenue,
consolidated statement of operations data for the periods indicated:
Year Ended December 31,
---------------------
1999 2000 2001
---- ---- ----
Revenues:
License....................................... 64% 66% 56%
Services...................................... 36 34 44
---- --- ---
Total revenues............................ 100 100 100
Cost of revenues:
License....................................... 1 1 1
Services...................................... 39 29 29
---- --- ---
Total cost of revenues.................... 40 30 30
---- --- ---
Gross profit..................................... 60 70 70
Operating expenses:
Research and development...................... 25 13 16
Sales and marketing........................... 93 55 49
General and administrative.................... 19 11 11
Amortization of stock based compensation...... 22 6 7
Amortization of acquired intangible assets.... 2 17 43
In-process research and development........... -- 1 --
Facilities relocation charges................. -- -- 11
---- --- ---
Total operating expenses.................. 161 103 137
---- --- ---
Loss from operations............................. (101) (33) (67)
Interest and other income, net................... 8 9 4
Provision for income taxes.................... -- -- (1)
---- --- ---
Net loss......................................... (93)% (24)% (64)%
==== === ===
Comparison of the Years Ended 2000 and 2001
Revenues
Total revenues increased 53% from $132.1 million in 2000 to $202.7 million
in 2001. This increase was primarily attributable to sales to new customers in
2001, as well as to additional sales to existing customers,
20
reflecting greater market acceptance of our products and expanded product
configurations. Our ability to attract new customers was a result of our
developing a larger and more experienced sales and marketing staff and as a
result of increased levels of partner-influenced sales. During the second
quarter of 2001, we began to experience a decline in demand for our products
due to a world wide economic slowdown that has resulted in a substantial
reduction in overall spending in information technology initiatives. We also
experienced a slight decrease in our average selling prices during 2001, due to
overall pricing pressures as well as a shift to a greater number of smaller
dollar value agreements accounting for a larger percentage of our total
revenue. We expect the overall economic slowdown to adversely affect our
business through the first half of 2002 and perhaps longer. As a result, we
anticipate only modest growth in our overall revenues in 2002.
License. License revenues increased 30% from $87.0 million in 2000 to
$112.8 million in 2001. License revenues represented 66% and 56% of total
revenues, respectively, in those periods. The decrease in license revenues as a
percentage of total revenues reflects delays in customer spending and the
general slowdown in the economy. The increase in license revenues in absolute
dollars reflects our growing customer base.
Services. Services revenues increased 99% from $45.1 million in 2000 to
$89.9 million in 2001. Services revenues represented 34% and 44% of total
revenues, respectively, in those periods. The increase in services revenues as
a percentage of total revenues reflects a $24.1 million increase in maintenance
fees, a $15.2 million increase in professional services fees, and a $5.5
million increase in training fees. The increased professional services and
maintenance fees were due to increased demand for our products, maintenance
fees earned from a larger customer base and due to an increase in the number
and utilization of our professional services staff.
Cost of Revenues
License. Cost of license revenues includes expenses incurred to
manufacture, package and distribute our software products and related
documentation, as well as costs of licensing third-party software sold in
conjunction with our software products. Cost of license revenues was $1.1
million in 2000 and $2.7 million in 2001. Cost of license revenues represented
1% and 2% of license revenues in 2000 and 2001, respectively. The increase in
absolute dollars of cost of license revenues was attributable to an increase in
royalties paid to third party software vendors commensurate with increased
revenues of our products.
We expect cost of license revenues to increase in the future if our license
revenues increase. We also expect cost of license revenues as a percentage of
license revenues to vary from period to period depending primarily on the
amount of royalties paid to third parties which fluctuates in each period.
Services. Cost of services revenues consists primarily of salary and
related costs of our professional services, training, maintenance and support
personnel, and to a lesser extent, subcontractor expenses. Cost of services
revenues increased 51% from $38.5 million in 2000 to $58.2 million in 2001.
This increase was primarily attributable to an increase in personnel costs as a
result of increased staffing to meet the demand of our increased customer base.
Cost of services revenues represented 85% and 65% of services revenues,
respectively, in those periods. The decrease in cost of services revenues as a
percentage of services revenues was a result of improved productivity and
greater utilization in the services organization and due to an increase in
maintenance revenues as a percentage of total revenues which generally have a
lower associated costs in providing such services.
Since our services revenues have lower gross margins than our license
revenues, our overall gross margins will decline if our service revenues grow
faster than our license revenues. We expect cost of services revenues as a
percentage of services revenues to vary from period to period depending in part
on whether the services are performed by our in-house staff or by
subcontractors, and on the overall utilization rates of our in-house
professional services staff. The utilization of our in-house staff or
subcontractors is affected by the mix of services we provide, which is
unpredictable.
21
Gross Profit. Gross profit increased 53% from $92.5 million in 2000 to
$141.8 million in 2001. Gross profit represented 70% of total revenues in both
2000 and 2001. This increase in absolute dollar amounts reflects increased
license and services revenues from a larger customer base.
We expect gross profit as a percentage of total revenues to fluctuate from
period to period primarily as a result of changes in the relative proportion of
license and services revenues. We have made and we expect to continue to make
investments in our professional services organization to increase the capacity
of that organization to meet the demand for services from our customers.
Operating Expenses
Research and Development. Research and development expenses consist
primarily of personnel and related costs to support product development
activities. Research and development expenses increased 78% from $17.7 million
in 2000 to $31.6 million in 2001, representing 13% and 16% of total revenues,
respectively, in those periods. This increase in absolute dollars was due to an
increase in allocated expenses such as rent and deprecation and due to an
increase in personnel costs of our product development personnel as a result of
increased staffing.
We believe that continued investment in research and development is critical
to our strategic objectives, and we expect the dollar amounts of research and
development expenses to increase in future periods. We expect that the
percentage of total revenues represented by research and development expenses
will fluctuate from period to period depending primarily on when we hire new
research and development personnel and secondarily on the size and timing of
product development projects and revenue fluctuations. To date, all software
development costs have been expensed in the period incurred.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and related costs for sales and marketing personnel, sales
commissions, travel and marketing programs. Sales and marketing expenses
increased 37% from $72.7 million in 2000 to $99.3 million in 2001, representing
55% and 49% of total revenues in those periods, respectively. This increase in
absolute dollar amounts primarily relates to increases in sales and marketing
personnel costs as a result of increased staffing of our sales and marketing
departments, and secondarily increased marketing-related costs associated with
brand awareness initiatives and other promotional efforts. The decrease in
sales and marketing expenses as a percentage of total revenues reflects total
revenue increasing more rapidly than sales expenses and a reduced rate of
spending on marketing programs as a result of the current economic slowdown.
We are endeavoring to control, and possibly reduce, our sales and marketing
costs in absolute dollars throughout the current economic slowdown. We
anticipate that with evidence of a sustained recovery of the U.S. economy, we
would continue to invest in order to expand our customer base and increase
brand awareness. We also anticipate that the percentage of total revenues
represented by sales and marketing expenses will fluctuate from period to
period depending primarily on when we hire new sales personnel, the timing of
new marketing programs and the levels of revenues in each period.
General and Administrative. General and administrative expenses consist
primarily of salaries and related costs for accounting, human resources, legal
and other administrative functions, as well as provisions for doubtful
accounts. General and administrative expenses increased 61% from $13.9 million
in 2000 to $22.5 million in 2001, representing 11% of total revenues in both
periods. The increase in absolute dollar amounts was due to increased staffing
of general and administrative functions to support our expanded operations.
Other increases in general and administrative expenses were due to increased
bad debt expense and increases in allocated expenses such as rent and
depreciation.
We are endeavoring to control, and possibly reduce, our general and
administrative costs in light of the current economic slowdown. We anticipate
that, with evidence of a sustained recovery of the U.S. economy, we
22
would continue to invest in our general and administrative infrastructure in
order to support expanding operations. We expect that the percentage of total
revenues represented by general and administrative expenses will fluctuate from
period to period depending primarily on when we hire new general and
administrative personnel to support expanding operations as well as the size
and timing of expansion projects.
Amortization of Deferred Stock-Based Compensation. We recorded deferred
stock-based compensation of $7.3 million and $30.4 million for stock options
granted in 1999 and stock options granted and assumed in 2000, respectively. In
2000, we recorded deferred stock-based compensation of $28.8 million in
connection with granting of stock options and issuance of shares related to the
acquisitions of Neonyoyo, Metacode Technologies and Ajuba Solutions.
Amortization of deferred stock-based compensation was $7.5 million in 2000 and
$14.2 million in 2001. Amortization of deferred stock-based compensation is
attributable to the following categories for the years ended December 31, 2000
and 2001, respectively:
2000 2001
------ -------
Costs of sales............................................. $ 683 $ 336
Research and development................................... 3,401 7,905
Sales and marketing........................................ 2,550 4,980
General and administrative................................. 888 1,004
------ -------
Total................................................... $7,522 $14,225
====== =======
We expect amortization of deferred stock-based compensation to be
approximately $6.9 million, $3.1 million and $1.2 million for 2002, 2003 and
2004, respectively, which includes the projected variable accounting charge
associated with our stock option exchange program and, which is based on the
assumption that our stock price will remain unchanged in future periods as that
at December 31, 2001. The variable component of the accounting charge for the
options will be reassessed and reflected in the statement of operations for
each reporting period based on the then current stock price for each period.
For example, for every one dollar in value that our stock price exceeds the
adjusted exercise price of $14.63 per share, we will recognize an additional
$2.6 million in deferred stock compensation.
Amortization of Acquired Intangible Assets. In July 2000, we recorded
intangible assets of approximately $85.4 million in connection with the
acquisition of Neonyoyo, Inc. Goodwill related to this transaction approximated
$77.9 million, intangible assets related to workforce and covenants not to
compete of Neonyoyo, Inc. approximated $7.5 million and in-process research and
development approximated $1.7 million of the purchase price. The total purchase
price for this acquisition was approximately $88.2 million. The purchase price
was allocated to the tangible and intangible assets acquired and liabilities
assumed based upon their respective fair values at the acquisition date. In
October 2000, we recorded intangible assets of approximately $27.2 million in
connection with the acquisition of Ajuba Solutions, Inc. including goodwill in
the amount of approximately $25.7 million and intangible assets related to
workforce of approximately $1.5 million of the purchase price. The total
purchase price for this acquisition was approximately $24.9 million. In
November 2000, we recorded intangible assets of approximately $147.8 million in
connection with the acquisition of Metacode Technologies, Inc. including
goodwill of approximately $143.5 million, intangible assets related to the
workforce of Metacode of approximately $1.7 million and completed technology of
approximately $2.6 million of the purchase price. The total purchase price for
this acquisition was approximately $152.5 million. Amortization of acquired
intangible assets was $22.3 million in 2000 and $88.3 million in 2001.
Effective January 1, 2002, we will be required to adopt the accounting
provisions of SFAS No. 142 "Goodwill and Other Intangibles". With the adoption
of SFAS No. 142, we will cease amortizing net goodwill of $148.2 million, which
includes $1.7 million related to assembled workforce. We will evaluate goodwill
for impairment under the initial SFAS No. 142 transitional impairment test
requirements in the second quarter of 2002 and annually, thereafter. As a
result of this adoption, we expect amortization of acquired intangible assets
to be $3.5 million in 2002 and $1.5 million in 2003.
23
The original purchase price allocations for each acquisition were based on
preliminary unaudited information. Subsequent to each acquisition date and upon
completion of audits of each acquiree and the integration of the acquisitions,
a number of adjustments have been made to the respective acquisition balance
sheet assets and goodwill, including a $3.7 million adjustment in respect of
Metacode to reduce cash and cash equivalents, and an aggregate non-cash
adjustment of $2.3 million in respect of Neonyoyo and Ajuba, relating primarily
to reversals of excess accruals for acquisition related expenses.
These acquisitions were accounted for as purchase business combinations. In
connection with these acquisitions, we recorded $249.1 million in goodwill and
$13.8 million in other intangible assets. In accordance with the provisions of
SFAS No. 142, we will evaluate whether the respective fair values of our
goodwill and other intangible assets may be less than their respective carrying
values. This process will include an analysis of estimated cash flows that we
expect to generate from future operations for purposes of determining whether
an impairment of goodwill and other intangible assets has occurred. If, as a
result of our analysis, we determine that there has been an impairment of
goodwill and other intangible assets, the carrying value of these assets would
be written down to their fair values as a charge against our operating results
in the period that the determination is made. A significant impairment would
have a material adverse effect on our financial position and operating results.
Facilities Relocation Charges. We recorded a $22.2 million charge in 2001,
associated with costs of relocating our facilities. These charges included
$16.7 million in lease abandonment charges relating to the consolidation of our
three facilities in the Silicon Valley into a single corporate location and
costs associated with abandoned leased facilities in Austin. Facilities
relocation charges also include $3.5 million consisting of the write-down of
certain operating equipment and leasehold improvements associated with the
abandoned facilities. We also incurred charges of $2.0 million, through
December 31, 2001, as a result of duplicate lease costs associated with the
dual occupation of our current and abandoned facilities.
Interest Income and Other, Net. Interest income and other, net, decreased
from $12.1 million in 2000 to $8.5 million in 2001 primarily due to the
decrease in interest rates earned on cash and short-term investments.
Provision for Income Taxes. Income tax expense increased 133% from $610,000
in 2000 to $1.4 million in 2001. Our income tax expense in 2000 was associated
with state and foreign income taxes. Our 2001 income tax expense was based on a
pretax loss of $127.8 million. During the third quarter of 2001, we changed our
estimate of the annual effective tax rate as a result of revised expectations
for our operating results for 2001. As a result of this change, the income tax
provision recorded during the six months ended June 30, 2001, did not need to
be changed during the six months ended December 31, 2001, in order to reflect
the effective tax rate for the year. Accordingly, there was no provision for
income taxes recorded during the six months ended December 31, 2001. Prior to
this change, excluding the effect of amortization of deferred stock-based
compensation, amortization of acquired intangible assets and facilities
relocation charges, the effective tax rate was 34%.
Comparison of the Years Ended 1999 and 2000
Revenues
Total revenues increased 686% from $16.8 million in 1999 to $132.1 million
in 2000. This increase reflects sales to a larger number of new customers and
higher average sales price per customer. The number of new customers increased
from 175 as of December 31, 1999 to over 650 as of December 31, 2000. Our
ability to attract new customers was a result of our developing a larger and
more experienced sales and marketing staff. The increase in average sales price
per customer was primarily a result of selling more user licenses in the
average new order, and to a lesser extent, increased sales of optional software
modules and price increases.
License. License revenues increased 713% from $10.7 million in 1999 to
$87.0 million in 2000. License revenues represented 64% and 66% of total
revenues in those periods. This increase in license revenues reflects the same
factors that caused total revenues to increase from period to period.
24
Services. Services revenues increased 640% from $6.1 million in 1999 to
$45.1 million in 2000. Services revenues represented 36% and 34% of total
revenues in those periods. The increase in services revenues reflects a $22.2
million increase in professional services fees, an $11.6 million increase in
maintenance fees and a $5.2 million increase in training fees. The increased
professional services and maintenance fees were generated by an expanded number
of customers who licensed our products.
Cost of Revenues
License. Cost of license revenues increased 508% from $181,000 in 1999 to
$1.1 million in 2000. Cost of license revenues represented 2% and 1% of license
revenues in 1999 and 2000, respectively. The increase in cost of license
revenues was primarily attributable to an increase in royalties paid to
third-party software vendors, and, to a lesser extent, to an increase in the
volume of products shipped.
Services. Cost of services revenues increased 486% from $6.6 million in
1999 to $38.5 million in 2000. Cost of services revenues represented 108% and
85% of services revenues, respectively. This increase in cost of services
revenues was attributable to an increase in the number of service employees and
due to an increase in subcontractor expenses.
Gross Profit
Gross profit increased 820% from $10.0 million in 1999 to $92.5 million in
2000. Gross profit represented 60% and 70% of total revenues, respectively, in
those periods. This increase reflected the more rapid increase of license
revenues compared to services revenues as our customer base has grown.
Operating Expenses
Research and Development. Research and development expenses increased 322%
from $4.2 million in 1999 to $17.7 million in 2000, representing 25% and 13% of
total revenues in those periods, respectively. The increase in research and
development expenses was due to an increase in the number of our product
development employees, increased use of sub-contractors and due to higher
associated wages, salaries and recruitment costs. The decrease in research and
development expenses as a percentage of total revenues reflects a higher growth
rate in total revenues compared to the growth rate in research and development
expenses.
Sales and Marketing. Sales and marketing expenses increased 366% from $15.6
million for 1999 to $72.7 million in 2000, representing 93% and 55% of total
revenues, respectively, in those periods. This increase in sales and marketing
expenses was caused by higher sales commissions and bonuses, increases in sales
and marketing personnel costs, and increased marketing-related costs. The
decrease in sales and marketing expenses as a percentage of total revenues
reflects a higher growth rate in total revenues compared to the growth rate in
sales and marketing expenses.
General and Administrative. General and administrative expenses increased
333% from $3.2 million in 1999 to $13.9 million in 2000, representing 19% and
11% of total revenues, respectively. The increase in general and administrative
expenses was caused by additional staffing of these functions to support
expanded operations during this same period. The decrease in general and
administrative expenses as a percentage of total revenues reflects a higher
growth rate in total revenues, compared to the growth rate in general and
administrative expenses.
25
Amortization of Deferred Stock-Based Compensation. Amortization of deferred
stock-based compensation is attributable to the following categories for the
years ended December 31, 1999 and 2000, respectively:
1999 2000
------ ------
Costs of sales................................... $1,078 $ 683
Research and development......................... 647 3,401
Sales and marketing.............................. 1,565 2,550
General and administrative....................... 396 888
------ ------
Total......................................... $3,686 $7,522
====== ======
Amortization of Acquired Intangible Assets. Amortization of acquired
intangible assets was $377,000 in 1999 and $22.3 million in 2000.
In-Process Research and Development. We recorded purchased in-process
research and development of approximately $1.7 million and approximately
$100,000 related to the acquisitions of Neonyoyo and Metacode, respectively,
representing the present value of the estimated after-tax cash flows expected
to be generated by the purchased technology, which had not yet reached
technological feasibility at the acquisition date.
Interest and Other Income, Net
Interest income and other expense, net, increased from $1.4 million for 1999
to $12.1 million for 2000, due to increased interest income earned on proceeds
from our initial public offering in October 1999 and our follow-on public
offering in February 2000.
Provision for Income Taxes
We recorded a provision for income taxes of $610,000 for state and foreign
taxes in 2000.
Recent Accounting Pronouncements
On September 29, 2001, the Financial Accounting Standards Board ("FASB"),
issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS
No. 141 requires the purchase method of accounting on all transactions
initiated after July 1, 2001 and the pooling of interests method will no longer
be allowed. SFAS No. 142 will require that goodwill and all identifiable
intangible assets that have an infinite life be recognized as assets but not be
amortized. These assets will be assessed for impairment on an annual basis.
Identifiable intangible assets that have a finite life will continue to be
segregated from goodwill and amortized over their useful lives. These assets
will be assessed for impairment pursuant to guidance in SFAS No. 121. Companies
will be required to maintain documentation of their impairment testing
activities and include significant disclosure in filings in the event of an
impairment charge. Goodwill and other intangible assets arising from
acquisitions completed before July 1, 2001 (previously recognized goodwill and
intangible assets) will be accounted for in accordance with the provisions of
SFAS No. 142 beginning January 1, 2002. With the adoption of SFAS No. 142, we
will cease amortizing net goodwill of $148.2 million, which includes $1.7
million related to assembled workforce. As a result of this adoption, we expect
amortization of acquired intangible assets to be $3.5 million in 2002 and $1.5
million in 2003. We adopted the provisions of SFAS No. 141, effective July 1,
2001. The adoption of SFAS No. 141 did not have a material impact on our
financial position or results of operations. We will evaluate goodwill for
impairment under the initial SFAS No. 142 transitional impairment test
requirements during the second quarter of 2002 and annually, thereafter. The
impairment review will involve a two-step process as follows:
Step 1--We will compare the fair value of our reporting units to the
carrying value, including goodwill of each of those units. For each reporting
unit where the carrying value, including goodwill, exceeds the unit's fair
26
value, we will move on step two as described below. If a unit's fair value
exceeds the carrying value, no impairment charge is necessary.
Step 2--We will perform an allocation of the fair value of the reporting
units to its identifiable tangible and non-goodwill intangible assets and
liabilities. This will derive an implied fair value for the reporting unit's
goodwill. We will then compare the implied fair value of the reporting unit's
goodwill with the carrying amount of the reporting unit's goodwill. If the
carrying amount of the reporting unit's goodwill is greater than the implied
fair value of its goodwill, an impairment loss must be recognized for the
excess of such amount.
We expect to complete this review during the second quarter of 2002. We do
not expect to record an impairment charge upon the completion of the initial
review. However, there can be no assurance that at the time the review is
completed a material charge will not be recorded.
Any transitional impairment loss will be recognized as a change in
accounting principle.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supercedes SFAS No.
121, "Accounting for the Impairment of Long-lived Assets and Assets to be
Disposed of" and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
SFAS No. 144 establishes a single accounting model for impairment or disposal
by sale of long-lived assets. The provisions of SFAS No. 144 will be effective
for fiscal years beginning after December 15, 2001. We are currently evaluating
the potential impact, if any, the adoption of SFAS No. 144 will have on our
financial position and results of operations.
In November 2001, the FASB issued Topic D-103 "Income Statement
Characterization of Reimbursements Received for 'out-of-pocket' Expenses
Incurred", which will require companies to report reimbursements of
"out-of-pocket" expenses as revenues and the corresponding expenses incurred as
costs of revenues within the income statement. We will adopt the provisions of
D-103 during the first quarter of 2002.
Liquidity and Capital Resources
Net cash provided by operating activities was $20.0 million and $7.9 million
in 2000 and 2001, respectively. Net cash provided by operating activities in
2000 primarily reflected net losses, increases in accounts receivable and
prepaid expenses, offset in part by an increase in accrued liabilities,
deferred revenue, amortization of acquired intangibles, in-process research and
development expenses and amortization of deferred stock compensation. Net cash
provided by operating activities in 2001 primarily reflected increasing net
losses offset in part by amortization of acquired intangibles, facilities
relocation charges, amortization of stock-based compensation and depreciation
expense.
A significant portion of our cash inflows have historically been generated
by our operations. These inflows may fluctuate significantly. A decrease in
customer demand or decrease in the acceptance of our products, would jeopardize
our ability to generate positive cash flows from operations.
During 2000 and 2001, investing activities included purchases of property
and equipment, principally computer hardware and software for our growing
number of employees in addition to leasehold improvements for our new
facilities. Cash used to purchase property and equipment was $13.8 million and
$16.2 million during 2000 and 2001, respectively. We expect that capital
expenditures will increase as we grow our operations, expand our infrastructure
and hire new personnel. As of December 31, 2001, we had no material capital
expenditure commitments.
During 2000 and 2001, our investing activities included purchases and
maturities of short-term investments. Net purchases of investments were
approximately $86.1 million in 2000 and $3.1 million in 2001. As of
27
December 31, 2001, we have not invested in derivative securities. We expect
that, in the future, cash in excess of current requirements will continue to be
invested in high credit quality, interest-bearing securities.
During 2001, our investing activities included a $3.9 million purchase price
adjustment, which primarily related to Metacode Technologies, Inc. The purchase
price adjustment reflects a reduction in the valuation of cash and investments,
subsequent to the acquisition date and upon completion of an audit of Metacode
Technologies, Inc.
During 2000, our investing activities included the acquisitions of Neonyoyo,
Inc, Ajuba Solutions, Inc. and Metacode Technologies, Inc. The net cash paid in
connection with these acquisitions was $13.9 million.
Net cash provided by financing activities in 2000 and 2001 was $157.8
million and $11.8 million, respectively. Net cash provided by financing
activities primarily reflects the proceeds of issuance of common stock in each
of these periods. During September 2001, the Board of Directors approved a
program to repurchase up to $25.0 million of our common stock on the open
market. During 2001, we repurchased 827,500 of our common shares on the open
market at cost of $3.6 million under this program. We do not expect to
repurchase any more shares of our common stock under this program.
At December 31, 2001, our sources of liquidity consisted of $220.0 million
in cash, cash equivalents and investments. At December 31, 2001, we had $175.4
million in working capital. We have a $20.0 million line of credit with
Washington Mutual Business Bank, which bears interest at the Wall Street
Journal's prime rate, which was 4.75% at December 31, 2001 and is secured by
cash. This line of credit agreement expires in May 2002. We also have a $15.2
million line of credit with Wells Fargo Bank, which is secured by cash and
bears interest at our option of either a variable rate of 1% below the bank's
prime rate adjusted from time to time or a fixed rate of 1.5% above the LIBOR
in effect on the first day of the term. We had no outstanding borrowings under
these lines of credit as of December 31, 2001. As of December 31, 2001, we were
in compliance with all of our restrictions under the lines of credit. This line
of credit agreement expires in December 2002. We intend to maintain these lines
of credit in the future.
We lease our facilities under operating lease agreements that expire at
various dates through 2007. The following presents our future lease payments
under these agreements (in thousands):
Operating
Year Ended December 31, Leases
----------------------- ---------
2002......................... $ 16,369
2003......................... 18,661
2004......................... 18,096
2005......................... 17,998
2006......................... 17,827
Over five years.............. 15,422
--------
Total payments............... $104,373
========
28
We have entered into various standby letter of credit agreements associated
with our facilities operating lease agreements as required deposits for such
facilities. These letters of credit expire at various times through 2006. At
December 31 2001, we had $15.4 million outstanding under standby letters of
credit, which are accured by substantially all of our assets. The following
presents our outstanding commitments under these agreements as each respective
balance sheet date (in thousands):
Standby Letters
December 31, of Credit
------------ ---------------
2002......................... $3,153
2003......................... 2,516
2004......................... 2,185
2005......................... 2,112
2006......................... 2,112
We believe that our current cash, cash equivalents short-term investment
balances, cash flows from operations and funds available under existing credit
facilities will be sufficient to meet our working capital requirements and
capital expenditures for the foreseeable future. Lont-term, we ma require
additional funds to support our working capital requirements or for other
purposes and may seek to raise additional funds through public or private equit
or debt financing or from other sources. There can be assurance that additional
financing will be available on acceptable terms, or at all.
If adequate Funds are not available or are not available on acceptable
terms, we may be unable to develop or enhance our products, take advantage of
future opportunities, or respond to competitive pressures or unanticipated
requirements, which could have a material adverse effect on our business,
financial condition and operating results.
29
FACTORS AFFECTING FUTURE RESULTS
The risks and uncertainties described below are not the only risks we face.
These risks are the ones we consider to be significant to your decision whether
to invest in our common stock at this time. We might be wrong. There may be
risks that you in particular view differently than we do, and there are other
risks and uncertainties that we do not presently know or that we currently deem
immaterial, but that may in fact harm our business in the future. If any of
these events occur, our business, results of operations and financial condition
could be seriously harmed, the trading price of our common stock could decline
and you may lose all or part of your investment.
Our operating history is limited, so it will be difficult for you to evaluate
our business in making an investment decision.
We have a limited operating history and are still in the early stages of our
development, which makes the evaluation of our business operations and our
prospects difficult. We shipped our first product in May 1997. Since that time,
we have derived substantially all of our revenues from licensing our TeamSite
product and related products and services. In evaluating our common stock, you
should consider the risks and difficulties frequently encountered by companies
in new and rapidly evolving markets, particularly those companies whose
businesses depend on the Internet and corporate information technology
spending. These risks and difficulties, as they apply to us in particular,
include:
. delay or deferral of customer orders or implementations of our products;
. fluctuations in the size and timing of individual license transactions;
. the mix of products and services sold;
. our ability to develop and market new products and control costs;
. changes in demand for our products;
. concentration of our revenues in a single product or family of products
and our services;
. our dependence on large orders;
. our ability to manage expanding operations;
. our need to attract, train and retain qualified personnel;
. our need to establish and maintain strategic relationships with other
companies, some of which may in the future become our competitors; and
. our need to expand internationally.
One or more of the foregoing factors may cause our operating expenses to be
disproportionately high during any given period or may cause our net revenue
and operating results to be significantly lower than expected. Based upon the
preceding factors, we may experience a shortfall in revenue or earnings or
otherwise fail to meet public market expectations, which could materially
adversely affect our business, financial condition and the market price of our
common stock.
If we do not increase our license revenues significantly, we will fail to
achieve and sustain operating profitability.
We have incurred net losses from operations in each quarter since our
inception through the year ended December 31, 2001. Our net losses amounted to
$6.3 million in 1998, $15.7 million in 1999, $32.1 million in 2000 and $129.2
million in 2001. As of December 31, 2001, we had an accumulated deficit of
approximately $187.2 million. We anticipate that we will continue to invest in
order to expand our customer base and increase
30
brand awareness. To achieve and sustain operating profitability on a quarterly
and annual basis, we will need to increase our revenues significantly,
particularly our license revenues. We cannot predict when we will become
profitable, if at all. Furthermore, we have generally made business decisions
with reference to net profit metrics excluding non-cash charges, such as,
acquisition and stock-based compensation charges. We expect to continue to make
acquisitions, which are likely to cause us to incur certain non-cash charges
such as stock-based compensation and intangible amortization charges, which
will increase our losses.
Reduced demand and increased competition may cause our services revenue to
decline and our results to fluctuate unpredictably.
Our services revenue represents a significant component of our total
revenue--34% and 44% of total revenue in 2000 and 2001. We anticipate that
services revenue will continue to represent a significant percentage of total
revenue in the future, and the actual percentage that it represents will have
an impact on our results of operations. To a large extent, the leve