-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EZy3HJqt1mBevbywDx49zRGIo5AFqB9JonpoYNZoVhUoGBXjFWYxEguGskBhAkex nER+UEZmq0Qr2StXqya9/Q== 0000950134-05-021049.txt : 20051109 0000950134-05-021049.hdr.sgml : 20051109 20051109161421 ACCESSION NUMBER: 0000950134-05-021049 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051109 DATE AS OF CHANGE: 20051109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERWOVEN INC CENTRAL INDEX KEY: 0001042431 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 943221352 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-27389 FILM NUMBER: 051190219 BUSINESS ADDRESS: STREET 1: C/O INTERWOVEN INC. STREET 2: 803 11TH AVENUE CITY: SUNNYVALE STATE: CA ZIP: 94089 BUSINESS PHONE: 4087742000 MAIL ADDRESS: STREET 1: C/O INTERWOVEN INC. STREET 2: 803 11TH AVENUE CITY: SUNNYVALE STATE: CA ZIP: 94089 10-Q 1 f14289e10vq.htm FORM 10-Q e10vq
 

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
     
þ
  Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2005
OR
     
o
  Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 000-27389
INTERWOVEN, INC.
(Exact name of registrant as specified in its charter)
     
Delaware   77-0523543
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
803 11TH Avenue
Sunnyvale, California 94089

(Address of principal executive offices)
(408) 774-2000
(Registrant’s telephone number, including area code)
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 þ
  No o    
     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
         
Yes þ
  No o    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
         
Yes o
  No þ    
As of October 28, 2005, there were approximately 42,114,000 shares of the registrant’s common stock outstanding.
 
 

 


 

INTERWOVEN, INC.
Table of Contents
             
  FINANCIAL INFORMATION   Page No.
 
           
  Condensed Consolidated Financial Statements:        
 
           
 
  Condensed Consolidated Balance Sheets
       
 
    September 30, 2005 and December 31, 2004     2  
 
           
 
  Condensed Consolidated Statements of Operations
       
 
    Three and nine months ended September 30, 2005 and 2004     3  
 
           
 
  Condensed Consolidated Statements of Cash Flows
       
 
    Nine months ended September 30, 2005 and 2004     4  
 
           
 
  Notes to Condensed Consolidated Financial Statements     5  
 
           
  Management's Discussion and Analysis of Financial Condition
       
 
    and Results of Operations     21  
 
           
  Quantitative and Qualitative Disclosures About Market Risk     45  
 
           
  Controls and Procedures     47  
 
           
  OTHER INFORMATION        
 
           
  Legal Proceedings     48  
 
           
  Exhibits     49  
 
           
 
  Signatures     50  
 
           
 
  Exhibit Index     51  

 


 

PART I: FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INTERWOVEN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
                 
    September 30,     December 31,  
Assets
  2005     2004  
                 
 
  (Unaudited)     (1)  
Current assets:
               
Cash and cash equivalents
  $ 49,480     $ 22,466  
Short-term investments
    77,236       111,291  
Accounts receivable, net
    29,001       28,292  
Prepaid expenses and other current assets
    6,242       8,450  
 
           
Total current assets
    161,959       170,499  
Property and equipment, net
    5,528       5,831  
Goodwill, net
    191,480       185,464  
Other intangible assets, net
    30,134       30,035  
Other assets
    1,907       1,947  
 
           
Total assets
  $ 391,008     $ 393,776  
 
           
 
               
Liabilities and Stockholders’ Equity
               
 
               
Current liabilities:
               
Accounts payable
  $ 4,196     $ 5,568  
Accrued liabilities
    21,253       20,370  
Restructuring and excess facilities accrual
    7,475       8,966  
Deferred revenues
    49,574       50,121  
 
           
Total current liabilities
    82,498       85,025  
Accrued liabilities
    2,904       3,413  
Restructuring and excess facilities accrual, less current portion
    11,529       16,716  
 
           
Total liabilities
    96,931       105,154  
 
           
 
               
Commitments and contingencies
               
 
               
Stockholders’ equity:
               
Common stock, $0.001 par value, 125,000 shares authorized; 42,035 and 41,087 shares issued and outstanding, respectively
    42       41  
Additional paid-in capital
    703,661       697,860  
Deferred stock-based compensation
    (1,752 )     (2,067 )
Accumulated other comprehensive loss
    (368 )     (205 )
Accumulated deficit
    (407,506 )     (407,007 )
 
           
Total stockholders’ equity
    294,077       288,622  
 
           
Total liabilities and stockholders’ equity
  $ 391,008     $ 393,776  
 
           
 
(1)   Derived from audited consolidated financial statements
See accompanying notes to condensed consolidated financial statements.

2


 

INTERWOVEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2005     2004     2005     2004  
Revenues:
                               
License
  $ 17,417     $ 16,157     $ 48,500     $ 49,335  
Support and service
    26,522       24,104       78,958       67,815  
 
                       
Total revenues
    43,939       40,261       127,458       117,150  
 
                       
 
                               
Cost of revenues:
                               
License
    3,951       3,387       10,781       9,864  
Support and service
    10,654       9,705       30,864       28,643  
 
                       
Total cost of revenues
    14,605       13,092       41,645       38,507  
 
                       
Gross profit
    29,334       27,169       85,813       78,643  
 
                               
Operating expenses:
                               
Sales and marketing
    17,888       17,300       51,631       52,585  
Research and development
    7,635       7,746       23,503       23,033  
General and administrative
    3,506       3,052       9,887       9,022  
Amortization of stock-based compensation
    326       941       1,119       4,352  
Amortization of intangible assets
    834       1,217       2,472       3,631  
Restructuring and excess facilities charges (recoveries)
    35       (1,360 )     (598 )     10,477  
 
                       
Total operating expenses
    30,224       28,896       88,014       103,100  
 
                       
Loss from operations
    (890 )     (1,727 )     (2,201 )     (24,457 )
Interest income and other, net
    984       468       2,605       1,114  
 
                       
Income (loss) before provision for income taxes
    94       (1,259 )     404       (23,343 )
Provision for income taxes
    278       243       903       729  
 
                       
Net loss
  $ (184 )   $ (1,502 )   $ (499 )   $ (24,072 )
 
                       
 
                               
Basic and diluted net loss per common share
  $ (0.00 )   $ (0.04 )   $ (0.01 )   $ (0.60 )
 
                       
 
                               
Shares used in computing basic and diluted net loss per common share
    41,988       40,564       41,586       40,374  
 
                       
See accompanying notes to condensed consolidated financial statements.

3


 

INTERWOVEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
                 
    Nine Months Ended  
    September 30,  
    2005     2004  
Cash flows from operating activities:
               
Net loss
  $ (499 )   $ (24,072 )
Adjustments to reconcile net loss to net cash used in
operating activities:
               
Depreciation
    2,758       3,312  
Amortization of stock-based compensation
    1,119       4,352  
Amortization of intangible assets and purchased technology
    11,021       11,548  
Changes in allowance for doubtful accounts and sales returns
    (545 )     (479 )
Changes in operating assets and liabilities:
               
Accounts receivable
    698       8,485  
Prepaid expenses and other
    2,080       358  
Accounts payable and accrued liabilities
    (2,100 )     (2,856 )
Restructuring and excess facilities accrual
    (6,678 )     (4,474 )
Deferred revenues
    (896 )     1,279  
 
           
Net cash provided by (used in) operating activities
    6,958       (2,547 )
 
           
 
               
Cash flows from investing activities:
               
Purchases of property and equipment
    (2,362 )     (2,119 )
Cash paid for business acquired, net
    (16,596 )      
Purchases of investments
    (79,287 )     (48,157 )
Maturities and sales of investments
    113,493       81,936  
 
           
Net cash provided by investing activities
    15,248       31,660  
 
           
 
               
Cash flows from financing activities:
               
Payment of bank borrowings
          (602 )
Net proceeds from issuance of common stock
    4,809       3,810  
 
           
Net cash provided by financing activities
    4,809       3,208  
 
           
Effect of exchange rates
    (1 )     (157 )
 
           
 
               
Net increase in cash and cash equivalents
    27,014       32,164  
Cash and cash equivalents at beginning of period
    22,466       30,061  
 
           
Cash and cash equivalents at end of period
  $ 49,480     $ 62,225  
 
           
 
               
Supplemental disclosures of cash flow information:
               
Cash paid for interest expense
  $     $ 32  
 
           
Cash paid for income taxes, net of refunds
  $ 251     $ 455  
 
           
 
               
Supplemental disclosures of non-cash investing and financing activities:
               
Unrealized loss on short-term investments
  $ (162 )   $ (178 )
 
           
Common stock issued in business combination
  $ 1,354     $ 782  
 
           
See accompanying notes to condensed consolidated financial statements.

4


 

INTERWOVEN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
     Basis of Presentation
     The condensed consolidated financial statements included herein are unaudited and reflect all adjustments (consisting only of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Interwoven, Inc. (“Interwoven” or “Company”) Annual Report on Form 10-K for the year ended December 31, 2004. The results of operations for the three and nine months ended September 30, 2005 are not necessarily indicative of the results for the entire year or for any other period.
     The consolidated balance sheet as of December 31, 2004 has been derived from audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. Such disclosures are contained in the Company’s Annual Report on Form 10-K.
     The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
     Certain reclassifications have been made to the prior year’s condensed consolidated financial statements to conform to the current period presentation.
     All assets and liabilities of the Company’s foreign subsidiaries, whose functional currency is the local currency, are translated using current rates of exchange at the balance sheet date, while revenues and expenses are translated using weighted-average exchange rates prevailing during the period. The resulting gains or losses from translation are charged or credited to other comprehensive income (loss) and are accumulated and reported in the stockholders’ equity section of the Company’s consolidated balance sheets. In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 52, Foreign Currency Translation, the Company recorded an unrealized gain (loss) due to foreign currency translation of ($59,000) and $91,000 for the three months ended September 30, 2005 and 2004, respectively, and ($1,000) and ($157,000) for the nine months ended September 30, 2005 and 2004, respectively.
     Use of Estimates
     The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
     Revenue Recognition
     Revenue consists principally of perpetual software licenses, support, consulting and training fees. The Company recognizes revenue using the residual method in accordance with Statement of Position (“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. Revenue is recognized for the delivered elements in an arrangement in which vendor specific objective evidence (“VSOE”) of fair value exists for all of the undelivered elements in the arrangement, but does not exist for one or more of the delivered elements in the arrangement. VSOE of fair value of support and other services is based on the Company’s customary pricing for such support and services when sold separately. At the outset of a customer arrangement, the Company defers revenue for the fair value of its undelivered elements (e.g., support, consulting and training) and recognizes revenue for the residual fee

5


 

attributable to the elements initially delivered (i.e., software product) when the basic criteria in SOP 97-2 have been met. The Company has analyzed all of the elements included in its multiple-element arrangements and determined that it has sufficient VSOE to allocate revenue to the support and professional services components including consulting and training services of its perpetual license arrangements. The Company sells its professional services separately and has established VSOE on this basis. VSOE for support is determined based upon the customer’s annual renewal rates for this element. Accordingly, assuming all other revenue recognition criteria are met, revenue from licenses is recognized upon delivery using the residual method in accordance with SOP 98-9, and revenue from support services is recognized ratably over its respective support period. If such evidence of fair value for each undelivered element does not exist, all revenue 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 (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, (iv) collectibility is probable and (v) the arrangement does not require services that are essential to the functionality of the software.
     Persuasive evidence of an arrangement exists. The Company determines that persuasive evidence of an arrangement exists with respect to a customer when it has a written contract, which is signed by both the customer and the Company, or a signed purchase order from the customer and the customer agrees or has agreed to a license arrangement with the Company.
     Delivery has occurred. The Company’s software may be delivered either physically or electronically to the customer. The Company determines that delivery has occurred upon shipment of the software pursuant to the terms of the agreement or when the software is made available to the customer through electronic delivery.
     The fee is fixed or determinable. If at the outset of the customer arrangement, the Company determines that the arrangement fee is not fixed or determinable, revenue is recognized when the fee becomes due and payable. Fees due under an arrangement are deemed not to be fixed or determinable if a portion of the license fee is due beyond the Company’s normal payment terms, which are no greater than 185 days from the date of invoice.
     Collectibility is probable. The Company determines whether collectibility is probable on a case-by-case basis. When assessing probability of collection, the Company considers the number of years the customer has been in business, history of collection for each customer and market acceptance of its products within each geographic sales region. The Company typically sells to customers with whom there is a history of successful collection. New customers are subject to a credit review process, which evaluates the customer’s financial position and, ultimately, its ability to pay. If the Company determines from the outset of an arrangement or based on historical experience in a specific geographic region that collectibility is not probable based upon its review process, revenue is recognized as payments are received and all other criteria for revenue recognition have been met. The Company periodically reviews collection patterns from its geographic locations to ensure that its historical collection results provide a reasonable basis for revenue recognition upon entering into an arrangement. For example, in the third quarter of 2004, the Company began recognizing revenue from customers in Spain on an accrual basis. Previously, revenue had been recognized from customers in that country only when cash was received and all other criteria for revenue recognition were met.
     Certain software orders are placed by resellers on behalf of end users. Interwoven recognizes revenue on these orders when end users have been identified, persuasive evidence of arrangements with end users exist and all other revenue recognition criteria are met.
     Support and service revenues consist of professional services and support fees. The Company’s professional services, which are comprised of software installation and integration, business process consulting and training, are not essential to the functionality of its software products. These products are fully functional upon delivery and do not require any significant modification or alteration for customer use. Customers purchase these professional services to facilitate the adoption of the Company’s technology and dedicate personnel to participate in the services being performed, but they may also decide to use their own resources or appoint other professional service organizations to provide these services. Software products are billed separately from professional services, which

6


 

are generally billed on a time-and-materials basis. The Company recognizes revenue from professional services as services are performed.
     Support contracts are typically priced based on a percentage of license fees and have a one-year term. Services provided to customers under support contracts include technical support and unspecified product upgrades. Revenues from support contracts are recognized ratably over the term of the agreement.
     The Company expenses all manufacturing, packaging and distribution costs associated with its software as cost of license revenues.
     Cash, Cash Equivalents and Short- and Long-Term Investments
     The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents include money market funds, commercial paper, government agencies and various deposit accounts. Cash equivalents are recorded at fair value, which approximates cost.
     The Company’s investments are classified as “available-for-sale” and are carried at fair value based on quoted market prices. These investments consist of corporate obligations that include commercial paper, corporate bonds and notes, market auction rate preferred and United States government agency securities. Realized gains and losses are calculated using the specific identification method. There were no realized gains (losses) for the three and nine months ended September 30, 2005 and 2004, respectively. For the three months ended September 30, 2005 and 2004, unrealized gains (losses) totaled ($60,000) and $108,000, respectively, and for the nine months ended September 30, 2005 and 2004, unrealized gains (losses) totaled ($162,000) and ($178,000). Unrealized gains and losses are included as a separate component of accumulated other comprehensive loss in stockholders’ equity.
     At December 31, 2004, the Company began to classify investments in auction-rate securities as short-term investments. These investments were included in cash equivalents in previous years and such amounts have been reclassified for all periods presented in the accompanying financial statements to conform to the current year classification. This change in classification had the effect of decreasing cash and cash equivalents as of September 30, 2004, increasing short term investments as of September 30, 2004 and decreasing cash flows from investing activities for the nine months ended September 30, 2004 by $2.0 million. However, this reclassification had no effect on the amounts of total current assets, total assets, net loss or cash flows from operations of the Company.
     Allowance for Doubtful Accounts
     The Company makes estimates as to the overall collectibility of accounts receivable and provides an allowance for accounts receivable considered uncollectible. The Company specifically analyzes its accounts receivable and historical bad debt experience, customer concentrations, customer credit-worthiness, current economic trends and changes in its customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. At September 30, 2005 and December 31, 2004, the Company’s allowance for doubtful accounts was $603,000 and $961,000, respectively.
     Allowance for Sales Returns
     The Company makes an estimate of its expected product returns and provides an allowance for sales returns. The accumulated allowance for sales return is reflected as a reduction from accounts receivable. The Company analyzes its revenue transactions, customer software installation patterns, historical return patterns, current economic trends and changes in its customer payment terms when evaluating the adequacy of the allowance for sales returns. At September 30, 2005 and December 31, 2004, the Company’s allowance for sales returns was $483,000 and $670,000, respectively.
     Risks and Concentrations
     Financial instruments that subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, short-term investments and accounts receivable. The Company maintains the majority of its cash,

7


 

cash equivalents and short-term investments with three financial institutions domiciled in the United States and one financial institution in the United Kingdom. The Company performs ongoing evaluations of its customers’ financial condition and generally requires no collateral from its customers on accounts receivable.
     The Company derived a significant portion of total revenue in the three and nine months ended September 30, 2005 and 2004 from its Web content management and collaborative document management products and services. The Company expects that these products will continue to account for a significant portion of its revenues in future periods.
     The Company relies on software licensed from third parties, including software that is integrated with internally developed software. These software license agreements expire on various dates from 2005 to 2009 and the majority of these agreements are renewable with written consent of the parties. Either party may terminate the agreement for cause before the expiration date with written notice. If the Company cannot renew these licenses, shipments of its products could be delayed until equivalent software could be developed or licensed and integrated into its products. These types of delays could seriously harm the Company’s business. In addition, the Company would be seriously harmed if the providers from whom the Company licenses its software ceased to deliver and support reliable products, enhance their current products or respond to emerging industry standards. Moreover, the third-party software may not continue to be available to the Company on commercially reasonable terms or at all.
     Financial Instruments
     The Company enters into forward foreign exchange contracts where the counterparty is a bank. The Company purchases forward foreign exchange contracts to mitigate the risk of changes in foreign exchange rates on accounts receivable. Although these contracts are or can be effective as hedges from an economic perspective, they do not qualify for hedge accounting under SFAS No. 133, Derivative Instruments and Hedging Activities, as amended. Any derivative that is either not designated as a hedge or is so designated but is ineffective per SFAS No. 133, is marked to market and recognized in results of operations.
     At September 30, 2005 and December 31, 2004, the notional equivalent of forward foreign currency contracts aggregated $3.6 million and $8.0 million, respectively. The fair value of the forward foreign exchange contracts was insignificant. The forward foreign currency contracts aggregating $3.6 million at September 30, 2005 are scheduled to expire in October 2005.
     Property and Equipment
     Property and equipment are recorded at cost and depreciated using the straight-line method over estimated useful lives of two to five years. Amortization of leasehold improvements is recorded using the straight-line method over the lesser of the estimated useful lives of the assets or the lease term, generally three to five years. Upon the sale or retirement of an asset, the cost and related accumulated depreciation are removed from the consolidated balance sheet and the resulting gain or loss is reflected in operations.
     Repair and maintenance expenditures, which are not considered improvements and do not extend the useful life of an asset, are expensed as incurred.
     Goodwill and Other Intangible Assets
     On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, which requires that goodwill no longer be amortized and that goodwill be tested annually for impairment or more frequently if events and circumstances warrant. This impairment testing involves a two-step process as follows:
    Step 1 — The Company has determined that it has one reporting unit and compares the fair value of its reporting unit to its carrying value, including goodwill. If the reporting unit’s carrying value, including goodwill, exceeds the unit’s fair value, the Company moves on to Step 2. If the unit’s fair value exceeds the carrying value, no further work is performed and no impairment charge is necessary.

8


 

    Step 2 — The Company performs an allocation of the fair value of the reporting unit to its identifiable tangible and non-goodwill intangible assets and liabilities. This allocation derives an implied fair value for the reporting unit’s goodwill. The Company then compares 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 charge shall be recognized for the excess.
     The Company performed its annual impairment test in the third quarter of 2005. Based on this testing, the Company determined that the carrying value of its recorded goodwill had not been impaired. Accordingly, no impairment charge was recorded as a result of this testing. The Company will continue to assess goodwill for impairment on an interim basis when indicators exist that goodwill may be impaired. Conditions that indicate that the Company’s goodwill may be impaired include the Company’s market capitalization declining below its net book value or the Company suffering a sustained decline in its stock price. A significant impairment could have a material adverse effect on the Company’s consolidated financial position and results of operations.
     Impairment of Long-Lived Assets
     The Company accounts for the impairment and disposal of long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 requires that long-lived assets, such as property and equipment and purchased intangible assets subject to amortization, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The recoverability of an asset is measured by a comparison of the carrying amount of an asset to its estimated undiscounted future cash flows. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less estimated selling costs, and would no longer be depreciated. The assets and liabilities of a disposal group classified as held for sale, if any, would be presented separately in the appropriate asset and liability sections of the balance sheet.
     Software Development Costs
     Costs incurred in the research and development of new software products to be sold are expensed as incurred until technological feasibility has been established at which time such costs are capitalized, subject to a net realizable value evaluation. Technological feasibility is established upon the completion of an integrated working model. Once a new product is ready for general release, costs are no longer capitalized. Costs incurred between completion of the working model and the point at which the product is ready for general release have not been significant. Accordingly, the Company has charged all software development costs to research and development expense in the period incurred.
     Restructuring and Related Expenses
     In June 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 supersedes Emerging Issues Task Force (“EITF”) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs To Exit an Activity (Including Certain Costs Associated with a Restructuring) and EITF Issue No. 88-10, Costs Associated with Lease Modification or Termination. The Company adopted SFAS No. 146 effective January 1, 2003; therefore, the restructuring activities initiated on or after January 1, 2003 were accounted for in accordance with SFAS No. 146. The adoption of SFAS No. 146 did not impact the Company’s restructuring obligations recognized in 2002 as these obligations must continue to be accounted for in accordance with EITF No. 88-10 and EITF No. 94-3 and other applicable pre-existing guidance.
     SFAS No. 146 requires that a liability associated with an exit or disposal activity be recognized when the liability is incurred, as opposed to when management commits to an exit plan. SFAS No. 146 also requires that: (i) liabilities associated with exit and disposal activities be measured at fair value; (ii) one-time termination benefits be expensed at the date the entity notifies the employee, unless the employee must provide future service, in which case the benefits are expensed ratably over the future service period; (iii) liabilities related to an operating lease/contract

9


 

be recorded at fair value and measured when the contract does not have any future economic benefit to the entity (i.e., the entity ceases to utilize the rights conveyed by the contract); and (iv) all other costs related to an exit or disposal activity be expensed as incurred. The Company estimated the fair value of its lease obligations included in its 2003 and later restructuring activities based on the present value of the remaining lease obligation, operating costs and other associated costs, less estimated sublease income.
     Restructuring obligations incurred prior to the adoption of SFAS No. 146 were accounted for and continue to be accounted for in accordance with EITF No. 88-10 and EITF No. 94-3. Specifically, the Company accounts for the costs associated with the reduction of its workforce in accordance with EITF No. 94-3. Accordingly, the Company recorded the liability related to these termination costs when the following conditions were met: (i) management with the appropriate level of authority approves a termination plan that commits the Company to such plan and establishes the benefits the employees will receive upon termination; (ii) the benefit arrangement is communicated to the employees in sufficient detail to enable the employees to determine the termination benefits; (iii) the plan specifically identifies the number of employees to be terminated, their locations and their job classifications; and (iv) the period of time to implement the plan does not indicate changes to the plan are likely. The termination costs recorded by the Company are not associated with nor do they benefit continuing activities.
     The Company accounted for costs associated with lease termination and/or abandonment prior to the adoption of SFAS No. 146 in accordance with EITF No. 88-10. Accordingly, the Company recorded the costs associated with lease termination and/or abandonment when the leased property had no substantive future use or benefit to the Company. Under EITF No. 88-10, the liability associated with lease termination and/or abandonment represents the sum of the total remaining lease costs and related exit costs, less probable sublease income. Accordingly, the Company has not reduced the obligations incurred in 2002 and prior to their net present value.
     Income Taxes
     The Company accounts for income taxes under the provisions of SFAS No. 109, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and carryforwards of net operating losses and tax credits. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be recovered.
     Advertisement and Sales Promotion Expenses
     Advertisement and sales promotion expenses are expensed as incurred and reflected, net of recoveries, if any, for sponsorship support from partners and other third parties.
     Stock-based Compensation
     At September 30, 2005, the Company had five stock-based compensation plans. The Company accounts for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and has elected to adopt the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”). The resulting stock-based compensation is amortized over the estimated term of the stock option, generally four years, using an accelerated approach. This accelerated approach is consistent with the method described in Financial Accounting Standards Board Interpretation (“FIN”) No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Awards Plans. Stock-based compensation to non-employees is based on the fair value of the option estimated using the Black-Scholes model on the date of the grant and revalued at the end of each reporting period until vested.
     Pro Forma Net Loss and Net Loss per Share
     The Company has adopted the disclosure-only provisions of SFAS No. 123. Had compensation cost been determined based on the fair value at the grant date, the Company’s net loss and basic and diluted net loss per common share would have been as follows (in thousands, except per share amounts):

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    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2005     2004     2005     2004  
Net loss:
                               
As reported
  $ (184 )   $ (1,502 )   $ (499 )   $ (24,072 )
Stock-based employee compensation included in net loss as reported, net of related tax *
    326       941       1,119       4,352  
Stock-based employee compensation using the fair value method, net of related tax *
    (2,457 )     (4,936 )     (9,243 )     (15,049 )
 
                       
Pro forma
  $ (2,315 )   $ (5,497 )   $ (8,623 )   $ (34,769 )
 
                       
 
                               
Basic and diluted net loss per common share:
                               
As reported
  $ (0.00 )   $ (0.04 )   $ (0.01 )   $ (0.60 )
Pro forma
  $ (0.06 )   $ (0.14 )   $ (0.21 )   $ (0.86 )
 
*   The tax effects on stock-based compensation have been fully reserved by way of a valuation allowance.
     The estimated weighted average fair values of options granted under the stock option plans during the three months ended September 30, 2005 and 2004 were $3.78 and $5.58 per share, respectively. The weighted average fair values of stock purchase rights for the three months ended September 30, 2005 and 2004 were $1.16 and $2.01, respectively. The fair value of each option is estimated on the date of grant using the Black-Scholes option valuation method, with the following weighted-average assumptions:
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2005   2004   2005   2004
Expected life from vest date of option
  0.75-1 year     1 year      0.75-1 year     1 year   
Risk-free interest rate
  3.87%-4.12%     3.5%     3.2%-4.2%   3.0%-3.7%
Dividend yield
  0.0%       0.0%       0.0%   0.0%
Volatility
  42.59%-68.93%         118.9%         42.59%-70.9%   113.8%-118.9%
     The fair value of each stock purchase right granted under the Employee Stock Purchase Plan (“ESPP”) is estimated using the Black-Scholes option valuation method, using the following weighted-average assumptions:
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2005   2004   2005   2004
Expected life from vest date of ESPP
  0.5 – 2 years   0.5 – 2 years   0.5 – 2 years   0.5 – 2 years
Risk-free interest rate
  1.0%-2.6%   1.1%   1.0%-2.6%   1.1%-1.3%
Dividend yield
  0.0%   0.0%   0.0%   0.0%
Volatility
  45.0%-83.2%   31.2%   45.0%-83.2%   31.2%-56.8%
     On October 3, 2005, the Board of Directors approved the acceleration of vesting of approximately 3.2 million “out-of-the-money” unvested common stock options previously awarded to employees and officers under the Company’s stock option plans. The exercise price of common stock options accelerated ranged in price from $8.35 per share to $67.60 per share and had a weighted average exercise price of $10.42 per share. The acceleration of vesting was not conditioned on continued employment or other such restrictions; however, the holders of the common stock options accelerated are required to refrain from selling any shares acquired upon exercise before the date on which the shares to be sold would have vested had the vesting of common stock options not been accelerated. The acceleration of these common stock options eliminated future stock compensation expense the Company would otherwise have been required to recognize in its consolidated statement of operations with respect to these common stock options upon the adoption of Statement of Financial Accounting Standard No. 123R, Share-Based Payment (“SFAS No. 123R), in January 2006. The Company will be required to reflect material stock-based compensation expense in the pro forma footnote disclosure required by the provisions of SFAS No. 123 in its

11


 

     Annual Report on Form 10-K for the year ended December 31, 2005. The amount of this additional pro forma expense has not yet been determined.
Note 2. Net Loss Per Common Share
     Basic net loss per common share is computed using the weighted average number of outstanding shares of common stock during the period, excluding shares of restricted stock subject to repurchase. Dilutive net loss per common share is computed using the weighted average number of common shares outstanding during the period and, when dilutive, potential common shares from options to purchase common stock and common stock subject to repurchase, using the treasury stock method.
     The following table sets forth the computation of basic and diluted net loss per common share (in thousands, except per share amounts):
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2005     2004     2005     2004  
Net loss
  $ (184 )   $ (1,502 )   $ (499 )   $ (24,072 )
 
                       
Shares used in computing basic and diluted net loss per common share
    41,988       40,564       41,586       40,374  
 
                       
Basic and diluted net loss per common share
  $ (0.00 )   $ (0.04 )   $ (0.01 )   $ (0.60 )
 
                       
     For periods ended September 30, 2005 and 2004, 10.3 million and 11.2 million stock options, respectively, were anti-dilutive and excluded from the diluted net loss per share calculation due to the Company’s net loss in each of the periods presented.
Note 3. Comprehensive Loss
     Other comprehensive income (loss) refers to gains and losses that under the accounting principles generally accepted in the United States of America are recorded as an element of stockholders’ equity and are excluded from operations.
     For the three and nine months ended September 30, 2005 and 2004, the components of comprehensive loss consisted of the following (in thousands):
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2005     2004     2005     2004  
Net loss
  $ (184 )   $ (1,502 )   $ (499 )   $ (24,072 )
Other comprehensive income (loss):
                               
Translation adjustment *
    (59 )     91       (1 )     (157 )
Unrealized gain (loss) on available-for-sale investments *
    (60 )     108       (162 )     (178 )
 
                       
Comprehensive loss
  $ (303 )   $ (1,303 )   $ (662 )   $ (24,407 )
 
                       
     Accumulated other comprehensive loss as of September 30, 2005 and December 31, 2004 consisted of the following (in thousands):
                 
    September 30,     December 31,  
    2005     2004  
Unrealized loss on available-for-sale investments *
  $ (401 )   $ (239 )
Cumulative translation adjustment *
    33       34  
 
           
 
  $ (368 )   $ (205 )
 
           
 
*   The tax effect on translation adjustments and unrealized gain (loss) has not been significant.

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Note 4. Mergers and Acquisitions
     In August 2005, the Company acquired Scrittura, Inc. (“Scrittura”), a provider of document automation software for the non-exchange based trading operations of financial services companies. The aggregate purchase price of this acquisition was $18.1 million, which included cash payments of $16.3 million, the assumption of Scrittura stock options of $1.4 million and transaction costs of $385,000. The purchase price may increase by up to $2.0 million if specific revenue and operating margin goals are achieved during a period that ends on December 31, 2005 with such purchase price increase payable in cash. The purchase price allocation is preliminary as management is in the process of obtaining certain information to finalize the value of a particular customer contract related intangible asset and the fair value of Interwoven’s remaining legal performance obligations in that contract. Our estimates and assumptions are subject to change upon the receipt of information and accordingly, additional purchase price adjustments may be required to be made, which in the opinion of the management is not expected to be material. The preliminary allocation of the purchase price for this acquisition included purchased technology of $7.4 million, non-competition covenants of $2.1 million, customer list of $1.3 million, customer backlog of $380,000, goodwill of $6.0 million and unamortized stock compensation of $1.2 million less the fair value of net liabilities of $240,000. The results of operations of Scrittura have been included in the consolidated results of operations of the Company since August 16, 2005 Pro forma financial information for Scrittura has not been presented, as the effects were not material to our consolidated financial statements.
     In August 2004, the Company acquired certain assets and assumed certain liabilities of Software Intelligence, Inc. (“Software Intelligence”), a provider of records management systems. The aggregate purchase price of this acquisition was $1.6 million, which included issuance of 118,042 shares of the Company’s common stock with an estimated fair value of $782,000, assumed liabilities of $693,000 and transaction costs of $156,000. The purchase price may increase by up to $200,000 if specific software license revenue goals are achieved during a period that ends on December 31, 2005 with such purchase price increase payable in shares of common stock. The allocation of the purchase price for this acquisition included purchased technology of $1.2 million, customer list of $303,000 and goodwill of $215,000 less the fair value of assumed liabilities of $84,000. The results of operations of Software Intelligence have been included in the consolidated results of operations of the Company since August 12, 2004.
Note 5. Stock-Based Compensation
     The amortization of stock-based compensation relates to the following functional categories in the accompanying condensed consolidated statement of operations (in thousands):
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2005     2004     2005     2004  
Cost of support and service revenues
  $ 77     $ 51     $ 146     $ 202  
Sales and marketing
    78       340       334       1,468  
Research and development
    4       270       123       945  
General and administrative
    167       280       516       1,737  
 
                       
 
  $ 326     $ 941     $ 1,119     $ 4,352  
 
                       
     Amortization of stock-based compensation will be reduced in future periods to the extent options are terminated prior to full vesting.

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Note 6. Goodwill and Intangible Assets
     The carrying amounts of the goodwill and other intangible assets as of September 30, 2005 and December 31, 2004 are as follows (in thousands):
                                                 
    September 30, 2005     December 31, 2004  
    Gross Carrying     Accumulated     Net     Gross Carrying     Accumulated     Net  
    Amount     Amortization     Amount     Amount     Amortization     Amount  
Purchased technology
  $ 42,381     $ (23,805 )   $ 18,576     $ 34,971     $ (16,344 )   $ 18,627  
Patents and
patent applications
    4,506       (2,787 )     1,719       4,506       (1,690 )     2,816  
Customer lists
    12,831       (5,445 )     7,386       11,581       (3,221 )     8,360  
Acquired workforce
    464       (406 )     58       464       (232 )     232  
Existing contract
    380             380                    
Non-compete agreements
    9,009       (6,994 )     2,015       6,929       (6,929 )      
 
                                   
Other intangible assets
    69,571       (39,437 )     30,134       58,451       (28,416 )     30,035  
Goodwill
    373,051       (181,571 )     191,480       367,035       (181,571 )     185,464  
 
                                   
 
  $ 442,622     $ (221,008 )   $ 221,614     $ 425,486     $ (209,987 )   $ 215,499  
 
                                   
     Intangible assets, other than goodwill, are amortized over estimated useful lives of between 12 and 48 months. The aggregate amortization expense of intangible assets was $3.9 million and $4.0 million for three months ended September 30, 2005 and 2004, respectively, and $11.0 million and $11.5 million for nine months ended September 30, 2005 and 2004, respectively. Of the $3.9 million amortization of intangible assets recorded in the three months ended September 30, 2005, $834,000 was recorded in operating expenses and $3.1 million was recorded in cost of license revenues. Of the $4.0 million amortization of intangible assets recorded in the three months ended September 30, 2004, $1.2 million was recorded in operating expenses and $2.8 million was recorded in cost of license revenues. Of the $11.0 million amortization of intangible assets for the nine months ended September 30, 2005, $2.5 million was recorded as operating expenses and $8.5 million was recorded in cost of license revenues. Of the $11.5 million amortization of intangible assets for the nine months ended September 30, 2004, $3.6 million was recorded as operating expenses and $7.9 million was recorded in cost of license revenues. Based on the intangible assets balance as of September 30, 2005, the Company expects amortization of intangible assets recorded as operating expenses to be $886,000 in the remaining three months of 2005, $3.3 million in 2006, $2.9 million in 2007 and $308,000 in 2008, as well as the amortization of purchased technology classified as a cost of license revenues to be $3.5 million in the remaining three months in 2005, $13.1 million in 2006, $3.7 million in 2007, $2.1 million in 2008 and $325,000 in 2009.
     The change in the carrying amount (net of amortization) of goodwill for the nine months ended September 30, 2005 is as follows (in thousands):
         
Beginning balance at December 31, 2004
  $ 185,464  
Goodwill from acquisition
    6,016  
 
     
Ending balance at September 30, 2005
  $ 191,480  
 
     
Note 7. Restructuring and Excess Facilities
     In the years 2001, 2002, 2003 and 2004, the Company implemented a series of restructuring and facility consolidation plans to improve operating performance. Restructuring and facilities consolidation costs consist of workforce reductions, the consolidation of excess facilities and the impairment of leasehold improvements and other equipment associated with abandoned facilities.
     Workforce Reductions
     During the three months ended June 30, 2004, the Company implemented a restructuring plan in certain of its European locations, and within its professional services organization to better align its expenses with expected future revenues. These actions resulted in the termination of 28 employees and, as a result, the Company recorded a charge of $1.8 million associated with these workforce reductions. The employee terminations were substantially

14


 

completed by December 31, 2004. At March 31, 2005, certain outstanding matters associated with these terminations were resolved and, accordingly, the Company reversed $333,000 of the recorded restructuring accrual related to litigation exposure and expected legal costs. At September 30, 2005, $34,000 remained accrued for workforce related restructuring.
     Excess Facilities
     In July 2004, the Company notified the landlord of a facility in Chicago, Illinois, that the Company was exercising a termination option included in the lease agreement for that facility effective August 31, 2005. As a result, the Company was relieved of future obligations under the lease after such date in return for a one-time termination payment of $346,000. In addition, on September 30, 2004, Interwoven entered into an agreement with the landlord of that facility, under which the lease termination date was changed to September 30, 2004 and the Company was relieved of its future obligations under its lease agreement in return for an additional one-time termination payment of $212,000. As a result, the Company reversed the remaining excess facilities accrual associated with this lease of $266,000.
     In September 2004, the Company and Ariba, Inc. (“Ariba”) entered into an amendment of the Amended and Restated Ariba Plaza Sublease dated August 6, 2001 between Ariba and Interwoven (the “Amendment”). Under the Amendment, the Company relinquished its rights to occupy approximately 89,000 square feet of currently unoccupied space and paid Ariba approximately $12.3 million in the quarter ended December 31, 2004. The Company was relieved of its obligation to pay rent and operating expenses on that space for the remaining term of the sublease, which ends July 31, 2007. As a result, the Company reversed the remaining excess facilities accrual associated with this lease of $1.1 million.
     During the three months ended June 30, 2005, the Company entered into an agreement to sublease an excess facility in Mountain View, California which was not previously anticipated or considered probable and, accordingly, reversed $462,000 of the previously recorded restructuring accrual.
     At September 30, 2005, the Company had $19.0 million accrued for excess facilities, which is payable through 2010. This accrual is net of estimated future sublease income of $3.2 million. The Company reassesses the estimated liabilities each period based on current real estate market conditions. Most of the Company’s excess facilities have been subleased at rates below those the Company is required to pay under its lease agreements. Those facilities that are not subleased are being marketed for sublease and are currently unoccupied. Accordingly, the estimate of excess facilities costs could differ from actual results and such differences could result in additional charges or credits that could materially affect the Company’s consolidated financial condition and results of operations.
     The restructuring costs and excess facilities charges have had a material impact on the Company’s consolidated results of operations and will require additional payments in future periods. The following table summarizes the estimated payments, net of estimated sublease income and the impact of discounting expected future lease payments, associated with these charges (in thousands):
                         
    Work Force     Excess        
Years Ending December 31,   Reduction     Facilities     Total  
2005 (remaining three months)
  $ 34     $ 2,400     $ 2,434  
2006
          7,243       7,243  
2007
          5,795       5,795  
2008
          1,612       1,612  
2009
          1,196       1,196  
Thereafter
          975       975  
 
                 
 
    34       19,221       19,255  
Present value discount of future lease payments
          (251 )     (251 )
 
                 
 
  $ 34     $ 18,970     $ 19,004  
 
                 

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     The following table summarizes the activity in the related restructuring and excess facilities accrual (in thousands):
                         
            Non-Cancelable        
            Lease        
    Workforce     Commitments        
    Cost     and Other     Total  
Balance at December 31, 2004
  $ 656     $ 25,026     $ 25,682  
Restructuring and excess facilities charges (recoveries)
    (365 )     (461 )     (826 )
Accretion of restructuring obligations to present value
          228       228  
Cash payments
    (257 )     (5,823 )     (6,080 )
 
                 
Balance at September 30, 2005
  $ 34     $ 18,970     $ 19,004  
 
                 
Note 8. Borrowings
     The Company entered into a line of credit agreement in August 2001 with a financial institution, which was subsequently amended in June 2004. The amended line of credit provides for borrowings up to $16.0 million. Borrowings under the line of credit agreement are secured by cash, cash equivalents and investments. The line of credit bears interest at the lower of 1% below the bank’s prime rate (6.75% at September 30, 2005) or 1.5% above LIBOR in effect on the first day of the term. The line of credit expires in July 2006 and is primarily used as collateral for letters of credit required by facilities leases. There are no financial covenant requirements associated with the line of credit. At September 30, 2005 and December 31, 2004, there were no borrowings under this line of credit agreement.
     Interest expense was none and $11,000 for the three months ended September 30, 2005 and 2004, respectively, and $1,000 and $36,000 for the nine months ended September 30, 2005 and 2004, respectively.
Note 9. Guarantees
     In November 2002, the FASB issued FIN No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others an Interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34. FIN No. 45 requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken by issuing the guarantee. It also requires additional disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees it has issued. The following is a summary of the agreements that the Company has determined are within the scope of FIN No. 45.
     The Company enters into standard indemnification agreements in the ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party – generally, the Company’s business partners, subsidiaries and/or customers, in connection with any United States patent or any copyright or other intellectual property infringement claim by any third-party with respect to the Company’s products or services. The term of these indemnification agreements is generally perpetual any time after execution of the agreement. The potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company has not incurred significant costs to defend lawsuits or settle claims related to these indemnification agreements and does not expect the liability to be material.
     The Company generally warrants that its software products will perform in all material respects in accordance with the Company’s standard published specifications in effect at the time of delivery of the licensed products to the customer. Additionally, the Company warrants that its support and services will be performed consistent with generally accepted industry standards. If necessary, the Company would provide for the estimated cost of product and service warranties based on specific warranty claims and claim history. The Company has not incurred significant expense under its product or services warranties. As of September 30, 2005 and December 31, 2004, the Company does not have or require an accrual for product or service warranties.

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     The Company may, at its discretion and in the ordinary course of business, subcontract the performance of any of its services. Accordingly, the Company enters into standard indemnification agreements with its customers, whereby customers are indemnified for acts of the Company’s subcontractors. The potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. However, the Company has general and umbrella insurance policies that enable it to recover a portion of any amounts paid. The Company has not incurred significant costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is not significant. Accordingly, the Company has no liabilities recorded for these agreements at September 30, 2005 and December 31, 2004.
Note 10. Interest Income and Other
     Interest income and other consisted of the following (in thousands):
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2005     2004     2005     2004  
Interest income
  $ 990     $ 500     $ 2,653     $ 1,367  
Interest expense
          (11 )     (1 )     (36 )
Foreign currency gain (loss)
    53       23       82       (115 )
Other
    (59 )     (44 )     (129 )     (102 )
 
                       
 
  $ 984     $ 468     $ 2,605     $ 1,114  
 
                       
Note 11. Recent Accounting Pronouncements
     In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS No. 154 replaces APB Opinion No. 20 and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements, and applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of change a cumulative effect of changing to the new accounting principle whereas SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle, unless it is impracticable. SFAS No. 154 enhances the consistency of financial information between periods. SFAS No. 154 will be effective beginning with the Company’s first quarter of 2006. The Company does not expect that the adoption of SFAS No. 154 will have a material impact on its consolidated results of operations or financial position.
     In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (an interpretation of FASB Statement No. 143) (“FIN No. 47”). This Interpretation clarifies that the term conditional asset retirement obligation, as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty may exist about the timing and (or) method of settlement. Accordingly, an entity is required to recognize the fair value of a liability for the conditional asset retirement obligation when incurred and the uncertainty about the timing and (or) method of settlement should be factored into the measurement of the liability when sufficient information exists. This Interpretation is effective no later than December 31, 2005. Retrospective application of interim financial information is permitted but is not required. Additionally, companies shall recognize the cumulative effect of initially applying this Interpretation as a change in accounting principle. The Company is currently evaluating the effect the adoption of FIN No. 47 will have on its consolidated results of operations and financial condition, but does not expect it to have a material impact.
     In December 2004, the FASB issued SFAS No. 123R, which replaces SFAS No. 123 and supersedes APB No. 25. SFAS No. 123R requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in the Company’s consolidated statements of operations. SFAS No. 123R allows either the modified prospective or the modified

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retrospective method as the method of transition. Under the modified prospective method, compensation cost is recognized beginning with the effective date of adoption (i) for all share-based payments granted after the effective date of adoption and (ii) for all stock options and restricted stock granted prior to the effective date of adoption and that remain unvested on the date of adoption. Under the modified retrospective method, prior periods may be restated for all periods presented. In April 2005, the Securities and Exchange Commission announced that the accounting provisions of SFAS No. 123R are effective at the beginning of a company’s next year that begins after June 15, 2005. The Company is now required to adopt SFAS No. 123R in the first quarter of 2006. The pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement recognition. Although the Company has not yet determined the transition method or whether the adoption of SFAS No. 123R will result in amounts that are similar to the current pro forma disclosures under SFAS No. 123, the Company is evaluating the requirements under SFAS No. 123R and expects the adoption to have a significant adverse impact on its consolidated statements of operations and net loss per share.
     In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets—an amendment of APB Opinion No. 29. The guidance in APB No. 29, Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in APB No. 29, however, included certain exceptions to that principle. SFAS No. 153 amends APB No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. The provision of SFAS No. 153 is effective in periods beginning after June 15, 2005. The Company does not believe that the adoption of the provisions of SFAS No. 153 will have a material impact on the Company’s consolidated financial statements as the Company does not expect to have any material nonmonetary exchange transactions.
     In December 2004, the FASB issued FASB Staff Position (“FSP”) No. 109-1, Application of FASB Statement No. 109, “Accounting for Income Taxes,” to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004. The American Jobs Creation Act (“AJCA”) introduces a special 9% tax deduction on qualified production activities. FAS No. 109-1 clarifies that this tax deduction should be accounted for as a special tax deduction in accordance with SFAS No. 109. The Company does not expect the adoption of these new tax provisions to have a material impact on its consolidated financial position, results of operations or cash flows.
     In December 2004, the FASB issued FSP No. 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creations Act of 2004. It allows companies additional time to evaluate whether foreign earnings will be repatriated under the repatriation provisions of the AJCA and requires specified disclosures for companies needing the additional time to complete the evaluation. Once a decision is made to repatriate the foreign earnings, companies must reflect the deferred tax liabilities attributable to foreign earnings in the period that the decision is made to remit those earnings. Management expects to complete this assessment in the next quarter.
Note 12. Contingencies
     In 2001, Interwoven and certain of its officers and directors and certain investment banking firms, were separately named as defendants in a securities class-action lawsuit filed in the United States District Court Southern District of New York, which was subsequently consolidated with more than 300 substantially identical proceedings against other companies. Similar suits were named against iManage, its directors and certain of its officers. The consolidated complaint asserts that the prospectuses for the Company’s October 8, 1999 initial public offering and January 26, 2000 follow-on public offering and iManage’s November 17, 1999 initial public offering failed to disclose certain alleged actions by the underwriters for the offerings. In addition, the consolidated complaint alleges claims under Section 11 and 15 of the Securities Act of 1933 against Interwoven and iManage and certain officers and directors of Interwoven and iManage. The plaintiff seeks damages in an unspecified amount. In June 2003, following the dismissal of Interwoven’s and iManage’s respective officers and directors from the litigation without prejudice and after several months of negotiation, the plaintiffs named in the consolidated complaint and Interwoven and iManage, together with the other issuers named there under and their respective insurance carriers, agreed to settle the litigation and dispose of any remaining claims against the issuers named in the consolidated complaint, in each case without admitting any wrongdoing. As part of this settlement, the respective insurance carriers of Interwoven and iManage have agreed to assume Interwoven’s and iManage’s entire payment obligation under the terms of the settlement. The court has finalized its preliminary approval of a settlement and set a new hearing date

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in April 2006 to consider whether the settlement should be given final approval. The Company cannot be reasonably assured, however, that the settlement will be approved by the putative plaintiff classes or finally approved the District Court.
     In addition to the matters mentioned above, the Company has been named as a defendant in other threatened legal action and employment-related lawsuits that arose in the normal course of business. In the opinion of management, the resolution of these matters is not expected to have a material adverse impact on the Company’s consolidated results of operations, cash flows or its financial position. However, depending on the amount and timing, an unfavorable resolution of a matter could materially affect the Company’s results of operations, cash flows or financial position in a particular period.
     The Company accrues for loss contingencies when available information indicates that it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated, in accordance with SFAS No. 5, Accounting for Contingencies.
Note 13. Significant Customer Information and Segment Reporting
     The Company has adopted the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which establishes standards for the manner in which public companies report information about operating segments in annual and interim financial statements. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The method for determining the information to report is based on the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance.
     The Company’s chief operating decision-maker is considered to be the Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenues by geographic region for purposes of making operating decisions and assessing financial performance. On this basis, the Company is organized and operates in a single operating and reporting segment: the design, development and marketing of software solutions.
     The following table presents geographic information (in thousands):
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2005     2004     2005     2004  
Revenues:
                               
United States of America
  $ 30,052     $ 25,906     $ 85,581     $ 76,255  
United Kingdom
    4,145       5,764       14,051       16,721  
Other geographies
    9,742       8,591       27,826       24,174  
 
                       
 
  $ 43,939     $ 40,261     $ 127,458     $ 117,150  
 
                       
                 
    September 30,     December 31,  
    2005     2004  
Long-lived assets (excluding goodwill):
               
United States of America
  $ 34,835     $ 35,248  
Other geographies
    827       618  
 
           
 
  $ 35,662     $ 35,866  
 
           
     The Company’s revenues are derived from software licenses, consulting and training services and customer support. Although a significant portion of the Company’s revenue is derived from WorkSite and TeamSite products and related services, the Company does not specifically track revenues by individual products. The Company’s disaggregated revenue information is as follows (in thousands):

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    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2005     2004     2005     2004  
License
  $ 17,417     $ 16,157     $ 48,500     $ 49,335  
Customer support
    19,410       17,067       56,726       47,377  
Consulting
    5,965       5,921       18,727       17,281  
Training
    1,147       1,116       3,505       3,157  
 
                       
 
  $ 43,939     $ 40,261     $ 127,458     $ 117,150  
 
                       
     No customer accounted for more than 10% of the total revenues for the three and nine months ended September 30, 2005 and 2004. At September 30, 2005 and December 31, 2004, no single customer accounted for more than 10% of the outstanding accounts receivable.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
     The following contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Words such as “anticipates,” “expects,” “believes,” “seeks,” “estimates” and similar expressions identify such forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements. Factors that could cause actual results to differ materially from expectations include those set forth in the following discussion, and, in particular, the risks discussed below under the subheading “Factors That May Impact Our Business” and in other documents we file with the Securities and Exchange Commission. Unless required by law, we do not undertake any obligation to update any forward-looking statements or risk factors.
Overview
     Incorporated in March 1995, we provide enterprise content management (“ECM”) software and services that enable businesses to create, review, manage, distribute and archive business content, such as documents, spreadsheets, e-mails and presentations, as well as Web images, graphics, content and applications code, across the enterprise and its value chain of customers, partners and suppliers. Our ECM platform consists of integrated software product offerings, delivering customers end-to-end content lifecycle management including collaboration, e-mail management, imaging, digital asset management, Web content management, document management and records management. Customers have deployed our products for business initiatives such as Web content management, intranet management, marketing content management, collaborative portals, records management, deal management, matter-centric collaboration and content provisioning. To date, more than 3,300 enterprises and professional services organizations worldwide have licensed our software products. We market and license our software products and services primarily through a direct sales force and augment our sales, marketing and service efforts through relationships with technology vendors, professional service firms, systems integrators and other strategic partners. Our revenues to date have been derived primarily from accounts in the United States of America; revenues from outside of the United States of America accounted for 32% and 36% of our total revenues in the three months ended September 30, 2005 and 2004, respectively, and 33% and 35% of our total revenues in the nine months ended September 30, 2005 and 2004, respectively. We had 728 employees as of September 30, 2005.
Results of Operations
     Prior to 2003, our revenues were primarily derived from our Web content management product, TeamSite. Revenues from TeamSite have been affected since mid 2001 by a shift away from spending on public-facing Web applications to internal productivity enhancing applications and other software applications. In response to these challenges, we initiated and completed a series of strategic actions designed to expand our product offerings into the ECM market and create product offerings that we believe address a larger market opportunity. During 2003, we acquired MediaBin and iManage to extend our product offerings into digital asset management and collaborative document management. These business combinations also allowed us to benefit from greater economies of scale in our sales, marketing, development and administrative functions. We also completed a series of restructuring actions to help align our cost structure with expected revenues. These restructuring actions included staff reductions in all functional areas of our business, decreases in marketing and promotional spending and the abandonment of certain facilities in excess of current and expected future needs.
     The ECM market is fragmented, intensely competitive and growth in the market has been sporadic as customers tightly manage their information technology budgets and priorities. As a result, our results of operations have been impacted in recent periods by longer product evaluation periods, protracted contract negotiations and the multiple authorization requirements of our customers. While we have taken steps to mitigate the effects of these forces, we expect that our results of operations will continue to be impacted by these factors and others for the foreseeable future.

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Revenues
     The following sets forth, for the periods indicated, our revenues (in thousands, except percentages):
                                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2005     2004     Change     2005     2004     Change  
License
  $ 17,417     $ 16,157       8 %   $ 48,500     $ 49,335       (2 )%
Percentage of total revenues
    40 %     40 %             38 %     42 %        
Support and service
    26,522       24,104       10 %     78,958       67,815       16 %
Percentage of total revenues
    60 %     60 %             62 %     58 %        
 
                                       
 
  $ 43,939     $ 40,261       9 %   $ 127,458     $ 117,150       9 %
 
                                       
     Total revenues increased 9% to $43.9 million for the three months ended September 30, 2005 from $40.3 million for the three months ended September 30, 2004. The increase in revenues was attributable to higher license revenue and higher revenues from customer support. Our average selling prices were $217,000 and $180,000 for the three months ended September 30, 2005 and 2004, respectively, for transactions in excess of $50,000 in aggregate license revenues. The increase in our average selling price resulted primarily from the receipt of four large customer orders of $1 million or greater during the quarter ended September 30, 2005. Sales outside of the United States of America represented 32% and 36% of our total revenues for the three months ended September 30, 2005 and 2004, respectively. The decrease as a percentage of total revenue was primarily the result of a revenue decline from customers in Europe. Total revenues increased 9% to $127.5 million for the nine months ended September 30, 2005 from $117.2 million for the nine months ended September 30, 2004. The increase in revenues was attributable to higher revenues from customer support, consulting services and, to a lesser extent, training services. The impact of foreign exchange fluctuations on revenue during the three months and nine months ended September 30, 2005 and 2004 was immaterial.
     License. License revenues increased 8% to $17.4 million for the three months ended September 30, 2005 from $16.2 million for the three months ended September 30, 2004. License revenues represented 40% of total revenues for the three months and nine months ended September 30, 2005 and 2004. The increase in license revenues for the three months ended September 30, 2005 over the prior year was attributable to the effect of larger customer orders and improved sales performance in the United States of America. License revenues decreased 2% to $48.5 million for the nine months ended September 30, 2005 from $49.3 million in the same period in 2004. We believe that the decrease in license revenues for the nine months ended September 30, 2005 over the prior year was attributable to a reduction in spending on information technology initiatives, longer sales cycles and reduced license revenues from our European operations. License revenues represented 38% and 42% of total revenues for the nine months ended September 30, 2005 and 2004, respectively. We believe that reduced spending on information technology initiatives and the effect of longer sales cycles may continue to adversely affect our business for the foreseeable future and, to the extent that any improvement occurs in either the information technology spending environment or sales cycles, such improvements may not be sustained.
     Support and Service. Support and service revenues increased 10% to $26.5 million for the three months ended September 30, 2005 from $24.1 million for the three months ended September 30, 2004. The increase in support and service revenues was the result of a $2.3 million increase in customer support revenues from a larger installed base of customers and customer follow-on orders. Support and service revenues accounted for 60% of total revenues for the three months ended September 30, 2005 and 2004. Support and service revenues increased 16% to $79.0 million for the nine months ended September 30, 2005 from $67.8 million for the nine months ended September 30, 2004. This increase was the result of a $9.3 million increase in customer support revenues, a $1.5 million increase in consulting services revenues and a $348,000 increase in training services revenues. Support and service revenues accounted for 62% and 58% for the nine months ended September 30, 2005 and 2004, respectively.
     We realize lower gross profits on support and service revenues than on license revenues. In addition, we may contract with outside consultants and system integrators to supplement the services we provide to customers, which increases our costs and further reduces gross profits. As a result, if support and service revenues increase as a percentage of total revenues or if we increase our use of third parties to provide such services, our gross profits will be lower and our operating results may be adversely affected.

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     To the extent that our license revenues decline in the future, our support and service revenues may also decline. Specifically, a decline in license revenues may result in fewer consulting engagements. Additionally, since customer support contracts are generally sold with each license transaction, a decline in license revenues may also result in a slow down in customer support revenues. However, since customer support revenues are recognized over the duration of the support contract, the impact will not be experienced for up to several months after a decline in license revenues. Customer support revenues may also be adversely impacted if customers fail to renew their support agreements or renew the agreements at a lower price than previously existed for their support arrangement.
Cost of Revenues
     The following sets forth, for the periods indicated, our cost of revenues (in thousands, except percentages):
                                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2005     2004     Change     2005     2004     Change  
License
  $ 3,951     $ 3,387       17 %   $ 10,781     $ 9,864       9 %
Percentage of total revenues
    9 %     8 %             8 %     8 %        
Percentage of license revenues
    23 %     21 %             22 %     20 %        
Support and service
    10,654       9,705       10 %     30,864       28,643       8 %
Percentage of total revenues
    24 %     24 %             24 %     24 %        
Percentage of support and service revenues
    40 %     40 %             39 %     42 %        
 
                                       
 
  $ 14,605     $ 13,092       12 %   $ 41,645     $ 38,507       8 %
 
                                       
     License. Cost of license revenues includes expenses incurred to manufacture, package and distribute our software products and documentation, as well as costs of licensing third-party software embedded in or sold with our software products and amortization of purchased technology associated with business combinations. Cost of license revenues represented 9% and 8% of total revenues for the three months ended September 30, 2005 and 2004, respectively. The increase in cost of license revenues in absolute dollars for the three months ended September 30, 2005 from the same period in 2004 was attributable primarily to a $360,000 increase in amortization of purchased technology and a $326,000 increase in royalties due to third parties offset by a $122,000 decrease in packaging and supplies cost. Cost of license revenues represented 8% of total revenues for the nine months ended September 30, 2005 and 2004. The increase in cost of license revenues in absolute dollars for the nine months ended September 30, 2005 from the same period in 2004 was attributable to a $631,000 increase in amortization of purchased technology and $579,000 in higher royalties due to third parties offset by a $293,000 decrease in packaging and supplies cost.
     Based only on acquisitions completed through September 30, 2005, we expect the amortization of purchased technology classified as a cost of license revenues to be $3.5 million for the remaining three months of 2005, $13.1 million in 2006, $3.7 million in 2007, $2.1 million for 2008 and $325,000 for 2009. We expect cost of license revenues as a percentage of license revenues to vary from period to period depending on the mix of products sold, the extent to which third-party software products are bundled with our products and the amount of overall license revenues, as many of the third-party software products embedded in our software are under fixed-fee arrangements.
     Support and Service. Cost of support and service revenues consists of salary and personnel-related expenses for our consulting, training and support personnel, costs associated with furnishing product updates to customers under active support contracts, subcontractor expenses, travel expenses and depreciation of equipment used in our services and customer support operation. Cost of support and service revenues increased 10% to $10.7 million in the three months ended September 30, 2005 from $9.7 million for the same period in 2004. The increase in cost of support and service revenues in the three months ended September 30, 2005 from the same period in 2004 was due primarily to an increase of $581,000 in personnel related costs mainly from the additional headcount from Scrittura and $310,000 in travel expenses. Cost of support and service revenues represented 40% of support and service revenues for the three months ended September 30, 2005 and 2004. Cost of support and service revenues increased 8% to $30.9 million for the nine months ended September 30, 2005 from $28.6 million for the same period in 2004. The increase in cost of support and service revenues in the nine months ended September 30, 2005 from the same

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period in 2004 was due primarily to higher subcontractor fees of $910,000 as a result of the increased usage of outside consulting firms to supplement our current services capacity, higher travel expenses of $702,000 and higher personnel related costs of $584,000. Cost of support and service revenues represented 39% and 42% of support and service revenues in the nine months ended September 30, 2005 and 2004, respectively. The decrease in cost of support and service revenues as a percentage of its related revenues was primarily attributable to an increase in support revenues as a percentage of total support and service revenues, as support revenues generally have higher gross margins than consulting and training services. Support and service headcount was 204 and 177 at September 30, 2005 and 2004, respectively. The increase in headcount was due to hiring of support personnel primarily in the European and Asia Pacific geographic regions and the acquisition of Scrittura.
     Since our support and service revenues have lower gross profits than our license revenues, our overall gross margin percentage will typically decline if our support and service revenues increase as a percent of total revenues. We expect cost of support and service revenues as a percentage of support and service revenues to vary from period to period, depending in part on the percentage of services performed by our in-house staff or outside subcontractors.
Operating Expenses
     Sales and Marketing
     The following sets forth, for the periods indicated, our sales and marketing expense (in thousands, except percentages):
                                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2005     2004     Change     2005     2004     Change  
Sales and marketing
  $ 17,888     $ 17,300       3 %   $ 51,631     $ 52,585       (2 )%
Percentage of total revenues
    41 %     43 %             41 %     45 %        
     Sales and marketing expense consists of salaries, commissions, benefits and related costs for sales and marketing personnel, travel expense and marketing programs, including customer conferences, promotional materials, trade shows and advertising. Sales and marketing expense increased 3% to $17.9 million for the three months ended September 30, 2005 from $17.3 million for the three months ended September 30, 2004. The increase in sales and marketing expense in the three months ended September 30, 2005 from the same period in 2004 was due primarily to a $508,000 increase in commissions as a result of higher license revenue, a $143,000 increase in marketing expense, and a $113,000 increase in personnel costs, offset in part by a $109,000 decrease in rent expense and a $70,000 decrease in depreciation expense. Sales and marketing expense decreased 2% to $51.6 million for the nine months ended September 30, 2005 from $52.6 million for the same period in 2004. The decrease in sales and marketing expense in the nine months ended September 30, 2005 from the same period in 2004 was due primarily to a $626,000 decrease in personnel costs, a $325,000 decrease in rent expense as we renewed certain lease arrangements on favorable terms, a $312,000 decrease in depreciation expense, a $281,000 decrease in travel expense, and a $258,000 decrease in outside services, offset in part by a $685,000 increase in marketing expense and a $227,000 increase in recruiting expense. Sales and marketing expense represented 41% and 43% of total revenues in the three months ended September 30, 2005 and 2004, respectively, and 41% and 45% of total revenues for the nine months ended September 30, 2005 and 2004, respectively. The decline in sales and marketing expense as a percentage of total revenues is due to lower variable compensation costs and higher total revenues. Sales and marketing headcount was 240 and 234 at September 30, 2005 and 2004, respectively.
     We anticipate that sales and marketing expense, as a percentage of total revenues, will decrease slightly in 2005 from levels posted in 2004 due to expected economies of scale as a result of total revenue growth. We expect that the percentage of total revenues represented by sales and marketing expense will fluctuate from period to period due to the timing of hiring of new sales and marketing personnel, our spending on marketing programs and the level of revenues, in particular license revenues, in each period.

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     Research and Development
     The following sets forth, for the periods indicated, our research and development expense (in thousands, except percentages):
                                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2005     2004     Change     2005     2004     Change  
Research and development
  $ 7,635     $ 7,746       (1 )%   $ 23,503     $ 23,033       2 %
Percentage of total revenues
    17 %     19 %             18 %     20 %        
     Research and development expense consists of salaries and benefits, third-party contractors, facilities and related overhead costs associated with our product development and quality assurance activities. Research and development expense decreased 1% to $7.6 million in the three months ended September 30, 2005 from $7.7 million for the three months ended September 30, 2004. The decrease in the three months ended September 30, 2005 from the same period in 2004 was primarily due to a $284,000 decrease in third-party contractor fees and a $152,000 decrease in rent expense, offset in part by a $288,000 increase in personnel related costs. Research and development expense increased 2% to $23.5 million for the nine months ended September 30, 2005 from $23.0 million for the same period in 2004. The increase in the nine months ended September 30, 2005 from the same period in 2004 was primarily due to an $819,000 increase in personnel related costs and an $87,000 increase in travel expense, offset in part by a $128,000 decrease in depreciation expenses and a $282,000 decrease in rent expense as we renewed certain lease arrangements on favorable terms. Research and development expense was 17% and 18% of total revenues in the three and nine months ended September 30, 2005, respectively, and was 19% and 20% for the three and nine months ended September 30, 2004. The decline in research and development expense as a percentage of total revenues is due to increased revenues. Research and development headcount was 198 and 200 at September 30, 2005 and 2004, respectively. We expect that research and development expense in 2005 will decline slightly as a percentage of total revenues when compared to similar periods in 2004 as we continue to manage our expenses and realize greater expected cost efficiencies in our product development activities.
General and Administrative
     The following sets forth, for the periods indicated, our general and administrative expense (in thousands, except percentages):
                                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2005     2004     Change     2005     2004     Change  
General and administrative
  $ 3,506     $ 3,052       15 %   $ 9,887     $ 9,022       10 %
Percentage of total revenues
    8 %     8 %             8 %     8 %        
     General and administrative expense consists of salaries and related costs for general corporate functions including finance, accounting, human resources, legal and information technology, as well as costs associated with being a public company including listing fees, directors and officers insurance and audit fees. General and administrative expense increased 15% to $3.5 million for the three months ended September 30, 2005 from $3.1 million for the three months ended September 30, 2004. The increase was primarily due to an increase of $357,000 in accounting fees and an increase of $190,000 in personnel related costs partially offset by a decrease of $140,000 in bad debt expense. General and administrative expense increased 10% to $9.9 million for the nine months ended September 30, 2005 from $9.0 million for the same period in 2004. The increase was primarily due to an increase of $536,000 in accounting fees, an increase of $439,000 in personnel related costs and an increase of $97,000 in outside services offset in part by a decrease of $232,000 in bad debt expense. General and administrative expense represented 8% of total revenues in the three months ended September 30, 2005 and 2004 and for the nine months ended September 30, 2005 and 2004. General and administrative headcount was 86 and 81 at September 30, 2005 and 2004, respectively. We expect general and administrative expense to remain constant as a percentage of total revenues in 2005 when compared to 2004.

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     Amortization of Stock-Based Compensation
     The following sets forth, for the periods indicated, our amortization of stock-based compensation (in thousands, except percentages):
                                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2005     2004     Change     2005     2004     Change  
Amortization of stock-based compensation
  $ 326     $ 941       (65 )%   $ 1,119     $ 4,352       (74 )%
Percentage of total revenues
    1 %     2 %             1 %     4 %        
     We recorded deferred stock-based compensation in connection with stock options granted prior to our initial public offering, for a stock option grant made to our Chief Executive Officer at an exercise price below the fair market value of our common stock on the date of grant and in connection with stock options granted and assumed in our business combinations. Amortization of stock-based compensation was $326,000 and $941,000 for the three months ended September 30, 2005 and 2004, respectively, and $1.1 million and $4.4 million for the nine months ended September 30, 2005 and 2004, respectively. The decrease in amortization of stock-based compensation was primarily attributable to the use of the accelerated method of amortizing deferred stock-based compensation expense, as prescribed by Financial Accounting Standards Board Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans (An Interpretation of APB Opinions No. 15 and 25), which has resulted in greater recognition of amortization expense in the beginning of the vesting period for such options. Based on deferred stock-based compensation recorded through September 30, 2005, we expect the amortization of deferred stock-based compensation to be $497,000 in the remaining three months of 2005, $1.1 million in 2006 and $157,000 in 2007. We may incur additional amortization expense beyond these expected future levels to the extent we modify the terms of any existing option awards or grant new awards which are determined to require variable accounting treatment.
     Amortization of stock-based compensation related to the following expense categories in the accompanying consolidated statements of operations for 2005 and 2004, respectively (in thousands):
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2005     2004     2005     2004  
Cost of support and service revenues
  $ 77     $ 51     $ 146     $ 202  
Sales and marketing
    78       340       334       1,468  
Research and development
    4       270       123       945  
General and administrative
    167       280       516       1,737  
 
                       
 
  $ 326     $ 941     $ 1,119     $ 4,352  
 
                       
     In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (“SFAS”) No. 123R, Share-Based Payment, which revises SFAS No. 123 and supersedes Accounting Principles Board Opinion No. 25 and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions, including the issuance of stock options and other stock-based compensation to employees. Companies are required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award, which is usually the vesting period. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments. SFAS No. 123R is effective for the first annual reporting period after June 15, 2005 and applies to all awards granted after the effective date and to awards modified, repurchased or canceled after that date. Although we have not yet determined whether the adoption of SFAS No. 123R will result in amounts that are similar to the current pro forma disclosures under SFAS No. 123, we are currently assessing the impact of adopting SFAS No. 123R. As we have 4.4 million unvested stock options outstanding at September 30,

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2005 (including the unvested “out of the money” common stock options that were accelerated as of October 3, 2005), we expect the adoption of SFAS No. 123R will have a significant adverse impact on our consolidated statements of operations.
     Amortization of Intangible Assets
     The following sets forth, for the periods indicated, our amortization of intangible assets (in thousands, except percentages):
                                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2005     2004     Change     2005     2004     Change  
Amortization of intangible assets
  $ 834     $ 1,217       (31 )%   $ 2,472     $ 3,631       (32 )%
Percentage of total revenues
    2 %     3 %             2 %     3 %        
     Amortization of intangible assets was $834,000 and $1.2 million for the three months ended September 30, 2005 and 2004, respectively, and $2.5 million and $3.6 million for the nine months ended September 30, 2005 and 2004, respectively. The decrease in amortization of intangible assets was due to certain intangible assets becoming fully amortized. Based on the intangible assets balance as of September 30, 2005, we expect amortization of intangible assets classified as operating expenses to be $886,000 in the remaining three months of 2005, $3.3 million in 2006, $2.9 million in 2007 and $308,000 in 2008. We may incur additional amortization expense beyond these expected future levels to the extent we make additional acquisitions.
     We performed our annual impairment test on goodwill in the third quarter of 2005. Based on this testing, we determined that the carrying value of recorded goodwill of $191.5 million had not been impaired. Accordingly, no impairment charge was recorded as a result of this testing. Generally accepted accounting principles in the United States of America require that we review the value of goodwill and intangible assets from time to time to determine whether the recorded values of these assets have been impaired and should be reduced. We will perform impairment assessments on an interim basis when indicators exist that goodwill or our intangible assets may be impaired. These indicators include our market capitalization declining below our net book value or if we suffer a sustained decline in our stock price. If we determine there has been an impairment of goodwill and other intangible assets, the carrying value of those assets will be written down to fair value, and a charge against operating results will be recorded in the period that the determination is made. Any impairment could have a material impact on our consolidated operating results and financial position, and could harm the trading price of our common stock.
     Restructuring and Excess Facilities Charges (Recoveries)
     The following sets forth, for the periods indicated, our restructuring and excess facilities charges (in thousands, except percentages):
                                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2005     2004     Change     2005     2004     Change  
Restructuring and excess facilities charges (recoveries)
  $ 35     $ (1,360 )     (103 )%   $ (598 )   $ 10,477       (106 )%
Percentage of total revenues
    *       (3 )%             *       9 %        
     *percent not meaningful
     For the three months ended September 30, 2005, we recorded $67,000 associated with the accretion of discounted future lease payments associated with facilities leases recorded under SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. We also reversed $32,000 of the recorded restructuring accrual related to expected settlement costs since the outstanding matters associated with the termination of certain European employees were settled.

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     During the three months ended June 30, 2005, we reversed $462,000 of the previously recorded restructuring accrual as a result of our subleasing an excess facility in Mountain View, California, which sublease was not previously anticipated or considered probable. We also recorded $159,000 in the three months ended June 30, 2005 associated with the accretion of discounted future lease payments related to excess facilities.
     At the end of the three months ended March 31, 2005, we resolved several outstanding matters associated with the termination of certain European employees in 2004. As a result, we reversed $333,000 of the recorded restructuring accrual related to expected settlement costs. We also recorded $3,000 for the three months ended March 31, 2005 associated with the accretion of discount associated with facilities.
     During the three months ended September 30, 2004, we entered into an agreement with the landlord of an excess facility in Chicago, Illinois. As part of this agreement, we were relieved of future obligations under the lease agreement in return for a one-time termination payment of $212,000. As a result, we reversed the remaining excess facilities accrual associated with this lease of $266,000. In addition, we entered into an agreement with the sublandlord of our corporate headquarters. As part of this agreement, we relinquished our rights to occupy approximately 89,000 square feet of currently unoccupied space and were relieved of future obligations under the sublease agreement in return for a one-time termination payment of $12.3 million. As a result, we reversed the $1.1 million remaining excess facilities accrual associated with this lease.
     During the three months ended June 30, 2004, we revised our sublease assumptions associated with certain of our excess facilities, abandoned a leased facility in Germany and elected to terminate a lease in Chicago, Illinois. As a result of these actions, we recorded a charge of $10.0 million. Additionally, we implemented a restructuring plan in some of our European locations, and within our professional services organization, to better align our expenses with future revenue potential in those locations. These actions resulted in the termination of 28 employees and a charge of $1.8 million associated with such workforce reductions.
     The previously recorded charges for excess facilities were based on the payments due over the remainder of the lease term and estimated operating costs offset by our estimate of future sublease income. Accordingly, our estimate of excess facilities costs may differ from actual results and such differences may result in additional charges or credits that could materially affect our consolidated financial condition and results of operations.
Interest Income and Other, Net
     The following sets forth, for the periods indicated, our interest income and other (in thousands, except percentages):
                                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2005     2004     Change     2005     2004     Change  
Interest income and other, net
  $ 984     $ 468       110 %   $ 2,605     $ 1,114       134 %
Percentage of total revenues
    2 %     1 %             2 %     1 %        
     Interest income and other is composed of interest earned on our cash, cash equivalents and investments, foreign exchange transaction gains and losses. Interest income and other increased $516,000, or 110%, to $984,000 for the three months ended September 30, 2005 from $468,000 for the three months ended September 30, 2004. The increase was primarily due to higher interest income as a result of increasing interest rates. For the nine months ended September 30, 2005, interest and other income increased $1.5 million, or 134%, to $2.6 million from $1.1 million recorded in the same period in 2004. The increase was primarily due to higher interest income of $1.3 million and foreign exchange gains of $197,000.

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Provision for Income Taxes
     The following sets forth, for the periods indicated, our provision for income taxes (in thousands, except percentages):
                                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2005     2004     Change     2005     2004     Change  
Provision for income taxes
  $ 278     $ 243       14 %   $ 903     $ 729       24 %
Percentage of total revenues
    1 %     1 %             1 %     1 %        
     The provision for income taxes recorded for the three and nine months ended September 30, 2005 and 2004 related to state and foreign taxes. Management periodically evaluates the recoverability of the deferred tax assets and recognizes the tax benefit only as reassessment demonstrates that these assets are realizable. Currently, it is determined that it is not likely that the assets will be realized. Therefore, we have recorded a full valuation allowance against the deferred income tax assets.
     Liquidity and Capital Resources
                         
    September 30,  
    2005     2004     Change  
    (in thousands, except percentages)  
Cash, cash equivalents and short-term investments
  $ 126,716     $ 138,694       (9 )%
Working capital
  $ 79,461     $ 80,741       (2 )%
Stockholders’ equity
  $ 294,077     $ 285,471       3 %
     Our primary sources of cash are the collection of accounts receivable from our customers, proceeds from the exercise of stock options and stock purchased under our employee stock purchase plan. Our uses of cash include payroll and payroll-related expenses and operating expenses such as marketing programs, travel, professional services and facilities costs. We have also used cash to purchase property and equipment, pay liabilities associated with excess facilities and acquire businesses and technologies to expand our product offerings.
     A number of non-cash items were charged to expense and contribute to our net loss for the three and nine months ended September 30, 2005 and 2004. These items include depreciation and amortization of property and equipment, intangible assets and deferred stock-based compensation. The extent to which these non-cash items increase or decrease will have no corresponding impact on our operating cash flows.
     Cash provided by operating activities for the nine months ended September 30, 2005 was $7.0 million, representing an improvement of $9.5 million from the same period in 2004. This improvement primarily resulted from a smaller net loss, adjustments for non-cash expenses and payments to reduce our restructuring and excess facilities accrual offset in part by higher accounts receivable outstanding. Payments made to reduce our excess facilities obligations totaled $5.8 million. Our days sales outstanding in accounts receivable (“days outstanding”) were 60 days at September 30, 2005 and December 31, 2004.
     Cash used by operating activities for the nine months ended September 30, 2004 was $2.5 million. This amount primarily resulted from our net loss, adjusted for non-cash expenses, payments to reduce our restructuring and excess facilities and payments against accounts payable and accrued liabilities. The cash used in operating activities was offset by a decrease in accounts receivable and an increase in deferred revenues. Our days sales outstanding were 58 days at September 30, 2004. Deferred revenues increased due to higher renewals of customer support contracts.
     Cash provided by investing activities was $15.2 million for the nine months ended September 30, 2005. This primarily resulted from net proceeds from short-term investments of $34.2 million, comprised of $113.5 million of proceeds from the maturity and sale of investments partially offset by $79.3 million to purchase investment securities, and $2.4 million to purchase property and equipment. In addition, our investing activities included $16.6 million in net cash used to acquire Scrittura.

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     Cash provided by investing activities was $31.7 million for the nine months ended September 30, 2004. This primarily resulted from net proceeds from short-term investments of $33.8 million, comprised of $81.9 million of proceeds from the maturity and sale of investments partially offset by $48.1 million to purchase investment securities, and $2.1 million to purchase property and equipment.
     Cash provided from financing activities was $4.8 million and $3.2 million for the nine months ended September 30, 2005 and 2004, respectively, and consists primarily of cash received from the exercise of common stock options and shares issued under the Company’s employee stock purchase plan. Additionally, in 2004, we used $602,000 to retire a bank loan assumed in our acquisition of iManage.
     We have classified our investment portfolio as “available for sale,” and our investment objectives are to preserve principal and provide liquidity while at the same time maximizing yields without significantly increasing risk. We may sell an investment at any time if the quality rating of the investment declines, the yield on the investment is no longer attractive or we are in need of cash. Because we invest only in investment securities that are highly liquid with a ready market, we believe that the purchase, maturity or sale of our investments has no material impact on our overall liquidity.
     We anticipate that we will continue to purchase property and equipment necessary in the normal course of our business. The amount and timing of these purchases and the related cash outflows in future periods is difficult to predict and is dependent on a number of factors including the hiring of employees, the rate of change of computer hardware and software used in our business and our business outlook.
     We have used cash to acquire businesses and technologies that enhance and expand our product offerings and we anticipate that we will continue to do so in the future. The nature of these transactions makes it difficult to predict the amount and timing of such cash requirements. We may also be required to raise additional financing to complete future acquisitions.
     We receive cash from the exercise of common stock options and the sale of common stock under our Employee Stock Purchase Plan. While we expect to continue to receive these proceeds in future periods, the timing and amount of such proceeds is difficult to predict and is contingent on a number of factors including the price of our common stock, the number of employees participating in our stock option plans and our Employee Stock Purchase Plan and general market conditions.
     Bank Borrowings. We have a $16.0 million line of credit available to us at September 30, 2005, which is secured by cash, cash equivalents and investments. The line of credit bears interest at the lower 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. There are no financial covenant requirements under our line of credit. This line of credit agreement expires in July 2006 and is primarily used as collateral for letters of credit required by our facilities leases. There were no outstanding borrowings under this line of credit as of September 30, 2005.
     Facilities. We lease our facilities under operating lease agreements that expire at various dates through 2016. As of September 30, 2005, minimum cash payments due under our operating lease obligations totaled $43.1 million. The following presents our prospective future lease payments under these agreements as of September 30, 2005, which is net of our estimate of potential sublease income (in thousands):

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            Excess Facilities        
    Occupied     Minimum Lease     Estimated Sub-     Estimated     Net        
Years Ending December 31,   Facilities     Commitments     Lease Income     Costs     Outflows     Total  
 
                                               
2005 (remaining three months)
  $ 2,402     $ 1,929     $ 288     $ 452     $ 2,093     $ 4,331  
2006
    9,005       7,332       1,015       1,211       7,528       16,337  
2007
    5,541       5,498       587       868       5,779       11,039  
2008
    1,156       1,990       647       286       1,629       3,146  
2009
    842       1,258       348       286       1,196       2,100  
Thereafter
    5,091       1,049       291       238       996       6,140  
 
                                   
 
  $ 24,037     $ 19,056     $ 3,176     $ 3,341       19,221     $ 43,093  
 
                                   
 
                                               
Present value discount of future lease payments
                                    (251 )        
 
                                             
Obligations for excess facilities as of September 30, 2005
                                  $ 18,970          
 
                                             
     Of these future minimum lease payments, we have $19.0 million recorded in the restructuring and excess facilities accrual at September 30, 2005. This accrual, in addition to minimum lease payments of $19.1 million, includes estimated operating expenses of $3.3 million, is net of estimated sublease income of $3.2 million and is net of the present value impact of $251,000 recorded in accordance with SFAS No. 146. We estimated sublease income and the related timing thereof based on existing sub-lease agreements or on the opinions of independent real estate consultants and current market conditions, among other factors. Our estimates of sublease income may vary significantly from actual amounts realized depending, in part, on factors that may be beyond our control, such as the time periods required to locate and contract suitable subleases and the market rates at the time of such subleases.
     In relation to our excess facilities, we may decide to negotiate and enter into lease termination agreements, if and when the circumstances are appropriate. These lease termination agreements would likely require that a significant amount of the remaining future lease payments be paid at the time of execution of the agreement, but would release us from future lease payment obligations for the abandoned facility. The timing of a lease termination agreement and the corresponding payment could materially affect our cash flows in the period of payment.
     We have entered into various standby letter of credit agreements associated with our facilities leases, which serve as required security deposits for such facilities. These letters of credit expire at various times through 2016. At September 30, 2005, we had $12.4 million outstanding under standby letters of credit, which are secured by cash, cash equivalents and investments.
     We currently anticipate that our current cash, cash equivalents and short-term investments, together with our existing line of credit, will be sufficient to meet our anticipated needs for working capital and capital expenditures for at least the next 12 months. However, we may be required, or could elect, to seek additional funding at any time. We cannot assure you that additional equity or debt financing, if required, will be available on acceptable terms, if at all.
Financial Risk Management
     As a global company, we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on our consolidated financial results. Our primary exposures relate to non-United States Dollar-denominated revenues and operating expenses in Europe, Asia Pacific, Australia and Canada.
     We use foreign currency forward contracts as risk management tools and not for speculative or trading purposes. Gains and losses on the changes in the fair values of the forward contracts are included in interest income and other, net in our consolidated statements of operations. We do not anticipate significant currency gains or losses in the near term.
     We maintain investment portfolio holdings of various issuers, types and maturities. These securities are classified as available-for-sale and, consequently, are recorded on the consolidated balance sheet at fair value with unrealized gains and losses reported in accumulated other comprehensive income (loss). These securities are not leveraged and are held for purposes other than trading.

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Critical Accounting Policies
     In preparing our condensed consolidated financial statements, we make estimates, assumptions and judgments that can have a significant impact on our revenues, loss from operations and net loss, as well as on the value of certain assets and liabilities on our condensed consolidated balance sheet. We believe that there are several accounting policies that are critical to an understanding of our historical and future performance, as these policies affect the reported amounts of revenues, expenses and significant estimates and judgments applied by management in the preparation of our consolidated financial statements. While there are a number of accounting policies, methods and estimates affecting our condensed consolidated financial statements, areas that are particularly significant include:
    revenue recognition;
 
    estimating the allowance for doubtful accounts and sales returns;
 
    estimating the accrual for restructuring and excess facilities costs;
 
    accounting for stock-based compensation;
 
    accounting for income taxes; and
 
    valuation of long-lived assets, intangible assets and goodwill.
     Revenue Recognition. We derive revenues from the license of our software products and from support, consulting and training services that we provide to our customers.
     We recognize revenue using the “residual method” in accordance with Statement of Position (“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. Under the residual method, for agreements that have multiple deliverables or “multiple element arrangements” (e.g., software products, services, support, etc.), revenue is recognized for delivered elements only where vendor specific objective evidence of fair value exists for all of the undelivered elements. Our specific objective evidence of fair value is based on the price of the element when sold separately. 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 dollar value of the arrangement is then allocated to the delivered elements. At the outset of the arrangement with the customer, we defer revenue for the fair value of undelivered elements (e.g., support, 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 additional services that are essential to the functionality of the software.
     At the outset of our customer arrangements, 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 portion of the license fee is due beyond our normal payments terms, which generally does not exceed 185 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 determine collectibility on a case-by-case basis, following analysis of the general payment history within the geographic sales region and a customer’s years of operation, payment history and credit profile. If we determine from the outset of an arrangement that collectibility is not probable based upon our review process, we recognize revenue as payments are received. We periodically review collection patterns from our geographic locations to ensure historical collection results provide a reasonable basis for revenue recognition upon signing of an arrangement. We determined that we had sufficient evidence in the first quarter of 2004 from customers in Japan and Singapore to begin recognizing revenue on an accrual basis and, in the third quarter of 2004, we began

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recognizing revenue from customers in Spain on an accrual basis. Previously, revenues had been recognized from customers in those countries only when cash was received and all other revenue recognition criteria were met.
     Support and service revenues consist of professional services and support fees. Professional services consist of software installation and integration, training and business process consulting. Professional services are predominantly billed on a time-and-materials basis and we recognize revenues as the services are performed.
     Support contracts are typically priced as a percentage of the product license fee and generally have a one-year term. Services provided to customers under support contracts include technical product support and unspecified product upgrades. Revenues from advanced payments for support contracts are recognized ratably over the term of the agreement, which is typically one year.
     Allowance for Doubtful Accounts. We make estimates as to the overall collectibility of accounts receivable and provide an allowance for accounts receivable considered uncollectible. Management specifically analyzes its accounts receivable and historical bad debt experience, customer concentrations, customer credit-worthiness, current economic trends and changes in its customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. In general, our allowance for doubtful accounts consists of specific accounts where we believe collection is not probable and a rate based on our historical experience which is applied to accounts receivable not specifically reserved. At September 30, 2005 and December 31, 2004, our allowance for doubtful accounts balance was $603,000 and $961,000, respectively. These amounts represent 2% and 3% of total accounts receivable at September 30, 2005 and December 31, 2004, respectively. The decrease in the allowance for doubtful accounts in absolute dollars reflects the continued improvement of our aged accounts receivable profile.
     Allowance for Sales Returns. From time to time, a customer may return to us some or all of the software purchased. While our software and reseller agreements generally do not provide for a specific right of return, we may accept product returns in certain circumstances. To date, sales returns have been infrequent and not significant in relation to our total revenues. We make an estimate of our expected returns and provide an allowance for sales returns in accordance with SFAS No. 48, Revenue Recognition When Right of Return Exists. In determining the amount of the allowance required, management specifically analyzes our revenue transactions, customer software installation patterns, historical return pattern, current economic trends and changes in its customer payment terms when evaluating the adequacy of the allowance for sales returns. At September 30, 2005 and December 31, 2004, our allowance for sales returns was $483,000 and $670,000, respectively.
     Restructuring and Excess Facilities Accrual. In order to better align our cost structure with our revenues, we implemented a series of restructuring and facility consolidation plans. Restructuring and facilities consolidation costs consist of expenses associated with workforce reductions, the consolidation of excess facilities and the impairment of leasehold improvements and other equipment associated with abandoned facilities.
     We accrue for severance payments and other related termination benefits provided to employees in connection with involuntary staff reductions. We accrue for these benefits in the period when benefits are communicated to the terminated employees. Typically, terminated employees are not required to provide continued service to receive termination benefits. If continued service is required, then the severance liability is accrued over the required service period. In general, we use a formula based on a combination of the number of years of service and the employee’s position within the Company to calculate the termination benefits to be provided to affected employees. At September 30, 2005, $34,000 was accrued for future severance and termination benefits payments.
     In connection with our restructuring and facility consolidation plans, we perform evaluations of our then-current facilities requirements and identify facilities that are in excess of our current and estimated future needs. When a facility is identified as excess and we have ceased use of the facility, we accrue the fair value of the lease obligations. In determining fair value of expected sublease income over the remainder of the lease term and of related exit costs, if any, we receive appraisals from real estate brokers to aid in our estimate. In addition, during the evaluation of our facilities requirements, we also identify operating equipment and leasehold improvements that may be impaired. Excluding the facilities that are currently subleased, our excess facilities are being marketed for sublease and are currently unoccupied. Accordingly, our estimate of excess facilities could differ from actual results and such differences could require additional charges or credits that could materially affect our consolidated financial condition and results of operations. At September 30, 2005, we had $19.0 million accrued for excess

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facilities, which is payable through 2010. This accrual is net of estimated future sublease income of $3.2 million. We reassess our excess facilities liability each period based on current real estate market conditions.
     Accounting for Stock-Based Compensation. We currently measure compensation expense for our stock-based incentive programs using the intrinsic value method prescribed by APB No. 25, Accounting for Stock Issued to Employees. Under this method, we do not record compensation expense when stock options are granted to eligible participants as long as the exercise price is not less than the fair market value of the stock when the option is granted. In accordance with SFAS No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, we disclose our pro forma net income or loss and net income or loss per share as if the fair value-based method had been applied in measuring compensation expense for our stock-based incentive programs. On December 16, 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123. SFAS No. 123R generally requires share-based payments to employees, including grants of employee stock options and purchases under employee stock purchase plans, to be recognized in the statement of operations based on their fair values. This standard is effective for public companies with fiscal years beginning after June 15, 2005. We are required to adopt this new standard on January 1, 2006.
     Accounting for Income Taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate our income tax liability in each of the jurisdictions in which we do business. This process involves estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items, such as deferred revenues, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess the likelihood that these deferred tax assets will be recovered from future taxable income and, to the extent we believe it is more likely than not that these amounts will not be recovered, we must establish a valuation allowance.
     Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our deferred tax assets. The valuation allowance is based on our estimates of taxable income by jurisdiction and the period over which our deferred tax assets will be recoverable. At September 30, 2005, we have recorded a full valuation allowance against our deferred tax assets, due to uncertainties related to our ability to utilize our deferred tax assets, consisting principally of certain net operating losses carried forward.
     Impairment of Goodwill and Long-Lived Assets. On January 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill no longer be amortized and that goodwill be tested annually for impairment or more frequently if events and circumstances warrant. We are required to perform an impairment review of goodwill on at least an annual basis. This impairment review involves a two-step process as follows:
    Step 1 — We compare the fair value of our reporting unit to its carrying value, including goodwill. If the reporting unit’s carrying value, including goodwill, exceeds the unit’s fair value, we move on to Step 2. If the unit’s fair value exceeds the carrying value, no further work is performed and no impairment charge is necessary.
 
    Step 2 — We perform an allocation of the fair value of the reporting unit to its identifiable tangible and non-goodwill intangible assets and liabilities. This allocation derives an implied fair value for the reporting unit’s goodwill. We 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 charge shall be recognized for the excess.
     We have determined that we have one reporting unit. We performed and completed our required annual impairment testing in the third quarter of 2005. Upon completing our review, we determined that the carrying value of our recorded goodwill had not been impaired and no impairment charge was recorded. Although we determined in 2005 that our recorded goodwill had not been impaired, changes in the economy, the business in which we operate and our own relative performance may result in goodwill impairment in future periods.
     We are also required to assess goodwill for impairment on an interim basis when indicators exist that goodwill may be impaired based on the factors mentioned above. For example, if our market capitalization declines below

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our net book value or we suffer a sustained decline in our stock price, we will assess whether our goodwill has been impaired. A significant impairment could result in additional charges and have a material adverse impact on our consolidated financial condition and operating results.
     We account for the impairment and disposal of long-lived assets utilizing SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 requires that long-lived assets, such as property and equipment, and purchased intangible assets subject to amortization, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The recoverability of an asset is measured by a comparison of the carrying amount of an asset to its estimated undiscounted future cash flows expected to be generated. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. We do not believe there were any circumstances which indicated that the carrying value of an asset may not be recoverable.
     The following table reflects the expected future amortization of intangible assets (in thousands):
                         
    Amortization     Amortization        
    of Intangible     of Purchased        
Years Ending December 31,   Assets     Technology     Total  
2005 (remaining three months)
  $ 886     $ 3,472     $ 4,358  
2006
    3,312       13,076       16,388  
2007
    2,939       3,752       6,691  
2008
    308       2,064       2,372  
2009
          325       325  
 
                 
 
  $ 7,445     $ 22,689     $ 30,134  
 
                 
     Intangible assets, other than goodwill, are amortized over estimated useful lives of between 12 and 48 months. The amortization expense related to the intangible assets may be accelerated in the future if we reduce the estimated useful life of the intangible assets.
Recent Accounting Pronouncements
     For recent accounting pronouncements see Note 11 Recent Accounting Pronouncements to the Condensed Consolidated Financial Statements under Part I, Item. 1.
Factors That May Impact Our Business
     The risks and uncertainties described below are not the only risks we face. These risks include those that we consider to be significant to your decision whether to invest in our common stock at this time. There may be risks that you view differently than we do, and there are other risks and uncertainties that we do not presently know of 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 part or all of your investment.
     You should consider carefully the following factors, in addition to other information in this Quarterly Report on Form 10-Q, in evaluating our business.
We have incurred annual losses throughout our operating history and may not be able to achieve consistent profitability.
     We have incurred operating losses on a quarterly and annual basis throughout our history. As of September 30, 2005, we had an accumulated deficit of $407.5 million. We must increase both our license and support and service revenues to achieve and sustain profitable operations and positive cash flows. If our revenues do not grow, we will not achieve and maintain profitable operations, which could cause the price of our common stock to decline. In addition, our revenues may decline from prior period levels resulting in greater operating losses and significant negative cash flows, which could cause us to fail and the price of our common stock to decline.

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Many factors can cause our revenues to fluctuate on a quarterly basis and if we fail to satisfy the expectations of investors or securities analysts, our stock price may decline.
     Our quarterly and annual operating results have fluctuated significantly in the past and we expect unpredictable fluctuations in the future. The main factors impacting these fluctuations are likely to be:
    the discretionary nature of our customers’ purchases and their budget cycles;
 
    the inherent complexity, length and associated unpredictability of our sales cycle;
 
    the number of new information technology initiatives launched by our customers;
 
    the success or failure of any of our product offerings to meet with customer acceptance;
 
    the size and complexity of our license and service transactions;
 
    delays in recognizing revenue from license transactions;
 
    timing of new product releases;
 
    timing of large customer orders;
 
    changes in competitors’ product offerings;
 
    sales force capacity and the influence of resellers and systems integrator partners;
 
    our ability to integrate newly acquired products with our existing products and effectively sell newly acquired products;
 
    the level of our sales incentive and commission related expenses; and
 
    seasonal variations in our operating results.
     Many of these factors are outside of our control. Further, because we experience seasonal variations in our operating results, our operating results may vary significantly from one quarter to the next as part of our normal business cycle. As a result, we believe that quarterly comparisons of our operating results are not necessarily meaningful and that you should not rely on the results of one quarter as an indication of our future performance. If our results of operations do not meet our public forecasts or the expectations of securities analysts and investors, the price of our common stock is likely to decline.
Our products have a long and unpredictable sales cycle, which makes it difficult to forecast our future results and may cause our operating results to vary from period to period.
     Our sales cycle typically ranges from six to nine months. However, the period between initial contact with a prospective customer and the licensing of our software applications varies and can last more than twelve months. In recent quarters, we have experienced a lengthening of our sales cycle as we have been successful at selling multiple products in customer orders. These kinds of orders are complex and difficult to complete because prospective customers generally consider a number of factors before committing to purchase a suite of products or applications. Factors considered by prospective customers in evaluating our software products include, among other factors, product benefits, cost and time of implementation, return on investment, ability to operate with existing and future systems, product reliability, ability to accommodate increased transaction volume, suite integration and ability to provide an end-to-end solution. Customer evaluation, purchasing and budgeting processes vary significantly from company to company. As a result, we spend significant time and resources informing prospective customers about our software products, which may not result in a completed transaction and may negatively impact our operating margins. Even if a customer chooses our software products, completion of the associated sales transaction is subject to a number of factors, which makes our quarterly revenues difficult to forecast. These factors include but are not limited to the following:
    Licensing of our software products is often an enterprise-wide decision by our customers that involves many customer-specific factors in addition to the factors mentioned above. Accordingly, our ability to license our software products may be affected by changes in the strategic importance of content management projects to a customer, a customer’s budgetary constraints or changes in a customer’s personnel.

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    Passage through customer approval and expenditure authorization processes can be difficult and time consuming. Delays in the authorization and approval process, even after vendor selection, could impact the timing and amount of revenues recognized in a quarterly period.
 
    Changes in our sales incentive plans may have an unpredictable impact on our sales cycle and contracting activities.
 
    The number, timing and significance of enhancements to our software products and the introduction of new software by our competitors and us may affect customer purchases.
     Over the last several years, our sales cycles have been affected by increased customer scrutiny of software purchases regardless of transaction size. Specifically, we experienced several delayed software license orders at the end of the second quarter of 2005, representing a larger cumulative value of delayed transactions than experienced in recent quarters. A continued lengthening of our sales cycles or our inability to predict these trends could result in lower than expected future revenue, which would have an adverse impact on our consolidated operating results and could cause our stock price to decline.
     Our sales incentive plans are primarily based on quarterly and annual quotas for sales representatives and certain sales support personnel. These sales incentive plans have accelerated commission rates in the event a representative exceeds the expected sales quota. The concentration of sales orders with any one or a few sales representatives has resulted, and in the future may result, in commission expense in excess of forecasted levels, which have caused, or would in the future cause, fluctuations in sales and marketing expenses. As an example, several of our sales representatives substantially overachieved their sales quotas for the third quarter of 2005 resulting in higher than anticipated commission expense in that quarter. Any increase in sales and marketing expenses could adversely affect our consolidated results of operations .
Our revenues are derived from a small number of software products and vertical markets.
     For the three and nine months ended September 30, 2005 and 2004, we believe that a significant portion of our total revenue was derived from our WorkSite and TeamSite products and related services. We expect that these products will continue to account for a significant portion of our revenues in future periods. Accordingly, any decline in the demand for these products or services will have a material and adverse effect on our consolidated financial condition and results of operations. We generated lower than expected revenues from our TeamSite product in the first quarter of 2005 due to weak sales to customers in Europe and experienced several delayed transactions in the second quarter of 2005.
     We also derive a significant portion of our revenues from a few vertical markets. In particular, our WorkSite product is primarily sold to professional service organizations, such as law firms, accounting firms and corporate legal departments. In order for us to sustain and grow our business, we must continue to successfully sell our software products and services into this vertical market. Failure to successfully sell to professional service organizations will have a material and adverse effect on our consolidated financial condition and results of operations. In general, we believe that our customers in these markets are affected by the same conditions that affect our customers in other markets.
     Further, the future success of our collaborative content management software applications depends on our ability to sell software licenses and services to large multi-national corporations in financial services, manufacturing, telecommunications and governmental entities. To sell to these organizations, we must devote time and resources to hire and train sales employees to work with enterprises in industries other than legal and professional services. Even if we are successful in hiring and training sales teams, customers in other industries may not need or sufficiently value our collaborative content management software applications.
The timing of large customer orders may have a significant impact on our consolidated financial results from period to period.
     Our ability to achieve our forecasted quarterly earnings is dependent on the dollar value of license transactions being in the mid to high six-figure range. From time to time, we receive large customer orders that have a significant impact on our consolidated financial results in the period in which the order is recognized as revenue. While we had

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no transaction in excess of $1 million in the first six months of 2005, we had four customer license transactions of $1 million or greater in the third quarter of 2005. Because it is difficult for us to accurately predict the timing of large customer orders, our consolidated financial results are likely to vary materially from quarter to quarter based on the receipt of such orders and their ultimate recognition as revenue. Additionally, the loss or delay of an anticipated large order in a given quarterly period could result in a shortfall of revenues from levels anticipated by us and our stockholders. Any shortfall in revenues from levels anticipated by our stockholders and securities analysts could have a material and adverse impact on the trading price of our common stock.
Contractual issues may arise during the negotiation process that may delay anticipated transactions and our ability to recognize revenue as expected.
     Because our solutions are often a critical element to the information technology systems of our customers, the process of contractual negotiation may be protracted. The additional time needed to negotiate mutually acceptable terms that culminate in an agreement to license our products could extend the sales cycle.
     Several factors may also require us to defer recognition of license revenue for a significant period of time after entering into a license agreement, including instances in which we are required to deliver either specified additional products or product upgrades for which we do not have vendor-specific objective evidence of fair value. We have a standard software license agreement that provides for revenue recognition provided that, among other factors, delivery has taken place, collectibility from the customer is probable and no significant future obligations or customer acceptance rights exist. However, customer negotiations and revisions to these terms could have an impact on our ability to recognize revenue at the time of delivery.
     In addition, slowdowns or variances from our expectations of our quarterly licensing activities may result in fewer customers, which could impact our service offerings, resulting in lower revenues from our customer training, consulting services and customer support organizations. Our ability to maintain or increase support and service revenues is highly dependent on our ability to increase the number of enterprises that license our products and the number of seats licensed by those enterprises.
Competition from providers of software enabling content and collaboration management is increasing, which could cause us to reduce our prices and result in reduced gross margins or loss of market share.
     The enterprise content management market is fragmented, rapidly changing and increasingly competitive. We have experienced and expect to continue to experience increased competition from current and potential competitors. Our current competitors include:
    companies addressing needs of the market in which we compete such as EMC Corporation, FileNet Corporation, Hummingbird Ltd., IBM, Microsoft Corporation, Xerox Corporation, Open Text Corporation, Stellent, Inc., Oracle Corporation and Vignette Corporation;
 
    intranet and groupware companies, such as IBM, Microsoft Corporation and Novell, Inc.;
 
    open source vendors, such as RedHat, Inc., OpenCms and Mambo; and
 
    in-house development efforts by our customers and partners.
     We also face potential competition from our strategic partners, such as Microsoft Corporation, or from other companies that may in the future decide to compete in our market. Many of our existing and potential competitors have longer operating histories, greater name recognition and greater financial, technical and marketing resources than we do. Many of these companies can also take advantage of extensive customer bases and adopt aggressive pricing policies to gain market share. Potential competitors may bundle their products in a manner that discourages users from purchasing our products or makes their products more appealing. Barriers to entering the content management software market are relatively low. Competitive pressures may also increase with the consolidation of competitors within our market and partners in our distribution channel, such as the acquisition of Groove Networks by Microsoft Corporation, Captiva Software Corporation and Documentum, Inc. by EMC Corporation, Presence Online Pty Ltd. by IBM, Optika, Inc. by Stellent, Inc., Artesia Technologies, Inc. by Open Text Corporation and TOWER Technology Pty Ltd. and Epicentric, Inc. by Vignette Corporation.

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     In recent quarters, some of our competitors have reduced their price proposals in an effort to strengthen their bids and expand their customer bases at our expense. Even if these tactics are unsuccessful, they could delay decisions by some customers who would otherwise purchase our software products and may reduce the ultimate selling price of our software and services, causing our operating results to be adversely affected.
Our future revenues are dependent in part on our installed customer base continuing to license additional products, renew customer support agreements and purchase additional services.
     Our installed customer base has traditionally generated additional license and support and service revenues. In addition, the success of our strategic plan depends on our ability to cross-sell products, such as the products acquired in the acquisitions of MediaBin, iManage and Software Intelligence to our installed base of customers. Our ability to cross-sell new products may depend in part on the degree to which new products have been integrated with our existing application suite, which may vary with the timing of new product acquisitions or releases. In future periods, customers may not necessarily license additional products or contract for additional support or other services. Customer support agreements are generally renewable annually at a customer’s option, and there are no mandatory payment obligations or obligations to license additional software. If our customers decide to cancel their support agreements or fail to license additional products or contract for additional services, or if they reduce the scope of their support agreements, revenues could decrease and our operating results could be adversely affected.
Support and service revenues have represented a large percentage of our total revenues. Our support and service revenues are vulnerable to reduced demand and increased competition.
     Our support and service revenues represented approximately 60% of total revenues for the three months ended September 30, 2005 and 2004. Support and service revenues depend, in part, on our ability to license software products to new and existing customers that generate follow-on consulting, training and support revenues. Thus, reduced license revenue in the first nine months of 2005 may result in reduced support and services revenue in future periods. Additionally, demand for these services is also affected by competition from independent service providers and systems integrators with knowledge of our software products. Since mid-2000, we have experienced increased competition for professional services engagements, which has resulted in an overall decrease in average billing rates for our consultants and price pressure on our software support products. If our business continues to be affected this way, our support and service revenues may decline and such a decline would have a material and adverse effect on our consolidated financial condition and results of operations.
     For the three months ended September 30, 2005 and 2004, we recognized support revenues of $19.4 million and $17.1 million, respectively. Our support agreements typically have a term of one year and our renewable thereafter for periods generally of one year. Customers may elect not to renew their support agreements or may renew the agreements at a lower price, thereby reducing our future support revenue.
Charges to earnings resulting from the application of the purchase method of accounting and asset impairments may adversely affect the market value of our common stock.
     In accordance with accounting principles generally accepted in the United States of America, we accounted for our acquisitions using the purchase method of accounting, which resulted in significant charges to earnings in prior periods and, through ongoing amortization, will continue to generate charges that could have a material adverse effect on the market value of our common stock. Under the purchase method of accounting, we allocated the total estimated purchase price of these acquisitions to their net tangible assets, amortizable intangible assets, intangible assets with indefinite lives based on their fair values as of the closing date of these transactions and recorded the excess of the purchase price over those fair values as goodwill. A portion of the estimated purchase price in the iManage and MediaBin acquisitions was also allocated to in-process technology and was expensed in the quarter in which the acquisition was completed. We will incur additional depreciation and amortization expense over the useful lives of certain net tangible and intangible assets acquired and significant stock-based compensation expense in connection with these transactions. These depreciation and amortization charges could have a material impact on our consolidated results of operations.
     At September 30, 2005, we had $191.5 million in net goodwill and $30.1 million in net other intangible assets, which we believe are recoverable. Generally accepted accounting principles in the United States of America require

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that we review the value of these acquired assets from time to time to determine whether the recorded values have been impaired and should be reduced. In connection with our 2002 review, we reduced recorded goodwill by $76.4 million. We will continue to perform impairment assessments on an interim basis when indicators exist that goodwill or our intangible assets may be impaired. These indicators include our market capitalization declining below our net book value or if we suffer a sustained decline in our stock price. Changes in the economy, the business in which we operate and our own relative performance may result in indicators that our recorded asset values may be impaired. If we determine there has been an impairment of goodwill and other intangible assets, the carrying value of those assets will be written down to fair value, and a charge against operating results will be recorded in the period that the determination is made. Any impairment could have a material impact on our consolidated operating results and financial position, and could harm the trading price of our common stock.
Economic conditions and significant world events have harmed and could continue to negatively affect our revenues and results of operations.
     Our revenue growth and profitability depend on the overall demand for our enterprise content management software platforms and applications. The decline in customer spending on many kinds of information technology initiatives worldwide, particularly spending on public-facing Web applications, has resulted in lower revenues, lengthened sales cycles, lower average selling prices and has caused our customers to defer or cancel orders. To the extent that information technology spending, particularly spending on public-facing Web applications, does not improve or declines, the demand for our products and services, and therefore our future revenues, will be negatively affected. In addition, many of our customers have also been affected adversely by the same economic conditions we are and, as a result, we may find that collecting on accounts receivable may take longer than we expect or that some accounts receivable will become uncollectible.
     Our consolidated financial results could also be significantly affected by geopolitical concerns and world events, such as wars and terrorist attacks. Our revenues and financial results could be negatively affected to the extent geopolitical concerns continue and similar events occur or are anticipated to occur.
Our stock price may be volatile, and your investment in our common stock could suffer a decline in value.
     The market prices of the securities of software companies, including our own, have been extremely volatile and often unrelated to their operating performance. Broad market and industry factors may adversely affect the market price of our common stock, regardless of our actual operating performance. Factors that could cause fluctuations in the price of our stock may include, among other things:
    actual or anticipated variations in quarterly operating results;
 
    changes in financial estimates by us or in financial estimates or recommendations by any securities analysts who cover our stock;
 
    operating performance and stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are Internet-related or otherwise deemed comparable to us;
 
    announcements by us or our competitors of new products or services, technological innovations, significant acquisitions, strategic relationships or divestitures;
 
    announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us;
 
    announcements of negative conclusions about our internal controls;
 
    capital outlays or commitments;
 
    additions or departures of key personnel;
 
    sector factors including conditions or trends in our industry and the technology arena; and
 
    overall stock market factors, such as the price of oil futures, interest rates and the performance of the economy.
     These fluctuations may make it more difficult to use our stock as currency to make acquisitions that might otherwise be advantageous, or to use stock options as a means to attract and retain employees. Any shortfall in revenue or net income (loss) compared to expectations, as we experienced in the second quarter of 2005, could

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cause an immediate and significant decline in the trading price of our common stock. In addition, we may not learn of such shortfalls until late in the quarter and may not be able to adjust successfully to these shortfalls, which could result in an even more immediate and greater decline in the trading price of our common stock. In the past, securities class action litigation has often been initiated against companies following periods of volatility in their stock price. If we become subject to any litigation of this type, we could incur substantial costs and our management’s attention and resources could be diverted while the litigation is ongoing.
Our failure to deliver defect-free software could result in losses and harmful publicity.
     Our software products are complex and have in the past and may in the future contain defects or failures that may be detected at any point in the product’s life. We have discovered software defects in the past in some of our products after their release. Although past defects have not had a material effect on our results of operations, in the future we may experience delays or lost revenues caused by new defects. Despite our testing, defects and errors may still be found in new or existing products, and may result in delayed or lost revenues, loss of market share, failure to achieve market acceptance, reduced customer satisfaction, diversion of development resources and damage to our reputation. As has occurred in the past, new releases of products or product enhancements may require us to provide additional services under our support contracts to ensure proper installation and implementation.
     Errors in our application suite may be caused by defects in third-party software incorporated into our applications. If so, we may not be able to fix these defects without the cooperation of these software providers. Since these defects may not be as significant to our software providers as they are to us, we may not receive the rapid cooperation that we may require. We may not have the contractual right to access the source code of third-party software and, even if we access the source code, we may not be able to fix the defect.
     As customers rely on our products for critical business applications, errors, defects or other performance problems of our products or services might result in damage to the businesses of our customers. Consequently, these customers could delay or withhold payment to us for our software and services, which could result in an increase in our provision for doubtful accounts or an increase in collection cycles for accounts receivable, both of which could disappoint investors and result in a significant decline in our stock price. In addition, these customers could seek significant compensation from us for their losses. Even if unsuccessful, a product liability claim brought against us would likely be time consuming and costly and harm our reputation, and thus our ability to license products to new customers. Even if a suit is not brought, correcting errors in our application suite could increase our expenses.
Because a significant portion of our revenues are influenced by referrals from strategic partners and, in some cases, sold through resellers, our future success depends in part on those partners, but their interests differ from ours.
     Our direct sales force depends on strategic partnerships, marketing alliances and resellers to obtain customer leads, referrals and distribution. Approximately 57% of our new license orders for the quarter ended September 30, 2005 were influenced by our strategic partners and resellers. If we are unable to maintain our existing strategic relationships or fail to enter into additional strategic relationships, our ability to increase revenues will be harmed, and we could also lose anticipated customer introductions and co-marketing benefits and lose our investments in those relationships. In addition, revenues from any strategic partnership, no matter how significant we expect it to be, depend on a number of factors outside our control, are highly uncertain and may vary from period to period. Our success depends in part on the success of our strategic partners and their ability and willingness to market our products and services successfully. Losing the support of these third parties may limit our ability to compete in existing and potential markets. These third parties are under no obligation to recommend or support our software products and could recommend or give higher priority to the products and services of other companies, including those of one or more of our competitors, or to their own products. Our inability to gain the support of resellers, consulting and systems integrator firms or a shift by these companies toward favoring competing products could negatively affect our software license and support and service revenues.
     Some systems integrators also engage in joint marketing and sales efforts with us. If our relationships with these parties fail, we will have to devote substantially more resources to the sales and marketing of our software products. In many cases, these parties have extensive relationships with our existing and potential customers and

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influence the decisions of these customers. A number of our competitors have longer and more established relationships with these systems integrators than we do and, as a result, these systems integrators may be more likely to recommend competitors’ products and services.
     We may also be unable to grow our revenues if we do not successfully obtain leads and referrals from our customers. If we are unable to maintain these existing customer relationships or fail to establish additional relationships of this kind, we will be required to devote substantially more resources to the sales and marketing of our products. As a result, we are dependent on the willingness of our customers to provide us with introductions, referrals and leads. Our current customer relationships do not afford us any exclusive marketing and distribution rights. In addition, our customers may terminate their relationship with us at any time, pursue relationships with our competitors or develop or acquire products that compete with our products. Even if our customers act as references and provide us with leads and introductions, we may not penetrate additional markets or grow our revenues.
     We also rely on our strategic relationships to aid in the development of our products. Should our strategic partners not regard us as significant to their own businesses, they could reduce their commitment to us or terminate their relationship with us, pursue competing relationships or attempt to develop or acquire products or services that compete with our products and services.
Our revenues from international operations are a significant part of our overall operating results.
     We have established offices in various international locations in Europe and Asia Pacific, including a customer support and development operation in Bangalore, India and we derive a significant portion of our revenues from these international locations. For the three months ended September 30, 2005 and 2004, revenues from these international operations constituted approximately 32% and 36% of our total revenues, respectively. We anticipate devoting significant resources and management attention to international opportunities, which subjects us to a number of risks including:
    difficulties in attracting and retaining staff (particularly sales personnel) and managing foreign operations;
 
    the expense of foreign operations and compliance with applicable laws;
 
    political and economic instability;
 
    the expense of localizing products for sale in various international markets;
 
    reduced protection for intellectual property rights in some countries;
 
    protectionist laws and business practices that favor local competitors;
 
    difficulties in the handling of transactions denominated in foreign currency and the risks associated with foreign currency fluctuations;
 
    changes in multiple tax and regulatory requirements;
 
    the effect of longer sales cycles and collection periods or seasonal reductions in business activity; and
 
    economic conditions in international markets.
     Any of these risks could reduce revenues from international locations, or increase our cost of doing business outside of the United States. For example, beginning January 1, 2005, our Vice President of Enterprise Sales in Europe moved to Singapore to assume the role of our Vice President of Enterprise Sales in the Asia Pacific region. We believe the delay in replacing this position in the quarter caused our revenues from customers in Europe to suffer in the first quarter of 2005. Additionally, we believe economic conditions in Europe have adversely affected our sales in that region over the last three quarters.
Fluctuations in the exchange rates of foreign currency, particularly in Euro, British Pound and Australian Dollar and the various other local currencies of Asia and Europe, may harm our business.
     We are exposed to adverse movements in foreign currency exchange rates because we translate foreign currencies into United States Dollars for reporting purposes. Our primary exposures have related to operating expenses and sales in Asia and Europe that were not United States Dollar-denominated. Historically, these risks have been minimal for us, but as our international revenues and operations have grown and continue to grow, the

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adverse currency fluctuations could have a material adverse impact on our consolidated financial condition and results of operations.
Our workforce reductions may require us to incur severance costs and reduce our facilities commitments, which may cause us to incur expenses or recognize additional financial statement charges.
     Over the last several years, we have significantly reduced our worldwide employee headcount. In connection with our restructuring plans and business combinations, we relocated offices and abandoned facilities in the San Francisco Bay area; Chicago; New York City; Boston; Austin, Texas and several locations internationally. As a result, we are paying for facilities that we are not using and have no future plans to use. We recorded charges for excess facilities, net of expected sublease income, of $8.1 million, $12.6 million and $30.0 million in the years ended December 31, 2004, 2003 and 2002, respectively. At September 30, 2005, we have an accrual for excess facilities of $19.0 million, which is net of anticipated sublease income of $3.2 million. If the commercial real estate market deteriorates, if our anticipated sublease income is not realized or if we cannot sublease these excess facilities at all, we may be required to record additional charges for excess facilities or revise our estimate of sublease income in the future which may be material to our consolidated financial condition and results of operations.
     We have continued to review our operational performance across our company and will continue to make cost adjustments to better align our expenses with our expected revenues. We also may be required to make further adjustments to our business model to achieve operational efficiency and, as a result, may be required to take additional charges, which could be material to our results of operations.
If our products cannot scale to meet the demands of tens of thousands of concurrent users, our targeted customers may not license our software, which will cause our revenues to decline.
     Our strategy includes targeting large organizations that require our enterprise content management software because of the significant amounts of content that these companies generate and use. For this strategy to succeed, our software products must be highly scalable and accommodate tens of thousands of concurrent users. If our products cannot scale to accommodate a large number of concurrent users, our target markets will not accept our products and our business and operating results will suffer.
     If our customers cannot successfully implement large-scale software deployments, or if they determine that our products cannot accommodate large-scale deployments, our customers will not license our solutions and this will materially adversely affect our consolidated financial condition and operating results.
If our products do not operate with a wide variety of hardware, software and operating systems used by our customers, our revenues would be harmed.
     We currently serve a customer base that uses a wide variety of constantly changing hardware, software applications and operating systems. For example, we have designed our products to work with databases and servers developed by Microsoft Corporation, Sun Microsystems, Inc., Oracle Corporation and IBM and with software applications including Microsoft Office, WordPerfect, Lotus Notes and Novell GroupWise. We must continually modify and enhance our software products to keep pace with changes in computer hardware and software and database technology as well as emerging technical standards in the software industry. We further believe that our application suite will gain broad market acceptance only if it can support a wide variety of hardware, software applications and systems. If our products were unable to support a variety of these products, our business would be harmed. Additionally, customers could delay purchases of our application suite until they determine how our products will operate with these updated platforms or applications.
     Our products currently operate on the Microsoft Windows XP, Microsoft Windows NT, Microsoft Windows 2000, Linux, IBM AIX, Hewlett Packard UX and Sun Solaris operating environments. If other platforms become more widely used, we could be required to convert our server application products to additional platforms. We may not succeed in these efforts, and even if we do, potential customers may not choose to license our product. In addition, our products are required to interoperate with leading content authoring tools and application servers. We must continually modify and enhance our products to keep pace with changes in these applications and operating systems. If our products were to be incompatible with a popular new operating system or business application, our

43


 

business could be harmed. Also, uncertainties related to the timing and nature of new product announcements, introductions or modifications by vendors of operating systems, browsers, back-office applications and other technology-related applications, could harm our business.
Difficulties in introducing new products and product upgrades and integrating new products with our existing products in a timely manner will make market acceptance of our products less likely.
     The market for our products is characterized by rapid technological change, frequent new product introductions and technology-related enhancements, uncertain product life cycles, changes in customer demands and evolving industry standards. We expect to add new functionality to our product offerings by internal development and possibly by acquisition. Content management and document management technology is more complex than most software and new products or product enhancements can require long development and testing periods. Any delays in developing and releasing new products or integrating new products with existing products could harm our business. New products or upgrades may not be released according to schedule, may not be adequately integrated with existing products or may contain defects when released, resulting in adverse publicity, loss of sales, delay in market acceptance of our products or customer claims against us, any of which could harm our business. If we do not develop, license or acquire new software products, adequately integrate them with existing products or deliver enhancements to existing products, on a timely and cost-effective basis, our business will be harmed.
Our products may lack essential functionality if we are unable to obtain and maintain licenses to third-party software and applications.
     We rely on software that we license from third parties, including software that is integrated with our internally developed software and used in our products to perform key functions. The functionality of our software products, therefore, depends on our ability to integrate these third-party technologies into our products. Furthermore, we may license additional software from third parties in the future to add functionality to our products. If our efforts to integrate this third-party software into our products are not successful, our customers may not license our products and our business will suffer.
     In addition, we would be seriously harmed if the providers from whom we license software fail to continue to deliver and support reliable products, enhance their current products or respond to emerging industry standards. Moreover, the third-party software may not continue to be available to us on commercially reasonable terms or at all. Each of these license agreements may be renewed only with the other party’s written consent. The loss of, or inability to maintain or obtain licensed software, could result in shipment delays or reductions. Furthermore, we may be forced to limit the features available in our current or future product offerings. Either alternative could seriously harm our business and operating results.
When we account for employee stock options using the fair value method, it will significantly increase our compensation costs and increase our net loss.
     In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R which requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of compensation expense in the consolidated statement of operations. The accounting provisions of SFAS No. 123R are effective for years beginning after June 15, 2005 and we will be required to adopt the provisions of this statement in the first quarter of 2006. We are currently assessing the impact of adopting SFAS No. 123R, but as we have 4.4 million unvested stock options outstanding at September 30, 2005, we expect the adoption to have a significant adverse impact on our consolidated statements of operations.
New legislation and potential new accounting pronouncements are likely to impact our future consolidated financial condition and results of operations.
     Recently, there have been significant regulatory changes, including the Sarbanes-Oxley Act of 2002, and there may be new accounting pronouncements or regulatory rulings that will have an impact on our future consolidated financial condition and results of operations. The Sarbanes-Oxley Act of 2002 and other rule changes following several highly publicized corporate accounting and corporate governance failures are likely to increase general and administrative costs. These changes have and may continue to materially increase the expenses we report under

44


 

accounting principles generally accepted in the United States of America and adversely affect our consolidated operating results. Additionally, the impact of these changes may increase costs incurred by our customers and prospects, which could result in delays or cancellations in spending on enterprise content management software and services like those we provide. Such delays and cancellations could have a material adverse impact on our consolidated statement of operations and financial condition.
We might not be able to protect and enforce our intellectual property rights, a loss of which could harm our business.
     We depend upon our proprietary technology and rely on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures and contractual restrictions to protect it. We currently have 32 issued United States patents and 43 foreign patents, as well as several United States and foreign patents pending approval. These patents may not offer us meaningful product differentiation or market exclusivity because there are alternative processes available or prospective customers do not assign material value to the unique capabilities inherent in the patented processes. It is possible that patents will not be issued from our currently pending applications or any future patent application we may file. We also have restricted customer access to our source code and require all employees enter into confidentiality and invention assignment agreements. Despite our efforts to protect our proprietary technology, unauthorized parties may attempt to copy aspects of our products or to obtain and use information we regard as proprietary. In addition, the laws of some foreign countries do not protect our proprietary rights as effectively as the laws of the United States and we expect that it will become more difficult to monitor use of our products as we increase our international presence. 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. Any such resulting litigation could result in substantial costs and diversion of resources that could have a material adverse effect on our business, operating results and financial condition.
     Further, third parties may claim that our products infringe the intellectual property of their products. For example, Advanced Software, Inc. had filed suit against us in the United States District Court for the Northern District of California alleging that our TeamSite software infringes Advanced Software’s United States Patent. Although this matter was settled and dismissed with prejudice in September 2005, intellectual property litigation is inherently uncertain and, regardless of the ultimate outcome, could be costly and time-consuming to defend, cause us to cease making, licensing or using products that incorporate the challenged intellectual property, require us to redesign or reengineer its products, if feasible, divert management’s attention or resources, or cause product delays, or require us to enter into royalty or licensing agreements to obtain the right to use a necessary product, component or process; any of which could have a material impact on our consolidated financial condition and results of operation.
There may be sales of a substantial amount of our common stock in the near future that could cause our stock price to fall.
     Some of our current stockholders hold a substantial number of shares of our common stock, which they are able to sell in the public market, subject to restrictions under the securities laws and regulations. Sales of a substantial number of shares of our common stock within a short period of time could cause our stock price to fall. Moreover, our Chief Executive Officer has established systematic plan under which he will sell a pre-determined number of shares per quarter, provided that a certain minimum price is obtained. This plan may be perceived poorly in the market and, together with the increased number of shares being made available on the market, may have an adverse effect on our share price. Our Chief Executive Officer may also sell stock outside of his systematic plan at his election. Other executive officers may consider similar systematic sale programs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     All market risk sensitive instruments were entered into for non-trading purposes. We do not use derivative financial instruments for speculative trading purposes, nor do we hedge our foreign currency exposure in a manner that entirely offsets the effects of changes in foreign exchange rates.

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Interest Rate Risk
     The primary objectives of our investment activities are to preserve principal and provide liquidity while at the same time maximizing yields without significantly increasing risk. To achieve these objectives, we maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including government and corporate obligations, certificates of deposit and money market funds.
     The following table presents the fair value of cash equivalents and short-term investments that are subject to interest rate risk and the average interest rate as of September 30, 2005 and 2004 (dollars in thousands):
                 
    September 30,  
    2005     2004  
Cash equivalents and short-term investments
  $ 112,149     $ 116,579  
Average interest rate
    2.9 %     1.4 %
     Our cash equivalents and short-term investments are subject to interest rate risk and will decline in value if market interest rates increase. As of September 30, 2005, we had net unrealized losses of $401,000 associated with these securities. Assuming an average investment balance of $110.0 million, if interest rates were to increase (decrease) by 10%, this would result in a $80,000 increase (decrease) in quarterly interest income. However, we have the ability to hold our investments until maturity and, therefore, we would not expect to recognize an adverse impact on income or cash flows.
     At September 30, 2005, we had no outstanding borrowings.
Foreign Currency Risk
     We develop our software products in the United States for sale in the Americas, Europe and Asia Pacific. Our financial results could be affected by factors such as changes in foreign currency exchange rates or economic conditions in foreign markets. A majority of our revenues are denominated in United States Dollars; however, a strengthening of the United States Dollar could make our software products less competitive in foreign markets. We enter into forward foreign currency contracts to manage the exposure related to accounts receivable denominated in foreign currencies. We do not enter into derivative financial instruments for trading purposes. We had outstanding forward foreign currency contracts with notional amounts totaling approximately $3.6 million at September 30, 2005. The forward foreign currency contracts mature at various times in October 2005 and offset certain foreign currency transaction exposures in the Euro, British Pound and Australian Dollar. The fair value of the forward foreign currency contracts at September 30, 2005 was $14,000.
     We have performed a sensitivity analysis as of September 30, 2005 measuring the change in fair value arising from a hypothetical adverse movement in foreign currency exchange rates vis-à-vis the United States Dollar, with all other variables held constant. The analysis covers all of our foreign currency contracts offset by underlying exposures. We used foreign currency exchange rates based on market rates in effect at September 30, 2005. This sensitivity analysis indicated that a hypothetical 10% adverse movement in foreign currency exchange rates would result in an insignificant impact on the fair values of our foreign exchange derivative financial instruments, net of related exposures.
     We regularly review our foreign currency strategy and may as part of this review determine at any time to change our strategy.
Commodity Price Risk
     We did not hold commodity instruments as of September 30, 2005 and have never had such instruments.

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ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
     Regulations under the Securities Exchange Act of 1934 require public companies, including Interwoven, to maintain “disclosure controls and procedures,” which are defined to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our Chief Executive Officer and Chief Financial Officer, based upon their evaluation of our disclosure controls and procedures as of the end of the period covered by this report, concluded that as of the date of this evaluation, our disclosure controls and procedures were effective for this purpose.
(b) Changes in Internal Control Over Financial Reporting
     There was no change in our internal control over financial reporting during the three months ended September 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
     Management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors or fraud. An internal control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all control issues, errors and instances of fraud, if any, within Interwoven, Inc. have been detected.

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PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
     Beginning in 2001, Interwoven, Inc. and certain of our officers and directors and certain investment banking firms, were separately named as defendants in a securities class-action lawsuit filed in the United States District Court Southern District of New York, which was subsequently consolidated with more than 300 substantially identical proceedings against other companies. Similar suits were filed against iManage, Inc., its directors and certain of its officers. The consolidated complaint asserts that the prospectuses for our October 8, 1999 initial public offering, our January 26, 2000 follow-on public offering and iManage’s November 17, 1999 initial public offering, failed to disclose certain alleged actions by the underwriters for the offerings. In addition, the consolidated complaint alleges claims under Section 11 and 15 of the Securities Act of 1933 against iManage and us and certain of iManage’s and our officers and directors. The plaintiff seeks damages in an unspecified amount. In June 2003, following the dismissal of iManage’s and our respective officers and directors from the litigation without prejudice and after several months of negotiation, the plaintiffs named in the consolidated complaint and iManage and Interwoven, together with the other issuers named in those complaints and their respective insurance carriers, agreed to settle the litigation and dispose of any remaining claims against the issuers named in the consolidated complaint, in each case without admitting any wrongdoing. As part of this settlement, iManage’s and our respective insurance carriers have agreed to assume iManage’s and our entire payment obligation under the terms of the settlement. The court has finalized its preliminary approval of a settlement and set a new hearing date in April 2006 to consider whether the settlement should be given final approval. . We cannot be reasonably assured, however, that the settlement will be approved by the putative plaintiff classes or finally approved the District Court.
     The action filed by Advanced Software was settled and dismissed with prejudice in September 2005.
     We are a party to other threatened legal action and employment-related lawsuits arising in the normal course of business activities. In our opinion, resolution of these matters is not expected to have a material adverse impact on our consolidated results of operations or financial position. However, an unfavorable resolution of a matter could materially affect our consolidated results of operations or financial position in a particular period.

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ITEM 6. EXHIBITS
     
Exhibit No.   Description
     
 
   
10.01
  Interwoven, Inc. 1999 Employee Stock Purchase Plan, as amended.
 
   
10.02
  Summary of Non-employee Director Compensation (incorporated by reference to Exhibit 10.1 to Registrant’s current report on Form 8-K, filed with the Commission on September 21, 2005).
 
   
10.03
  Amendment of Line of Credit Agreement, dated July 25, 2005, between Registrant and Wells Fargo Bank.
 
   
31.01
  Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-15(a).
 
   
31.02
  Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-15(a).
 
   
32.01
  Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
 
   
32.02
  Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

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SIGNATURES
     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Sunnyvale, County of Santa Clara, State of California, on the 9th day of November 2005.
         
    INTERWOVEN, INC.
    (Registrant)
 
       
 
  By:   /s/ MARTIN W. BRAUNS
       
      Martin W. Brauns
President, Chief Executive Officer and
Chairman of the Board of Directors
 
       
      /s/ JOHN E. CALONICO, JR.
       
      John E. Calonico, Jr.
Senior Vice President and Chief Financial Officer

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INTERWOVEN, INC.
EXHIBITS TO FORM 10-Q QUARTERLY REPORT
For the Quarter Ended September 30, 2005
     
Number   Exhibit Title
     
 
   
10.01
  Interwoven, Inc. 1999 Employee Stock Purchase Plan, as amended.
 
   
10.02
  Summary of Non-employee Director Compensation (incorporated by reference to Exhibit 10.1 to Registrant’s current report on Form 8-K, filed with the Commission on September 21, 2005).
 
   
10.03
  Amendment of Line of Credit Agreement, dated July 25, 2005, between Registrant and Wells Fargo Bank.
 
   
31.01
  Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-15(a).
 
   
31.02
  Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-15(a).
 
   
32.01
  Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
 
   
32.02
  Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

 

EX-10.01 2 f14289exv10w01.htm EXHIBIT 10.01 exv10w01
 

EXHIBIT 10.01
INTERWOVEN, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
As Adopted July 22, 1999
Amended September 20, 1999, and September 15, 2005 and adjusted January 1, 2000,
July 13, 2000, December 29, 2000, January 1, 2001, January 1, 2002, January 1, 2003,
November 13, 2003, January 1, 2004 and January 1, 2005
     1. Establishment of Plan. Interwoven, Inc. (the “Company”) proposes to grant options for purchase of the Company’s Common Stock to eligible employees of the Company and its Participating Subsidiaries (as hereinafter defined) pursuant to this Employee Stock Purchase Plan (this “Plan”). For purposes of this Plan, “Parent Corporation” and “Subsidiary” shall have the same meanings as “parent corporation” and “subsidiary corporation” in Sections 424(e) and 424(f), respectively, of the Internal Revenue Code of 1986, as amended (the “Code”). “Participating Subsidiaries” are Parent Corporations or Subsidiaries that the Board of Directors of the Company (the “Board”) designates from time to time as corporations that shall participate in this Plan. The Company intends this Plan to qualify as an “employee stock purchase plan” under Section 423 of the Code (including any amendments to or replacements of such Section), and this Plan shall be so construed. Any term not expressly defined in this Plan but defined for purposes of Section 423 of the Code shall have the same definition herein. A total of 6,018,216 1 shares of the Company’s Common Stock is reserved for issuance under this Plan. In addition, on each January 1, the aggregate number of shares of the Company’s Common Stock reserved for issuance under the Plan shall be increased automatically by a number of shares equal to 1% of the total number of outstanding shares of the Company Common Stock on the immediately preceding December 31; provided that the aggregate number of shares issued over the term of this Plan shall not exceed 3,000,000 2 shares. Such number shall be subject to adjustments effected in accordance with Section 14 of this Plan.
     2. Purpose. The purpose of this Plan is to provide eligible employees of the Company and Participating Subsidiaries with a convenient means of acquiring an equity interest in the Company through payroll deductions, to enhance such employees’ sense of participation in the affairs of the Company and Participating Subsidiaries, and to provide an incentive for continued employment.
 
1   Adjusted to reflect (1) the automatic authorization of 228,864 additional shares of Common Stock for issuance under this Plan pursuant to Section 1 of this Plan in January 2000 (based upon 22,886,494 shares of Common Stock issued and outstanding as of December 31, 1999); (2) the 2-for-1 split of the Company’s Common Stock, paid in the form of a dividend, effected in July 2000 with respect to stockholders of record on June 22, 2000; (3) the 2-for-1 split of the Company’s Common Stock, paid in the form of a dividend, effected in December 2000 with respect to stockholders of record on December 13, 2000; (4) the automatic authorization of 1,021,711 additional shares of Common Stock for issuance under this Plan pursuant to Section 1 of this Plan in January 2001 (based upon 102,171,132 shares of Common Stock issued and outstanding as of December 31, 2000); (5) the automatic authorization of 1,044,744 additional shares of Common Stock for issuance under this Plan pursuant to Section 1 of this Plan in January 2002 (based upon 104,474,483 shares of Common Stock issued and outstanding as of December 31, 2001); (6) the automatic authorization of 1,025,362 additional shares of Common Stock for issuance under this Plan pursuant to Section 1 of this Plan in January 2003 (based upon 102,536,200 shares of Common Stock issued and outstanding as of December 31, 2002); (7) the automatic authorization of 400,076 additional shares of Common Stock for issuance under this Plan pursuant to Section 1 of this Plan in January 2004 (based upon 40,007,621 shares of Common Stock issued and outstanding as of December 31, 2003); and (8) the automatic authorization of 410,867 additional shares of Common Stock for issuance under this Plan pursuant to Section 1 of this Plan in January 2005 (based upon 41,087,000 shares of Common Stock issued and outstanding as of December 31, 2004).
 
2   Adjusted to account for (1) the 2-for-1 split of the Company’s Common Stock, paid in the form of a dividend, effected in July 2000 with respect to stockholders of record on June 22, 2000; (2) the 2-for-1 split of the Company’s Common Stock, paid in the form of a dividend, effected in December 2000 with respect to stockholders of record on December 13, 2000; and (3) the 1-for-4 reverse stock split of the Company’s Common Stock effected in November 2003 with respect to stockholders of record on November 18, 2003.

 


 

Interwoven, Inc.
1999 Employee Stock Purchase Plan
     3. Administration. This Plan shall be administered by the Compensation Committee of the Board (the “Committee”). Subject to the provisions of this Plan and the limitations of Section 423 of the Code or any successor provision in the Code, all questions of interpretation or application of this Plan shall be determined by the Committee and its decisions shall be final and binding upon all participants. Members of the Committee shall receive no compensation for their services in connection with the administration of this Plan, other than standard fees as established from time to time by the Board for services rendered by Board members serving on Board committees. All expenses incurred in connection with the administration of this Plan shall be paid by the Company.
     4. Eligibility. Any employee of the Company or the Participating Subsidiaries is eligible to participate in an Offering Period (as hereinafter defined) under this Plan except the following:
     (a) employees who are not employed by the Company or a Participating Subsidiary (10) days before the beginning of such Offering Period, except that employees who are employed on the Effective Date of the Registration Statement filed by the Company with the Securities and Exchange Commission (“SEC”) under the Securities Act of 1933, as amended (the “Securities Act”) registering the initial public offering of the Company’s Common Stock shall be eligible to participate in the first Offering Period under the Plan;
     (b) employees who are customarily employed for twenty (20) hours or less per week;
     (c) employees who are customarily employed for five (5) months or less in a calendar year;
     (d) employees who, together with any other person whose stock would be attributed to such employee pursuant to Section 424(d) of the Code, own stock or hold options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or any of its Participating Subsidiaries or who, as a result of being granted an option under this Plan with respect to such Offering Period, would own stock or hold options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or any of its Participating Subsidiaries; and
     (e) individuals who provide services to the Company or any of its Participating Subsidiaries as independent contractors who are reclassified as common law employees for any reason except for federal income and employment tax purposes.
     5. Offering Dates. The offering periods of this Plan (each, an “Offering Period”) shall be of six (6) months duration commencing on May 1 and November 1 of each year and ending on April 30 and October 31 of each year. Each Offering Period shall consist of one (1) six month purchase period (a “Purchase Period”) during which payroll deductions of the participants are accumulated under this Plan. Any Offering Period that began prior to October 31, 2005 shall end on October 31, 2005. The first business day of each Offering Period is referred to as the “Offering Date”. The last business day of each Purchase Period is referred to as the “Purchase Date”. The Committee shall have the power to change the duration of Offering Periods with respect to offerings without stockholder approval if such change is announced at least fifteen (15) days prior to the scheduled beginning of the first Offering Period to be affected.
     6. Participation in this Plan. Eligible employees may become participants in an Offering Period under this Plan on the first Offering Date after satisfying the eligibility requirements by delivering a subscription agreement to the Company’s treasury department (the “Treasury Department”) not later than five (5) days before such Offering Date. Notwithstanding the foregoing, the Committee may set a later time for filing the subscription agreement authorizing payroll deductions for all eligible employees with respect to a given Offering Period. An eligible employee who does not deliver a subscription agreement to the Treasury Department by such date after becoming eligible to participate in such Offering Period shall not participate in that Offering Period or any subsequent Offering Period unless such employee enrolls in this Plan by filing a subscription agreement with the Treasury Department not later than five (5) days preceding a subsequent Offering Date. Once an employee becomes a participant in an Offering Period, such employee will automatically participate in the Offering Period commencing immediately following the last day of the prior Offering Period unless the employee withdraws or is deemed to withdraw from this

2


 

Interwoven, Inc.
1999 Employee Stock Purchase Plan
Plan or terminates further participation in the Offering Period as set forth in Section 11 below. Such participant is not required to file any additional subscription agreement in order to continue participation in this Plan.
     7. Grant of Option on Enrollment. Enrollment by an eligible employee in this Plan with respect to an Offering Period will constitute the grant (as of the Offering Date) by the Company to such employee of an option to purchase on the Purchase Date up to that number of shares of Common Stock of the Company determined by dividing (a) the amount accumulated in such employee’s payroll deduction account during such Purchase Period by (b) the lower of (i) eighty-five percent (85%) of the fair market value of a share of the Company’s Common Stock on the Offering Date (but in no event less than the par value of a share of the Company’s Common Stock), or (ii) eighty-five percent (85%) of the fair market value of a share of the Company’s Common Stock on the Purchase Date (but in no event less than the par value of a share of the Company’s Common Stock), provided, however, that the number of shares of the Company’s Common Stock subject to any option granted pursuant to this Plan shall not exceed the lesser of (x) the maximum number of shares set by the Committee pursuant to Section 10(c) below with respect to the applicable Purchase Date, or (y) the maximum number of shares which may be purchased pursuant to Section 10(b) below with respect to the applicable Purchase Date. The fair market value of a share of the Company’s Common Stock shall be determined as provided in Section 8 below.
     8. Purchase Price. The purchase price per share at which a share of Common Stock will be sold in any Offering Period shall be eighty-five percent (85%) of the lesser of:
     (a) The fair market value on the Offering Date; or
     (b) The fair market value on the Purchase Date.
     For purposes of this Plan, the term “Fair Market Value” means, as of any Purchase Date, the value of a share of the Company’s Common Stock determined as follows:
  (a)   if such Common Stock is then quoted on the Nasdaq National Market, its closing price on the Nasdaq National Market on the Purchase Date as reported in The Wall Street Journal;
 
  (b)   if such Common Stock is publicly traded and is then listed on a national securities exchange, its closing price on the Purchase Date on the principal national securities exchange on which the Common Stock is listed or admitted to trading as reported in The Wall Street Journal; or
 
  (c)   if such Common Stock is publicly traded but is not quoted on the Nasdaq National Market nor listed or admitted to trading on a national securities exchange, the average of the closing bid and asked prices on the Purchase Date as reported in The Wall Street Journal.
     For purposes of this Plan, the term “Fair Market Value” means, as of any Offering Date, the value of a share of the Company’s Common Stock determined as follows:
  (a)   if such Common Stock is then quoted on the Nasdaq National Market, its closing price on the Nasdaq National Market on the business day immediately prior to the Offering Date as reported in The Wall Street Journal;
 
  (b)   if such Common Stock is publicly traded and is then listed on a national securities exchange, its closing price on the business day immediately prior to the Offering Date on the principal national securities exchange on which the Common Stock is listed or admitted to trading as reported in The Wall Street Journal;
 
  (c)   if such Common Stock is publicly traded but is not quoted on the Nasdaq National Market nor listed or admitted to trading on a national securities exchange, the average of the

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Interwoven, Inc.
1999 Employee Stock Purchase Plan
      closing bid and asked prices on the business day immediately prior to the Offering Date as reported in The Wall Street Journal; or
 
  (d)   if none of the foregoing is applicable, by the Board in good faith, which in the case of the First Offering Date will be the price per share at which shares of the Company’s Common Stock are initially offered for sale to the public by the Company’s underwriters in the initial public offering of the Company’s Common Stock pursuant to a registration statement filed with the SEC under the Securities Act.
     9. Payment Of Purchase Price; Changes In Payroll Deductions; Issuance Of Shares.
     (a) The purchase price of the shares is accumulated by regular payroll deductions made during each Offering Period. The deductions are made as a percentage of the participant’s compensation in one percent (1%) increments not less than two percent (2%), nor greater than fifteen percent (15%) or such lower limit set by the Committee. Compensation shall mean all W-2 cash compensation, including, but not limited to, base salary, wages, commissions, overtime, shift premiums and bonuses, plus draws against commissions, provided, however, that for purposes of determining a participant’s compensation, any election by such participant to reduce his or her regular cash remuneration under Sections 125 or 401(k) of the Code shall be treated as if the participant did not make such election. Payroll deductions shall commence on the first payday of the Offering Period and shall continue to the end of the Offering Period unless sooner altered or terminated as provided in this Plan.
     (b) A participant may decrease the rate of payroll deductions during an Offering Period by filing with the Treasury Department a new authorization for payroll deductions, in which case the new rate shall become effective for the next payroll period commencing more than fifteen (15) days after the Treasury Department’s receipt of the authorization and shall continue for the remainder of the Offering Period unless changed as described below. Such change in the rate of payroll deductions may be made at any time during an Offering Period, but not more than one (1) change may be made effective during any Purchase Period. A participant may increase or decrease the rate of payroll deductions for any subsequent Offering Period by filing with the Treasury Department a new authorization for payroll deductions not later than fifteen (15) days before the beginning of such Offering Period.
     (c) A participant may reduce his or her payroll deduction percentage to zero during an Offering Period by filing with the Treasury Department a request for cessation of payroll deductions. Such reduction shall be effective beginning with the next payroll period commencing more than fifteen (15) days after the Treasury Department’s receipt of the request and no further payroll deductions will be made for the duration of the Offering Period. Payroll deductions credited to the participant’s account prior to the effective date of the request shall be used to purchase shares of Common Stock of the Company in accordance with Section (e) below. A participant may not resume making payroll deductions during the Offering Period in which he or she reduced his or her payroll deductions to zero.
     (d) All payroll deductions made for a participant are credited to his or her account under this Plan and are deposited with the general funds of the Company. No interest accrues on the payroll deductions. All payroll deductions received or held by the Company may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions.
     (e) On each Purchase Date, so long as this Plan remains in effect and provided that the participant has not submitted a signed and completed withdrawal form before that date which notifies the Company that the participant wishes to withdraw from that Offering Period under this Plan and have all payroll deductions accumulated in the account maintained on behalf of the participant as of that date returned to the participant, the Company shall apply the funds then in the participant’s account to the purchase of whole shares of Common Stock reserved under the option granted to such participant with respect to the Offering Period to the extent that such option is exercisable on the Purchase Date. The purchase price per share shall be as specified in Section 8 of this Plan. Any cash remaining in a participant’s account after such purchase of shares shall be refunded to such participant in cash, without interest; provided, however that any amount remaining in such participant’s account on a Purchase Date which is less than the amount necessary to purchase a full share of Common Stock of the Company shall be carried forward, without interest, into the next Purchase Period. In the event that this Plan has been oversubscribed, all funds not used to purchase

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Interwoven, Inc.
1999 Employee Stock Purchase Plan
shares on the Purchase Date shall be returned to the participant, without interest. No Common Stock shall be purchased on a Purchase Date on behalf of any employee whose participation in this Plan has terminated prior to such Purchase Date.
     (f) As promptly as practicable after the Purchase Date, the Company shall issue shares for the participant’s benefit representing the shares purchased upon exercise of his or her option.
     (g) During a participant’s lifetime, his or her option to purchase shares hereunder is exercisable only by him or her. The participant will have no interest or voting right in shares covered by his or her option until such option has been exercised.
     10. Limitations on Shares to be Purchased.
     (a) No participant shall be entitled to purchase stock under this Plan at a rate which, when aggregated with his or her rights to purchase stock under all other employee stock purchase plans of the Company or any Subsidiary, exceeds $25,000 in fair market value, determined as of the Offering Date (or such other limit as may be imposed by the Code) for each calendar year in which the employee participates in this Plan. The Company shall automatically suspend the payroll deductions of any participant as necessary to enforce such limit provided that when the Company automatically resumes such payroll deductions, the Company must apply the rate in effect immediately prior to such suspension.
     (b) On any single Purchase Date, no participant shall be entitled to purchase more than twice the number of shares which could have been purchased if the purchase price were eighty-five percent (85%) of the fair market value of a share of the Company’s Common Stock on the Offering Date.
     (c) No participant shall be entitled to purchase more than the Maximum Share Amount (as defined below) on any single Purchase Date. Not less than thirty (30) days prior to the commencement of any Offering Period, the Committee may, in its sole discretion, set a maximum number of shares which may be purchased by any employee at any single Purchase Date (hereinafter the “Maximum Share Amount"). Until otherwise determined by the Committee, there shall be no Maximum Share Amount. In no event shall the Maximum Share Amount exceed the amounts permitted under Section 10(b) above. If a new Maximum Share Amount is set, then all participants must be notified of such Maximum Share Amount prior to the commencement of the next Offering Period. The Maximum Share Amount shall continue to apply with respect to all succeeding Purchase Dates and Offering Periods unless revised by the Committee as set forth above.
     (d) If the number of shares to be purchased on a Purchase Date by all employees participating in this Plan exceeds the number of shares then available for issuance under this Plan, then the Company will make a pro rata allocation of the remaining shares in as uniform a manner as shall be reasonably practicable and as the Committee shall determine to be equitable. In such event, the Company shall give written notice of such reduction of the number of shares to be purchased under a participant’s option to each participant affected.
     (e) Any payroll deductions accumulated in a participant’s account which are not used to purchase stock due to the limitations in this Section 10 shall be returned to the participant as soon as practicable after the end of the applicable Purchase Period, without interest.
     11. Withdrawal.
     (a) Each participant may withdraw from an Offering Period under this Plan by signing and delivering to the Treasury Department a written notice to that effect on a form provided for such purpose. Such withdrawal may be elected at any time at least fifteen (15) days prior to the end of an Offering Period.
     (b) Upon withdrawal from this Plan, the accumulated payroll deductions shall be returned to the withdrawn participant, without interest, and his or her interest in this Plan shall terminate. In the event a participant voluntarily elects to withdraw from this Plan, he or she may not resume his or her participation in this Plan during the same Offering Period, but he or she may participate in any Offering Period under this Plan which commences on a

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Interwoven, Inc.
1999 Employee Stock Purchase Plan
date subsequent to such withdrawal by filing a new authorization for payroll deductions in the same manner as set forth in Section 6 above for initial participation in this Plan.
     12. Termination of Employment. Termination of a participant’s employment for any reason, including retirement, death or the failure of a participant to remain an eligible employee of the Company or of a Participating Subsidiary, immediately terminates his or her participation in this Plan. In such event, the payroll deductions credited to the participant’s account will be returned to him or her or, in the case of his or her death, to his or her legal representative, without interest. For purposes of this Section 12, an employee will not be deemed to have terminated employment or failed to remain in the continuous employ of the Company or of a Participating Subsidiary in the case of sick leave, military leave, or any other leave of absence approved by the Board; provided that such leave is for a period of not more than ninety (90) days or reemployment upon the expiration of such leave is guaranteed by contract or statute.
     13. Return of Payroll Deductions. In the event a participant’s interest in this Plan is terminated by withdrawal, termination of employment or otherwise, or in the event this Plan is terminated by the Board, the Company shall deliver to the participant all payroll deductions credited to such participant’s account. No interest shall accrue on the payroll deductions of a participant in this Plan.
     14. Capital Changes. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by each option under this Plan which has not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under this Plan but have not yet been placed under option (collectively, the “Reserves”), as well as the price per share of Common Stock covered by each option under this Plan which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued and outstanding shares of Common Stock of the Company resulting from a stock split or the payment of a stock dividend (but only on the Common Stock) or any other increase or decrease in the number of issued and outstanding shares of Common Stock effected without receipt of any consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration”. Such adjustment shall be made by the Committee, whose determination shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option.
     In the event of the proposed dissolution or liquidation of the Company, the Offering Period will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Committee. The Committee may, in the exercise of its sole discretion in such instances, declare that this Plan shall terminate as of a date fixed by the Committee and give each participant the right to purchase shares under this Plan prior to such termination. In the event of (i) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of the Company in a different jurisdiction, or other transaction in which there is no substantial change in the stockholders of the Company or their relative stock holdings and the options under this Plan are assumed, converted or replaced by the successor corporation, which assumption will be binding on all participants), (ii) a merger in which the Company is the surviving corporation but after which the stockholders of the Company immediately prior to such merger (other than any stockholder that merges, or which owns or controls another corporation that merges, with the Company in such merger) cease to own their shares or other equity interest in the Company, (iii) the sale of all or substantially all of the assets of the Company or (iv) the acquisition, sale, or transfer of more than 50% of the outstanding shares of the Company by tender offer or similar transaction, the Plan will continue with regard to Offering Periods that commenced prior to the closing of the proposed transaction and shares will be purchased based on the Fair Market Value of the surviving corporation’s stock on each Purchase Date, unless otherwise provided by the Committee consistent with pooling of interests accounting treatment.
     The Committee may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per share of Common Stock covered by each outstanding option, in the event that the Company effects one or more reorganizations, recapitalizations, rights offerings or other increases or reductions of shares of its outstanding Common Stock, or in the event of the Company being consolidated with or merged into any other corporation.

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     15. Nonassignability. Neither payroll deductions credited to a participant’s account nor any rights with regard to the exercise of an option or to receive shares under this Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 22 below) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be void and without effect.
     16. Reports. Individual accounts will be maintained for each participant in this Plan. Each participant shall receive promptly after the end of each Purchase Period a report of his or her account setting forth the total payroll deductions accumulated, the number of shares purchased, the per share price thereof and the remaining cash balance, if any, carried forward to the next Purchase Period or Offering Period, as the case may be.
     17. Notice of Disposition. Each participant shall notify the Company in writing if the participant disposes of any of the shares purchased in any Offering Period pursuant to this Plan if such disposition occurs within two (2) years from the Offering Date or within one (1) year from the Purchase Date on which such shares were purchased (the “Notice Period”). The Company may, at any time during the Notice Period, place a legend or legends on any certificate representing shares acquired pursuant to this Plan requesting the Company’s transfer agent to notify the Company of any transfer of the shares. The obligation of the participant to provide such notice shall continue notwithstanding the placement of any such legend on the certificates.
     18. No Rights to Continued Employment. Neither this Plan nor the grant of any option hereunder shall confer any right on any employee to remain in the employ of the Company or any Participating Subsidiary, or restrict the right of the Company or any Participating Subsidiary to terminate such employee’s employment.
     19. Equal Rights And Privileges. All eligible employees shall have equal rights and privileges with respect to this Plan so that this Plan qualifies as an “employee stock purchase plan” within the meaning of Section 423 or any successor provision of the Code and the related regulations. Any provision of this Plan which is inconsistent with Section 423 or any successor provision of the Code shall, without further act or amendment by the Company, the Committee or the Board, be reformed to comply with the requirements of Section 423. This Section 19 shall take precedence over all other provisions in this Plan.
     20. Notices. All notices or other communications by a participant to the Company under or in connection with this Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof.
     21. Term; Stockholder Approval. After this Plan is adopted by the Board, this Plan will become effective on the First Offering Date (as defined above). This Plan shall be approved by the stockholders of the Company, in any manner permitted by applicable corporate law, within twelve (12) months before or after the date this Plan is adopted by the Board. No purchase of shares pursuant to this Plan shall occur prior to such stockholder approval. This Plan shall continue until the earlier to occur of (a) termination of this Plan by the Board (which termination may be effected by the Board at any time), (b) issuance of all of the shares of Common Stock reserved for issuance under this Plan, or (c) ten (10) years from the adoption of this Plan by the Board.
     22. Designation of Beneficiary.
     (a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant’s account under this Plan in the event of such participant’s death subsequent to the end of a Purchase Period but prior to delivery to him of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant’s account under this Plan in the event of such participant’s death prior to a Purchase Date.
     (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under this Plan who is living at the time of such participant’s death, the Company shall deliver such shares or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge

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Interwoven, Inc.
1999 Employee Stock Purchase Plan
of the Company), the Company, in its discretion, may deliver such shares or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate.
     23. Conditions Upon Issuance of Shares; Limitation on Sale of Shares. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange or automated quotation system upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance.
     24. Applicable Law. The Plan shall be governed by the substantive laws (excluding the conflict of laws rules) of the State of California.
     25. Amendment or Termination of this Plan. The Board may at any time amend, terminate or extend the term of this Plan, except that any such termination cannot affect options previously granted under this Plan, nor may any amendment make any change in an option previously granted which would adversely affect the right of any participant, nor may any amendment be made without approval of the stockholders of the Company obtained in accordance with Section 21 above within twelve (12) months of the adoption of such amendment (or earlier if required by Section 21) if such amendment would:
     (a) increase the number of shares that may be issued under this Plan; or
     (b) change the designation of the employees (or class of employees) eligible for participation in this Plan.
     Notwithstanding the foregoing, the Board may make such amendments to the Plan as the Board determines to be advisable, if the continuation of the Plan or any Offering Period would result in financial accounting treatment for the Plan that is different from the financial accounting treatment in effect on the date this Plan is adopted by the Board.

8

EX-10.03 3 f14289exv10w03.htm EXHIBIT 10.03 exv10w03
 

EXHIBIT 10.03
Peninsula Regional
Commercial Banking
P.O. Box 150
Palo Alto, CA 94302
650 855-7662
650 328-0814 Fax
July 25, 2005
Interwoven, Inc.
803 11th Street
Sunnyvale, CA 94089
Dear Mr. Calonico:
     This letter amendment (this “Amendment”) is to confirm the changes agreed upon between WELLS FARGO BANK, NATIONAL ASSOCIATION (“Bank”) and INTERWOVEN, INC. (“Borrower”) to the terms and conditions of that certain letter agreement between Bank and Borrower dated as of June 1, 2004, as amended from time to time (the “Agreement”). For valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Bank and Borrower hereby agree that the Agreement shall be amended as follows to reflect said changes.
     1. The Agreement is hereby amended (a) by deleting “July 31, 2005” as the last day on which Bank will issue Letters of Credit under the Letter of Credit Line, and by substituting for said date “July 31, 2006.”
     2. In consideration of the changes set forth herein and as a condition to the effectiveness hereof, immediately upon signing this Amendment Borrower shall pay to Bank a non-refundable fee of $3,200.00.
     3. Except as specifically provided herein, all terms and conditions of the Agreement remain in full force and effect, without waiver or modification. All terms defined in the Agreement shall have the same meaning when used herein. This Amendment and the Agreement shall be read together, as one document.
     4. Borrower hereby remakes all representations and warranties contained in the Agreement and reaffirms all covenants set forth therein. Borrower further certifies that as of the date of Borrower’s acknowledgment set forth below there exists no default or defined event of default under the Agreement or any promissory note or other contract, instrument or document executed in connection therewith, nor any condition, act or event which with the giving of notice or the passage of time or both would constitute such a default or defined event of default.

 


 

July 25, 2005
Page 2
     Your acknowledgment of this Amendment shall constitute acceptance of the foregoing terms and conditions.
WELLS FARGO BANK,
NATIONAL ASSOICATION
     
By:
  /s/ Manao Keegan
   
  Manao Keegan
Vice President
Acknowledged and accepted as of 8/8/2005:
         
Interwoven, Inc.
 
By:   /s/ John Calonico    
    John Calonico
   
    Senior Vice President    

 


 

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Statement of Purpose for an Extension of Credit Secured By Margin Stock
(Federal Reserve Form U-l)
Wells Fargo Bank, National Association
Name of Bank
This report is required by law (15 U.S.C. 78g and 78w, 12 CFR 221).
Public reporting burden for this collection of information is estimated to average 4.2 minutes (0.07 hours) per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Send comments regarding this burden estimate, including suggestions for reducing this burden, to Secretary, Board of Governors of the Federal Reserve System, 20th and C Streets, N. W., Washington, D. C. 20551; and to the Office of Management and Budget, Paperwork Reduction Project (7100-0115), Washington, D. C. 20503.
INSTRUCTIONS
1.   This form must be completed when a bank extends credit in excess of $100,000.00 secured directly or indirectly, in whole or in part, by any margin stock.
 
2.   The term “margin stock” is defined in Regulation U (12 CFR 221) and includes, principally: (1) stocks that are registered on a national securities exchange or that are on the Federal Reserve Board’s List of Marginable OTC Stocks; (2) debit securities (bonds) that are convertible into margin stocks; (3) any over-the-counter security designated as qualified for trading in the National Market System under a designation plan approved by the Securities and Exchange Commission (NMS security); and (4) shares of mutual funds, unless 95 per cent of the assets of the fund are continuously invested in U.S. government, agency, state, or municipal obligations
 
3.   Please print or type (if space is inadequate, attach separate sheet.)
PART 1. To be completed by borrower(s).
1.   What is the amount of the credit being extended? $16,000,000.00
 
2.   Will any part of this credit be used to purchase or carry margin stock? o Yes þ No
If the answer is “no”, describe the specific purpose of the credit To issue Standby Letter of Credit
I (we) have read this form and certify that to the best of my (our) knowledge and belief the information given is true, accurate, and compete, and that the margin stock and any other securities collateralizing this credit are authentic, genuine, unaltered, and not stolen, forged, or counterfeit.
             
BORROWER: INTERWOVEN, INC.        
By:
  /s/ John Calonico   By:   John E. Calonico, JR.
           
  John Calonico        
Title:
      Title:   Chief Financial Officer
           
  Senior Vice President        
This form should not be signed blank.
     A borrower who falsely certifies the purpose of a credit on this form or otherwise willfully or intentionally evades the provisions of Regulation U will also violate Federal Reserve Regulation X, “Borrowers of Obtain Securities Credit.”

 


 

     
  SECURITY AGREEMENT
WELLS FARGO
  SECURITIES ACCOUNT
 
1. GRANT OF SECURITY INTEREST. For valuable consideration, the undersigned Interwoven, Inc., or any of them (“Debtor), hereby grants and transfers to WELLS FARGO BANK. NATIONAL ASSOCIATION (“Bank”) a security interest in (a) Debtor’s account no. 10427400 (whether held in Debtor’s name or as a Bank collateral account for the benefit of Debtor), any sub-account thereunder or consolidated therewith, and all replacements or substitutions therefor, including any account resulting from a renumbering or other administrative re-identification thereof (collectively, the “Securities Account”) maintained with Wells Capital Management Incorporated (“Intermediary”), (b) all financial assets credited to the Securities Account, (c) all security entitlements with respect to the financial assets credited to the Securities Account, and (d) any and all other investment property or assets maintained or recorded in the Securities Account (with all the foregoing defined as “Collateral”), together with whatever is receivable or received when any of the Collateral or proceeds thereof are sold, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, including without limitation, (i) all rights to payment, including returned premiums, with respect to any insurance relating to any of the foregoing, (ii) all rights to payment with respect to any claim or cause of action affecting or relating to any of the foregoing, and (iii) all stock rights, rights to subscribe, stock splits, liquidating dividends, cash dividends, dividends paid in stock, new securities or other property of any kind which Debtor is or may hereafter be entitled to receive on account of any securities pledged hereunder, including without limitation, stock received by Debtor due to stock splits or dividends paid in stock or sums paid upon or in respect of any securities pledged hereunder upon the liquidation or dissolution of the issuer thereof (hereinafter called “Proceeds”). Except as otherwise expressly permitted herein, in the event Debtor receives any such Proceeds, Debtor will hold the same in trust on behalf of and for the benefit of Bank and will immediately deliver all such Proceeds to Bank in the exact form received, with the endorsement of Debtor if necessary and/or appropriate undated stock powers duly executed in blank, to be held by Bank as part of the Collateral, subject to all terms hereof. As used herein, the terms “security entitlement,” “financial asset” and “investment property” shall have the respective meanings set forth in the California Uniform Commerical Code.
2. OBLIGATIONS SECURED. The obligations secured hereby are the payment and performance of: (a) all present and future Indebtedness of Debtor to Bank; (b) all obligations of Debtor and rights of Bank under this Agreement; and (c) all present and future obligations of Debtor to Bank of other kinds. The word “Indebtedness” is used herein in its most comprehensive sense and includes any and all advances, debts, obligations and liabilities of Debtor, or any of them, heretofore, now or hereafter made, incurred or created, whether voluntary or involuntary and however arising, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and whether Debtor may be liable individually or jointly, or whether recovery upon such indebtedness may be or hereafter becomes unenforceable.
3. TERMINATION. This Agreement will terminate upon the performance of all obligations of Debtor to Bank, including without limitation, the payment of all Indebtedness of Debtor to Bank, and the termination of all commitments of Bank to extend credit to Debtor, existing at the time Bank receives written notice from Debtor of the termination of this Agreement.
4. OBLIGATIONS OF BANK. Bank has no obligation to make any loans hereunder. Any money received by Bank in respect of the Collateral may be deposited, at Bank’s option, into a non-interest bearing account over which Debtor shall have no control, and the same shall, for all purposes, be deemed Collateral hereunder. Bank shall have no duty to take any steps necessary to preserve the rights of Debtor against prior parties, or to initiate any action to protect against the possibility of a decline in the market value of the Collateral or Proceeds. Bank shall not be obligated to take any action with respect to the Collateral or Proceeds requested by Debtor unless such request is made in writing and Bank determines, in its sole discretion, that the requested action would not unreasonably jeopardize the value of the Collateral and Proceeds as security for the Indebtedness.
5. REPRESENTATIONS AND WARRANTIES. Debtor represents and warrants to Bank that: (a) Debtor’s legal name is exactly as set forth on the first page of this Agreement, and all of Debtor’s organizational documents or agreements delivered to Bank are complete and accurate in every respect; (b) Debtor is the owner of the Collateral and Proceeds; (c) Debtor has the exclusive right to grant a security interest in the Collateral and Proceeds; (d) all Collateral and Proceeds are genuine, free from liens, adverse claims, setoffs, default, prepayment, defenses

 


 

and conditions precedent of any kind or character, except the lien created hereby or as otherwise agreed to by Bank, or heretofore disclosed by Debtor to Bank, in writing; (e) all statements contained herein and, where applicable, in the Collateral, are true and complete in all material respects; (f) no financing statement or control agreement covering any of the Collateral or Proceeds, and naming any secured party other than Bank, exists or is on file in any public office or remains in effect; (g) no person or entity, other than Debtor, Bank and Intermediary, has any interest in or control over the Collateral; and (h) specifically with respect to Collateral and Proceeds consisting of investment securities, instruments, chattel paper, documents, contracts, insurance policies or any like property, (i) all persons appearing to be obligated thereon have authority and capacity to contract and are bound as they appear to be, and (ii) the same comply with applicable laws concerning form, content and manner of preparation and execution.
6. COVENANTS OF DEBTOR.
6.1 Debtor Agrees in general: (a) to pay Indebtedness secured hereby when due: (b) to indemnify Bank against all losses, claims, demands, liabilities and expenses of every kind caused by property subject hereto; (c) to pay all costs and expenses, including reasonable attorneys’ fees, incurred by Bank in the perfection and preservation of the Collateral or Bank’s interest therein and/or the realization, enforcement and exercise of Bank’s rights, powers and remedies hereunder; (d) to permit Bank to exercise its powers; (e) to execute and deliver such documents as Bank deems necessary to create, perfect and continue the security interests contemplated hereby; (f) not to change its name, and as applicable, its chief executive office, its principal residence or the jurisdiction in which it is organized and/or registered without giving Bank prior written notice thereof; (g) not to change the places where Debtor keeps any Collateral or Debtor’s records concerning the Collateral and Proceeds without giving Bank prior written notice of the address to which Debtor is moving same; and (h) to cooperate with Bank in perfecting all security interests granted herein and in obtaining such agreements from third parties as Bank deems necessary, proper or convenient in connection with the preservation, perfection or enforcement of any of its rights hereunder.
6.2 Debtor agrees with regard to the Collateral and Proceeds, unless Bank agrees otherwise in writing: (a) that Bank is authorized to file financing statements in the name of Debtor to perfect Bank’s security interest in Collateral and Proceeds; (b) not to permit any security interest in or lien on the Collateral or Proceeds, except in favor of Bank and except liens in favor of Intermediary to the extent expressly permitted by Bank in writing; (c) not to hypothecate or permit the transfer by operation of law of any of the Collateral or Proceeds or any interest therein; (d) to keep, in accordance with generally accepted accounting principles, complete and accurate records regarding all Collateral and Proceeds, and to permit Bank to inspect the same and make copies thereof at any reasonable time; (e) if requested by Bank, to receive and use reasonable diligence to collect Proceeds, in trust and as the property of Bank, and to immediately endorse as appropriate and deliver such Proceeds to Bank daily in the exact form in which they are received together with a collection report in form satisfactory to Bank; (f) in the event Bank elects to receive payments of Proceeds hereunder, to pay all expenses incurred by Bank in connection therewith, including expenses of accounting, correspondence, collection efforts, filing, recording, record keeping and expenses incidental thereto; (g) to provide any service and do any other acts which may be necessary to keep all Collateral and Proceeds free and clear of all defenses, rights of offset and counterclaims; and (h) if the Collateral or Proceeds consists of securities and so long as no Event of Default exists, to vote said securities and to give consents, waivers and ratifications with respect thereto, provided that no vote shall be cast or consent, waiver or ratification given or action taken which would impair Bank’s interests in the Collateral and Proceeds or be inconsistent with or violate any provisions of this Agreement. Debtor further agrees that any party now or at any time hereafter authorized by Debtor to advise or otherwise act with respect to the Securities Account shall be subject to all terms and conditions contained herein and in any control, custodial or other similar agreement at any time in effect among Bank, Debtor and Intermediary relating to the Collateral.
7. POWERS OF BANK. Debtor appoints Bank its true attorney-in-fact to perform any of the following powers, which are coupled with an interest, are irrevocable until termination of this Agreement and may be exercised from time to time by Bank’s officers and employees, or any of them, whether or not Debtor is in default: (a) to perform any obligation of Debtor hereunder in Debtor’s name or otherwise; (b) to notify any person obligated on any security, instrument or other document subject to this Agreement of Bank’s rights hereunder; (c) to collect by legal proceedings or otherwise all dividends, interest, principal or other sums now or hereafter payable upon or on account of the Collateral or Proceeds; (d) to enter into any extension, modification, reorganization, deposit, merger or consolidation agreement, or any other agreement relating to or affecting the Collateral or Proceeds, and in connection therewith to deposit or surrender control of the Collateral and Proceeds, to accept other property in

 


 

exchange for the Collateral and Proceeds, and to do and perform such acts and things as Bank may deem proper, with any money or property received in exchange for the Collateral or Proceeds, at Bank’s option, to be applied to the Indebtedness or held by Bank under this Agreement; (e) to make any compromise or settlement Bank deems desirable or proper in respect of the Collateral and Proceeds; (f) to insure, process and preserve the Collateral and Proceeds; (g) to exercise rights, powers and remedies which Debtor would have, but for this Agreement, with respect to all Collateral and Proceeds subject hereto; and (h) to do all acts and things and execute all documents in the name of Debtor or otherwise, deemed by Bank as necessary, proper and convenient in connection with the preservation, perfection or enforcement of its rights hereunder. To effect the purposes of this Agreement or otherwise upon instructions of Debtor, or any of them, Bank may cause any Collateral and/or Proceeds to be transferred to Bank’s name or the name of Bank’s nominee. If an Event of Default has occurred and is continuing, any or all Collateral and/or Proceeds consisting of securities may be registered, without notice, in the name of Bank or its nominee, and thereafter Bank or its nominee may exercise, without notice, all voting and corporate rights at any meeting of the shareholders of the issuer thereof, any and all rights of conversion, exchange or subscription, or any other rights, privileges or options pertaining to such Collateral and/or Proceeds, all as if it were the absolute owner thereof. The foregoing shall include, without limitation, the right of Bank or its nominee to exchange, at its discretion, any and all Collateral and/or Proceeds upon the merger, consolidation, reorganization, recapitalization or other readjustment of the issuer thereof, or upon the exercise by the issuer thereof or Bank of any right, privilege or option pertaining to any shares of the Collateral and/or Proceeds, and in connection therewith, the right to deposit and deliver any and all of the Collateral and/or Proceeds with any committee, depository, transfer agent, registrar or other designated agency upon such terms and conditions as Bank may determine. All of the foregoing rights, privileges or options may be exercised without liability on the park of Bank or its nominee except to account for property actually received by Bank. Bank shall have no duty to exercise any of the foregoing, or any other rights, privileges or options with respect to the Collateral or Proceeds and shall not be responsible for any failure to do so or delay in so doing.
8. PAYMENT OF PREMIUMS, TAXES, CHARGES, LIENS AND ASSESSMENTS. Debtor agrees to pay, prior to delinquency, all insurance premiums, taxes, charges, liens and assessments against the Collateral and Proceeds, and upon the failure of Debtor to do so, Bank at its option may pay any of them and shall be the sole judge of the legality or validity thereof and the amount necessary to discharge the name. Any such payments made by Bank shall be obligations of Debtor to Bank, due and payable immediately upon demand, together with interest at a rate determined in accordance with the provisions of this Agreement, and shall be secured by the Collateral and Proceeds, subject to all terms and conditions of this Agreement.
9. EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an “Event of Default” under this Agreement: (a) any default in the payment or performance of any obligation, or any defined event of default, under (i) any contract or instrument evidencing any Indebtedness, (ii) any other agreement between Debtor and Bank, including without limitation any loan agreement, relating to or executed in connection with any Indebtedness, or (iii) any control, custodial or other similar agreement in effect among Bank. Debtor and Intermediary relating to the Collateral; (b) any representation or warranty made by Debtor herein shall prove to be incorrect, false or misleading in any material respect when made, (c) Debtor shall fail to observe or perform any obligation or agreement contained herein; (d) any impairment of the rights of Bank in any Collateral or Proceeds or any attachment or like levy on any property of Debtor; and (e) Bank, in good faith, believes any or all of the Collateral and/or Proceeds to be in danger of misuse, dissipation, commingling, loss, theft, damage or destruction, or otherwise in jeopardy or unsatisfactory in character or value.
10. REMEDIES. Upon the occurrence of any Event of Default, Bank shall have the right to declare immediately due and payable all or any Indebtedness secured hereby and to terminate any commitments to make loans or otherwise extend credit to Debtor. Bank shall have all other rights, powers, privileges and remedies granted to a secured party upon default under the California Uniform Commerical Code or otherwise provided by law, including without limitation, the right (a) to contact all persons obligated to Debtor on any Collateral or Proceeds and to instruct such persons to deliver all Collateral and/or Proceeds directly to Bank, and (b) to sell, lease, license or otherwise dispose of any or all Collateral All rights, powers, privileges and remedies of Bank shall be cumulative. No delay, failure or discontinuance of Bank in exercising any right, power, privilege or remedy hereunder shall affect or operate as a waiver of such right, power, privilege or remedy; nor shall any single or partial exercise of any such right, power, privilege or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power, privilege or remedy. Any waiver, permit, consent or approval of any kind by

 


 

Bank of any default hereunder, or any such waiver of any provisions or conditions hereof, must be in writing and shall be effective only to the extent set forth in writing. It is agreed that public or private sales or other dispositions, for cash or on credit, to a wholesaler or retailer or investor, or user of property of the types subject to this Agreement, or public auctions, are all commercially reasonable since differences in the prices generally realized in the different kinds of dispositions are ordinarily offset by the differences in the costs and credit risks of such dispositions.
While an Event of Default exists: (a) Debtor will not dispose of any Collateral or Proceeds except on terms approved by Bank; (b) Bank may appropriate the Collateral and apply all Proceeds toward repayment of the Indebtedness in such order of application as Bank may from time to time elect; (c) Bank may take any action with respect to the Collateral contemplated by any control, custodial or other similar agreement then in effect among Bank, Debtor and Intermediary; and (d) at Bank’s request, Debtor will assemble and deliver all books and records pertaining to the Collateral or Proceeds to Bank at a reasonably convenient place designated by Bank. For any Collateral or Proceeds consisting of securities, Bank shall have no obligation to delay a disposition of any portion thereof for the period of time necessary to permit the issuer thereof to register such securities for public sale under any applicable state or Federal law, even if the issuer thereof would agree to do so. Debtor further agrees that Bank shall have no obligation to process or prepare any Collateral for sale or other disposition.
11. DISPOSITION OF COLLATERAL AND PROCEEDS; TRANSFER OF INDEBTEDNESS. In disposing Collateral hereunder, Bank may disclaim all warranties of title, possession, quiet enjoyment and the like. Any proceeds of any disposition of any Collateral or Proceeds, or any part thereof, may be applied by Bank to the payment of expenses incurred by Bank in connection with the foregoing, including reasonable attorneys’ fees, and the balance of such proceeds may be applied by Bank toward the payment of the Indebtedness in such order of application as Bank may from time to time elect. Upon the transfer of all or any part of the Indebtedness, Bank may transfer all or any part of the Collateral or Proceeds and shall be fully discharged thereafter from all liability and responsibility with respect to any of the foregoing so transferred, and the transferee shall be vested with all rights and powers of Bank hereunder with respect to any of the foregoing so transferred; but with respect to any Collateral or Proceeds not so transferred Bank shall retain all rights, powers, privileges and remedies herein given.
12. STATUTE OF LIMITATIONS. Until all Indebtedness shall have been paid in full and all commitments by Bank to extend credit to Debtor have been terminated, the power of sale or other disposition and all other rights, powers, privileges and remedies granted to Bank hereunder shall continue to exist and may be exercised by Bank at any time and from time to time irrespective of the fact that the Indebtedness or any part thereof may have become barred by any statute of limitations, or that the personal liability of Debtor may have ceased, unless such liability shall have ceased due to the payment in full of all Indebtedness secured hereunder.
13. MISCELLANEOUS. When there is more than one Debtor named herein: (a) the word “Debtor” shall mean all or any one or more of them as the context requires; (b) the obligations of each Debtor hereunder are joint and several; and (c) until all Indebtedness shall have been paid in full, no Debtor shall have any right of subrogation or contribution, and each Debtor hereby waives any benefit of or right to participate in any of the Collateral or Proceeds or any other security now or hereafter held by Bank. Debtor hereby waives any right to require Bank to (i) proceed against Debtor or any other person, (ii) proceed against or exhaust any security from Debtor or any other person, (iii) perform any obligation of Debtor with respect to any Collateral or Proceeds, and (d) make any presentment or demand, or give any notice of nonpayment or nonperformance, protest, notice of protest or notice of dishonor hereunder or in connection with any Collateral or Proceeds. Debtor further waives any right to direct the application of payments or security for any Indebtedness of Debtor or indebtedness of customers of Debtor.
14. NOTICES. All notices, requests and demands required under this Agreement must be in writing, addressed to Bank at the address specified in any other loan documents entered into between Debtor and Bank and to Debtor at the address of its chief executive office (or principal residence, if applicable) specified below or to such other address as any party may designate by written notice to each other party, and shall be deemed to have been given or made as follows: (a) if personally delivered, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or 3 days after deposit in the U. S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt.
15. COSTS, EXPENSES AND ATTORNEYS’ FEES. Debtor shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys’ fees (to include

 


 

outside counsel fees and all allocated costs of Bank’s in-house counsel), expended or incurred by Bank in exercising any right, power, privilege or remedy conferred by this Agreement or in the enforcement thereof, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitations, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to Debtor or in any way affecting any of the Collateral or Bank’s ability to exercise any of its rights or remedies with respect thereto. All of the foregoing shall be paid by Debtor with interest from the date of demand until paid in full at a rate per annum equal to the greater of ten percent (10%) or Bank’s Prime Rate in effect from time to time.
16. SUCCESSORS; ASSIGNS; AMENDMENT. This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties, and may be amended or modified only in writing signed by Bank and Debtor.
17. OBLIGATIONS OF MARRIED PERSONS. Any married person who signs this Agreement as Debtor hereby expressly agrees that recourse may be had against his or her separate property for all his or her Indebtedness to Bank secured by the Collateral and Proceeds under this Agreement.
18. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision stall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or any remaining provisions of this Agreement.
19. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California.
20. ADDENDUM. Additional terms and conditions relating to the Securities Account are set forth in an Addendum attached hereto and incorporated herein by this reference.
Debtor warrants that its chief executive office (or principal residence, if applicable) is located at the following address: 803 11th Street, Sunnyvale, CA 94089-4731
IN WITNESS WHEREOF, this Agreement has been duly executed as of July 25, 2005.
Interwoven, Inc.
         
By:
  /s/ John Calonico    
       
  John Calonico, Senior Vice President    

 


 

ADDENDUM TO SECURITY AGREEMENT: SECURITIES ACCOUNT
     THIS ADDENDUM is attached to and made a part of that certain Security Agreement: Securities Account executed by INTERWOVEN, INC. (“Debtor”) in favor of WELLS FARGO BANK, NATIONAL ASSOCIATION (“Bank”), dated as of July 25, 2005 (the “Agreement”).
     The following provisions are hereby incorporated into the Agreement:
     1. Securities Account Activity. So long as no Event of Default exists, Debtor, or any party authorized by Debtor to act with respect to the Securities Account, may (a) receive payments of interest and/or cash dividends earned on financial assets maintained in the Securities Account, and (b) trade financial assets maintained in the Securities Account. Without Bank’s prior written consent, except as permitted by the preceding sentence, neither Debtor nor any party other than Bank may withdraw or receive any distribution of any Collateral from the Securities Account, The Collateral Value of the Securities Account shall at all times be equal to or greater than one hundred percent (100%) of the Letter of Credit Line amount, including the amount of all issued and outstanding letters of credit if any, secured hereby. In the event that the Collateral Value, for any reason and at any time, is less than the required amount, Debtor shall promptly make a principal reduction on the Indebtedness or deposit additional assets of a nature satisfactory to Bank into the Securities Account, in either case in amounts or with values sufficient to achieve the required Collateral Value.
     2. “Collateral Value” means the percentage set forth below of the lower of the face or market value, or the lower of the face or redemption value, as appropriate, for each type of investment property held in the Securities Account at the time of computation, with such value and the classification of any particular investment property in all instances determined by Bank in its sole discretion, and excluding from such computation (a) all WF Securities and Collective Investment Funds, (b) any stock with a market value of $10.00 or less, and (c) all investment property from an issuer if Bank determines such issuer to be ineligible.
     
Type of Investment Property   Percentage
 
   
Cash
  100%
 
   
Cash Equivalents
  95%
 
   
U.S. Government Bills, Notes and U.S. Government Sponsored Agency Securities:
   
 
   
(a) with maturities less than or equal to 5 years
  90%
 
   
Corporate and Municipal Bonds and Notes:
   
 
   
(a) rated AAA/Aaa, AA/Aa or SP-1 by a nationally recognized rating agency with maturities less than or equal to 5 years
  85%
 
   
Commercial Paper:
   
 
   
(a) rated A1 or P1 by a nationally recognized rating agency
  80%
     3. Exclusion from Collateral. Notwithstanding anything herein to the contrary, the terms “Collateral” and “Proceeds” do not include, and Bank disclaims a security interest in all WF Securities and Collective Investment Funds now or hereafter maintained in the Securities Account.
     4. “Collective Investment Funds” means collective investment funds as described in 12 CFR 9.18 and includes, without limitation, common trust funds maintained by Bank for the exclusive use of its fiduciary clients.

 


 

     5. “WF Securities” means stock, securities or obligations of Wells Fargo & Company or of any affiliate thereof (as the term affiliate is defined in Section 23A of the Federal Reserve Act (12 USC 371(c), as amended from time to time).
     IN WITNESS WHEREOF, this Addendum has been executed as of the same date as the Agreement.
             
Interwoven, Inc.   WELLS FARGO BANK,
         NATIONAL ASSOCIATION
 
           
By:
  /s/ John Calonico   By:   /s/ Manao Keegan
           
  John Calonico       Manao Keegan
  Senior Vice President       Vice President

 


 

     
  SECURITIES ACCOUNT CONTROL AGREEMENT
WELLS FARGO
  (Wells Fargo Affiliate Intermediary)
 
THIS SECURITIES ACCOUNT CONTROL AGREEMENT (this “Agreement”) is entered into as of July 25, 2005, by and among Interwoven, Inc. (“Customer”), Wells Capital Management Incorporated (“Intermediary”), and WELLS FARGO BANK, NATIONAL ASSOCIATION (“Secured Party”).
RECITALS
A. Customer maintains that certain account no. 10427400 , and may now or hereafter maintain sub-accounts thereunder or consolidated therewith (collectively, the “Securities Account”) with Intermediacy pursuant to an agreement between Intermediary and Customer dated as of June 1, 2004 (the “Account Agreement”), and Customer has granted to Secured Party a security interest in the Securities Account and all financial assets and other property now or at any time hereafter held in the Securities Account.
B. Secured Party, Customer and Intermediary have agreed to enter into this Agreement to perfect Secured Party’s security interests in the Collateral, as defined below.
NOW, THEREFORE, in consideration of their mutual covenants and promises, the parties agree as follows:
1. DEFINITIONS. As used herein:
1.1 the term “Collateral” shall mean: (a) the Securities Account; (b) all financial assets credited to the Securities Account; (c) all security entitlements with respect to the financial assets credited to the Securities Account; (d) any and all other investment property or assets maintained or recorded in the Securities Account; and (e) all replacements or substitutions for, and proceeds of the sale or other disposition of, any of the foregoing, including without limitation, cash proceeds; and
1.2 the terms “investment property,” “entitlement order,” “financial asset” and “security entitlement” shall have the respective meanings set forth in the California Uniform Commercial Code. The parties hereby expressly agree that all property, including without limitation, cash, certificates of deposit and mutual funds, at any time held in the Securities Account is to be treated as a “financial asset.”
2. AGREEMENT FOR CONTROL. Intermediary is authorized by Customer and agrees to comply with all entitlement orders originated by Secured Party with respect to the Securities Account, and all other requests or instructions from Secured Party regarding disposition and/or delivery of the Collateral, without further consent or direction from Customer or any other party
3. CUSTOMER’S RIGHTS WITH RESPECT TO THE COLLATERAL.
3.1 Until Intermediary is notified otherwise by Secured Party: (a) Customer, or any party authorized by Customer to act with respect to the Securities Account, may give trading instructions to Intermediary with respect to Collateral in the Securities Account; and (b) Intermediary may distribute to Customer or any other party in accordance with Customer’s directions only that portion of the Collateral which consists of interest and/or cash dividends earned on financial assets maintained in the Securities Account.
3.2 Without Secured Party’s prior written consent, except to the extent permitted by the preceding paragraph: (a) neither Customer nor any party other than Secured Party may withdraw any Collateral from the Securities Account; and (b) intermediary will not comply with any entitlement order or request to withdraw any Collateral from the Securities Account given by any party other than Secured Party.
3.3 Upon receipt of either written or oral notice from Secured Party: (a) intermediary shall promptly cease complying with entitlement orders and other instructions concerning the Collateral, including the Securities Account, from all parties other than Secured Party; and (b) Intermediary shall not make any further distributions of any Collateral to any party other than Secured Party, nor permit any further voluntary changes in the financial assets.

 


 

4. INTERMEDIARY’S REPRESENTATIONS AND WARRANTIES. Intermediary represents and warrants to Secured Party that:
4.1 The Securities Account is maintained with Intermediary solely in Customer’s name.
4.2 Intermediary has no knowledge of any claim to, security interest in or lien upon any of the Collateral, except: (a) the security interests in favor of Secured Party; and (b) Intermediary’s liens securing fees and charges, or payment for open trade commitments, as described in the last paragraph of this Section.
4.3 Any claim to, security interest in or lien upon any of the Collateral which Intermediary now has or at any time hereafter acquires shall be junior and subordinate to the security interests of Secured Party in the Collateral, except for Intermediary’s liens securing: (a) fees and charges owed by Customer with respect to the operation of the Securities Account; and (b) payment owed to Intermediary for open trade commitments for purchases in and for the Securities Account.
5. AGREEMENTS OF INTERMEDIARY AND CUSTOMER. Intermediary and Customer agree that:
5.1 Intermediary shall flag its books, records and systems to reflect Secured Party’s security interests in the Collateral, and shall provide notice thereof to any party making inquiry as to Customer’s accounts with Intermediary to whom or which Intermediary is legally required or permitted to provide information.
5.2 Intermediary shall send copies of all statements relating to the Securities Account simultaneously to Customer and Secured Party,
5.3 Intermediary shall promptly notify Secured Party if any other party asserts any claim to, security interest in or lien upon any of the Collateral, and intermediary shall not enter into any control, custodial or other similar agreement with any other party that would create or acknowledge the existence of any such other claim, security interest or lien.
5.4 Without Secured Party’s prior written consent, Intermediary and Customer shall not amend or modify the Account Agreement, other than: (a) amendments to reflect ordinary and reasonable changes in intermediary’s fees and charges for handling the Securities Account; and (b) operational changes initiated by Intermediary as long as they do not alter any of Secured Party’s rights hereunder.
5.5 Neither Intermediary nor Customer shall terminate the Account Agreement without giving 30 days’ prior written notice to Secured Party.
6. MISCELLANEOUS.
6.1 This Agreement shall not create any obligation or duty of Intermediary except as expressly set forth herein.
6.2 As to the matters specifically the subject of this Agreement, in the event of any conflict between this Agreement and the Account Agreement or any other agreement between Intermediary and Customer, the terms of this Agreement shall control.
6.3 All notices, requests and demands which any party is required or may desire to give to any other party under any provision of this Agreement must be in writing (unless otherwise specifically provided) and delivered to each party at the address or facsimile number set forth below its signature, or to such other address or facsimile number as any party may designate by written notice to all other parties. Each such notice, request and demand shall be deemed given or made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by facsimile, upon receipt; and (c) if sent by mail, upon the earlier of the date of receipt or 3 days after deposit in the U.S. mail, first class and postage prepaid.
6.4 This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties; provided however, that Intermediary may not assign its

 


 

obligations hereunder without Secured Party’s prior written consent. This Agreement may be amended or modified only in writing signed by all parties hereto.
6.5 This Agreement shall terminate upon: (a) Intermediary’s receipt of written notice from Secured Party expressly stating that Secured Party no longer claims any security interest in the Collateral; or (b) termination of the Account Agreement pursuant to the terms hereof, and Intermediary’s delivery of all Collateral to Secured Party or its designee in accordance with Secured Party’s written instructions.
6.6 This Agreement shall be governed by and construed in accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above.
             
Wells Capital Management Incorporated   WELLS FARGO BANK
        NATIONAL ASSOCIATION
 
           
By:
      By:   /s/ Manao Keegan
           
          Manao Keegan, Relationship Manger
Title:
           
           
 
           
Address:
      Address:   400 Hamilton Avenue
           
  San Francisco, CA 94105       Palo Alto, CA 94301
 
           
FAX No.:
  (_____)_______________-_______________   FAX No.:   (650) 328-0814
           
 
           
Interwoven, Inc.        
 
           
By:
  /s/ John Calonico        
           
  John Calonico, Senior Vice President        
 
           
Address:
  803 11th Street        
  Sunnyvale, CA 94089-4731        
 
           
FAX No.:
  (408) 616- 0083        
           

 

EX-31.01 4 f14289exv31w01.htm EXHIBIT 31.01 exv31w01
 

EXHIBIT 31.01
CERTIFICATION
I, Martin W. Brauns, President and Chief Executive Officer of the registrant, certify that:
  1.   I have reviewed this Quarterly Report on Form 10-Q of Interwoven, Inc.;
 
  2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
  3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
  4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
  5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
     
     Dated: November 9, 2005
  /s/ MARTIN W. BRAUNS
  Martin W. Brauns
  President and Chief Executive Officer

EX-31.02 5 f14289exv31w02.htm EXHIBIT 31.02 exv31w02
 

EXHIBIT 31.02
CERTIFICATION
I, John E. Calonico, Jr., Senior Vice President and Chief Financial Officer of the registrant, certify that:
  1.   I have reviewed this Quarterly Report on Form 10-Q of Interwoven, Inc.;
 
  2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
  3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
  4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
  5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
     
     Dated: November 9, 2005
  /s/ JOHN E. CALONICO, JR.
  John E. Calonico, Jr.
Senior Vice President and Chief
Financial Officer

EX-32.01 6 f14289exv32w01.htm EXHIBIT 32.01 exv32w01
 

EXHIBIT 32.01
Certification Pursuant to 18 U.S.C. Section 1350
     In connection with the Interwoven, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Martin W. Brauns, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
  1)   this Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
  2)   that information contained in this Report fairly presents, in all material respects, the consolidated financial condition and results of operations of Interwoven, Inc. for the quarter covered by the Report.
     
     Dated: November 9, 2005
  /s/ MARTIN W. BRAUNS
  Martin W. Brauns
  President and Chief Executive Officer
     A signed original of this written statement required by Section 906 has been provided to Interwoven, Inc. and will be retained by Interwoven, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.02 7 f14289exv32w02.htm EXHIBIT 32.02 exv32w02
 

EXHIBIT 32.02
Certification Pursuant to 18 U.S.C. Section 1350
     In connection with the Interwoven, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John E. Calonico, Jr., certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
  1)   this Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
  2)   that information contained in this Report fairly presents, in all material respects, the consolidated financial condition and results of operations of Interwoven, Inc. for the quarter covered by the Report.
     
     Dated: November 9, 2005
  /s/ JOHN E. CALONICO, JR.
  John E. Calonico, Jr.
Senior Vice President and Chief
Financial Officer
     A signed original of this written statement required by Section 906 has been provided to Interwoven, Inc. and will be retained by Interwoven, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

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