-----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, Lo+7BoMraW6xCXWeF7TnCKkVrId4FGhj7xgwp3Li0PfPNBIFeB2eGzrB8XfFGOXU DqhjJ5dePtuJC+vWbA7OxQ== 0001012870-00-002669.txt : 20000511 0001012870-00-002669.hdr.sgml : 20000511 ACCESSION NUMBER: 0001012870-00-002669 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000510 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: SEC FILE NUMBER: 000-27389 FILM NUMBER: 624985 BUSINESS ADDRESS: STREET 1: 1195 W FREMONT AVE STREET 2: STE 2000 CITY: SUNNYVALE STATE: CA ZIP: 94087 BUSINESS PHONE: 4087742000 MAIL ADDRESS: STREET 1: 1195 W FREMONT AVE STREET 2: STE 2000 CITY: SUNNYVALE STATE: CA ZIP: 94087 10-Q 1 FORM 10-Q DATED 3/31/00 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-Q [X]Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2000 or [_]Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number 000-27389 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 Number) 1195 West Fremont Avenue, Suite 2000, Sunnyvale, CA 94087 (Address of principal executive offices) (Zip Code)
(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 [X] No [_] There were 24,122,967 shares of the Company's Common Stock, par value $0.001, outstanding on May 10, 2000. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS
Page No. -------- PART I FINANCIAL INFORMATION Item 1 - Condensed Consolidated Financial Statements: Condensed Consolidated Balance Sheet as of March 31, 2000 and December 31, 1999............................................. 3 Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2000 and 1999.......................... 4 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2000 and 1999.......................... 5 Notes to Condensed Consolidated Financial Statements........... 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................... 9 Item 3 - Quantitative and Qualitative Disclosures about Market Risk............................................................... 21 PART II OTHER INFORMATION Item 1 - Legal Proceedings.......................................... 23 Item 2 - Changes in Securities and Use of Proceeds.................. 23 Item 3 - Default upon Senior Securities............................. 24 Item 4 - Submission of Matters to a Vote of Securities Holders...... 24 Item 5 - Other Information.......................................... 24 Item 6 - Exhibits and Reports on Form 8-K........................... 24 SIGNATURE........................................................... 25
2 PART I FINANCIAL INFORMATION Item 1. Financial Statements INTERWOVEN, INC. CONDENSED CONSOLIDATED BALANCE SHEET (In thousands, except per share amounts)
March 31, December 31, 2000 1999 ----------- ------------ (unaudited) Assets Current assets: Cash and cash equivalents........................... $49,884 $10,983 Short-term investments.............................. 111,887 44,665 Accounts receivable, net of allowance for doubtful accounts of $275 and $288, respectively............ 12,081 5,158 Prepaid expenses.................................... 1,384 787 Other current assets................................ 313 559 ------- ------- Total current assets.............................. 175,549 62,152 Investments........................................... 63,966 16,464 Property and equipment, net........................... 4,230 3,145 Intangible assets, net................................ 365 416 Restricted cash....................................... 605 605 Other assets.......................................... 149 297 ------- ------- 244,864 83,079 ======= ======= Liabilities and Stockholders' Equity Current liabilities: Accounts payable.................................... $ 1,328 $ 834 Accrued liabilities................................. 8,624 4,966 Deferred revenue.................................... 8,628 1,939 ------- ------- Total current liabilities......................... 18,580 7,739 Stockholders' equity: Preferred stock, $0.001 par value, 5,000 shares authorized, no shares issued or outstanding; no shares authorized, issued or outstanding............. -- -- Common stock, 100,000 shares authorized, 23,967 and 22,886 issued and outstanding........................ 24 23 Additional paid-in capital............................ 259,369 106,214 Notes receivable from stockholders.................... (202) (202) Deferred stock-based compensation..................... (3,899) (4,732) Accumulated deficit................................... (29,008) (25,963) ------- ------- Total stockholders' equity........................ 226,284 75,340 ------- ------- 244,864 83,079 ======= =======
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 INTERWOVEN, INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (In thousands, except per share amounts)
Three Months Ended March 31, ---------------- 2000 1999 ------- ------- (unaudited) Revenues: License................................................... $ 9,388 $ 1,360 Services.................................................. 4,472 742 ------- ------- Total revenues.......................................... 13,860 2,102 Cost of revenues: License................................................... 66 15 Services.................................................. 4,654 549 ------- ------- Total cost of revenues.................................. 4,720 564 Gross profit................................................ 9,140 1,538 Operating expenses: Research and development.................................. 2,208 779 Sales and marketing....................................... 9.669 2,287 General and administrative................................ 1,960 598 Amortization of deferred stock-based compensation......... 833 640 Amortization of acquired intangible assets................ 52 -- ------- ------- Total operating expenses................................ 14,722 4,304 Loss from operations........................................ (5,582) (2,766) Interest income and other income (expense), net............. 2,537 65 ------- ------- Net loss.................................................... (3,045) (2,701) ======= ======= Accretion of mandatorily redeemable convertible preferred stock to redemption value.................................. -- (2,126) ------- ------- Net loss attributable to common stockholders................ $(3,045) $(4,827) ======= ======= Basic and diluted net loss per share (Note 1)............... $ (0.14) $ (1.47) ======= ======= Shares used in computing basic and diluted net loss per share...................................................... 21,760 3,278 ======= ======= Pro forma basic and diluted net loss per share (Note 1)..... $ (0.14) $ (0.20) ======= ======= Shares used in computing pro forma basic and diluted net loss per share............................................. 21,760 13,499 ======= =======
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 INTERWOVEN, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
Three Months Ended March 31, ----------------- 2000 1999 -------- ------- (unaudited) Cash flows used in operating activities: Net loss................................................... $ (3,045) $(2,701) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............................. 382 139 Amortization of deferred stock-based compensation......... 833 640 Amortization of acquired intangible assets................ 52 -- Issuance of common stock for services..................... -- 27 Provisions for doubtful accounts.......................... (13) 22 Changes in assets and liabilities: Accounts receivable...................................... (6,910) 8 Prepaid expenses and other assets........................ (203) 34 Accounts payable......................................... 494 (30) Accrued liabilities...................................... 3,658 (178) Deferred revenue......................................... 6,688 166 -------- ------- Net cash provided by (used in) operating activities..... 1,936 (1,873) -------- ------- Cash flows from investing activities: Purchase of property and equipment......................... (1,467) (156) Purchases of investments................................... (127,814) -- Maturities of investments.................................. 13,090 -- -------- ------- Net cash used in investing activities................... (116,191) (156) Cash flows from financing activities: Proceeds from exercise of warrants......................... 10 -- Proceeds from exercise of stock options.................... 484 59 Proceeds from issuance of common stock for follow-on offering.................................................. 152,662 -- Principal payments of debt and leases...................... -- (3) -------- ------- Net cash provided by financing activities............... 153,156 56 -------- ------- Net increases in cash and cash equivalents.................. 38,901 (1,973) Cash and cash equivalents at beginning of period............ 10,983 9,022 -------- ------- Cash and cash equivalents at end of period.................. $ 49,884 $ 7,049 -------- ------- Supplemental cash flow disclosures: Cash paid for interest.................................. $ -- $ 11 -------- -------
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 INTERWOVEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1. The Company and Summary of Significant Accounting Policies: The Company Interwoven, Inc. (the "Company") is a leading provider of software products and services that help businesses and other organizations manage the information that makes up the content of their web sites. In the Internet industry this is often referred to as "web content management." The Company's flagship software product, TeamSite, is designed to help customers develop, maintain and extend large web sites that are essential to their businesses. The Company also markets and sells its software products and services through its wholly-owned subsidiaries in the United Kingdom and Australia. In April 2000, the Company incorporated subsidiaries in Germany and Singapore. Basis of Presentation The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company's financial position, results of operations and cash flows as of March 31, 2000 and 1999. These condensed consolidated financial statements and notes thereto are unaudited and should be read in conjunction with the Company's audited financial statements and related notes included in the Company's 1999 Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2000 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year. Follow-on offering On February 1, 2000, we completed our follow-on offering. We sold a total of 1,000,000 shares of Common Stock at a price of $161.00 per share. The offering resulted in net proceeds to us of approximately $152.3 million, net of an underwriting discount of $7.7 million and estimated offering expenses of $1.0 million. Principles of consolidation The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after elimination of all significant intercompany accounts and transactions. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Fair value of instruments The Company's financial instruments, including cash and cash equivalents, short-term investments, long-term investments, accounts receivable and accounts payable, are carried at cost, which approximate fair value due to the short- term maturity of these instruments. Debt and capital lease obligations are carried at cost, which approximates fair value due to the proximity of the implicit rates of these financial instruments and the prevailing market rates for similar instruments. 6 INTERWOVEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Net loss per share The Company computes net loss per share in accordance with SFAS No. 128, "Earnings per Share" and SEC Staff Accounting Bulletin ("SAB") No. 98. Under the provisions of SFAS No. 128 and SAB No. 98, basic net loss per share is computed by dividing the net loss attributed to common stockholders for the period by the weighted average number of shares of Common Stock outstanding during the period excluding shares of Common Stock subject to repurchase. Such shares of Common Stock subject to repurchase aggregated 1,791,929 (unaudited) and 1,884,257 (unaudited) as of March 31, 1999 and 2000, respectively. The following table sets forth the computation of basic and diluted net loss per share for the periods indicated (in thousands, except per share amounts):
Three Months Ended March 31, -------------- 2000 1999 ------ ------ (unaudited) Numerator: Net loss available to Common Stockholders................ (3,045) (2,701) Denominator: Weighted average shares.................................. 23,644 15,291 Weighted average unvested Common Stock subject to repurchase.............................................. (1,884) (1,792) ------ ------ Denominator for basic and diluted calculation............ 21,760 13,499 Net loss per share: Basic and diluted........................................ ($0.14) ($0.20) ====== ======
Pro forma net loss per share Pro forma net loss per share is computed using the weighted average number of shares of Common Stock outstanding, including the pro forma effects of the exercise of warrants and automatic conversion of the Company's Series A, B, C, D and E Preferred Stock into shares of Common Stock effective upon the closing of the Company's initial public offering as if such conversion occurred at the beginning of the period, or at the date of issuance, if later. The resulting pro forma adjustment for the three months ended March 31, 2000 and 1999 includes (i) an increase in the weighted average shares used to compute the basic net loss per share of 0 (unaudited) and 10,220,586 (unaudited), respectively, and (ii) a decrease in the net loss attributable to Common Stockholders for the accretion of mandatorily redeemable convertible preferred stock of $0 and $2,126,000 (unaudited), respectively. The calculation of diluted net loss per share excludes potential shares of Common Stock as their effect would be antidilutive. Pro forma potential Common Stock consists of Common Stock subject to repurchase rights shares of Common Stock issuable upon the exercise of stock options. Comprehensive income Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources. As of March 31, 2000 and 1999, the Company had not had any transactions that are required to be reported in comprehensive income. Segment information Effective January 1, 1998, the Company adopted the provisions of SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information." The Company identifies its operating segment based on 7 INTERWOVEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) business activities, management responsibility and geographic location. During all periods presented, the Company operated in a single business segment. Through March 31, 2000, foreign operation revenues or investments in foreign operation long-lived assets have not been significant. Cash, cash equivalents and investments The Company considers all highly liquid investments with a maturity from date of purchase of three months or less to be cash equivalents. Cash and cash equivalents consist primarily of cash on deposit with banks and high quality money market instruments. All other liquid investments are classified as short-term investments and long-term investments. Short-term investments and long-term investments consist of commercial paper and corporate bonds. Management determines the appropriate classification of investment securities at the time of purchase and reevaluates such designation as of each balance sheet date. At March 31, 2000, all investment securities were designated as available-for-sale. Available-for-sale securities are carried at fair value, using available market information and appropriate valuation methodologies, with unrealized gains and losses reported in stockholders' equity. Realized gains and losses and declines in value judged to be other-than- temporary on available-for-sale securities are included in the statement of operations. There have been no such transactions in the three months ended March 31, 2000. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income within the consolidated statement of operations. At March 31, 2000, the Company's available-for-sale securities consisted of commercial paper $59.8 million, corporate notes $6.2 million, corporate bonds $44.7 million, foreign debt securities $4.6 million, municipal bonds $7.6 million, medium term notes $9.2 million and United States government agencies $76.9 million and money market funds $13.7 million. Of these securities, $46.9 million, $111.9 million and $63.9 million was classified as cash equivalents, short-term investments and long-term investments, respectively. The estimated fair value of investments classified by the date of contractual maturity due within one year is $158.8 million and due after one year is $63.9 million. As of March 31, 2000 the difference between the fair value and the amortized cost of available-for-sale securities was insignificant; therefore, no unrealized gains or losses were recorded in stockholders' equity. For the three months ended March 31, 2000, there were no realized gains and losses. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This report contains forward-looking statements that involve risks and uncertainties. The statements contained in this report that are not purely historical are 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, including statements regarding our expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this document are based on the information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Actual results may differ materially from the results discussed on this report. Factors that might cause such a difference include, but are not limited to, those discussed in "Factors That May Affect Future Results". The following discussion and analysis of the financial condition and results of operations should be read in conjunction with our Financial Statements and Notes appearing elsewhere in this Form 10-Q. Overview Interwoven was incorporated in March 1995 to provide software products and services for web content management. Designed specifically for the web, our products allow large teams of people across an enterprise to contribute and edit web content on a collaborative basis, reducing the time-to-web for critical eBusiness initiatives. From March 1995 through March 1997, we were a development stage company conducting research and development for our initial products. In May 1997, we shipped the first version of our principal product, TeamSite. We subsequently developed and released enhanced versions of TeamSite and have introduced related products. We market and sell our products primarily through a direct sales force and augment our sales efforts through relationships with systems integrators and other strategic partners. We are headquartered in Sunnyvale, California and maintain additional offices in the metropolitan areas of Atlanta, Boston, Chicago, Dallas, London, Los Angeles, New York City, Seattle and Washington, D.C. Our revenues to date have been derived primarily from accounts in North America. In May 1999, we opened an office in the United Kingdom; in December 1999, we opened an office in Australia; and in April 2000, we opened offices in Germany, Japan and Singapore. We derive revenues from the license of our software products and from services we provide to our customers. To date, we have derived virtually all of our license revenues from licenses of TeamSite. License revenues are recognized when persuasive evidence of an agreement exists, the product has been delivered, no significant post-delivery obligations remain, the license fee is fixed or determinable and collection of the fee is probable. Services revenues consist of professional services and maintenance fees. Professional services primarily consist of software installation and integration, business process consulting and training. We generally bill our professional services customers on a time and materials basis and recognize revenues as the services are performed. Maintenance agreements are typically priced based on a percentage of the product license fee, and typically have a one-year term that is renewable annually. Services provided to customers under maintenance agreements include technical product support and an unspecified number of product upgrades as released by us during the term of a maintenance agreement. Revenues from maintenance support agreements are recognized ratably over the term of the agreement. Since inception, we have incurred substantial costs to develop our technology and products, to recruit and train personnel for our engineering, sales and marketing and services organizations, and to establish an administrative organization. As a result, we have incurred net losses in each quarter since inception and, as of March 31, 2000, had an accumulated deficit of $29.0 million. We anticipate that our cost of services revenues and operating expenses will increase substantially in future quarters as we grow our service organization to support an increased level and expanded number of services offered, increase our sales and marketing operations, develop new distribution channels, fund greater levels of research and development, and improve operational and financial systems. Accordingly, we expect to incur additional losses for the foreseeable future as we continue to expand our operations. In addition, our limited operating history makes the prediction of future results of operations difficult and, accordingly, there can be no assurance that we will achieve or sustain profitability. 9 Results of Operations Our license and services revenues have grown in each of the last nine quarters, including in the three months ended March 31, 2000, except that our license revenues declined in the three months ended March 31, 1999 from that in the three months ended December 31, 1998. This decline reflected the unusually high revenues in the prior period, due in part to a few large license sales in that period. The increase in services revenues in the three months ended March 31, 2000 reflects an increase in both professional services and maintenance fees, generated from a greater number of customers which licensed our products in prior periods, and it reflects an increase in the number of professional services staff and a higher effective staff utilization rate. As a result of our limited operating history and the emerging nature of the market for web content management software and services in which we compete, it is difficult for us to forecast our revenues or earnings accurately. It is possible that in some future periods our results of operations may not meet or exceed the expectations of public market analysts and investors. If this occurs, the price of our common stock is likely to decline. Factors that have caused our results to fluctuate in the past, and are likely to cause fluctuations in the future, include: . the size of customer orders and the timing of product and service deliveries; . variability in the mix of products and services sold; . our ability to retain our current customers and attract new customers; . the amount and timing of operating costs relating to expansion of our business, including our planned international expansion; . the announcement or introduction of new products or services by us or our competitors; . our ability to attract and retain personnel, particularly management, engineering and sales personnel and technical consultants; . our ability to upgrade and develop our systems and infrastructure to accommodate our growth; and . costs related to acquisition of technologies or businesses. As a result of these and other factors, we believe that period-to-period comparisons of our results of operations may not be meaningful and should not be relied upon as indicators of our future performance. 10 The following table lists, for the periods indicated, our statement of operations data as a percentage of total revenues:
Three Months Ended March 31, ---------- 2000 1999 ---- ---- Revenues: License........................................................ 68% 65% Services....................................................... 32 35 --- ---- Total revenues............................................... 100 100 Cost of revenues: License........................................................ 0 1 Services....................................................... 34 26 --- ---- Total cost of revenues....................................... 34 27 Gross profit..................................................... 66 73 Operating expenses: Research and development....................................... 16 37 Sales and marketing............................................ 70 109 General and administrative..................................... 14 28 Amortization of deferred stock-based compensation.............. 6 30 Amortization of acquired intangible assets..................... 0 0 --- ---- Total operating expenses..................................... 106 204 --- ---- Loss from operations............................................. (40) (131) Interest income and other expenses, net.......................... 18 3 --- ---- Net loss......................................................... (22) (128) === ====
Three Months Ended March 31, 1999 and 2000 Revenues Total revenues increased 559% from $2.1 million for the three months ended March 31, 1999 to $13.9 million for the three months ended March 31, 2000. This increase was attributable to greater market acceptance of our products and services, which was a result of our increased sales and marketing staff selling our products to a larger number of customers, and to a higher average sales price due to our December 1999 price increase, expanded product configurations and the greater quantity of user seats purchased. License. License revenues increased 590% from $1.4 million for the three months ended March 31, 1999 to $9.4 million for the three months ended March 31, 2000. License revenues represented 65% and 68% of total revenues, respectively, in those periods. The increase in license revenues reflects our growing customer base and increasing average sales price. The increase in license revenue as a percentage of total revenue for the three months ended March 31, 2000, to 68% of total revenue, reflects demand for our products that is growing faster than the delivery of services ordered with those products. Services. Services revenues increased 503% from $742,000 for the three months ended March 31, 1999 to $4.5 million for the three months ended March 31, 2000. Services revenues represented 35% and 32% of total revenues, respectively, in those periods. The increase in services revenues reflects a $2.3 million increase in professional services fees, a $1.0 million increase in maintenance fees and a $455,000 increase in training fees. The increase in service revenues reflects an increase in both professional services and maintenance fees generated from an expanded number of customers which licensed our products. 11 Cost of Revenues License. Cost of license revenues includes expenses incurred to manufacture, package and distribute our software products and related documentation, as well as costs of licensing third-party software sold in conjunction with our software products. Cost of license revenues was $15,000 for the three months ended March 31, 1999 and increased to $66,000 for the three months ended March 31, 2000. Cost of license revenues represented 1% and 0%, respectively, of license revenues in the three months ended March 31, 1999 and March 31, 2000, respectively. Services. Cost of services revenues consists primarily of salary and related costs of our professional services, training, maintenance and support staffs, as well as subcontractor expenses. Cost of services revenues increased 748% from $549,000 for the three months ended March 31, 1999 to $4.7 million for the three months ended March 31, 2000. Cost of services revenues represented 74% and 104% of services revenues, respectively, in those periods. This increase in cost of services revenues was attributable to an increase in the number of in-house staff from 16 to 82, and a $1.4 million increase in subcontractor expenses. We expect our cost of services revenues to increase for the foreseeable future as we continue to expand our services staff and consulting organizations. Since services revenues have lower margins than license revenues, this expansion will reduce our gross margins if our license revenues do not increase significantly. We expect cost of services revenues as a percentage of services revenues to vary from period to period depending on the mix of services we provide, whether the services are performed by our in-house staff or subcontractors, and the overall utilization rates of our professional services staff. Gross Profit Gross profit increased 494% from $1.5 million for the three months ended March 31, 1999 to $9.1 million for the three months ended March 31, 2000. Gross profit represented 73% and 66% of total revenues, respectively, in those periods. This increase in absolute dollar amounts reflects increased license and services revenues from a growing customer base. The decrease in gross profit percentage was a result of the expansion of our professional services organization. The Company has made and will continue to make investments in our professional services organization to increase the capacity of that organization to meet the demand for services from our customers. We expect gross profit as a percentage of total revenues to fluctuate from period to period as a result of changes in the relative proportion of license and services revenues. Operating Expenses Research and Development. Research and development expenses consist primarily of personnel and related costs to support product development activities. Research and development expenses increased 183% from $779,000 for the three months ended March 31, 1999 to $2.2 million for the three months ended March 31, 2000, representing 37% and 16% of total revenues in those periods, respectively. This increase in absolute dollar amounts was due to increases in the number of product development personnel. We believe that continued investment in research and development is critical to our strategic objectives, and we expect that the dollar amounts of research and development expenses will increase in future periods. To date, all software development costs have been expensed in the period incurred. Sales and Marketing. Sales and marketing expenses consist primarily of salaries and related costs for sales and marketing personnel, sales commissions, travel and marketing programs. Sales and marketing expenses increased 323% from $2.3 million for the three months ended March 31, 1999 to $9.7 million for the three months ended March 31, 2000, representing 109% and 70% of total revenues, respectively, in those periods. This increase in dollar amounts reflects increases in the number of our sales and marketing personnel costs of $2.5 million, higher sales commissions and bonuses of $3.0 million and increased marketing-related costs of $344,000. We expect to continue to invest heavily in sales and marketing in order to expand our customer base and increase brand awareness. We also anticipate that the percentage of total revenues represented by sales and marketing expenses will fluctuate from period to period depending primarily on when we hire new sales personnel, the timing of new marketing programs and the levels of revenues in each period. 12 General and Administrative. General and administrative expenses consist primarily of salaries and related costs for accounting, human resources, legal and other administrative functions, as well as provisions for doubtful accounts. General and administrative expenses increased 228% from $598,000 for the three months ended March 31, 1999 to $2.0 million for the three months ended March 31, 2000, representing 28% and 14% of total revenues, respectively. This increase in dollar amounts was due to additional staffing of these functions to support expanded operations during this same period. We expect general and administrative expenses to increase in absolute dollars in 2000 as we add personnel to support expanding operations, incur additional costs related to the growth of our business, and continue the reporting requirements of a public company. Amortization of Deferred Stock-Based Compensation. In 1998 and 1999, we recorded deferred stock-based compensation of $1.9 million and $7.3 million in connection with stock options granted during 1998 and 1999, respectively. These amounts represent the difference between the exercise price of stock options granted during those periods and the deemed fair value of our common stock at the time of the grants. Amortization of deferred stock-based compensation was $640,000 and $833,000 for the three months ended March 31, 1999 and 2000, respectively. We expect per quarter amortization related to these options of between approximately $600,000 and $850,000 during 2000, between approximately $315,000 and $430,000 during 2001, between approximately $125,000 and $205,000 during 2002 and between approximately $10,000 and $60,000 during 2003. Amortization of Acquired Intangible Assets. In July 1999, we recorded intangible assets of approximately $800,000 in connection with the acquisition of Lexington Software Associates Incorporated. Goodwill related to this transaction approximated $300,000 and intangible assets related to the workforce of Lexington Software approximated $500,000 of the purchase price. The total purchase price for this acquisition was approximately $800,000. The purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based upon their respective fair values at the acquisition date. Amortization of acquired intangible assets was $52,000 for the three months ended March 31, 2000. Interest Income and Other Expenses, Net Interest income and other expenses, net, increased from $65,000 for the three months ended March 31, 1999 to $2.5 million for the three months ended March 31, 2000 due to increased interest income earned on the proceeds from our initial public offering in October 1999 and our subsequent public offering in February 2000. Liquidity and Capital Resources Prior to our initial public offering, since our inception, we raised a total of $37.0 million from the sale of preferred stock, net of issuance costs, which was the primary source of financing for our operations. In October 1999, we completed our initial public offering of 3,622,500 shares of our common stock, including the exercise of the underwriters' overallotment option, at $17.00 per share. Realized net proceeds to us were approximately $56.2 million. In February 2000, we completed a follow-on offering of 3,000,000 shares of common stock at $161.00 per share. We sold 1,000,000 shares in this offering and selling stockholders sold 2,000,000 shares. Realized net proceeds to us were $152.3 million. At March 31, 2000, our sources of liquidity consisted of $225.7 million in cash, cash equivalents and investments and $157.0 million in working capital. We have a $3.0 million line of credit with Silicon Valley Bank, which bears interest at the bank's prime rate, which was 9.00% at March 31, 2000. At March 31, 2000, the line of credit was unused. The line of credit is secured by all of our tangible and intangible assets, and contains financial covenants including: a quick asset ratio, excluding deferred maintenance revenue, of at least 2:1 and a liquidity ratio of unrestricted cash plus 80% of eligible accounts receivable minus outstanding advances divided by loans outstanding of not less than 1.5:1. We intend to maintain the line of credit. As of March 31, 2000, we were in compliance with all related financial covenants and restrictions under the line of credit. 13 Net cash used in operating activities was $1.9 million and net cash provided by operating activities was $1.9 million in the three months ended March 31, 1999 and 2000, respectively. Net cash provided by operating activities reflected increasing net losses and, to a lesser extent, accounts receivable, offset in part by increase in accrued liabilities and deferred revenue. Net cash used in operating activities in prior periods primarily reflected net losses. From inception, our investing activities have consisted primarily of purchases of investments and purchases of property and equipment, principally computer hardware and software for our growing number of employees. Cash used to purchase property and equipment was $156,000 and $1.5 million during the three months ended March 31, 1999 and March 31, 2000, respectively. We expect that capital expenditures will increase with our anticipated growth in operations, infrastructure and personnel. As of March 31, 2000 we had no material capital expenditure commitments. During the three months ended March 31, 2000, the Company's investing activities have consisted of purchases of short-term and long-term investments. To date, the Company has not invested in derivative securities or any other financial instruments that involve a high level of complexity or risk. We expect that, in the future, cash in excess of current requirements will continue to be invested in high credit quality, interest-bearing securities. Net cash provided by financing activities in three months ended March 31, 1999 and 2000 was $56,000 and $153.2 million, respectively. Net cash provided by financing activities reflected primarily the proceeds of issuances of preferred stock and common stock, respectively, in each of these periods. We believe that the current cash, cash equivalents, investments and funds available under existing credit facilities and the net proceeds from the sale of the common stock in our initial public offering and follow-on offering, will be sufficient to meet our working capital requirements for at least the next 12 months. Thereafter, we may require additional funds to support our working capital requirements or for other purposes and may seek to raise additional funds through public or private equity financing or from other sources. There can be no assurance that additional financing will be available on acceptable terms, if at all. If adequate funds are not available or are not available on acceptable terms, we may be unable to develop or enhance our products, take advantage of future opportunities, or respond to competitive pressures or unanticipated requirements, which could have a material adverse effect on our business, financial condition and operating results. 14 FACTORS THAT MAY AFFECT FUTURE RESULTS Some of the statements under "Factors That May Affect Future Results," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this Form 10-Q constitute forward-looking statements. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential," "continue" or the negative of these terms or other comparable terminology. The forward-looking statements contained in this Form 10-Q involve known and unknown risks, uncertainties and other factors that may cause industry trends or our actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. These factors include those listed under "Factors That May Affect Future Results" and elsewhere in this Form 10-Q. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this Form 10-Q to conform these statements to actual results. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Form 10-Q. The risks and uncertainties described below are not the only risks we face. These risks are the ones we consider to be significant to your decision whether to invest in our common stock at this time. We might be wrong. There may be risks that you in particular view differently than we do, and there are other risks and uncertainties that are not presently known to us or that we currently deem immaterial, but that may in fact impair our business operations. If any of the following risks actually occur, our business, results of operations and financial condition could be seriously harmed, the trading price of our common stock could decline and you may lose all or part of your investment. Our operating history is limited, so it will be difficult for you to evaluate our business in making an investment decision. We were incorporated in March 1995 and have a limited operating history. We are still in the early stages of our development, which makes the evaluation of our business operations and our prospects difficult. We shipped our first product in May 1997. Since that time, we have derived substantially all of our revenues from licensing our TeamSite product and related services. In evaluating our common stock, you should consider the risks and difficulties frequently encountered by early stage companies in new and rapidly evolving markets, particularly those companies whose businesses depend on the Internet. These risks and difficulties, as they apply to us in particular, include: . potential fluctuations in operating results and uncertain growth rates; . limited market acceptance of our products; . concentration of our revenues in a single product; . our dependence on a small number of orders for most of our revenue; . our need to expand our direct sales forces and indirect sales channels; . our need to manage rapidly expanding operations; and . our need to attract and train qualified personnel. If we do not increase our license revenues significantly, we will fail to achieve profitability. We have incurred net losses in each quarter since our inception, and we expect our net losses to increase. We incurred net losses of $2.9 million in 1997, $6.3 million in 1998, $15.7 million in 1999 and $3 million for 15 the three months ended March 31, 2000. As of March 31, 2000, we had an accumulated deficit of approximately $29.0 million. To compete effectively, we plan to continue to invest aggressively to expand our sales and marketing, research and development, and professional services organizations. As a result, if we are to achieve profitability we will need to increase our revenues significantly, particularly our license revenues. We cannot predict when we will become profitable, if at all. Our operating results fluctuate widely and are difficult to predict, so we may fail to satisfy the expectations of investors or market analysts and our stock price may decline. Our quarterly operating results have fluctuated significantly in the past, and we expect them to continue to fluctuate unpredictably in the future. It is possible that in some future periods our results of operations may not meet or exceed the expectations of public market analysts and investors. If this occurs, the price of our common stock is likely to decline. We face significant competition, which could make it difficult to acquire and retain customers and inhibit any future growth. We expect the competition in the market in which we operate to persist and intensify in the future. Competitive pressures may seriously harm our business and results of operations if they inhibit our future growth, or require us to hold down or reduce prices, or increase our operating costs. Our competitors include: . potential customers that utilize in-house development efforts; and . developers of software that directly addresses the need for web content management, such as Vignette. In addition, other enterprise software companies such as Rational Software and Documentum have announced plans to enter our market. We also face potential competition from companies--for example, Microsoft and IBM--that may decide in the future to enter our market. Many of our existing and potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do. Many of these companies can also leverage 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. Barriers to entering the web content management software market are relatively low. Because the market for our products is new, we do not know whether existing and potential customers will purchase our products in sufficient quantity for us to achieve profitability. The market for web content management software in which we sell is new and rapidly evolving. While we have licensed our products to 255 customers, we expect that we will continue to need intensive marketing and sales efforts to educate prospective clients about the uses and benefits of our products and services. Various factors could inhibit the growth of the market, and market acceptance of our products and services. In particular, potential customers that have invested substantial resources in other methods of conducting business over the Internet may be reluctant to adopt a new approach that may replace, limit or compete with their existing systems. We cannot be certain that a viable market for our products will emerge, or if it does emerge, that it will be sustainable. Our lengthy sales cycle makes it particularly difficult for us to forecast revenue, requires us to incur high costs of sales, and aggravates the variability of quarterly fluctuations. The time between our initial contact with a potential customer and the ultimate sale, which we refer to as our sales cycle, typically ranges between three and nine months depending largely on the customer. If we do not shorten our sales cycle, it will be difficult for us to reduce sales and marketing expenses. In addition, as a 16 result of our lengthy sales cycle, we have only a limited ability to forecast the timing and size of specific sales. This makes it more difficult to predict quarterly financial performance, or to achieve it, and any delay in completing sales in a particular quarter could harm our business and cause our operating results to vary significantly. We rely heavily on sales of one product, so if it does not achieve market acceptance we are likely to experience larger losses. Since 1997, we have generated substantially all of our revenues from licenses of, and services related to, our TeamSite product. We believe that revenues generated from TeamSite will continue to account for a large portion of our revenues for the foreseeable future. A decline in the price of TeamSite, or our inability to increase license sales of TeamSite, would harm our business and operating results more seriously than it would if we had several different products and services to sell. In addition, our future financial performance will depend upon successfully developing and selling enhanced versions of TeamSite. If we fail to deliver product enhancements or new products that customers want it will be more difficult for us to succeed. We depend on our direct sales force to sell our products, so future growth will be constrained by our ability to hire and train new sales personnel. We sell our products primarily through our direct sales force, and we expect to continue to do so in the future. Our ability to sell more products is limited by our ability to hire and train direct sales personnel, and we believe that there is significant competition for direct sales personnel with the advanced sales skills and technical knowledge that we need. Some of our competitors may have greater resources to hire personnel with that skill and knowledge. If we are not able to hire experienced and competent sales personnel, our business would be harmed. Furthermore, because we depend on our direct sales force, any turnover in our sales force can significantly harm our operating results. Sales force turnover tends to slow sales efforts until replacement personnel can be recruited and trained to become productive. See "--We must attract and retain qualified personnel, which is particularly difficult for us because we compete with other Internet-related software companies and are located in the San Francisco Bay area where competition for personnel is extremely intense." If we do not develop our indirect sales channels, we will be less likely to increase our revenues. If we do not develop indirect sales channels, we may miss sales opportunities that might be available through these other channels. For example, domestic and international resellers may be able to reach new customers more quickly or more effectively than our direct sales force. Although we are currently investing and plan to continue to invest significant resources to develop these indirect sales channels, we may not succeed in establishing a channel that can market our products effectively and provide timely and cost-effective customer support and services. In addition, we may not be able to manage conflicts across our various sales channels, and our focus on increasing sales through our indirect channel may divert management resources and attention from direct sales. We must attract and retain qualified personnel, which is particularly difficult for us because we compete with other Internet-related software companies and are located in the San Francisco Bay area where competition for personnel is extremely intense. Our success depends on our ability to attract and retain qualified, experienced employees. We compete for experienced engineering, sales and consulting personnel with Internet professional services firms, software vendors, consulting and professional services companies. It is also particularly difficult to recruit and retain personnel in the San Francisco Bay area, where we are located. Although we provide compensation packages that include incentive stock options, cash incentives and other employee benefits, the volatility and current market price of our common stock may make it difficult for us to attract, assimilate and retain highly qualified 17 employees in the future. In addition, our customers generally purchase consulting and implementation services. While we have recently established relationships with some third-party service providers, we continue to be the primary provider of these services. It is difficult and expensive to recruit, train and retain qualified personnel to perform these services, and we may from time to time have inadequate levels of staffing to perform these services. As a result, our growth could be limited due to our lack of capacity to provide those services, or we could experience deterioration in service levels or decreased customer satisfaction, any of which would harm our business. If we do not improve our operational systems on a timely basis, we will be more likely to fail to manage our growth properly. We have expanded our operations rapidly in recent years. We intend to continue to expand our operational systems for the foreseeable future to pursue existing and potential market opportunities. This rapid growth places a significant demand on management and operational resources. In order to manage our growth, we need to implement and improve our operational systems, procedures and controls on a timely basis. If we fail to implement and improve these systems in a timely manner, our business will be seriously harmed. Difficulties in introducing new products and upgrades 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 Internet-related technology enhancements, uncertain product life cycles, changes in customer demands and evolving industry standards. We expect to add new content management functionality to our product offerings by internal development, and possibly by acquisition. Content 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 could harm our business. New products or upgrades may not be released according to schedule or may contain defects when released. Either situation could result 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, or deliver enhancements to existing products on a timely and cost-effective basis, our business will be harmed. Our products might not be compatible with all major platforms, which could limit our revenues. Our products currently operate on the Microsoft Windows NT and Sun Solaris operating systems. In addition, our products are required to interoperate with leading web content authoring tools and web 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 Internet business application, our business would be harmed. In addition, 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 Internet- related applications, could also harm our business. We have no significant experience conducting operations internationally, which may make it more difficult than we expect to expand overseas and may increase the costs of doing so. We derive substantially all of our revenues from sales to North American customers. We are expanding our international operations and plan to do so for the foreseeable future. There are many barriers to competing successfully in the international arena, including: . costs of customizing products for foreign countries; . restrictions on the use of software encryption technology; . dependence on local vendors; 18 . compliance with multiple, conflicting and changing governmental laws and regulations; . longer sales cycles; and . import and export restrictions and tariffs. As a result of these competitive barriers, we cannot assure you that we will be able to market, sell and deliver our products and services in international markets. If we fail to establish and maintain strategic relationships, the market acceptance of our products, and our profitability, may suffer. To offer products and services to a larger customer base our direct sales force depends on strategic partnerships and marketing alliances to obtain customer leads, referrals and distribution. If we are unable to maintain our existing strategic relationships or fail to enter into additional strategic relationships, our ability to increase our sales and reduce expenses will be harmed. We would also lose anticipated customer introductions and co-marketing benefits. Our success depends in part on the success of our strategic partners and their ability to market our products and services successfully. In addition, our strategic partners may not regard us as significant for their own businesses. Therefore, they could reduce their commitment to us or terminate their respective relationships with us, pursue other partnerships or relationships, or attempt to develop or acquire products or services that compete with our products and services. Even if we succeed in establishing these relationships, they may not result in additional customers or revenues. If our services revenues do not grow substantially, our total revenues are unlikely to increase. Our services revenues represent a significant component of our total revenues: 21% of total revenues for 1998, 36% of total revenues for 1999 and 32% of total revenues for the three months ended March 31, 2000. We anticipate that services revenues will continue to represent a significant percentage of total revenues in the future. To a large extent, the level of services revenues depends upon our ability to license products which generate follow-on services revenue. Additionally, services revenues growth depends on ongoing renewals of maintenance and service contracts. Moreover, if third-party organizations such as systems integrators become proficient in installing or servicing our products, our services revenues could decline. Our ability to increase services revenues will depend in large part on our ability to increase the capacity of our professional services organization, including our ability to recruit, train and retain a sufficient number of qualified personnel. 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 provisions to protect it. We currently do not have any issued United States or foreign patents, but we have applied for one U.S. patent. It is possible that a patent will not issue from our currently pending patent application or any future patent application we may file. We have also restricted customer access to our source code and required all employees to 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 that 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. In addition, third parties may claim that our products infringe theirs. Our failure to deliver defect-free software could result in greater 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 19 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 revenue 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 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 maintenance contracts to ensure proper installation and implementation. Moreover, third parties may develop and spread computer viruses that may damage the functionality of our software products. Any damage to or interruption in the performance of our software could also harm our business. Defects in our products may result in customer claims against us that could cause unanticipated losses. Because customers rely on our products for business critical processes, defects or errors in our products or services might result in tort or warranty claims. It is possible that the limitation of liability provisions in our contracts will not be effective as a result of existing or future federal, state or local laws or ordinances or unfavorable judicial decisions. We have not experienced any product liability claims like this to date, but we could in the future. Further, although we maintain errors and omissions insurance, this insurance coverage may not be adequate to cover us. A successful product liability claim could harm our business. Even defending a product liability suit, regardless of its merits, could harm our business because it entails substantial expense and diverts the time and attention of key management personnel. Acquisitions may harm our business by being more difficult than expected to integrate or by diverting management's attention. As part of our business strategy, we may seek to acquire or invest in additional businesses, products or technologies that we feel could complement or expand our business. If we identify an appropriate acquisition opportunity, we might be unable to negotiate the terms of that acquisition successfully, finance it, or integrate it into our existing business and operations. We may also be unable to select, manage or absorb any future acquisitions successfully. Further, the negotiation of potential acquisitions, as well as the integration of an acquired business, would divert management time and other resources. We may have to use a substantial portion of our available cash, including proceeds of this offering, to consummate an acquisition. On the other hand, if we consummate acquisitions through an exchange of our securities, our stockholders could suffer significant dilution. In addition, we cannot assure you that any particular acquisition, even if successfully completed, will ultimately benefit our business. If widespread Internet adoption does not continue, or if the Internet cannot accommodate continued growth, our business will be harmed because it depends on growth in the use of the Internet. Acceptance of our products depends upon continued adoption of the Internet for commerce. As is typical in the case of an emerging industry characterized by rapidly changing technology, evolving industry standards and frequent new product and service introductions, demand for and acceptance of recently introduced products and services are subject to a high level of uncertainty. To the extent that businesses do not consider the Internet a viable commercial medium, our customer base may not grow. In addition, critical issues concerning the commercial use of the Internet remain unresolved and may affect the growth of Internet use. The adoption of the Internet for commerce, communications and access to content, particularly by those who have historically relied upon alternative methods, generally requires understanding and accepting new ways of conducting business and exchanging information. In particular, companies that have already invested substantial resources in other means of conducting commerce and exchanging information may be particularly reluctant or slow to adopt a new, Internet-based strategy that may render their existing infrastructure obsolete. If the use of the Internet fails to develop or develops more slowly than expected, our business may be seriously harmed. To the extent that there is an increase in Internet use, an increase in frequency of use or an increase in the required bandwidth of users, the Internet infrastructure may not be able to support the demands placed upon it. 20 In addition, the Internet could lose its viability as a commercial medium due to delays in development or adoption of new standards or protocols required to handle increased levels of Internet activity. Changes in, or insufficient availability of, telecommunications or similar services to support the Internet also could result in slower response times and could adversely impact use of the Internet generally. If use of the Internet does not continue to grow or grows more slowly than expected, or if the Internet infrastructure, standards, protocols or complementary products, services or facilities do not effectively support any growth that may occur, our business would be seriously harmed. There is substantial risk that future regulations could be enacted that either directly restrict our business or indirectly impact our business by limiting the growth of Internet commerce. As Internet commerce evolves, we expect that federal, state or foreign agencies will adopt new legislation or regulations covering issues such as user privacy, pricing, content and quality of products and services. If enacted, these laws, rules or regulations could indirectly harm us to the extent that they impact our customers and potential customers. We cannot predict if or how any future legislation or regulations would impact our business. Although many of these regulations may not apply to our business directly, we expect that laws regulating or affecting commerce on the Internet could indirectly harm our business. Year 2000 problems with our products may increase our costs. Our products are generally integrated into enterprise computer systems involving sophisticated hardware and complex software products, which may not be Year 2000 compliant. We may in the future be subject to claims based on Year 2000 problems in other parties' products, Year 2000 problems alleged to be found in our products, Year 2000-related issues arising from the integration of multiple products within an overall system, or other similar claims. The total cost of Year 2000 compliance may be material and may harm our business. We have various mechanisms in place to discourage takeover attempts, which might tend to suppress our stock price. Provisions of our certificate of incorporation and bylaws that may discourage, delay or prevent a change in control include: . we are authorized to issue "blank check" preferred stock, which could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt; . we provide for the election of only one-third of our directors at each annual meeting of stockholders, which slows turnover on the board of directors; . we limit who may call special meetings of stockholders; . we prohibit stockholder action by written consent, so all stockholder actions must be taken at a meeting of our stockholders; and . we require advance notice for nominations for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings. Item 3. Quantitative and Qualitative Disclosures about Market Risk We develop products in the United States and market our products in North America, and, to a lesser extent in Europe and the Pacific Rim. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Since all of our revenue is currently denominated in U.S. Dollars, a strengthening of the Dollar could make our products less competitive in foreign markets. Our interest income and expense is sensitive to changes in the general level of U.S. interest rates, particularly since the majority of our financial investments are in cash equivalents and investments. Due to the nature of our financial investments, we believe that there is no material risk exposure. Therefore, no quantitative tabular disclosures are required. 21 Interest Rate Risk The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents and short-term and long-term investments in a variety of securities, including both government and corporate obligations and money market funds. As of March 31, 2000, approximately 72% of our total portfolio matures in one year or less, with the reminder maturing in less than two years. See Note 1 of Notes to Condensed Consolidated Financial Statements. The following table presents the amounts of cash equivalents and short-term and long-term investments that are subject to interest rate risk by year of expected maturity and average interest rates as of March 31, 2000:
Fair 2000 2001 Total Value -------- ------- -------- -------- (in thousands) Cash equivalents and short-term and long- term investments........................ $111,887 $63,966 $175,853 $175,853 Average interest rates................... 5.5% 6%
We did not hold derivative financial instruments as of March 31, 2000, and have never held such instruments in the past. In addition, we had no outstanding debt as of March 31, 2000. Foreign Currency Risk Currently the majority of our sales and expenses are denominated in U.S. dollars, as a result we have experienced no significant foreign exchange gains and losses to date. While we do expect to effect some transactions in foreign currencies in 2000, we do not anticipate that foreign exchange gains or losses will be significant. We have not engaged in foreign currency hedging activities to date. 22 PART II OTHER INFORMATION Item 1. Legal Proceedings Not applicable. Item 2. Changes in Securities and Use of Proceeds (c) Changes in Securities During the period of this report, we issued 6,483 shares of common stock to a bank, upon net exercise of a warrant to purchase Series B Preferred Stock issued in connection with a loan agreement in August 1996. During the period of this report, we issued to certain former stockholders of Lexington Software Associates, Inc. ("LSA") 1,420 and 264 shares of common stock, upon exercise of warrants to purchase Series E Preferred Stock issued in connection with our acquisition of LSA in July 1999, for an aggregate cash consideration of $12,056 and upon net exercise, respectively. The warrants described under this heading became exercisable for common stock upon the closing of our initial public offering on October 14, 1999, when all of our preferred stock converted into common stock. These securities were not registered under the Securities Act of 1933, as amended, in reliance upon the exemption provided by Section 4(2) of the Securities Act and/or Regulation D promulgated thereunder for transactions by an issuer not involving a public offering. (d) Use of Proceeds Our initial public offering of common stock was effected through a registration statement on Form S-1 (Registration No. 333-83779) that was declared effective by the SEC on October 7, 1999 and pursuant to which we sold an aggregate of 3,622,500 shares of our common stock. As of March 31, 2000, we had used the estimated aggregate net proceeds of $56.2 million from our initial public offering as follows: Construction of plant, building and facilities................. $ -- Purchase and installation of machinery and equipment........... -- Purchases of real estate....................................... -- Acquisition of other businesses................................ -- Repayment of indebtedness...................................... 1.3 million Working capital................................................ -- Short-term investments......................................... 38.4 million Long-term investments.......................................... 16.5 million Other purposes................................................. --
The foregoing amounts represent our best estimate of our use of proceeds for the period indicated. No such payments were made to our directors or officers or their associates, holders of 10% or more of any class of our equity securities or to our affiliates. We intend to use the net proceeds from the initial public offering for additional working capital and other general corporate purposes, including increased sales and marketing expenditures, increased research and development expenditures and capital expenditures. 23 Item 3. Defaults upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Securities Holders Not applicable. Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K (a) List of Exhibits
Number Exhibit Description ------ ------------------- 27.1 Financial Data Schedule (Filed Electronically)
(b) Reports on Form 8-K: None 24 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERWOVEN, INC. Dated: May 10, 2000 By: /s/ Martin W. Brauns ----------------------------------- Martin W. Brauns President and Chief Executive Officer (Duly Authorized Officer) Dated: May 10, 2000 By: /s/ David M. Allen ----------------------------------- David M. Allen Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 25 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Interwoven Inc's quarterly report on form 10Q for the period ended March 31, 2000 and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-30-2000 49,884 175,853 12,356 275 0 175,549 5,865 1,635 244,864 18,580 0 0 0 24 226,260 244,864 9,388 13,860 66 4,720 14,722 0 0 (3,045) 0 (3,045) 0 0 0 (3,045) (0.14) (0.14)
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