-----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, L0pkd/buWZvB5w2WkFmWwC0yQKFBRhZC+2g6xAvhVAVDynakFvzlxZku+UTpYaq+ JAH0PUULZK1iXe8bHHCkog== 0001012870-99-003483.txt : 19991018 0001012870-99-003483.hdr.sgml : 19991018 ACCESSION NUMBER: 0001012870-99-003483 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19991004 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: S-1/A SEC ACT: SEC FILE NUMBER: 333-83779 FILM NUMBER: 99722739 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 S-1/A 1 AMENDMENT #4 TO FORM S-1 (10-1-1999) As filed with the Securities and Exchange Commission on October 4, 1999 Registration No. 333-83779 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 --------------- PRE-EFFECTIVE AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT Under the Securities Act of 1933 --------------- INTERWOVEN, INC. (Exact name of Registrant as specified in its charter) Delaware 7372 (State or other (Primary standard 77-0523543 jurisdiction of industrial classification (I.R.S. employer incorporation or code number) identification no.) organization) Interwoven, Inc. 1195 West Fremont Avenue, Suite 2000 Sunnyvale, California 94087 (408) 774-2000 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) --------------- David M. Allen Chief Financial Officer Interwoven, Inc. 1195 West Fremont Avenue, Suite 2000 Sunnyvale, California 94087 (408) 774-2000 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------- Copies to: Matthew P. Quilter, Esq. Mark A. Bertelsen, Esq. Horace L. Nash, Esq. Jose F. Macias, Esq. Darren L. Nunn, Esq. Jon C. Avina, Esq. William L. Hughes, Esq. WILSON SONSINI GOODRICH & ROSATI FENWICK & WEST LLP Professional Corporation Two Palo Alto Square 650 Page Mill Road Palo Alto, California 94306 Palo Alto, California 94304 (650) 494-0600 (650) 493-9300 --------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] --------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. We may + +not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This prospectus is not an + +offer to sell these securities and it is not soliciting offers to buy these + +securities in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED OCTOBER 4, 1999 3,000,000 Shares [LOGO OF INTERWOVEN APPEARS HERE] Common Stock --------- Prior to this offering, there has been no public market for our common stock. The initial public offering price is expected to be between $10.00 and $12.00 per share. We have applied to list our common stock on The Nasdaq Stock Market's National Market under the symbol "IWOV." The underwriters have an option to purchase a maximum of 450,000 additional shares to cover over-allotments of shares. Investing in our common stock involves risks. See "Risk Factors" on page 6.
Underwriting Price to Discounts and Proceeds to Public Commissions Interwoven ------------ ------------- ------------ Per Share.................................. $ $ $ Total...................................... $ $ $
Delivery of the shares of common stock will be made on or about , 1999. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Credit Suisse First Boston BancBoston Robertson Stephens Dain Rauscher Wessels a division of Dain Rauscher Incorporated The date of this prospectus is October , 1999. ---------------- TABLE OF CONTENTS
Page ---- Prospectus Summary.................. 3 Risk Factors........................ 6 Special Note Regarding Forward- Looking Statements................. 14 Use of Proceeds..................... 15 Dividend Policy..................... 15 Capitalization...................... 16 Dilution............................ 17 Selected Financial Data............. 18 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 19 Business............................ 29
Page ---- Management....................... 43 Related Party Transactions....... 54 Principal Stockholders........... 56 Description of Capital Stock..... 59 Shares Eligible for Future Sale.. 63 Underwriting..................... 65 Notice to Canadian Residents..... 67 Legal Matters.................... 68 Experts.......................... 68 Where You Can Find Additional Information..................... 68 Index to Financial Statements.... F-1
---------------- Dealer Prospectus Delivery Obligation Until , 1999 (25 days after the commencement of this offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions. [ARTWORK] [front cover gatefold] Artwork consists of a flow chart entitled Software to Manage Web Content. From left to right, the chart contains several images of people working on computers representing Web Contributors, including Technical Contributors and Business Contributors. To the right are icons representing several types of web content comprising a company's web site, labeled Executable Code, Database Assets, Video, Graphics and Audio, Templates and Text. Arrows lead from these icons to a box labeled Interwoven TeamSite which contains a column of gears representing the functions performed by the TeamSite product. These functions include Web Content Development, Quality Assurance, File Version Control, Task-based Work Flow and Web Content Deployment. Arrows lead from this box through a firewall to a group of icons representing various Web Applications, including Business-to-Employees, Business-to-Business and Business-to-Consumer applications. A line leading down and to the right from the box labeled Interwoven TeamSite highlights the following explanatory text: "Work Areas contain virtual copies of a web site, allowing multiple users to work in the context of an entire web site," "The Staging Area is where content changes from the Work Areas are integrated and shared" and "Editions of the web site can be published as snapshots of the Staging Area." At the end of this line is a smaller flow chart representing the web content management process, beginning from the Work Areas through Content Integration and Approval to the Staging Area and finally to Edition. Directly above this smaller flow chart, and to the right of the main flow chart is the following text: "We provide businesses with the ability to expand the number of web content contributors across the enterprise and to manage the workflow and publications of those contributions. TeamSite's open architecture supports leading web authoring tools and web application servers, allowing businesses to leverage existing investments in information technology systems, content and expertise." PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus; it does not contain all the information you should consider before buying shares in this offering. You should read the entire prospectus carefully before making a decision whether to purchase our common stock. Interwoven Interwoven is a 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." We have designed our software products to help companies rapidly and efficiently develop, maintain and extend large web sites that are essential to their businesses. Our principal product, TeamSite, incorporates widely accepted Internet industry standards and is designed with an open architecture that allows it to support a wide variety of Internet software products, including web authoring tools and web application servers. Using TeamSite, our customers can manage web content, control the versions of their web sites, manage web site contribution and content approval processes, and develop Internet applications. TeamSite allows large numbers of contributors across an enterprise to add web content in a carefully-managed process. In addition, our OpenDeploy product allows customers to distribute web content automatically from one server to one or more servers. As leading companies demonstrate success on the Internet, business leaders are seeking to capitalize on new business opportunities, reach a broader customer base and reduce overall operating costs by moving their businesses to the Internet. The use of the Internet to conduct business is frequently referred to as "Internet commerce" or "eBusiness." Companies are making significant investments to develop and deploy these eBusiness initiatives. International Data Corporation, or IDC, estimates that spending on software applications and services for Internet commerce will grow from $7.8 billion in 1998 to $53.8 billion in 2002. The competitive online environment is driving companies to deploy complex web sites that offer enhanced user experiences. These web sites can contain hundreds of thousands of content-rich web pages, and this content has been increasing in volume and complexity. In addition, today's web sites must be updated frequently by numerous contributors throughout an enterprise. Web teams find it difficult to manage the increasing complexity, volume and variability of this content. At the same time, the large number of web authoring tools and web application servers have contributed to the increasing technological complexity involved in developing and maintaining web sites. These trends have created a need for content management software that can accommodate the increasing volume of web content, leverage existing investments in computers, software and associated information technology infrastructure, and allow more contributors to add content to a web site. IDC estimates that one of the markets in which we participate, which they refer to as the web development life-cycle management software market, will grow from $76.4 million in 1998 to $1.6 billion in 2003. Interwoven's content management software assists customers in accelerating their time-to-web--the rate at which they can deploy new content on their web sites--by enabling them to develop multiple eBusiness applications simultaneously. It lowers web operating costs by reducing a customer's dependence on highly-paid web professionals and reducing the time required to test and approve new content for a web site or eBusiness application. The scalability of our products also allows customers to manage hundreds of thousands of web files and enables hundreds of employees throughout the enterprise to contribute web content. In addition, our software's architecture is non-proprietary and based on recognized industry standards, so it enables businesses to take advantage of existing investments in technology and web content and, at the same time, to integrate new technologies and applications easily. 3 We market and sell our software products and services primarily through a direct sales force in North America. To date, we have licensed our software products to over 85 customers, including AltaVista, AT&T/TCI, BellSouth, Best Buy, Cisco Systems, FedEx, Gap, General Electric, the U.S. Department of Education, USWeb/CKS, Viacom/Nickelodeon and Yahoo!/GeoCities, although we have incurred losses to date resulting in an accumulated deficit of approximately $16.5 million at June 30, 1999. We were incorporated in California in March 1995 and intend to reincorporate in Delaware immediately prior to the completion of this offering. Our principal executive offices are located at 1195 West Fremont Avenue, Suite 2000, Sunnyvale, California 94087 and our telephone number is (408) 774-2000. Our World Wide Web address is www.interwoven.com. The information on our web site is not part of this prospectus. The Offering Common stock offered................................ 3,000,000 shares Common stock to be outstanding after this offering.. 21,642,241 shares Use of proceeds..................................... For general corporate purposes, including working capital. See "Use of Proceeds." Proposed Nasdaq National Market symbol.............. IWOV
The number of shares of our common stock to be outstanding immediately after this offering is based on the number of shares outstanding as of June 30, 1999, but does not include: . 944,980 shares issuable upon exercise of options outstanding as of June 30, 1999 under our stock option plans and 3,684,034 shares available for future issuance under those plans; . 300,000 shares available for future issuance under our employee stock purchase plan; . 72,071 shares issuable upon exercise of outstanding warrants; and . 39,096 shares issuable upon exercise of warrants issued after July 1, 1999. ---------------- You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document. Interwoven(R), TeamSite(R), OpenDeploy(TM) and SmartContext(TM) are our trademarks. This prospectus also contains trademarks of other companies and organizations. Unless otherwise indicated, all information contained in this prospectus assumes: . that the underwriters will not exercise their over-allotment option; . the completion of a 2-for-3 reverse stock split prior to consummation of this offering; . the conversion of each outstanding share of our preferred stock into two-thirds of a share of common stock, except for Series B Preferred Stock, each share of which will be converted into 0.702205 shares of common stock; . no exercise of outstanding warrants to purchase shares of our preferred stock prior to the consummation of this offering; and . our reincorporation from California to Delaware prior to consummation of this offering. 4 Summary Financial Data (in thousands, except per share amounts)
Six Months Years Ended December 31, Ended June 30, ---------------------------- ---------------- 1996 1997 1998 1998 1999 -------- -------- -------- ------- ------- Statement of Operations Data: Revenues....................... $ -- $ 168 $ 4,003 $ 886 $ 5,004 Gross profit................... -- 73 2,670 536 3,456 Total operating expenses....... 520 2,933 9,165 3,011 9,838 Loss from operations........... (520) (2,860) (6,495) (2,475) (6,382) Net loss....................... (510) (2,948) (6,344) (2,418) (6,228) Net loss per share: Basic and diluted............ $ (0.22) $ (1.36) $ (2.85) $ (1.25) $ (3.66) Weighted average shares-- basic and diluted........... 2,282 2,356 2,633 2,404 3,435 Pro forma net loss per share: Basic and diluted............ $ (0.74) $ (0.44) Weighted average shares-- basic and diluted........... 8,530 14,000
As of June 30, 1999 --------------------- Actual As Adjusted -------- ----------- Balance Sheet Data: Cash and cash equivalents............................... $ 25,203 $54,703 Working capital......................................... 22,634 52,134 Total assets............................................ 29,948 59,448 Long-term debt and capital lease obligations, less current portion........................................ 1,000 1,000 Manditorily redeemable convertible preferred stock...... 45,276 -- Total stockholders' equity (deficit).................... (21,155) 53,621
See Note 1 of Notes to Financial Statements for a description of the method that we used to compute our basic and diluted net loss per share and pro forma basic and diluted net loss per share. The adjusted balance sheet data gives effect to the sale of the shares of common stock that we are offering under this prospectus at an assumed initial public offering price of $11.00 per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses. See "Use of Proceeds" and "Capitalization." 5 RISK FACTORS You should carefully consider the risks described below before buying shares in this offering. 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. Before buying 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 approximately $510,000 in 1996, $2.9 million in 1997, $6.3 million in 1998 and $6.2 million for the six months ended June 30, 1999. As of June 30, 1999, we had an accumulated deficit of approximately $16.5 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. 6 Our quarterly results depend on a small number of large orders, so the loss of any single large order could harm those results and cause our stock price to drop. Each quarter, we derive a significant portion of our license revenues from a small number of relatively large orders. As a result, our operating results could suffer if any large orders are delayed or cancelled in any future period. In the first and second quarters of 1999, our top five customers accounted for 41% and 30%, respectively, of the total revenue in those quarters. We expect that we will continue to depend upon a small number of large orders for a significant portion of our license revenues. 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; . developers of software that directly addresses the need for web content management, such as Vignette. In addition, we 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 over 85 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 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 7 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 seriously 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 and the products. 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 channel, 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. 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 8 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. To date, we have derived all of our revenues from sales to North American customers. We plan to expand our international operations in the 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; . 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 profitablity, 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. To succeed, 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 9 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. 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 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 and 35% of total revenues for the six months ended June 30, 1999. 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 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 10 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. Year 2000 concerns by our customers could cause them to defer purchases of our products. We may experience reduced sales of products as customers and potential customers put a priority on correcting their own Year 2000 problems or avoiding new ones and therefore defer purchases of our products until later in 2000. As a result, the demand for our products may be particularly volatile and unpredictable for the remainder of 1999 and early 2000. 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. We also need to ensure Year 2000 compliance of our own internal computer and other systems, to continue testing our software products, to audit the Year 2000 compliance status of our suppliers and business partners, and to conduct a legal audit. We have not conducted a comprehensive Year 2000 investigation of our internal systems and do not intend to do so. The total cost of Year 2000 compliance may be material and may harm our business. Acquisitions may harm our business by being more difficult than expected to integrate or by diverting management's attention. In July 1999, we acquired Lexington Software Associates, Inc., a software consulting company, to help support our existing customer base and to help attract and retain new customers. We may be unable to integrate this company into ours successfully, and our business may not benefit as expected. 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 11 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. 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. Our existing stockholders hold a majority of our stock and will be able to control matters requiring stockholder approval. Immediately after the closing of this offering, approximately 48% of our outstanding capital stock will be owned by our directors and executive officers or their affiliated entities. As a result, these stockholders, acting together, would be able to control all matters requiring approval by the stockholders, including the election of all directors and approval of significant corporate transactions. 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 stockholder, 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. 12 In addition, Section 203 of the Delaware General Corporations Law and our stock incentive plans may discourage, delay or prevent a change in control of us. See "Description of Capital Stock--Anti-Takeover Provisions." Purchasers in this offering will incur immediate and substantial dilution. The initial public offering price of our common stock will be substantially higher than the book value per share of the outstanding common stock. As a result, if we were liquidated for book value immediately following this offering, each stockholder purchasing in this offering would receive less than they paid for their common stock. To the extent that outstanding options to purchase our common stock are exercised, or options or warrants reserved for issuance are issued and exercised, each stockholder purchasing in this offering will experience further substantial dilution. If a significant number of shares become available for sale and are sold in a short period of time, the market price of our stock could decline. If our stockholders sell substantial amounts of our common stock in the public market following this offering, the market price of our common stock could fall. Based on shares outstanding as of June 30, 1999, upon completion of this offering, we will have 21,642,241 shares of common stock outstanding. Other than the 3,000,000 shares of common stock sold in this offering, no shares will be eligible for sale in the public market immediately. The limited number of shares available for resale may affect the liquidity of the market for those shares. Our stockholders are subject to agreements with the underwriters or us that restrict their ability to transfer their stock for 180 days from the date of this prospectus. After these agreements expire, an additional 15,690,149 shares will be eligible for sale in the public market. If many of these shares are sold when they become available for resale, the market price of our common stock may decline. For a detailed discussion of the shares eligible for future sale, please see "Shares Eligible for Future Sale." We have broad discretion to use the offering proceeds and how we invest these proceeds may not yield a favorable, or any, return. The net proceeds of this offering are not allocated for specific uses other than working capital and general corporate purposes. Thus, our management has broad discretion over how these proceeds are used and could spend the proceeds in ways with which you may not agree. We cannot assure you that the proceeds will be invested in a way that yields a favorable, or any, return for us. 13 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Some of the statements under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this prospectus 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 prospectus 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 "Risk Factors" and elsewhere in this prospectus. 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. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these statements. We are under no duty to update any of the forward-looking statements after the date of this prospectus 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 prospectus. 14 USE OF PROCEEDS We estimate that we will receive net proceeds of approximately $29.5 million from the sale of 3,000,000 shares of our common stock ($34.1 million if the underwriters exercise their over-allotment option in full) at an assumed initial public offering price of $11.00 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses. The primary purposes of this offering are to obtain additional working capital, create a public market for our common stock, facilitate our future access to public capital markets and provide liquidity to existing stockholders. We intend to use the net proceeds of this offering primarily for additional working capital and other general corporate purposes, including increased sales and marketing expenditures, increased research and development expenditures and capital expenditures. We have not yet determined our expected use of these proceeds, but we currently estimate that we will incur at least $5 million in research and development expenditures, $17 million in sales and marketing expenditures and $3 million in capital expenditures during the next twelve months. The amounts and timing of these expenditures will vary depending on a number of factors, including the amount of cash generated by our operations, competitive and technological developments and the rate of growth, if any, of our business. We may also use a portion of the net proceeds to acquire additional businesses, products and technologies, to lease additional facilities, or to establish joint ventures that we believe will complement our current or future business. However, we have no specific plans, agreements or commitments to do so and are not currently engaged in any negotiations for any acquisition or joint venture. We will retain broad discretion in the allocation of the net proceeds of this offering. Pending the uses described above, we will invest the net proceeds of this offering in short-term to medium-term interest-bearing, investment-grade securities. We cannot predict whether the proceeds will be invested to yield a favorable return. We believe that our available cash, together with the net proceeds of this offering, will be sufficient to meet our capital requirements for at least the next 12 months. DIVIDEND POLICY We have never declared or paid cash dividends on our common stock or other securities, and we do not anticipate paying a cash dividend in the foreseeable future. Our lines of credit currently prohibit the payment of dividends. 15 CAPITALIZATION The following table sets forth the following information, as of June 30, 1999: . our actual capitalization; . our pro forma capitalization after giving effect to the conversion of all outstanding shares of preferred stock into shares of common stock upon the closing of this offering; and . our pro forma as adjusted capitalization to give effect to the sale of 3,000,000 shares of common stock offered hereby at an assumed initial public offering price of $11.00 per share, less the estimated underwriting discounts and commissions and estimated offering expenses.
June 30, 1999 ------------------------------- Pro Pro Forma Actual Forma As Adjusted -------- -------- ----------- (in thousands, except share data) Debt and leases, current and long-term......... $ 1,511 $ 1,511 $ 1,511 Mandatorily redeemable convertible preferred stock, 18,763,092 shares authorized, 18,455,184 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted...................................... 45,276 -- -- Stockholders' equity (deficit): Preferred stock, $0.001 par value, no shares authorized, issued or outstanding, actual; 5,000,000 shares authorized, no shares issued or outstanding, pro forma and pro forma as adjusted........................... -- -- -- Common stock, $0.001 par value, 26,666,666 shares authorized, 6,230,590 shares issued and outstanding, actual; 75,000,000 shares authorized, 18,642,241 shares issued and outstanding, pro forma; 21,642,241 shares issued and outstanding, pro forma as adjusted.................................... 6 19 22 Additional paid-in capital................... 1,707 46,970 76,467 Notes receivable for purchase of common stock....................................... (202) (202) (202) Deferred stock-based compensation............ (6,130) (6,130) (6,130) Accumulated deficit.......................... (16,536) (16,536) (16,536) -------- -------- -------- Total stockholders' equity (deficit)....... (21,155) 24,121 53,621 -------- -------- -------- Total capitalization..................... $ 25,632 $ 25,632 $ 55,132 ======== ======== ========
The table excludes: . 944,980 shares issuable upon exercise of options outstanding at June 30, 1999 under our stock option plans and 3,684,034 shares available for future issuance under those plans; . 300,000 shares available for future issuance under our employee stock purchase plan; . 72,071 shares issuable upon exercise of outstanding warrants; . 445,237 shares issuable upon exercise of outstanding options issued after June 30, 1999; and . 39,096 shares issuable upon exercise of outstanding warrants issued after July 1, 1999. 16 DILUTION The pro forma net intangible book value of our common stock as of June 30, 1999, after giving effect to the conversion of all outstanding shares of preferred stock into common stock, was $24.1 million, or approximately $1.29 per share. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding. Assuming our sale of 3,000,000 shares of common stock offered at an assumed initial public offering price of $11.00 per share, and after deducting estimated underwriting discounts and commissions and estimated offering expenses, our pro forma net tangible book value as of June 30, 1999 would have been $53.6 million, or $2.48 per share. This represents an immediate increase in pro forma net tangible book value of $1.19 per share to existing stockholders and an immediate dilution in net tangible book value of $8.52 per share to new investors. Investors participating in this offering will incur immediate, substantial dilution. The following table illustrates the per share dilution: Assumed initial public offering price per share................... $11.00 Pro forma net tangible book value per share as of June 30, 1999........................................................... $1.29 Increase in pro forma net tangible book value per share attributable to new investors.................................. $1.19 ----- Pro forma net tangible book value per share after offering........ $ 2.48 ------ Dilution per share to new investors............................... $ 8.52 ======
The following table summarizes, on a pro forma basis, as of June 30, 1999, the differences between the number of shares of common stock purchased from us, the total consideration paid and the average price per share paid by existing stockholders and by the new investors purchasing shares in this offering. We have assumed an initial public offering price of $11.00 per share, and we have not deducted estimated underwriting discounts and commissions and estimated offering expenses in our calculations.
Shares Purchased Total Consideration Average ------------------ ------------------- Price Number Percent Amount Percent Per Share ---------- ------- ----------- ------- --------- Existing stockholders.......... 18,642,241 86.1% $39,382,600 54.4% $ 2.11 New investors.................. 3,000,000 13.9 33,000,000 45.6 11.00 ---------- ----- ----------- ----- ------ Total........................ 21,642,241 100.0% $72,382,600 100.0% $ 3.34 ========== ===== =========== ===== ======
This discussion of dilution, and the table quantifying it, assume no exercise of any outstanding stock options. The exercise of stock options outstanding under our stock option plans having an exercise price less than the offering price would increase the dilutive effect to new investors. If the underwriters exercise their over-allotment in full, the following will occur: . the number of shares of common stock held by existing stockholders will decrease to approximately 84.4% of the total number of shares of our common stock outstanding; and . the number of shares held by new investors will increase to 3,450,000, or approximately 15.6% of the total number of our common stock outstanding after this offering. 17 SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with, and is qualified by reference to, the Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial data included elsewhere in this prospectus. The statement of operations data for the years ended December 31, 1996, 1997 and 1998 and the balance sheet data at December 31, 1997 and 1998, are derived from and are qualified by reference to audited financial statements included elsewhere in this prospectus. The balance sheet data at December 31, 1996 is derived from audited financial statements not included in this prospectus. The statement of operations data for the six months ended June 30, 1998 and 1999, and the balance sheet data at June 30, 1999 are derived from unaudited financial statements included elsewhere in this prospectus and, in the our opinion, include all adjustments consisting solely of normal recurring accruals which are necessary to present fairly the data for those periods. Historical results are not necessarily indicative of future results and the results, for interim periods are not necessarily indicative of results to be expected for the entire year.
Year Ended Six Months December 31, Ended June 30, ------------------------ ---------------- 1996 1997 1998 1998 1999 ------ ------- ------- ------- ------- (in thousands, except per share data) Statement of Operations Data: Revenues: License .......................... $ -- $ 84 $ 3,176 $ 624 $ 3,258 Services ......................... -- 84 827 262 1,746 ------ ------- ------- ------- ------- Total revenues................... -- 168 4,003 886 5,004 ------ ------- ------- ------- ------- Cost of revenues: License........................... -- -- 59 -- 119 Services.......................... -- 95 1,274 350 1,429 ------ ------- ------- ------- ------- Total cost of revenues........... -- 95 1,333 350 1,548 ------ ------- ------- ------- ------- Gross profit....................... -- 73 2,670 536 3,456 Operating expenses: Research and development.......... 328 884 1,797 735 1,701 Sales and marketing............... 101 1,519 4,817 1,357 5,225 General and administrative........ 91 530 1,739 572 1,244 Amortization of deferred stock- based compensation............... -- -- 812 347 1,668 ------ ------- ------- ------- ------- Total operating expenses......... 520 2,933 9,165 3,011 9,838 ------ ------- ------- ------- ------- Loss from operations............... (520) (2,860) (6,495) (2,475) (6,382) Interest income (expense), net..... 10 (88) 151 57 154 ------ ------- ------- ------- ------- Net loss........................... $ (510) $(2,948) $(6,344) $(2,418) $(6,228) ====== ======= ======= ======= ======= Net loss per share: Basic and diluted................. $(0.22) $ (1.36) $ (2.85) $ (1.25) $ (3.66) Weighted average shares--basic and diluted.......................... 2,282 2,356 2,633 2,404 3,435 Pro forma net loss per share: Basic and diluted................. $ (0.74) $ (0.44) Weighted average shares--basic and diluted.......................... 8,530 14,000
December 31, --------------------- June 30, 1996 1997 1998 1999 ---- ------ ------- -------- (in thousands) Balance Sheet Data: Cash and cash equivalents..................... $ 17 $1,019 $ 9,022 $25,203 Working capital............................... (208) 792 8,844 22,634 Total assets.................................. 92 1,384 13,908 29,948 Long-term debt and capital lease obligations, less current portion ........................ -- 87 1,257 1,000 Mandatorily redeemable convertible preferred stock........................................ 385 4,627 20,464 45,276 Total stockholders' deficit................... (525) (3,734) (10,752) (21,155)
See Note 1 of Notes to Financial Statements for a discussion regarding computation and presentation of pro forma basic and diluted net loss per share and shares used in computing pro forma basic and diluted net loss per share. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the financial condition and results of operations should be read in conjunction with "Selected Financial Data" and our Financial Statements and Notes appearing elsewhere in this prospectus. 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 have subsequently developed and released enhanced versions of TeamSite and have introduced related products. As of June 30, 1999, we had sold our products and services to over 75 customers. We market and sell our products primarily through a direct sales force and augment our sales efforts through relationships with systems integrators and other strategic partners. We are headquartered in Sunnyvale, California and maintain additional offices in the metropolitan areas of Atlanta, Boston, Chicago, Los Angeles, Seattle and Washington, D.C. Our revenues to date have been derived exclusively from accounts in North America. In May 1999, we opened an office in the United Kingdom. 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 June 30, 1999, had an accumulated deficit of $16.5 million. We anticipate that our cost of services revenues and operating expenses will increase substantially in future quarters as we grow our services 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. On July 1, 1999, we acquired Lexington Software Associates, Inc. As a result of this acquisition, we have substantially increased our professional services organization. The Lexington Software acquisition added 18 employees to the 118 employees we had as of June 30, 1999. See Note 9 of Notes to Financial Statements. 19 Results of Operations The following table lists, for the periods indicated, each line as a percentage of total revenues:
Years Ended Six Months Ended December 31, June 30, ---------------- ------------------- 1997 1998 1998 1999 ------- ------ -------- -------- Revenues: License.............................. 50% 79% 70% 65% Services............................. 50 21 30 35 ------- ----- -------- -------- Total revenues..................... 100 100 100 100 ------- ----- -------- -------- Cost of revenues: License.............................. -- 1 -- 2 Services............................. 57 32 40 29 ------- ----- -------- -------- Total cost of revenues............. 57 33 40 31 ------- ----- -------- -------- Gross profit........................... 43 67 60 69 ------- ----- -------- -------- Operating expenses: Research and development............. 526 45 83 34 Sales and marketing.................. 904 120 153 104 General and administrative........... 315 43 65 25 Amortization of deferred stock-based compensation........................ -- 20 39 33 ------- ----- -------- -------- Total operating expenses........... 1,745 228 340 196 ------- ----- -------- -------- Loss from operations................... (1,702) (161) (280) (127) Interest income (expense), net......... (52) 4 6 3 ------- ----- -------- -------- Net loss............................... (1,754)% (157)% (274)% (124)% ======= ===== ======== ========
Six Months Ended June 30, 1998 and 1999 Revenues Total revenues increased 456% from $900,000 for the six months ended June 30, 1998 to $5.0 million for the six months ended June 30, 1999. This increase was attributable to greater market acceptance of our products and services after their introduction in 1997 and an increase in the number of sales and marketing staff, resulting in an increased number of customers. License. License revenues increased 429% from $624,000 for the six months ended June 30, 1998 to $3.3 million for the six months ended June 30, 1999. License revenues represented 70% and 65% of total revenues, respectively, in those periods. The increase in license revenues reflects a 260% growth in customers and a 66% increase in the average contract license fee per customer. Services. Services revenues increased 549% from $262,000 for the six months ended June 30, 1998 to $1.7 million for the six months ended June 30, 1999. Services revenues represented 30% and 35% of total revenues, respectively, in those periods. The increase in services revenues reflects a $1.0 million increase in professional services fees and a $400,000 increase in maintenance fees. Cost of Revenues License. Cost of license revenues includes expenses incurred to manufacture, package and distribute 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 not significant for the six months ended June 30, 1998 and increased to $119,000 for the six months ended June 30, 1999. Cost of license revenues 20 represented 4% of license revenues in the six months ended June 30, 1999. The increase in cost of license revenues reflects increased sales of third-party products sold in conjunction with our software products. Cost of license revenues may fluctuate from period to period as we sell higher or lower numbers of third-party products. 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 300% from $350,000 for the six months ended June 30, 1998 to $1.4 million for the six months ended June 30, 1999. Cost of services revenues represented 134% and 82% of services revenues, respectively, in those periods. This increase in dollar amounts was directly attributable to an increase in the number of in- house staff from 10 to 21 and a $106,000 increase in subcontractor expenses. We expect our cost of services revenues to increase in dollar amounts as a result of the increased staffing of our professional services organization due to our acquisition of Lexington Software and through our continued expansion of our services staff and consulting organizations. Since services revenues have substantially lower margins than license revenues, this expansion would reduce our gross margins if our license revenues were not to 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 professional services staff. Gross Profit Gross profit increased 553% from $536,000 for the six months ended June 30, 1998 to $3.5 million for the six months ended June 30, 1999. Gross profit represented 60% and 69% of total revenues, respectively, in those periods. This increase in dollar amounts reflects increased license and services revenues from a growing customer base. 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. Research and development expenses increased 131% from $735,000 for the six months ended June 30, 1998 to $1.7 million for the six months ended June 30, 1999, representing 83% and 34% of total revenues, respectively, in those periods. This increase in 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 271% from $1.4 million for the six months ended June 30, 1998 to $5.2 million for the six months ended June 30, 1999, representing 153% and 104% 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 $1.6 million, higher sales commissions and bonuses of $1.0 million and increased marketing related costs of $200,000. 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 primarily depending on when we hire new sales personnel, the timing of new marketing programs and the levels of revenues in each period. General and Administrative. General and administrative expenses consist primarily of salaries and related costs for accounting, human resources, legal and other administrative functions, as well as provisions for doubtful accounts. General and administrative expenses increased 110% from $572,000 for the six months 21 ended June 30, 1998 to $1.2 million for the six months ended June 30, 1999, representing 65% and 25% 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 dollar amounts in 1999 as we add personnel to support expanding operations, incur additional costs related to the growth of our business, and assume the reporting requirements of a public company. Amortization of Deferred Stock-Based Compensation. In 1998 and the first six months of 1999, we recorded deferred stock-based compensation of $1.9 million and $6.7 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 $347,000 and $1.7 million for the six months ended June 30, 1998 and 1999, respectively. We expect per quarter amortization related to these options of approximately $1.0 million during the remainder of 1999, between $500,000 and $750,000 during 2000, between $270,000 and $400,000 during 2001, between $100,000 and $185,000 during 2002 and $50,000 in the quarter ended March 31, 2003. Interest Income (Expense), Net Interest income, net, increased from $57,000 for the six months ended June 30, 1998 to $154,000 for the six months ended June 30, 1999 due to higher average cash balances. Income Taxes As of June 30, 1999, we had approximately $10.8 million of federal and $1.7 million of state net operating loss carryforwards available to reduce future taxable income, expiring in 2015 and 2010 for federal and state tax purposes, respectively. Under the Tax Reform Act of 1986, the amounts of and benefits from net operating loss carryforwards may be impaired or limited. Events which cause limitation in the amount of net operating losses that we may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50%, as defined, over a three year period. We have provided a full valuation allowance on the deferred tax asset because of the uncertainty regarding its realization. Our accounting for deferred taxes under Statement of Financial Accounting Standards No. 109 involves the evaluation of a number of factors concerning the realizability of our deferred tax assets. In concluding that a full valuation allowance was required, management primarily considered factors such as our history of operating losses and expected future losses and the nature of our deferred tax assets. See Note 5 of Notes to Financial Statements. Years Ended December 31, 1996, 1997 and 1998 Revenues We had no revenues in 1996. Total revenues increased from $168,000 in 1997 to $4.0 million in 1998. This increase was attributable to greater market acceptance of our software products after their introduction in 1997 and an increase in the number of sales and marketing staff, resulting in an increased number of customers. License. License revenues increased from $84,000 in 1997 to $3.2 million in 1998. License revenues represented 50% and 79% of total revenues, respectively, in those periods. The increase in license revenues reflects growth from the low level of revenue in 1997, our first year in which we licensed our products. Services. Services revenues increased from $84,000 in 1997 to $827,000 in 1998. Services revenues represented 50% and 21% of total revenues, respectively, in those periods. The increase in services revenues reflects an increase in both professional services and maintenance fees generated from an expanded number of customers who licensed our products. 22 Cost of Revenues License. We had no cost of license revenues in 1996 or 1997. Cost of license revenues in 1998 was $59,000 and represented 2% of license revenues in 1998. The increase in cost of license revenues reflects increased sales of third- party products sold in conjunction with our software products. Services. We had no cost of services revenues in 1996. Cost of services revenues increased from $95,000 in 1997 to $1.3 million in 1998. Cost of services revenues represented 113% and 154% of services revenues, respectively, in those periods. This increase was due to an increase in the number of in- house staff from 3 to 11, and a $45,000 increase in subcontractor expenses. Gross Profit Gross profit increased from $73,000 in 1997 to $2.7 million in 1998, representing 43% and 67% of total revenues, respectively, in those periods. This increase reflected increased license and services revenues from a growing customer base. Operating Expenses Research and Development. Research and development expenses increased from $328,000 in 1996 to $884,000 in 1997 and $1.8 million in 1998. Research and development expenses represented 526% and 45% of total revenues in 1997 and 1998, respectively. This increase in dollar amounts was due to increases in the number of product development personnel. Sales and Marketing. Sales and marketing expenses increased from $101,000 in 1996 to $1.5 million in 1997 and $4.8 million in 1998. Sales and marketing expenses represented 904% and 120% of total revenues in 1997 and 1998, respectively. The increase in dollar amounts from 1996 to 1997 reflects increases in sales and marketing personnel costs of $900,000 and increased marketing related costs of $100,000. The increase in dollar amounts from 1997 to 1998 reflects increases in sale and marketing personnel costs of $1.4 million, higher sales commissions and bonuses of $900,000 and increased marketing related costs of $200,000. General and Administrative. General and administrative expenses increased from $91,000 in 1996 to $530,000 in 1997 and $1.7 million in 1998, representing 315% and 43% of total revenues in 1997 and 1998, respectively. This increase in dollar amounts reflects additional staffing of these functions to support expanded operations during this same period. Amortization of Deferred Stock-Based Compensation. In 1998 we recorded deferred stock-based compensation of $1.9 million, $812,000 of which was amortized in 1998. Interest Income (Expense), Net Interest income, net, decreased from $10,000 in 1996 to a net interest expense of $88,000 in 1997 and increased to a net interest income of $151,000 in 1998. The decrease from 1996 to 1997 reflected increased interest expense on promissory notes issued in conjunction with the sale of our preferred stock. The increase from 1997 to 1998 was due to increased interest income earned from cash balances on hand as a result of sales of our preferred stock in March, October, November and December 1998, partially offset by increased interest expense. 23 Quarterly Results of Operations The following tables set forth our unaudited statements of operations data in dollars and as a percentage of total revenues for each of our last six quarters. This data has been derived from unaudited financial statements that have been prepared on the same basis as our annual audited financial statements and, in our opinion, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this information. These unaudited quarterly results should be read in conjunction with the annual audited financial statements and notes thereto appearing elsewhere in this prospectus. The results of operations for any quarter are not necessarily indicative of the results for any future period.
Three Months Ended ---------------------------------------------------------- March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, 1998 1998 1998 1998 1999 1999 --------- -------- --------- -------- --------- -------- (in thousands) Statement of Operations Data: Revenues: License............... $ 187 $ 437 $ 946 $ 1,606 $ 1,360 $ 1,898 Services.............. 44 218 277 288 742 1,004 ----- ------- ------- ------- ------- ------- Total revenues....... 231 655 1,223 1,894 2,102 2,902 ----- ------- ------- ------- ------- ------- Cost of revenues: License............... -- -- 19 40 15 104 Services.............. 75 275 441 483 549 880 ----- ------- ------- ------- ------- ------- Total cost of revenues............ 75 275 460 523 564 984 ----- ------- ------- ------- ------- ------- Gross profit......... 156 380 763 1,371 1,538 1,918 ----- ------- ------- ------- ------- ------- Operating expenses: Research and development.......... 282 453 492 570 779 922 Sales and marketing... 473 884 1,603 1,857 2,287 2,938 General and administrative....... 185 387 563 604 598 646 Amortization of deferred stock-based compensation......... 151 196 217 248 640 1,028 ----- ------- ------- ------- ------- ------- Total operating expenses............ 1,091 1,920 2,875 3,279 4,304 5,534 ----- ------- ------- ------- ------- ------- Loss from operations.... (935) (1,540) (2,112) (1,908) (2,766) (3,616) Interest income, net.... 4 53 32 62 65 89 Net loss................ $(931) $(1,487) $(2,080) $(1,846) $(2,701) $(3,527) ===== ======= ======= ======= ======= =======
Three Months Ended -------------------------------------------------------- March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, 1998 1998 1998 1998 1999 1999 --------- -------- --------- -------- --------- -------- As a Percentage of Total Revenues: Revenues: License............... 81% 67% 77% 85% 65% 65% Services.............. 19 33 23 15 35 35 ---- ---- ---- ---- ---- ---- Total revenues....... 100 100 100 100 100 100 ---- ---- ---- ---- ---- ---- Cost of revenues: License............... -- -- 2 2 1 4 Services.............. 32 42 36 26 26 30 ---- ---- ---- ---- ---- ---- Total cost of revenues............ 32 42 38 28 27 34 ---- ---- ---- ---- ---- ---- Gross profit......... 68 58 62 72 73 66 ---- ---- ---- ---- ---- ---- Operating expenses: Research and development.......... 122 69 40 30 37 32 Sales and marketing... 205 135 131 98 109 101 General and administrative....... 80 59 46 32 28 22 Amortization of deferred stock-based compensation......... 65 30 18 13 30 35 ---- ---- ---- ---- ---- ---- Total operating expenses............ 472 293 235 173 204 190 ---- ---- ---- ---- ---- ---- Loss from operations.... (404) (235) (173) (101) (131) (124) Interest income, net.... 2 8 3 3 3 3 Net loss................ (402)% (227)% (170)% ( 98)% (128)% (121)% ==== ==== ==== ==== ==== ====
24 Our license and services revenues have grown in each of the six quarters in the period ended June 30, 1999, except that our license revenues declined in the three month period ended March 31, 1999 from that in the three month period 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. In addition, many companies that license enterprise-scale software products to large customers experience seasonal declines in the first fiscal quarter following the end of their fiscal year. Because of our limited operating history, we do not know whether this pattern was responsible for the declines in the three months ended March 31, 1999, or whether it will apply to future quarterly results. As a general matter, we depend on sales to a relatively few large customers. As a result, our revenues are subject to period-to-period fluctuations reflecting the impact of a few large sales. Increased services revenues beginning in the three month period ended March 31, 1999 reflect an increase in both professional services and maintenance fees generated from an expanded number of customers which had licensed our products in prior periods, and 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. In addition, our products are typically shipped when orders are received, so license backlog at the beginning of any quarter in the past has represented only a small portion of expected license revenues for that quarter. Moreover, we typically recognize a substantial percentage of revenues in the last month of the quarter, frequently in the last week or even the last days of the quarter. As a result, at the beginning of a quarter we have no assurance about the levels of sales in that quarter, and the delay or cancellation of any large orders can result in a significant shortfall from anticipated revenues. These factors make license revenues in any quarter difficult to forecast. Since our expenses are relatively fixed in the near term, any shortfall from anticipated revenues, could result in significant variations in operating results from quarter to quarter and harm to our business. 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. Liquidity and Capital Resources Since inception, we have funded our operations through private sales of equity securities. We raised a total of $37.0 million, net of offering costs, from the issuance of preferred stock. At June 30, 1999, our sources of 25 liquidity consisted of $25.2 million in cash and cash equivalents and $22.6 million in working capital. We have a $3.0 million line of credit and a $1.5 million equipment line of credit with Silicon Valley Bank, each of which bear interest at the bank's prime rate, which was 7.75% at June 30, 1999, plus 0.25%. At June 30, 1999, the line of credit was unused and $1.5 million was outstanding under the equipment line of credit. The lines of credit are secured by all of our tangible and intangible assets, and contain financial covenants including; a quick asset ratio, excluding deferred maintenance revenue, of at least 2:1; 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; and a covenant that quarterly net losses will not exceed a threshold based on projected annual revenues. We intend to maintain both lines of credit. We are currently in compliance with all related financial covenants and restrictions. Net cash used in operating activities was $2.7 million in 1997 and $6.0 million in 1998. Net cash used in operating activities in 1997 and 1998 reflected net losses and, to a lesser extent, accounts receivable, offset in part by increases in accrued liabilities. Net cash used in operating activities was $2.2 million in the six months ended June 30, 1999. Net cash used in operating activities reflected increasing net losses offset in part by reductions in accounts receivable and increases in accounts payable. From inception, our investing activities have consisted primarily of purchases of property and equipment, principally computer hardware and software for our growing number of employees. Capital expenditures, including those under capital leases, totaled $176,000, $1.7 million and $561,000 in 1997, 1998 and the six months ended June 30, 1999, respectively. We expect that capital expenditures will increase with our anticipated growth in operations, infrastructure and personnel. As of June 30, 1999 we had no material capital expenditure commitments, other than the acquisition of Lexington Software Associates, Inc. discussed in Note 9 to our Notes to Financial Statements. We do not expect to incur significant costs to make our products or internal information systems Year 2000 compliant because we believe these products and information systems are designed to function properly through and beyond year 2000. Net cash provided by financing activities in 1997, 1998 and the first six months of 1999 was $3.9 million, $15.8 million and $18.9 million, respectively. Net cash provided by financing activities reflected primarily the proceeds of issuances of preferred stock in each of these periods, and, in 1998, included proceeds from a bank line of credit. We believe that the net proceeds of this offering, together with cash and cash equivalents, and funds available under existing credit facilities, 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. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 is effective for all fiscal quarters beginning with the quarter ending June 30, 2000. SFAS 133 establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. We will adopt SFAS No. 133 in the quarter ending June 30, 2000 and do not expect its adoption to have an impact on our results of operations, financial position or cash flows. 26 Qualitative and Quantitative 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. 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 short-term. Due to the short-term nature of our financial investments, we believe that there is not a material risk exposure. Year 2000 Compliance The Year 2000 issue refers generally to the problems that some software may have in determining the correct century for the year. For example, software with date-sensitive functions that is not Year 2000 compliant may not be able to distinguish whether "00" means 1900 or 2000, which may result in system failures or erroneous results. We have conducted a Year 2000 readiness review for the current and prior versions of our products. The review includes: . assessment; . implementation, including remediation, upgrading and replacement of non- compliant product versions; . validation testing; and . contingency planning. We have completed all phases of our plan, except for contingency planning, with respect to the current and prior versions of all of our products. As a result, the current and prior versions of each of our products are Year 2000 compliant when configured and used in accordance with the related documentation, and provided that the underlying operating system of the host machine and any other software used with or in the host machine or our products are also Year 2000 compliant. We define "Year 2000 compliant" as the ability to: . correctly handle date information needed for the December 31, 1999 to January 1, 2000 date change; . function according to the product documentation provided for this date change, without changes in operation resulting from the advent of a new century, assuming correct configuration; . where appropriate, respond to two-digit date input in a way that resolves the ambiguity as to century in a disclosed, defined, and predetermined manner; . store and provide output of date information in ways that are unambiguous as to century if the date elements in interfaces and data storage specify the century; and . recognize year 2000 as a leap year. We have not tested our products on all platforms or all versions of operating systems that our products currently support. We are testing licensed software, shareware and freeware obtained from third parties that is incorporated into our products or sold in conjunction with our products, and have assurances from our vendors that this licensed software is Year 2000 compliant. Despite our testing, our products may contain undetected errors or 27 defects associated with Year 2000 date functions. Known or unknown errors or defects in our products could result in: . delay or loss of revenue; . diversion of development resources; . damage to our reputation; . increased service and warranty costs; or . liability from our customers. Accordingly, errors or defects in our products could seriously harm our business. Some commentators have predicted significant litigation regarding Year 2000 compliance issues, and we are aware of lawsuits against other software vendors. Because of the unprecedented nature of this litigation, it is uncertain whether or to what extent we will be affected by it. Our internal systems include both our computer and network systems and other systems. We have initiated an assessment of our most important computer and network systems and expect to complete the assessment by December 1999. We have not yet begun to assess the Year 2000 compliance of our other systems, but we expect to complete this assessment by December 1999. To the extent that we are not able to assess the technology provided by third-party vendors, we are seeking assurances from them that their systems are Year 2000 compliant. Although we are not currently aware of any material operational issues or costs associated with preparing these systems for the Year 2000, we may experience unanticipated problems and costs caused by undetected errors or defects in the technology used in these systems. We currently have only limited information concerning the Year 2000 compliance status of our customers. As is the case with other similarly situated software companies, if our current or future customers fail to achieve Year 2000 compliance or if they divert technology expenditures, especially technology expenditures that were reserved for enterprise software, to address Year 2000 compliance problems, our business could be harmed. We have funded our Year 2000 plan from available cash and have not separately accounted for these costs in the past. To date, these costs have not been material. We expect to incur additional costs related to the Year 2000 plan for: . administrative personnel to manage the project; . outside contractor assistance; . technical support for our products; and . product engineering and customer satisfaction. We may experience material problems and costs with Year 2000 compliance that could harm our business. We have not yet developed a contingency plan to address situations that may result if we are unable to achieve Year 2000 readiness of our critical operations and do not anticipate the need to do so. The cost of developing and implementing a plan may itself be material. Finally, we are also subject to external forces that might generally affect industry and commerce, such as utility or transportation company Year 2000 compliance failures and related service interruptions. 28 BUSINESS Overview Interwoven is a 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." Our flagship software product, TeamSite, is designed to help customers develop, maintain and extend large web sites that are essential to their businesses. TeamSite incorporates widely accepted Internet industry standards and is designed with an open architecture that allows it to support a wide variety of web authoring tools and web application servers. Using TeamSite, our customers can manage web content, control the versions of their web sites, manage web site contribution and content approval processes, and develop eBusiness applications. TeamSite allows large numbers of contributors across an enterprise to add web content in a carefully-managed process. In addition, our OpenDeploy product allows customers to automate the distribution of web content across multiple web sites. By using our products, businesses can accelerate their time-to-web, lower web operating costs, establish a differentiated presence on the web and attract and retain customers. Currently, we have licensed our software products to over 85 customers operating in a broad range of industries. Our customers include AltaVista, AT&T/TCI, BellSouth, Best Buy, Cisco Systems, FedEx, Gap, General Electric, the U.S. Department of Education, USWeb/CKS, Viacom/Nickelodeon and Yahoo!/GeoCities. Industry Background The use of the Internet to communicate and conduct business is increasing rapidly. Companies are accelerating their movement to the Internet to capitalize on new business opportunities, reach broader consumer audiences and reduce operational costs. Forrester Research estimates that the business-to- consumer Internet commerce market in the U.S. will grow from $7.8 billion in 1998 to $108.0 billion in 2003. In addition, Forrester Research estimates that the business-to-business Internet commerce market in the U.S. will grow from $43.1 billion in 1998 to $1.3 trillion in 2003. In this prospectus we refer to business-to-business and business-to-consumer Internet commerce as "e- commerce." Migrating to the Web. As leading companies demonstrate revenue growth and achieve competitive advantage by using the Internet, chief executives and other senior corporate decision makers are realizing that eBusiness initiatives are critical for the success of their businesses. As a result, many companies are developing eBusiness applications to enable them to market and sell products and services to consumers online, offer web-based customer self-service programs, implement business-to-business supply chain management solutions, and migrate other operational functions online. IDC estimates that spending on software applications and services for Internet commerce will grow from $7.8 billion in 1998 to $53.8 billion in 2002. In this prospectus we refer to the use of the Internet to conduct business generally as "Internet commerce" or "eBusiness." Moving Online Successfully. To compete online and to capitalize on Internet revenue opportunities, businesses must rapidly build a differentiated presence on the web and must continuously maintain and extend that presence. Since first-mover advantage is amplified on the web, companies must deploy high quality eBusiness applications quickly to create an online brand and establish a loyal base of customers. Accelerating the time required to develop and deploy eBusiness applications, or time-to-web, is essential to attracting customers and generating revenue opportunities. In addition, to retain customers, a company must differentiate its web site from competing sites by offering rich, accurate and relevant content. Once customers discover value in a web site, they may be less likely to visit competing web sites. Web site reliability is also important, since customers are only a click away from competitors' sites and may lose patience with an incomplete or non-functioning web site. Moreover, poor quality web sites can easily damage a business' online brand. Evolving Web Sites. As a result of this competitive environment and the available online business opportunities, web sites have rapidly evolved from simple online corporate brochures to complex online storefronts. Early web sites contained relatively limited content, consisting primarily of static text and simple graphics. This content was infrequently updated and web sites required only a few developers to build and 29 maintain them. Today, companies are seeking to differentiate their online presence and to become leaders on the Internet by transforming their businesses through sophisticated eBusinesses applications featuring content-rich web sites. In many cases, the content on these web sites must be updated on a daily or hourly basis to meet consumer expectations and to exploit emerging business opportunities. For example, a large online retailer may need to showcase tens of thousands of products through the use of graphic images and product descriptions. All of this information must be continuously refreshed as products are introduced or discontinued and as descriptive product information is revised. As the volume of web content has grown and sophisticated eBusiness applications have emerged, the responsibility for the development and management of web content has shifted from a few developers in small web teams to many contributors working in different departments across the enterprise. Furthermore, the large number of web authoring tools and web application servers required by these applications have contributed to the increasing technological complexity involved in developing these web sites. Managing Web Content. Web content, such as high-resolution graphics, audio segments, video clips, hyperlinked text and executable software, is the basis for every web page and most eBusiness applications. IDC estimates that the number of web pages will grow from 925 million in 1998 to 13.1 billion in 2003. In addition, complex eBusiness initiatives may contain hundreds of thousands of web pages. This dramatic growth in content has created a strong need for solutions to content management problems. These solutions must be highly automated to accommodate the volume, complexity and variability of this web content. In addition, these solutions must leverage existing investments in information technology, be highly scalable, and enable participation by increasing numbers of content contributors. IDC estimates that one of the markets in which we participate, which IDC refers to as the "web development life-cycle management software" market, will grow from $76.4 million in 1998 to $1.6 billion in 2003. Market Opportunity. Until recently, businesses have attempted to satisfy their web content management needs largely through in-house solutions. In-house solutions can be expensive and difficult to maintain, which can increase the risk of delaying the launch of important eBusiness initiatives. For example, in-house solutions may need to be extensively re-engineered each time a new web authoring tool or eBusiness application is introduced. Other businesses have used third-party solutions, typically turning to either workgroup software or web publishing software. Workgroup software is generally designed to enable small groups of developers to manage relatively simple web sites. They generally do not scale to support large numbers of contributors or the increasing complexity and volume of web content. Using workgroup software may impair a company's ability to deliver up-to-date and accurate web content. Web publishing software is generally designed only to collect and display information on a web site, and because it is often proprietary, does not accommodate many popular web authoring tools or web application servers. In addition, other third-party solutions do not allow large numbers of contributors to add content to a web site, do not allow web teams to work on applications simultaneously, and do not integrate new web technologies easily, thereby slowing the deployment of eBusiness initiatives. With the proliferation of eBusiness initiatives, the need has emerged for a common infrastructure, or "platform," that can enable large and diverse groups of content contributors, accommodate popular web authoring tools, and integrate to leading web application servers. An open architecture for such a platform enables customers to leverage their existing investments in information technology and facilitates rapid adoption of new web technologies and standards. 30 The Interwoven Solution Interwoven provides web content management software that serves as a platform from which its customers may develop multiple eBusiness applications. Our software products are specifically designed to help our customers rapidly and efficiently build, maintain and extend large web sites and eBusiness initiatives that are essential to their businesses. [graphic representing web software positioning (p. 31)] A multi-layer graphical representation of web software positioning from development to delivery. The top layer consists of four boxes. The box on the far left reads "Customer Relationship Management." The next box to the right reads "Electronic Commerce." The next box to the right reads "Knowledge Management." The next box to the right reads "Global Supply Chain." The layer immediately below the top layer reads "Web Application Servers." The next layer down contains the Interwoven logo and reads "Deploy," "QA" and "Develop" and a description to the left of the layer reads "Content Management." The next layer down reads "Web Authoring Tools." The bottom layer consists of three boxes. The box on the far left reads "Non-Technical Contributors." The next box to the right reads "Business Contributors." The next box to the right reads "Technical Contributors." Our products offer customers the following primary benefits: Accelerate eBusiness Revenue Opportunities. Our products enable customers to migrate their businesses to the web rapidly, thereby increasing their ability to generate more revenues and compete more effectively. Today, the volume and complexity of web content and the number of eBusiness applications continue to grow so rapidly that it can be difficult for businesses to meet their web site development schedules. Our products enable customers to develop and deploy multiple eBusiness applications simultaneously. This approach allows companies to complete their eBusiness initiatives more rapidly. In addition, our products allow content contributors to perform quality assurance functions on content modifications, which significantly reduces testing time. Reduce Cost of Web Operations. Complex web sites can consist of up to hundreds of thousands of pages containing both static and dynamic content supplied by departments throughout the enterprise. As a result, these sites can be expensive to deploy and manage. Our products lower the costs of web operations primarily by reducing the dependency on specialized web development personnel and by improving operating efficiency through automation of workflow processes, such as task assignment, routing, and approval. Automated workflow processes can reduce the time required to assemble, test and validate new web content. In addition, our products support evolving web standards and our open architecture is compatible with third-party web authoring tools and web application servers. As a result, businesses can productively leverage their existing information technology infrastructure. 31 Create Highly Differentiated Web Sites. To attract and retain online customers, today's leading web sites continuously enhance their users' online experience. Businesses seek to achieve this by introducing new web technologies and refreshing content frequently. The open architecture of our products facilitates rapid integration of new web technologies and simultaneous development of multiple eBusiness applications, such as global supply chain management, customer relationship management, knowledge management and e- commerce applications. In addition, our products are highly scalable, permitting the collaborative efforts of hundreds of contributors to be coordinated as the need arises. Improve Web Site Quality. Protecting brand and image online has become critical for companies doing business on the Internet. Non-functioning or poor quality sites can significantly harm a business' online brand. With TeamSite, companies can create reliable, high-quality web sites. TeamSite enables our customers to conduct comprehensive testing of the entire web site as it is built, updated or extended. In addition, TeamSite promotes individual accountability, and faster and more accurate authoring, by enabling all web developers and content contributors to control their own portion of the quality assurance and test process. This improves a site's overall quality. By using sophisticated workflow processes to maintain quality control, TeamSite also ensures that no unauthorized or unapproved content or application is deployed to the customer's site. The Interwoven Strategy Our goal is to establish our software as the platform of choice for web content management across the enterprise. To achieve this goal, we intend to pursue the following key strategies: Establish Position as a Leading Provider of Content Management Software Products. We intend to establish our leadership in content management solutions by continuing to offer a comprehensive, easy-to-use software products. Our feature-rich products address our customers' complete eBusiness life-cycle needs as they build, maintain and extend their web sites. We intend to extend that leadership position by introducing enhanced web content management products that assist our customers in accelerating their eBusiness initiatives, and aggressively increasing our sales and marketing efforts. Become the Preferred Web Development Platform for Industry-Leading Internet Technology Vendors. We intend to increase demand for our products among the customers of industry-leading Internet technology vendors. We intend to do so by providing a robust web development platform to complement their own eBusiness production applications. Unlike existing closed-architecture, or proprietary products, our products are designed to integrate easily with the products of industry-leading technology providers. This is attractive to Internet technology vendors because it expands their markets and eliminates costly integration and customization. We intend to continue to strengthen our existing relationships with vendors such as Allaire, ATG, BroadVision, IBM, InterWorld, Microsoft and Netscape. We also intend to enter into additional relationships with other leading technology providers, including additional reseller relationships. We believe our products can become widely adopted as a standard web development platform across Internet technology vendors. Expand Relationships with Systems Integrators and Internet Professional Services Firms. We have begun establishing relationships with leading systems integrators, such as Andersen Consulting, and Internet professional services firms, such as USWeb/CKS. These firms provide consulting services to assist their clients in designing and developing eBusiness applications. Our existing relationships with the leading systems integrators and Internet professional services firms have allowed us to expand our market reach and increase our access to senior decision makers. These firms have significant influence on a customer's technology selection, and their recommendations represent significant endorsements. We intend to continue to expand and build additional relationships with key systems integrators and Internet professional services firms. Extend our Technology Leadership Through Adherence to Industry Standards. Our products integrate easily and cost-effectively with web authoring tools and web application servers offered by other Internet technology vendors. In addition, our products have been designed to meet the demanding openness and scalability required of Internet software products. Our open architecture supports web authoring tools and web application servers that adhere to industry standards. The scalability of our products allows customers to manage hundreds of thousands of computer files that contain web content and enables hundreds of employees throughout the enterprise to contribute web content. We intend to continue to invest significantly in research 32 and development to increase the functionality of our products while adopting industry standards. We also intend to continue to participate actively in the promotion of industry standards, such as XML. Increase International Sales. As the Internet adoption rate accelerates overseas, we believe that significant international market demand will exist for content management solutions, especially in Europe and Asia. We intend to devote significant resources to penetrate international markets. To that end, we have begun expanding our overseas direct and indirect sales channels and our international marketing presence. We have recently opened an office in the United Kingdom, and intend to open offices in Asia during the next twelve months. Products and Services Our product line consists of TeamSite, our web content management product, and OpenDeploy, our web content replication and syndication product. We generally license our products on a per-server and per-user basis and occasionally on an enterprise or site license basis. We also provide services, including professional services, maintenance and support. The following table highlights the features of our products: Product Description Server Platforms TeamSite 3.1 Server-based content management . Sun Solaris application . Windows NT . allows numerous developers and contributors to add content to a web site . interoperates with leading web authoring tools and web application servers . SmartContext Editing allows direct edits to web site content through a simple browser interface . supports simultaneous eBusiness application development and deployment . offers real-time testing capability and sophisticated workflow processes . offers comprehensive file versioning and whole-site versioning - -------------------------------------------------------------------------------- TeamSite Server-based content templating . Sun Solaris Templating application . Windows NT . allows content contribution using standard templates . promotes participation from non- technical contributors . allows contribution through standard web browsers . optional software module licensed with TeamSite - -------------------------------------------------------------------------------- TeamSite Reporting and auditing application . Sun Solaris Global . allows administrators to monitor system . Windows NT Report activity Center . delivers sophisticated reporting and auditing functionality . optional software module licensed with TeamSite - -------------------------------------------------------------------------------- OpenDeploy 3.0 Content replication and distribution . Sun Solaris application . Windows NT . transfers content among multiple web . IBM AIX servers simultaneously . Silicon . enables automated scheduling of web Graphics IRIX site updates . ensures conformity of web site roll-out . offers secure and transactional content deployment over the Internet - -------------------------------------------------------------------------------- 33 TeamSite -- Content Management Our flagship product, TeamSite, is a software product that is designed to develop, maintain and extend large web sites. Web Content Management. TeamSite is designed to version, manage and control all web content. It supports parallel, distributed content contribution across the enterprise. TeamSite allows large numbers of contributors across an enterprise to add web content in a carefully-managed process. TeamSite is compatible with leading web authoring tools and web application servers, allowing businesses to leverage existing investments in information technology systems, content and expertise. This enables a faster time-to-web for eBusiness initiatives. TeamSite captures and stores the history of all modifications to the web content. These content histories, or versions, are managed and tracked for individual web files and for whole web sites. Workflow. TeamSite is designed for a diverse group of users, including non-technical and technical users, participating in building and contributing content to the web site operations. To facilitate the management of these web content contributors, TeamSite automates workflow processes such as task assignment, resource scheduling, content routing, content approval and web site release. Web Application Development. TeamSite provides programmers with a software development system that accommodates their choice of software development tools. TeamSite's computer file versioning features allow programmers to track software code modifications. Using TeamSite, programmers can reduce the time required to build, install and test the developed software code by working in a copy of the running web site. The architecture of TeamSite enables businesses to implement it without making significant changes to their existing web content or systems architecture, resulting in rapid implementation. Additionally, TeamSite's open architecture allows customers to use their preferred web content authoring software, web application servers and other web-based technologies. TeamSite currently operates on Sun Solaris and Microsoft Windows NT operating systems. TeamSite was first shipped in May 1997. We first shipped the current version of TeamSite, TeamSite 3.1, in May 1999. We also license optional software modules with TeamSite that extend its functionality. TeamSite Templating allows web content to be contributed using customer-defined templates, thereby eliminating the need for contributors to be familiar with HTML or client-side applications. TeamSite Global Report Center enables TeamSite administrators to generate reports on web operations activity. OpenDeploy -- Content Replication and Syndication Our OpenDeploy software product transfers web content from development to production web servers. OpenDeploy allows users automatically and precisely to distribute the same web content to numerous servers that can be located in one or multiple sites. This "synchronizes" web content so that regardless of which server your request for a web page reaches, you view the same content. By automating this process, businesses can maximize the availability of their web sites and minimize the time required for users to access content offered by those sites. Customers using OpenDeploy can also automate the scheduled deployment of content. We believe that OpenDeploy provides the most effective method for distribution and integration of dynamic content across web sites. OpenDeploy is typically licensed with TeamSite by our customers, but it may be used on a stand-alone basis. OpenDeploy encrypts content for secure transfer over TCP/IP. The version of OpenDeploy shipped within the United States uses 128-bit SSL encryption. Due to U.S. export regulations, the international version does not utilize encryption. OpenDeploy operates on Sun Solaris, Microsoft Windows NT, IBM AIX and Silicon Graphics IRIX operating systems. We first shipped OpenDeploy in January 1998. The current version of OpenDeploy 3.0, was first shipped in May 1999. Interwoven Services Our services organization consists of 41 professional employees who utilize a comprehensive methodology to deliver our web content management products to our customers. These services professionals may configure 34 each solution they deliver to meet the specific needs of the customer. We sell our services in conjunction with licenses of our software products. These services include: .needs analysis and web operations strategy; .software installation and configuration support; .project management; .workflow mapping; .content and web site release management; and .education and training. In addition to professional services, we offer various levels of product maintenance to our customers. Maintenance services are typically subject to an annual, renewable contract and are typically priced as a percentage of product license fees. Customers under maintenance contracts receive technical product support and product upgrades as they are released throughout the life of the maintenance contracts. Technology We believe that our technology offers our customers and partners a highly- scalable web content management solution that is implemented through an open architecture that incorporates widely accepted Internet industry standards and supports a wide variety of web-based software applications. Our products are specifically designed for the web. Our customers typically use our technology as the platform to manage their enterprise-wide web content operations. Content Management Process. The following graph illustrates how TeamSite manages content: [flow diagram representing web workflow process (p. 35)] A flow chart consisting of several icons representing the web workflow process. The column of icons on the far left consists of (from top to bottom) an icon of cascading pages labeled "Text, graphics, audio;" an icon of cascading pages labeled "Templates;" an icon of cascading pages labeled "Executable code & scripts;" and a cylindrical icon labeled "Database." Arrows lead from this column of icons to two circular icons to the right labeled "Work Areas." Arrows lead from here through a user approval area to a large rectangular icon of cascading pages labeled "Staging Area." An arrow leads from here through a final approval area to another large rectangular icon of cascading pages labeled "Edition." Three arrows lead to the right from this icon to a column of cylindrical icons labeled "E-Commerce," "Intranet" and "syndicated Extranet." Collaboration Through Work Areas, Staging Areas and Editions. TeamSite provides a virtual work area for each contributor. A virtual work area is a local, desktop web site representation that appears to a contributor as a complete, fully-functioning web site. This provides web developers and contributors the ability to see changes instantaneously in the development environment as they would appear in the actual production site. 35 This approach improves quality by promoting individual accountability, allowing web developers to discover costly bugs and helping web contributors prevent deployment of inaccurate content to the production site. Users submit revised content from work areas to a common staging area, a pre-production version of the web site which consolidates web site changes. After the consolidated changes in the staging area are approved, the next edition of the production site can be authorized and deployed. This content management process makes site-level rollbacks, site recovery and site audits possible. Content Versioning. TeamSite captures the history of modifications to web content within each contributors' work area as well as the content within the common staging area. Our comprehensive content versioning technology allows customers to record and manage all web content modifications and capture complete histories of all web files. TeamSite Global Report can then be used to audit and report on historical changes made to a company's web files and site. Whole-Site Versioning. An extension of our techniques for content versioning allows TeamSite to capture editions of the entire web site. As the content for an edition of an entire web site is approved, a full version of this site can be captured and recorded providing a complete history of whole site editions. This provides customers with an effective way to review and roll back to previous editions of their web sites as necessary for audit, disaster recovery and compliance requirements. Concurrent Development. TeamSite supports multiple contributors working on a single project, and multiple teams working on many projects simultaneously, by utilizing a technique we refer to as branching. A development branch typically consists of many work areas connected to one staging area. Branches, for example, might represent a company's intranet and extranet sites. When required, the content within these independent branches can be synchronized. Templating Our TeamSite Templating module enables non-technical content contributors to add content through customer-specific style templates, allowing a preferred look and feel to be leveraged where desired. Product Features Open Architecture. Our architecture incorporates widely accepted Internet industry standards and supports a wide variety of web-based software applications to integrate into our customers' heterogeneous environments. As a result, TeamSite also integrates with commercially available content web authoring tools and web application servers that adhere to industry standards. This allows our customers' content contributors to use their favorite web authoring software. For example, a graphics designer may use Adobe Photoshop, a layout expert may use Macromedia Dreamweaver, and a non-technical contributor may use Microsoft Office 2000, to add content to a site. In addition, TeamSite's browser interface has been developed primarily in Java and JavaScript. Project Management and Workflow. TeamSite allows customers to manage web development tasks through automated workflow processes, such as task assignment, resource scheduling, routing and approval. This enables TeamSite users to build, enforce and automate the business processes necessary to maintain high-quality web sites. Ease of Use. Our SmartContext Editing feature provides non-technical users with a simple and efficient interface for contributing content as they browse through the web site. With SmartContext Editing, non-technical contributors are only required to be familiar with a web browser. For web sites with many content contributors, TeamSite offers an easy to use, sophisticated, technique for tracking multiple content changes and merging them into a single file. Deployment and Content Syndication. OpenDeploy allows customers to deploy content to numerous web sites through a single transaction to ensure consistent site roll-outs. In addition, it can be used to deploy and run 36 application programs automatically as well as to replicate content from relational databases. OpenDeploy can also be used in an encrypted mode for the secure deployment of content over the Internet. Scalability, Performance and Availability Scalability and Performance. TeamSite uses a multi-threaded approach to promote faster server performance through parallel software code execution. It also uses C++ and object-oriented programming to promote scalability and performance. In addition, OpenDeploy can distribute content to a single or to multiple production web servers simultaneously. This content replication functionality meets the requirements for the most demanding web sites that are often located on geographically dispersed servers. Availability. Our design also promotes reliability and availability by allowing customers to employ their normal data backup and recovery tools. In addition, critical data is duplicated, providing the necessary redundancy for data recovery to minimize the potential for data loss. Industry Standards Open to All Files, Tools and Applications. Unlike proprietary, closed implementations, our products have been developed to accommodate industry leading Internet technologies, such as XML and Java, and other evolving industry standards. The TeamSite server presents its content through popular file management systems such as Unix Network File System and Microsoft Windows Network File System. eXtensible Markup Language. XML provides customers the ability to integrate new applications and data with other XML-compliant technologies and legacy applications. Together with companies such as Microsoft and IBM, we are a sponsoring member of OASIS, an industry association promoting XML standards. Our products use and support XML, and promote XML for data and content exchange. 37 Customers Our products and services are marketed and sold to a diverse group of customers operating in a broad range of industries. Our customers include both established companies migrating their operations online and new companies formed specifically to deliver products and services over the Internet. These customers typically consider the web and their web operations to be critical to their future success. As of August 31, 1999, over 85 companies had licensed our products. In 1998, Cisco Systems accounted for 13% of our total revenues. The following table is a representative list of our customers. Each of these customers had purchased more than $50,000 in licenses and services from us. In August 1999 we entered into an enterprise license agreement with General Electric. Technology Consulting Services Media/Entertainment AIM Technology Dahlin, Smith & White CondeNet AltaVista DynaMind Discovery Online Ascend/Lucent iXL Educational Testing Cisco Systems MacLaren McCan Service Documentum USWeb/CKS Hungry Minds Doublebill.com Los Angeles Times Electronic Arts Retail M-Path Hitachi Best Buy MyPlay How 2 HQ Gap Netflicks.com MicroAge Walgreens Quokka Sports NCR Sega Network Associates Financial Services Viacom/Nickelodeon Nortel Networks AG Edwards whynotu.com Novell BancBoston Sun Microsystems BancTec Industrial/Transportation TechRepublic Barclays Global Boeing Tivoli E*Trade Clorox Xerox Ford Motor Credit FedEx Yahoo!/GeoCities John Hancock General Electric First American Financial United Airlines Telecommunications/ Corporation W.W. Grainger Utilities Minnesota Life Yellow Services Alltel AT&T/TCI Health Government BellSouth Blue Cross California U.S. Department of Interpath Kaiser Education Salt River Project PacificCare U.S. Postal Service Telia Customer Case Studies The following case studies exemplify eBusiness initiatives that have utilized our products: Educational Testing Service. Educational Testing Service, the world's largest private educational measurement organization, annually administers almost 11 million tests in 180 countries worldwide. Since 1996, ETS has been using the Internet to provide a cost-effective, self-service source of updated information for its international customer base. ETS has moved much of its traditional business to the web in order to reduce operating costs and improve customer service. Its multiple web sites provide information on admission to colleges and universities, test registration and preparation, financial aid planning and services, to hundreds of thousands of students, parents and educators each year. 38 Educational Testing Service uses TeamSite to support its online business initiatives, such as online registration for exams, free online practice exams and preparatory information, as well as direct sales of its products. Nortel Networks. Nortel Networks, with 1998 revenues of $17.6 billion and 75,000 employees worldwide, is a leader in voice and data networking equipment. Nortel has been using TeamSite for over 18 months to manage and control globally dispersed content contributors for six different web sites. Nortel's customers include public and private enterprises and institutions, Internet service providers, local, long-distance, cellular and PCS communications companies, cable television carriers, and utilities. Nortel uses TeamSite to deploy content to its corporate web site, e-commerce systems, and a dynamic personalized customer portal. The content for these sites is developed and managed by Nortel Networks marketing teams, service teams, and external agencies but is centrally controlled and supported through TeamSite. The staff required to manage this initiative is kept to a minimum by leveraging TeamSite's ability to distribute web publishing responsibilities to many contributors. Nortel also uses TeamSite to control and support the web operations of its international divisions. Today, web contributors from four continents participate in the development of six multilingual web sites for Nortel, which translates content into many languages including Chinese, Japanese, French, Spanish and others. AltaVista. AltaVista is a leading media and commerce network that integrates unique technology, products and services. AltaVista seeks to deliver best-of- breed results by integrating content and functionality from both within the AltaVista network and through external partners. AltaVista has chosen Interwoven TeamSite as its global content management platform. Since its foundation four years ago, AltaVista has provided its loyal base of web users a broad range of Internet services. As part of its infrastructure requirement, AltaVista required a robust scalable platform to support its dynamic environment. AltaVista chose TeamSite as its content management platform. Demonstrating its ease of implementation, AltaVista installed and implemented TeamSite in less than one week. TechRepublic. TechRepublic offers a free web service that provides career insight, community interaction and customized information to information technology executives and strategists, network administrators, support training and other enterprise computing professionals. Its web site provides ready access to critical information through personalized news, analysis and original content written by expert contributors. TechRepublic selected TeamSite to develop and manage its rapidly changing web site. Since TechRepublic offers articles and information which must be published and frequently updated by contributors who work remotely. This content is routed through a series of editors for revision and approval before the content is finally deployed to the site. With near-constant updates, TechRepublic required a content management solution with robust workflow functionality and easy remote access. TeamSite provides TechRepublic with an ideal solution to its workflow problem because it allows timely central approval and publishing control of the content assigned to outside contributors. TeamSite also uses our OpenDeploy to provide secure, rules-based web content replication across multiple servers and distribution over the Internet. Technology Vendors and Service Providers Technology Vendors To ensure that our products are well integrated with related web technologies, we work with vendors of web authoring tools and web application servers. Web authoring tools, such as Macromedia's Dreamweaver, Microsoft's Office 2000 and Adobe's Photoshop, provide the content that we manage. Web application servers, such as Allaire's ColdFusion, ATG's Dynamo, BroadVision's One-to-One Commerce, IBM's Net.Commerce 39 and Microsoft's SiteServer, distribute the content managed by our software over the Internet. We have developed specific product interfaces for some of these companies, such as software and service modules for BroadVision and ATG, and some companies refer customers to us or resell our products. BroadVision, for example, resells our products. Service Providers We work with leading systems integrators, including Andersen Consulting, Cambridge Technology Partners, Computer Sciences Corporation, EDS, Ernst & Young and KPMG, and Internet professional services firms, including iXL, Ogilvy Interactive and USWeb/CKS. Our prospective customers frequently retain the services of these firms for the delivery and implementation of eBusiness applications, and these firms may recommend a content management solution as part of the eBusiness application they deliver. USWeb/CKS, for example, resells our products. We intend to devote significant resources to develop these relationships further. We believe that these relationships with these entities are essential as we continue to seek to integrate our products with current and future web technologies and deploy and implement our solution at customer sites. Our relationships with technology providers and service providers are not binding, however, and can be terminated by these providers at any time. Sales and Marketing To date, we have sold our products and services primarily through our direct sales force in North America and Europe. As of August 31, 1999, we had 36 professionals in our direct sales force, of which 34 were located in the United States and 2 were in Europe. We intend to increase the size of our direct sales force and establish additional sales offices domestically and internationally. In May 1999, we opened our first international sales office in the United Kingdom to support the management of direct and indirect sales channels in Europe. We are also aggressively developing our indirect sales channel by expanding our relationships with leading Internet technology vendors, Internet professional services firms and systems integrators that recommend and, when appropriate, resell our products. For example, BroadVision and USWeb/CKS currently resell our products. We believe that demand is increasing for content management solutions such as those we sell. We may not be able to expand our sales and marketing staff, either domestically or internationally, to take advantage of any increase in demand for those solutions. Our failure to expand our sales and marketing organization or other distribution channels could materially adversely affect our business. See "Risk Factors--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." Research and Development We invest significantly in research and development to enhance our current products, and develop new products. Our research and development expenses were $884,000 in 1997, $1.8 million in 1998 and $1.7 million for the six months ended June 30, 1999. We expect that we will increase our product development expenditures substantially in the future. As of August 31, 1999, approximately 31 employees were engaged in research and development activities and we plan to continue to hire additional engineers to further our research and development activities. Our business could be harmed if we were not able to hire and retain the required number of engineers. See "Risk Factors--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." We may fail to complete our product development efforts within our anticipated schedules, and even if completed, the products developed may not have the features necessary to make them successful in the marketplace. Future delays or problems in the development or marketing of product enhancements or new 40 products could harm our business. See "Risk Factors--Difficulties in introducing new products and upgrades in a timely manner will make market acceptance of our products less likely." Competition The market for content management solutions is rapidly emerging and is characterized by intense competition. We expect existing competition and competition from new market entrants to increase dramatically. A growing number of companies are vying to provide web content management solutions. In this market, new products are frequently introduced and existing products are often enhanced. In addition, new companies, or alliances among existing companies, may be formed that may rapidly achieve a significant market position. Potential customers may have developed in-house solutions which might make it more difficult for us to sell products to them. We compete with third-party content management solution providers, primarily Vignette, and, to a lesser extent, with workgroup solutions, and content publishing application providers. We may face increased competition from these providers in the future. Other potential competitors include client/server software vendors which are developing or extending existing products which address our market. In addition, although we currently partner with a number of companies that provide complementary products such as web tools, enterprise document repositories and web servers, they may introduce competitive products in the future. Other large software companies, such as Microsoft and IBM, may also introduce competitive products. Many of our existing and potential competitors have greater technical, marketing and financial resources than we do. We believe that competitive factors in the web content management industry include: . the quality, scalability and reliability of software; . functionality that enables a broad base of contributors to add and modify web content; . interoperability with all leading web authoring tools and web application servers based on industry standards; . ability to provide advanced workflow functionality; . the ability to leverage existing information technology infrastructure; and . adherence to emerging industry standards, including XML. We believe our products compete favorably on each of these factors. Proprietary Rights and Licensing Our success depends upon our ability to maintain the proprietary aspects of our technology and operate without infringing the proprietary rights of others. We rely on a combination of patent, trademark, trade secret and copyright law, and contractual restrictions, to protect the proprietary aspects of our technology. We seek to protect our source code for our software, documentation and other written materials under trade secret and copyright laws. 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. These legal protections afford only limited protection for our technology. Our license agreements impose restrictions on our customers' ability to utilize our software. We also seek to protect our intellectual property by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements with us and by restricting access to our source code. There can be no assurance that all employees or consultants have signed or could sign these agreements. Due to rapid technological change, we believe that factors such as the technological and creative skills of our personnel, new product developments and enhancements to existing products are equally as important as the various legal protections of our technology to establishing and maintaining a technology leadership position. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult and while we are unable to determine the extent to which piracy of our software exists, software piracy can be expected to be a persistent problem. Litigation may be necessary in the future to enforce 41 our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. However, the laws of many countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Any resulting litigation could result in substantial costs and diversion of resources and could seriously harm our business, operating results and financial condition. There can be no assurance that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology. Any failure by us to meaningfully protect our property could seriously harm our business, operating results and financial condition. To date, we have not been notified that our products infringe the proprietary rights of third parties, but there can be no assurance that third parties will not claim infringement by us with respect to our current or future products. We expect that developers of web-based commerce software products will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and as the functionality of products in different segments of the software industry increasingly overlaps. Any claims, with or without merit, could be time-consuming to defend, result in costly litigation, divert management's attention and resources, cause product shipment delays or require us to enter into royalty or licensing agreements. These royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all. A successful infringement claim against us and our inability to license the infringed technology or develop or license technology with comparable functionality could seriously harm our business, financial condition and operating results. See "Risk Factors--We might not be able to protect and enforce our intellectual property rights, loss of which could harm our business." Employees As of August 31, 1999, we had a total of 159 employees, including 69 in sales and marketing, 31 in research and development, 41 in professional services and 18 in administration and finance. Of these employees, 156 were located in the United States and 3 were located in the United Kingdom. None of our employees is represented by a collective bargaining agreement, nor have we experienced any work stoppage. We consider our relations with our employees to be good. Our future operating results depend in significant part on the continued service of our key technical, sales and senior management personnel. Other than as described in "Management--Employment and Severance Agreements," none of these individuals is bound by an employment agreement. Our future success also depends on our continuing ability to attract and retain highly qualified technical, sales and senior management personnel. Competition for these personnel is intense, and we may not be able to retain our key technical, sales and senior management personnel or attract these personnel in the future. We have experienced difficulty in recruiting qualified technical, sales and senior management personnel, and we expect to experience these difficulties in the future. If we are unable to hire and retain qualified personnel in the future, this inability could seriously harm our business. Facilities Our principal office occupies approximately 27,500 square feet in Sunnyvale, California, under a lease that expires in May 2003. In addition, we also lease sales and service offices in the metropolitan areas of Atlanta, Boston, Chicago, Dallas, London, Los Angeles, New York City, Seattle and Washington, D.C. In July, we moved our services organization to expanded facilities located in approximately 12,600 square feet in Sunnyvale, California. Our lease for this facility expires in December 2000. We believe that our existing facilities will not be adequate for our current needs. We are currently in the process of locating additional office space for expansion or relocation of our principal offices. There can be no assurance that suitable additional or alternative space will be available in the future on commercially reasonable terms. Legal Proceedings We are not a party to any material legal proceedings. We could become involved in litigation from time to time relating to claims arising out of our ordinary course of business. 42 MANAGEMENT Executive Officers and Directors The following table presents information regarding our executive officers and directors as of August 31, 1999.
Name Age Position - ---- --- -------- Martin W. Brauns............ 39 President, Chief Executive Officer and Director Peng T. Ong................. 36 Chairman of the Board and Vice President of Professional Services David M. Allen.............. 41 Vice President and Chief Financial Officer Michael A. Backlund......... 45 Vice President of Sales Jeffrey E. Engelmann........ 38 Vice President of Business Development Jack S. Jia................. 36 Vice President of Engineering Jozef Ruck.................. 47 Vice President of Marketing Kathryn C. Gould............ 49 Director Mark W. Saul................ 38 Director Mark C. Thompson............ 42 Director Ronald E.F. Codd............ 44 Director
Martin W. Brauns has served as our President, Chief Executive Officer and member of the Board of Directors since March 1998. Before joining Interwoven, Mr. Brauns served as President and Chief Operating Officer of Sqribe Technologies, Inc., a software company from July 1997 to November 1997. From March 1996 to June 1997, Mr. Brauns served in a number of positions, including most recently as Vice President of North American Sales, at Informix Software, Inc., a software company. From 1992 to January 1996, Mr. Brauns served as Vice President of Worldwide Sales of Adaptec Inc., a hardware and software manufacturer. Mr. Brauns holds a Bachelor of Science in international business and a Master of Business Administration from San Jose State University. Peng T. Ong is our founder, Chairman of our Board of Directors and Vice President of Professional Services. Prior to founding Interwoven, Mr. Ong was a founder of Electric Classifieds, Inc., an Internet classifieds company, and its Chief Architect from March 1994 to May 1995. From 1994 to December 1995, he served as a consultant to Illustra Information Technologies, Inc., a software company. Mr. Ong holds a Bachelor of Science in electrical engineering from the University of Texas at Austin and a Master of Science in computer science from the University of Illinois at Urbana-Champaign. David M. Allen has served as our Vice President and Chief Financial Officer since joining Interwoven in March 1999. Before joining Interwoven, Mr. Allen served as Vice President and Chief Financial Officer of Object Systems Integrators, Inc., a telecommunications network management company, from July 1996 to March 1999. From 1985 to July 1996, he served in a number of positions, including most recently as Vice President and Chief Financial Officer, at Telecommunications Techniques Corporation, a communications test equipment manufacturing company. Mr. Allen holds a Bachelor of Science in accounting from the University of Maryland. Michael A. Backlund has served as our Vice President of Worldwide Sales since joining Interwoven in May 1998. From January 1997 to May 1998, Mr. Backlund served in a number of positions at Computer Associates International, a software company, including most recently as Vice President of Divisional Sales. Prior to joining Interwoven, he was a founder of CMS Communications, Inc., a telecommunications equipment company, and served in a number of capacities from August 1986 to December 1996, including most recently as Vice President of Sales and Marketing. Mr. Backlund holds a Bachelor of Arts and a Master of Arts in economics from the University of Southern California. Jeffrey E. Engelmann has served as our Vice President of Business Development since joining Interwoven in January 1999. Before joining Interwoven, Mr. Engelmann served as Executive Operations Officer of the Internet division of IBM. From 1991 to December 1997, he served in a number of development, consulting and 43 sales positions within IBM, including most recently as Business Unit Executive of eBusiness Solution Sales. Mr. Engelmann holds a Bachelor of Science in chemical engineering and an Bachelor of Arts in computer science from the University of Wisconsin at Madison. Jack S. Jia has served in a variety of positions, including most recently as our Vice President of Engineering, since joining Interwoven in January 1997. Prior to joining Interwoven, Mr. Jia was a founder of V-Max America, Inc., a computer distribution company, and served as the Chief Executive Officer from June 1993 to October 1998. From May 1995 to January 1997, he served as a Project Manager at Silicon Graphics, Inc., a computer systems company, and from January 1993 to May 1995, he served in a number of senior engineering positions at Sun Microsystems, Inc., a computer systems company. Mr. Jia holds a Bachelor of Science in electrical engineering and a Master of Science in computer science from the Northern Jiao-Tong University, Beijing, a Master of Science in electrical engineering from Polytechnic University of New York, and a Master of Business Administration from Santa Clara University. Jozef Ruck has served as our Vice President of Marketing since joining Interwoven in March 1999. From April 1997 to April 1999, Mr. Ruck served in a number of positions at Genesys Telecommunications Laboratories, a call center software company, including most recently as Vice President of Customer Marketing. From September 1994 to March 1997, he served in a number of positions, including most recently as Western Region Sales Director, at Network Appliance, Inc., a data storage company. Mr. Ruck holds a Bachelor of Science in mechanical engineering from Oregon State University and a Master of Business Administration from Santa Clara University. Kathryn C. Gould has been one of our directors since March 1998. She is a founder of Foundation Capital, a venture capital firm, and has been a member since December 1995. Since 1989, Ms. Gould has been a general partner of Merrill, Pickard, Anderson & Eyre, a venture capital firm. Ms. Gould also serves as a director of Documentum, Inc., a publicly held web-based software application developer. Ms. Gould holds a Bachelor of Science in physics from the University of Toronto and a Master of Business Administration from the University of Chicago. Mark W. Saul has been one of our directors since July 1997. Since June 1996, Mr. Saul has served as President and Chief Executive Officer and Chairman of the Board of Acuity Corporation, a web-based customer interaction solutions company. From May 1995 to May 1996, Mr. Saul was Vice President of Marketing for Network Appliance, Inc. From March 1994 to May 1995, he served as Vice President of World Wide Field Operations of Minerva Systems, Inc., a video technology company. Mr. Saul holds a Bachelor of Arts in history and a Bachelor of Science in engineering from Stanford University and a Master of Business Administration from the Harvard Business School. Mark C. Thompson has been one of our directors since July 1999. Since 1988, Mr. Thompson has served in a number of positions with Charles Schwab since 1988, a financial services center, including most recently Senior Vice President and Executive Producer of Schwab.com. Mr. Thompson holds a Bachelor of Arts in international relations, and a Master of Arts in new media from Stanford University. Ronald E.F. Codd has been one of our directors since July 1999. Mr. Codd has served as President, Chief Executive Officer and a director of Momentum Business Applications, Inc., a publicly held software company, since January 1999. From 1991 to December 1998, he served as Senior Vice President, Finance and Administration, Chief Financial Officer and Secretary of PeopleSoft, Inc., an enterprise software developer. Mr. Codd also serves on the board of directors of Adept Technology, Inc., a robotics manufacturer, Information Advantage, Inc., a enterprise software developer and marketer, and Intraware, Inc., a provider of business-to-business e-commerce services. Mr. Codd holds a Bachelor of Science in accounting from the University of California at Berkeley and a Master of Management from the J.L. Kellogg Graduate School of Management (Northwestern University). There are no family relationships among any of our directors or officers. 44 Board Composition We currently have six directors. Our bylaws state that our board of directors will be divided into three classes: Class I, the term for which will expire at the annual meeting of stockholders to be held in 2000, Class II, the term for which will expire at the annual meeting of stockholders to be held in 2001, and Class III, the term for which will expire at the annual meeting of stockholders to be held in 2002. At each annual meeting of stockholders after the initial classification, the successors to directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following election. The Class I directors are Messrs. Brauns and Saul; the Class II directors are Mr. Peng and Ms. Gould; and the Class III directors will be Messrs. Thompson and Codd. In addition, our bylaws provide that the authorized number of directors may be changed only by resolution of the board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the total number of directors. This classification of the board of directors may have the effect of delaying or preventing a change in control. See "Description of Capital Stock-- Anti-Takeover Provisions." Board Committees Our board of directors has a compensation committee and an audit committee. Compensation Committee. The current members of our compensation committee are Mr. Saul and Ms. Gould. The compensation committee reviews and makes recommendations to our board concerning salaries and incentive compensation for our officers and employees. The compensation committee also administers our stock plans. Audit Committee. The current members of our audit committee are Messrs. Codd and Thompson. Our audit committee reviews and monitors our financial statements and accounting practices, makes recommendations to our board regarding the selection of independent auditors and reviews the results and scope of the audit and other services provided by our independent auditors. Compensation Committee Interlocks and Insider Participation Before April 1, 1998, our board of directors did not have a compensation committee and all compensation decisions were made by the full board of directors. In April 1998, the Company formed a compensation committee consisting of Mr. Brauns, Ms. Gould and Eileen Richardson, a former director. No compensation decisions were made by this committee in 1998; rather, all compensation decisions were made by the full board of directors. No interlocking relationship exists between our board of directors or compensation committee and the board of directors or compensation committee of any other company, nor has an interlocking relationship existed in the past. Preferred Stock Financings. Entities associated with Foundation Capital purchased 2,480,419 shares of Series C Preferred Stock at $1.6186 per share in March 1998, 613,896 shares of Series D Preferred Stock at $2.80668 per share in October 1998 and 146,666 shares of Series E Preferred Stock at $8.49 per share in June 1999. Ms. Gould is a member of Foundation Capital and may be deemed to own beneficially the shares held by entities associated with Foundation Capital. Loan to Martin W. Brauns. In March 1998, we loaned $240,000 to Mr. Brauns, our President and Chief Executive Officer, secured by a promissory note and stock pledge agreement, in connection with his purchase of 1,333,333 shares of our common stock. The note accrued interest at a rate of 6% per year and has been paid in full. 45 Director Compensation Our directors receive no cash compensation for their services as directors but are reimbursed for their reasonable expenses in attending board and board committee meetings. Each eligible director who is not our employee and who is a member of the board on the completion of this offering will be granted an option to purchase 10,000 shares of common stock under our 1999 Equity Incentive Plan, unless that director has previously received an option grant before the effective date of this offering. Each eligible director who is not our employee and who first becomes a member of our board on or after the completion of this offering will be granted an option to purchase 20,000 shares of common stock under our 1999 Equity Incentive Plan. Mr. Codd and Mr. Thompson were each granted an option to purchase 20,000 shares of Common Stock under our 1998 Stock Option Plan in July 1999. Ms. Gould and Mr. Saul will each be granted an option to purchase 10,000 shares of Common Stock under the 1999 Equity Incentive Plan on the effective date of this offering. Immediately following each annual meeting of our stockholders, each eligible director will automatically be granted an additional option to purchase 10,000 shares under the plan if the director has served continuously as a member of the board for at least one year. The options will have 10-year terms and will terminate three months following the date the director ceases to be one of our directors or consultants or 12 months following that date if the termination is due to death or disability. All options granted under the plan will be fully vested and immediately exercisable as of the date of grant. Executive Compensation The following table presents compensation information for 1998 paid to or accrued by each person serving as our chief executive officer in 1998 and each of our four other most highly compensated executive officers whose salary and bonus for 1998 was more than $100,000. The restricted stock value is calculated based upon a $0.39 per share purchase price and assuming that the estimated fair market value on the date of grant is equal to an assumed initial public offering price of $11.00 per share. On December 31, 1998, Mr. Brauns held 1,333,333 shares of our common stock pursuant to a restricted stock award and subject to our right to repurchase these shares upon termination of his employment. Our repurchase right expires ratably over a 48 month period from March 1998. If declared by the board, dividends will be paid on Mr. Brauns' restricted stock award. If the value of the common stock on December 31, 1998, had been $11.00 per share, the value of Mr. Brauns' restricted stock award at that time would have been $14,146,663. Summary Compensation Table
Long Term Annual Compensation Compensation Awards ------------------------------ ---------------------- Other Securities Name and Principal Annual Restricted Underlying Positions Salary Bonus Compensation Stock Award Options - ------------------ -------- -------- ------------ ----------- ---------- Martin W. Brauns......... $206,119 $100,000 $320 $14,146,663 -- President and Chief Executive Officer Steven Farber............ 93,060 -- -- -- -- President and Chief Executive Officer John Chang............... 134,186 67,167 960 -- 46,666 Vice President of Marketing Peng T. Ong.............. 114,315 125,000 -- -- -- Chairman and Vice President of Professional Services Michael A. Backlund...... 80,826 65,450 -- -- 156,666 Vice President of Sales Jack S. Jia.............. 104,988 55,000 960 -- 96,666 Vice President of Engineering
Mr. Farber's employment with us terminated as of August 1, 1998. Mr. Chang's employment with us terminated as of March 31, 1999. The amounts listed under the column captioned "Other Annual Compensation" represent payments in lieu of health insurance premiums paid by us. 46 Option Grants in 1998 The following table presents the grants of stock options under our 1996 Stock Option Plan and 1998 Stock Option Plan during 1998 to each person serving as our chief executive officer and each of the persons listed in the Summary Compensation Table. All options granted under the 1996 plan and 1998 plan are immediately exercisable and are either incentive stock options or nonqualified stock options. We have a right to repurchase the shares issued upon exercise of these options at the original purchase price if they are unvested at the time the grantee terminates employment with us. This repurchase right generally lapses as to 25% of the shares on the first anniversary of the date of grant and the remainder expire ratably over a 36-month period thereafter. We have also granted nonqualified stock options that do not contain a repurchase right or contain repurchase terms that are negotiated between the optionee and us. Options expire 10 years from the first date of employment. Options were granted at an exercise price equal to the fair market value of our common stock, as determined by our board, on the date of grant. In 1998, we granted to our employees and consultants options to purchase a total of 824,425 shares of our common stock. The 5% and 10% assumed annual rates of stock price appreciation are required by the rules of the Securities and Exchange Commission and do not represent our estimate or projection of future common stock prices. The potential realizable values at 0%, 5% and 10% appreciation are calculated by assuming that the estimated fair market value on the date of grant, based upon an assumed initial public offering price of $11.00 per share, appreciates at the indicated rate for the entire term of the options and that the option is exercised at the exercise price and sold on the last day of its term at the appreciated price.
Individual Grants --------------------------------------------- Potential Realizable Value at Assumed Number of Percent of Annual Rates of Stock Securities Total Options Price Appreciation Underlying Granted to Exercise for Option Term Options Employees Price Expiration -------------------------------- Name Granted in 1998 Per Share Date 0% 5% 10% - ---- ---------- ------------- --------- ---------- ---------- ---------- ---------- Martin W. Brauns........ -- -- % $ -- -- $ -- $ -- $ -- Steven Farber........... -- -- -- -- -- -- -- John Chang.............. 46,666 5.7 0.18 3/5/08 504,926 827,754 1,323,036 Peng T. Ong............. -- -- -- -- -- -- -- Michael A. Backlund..... 156,666 19.0 0.21 5/26/08 1,690,426 2,774,217 4,436,964 Jack S. Jia............. 23,333 2.8 0.18 3/5/08 252,436 413,877 661,518 13,333 1.6 0.18 5/7/08 144,263 236,499 378,006 60,000 7.3 0.21 10/15/08 647,400 1,062,470 1,699,270
47 Aggregate Option Exercises in 1998 and Option Values at December 31, 1998 The following table presents the number of shares acquired and the value realized upon exercise of stock options during 1998 and the number of shares of common stock subject to "exercisable" and "unexercisable" stock options held as of December 31, 1998 by each of the persons listed in the Summary Compensation Table. Also presented are values of "in-the-money" options, which represent the positive difference between the exercise price of each outstanding stock option and an assumed initial public offering price of $11.00 per share. Each of these options was exercisable immediately upon grant, subject to our right to repurchase the option shares at the exercise price upon termination of the optionee's employment. The repurchase right generally expires as to 25% of the shares on the first anniversary of the date of grant and the remainder expires ratably over a 36-month period thereafter. The amounts shown under the columns "Value Realized" and "Value of Unexercised In-the-Money Options at December 31, 1998" are based on an assumed initial public offering price of $11.00 per share, net of the exercise price payable for these shares.
Number of Securities Value of Unexercised Number of Underlying Unexercised In-the-Money Options at Shares Options at December 31, 1998 December 31, 1998 Acquired on Value ------------------------------- ------------------------- Name Exercise Realized Exercisable(1) Unexercisable(1) Exercisable Unexercisable - ---- ----------- ---------- -------------- ---------------- ----------- ------------- Martin W. Brauns........ -- $ -- -- -- $ -- $ -- Steven Farber........... 130,666 1,415,166 -- -- -- -- John Chang.............. -- -- 55,000 111,666 600,050 1,214,077 Peng T. Ong............. -- -- -- -- -- -- Michael A. Backlund..... -- -- -- 156,666 -- 1,690,426 Jack S. Jia............. -- -- 28,750 127,916 313,663 1,385,064
- --------------------- (1) Options granted under our stock option plans are generally exercisable immediately but the shares acquired upon exercise are subject to lapsing rights of repurchase at the exercise price. The heading "exercisable" refers to shares as to which our right of repurchase has lapsed. The heading "unexercisable" refers to shares that we still have the right to repurchase upon termination of the optionee's employment. Employee Benefit Plans 1996 Stock Option Plan. As of August 31, 1999, options to purchase 22,332 shares of common stock were outstanding under the 1996 Stock Option Plan and options to purchase 610,994 shares had been exercised, but remain subject to our repurchase right. No additional options may be granted under this plan. Options granted under the stock option plan are subject to terms substantially similar to those described below with respect to options granted under the 1999 Equity Incentive Plan. 1998 Stock Option Plan. As of August 31, 1999, options to purchase 1,057,555 shares of common stock were outstanding under the 1998 Stock Option Plan, options to purchase 411,273 shares remained available for issuance and options to purchase 1,189,508 shares had been exercised, but remain subject to our repurchase right. No additional options may be granted under this plan. Options granted under the stock option plan are subject to terms substantially similar to those described below with respect to options granted under the 1999 Equity Incentive Plan. 1999 Equity Incentive Plan. On July 22, 1999, the board adopted the 1999 Equity Incentive Plan and reserved 2,900,000 shares of common stock to be issued under this plan. In addition, shares under the 1996 Stock Option Plan and the 1998 Stock Option Plan not issued or subject to outstanding grants on the date of this prospectus and any shares issued under these plans that are forfeited or repurchased by us or that are issuable upon exercise of options that expire or become unexercisable for any reason without having been exercised in full will be available for grant and issuance under the equity incentive plan. Shares will again be available for grant and issuance under the equity incentive plan that: . are subject to issuance upon exercise of an option granted under the equity incentive plan that cease to be subject to the option for any reason other than exercise of the option; 48 . have been issued upon the exercise of an option granted under the equity incentive plan that are subsequently forfeited or repurchased by us at the original purchase price; . are subject to an award granted pursuant to a restricted stock purchase agreement under the equity incentive plan that are subsequently forfeited or repurchased by us at the original issue price; or . are subject to stock bonuses granted under the equity incentive plan that terminates without shares being issued. This plan will become effective on the consummation of this offering and will terminate on July 21, 2009, unless it is terminated earlier by our board. The plan will authorize the award of options, restricted stock awards and stock bonuses. No person will be eligible to receive more than 1,000,000 shares in any calendar year under the plan other than a new employee who will be eligible to receive no more than 1,500,000 shares in the calendar year in which the employee commences employment. The plan will be administered by our compensation committee, all of the members of which are "non-employee directors" under applicable federal securities laws and "outside directors" as defined under applicable federal tax laws. The compensation committee will have the authority to construe and interpret the plan, grant awards and make all other determinations necessary or advisable for the administration of the plan. Also, our non-employee directors are entitled to receive automatic annual grants of fully vested options to purchase shares of our common stock, as described under "Management--Director Compensation." The plan will provide for the grant of both incentive stock options that qualify under Section 422 of the Internal Revenue Code and nonqualified stock options. Incentive stock options may be granted only to our employees or employees of our parent or subsidiary, if any. All other awards other than incentive stock options may be granted to employees, officers, directors, consultants, independent contractors and advisors of ours or of our parent or subsidiary, if any, provided the consultants, independent contractors and advisors render bona fide services not in connection with the offer and sale of securities in a capital-raising transaction. The exercise price of incentive stock options must be at least equal to the fair market value of our common stock on the date of grant. The exercise price of incentive stock options granted to 10% stockholders must be at least equal to 110% of that value. The exercise price of nonqualified stock options must be at least equal to 85% of the fair market value of our common stock on the date of grant. Options may be exercisable only as they vest or may be immediately exercisable with the shares issued subject to our right of repurchase that lapses as the shares vest. In general, options will vest over a four-year period. The maximum term of options granted under the plan is 10 years. Awards granted under the plan may not be transferred in any manner other than by will or by the laws of descent and distribution. They may be exercised during the lifetime of the optionee only by the optionee. The compensation committee could determine otherwise and provide for these provisions in the award agreement, but only with respect to awards that are not incentive stock options. Options granted under the plan generally may be exercised for a period of time after the termination of the optionee's service to us or to our parent or subsidiary, if any. Options will generally terminate immediately upon termination of employment for cause. The purchase price for restricted stock will be determined by our compensation committee. Stock bonuses may be issued for past services or may be awarded upon the completion of certain services or performance goals. If we are dissolved or liquidated or have a "change in control" transaction, outstanding awards may be assumed or substituted by the successor corporation, if any. In the discretion of the compensation committee the vesting of these awards may accelerate upon one of these transactions. 1999 Employee Stock Purchase Plan. The board has adopted the 1999 Employee Stock Purchase Plan and has reserved 300,000 shares for issuance under this plan. This plan will become effective one business day 49 after consummation of this offering. On each January 1, the aggregate number of shares reserved for issuance under this plan will increase automatically by a number of shares equal to 1% of our outstanding shares on December 31 of the preceding year. The aggregate number of shares reserved for issuance under the plan may not exceed 3,000,000 shares. The plan will be administered by our compensation committee, which will have the authority to construe and interpret the plan. Employees generally will be eligible to participate in the plan if they are employed ten days before the beginning of an offering period and they are customarily employed by us, or our parent or any subsidiaries that we designate, for more than 20 hours per week and more than five months in a calendar year and are not, and would not become as a result of being granted an option under the plan, 5% stockholders of us or our designated parent or subsidiaries. Under the plan, eligible employees will be permitted to acquire shares of our common stock through payroll deductions. Eligible employees may select a rate of payroll deduction between 2% and 15% of their compensation and are subject to maximum purchase limitations. Participation in the plan will end automatically upon termination of employment for any reason. Each offering period under the plan will be for two years and consist of four six-month purchase periods. The first offering period is expected to begin on the first business day on which price quotations for our common stock are available on the Nasdaq National Market. Offering periods and purchase periods will begin on May 1 and November 1 of each year. However, because the first day on which price quotations for our common stock will be available on the Nasdaq National Market may not be May 1 or November 1, the length of the first offering period may be more or less than two years, and the length of the first purchase period may be more or less than six months. The plan will provide that, in the event of our proposed dissolution or liquidation, each offering period that commenced prior to the closing of the proposed event shall continue for the duration of the offering period, provided that the compensation committee may fix a different date for termination of the plan. The purchase price for our common stock purchased under the plan is 85% of the lesser of the fair market value of our common stock on the first day of the applicable offering period or the last day of the applicable purchase period. The compensation committee will have the power to change the duration of offering periods without stockholder approval, if the change is announced at least 15 days prior to the beginning of the affected offering period. The plan is intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code. Rights granted under the plan will not be transferable by a participant other than by will or the laws of descent and distribution. The plan will terminate on July 21, 2009, unless it is terminated earlier under the terms of the plan. The board will have the authority to amend, terminate or extend the term of the plan, except that no action may adversely affect any outstanding shares previously purchased under the plan. Except for the automatic annual increase of shares described above, stockholder approval is required to increase the number of shares that may be issued or to change the terms of eligibility under the plan. The board may make amendments to the plan as it determines to be advisable if the financial accounting treatment for the plan is different from the financial accounting treatment in effect on the date the plan was adopted by the board. 401(k) Plan. We sponsor a defined contribution plan intended to qualify under Section 401 of the Internal Revenue Code, or a 401(k) plan. All employees are generally eligible to participate and may enter the plan as of the first day of each calendar month. Participants may make pre-tax contributions to the plan of up to 15% of their eligible earnings, subject to a statutorily prescribed annual limit. Each participant is fully vested in his or her contributions and the investment earnings. Contributions to the plan by the participants or by us, and the income earned on these contributions, are generally not taxable to the participants until withdrawn. Contributions by us, if any, are generally deductible by us when made. Participant and company contributions 50 are held in trust as required by law. Individual participants may direct the trustee to invest their accounts in authorized investment alternatives. Employment and Severance Agreements Mr. Brauns, our President and Chief Executive Officer, entered into an employment agreement with us in February 1998. This agreement establishes Mr. Brauns' initial annual salary of $250,000 and eligibility for benefits and bonuses tied to our revenues. This agreement also provides for his election to the Board of Directors as a condition of employment. This agreement continues until it is terminated upon written notice by Mr. Brauns or by us. If his employment is terminated by us for cause or if he voluntarily elects to terminate his employment, we must pay his salary and other benefits through the date of his termination. If his employment is terminated by us without cause or if he terminates his employment under some circumstances, we must pay his benefits through the date of his termination and his salary for up to 12 additional months after this date, unless Mr. Brauns is employed full-time by another employer. Under this agreement, Mr. Brauns agreed to purchase 1,333,333 shares of common stock at an exercise price of $0.18 per share. The shares purchased by Mr. Brauns are subject to our right to repurchase the shares upon termination of his employment. Our repurchase right expires ratably over a 48 month period from March 1998. Our repurchase right also expires as to all of the shares in the event that we merge or consolidate with another entity or sell all or substantially all of our assets. In connection with this stock purchase, we agreed to loan Mr. Brauns the entire purchase price. This loan has been repaid in full. See "Management-- Compensation Committee Interlocks and Insider Participation." Mr. Ong's offer letter, dated February 29, 1996, provided for an initial annual salary of $48,000 commencing on March 1, 1996. Mr. Ong's employment is at will and may be terminated at any time, with or without formal cause. Mr. Allen's offer letter, dated February 12, 1999, provides for an initial annual salary of $140,000 commencing on March 3, 1999 and eligibility for an incentive bonus of $35,000. The offer letter also provides for reimbursement for relocation expenses. Mr. Allen received options to purchase 186,666 shares of our common stock at an exercise price of $0.39 per share under the 1998 Stock Option Plan, of which options to purchase 46,667 shares vest on March 3, 2000 and the remainder will vest ratably over a 36-month period thereafter. Half of the unvested portion of these options will vest if we sell the company. Mr. Allen's employment is at will and may be terminated at any time, with or without formal cause. Mr. Backlund's offer letter, dated May 1, 1998, provides for an initial annual salary of $135,000 commencing on May 26, 1999 and eligibility for an incentive bonus of up to $100,000. The offer letter also provides for reimbursement for relocation expenses. Mr. Backlund received options to purchase 156,666 shares of our common stock at an exercise price of $0.21 per share under the 1996 Stock Option Plan, of which options to purchase 39,166 shares vested on May 26, 1999 and the remainder will vest ratably over a 36- month period thereafter. On January 28, 1999, Mr. Backlund received options to purchase an additional 66,666 shares of our common stock at an exercise price of $0.39 per share as a result of meeting revenue objectives in 1998 and in lieu of a portion of his cash bonus earned in 1998. Mr. Backlund's employment is at will and may be terminated at any time, with or without formal cause. Mr. Engelmann's offer letter, dated December 11, 1998, provides for an initial annual salary of $130,000 commencing on January 18, 1999 and eligibility for an incentive bonus of up to $40,000. The offer letter also provides for reimbursement for relocation expenses. Pursuant to the offer letter, Mr. Engelmann purchased 183,333 shares of our common stock at an exercise price of $0.39 per share. The shares purchased by Mr. Engelmann are subject to our right to repurchase all of the shares of common stock upon termination of his employment. Our right to repurchase his shares at the original purchase price upon termination lapses with respect to 45,833 shares on January 18, 2000, and expires ratably as to the remaining shares over a 36- month period. The repurchase right will expire as to half of the shares of common stock subject to repurchase at any 51 given time if we are acquired. If we terminate Mr. Engelmann's employment without cause, we must pay him an amount equal to two months base salary. Pursuant to the offer letter, on January 28, 1999, Mr. Engelmann purchased an additional 86,666 shares of our common stock at an exercise price of $0.39 per share, subject to attainment of individual and corporate objectives, and subject to the same repurchase rights as described above. We loaned Mr. Engelmann $105,300 pursuant to a partial recourse secured promissory note representing the purchase price for his shares, due in five years or earlier in the event of our initial public offering, acquisition or Mr. Engelmann's termination of employment, and bearing interest at the rate of 6% per year. Mr. Engelmann's employment is at will and may be terminated at any time, with or without formal cause. Mr. Jia's offer letter, dated January 6, 1997, provides for an initial annual salary of $70,000 commencing January 27, 1997. Mr. Jia received options to purchase 60,000 shares of our common stock at an exercise price of $0.09 per share under the 1996 Stock Option Plan, of which options to purchase 15,000 shares vested on January 28, 1998 and the remainder will vest ratably over a 36 month period thereafter. Mr. Jia's employment is at will and may be terminated at any time, with or without formal cause. Mr. Ruck's offer letter, dated February 18, 1999, provides for an initial annual salary of $140,000 commencing March 15, 1999 and eligibility for an incentive bonus of up to $60,000. Pursuant to the offer letter, Mr. Ruck purchased 213,333 shares of our common stock at an exercise price of $0.39 per share. The shares purchased by Mr. Ruck are subject to our right to repurchase all of the shares of common stock upon termination of his employment. Our right to repurchase his shares upon termination lapses with respect to 53,333 on March 15, 2000, and expires ratably as to the remaining shares over a 36-month period. If we terminate Mr. Ruck's employment without cause, within his first year of employment, our right to repurchase his common stock will be equal to the shares granted less 4,444 shares for each full month of employment for Mr. Ruck after March 15, 1999. On March 18, 1999, Mr. Ruck purchased an additional 33,333 shares of our common stock at an exercise price of $0.39 per share, subject to the attainment of individual and corporate objectives, and subject to the same repurchase rights as described above. Also, pursuant to his offer letter, we loaned Mr. Ruck $96,200 pursuant to a partial recourse secured promissory note representing the purchase price for his shares, due in five years or earlier in the event of our initial public offering, acquisition, or Mr. Ruck's termination of employment, and bearing interest at the rate of 6% per year. The loan will be recourse with respect to interest and a combination, as determined by mutual agreement between the parties, of recourse and non- recourse for the principal. Mr. Ruck's employment is at will and may be terminated at any time, with or without formal cause. Mr. Chang's offer letter, dated January 20, 1997, provides for an initial annual salary of $125,000 commencing February 3, 1997 and eligibility for incentive bonus of up to $125,000. Mr. Chang received options to purchase 120,000 shares of our common stock at an exercise price of $0.09 per share under the 1996 Stock Option Plan, of which 30,000 shares vested upon February 10, 1998 and the remainder will vest ratably over a 36-month period thereafter. On April 13, 1998, we granted to Mr. Chang options to purchase an additional 46,667 shares of our common stock at an exercise price of $0.39 per share, subject to the attainment of individual and corporate objectives. Mr. Chang entered into a Confidential Separation Agreement and Release with us in November 1998. This agreement establishes the terms and conditions of the termination of his employment with us. Under the agreement, Mr. Chang's employment was terminated as of March 31, 1999. In addition, the agreement provides that we pay Mr. Chang $11,500 per month, plus a bonus of $64,167. Mr. Chang's options to purchase common stock continued to vest through March 31, 1999. Mr. Farber's offer letter, dated June 14, 1997, provides for an initial annual salary of $120,000. Mr. Farber received options to purchase 320,000 shares of our common stock at an exercise price of $0.18 per share under the 1996 Stock Option Plan, of which 80,000 shares vested on June 16, 1998 and the remainder will vest ratably over a 36-month period thereafter. 52 Mr. Farber entered into a Confidential Separation Agreement and Release with us in February 1998. This agreement establishes the terms and conditions of the termination of his employment with us. Under the agreement, Mr. Farber's employment terminated as of August 1, 1998. In addition, the agreement provides that we pay Mr. Farber $76,071. All 130,666 of Mr. Farber's options to purchase common stock at an exercise price of $0.18 per share completely vested as of August 1998. Indemnification of Directors and Executive Officers and Limitation of Liability Our certificate of incorporation includes a provision that eliminates the personal liability of our directors for monetary damages resulting from breach of fiduciary duty as a director, except for liability: . for any breach of the director's duty of loyalty to us or our stockholders; . for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; . under section 174 of the Delaware General Corporation Law regarding unlawful dividends and stock purchases; or . for any transaction from which the director derived an improper personal benefit. These provisions are permitted under Delaware law. Our bylaws provide that: . we must indemnify our directors and executive officers to the fullest extent permitted by Delaware law, subject to very limited exceptions; . we may indemnify our other employees and agents to the same extent that we indemnify our directors and executive officers, unless otherwise required by law, our certificate of incorporation, bylaws or agreements; and . we must advance expenses, as incurred, to our directors and executive officers in connection with a legal proceeding to the fullest extent permitted by Delaware law, subject to very limited exceptions. Prior to the completion of this offering, we intend to enter into indemnification agreements with each of our current directors and executive officers to give them additional contractual assurances regarding the scope of the indemnification provided in our certificate of incorporation and bylaws and to provide additional procedural protections. Presently, there is no pending litigation or proceeding involving any of our directors, executive officers or employees for which indemnification is sought, nor are we aware of any threatened litigation that may result in claims for indemnification. We have liability insurance for our directors and officers. 53 RELATED PARTY TRANSACTIONS Other than the employment and severance agreements described in "Management," and the transactions described below, since we were formed there has not been nor is there currently proposed, any transaction or series of similar transactions to which we were or will be a party: . in which the amount involved exceeded or will exceed $60,000; and . in which any director, executive officer, holder of more than 5% of our common stock or any member of their immediate family had or will have a direct or indirect material interest. Preferred Stock Financings In March and June 1996, we sold an aggregate of 1,199,998 shares of Series A Preferred Stock at a purchase price of $0.30 per share. In May and June 1997, we sold an aggregate of 2,134,548 shares of Series B Preferred Stock at a purchase price of $1.9293 per share. In March 1998, we sold an aggregate of 4,161,082 shares of Series C Preferred Stock at a purchase price of $1.6186 per share, and warrants to purchase 612,079 shares of Series C Preferred Stock at an exercise price of $1.9293 per share. In October, November and December 1998, we sold an aggregate of 2,494,142 shares of Series D Preferred Stock at a purchase price of $2.80668 per share. In June 1999, we sold an aggregate of 2,263,136 shares of Series E Preferred Stock at a purchase price of $8.49 per share. Purchasers of our preferred and common stock include, among others, the following executive officers, directors and holders of more than 5% of our outstanding stock. All of the share numbers in the following table reflect the conversion of each outstanding share of Series A Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock into two-thirds of a share of common stock and the conversion of each outstanding share of Series B Preferred Stock into 0.7022705 of a share of common stock.
Shares of Preferred Stock ------------------------------------------- Series Series Series A Series B Series C D E ------- --------- --------- ------- ------- Stockholder ----------- Kathryn C. Gould Entities associated with Foundation Capital.......... -- -- 2,480,419 613,896 146,666 Entities associated with JK&B Capital....................... -- 1,310,408 650,153 485,233 132,861 Entities associated with Draper Fisher Jurvetson............. 333,333 167,030 277,410 202,632 1,313 Entities associated with Accel Partners...................... -- -- 1,063,038 263,098 72,039 Peng T. Ong.................... 66,666 -- -- -- -- Mark W. Saul................... 83,333 13,919 -- -- --
Ms. Gould, one of our directors, is a member of Foundation Capital and may be deemed to own beneficially the shares held by entities associated with Foundation Capital. Mr. Ong disposed of his shares of Series A Preferred Stock in 1997. 54 Warrants On January 9, 1997, in connection with a bridge financing, we issued warrants to purchase shares of our Series B Preferred Stock with an exercise price of $1.92932 per share to the following executive officers, directors and holders of more than 5% of our outstanding stock:
Number of shares Warrant holder subject to warrant Expiration date -------------- ------------------ --------------- Mark W. Saul............................. 3,412 January 9, 2002 Entities associated with Draper Fisher Jurvetson............................... 40,950 January 9, 2002
The number of shares of Series B Preferred Stock represented in this table has been adjusted to reflect conversion to common stock. Each outstanding share of Series B Preferred Stock is convertible into 1.0534057 shares of common stock. These warrants have not been exercised but will expire upon the closing of this offering. In March 1998, in connection with the Series C Preferred Stock financing, we issued warrants to purchase shares of our Series C Preferred Stock with an exercise price of $1.92932 per share to the following executive officers, directors and holders of more than 5% of our outstanding stock. In October 1998, all warrants to purchase Series C Preferred Stock were exercised by their respective holders in connection with the Series D Preferred Stock financing.
Number of shares Warrant holder subject to warrant -------------- ------------------ Entities associated with Foundation Capital.............. 318,075 Entities associated with Accel Partners.................. 136,317 Entities associated with JK&B Capital.................... 83,371 Entities associated with Draper Fisher Jurvetson......... 35,573
Loans to Executive Officers Jeffrey E. Engelmann. In April 1999, we loaned an aggregate of $105,300 to Mr. Engelmann, our Vice President of Business Development, secured by two promissory notes and a stock pledge agreement, in connection with his purchase of 270,000 shares of our common stock. The notes accrue interest at a rate of 6% per year and are each due and payable on or before April 19, 2004. Interest is payable annually. In the event of an initial public offering of our common stock the principal sum of each note will become due and payable in monthly installments over the remaining term of our right to repurchase the shares. If Mr. Engelmann breaches his obligations under the notes we may enforce our right to payment of 25% of the principal and any accrued interest out of any of Mr. Engelmann's assets, but may enforce our right to payment of the balance due under the notes only out of the stock subject to the stock pledge agreement. As of August 31, 1999, $107,617 remained outstanding under the notes. Jozef Ruck. In April 1999, we loaned an aggregate of $96,200 to Mr. Ruck, our Vice President of Marketing, secured by two promissory notes and a stock pledge agreement, in connection with his purchase of 246,666 shares of our common stock. The notes accrue interest at a rate of 6% per year and are each due and payable on or before April 2004. Interest is payable annually. In the event of an initial public offering of our common stock the principal sum of each note will become due and payable in monthly installments over the remaining term of our right to repurchase the shares. If Mr. Ruck breaches his obligations under the notes we may enforce our right to payment of 25% of the principal and any accrued interest out of any of Mr. Ruck's assets, but may enforce our right to payment of the balance due under the notes only out of the stock subject to the stock pledge agreement. As of August 31, 1999, $98,284 remained outstanding under the notes. Please refer to "Management--Compensation Committee Interlocks and Insider Participation" for a description of a loan to Mr. Brauns. 55 PRINCIPAL STOCKHOLDERS The following table presents information as to the beneficial ownership of our common stock as of August 31, 1999 and as adjusted to reflect the sale of the common stock in this offering by: . each stockholder known by us to be the beneficial owner of more than 5% of our common stock; . each of our directors; . each executive officer listed in the Summary Compensation Table; and . all executive officers and directors as a group.
Percentage of Shares Number of Outstanding Shares ----------------- Beneficially Before After Name of Beneficial Owner Owned Offering Offering ------------------------ ------------ -------- -------- Kathryn C. Gould (1)........................................ 3,240,981 17.1% 14.7% Foundation Capital entities 70 Willow Road, Suite 200 Menlo Park, CA 94025 JK&B Capital entities (2)................................... 2,578,655 13.6 11.7 205 North Michigan Avenue, Suite 808 Chicago, IL 60601 Peng T. Ong (3)............................................. 1,933,333 10.2 8.8 Martin W. Brauns (4)........................................ 1,419,436 7.4 6.4 Accel Partners entities (5)................................. 1,398,175 7.3 6.3 428 University Avenue Palo Alto, CA 94301 Draper Fisher Jurvetson entities (6)........................ 1,022,668 5.3 4.6 400 Seaport Court, Suite 250 Redwood City, CA 94063 Michael A. Backlund (7)..................................... 236,665 1.2 1.0 Steven Farber............................................... 186,634 1.0 * Jack S. Jia (8)............................................. 193,332 1.0 * Mark W. Saul (9)............................................ 123,997 * * John Chang.................................................. 74,166 * * Mark C. Thompson (10) ...................................... 20,000 * * Ronald E.F. Codd (11)....................................... 20,000 * * All eleven directors and executive officers as a group (12) ........................................................... 7,891,076 41.5% 35.8%
- --------------------- (1) Represents 2,878,855 shares held by Foundation Capital II, L.P., 91,960 shares held by Foundation Capital II Entrepreneurs Fund, L.L.C., and 270,166 shares held by Foundation Capital II Principals Fund, L.L.C. Foundation Management II, L.L.C. is the general partner of Foundation Capital II, L.P. James C. Anderson, William B. Elmore, Paul G. Koontz, Kathryn Gould and Michael N. Schuh are the managing members of Foundation Management II, L.L.C. and share voting and investment power of the shares. The managing members of Foundation Management II, L.L.C. disclaim beneficial ownership of the shares, except to the extent of their direct pecuniary interest in the shares. Foundation Management II, L.L.C. is the managing member of both Foundation Capital II Entrepreneurs Fund, L.L.C. and Foundation Capital II Principals Fund, L.L.C. The managing members of Foundation Management II, L.L.C. are deemed to beneficially own the shares held by Foundation Capital II Entrepreneurs Fund, L.L.C. and Foundation Capital II Principals Fund, L.L.C. and have voting and investment power of the shares. The managing members of Foundation Management II, L.L.C. disclaim beneficial ownership of the shares, except to the extent of their direct pecuniary interest in the shares. 56 (2) Represents 1,800,630 shares held by JK&B Capital, L.P., and 778,025 shares held by JK&B Capital II, L.P. JK&B Management, L.L.C. is the general partner of JK&B Capital, L.P. and JK&B Capital II, L.P. David Kronfeld is the sole managing member of JK&B Management, L.L.C. Mr. Kronfeld is deemed to beneficially own the shares held by JK&B Capital, L.P. and JK&B Capital II, L.P. and has voting and investment power of the shares. Mr. Kronfeld disclaims beneficial ownership of the shares, except to the extent of his direct pecuniary interest in the shares. (3) Represents 1,933,333 shares of common stock held of record by the Ong-Leong Family Trust U/D/T 6/29/99, Peng Tsin Ong and Wai Ping-Leong, trustees, who share voting and investment control. (4) Represents 1,419,436 shares of common stock held of record by Martin W. Brauns and Margaret R. Brauns, trustees U/D/T 1/9/95. Includes 1,002,770 shares of common stock subject to our repurchase right. (5) Represents 1,097,568 shares held by Accel V L.P., 145,410 shares held by Accel Internet/Strategic Technology Fund, L.P., 57,325 shares held by Accel Keiretsu V L.P., 67,112 held by Accel Investors '97 L.P. and 30,760 held by Ellmore C. Patterson Partners. Accel V Associates L.L.C. is the general partner of Accel V L.P. and has the sole voting and investment power of the shares held by Accel V L.P. Arthur C. Paterson, ACP Family Partnership L.P., James R. Swartz, James W. Breyer, The Breyer 1995 Trust dated 10/4/95, Eugene D. Hill, Swartz Family Partnership L.P., Luke B. Evnin, J. Peter Wagner, and G. Carter Sednaoui are the managing members of Accel V Associates L.P. and share voting and investment power of the shares. The managing members of Accel V Associates L.L.C. disclaim beneficial ownership of the shares, except to the extent of their direct pecuniary interest in the shares, Accel Internet/Strategic Technology Fund Associates L.L.C, is the general partner of Accel Internet/Strategic Technology Fund L.P. and therefore has the sole voting and investment power of the shares held by Accel Internet/Strategic Technology Fund L.P. Arthur C. Paterson, ACP Family Partnership L.P., James R. Swartz, James W. Breyer, Eugene D. Hill, Swartz Family Partnership L.P., Luke B. Evnin, J. Peter Wagner, and G. Carter Sednaoui are the managing members of Accel Internet/Strategic Technology Fund L.P. and share voting and investment power of the shares. The managing members of Accel Internet/Strategic Technology Fund Associates L.L.C. disclaim beneficial ownership of the shares, except to the extent of their direct pecuniary interest in the shares. Accel Keiretsu V Associates L.L.C. is the general partner of Accel Keiretsu V L.P. and has the sole voting and investment power. Arthur C. Paterson, James R. Swartz, James W. Breyer, Eugene D. Hill, Luke B. Evnin, J. Peter Wagner, and G. Carter Sednaoui are the managing members of Accel Keiretsu V L.P. and share voting and investment power of the shares held by Accel Keiretsu V L.P. The managing members of Accel Keiretsu V L.L.C. disclaim beneficial ownership of the shares, except to the extent of their direct pecuniary interest in the shares. Arthur C. Paterson, James R. Swartz, James W. Breyer, Luke B. Evnin, J. Peter Wagner, and G. Carter Sednaoui are the general partners of Accel Investors '97 L.P. and share voting and investment powers of the shares held by Accel Investors '97 L.P. The general partners of Accel Investor '97 L.P. disclaim beneficial ownership of the shares, except to the extent of their direct pecuniary interest in the shares. Arthur C. Patterson is the sole general partner of Ellmore C. Patterson Partners and has sole voting and investment power with respect to the shares held by Ellmore C. Patterson Partners. Mr. Patterson disclaims beneficial ownership of the shares except to the extent of his direct pecuniary interest in the shares. (6) Represents 960,286 shares held by Draper Fisher Associates Fund III, L.P. and 62,382 shares held by Draper Fisher Partners, L.L.C. Includes 40,950 shares issuable upon the exercise of warrants to purchase shares of Series B Preferred Stock held by both entities. Draper Fisher Management Company, L.L.C. is the general partner of Draper Fisher Associates Fund III, L.P. and has sole voting and investment powers. The general partner of Draper Fisher Associates Fund III, L.P. disclaims beneficial ownership of the shares, except to the extent of its direct pecuniary interest in the shares held by Draper Fisher Management Company, L.L.C. and Draper Fisher Associates Fund III, L.P. Steven Jurvetson, Timothy Draper, Lawrence Kubal and John Fisher are the managing members of Draper Fisher Management Company, L.L.C. and Steven Jurvetson, Timothy Draper and John Fisher are the managing members of Draper Fisher Partners, L.L.C. The managing members of Draper Fisher Partners, L.L.C. are deemed to beneficially own the shares held by Draper Fisher Partners, L.L.C. and share voting and investment power of the shares. The managing members of Draper Fisher Partners, L.L.C. disclaim beneficial ownership of the shares, except to the extent of their direct pecuniary interest in the shares. 57 (7) Includes 180,901 shares of common stock subject to our repurchase right and options to purchase 13,333 shares of common stock exercisable within 60 days of August 31, 1999. Also includes 116,666 shares of common stock held of record by the Backlund Family Trust. (8) Includes 125,900 shares of common stock subject to our repurchase right and options to purchase 20,000 shares of common stock exercisable within 60 days of August 31, 1999. (9) Includes 3,412 shares issuable upon the exercise of warrants to purchase shares of Series B Preferred Stock held by Mr. Saul. (10) Represents options to purchase 20,000 shares of common stock exercisable within 60 days of August 31, 1999. (11) Represents options to purchase 20,000 shares of common stock exercisable within 60 days of August 31, 1999. (12) Includes 2,012,903 shares of common stock subject to our repurchase right, and 73,333 shares of common stock subject to options exercisable within 60 days of August 31, 1999 and 3,412 shares issuable upon exercise of warrants to purchase shares of Series B Preferred Stock. Beneficial ownership is determined under the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Unless indicated above, to our knowledge, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Shares of common stock subject to options and warrants that are currently exercisable or exercisable within 60 days of August 31, 1999 are deemed to be outstanding and to be beneficially owned by the person holding the options or warrants for the purpose of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Unless indicated above, the address for each listed stockholder is c/o Interwoven, Inc., 1195 West Fremont Avenue, Suite 2000, Sunnyvale, California 94087. The number of shares of common stock outstanding after this offering includes shares of common stock being offered and does not include the shares which are subject to the underwriters' over-allotment option. The percentage of common stock outstanding as of August 31, 1999 is based on 21,936,983 shares of common stock outstanding on that date, assuming that all outstanding preferred stock has been converted into common stock and excluding 72,021 shares of common stock issuable upon exercise of warrants to purchase Series B Preferred Stock. 58 DESCRIPTION OF CAPITAL STOCK Immediately following the closing of this offering, our authorized capital stock will consist of 75,000,000 shares of common stock, $0.001 par value per share, and 5,000,000 shares of preferred stock, $0.001 par value per share. Immediately before the closing of this offering, we will reincorporate in the state of Delaware. Following the closing of this offering, we intend to amend and restate our certificate of incorporation. Our certificate of incorporation, bylaws and third amended and restated investors' rights agreement, described below, are included as exhibits to the registration statement of which this prospectus forms a part. Common Stock As of August 31, 1999, there were 19,009,054 shares of common stock outstanding held by 173 shareholders of record, including 12,542,610 shares that will be issued upon conversion of all outstanding preferred stock and the exercise and subsequent conversion to common stock of warrants to purchase Series B Preferred Stock upon the closing of this offering. Dividend Rights. Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available at the times and in the amounts as our board may from time to time determine. Voting Rights. Each common stockholder is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors is not provided for in our certificate of incorporation, which means that the holders of a majority of the shares voted can elect all of the directors then standing for election. No preemptive or similar rights. The common stock is not entitled to preemptive rights and is not subject to conversion or redemption. Right to receive liquidation distributions. Upon a liquidation, dissolution or winding-up of Interwoven, the assets legally available for distribution to stockholders are distributable ratably among the holders of the common stock and any participating preferred stock outstanding at that time after payment of liquidation preferences, if any, on any outstanding preferred stock and payment of other claims of creditors. Each outstanding share of common stock is, and all shares of common stock to be outstanding upon completion of this offering will be, fully paid and nonassessable. Preferred Stock Upon the closing of this offering, each outstanding share of preferred stock will be converted into shares of common stock. See Note 6 of Notes to Financial Statements for a description of this preferred stock. Following this offering, we will be authorized, subject to the limits imposed by Delaware law, to issue preferred stock in one or more series, to establish from time to time the number of shares to be included in each series, to fix the rights, preferences and privileges of the shares of each wholly unissued series and any of its qualifications, limitations or restrictions. The board can also increase or decrease the number of shares of any series, but not below the number of shares of a given series then outstanding, without any further vote or action by the stockholders. The board may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of the common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in control and may adversely affect the market price of our common stock and the voting and other rights of the holders of common stock. We have no current plan to issue any shares of preferred stock. 59 Warrants As of August 31, 1999, we had outstanding the following warrants to purchase our stock:
Total number of shares Subject Exercise price Type of stock to Warrants per share Expiration date - ------------- --------------- -------------- ---------------------------------- Series B Preferred Stock.................. 65,519 $1.93 upon consummation of this offering Series B Preferred Stock.................. 6,552 1.93 September 2004 Series E Preferred Stock.................. 39,096 8.49 July 2006
Registration Rights The holders of approximately 12,420,390 shares of common stock have the right to require us to register their shares with the Securities and Exchange Commission so that those shares may be publicly resold or to include their shares in any registration statement we file. Right to demand registration At any time six months after this offering, these stockholders can request that we file a registration statement so they can publicly sell their shares. The underwriters of any underwritten offering will have the right to limit the number of shares to be included in a registration statement. Who may make a demand. At any time six months after the closing of this offering, any holder of shares of common stock issued upon conversion of Series B Preferred Stock immediately prior to this offering, any number of holders who together hold an aggregate of at least 954,633 shares of common stock issued upon conversion of Series C Preferred Stock immediately prior to this offering, any number of holders who together hold an aggregate of at least 498,829 shares of common stock issued upon conversion of Series D Preferred Stock immediately prior to this offering, any number of holders who together hold an aggregate of at least 452,628 shares of common stock issued upon conversion of Series E Preferred Stock immediately prior to this offering, or the holders of at least 40% of the shares having registration rights, including some holders of Series A Preferred Stock, have the right to demand that we file a registration statement on a form other than Form S-3, so long as the amount of securities to be sold in that registration exceeds $5,000,000. If we are eligible to file a registration statement on Form S-3, the same holders of the registration rights described above will have the right to demand that we file a registration statement on Form S-3, so long as the amount of securities to be sold in that registration exceeds $1,000,000. Number of times holders can make demands. We will only be required to file one registration statement on a form other than Form S-3 for each of two registrations. If we are eligible to file a registration statement on Form S-3, we are not required to file more than one registration statement during any 12 month period. Postponement. We may postpone the filing of a registration statement for up to 90 days once in a 12 month period if we determine that the filing would be seriously detrimental to us or our stockholders. Piggyback registration rights If we register any securities for public sale, the same stockholders with registration rights described above will have the right to include their shares in the registration statement. The underwriters of any underwritten offering will have the right to limit the number of shares to be included in a registration statement. Expenses of registration We will pay all of the expenses relating to any demand or piggyback registration. However, we will not pay for any expenses of any demand registration if the request is subsequently withdrawn by the holders of a majority of the shares having registration rights, subject to very limited exceptions. 60 Expiration of registration rights The registration rights described above will expire five years after this offering is completed. The registration rights will terminate earlier with respect to a particular stockholder if that holder owns less than 1% of our outstanding securities or can resell all of its securities in a three month period under Rule 144 of the Securities Act and we are subject to the reporting requirements of the Securities Exchange Act of 1934. Anti-Takeover Provisions The provisions of Delaware law, our certificate of incorporation and our bylaws described below may have the effect of delaying, deferring or discouraging another person from acquiring control of our company. Delaware Law We will be subject to the provisions of Section 203 of the Delaware General Corporation Law regulating corporate takeovers. This section prevents certain Delaware corporations from engaging, under limited circumstances, in a "business combination," which includes a merger or sale of more than 10% of the corporation's assets, with any "interested stockholder," or a stockholder who owns 15% or more of the corporation's outstanding voting stock, as well as affiliates and associates of stockholders, for three years following the date that the stockholder became an "interested stockholder" unless: . the transaction is approved by the board prior to the date the "interested stockholder" attained that status; . upon the closing of the transaction that resulted in the stockholder's becoming an "interested stockholder," the "interested stockholder" owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced; or . on or subsequent to the date the "business combination" is approved by the board and authorized at an annual or special meeting of stockholders by at least two-thirds of the outstanding voting stock that is not owned by the "interested stockholder." A Delaware corporation may "opt out" of this provision with an express provision in its original certificate of incorporation or an express provision in its certificate of incorporation or bylaws resulting from a stockholders' amendment approved by at least a majority of the outstanding voting shares. However, we have not "opted out" of this provision. Section 203 could prohibit or delay mergers or other takeover or change-in-control attempts and, accordingly, may discourage attempts to acquire us. Charter and Bylaw Provisions Our amended and restated certificate of incorporation, to be filed upon the closing of this offering, states that our board of directors is divided into three classes. The directors in each class will serve for a three-year term, with our stockholders electing one class each year. For more information on the classification of our board, please see "Management--Board Composition." This system of electing and removing directors may tend to discourage a third party from making a tender offer or otherwise attempting to obtain control of us, because it generally makes it more difficult for stockholders to replace a majority of the directors. Our bylaws provide that any action required or permitted to be taken by our stockholders at an annual meeting or a special meeting of the stockholders may only be taken if it is properly brought before the meeting. Our stockholders may not take any action by written consent instead of by a meeting. Our certificate of incorporation provides that our board of directors may issue preferred stock with voting or other rights without stockholder action. Our bylaws and certificate of incorporation provide that special meetings of the stockholders may only be called by our board, the chairman of our board, our chief executive officer or our president. 61 Our bylaws provide that we will indemnify officers and directors against losses that they may incur in investigations and legal proceedings resulting from their services to us, which may include services in connection with takeover defense measures. These provisions may have the effect of preventing changes in our management. Indemnification of Directors and Executive Officers and Limitation of Liability Our certificate of incorporation limits the liability of directors to the fullest extent permitted by Delaware law. In addition, our certificate of incorporation and bylaws provide that we will indemnify our directors and officers to the fullest extent permitted by Delaware law. We intend to enter into separate indemnification agreements with our directors and executive officers that provide them with indemnification protection in the event the certificate of incorporation is subsequently amended. Our certificate of incorporation and bylaws provide that we will indemnify our directors and executive officers against losses that they may incur in investigations and legal proceedings resulting from their services to us, which may include services in connection with takeover defense measures. These provisions may have the effect of preventing changes in the management. Transfer Agent and Registrar The Transfer Agent and Registrar for our common stock is ChaseMellon Shareholder Services, L.L.C., Ridgefield Park, New Jersey. Listing We have applied for our common stock to be quoted on The Nasdaq Stock Market's National Market under the symbol "IWOV." 62 SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of our common stock, including shares issued upon exercise of outstanding warrants or options, in the public market after this offering could adversely affect market prices prevailing from time to time and could impair our ability to raise capital through the sale of our equity securities. Furthermore, as described below, no shares currently outstanding will be available for sale immediately after this offering due to limited contractual restrictions on resale. Sales of substantial amounts of our common stock in the public market after these restrictions lapse could adversely affect the prevailing market price and our ability to raise equity capital in the future. Upon completion of this offering, based on shares outstanding at August 31, 1999, we will have outstanding 22,009,054 shares of common stock, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options. Of these shares, the 3,000,000 shares sold in this offering will be freely tradable without restriction under the Securities Act unless purchased by our "affiliates." The remaining shares will become eligible for public sale as follows:
Approximate Number of Shares Eligible for Future Date Sale Comment ---- ----------- ------- Date of this prospectus 0 Freely tradable shares 181 days after the date of 15,118,513 Underwriters' lock-up released. this prospectus These shares may be sold under Rules 144, 144(k), 145 or 701 One year after the date of 2,784,883 These shares may be sold under Rules this prospectus 144, 145 or 701 At various times thereafter 1,144,754 These shares may be sold under Rules 144 or 701
Lock-Up Agreements All of our officers and directors and substantially all of our stockholders have signed lock-up agreements under which they agreed not to sell, dispose of, loan, pledge or grant any rights with respect to any shares of common stock or any securities convertible into or exercisable or exchangeable for shares of common stock without the prior written consent of Credit Suisse First Boston Corporation for a period of 180 days after the date of this prospectus. Credit Suisse First Boston Corporation may choose to release some of these shares from these restrictions prior to the expiration of this 180-day period, though it has no current intention to do so. Rule 144 In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell within any three- month period a number of shares that does not exceed the greater of: . 1% of the number of shares of common stock then outstanding, which will equal approximately 220,091 shares immediately after this offering; or . the average weekly trading volume of the common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us. 63 Rule 144(k) Under Rule 144(k), a person who has not been one of our affiliates at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell those shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted, these shares may be sold immediately upon the completion of this offering. Rule 701 Any of our employees, officers, directors or consultants who purchased his or her shares under a written compensatory plan or contract may be entitled to sell his or her shares in reliance on Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that non-affiliates may sell these shares in reliance on Rule 144 without having to comply with the holding period, public information, volume limitation or notice provisions of Rule 144. All holders of Rule 701 shares are required to wait until 90 days after the date of this prospectus before selling those shares. However, all shares issued under Rule 701 are subject to lock-up agreements and will only become eligible for sale when the 180-day lock-up agreements expire. Registration Rights Upon completion of this offering, the holders of 12,420,390 shares of common stock, or their transferees, will be entitled to rights with respect to the registration of those shares under the Securities Act. For a discussion of these rights please see "Description of Capital Stock--Registration Rights." After these shares are registered, they will be freely tradable without restriction under the Securities Act. Stock Options Immediately after this offering, we intend to file a registration statement under the Securities Act covering 3,200,000 shares of common stock reserved for issuance under our stock option and employee stock purchase plans. As of August 31, 1999, options to purchase 1,039,887 shares of common stock were issued and outstanding. Upon the expiration of the lock-up agreements described above, 171,055 shares of common stock will be subject to vested options, based on options outstanding as of August 31, 1999. This registration statement is expected to be filed and become effective as soon as practicable after the effective date of this offering. Accordingly, shares registered under this registration statement will, subject to vesting provisions and Rule 144 volume limitations applicable to our affiliates, be available for sale in the open market immediately after the 180-day lock up agreements expire. Warrants As of August 31, 1999, we had outstanding warrants to purchase 111,167 shares of common stock. When these warrants are exercised and the exercise price is paid in cash the shares must be held for one year before they can be sold under Rule 144. Warrants to purchase up to 111,167 shares of common stock contain "net exercise provisions." These provisions allow a holder to exercise the warrant for a lesser number of shares of common stock in lieu of paying cash. The number of shares which would be issued in this case would be based upon the market price of the common stock at the time of the net exercise. If the warrant had been held for at least one year, the shares of common stock could be publicly sold under Rules 144 and 145. After the lock-up agreements described above expire, warrants to purchase 45,648 shares of our common stock, which also contain net exercise provisions, will have been outstanding for at least one year. 64 UNDERWRITING Under the terms and subject to the conditions contained in the underwriting agreement dated , 1999, we have agreed to sell to the underwriters named below, for whom Credit Suisse First Boston Corporation, BancBoston Robertson Stephens Inc. and Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, are acting as representatives, the following respective numbers of shares of common stock:
Number of Underwriter Shares ----------- --------- Credit Suisse First Boston Corporation............................ BancBoston Robertson Stephens Inc................................. Dain Rauscher Wessels............................................. --------- Total........................................................... 3,000,000 =========
The underwriting agreement provides that the underwriters are obligated to purchase all the shares of common stock in the offering, if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement also provides that if an underwriter defaults the purchase commitments of non-defaulting underwriters may be increased or the offering of common stock may be terminated. We have granted to the underwriters a 30-day option to purchase on a pro rata basis up to 450,000 additional shares from us at the initial public offering price less the underwriting discounts and commissions. The option may be exercised only to cover any over-allotments of common stock. The underwriters propose to offer the shares of common stock initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a concession of $ per share. The underwriters and selling group members may allow a discount of $ per share on sales to other broker/dealers. After the initial public offering, the public offering price and concession and discount to broker/dealers may be changed by the representatives. A copy of the prospectus in electronic format will be made available on the Internet web sites hosted by E*OFFERING Corp. and E*TRADE Securities, Inc. and Charles Schwab & Co. Customers seeking to submit conditional offers to purchase shares online must meet certain eligibility requirements promulgated by these institutions. The following table summarizes the compensation and estimated expenses we will pay.
Per Share Total ------------------------------ ----------------------------- Without With Without With Over- allotment Over-allotment Over-allotment Over-allotment --------------- -------------- -------------- -------------- Underwriting discounts and commissions paid by us................... $ $ $ $ Expenses payable by us.. $ $ $ $
The underwriters have informed us that they do not expect discretionary sales to exceed 5% of the shares of common stock being offered. 65 We, our officers and directors and our stockholders have agreed that we will not offer, sell, contract to sell, announce our intention to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement under the Securities Act relating to any additional shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock without the prior written consent of Credit Suisse First Boston Corporation for a period of 180 days after the date of this prospectus, except in the case of issuances pursuant to the exercise of employee stock options outstanding on the date of this prospectus. The underwriters have reserved for sale, at the initial public offering price, up to 150,000 shares of common stock, to be distributed by E*OFFERING, for employees, directors and other persons associated with us who have expressed an interest in purchasing common stock in the offering. The number of shares available for sale to the general public in the offering will be reduced to the extent such persons purchase such reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the others shares. We have agreed to indemnify the underwriters against liabilities under the Securities Act, or contribute to payments which the underwriters may be required to make in that respect. We have applied to list the shares of common stock on The Nasdaq Stock Market's National Market under the symbol "IWOV." In June 1999, we issued an aggregate of 3,394,719 shares of our Series E Preferred Stock at a per share price of $5.66 in a private placement. These shares of Series E Preferred Stock are convertible into an aggregate of 2,263,136 shares of common stock at $8.49 per share. Credit Suisse First Boston Corporation acted as the placement agent for this private placement, and it received a customary fee for its services. In addition, Merchant Capital, Inc., an affiliate of Credit Suisse First Boston Corporation, purchased 229,682 shares of Series E Preferred Stock. These shares of Series E Preferred Stock are convertible into 153,121 shares of common stock. Prior to this offering, there has been no public market for the common stock. The initial public offering price will be determined by negotiation between us and the underwriters. The principal factors to be considered in determining the public offering price include: . the information set forth in this prospectus and otherwise available to the underwriters; . the history and the prospects for the industry in which we will compete; . the ability of our management; . the prospects for our future earnings; . the present state of our development and our current financial condition; . the general condition of the securities markets at the time of this offering; and . the recent market prices of, and the demand for, publicly traded common stock of generally comparable companies. The representatives may engage in over-allotment, stabilizing transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Exchange Act. . Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. . Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. 66 . Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. . Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by such syndicate member is purchased in a syndicate covering transaction to cover syndicate short positions. These stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of the common stock to be higher than it would otherwise be in the absence of these transactions. These transactions may be effected on The Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. NOTICE TO CANADIAN RESIDENTS Resale Restrictions The distribution of the common stock in Canada is being made only on a private placement basis exempt from the requirement that we prepare and file a prospectus with the securities regulatory authorities in each province where trades of common stock are effected. Accordingly, any resale of the common stock in Canada must be made in accordance with applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made in accordance with available statutory exemptions or pursuant to a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the common stock. Representations of Purchasers Each purchaser of common stock in Canada who receives a purchase confirmation will be deemed to represent to us and the dealer from whom the purchase confirmation is received that (i) the purchaser is entitled under applicable provincial securities laws to purchase the common stock without the benefit of a prospectus qualified under the securities laws, (ii) where required by law, that the purchaser is purchasing as principal and not as agent, and (iii) the purchaser has reviewed the text above under "Resale Restrictions." Rights of Action (Ontario Purchasers) The securities being offered are those of a foreign issuer and Ontario purchasers will not receive the contractual right of action prescribed by Ontario securities law. As a result, Ontario purchasers must rely on other remedies that may be available, including common law rights of action for damages or recission or rights of action under the civil liability provisions of the U.S. federal securities laws. Enforcement of Legal Rights All of the issuer's directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon the issuer or these persons. All or a substantial portion of the assets of the issuer and these persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against the issuer or these persons in Canada or to enforce a judgment obtained in Canadian courts against the issuer or these persons outside of Canada. Notice to British Columbia Residents A purchaser of common stock to whom the Securities Act (British Columbia) applies is advised that the purchaser is required to file with the British Columbia Securities Commission a report within ten days of the sale of any common stock acquired by the purchaser in this offering. This report must be in the form attached to British Columbia Securities Commission Blanket Order BOR #95/17, a copy of which may be obtained from us. Only one report must be filed in respect of common stock acquired on the same date and under the same prospectus exemption. 67 Taxation and Eligibility for Investment Canadian purchasers of common stock should consult their own legal and tax advisors with respect to the tax consequences of an investment in the common stock in their particular circumstances and with respect to the eligibility of the common stock for investment by the purchaser under relevant Canadian legislation. LEGAL MATTERS Fenwick & West LLP, Palo Alto, California, will pass upon the validity of the issuance of the shares of common stock offered by this prospectus. The underwriters have been represented by Wilson Sonsini Goodrich & Rosati, Palo Alto, California. EXPERTS The financial statements as of December 31, 1997 and 1998 and for each of the three years in the period ended December 31, 1998 included in this Prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission, a registration statement on Form S-1 under the Securities Act with respect to the common stock. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules to the registration statement. For further information with respect to us and our common stock, we refer you to the registration statement and the exhibits and schedules filed as a part of the registration statement. Statements contained in this prospectus concerning the contents of any contract or any other document are not necessarily complete. If a contract or document has been filed as an exhibit to the registration statement, we refer you to the copy of the contract or document that has been filed. Each statement in this prospectus relating to a contract or document filed as an exhibit is qualified by the filed exhibit. The registration statement, including exhibits and schedules, may be inspected without charge at the principal office of the Securities and Exchange Commission in Washington, D.C., and copies of all or any part of it may be obtained from that office after payment of fees prescribed by the Securities and Exchange Commission. The Securities and Exchange Commission maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Securities and Exchange Commission at http://www.sec.gov. We intend to provide our stockholders with annual reports containing financial statements audited by an independent public accounting firm and quarterly reports containing unaudited financial data for the first three quarters of each year. 68 INTERWOVEN, INC. INDEX TO FINANCIAL STATEMENTS
Page ---- Report of Independent Accountants.......................................... F-2 Balance Sheet.............................................................. F-3 Statement of Operations.................................................... F-4 Statement of Changes in Stockholders' Deficit.............................. F-5 Statement of Cash Flows.................................................... F-6 Notes to Financial Statements.............................................. F-7
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Interwoven, Inc. In our opinion, the accompanying balance sheet and the related statements of operations, of stockholders' deficit and of cash flows present fairly, in all material respects, the financial position of Interwoven, Inc. (the "Company") at December 31, 1997 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP San Jose, California July 15, 1999 F-2 INTERWOVEN, INC. BALANCE SHEET (in thousands, except share and per share amounts)
December 31, Pro Forma ----------------- June 30, June 30, 1997 1998 1999 1999 ------- -------- -------- --------- (unaudited) ASSETS Current assets: Cash and cash equivalents............ $ 1,019 $ 9,022 $ 25,203 Accounts receivable, net............. 140 2,405 1,885 Prepaid expenses..................... -- 179 230 Other current assets................. 37 80 143 ------- -------- -------- Total current assets................ 1,196 11,686 27,461 Property and equipment, net............ 188 1,617 1,882 Restricted cash........................ -- 605 605 ------- -------- -------- $ 1,384 $ 13,908 $ 29,948 ======= ======== ======== LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable..................... $ 213 $ 484 $ 1,489 Accrued liabilities.................. 169 1,473 1,655 Debt and leases, current............. 22 258 511 Deferred revenue, current............ -- 627 1,172 ------- -------- -------- Total current liabilities........... 404 2,842 4,827 Debt and leases, long-term........... 87 1,257 1,000 Deferred revenue, long-term.......... -- 97 -- ------- -------- -------- 491 4,196 5,827 ------- -------- -------- Mandatorily redeemable convertible preferred stock 4,942,133, 15,163,093 and 18,763,092 shares authorized, respectively; 4,839,505, 15,060,465 and 18,455,184 shares issued and outstanding, respectively, actual; no shares authorized, issued or outstanding pro forma................. 4,627 20,464 45,276 $ -- ------- -------- -------- -------- Commitments (Note 4) Stockholders' Equity (Deficit): Preferred stock, $0.001 par value, no shares authorized, issued or outstanding, actual; 5,000,000 shares authorized, no shares issued or outstanding, pro forma........... -- -- -- -- Common Stock, 10,000,000, 16,666,667, 26,666,667 (unaudited) and 75,000,000 (unaudited) shares authorized, respectively; 2,433,333, 4,909,232, 6,230,590 (unaudited) and 18,642,241 (unaudited) shares, respectively, issued and outstanding......................... 3 5 6 19 Additional paid-in capital........... (243) 881 1,707 46,970 Notes receivable from stockholders... (3) (240) (202) (202) Deferred stock-based compensation.... -- (1,090) (6,130) (6,130) Accumulated deficit.................. (3,491) (10,308) (16,536) (16,536) ------- -------- -------- -------- Total stockholders' equity (deficit).......................... (3,734) (10,752) (21,155) $ 24,121 ------- -------- -------- ======== $ 1,384 $ 13,908 $ 29,948 ======= ======== ========
See accompanying notes to financial statements. F-3 INTERWOVEN, INC. STATEMENT OF OPERATIONS (in thousands, except per share amounts)
Six Months Ended Year Ended December 31, June 30, --------------------------- ----------------- 1996 1997 1998 1998 1999 ------- -------- -------- ------- -------- (unaudited) Revenues: License..................... $ -- $ 84 $ 3,176 $ 624 $ 3,258 Services.................... -- 84 827 262 1,746 ------- -------- -------- ------- -------- Total revenues............ -- 168 4,003 886 5,004 Cost of revenues: License..................... -- -- 59 -- 119 Services.................... -- 95 1,274 350 1,429 ------- -------- -------- ------- -------- Total cost of revenues.... -- 95 1,333 350 1,548 Gross profit.................. -- 73 2,670 536 3,456 Operating expenses: Research and development.... 328 884 1,797 735 1,701 Sales and marketing......... 101 1,519 4,817 1,357 5,225 General and administrative.. 91 530 1,739 572 1,244 Amortization of deferred stock-based compensation... -- -- 812 347 1,668 ------- -------- -------- ------- -------- Total expenses............ 520 2,933 9,165 3,011 9,838 Loss from operations.......... (520) (2,860) (6,495) (2,475) (6,382) Interest income (expense), net.......................... 10 (88) 151 57 154 ------- -------- -------- ------- -------- Net loss...................... $ (510) $ (2,948) $ (6,344) $(2,418) $ (6,228) Accretion of mandatorily redeemable convertible preferred stock to redemption value........................ -- (261) (1,165) (583) (6,350) ------- -------- -------- ------- -------- Net loss attributable to common stockholders.......... $ (510) $ (3,209) $ (7,509) $(3,001) $(12,578) ======= ======== ======== ======= ======== Basic and diluted net loss per share........................ $ (0.22) $ (1.36) $ (2.85) $ (1.25) $ (3.66) ======= ======== ======== ======= ======== Shares used in computing basic and diluted net loss per share........................ 2,282 2,356 2,633 2,404 3,435 ======= ======== ======== ======= ======== Pro forma basic and diluted net loss per share........... $ (0.74) $ (0.44) ======== ======== Shares used in computing pro forma basic and diluted net loss per share............... 8,530 14,000 ======== ========
See accompanying notes to financial statements. F-4 INTERWOVEN, INC. STATEMENT OF STOCKHOLDERS' DEFICIT (in thousands)
Note Common Stock Additional Receivable Deferred -------------- Paid-In from Stock-Based Accumulated Shares Amount Capital Stockholders Compensation Deficit Total ------ ------ ---------- ------------ ------------ ----------- -------- Balance at December 31, 1995................... 1,933 $ 2 $ 13 $ -- $ -- $ (33) $ (18) Issuance of Common Stock for cash............... 200 -- 3 -- -- -- 3 Issuance of Common Stock for notes receivable... 233 -- 3 (3) -- -- -- Net loss................ -- -- -- -- -- (510) (510) ----- --- ------ ----- ------- -------- -------- Balance at December 31, 1996................... 2,366 2 19 (3) -- (543) (525) Repurchase of Common Stock.................. (33) -- (5) -- -- -- (5) Issuance of Common Stock on exercise of stock options................ 100 1 4 -- -- -- 5 Accretion of mandatorily redeemable convertible preferred stock........ -- -- (261) -- -- -- (261) Net loss................ -- -- -- -- -- (2,948) (2,948) ----- --- ------ ----- ------- -------- -------- Balance at December 31, 1997................... 2,433 3 (243) (3) -- (3,491) (3,734) Issuance of Common Stock for notes receivable... 1,333 1 239 (240) -- -- -- Note repayment.......... -- -- -- 3 -- -- 3 Repurchase shares of Series A mandatorily redeemable convertible preferred stock........ -- -- -- -- -- (473) (473) Accretion of mandatorily redeemable convertible preferred stock........ -- -- (1,165) -- -- -- (1,165) Issuance of Common Stock on exercise of stock options................ 1,143 1 148 -- -- -- 149 Deferred stock-based compensation........... -- -- 1,902 -- (1,902) -- -- Amortization of stock- based compensation..... -- -- -- -- 812 -- 812 Net loss................ -- -- -- -- -- (6,344) (6,344) ----- --- ------ ----- ------- -------- -------- Balance at December 31, 1998................... 4,909 $ 5 $ 881 $(240) $(1,090) $(10,308) $(10,752) ===== === ====== ===== ======= ======== ======== Issuance of Common Stock for services .......... 9 -- 27 -- -- -- 27 Issuance of Common Stock for notes receivable ...... 517 -- 202 (202) -- -- -- Repurchase of Common Stock ................. (63) -- (5) -- -- -- (5) Note repayment.......... -- -- -- 240 -- -- 240 Accretion of mandatorily redeemable convertible preferred stock........ -- -- (6,350) -- -- -- (6,350) Issuance of Common Stock on exercise of stock options ............... 859 1 244 -- -- -- 245 Deferred stock-based compensation........... -- -- 6,708 -- (6,708) -- -- Amortization of stock- based compensation .... -- -- -- -- 1,668 -- 1,668 Net loss................ -- -- -- -- -- (6,228) (6,228) ----- --- ------ ----- ------- -------- -------- Balance at June 30, 1999 (unaudited)............ 6,231 $ 6 $1,707 $(202) $(6,130) $(16,536) $(21,155) ===== === ====== ===== ======= ======== ========
See accompanying notes to financial statements. F-5 INTERWOVEN, INC. STATEMENT OF CASH FLOWS (in thousands)
Six Months Year Ended December 31, Ended June 30, -------------------------- ---------------- 1996 1997 1998 1998 1999 ------- -------- -------- ------- ------- (unaudited) Cash flows used in operating activities: Net loss........................ $ (510) $ (2,948) $ (6,344) $(2,418) $(6,228) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization... 17 56 294 87 296 Amortization of deferred stock- based compensation............. -- -- 812 347 1,668 Issuance of common stock for services....................... -- -- -- -- 27 Non-cash interest expense....... 7 135 -- -- -- Provisions for doubtful accounts....................... -- -- 270 -- 18 Changes in assets and liabilities: Accounts receivable............ -- (140) (2,535) (435) 502 Prepaid expenses and other assets........................ (1) (30) (222) (31) (114) Restricted cash................ -- -- (605) -- -- Accounts payable............... 116 96 271 583 1,005 Accrued liabilities............ 48 121 1,304 115 182 Deferred revenue............... -- -- 724 169 448 ------ -------- -------- ------- ------- Net cash used in operating activities................... (323) (2,710) (6,031) (1,583) (2,196) ------ -------- -------- ------- ------- Cash flows used in investing activities: Purchase of property and equipment...................... (64) (138) (1,723) (1,258) (561) ------ -------- -------- ------- ------- Cash flows from financing activities: Proceeds from (repurchases of) Series A Preferred Stock, net.. 309 -- (632) (632) -- Proceeds from Series B Preferred Stock, net..................... -- 3,415 -- -- -- Proceeds from Series C Preferred Stock, net..................... -- -- 7,887 6,712 -- Proceeds from Series D Preferred Stock, net..................... -- -- 6,944 -- -- Proceeds from Series E Preferred Stock, net..................... -- -- -- -- 18,462 Proceeds from issuance of Common Stock.......................... 3 -- -- -- -- Proceeds from exercise of stock options........................ -- 5 149 123 245 Proceeds from notes payable, net of discount.................... 75 375 -- -- -- Repayment (issuance) of stockholders loans............. 10 (11) 3 -- 240 Proceeds from bank borrowings... -- 76 1,500 -- -- Repurchase of Common Stock...... -- (5) -- -- (5) Principal payments of debt and leases......................... -- (5) (94) (3) (4) ------ -------- -------- ------- ------- Net cash provided by financing activities................... 397 3,850 15,757 6,200 18,938 ------ -------- -------- ------- ------- Net increase in cash and cash equivalents..................... 10 1,002 8,003 3,359 16,181 Cash and cash equivalents at beginning of period............. 7 17 1,019 1,019 9,022 ------ -------- -------- ------- ------- Cash and cash equivalents at end of period....................... $ 17 $ 1,019 $ 9,022 $ 4,378 $25,203 ====== ======== ======== ======= ======= Supplemental cash flow disclosures: Cash paid for interest.......... $ -- $ -- $ 41 $ 9 $ 64 ====== ======== ======== ======= ======= Supplemental non-cash investing and finance activities: Property and equipment leases... $ -- $ 38 $ -- $ -- $ -- ====== ======== ======== ======= ======= Issuance of Series A Preferred Stock upon conversion of stockholder loans.............. $ 50 $ -- $ -- $ -- $ -- ====== ======== ======== ======= ======= Common Stock issued for notes receivable..................... $ 3 $ -- $ 240 $ 240 $ 202 ====== ======== ======== ======= ======= Common Stock issued for services....................... $ -- $ -- $ -- $ -- $ 27 ====== ======== ======== ======= ======= Series B Preferred Stock issued upon conversion of convertible notes payable and accrued interest....................... $ -- $ 460 $ -- $ -- $ -- ====== ======== ======== ======= ======= Issuance of warrants to purchase Series B Preferred Stock....... $ -- $ 106 $ -- $ -- $ -- ====== ======== ======== ======= =======
See accompanying notes to financial statements. F-6 INTERWOVEN, INC. NOTES TO FINANCIAL STATEMENTS Information as of June 30, 1999 and for the six months ended June 30, 1998 and 1999 is unaudited 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." Our flagship software product, TeamSite, is designed to help customers develop, maintain and extend large web sites that are essential to their businesses. Reincorporation In June 1999, the Company's Board of Directors authorized the reincorporation of the Company in the State of Delaware. As a result of the reincorporation, the Company is authorized to issue 75,000,000 shares of $0.001 par value Common Stock and 5,000,000 shares of $0.001 par value Preferred Stock. The Board of Directors has the authority to issue undesignated Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. Share and per share information for each of the periods presented has been retroactively adjusted to reflect the reincorporation. Unaudited interim results The accompanying interim financial statements as of June 30, 1999 and for the six months ended June 30, 1998 and 1999 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual 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 for the six months ended June 30, 1998 and 1999. The financial data and other information disclosed in these notes to financial statements related to these periods are unaudited. The results for the six months ended June 30, 1999 are not necessarily indicative of the results to be expected for the year ending December 31, 1999. 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. Revenue recognition In October 1997 and March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position No. 97-2, "Software Revenue Recognition" ("SOP No. 97-2") and Statement of Position No. 98-4, "Deferral of the Effective Date of a Provision of SOP No. 97-2" ("SOP No. 98-4"). SOP 98-4 defers for one year the application of certain provisions of SOP 97-2. In December 1998, the AICPA issued Statement of Position No. 98-9, "Modification of SOP No. 97-2 with Respect to Certain Transactions" ("SOP No. 98-9"), which is effective for transactions entered into beginning April 1, 1999. SOP 98-9 extends the effective date of SOP 98-4 and provides additional interpretive guidance. The adoption of SOP 97-2, SOP 98-4 and SOP 98-9 have not had and are not expected to have a material impact on the Company's results of operations, financial position or cash flows. The Company's revenues are derived from licenses of its software products and from services the Company provides to its customers. Revenues are recognized for the various contract elements based upon vendor-specific objective evidence of fair value of each element. F-7 INTERWOVEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Information as of June 30, 1999 and for the six months ended June 30, 1998 and 1999 is unaudited License revenues from resellers and end users 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. The Company does not offer product return rights to resellers or end users. Services revenues consist of professional services and maintenance fees. Professional services primarily consists of software installation and integration, business process consulting and training. Professional services are billed on a time and materials basis and revenues are recognized as the services are performed. Maintenance agreements are typically priced based on a percentage of the product license fee and have a one-year term, renewable annually. Services provided to customers under maintenance agreements include technical product support and unspecified product upgrades. Deferred revenues from advanced payments for maintenance agreements are recognized ratably over the term of the agreement, which is typically one year. Cash and cash equivalents The Company considers all highly liquid investments with an original maturity of three months or less at the date of acquisition to be cash equivalents. Cash equivalents consist principally of money-market accounts that are stated at historical cost, which approximates fair value. Concentration of credit risk Financial instruments, which potentially subject the Company to a concentration of credit risk, consist primarily of cash and cash equivalents and accounts receivable. The Company limits its exposure to credit loss by placing its cash and cash equivalents with a major financial institution. The Company's accounts receivable are derived from revenues earned from customers located in the U.S. and are denominated in U.S. dollars. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. The Company maintains an allowance for doubtful accounts receivable based upon expected collectibility of accounts receivable. The following table summarizes the revenues from customers in excess of 10% of the total revenues.
Six Months Year ended Ended December 31, June 30, --------------- ------------- 1997 1998 1998 1999 ------ ------ ----- ----- (unaudited) Company A.................................. 20% --% --% --% Company B.................................. 20% --% --% --% Company C.................................. 18% --% 13% --% Company D.................................. 11% --% --% --% Company E.................................. 10% --% --% --% Company F.................................. --% 13% --% --% Company G.................................. --% --% 17% --% Company H.................................. --% --% 14% --%
At December 31, 1997, Company A, B and C accounted for 25%, 22% and 21% of total accounts receivable, respectively. At December 31, 1998, Company F accounted for 10% of total accounts receivable. At June 30, 1999 (unaudited) no customer accounted for 10% of total accounts receivable. F-8 INTERWOVEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Information as of June 30, 1999 and for the six months ended June 30, 1998 and 1999 is unaudited Fair value of instruments The Company's financial instruments including cash and cash equivalents, 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. Software development costs Software development costs incurred in the research and development of new products and enhancements to existing products are charged to expense as incurred. Software development costs are capitalized after technological feasibility has been established. The period between achievement of technological feasibility, which the Company defines as the establishment of a working model, until the general availability of such software to customers, has been short and software development costs qualifying for capitalization have been insignificant. Accordingly, the Company has not capitalized any software development costs since its inception. Capitalization of internal-use software costs In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use". SOP 98-1 is effective for financial statements for years beginning after December 15, 1998 and provides guidance for the accounting of computer software developed or obtained for internal use including the requirement to capitalize specified costs and amortization of such costs. The Company adopted the provisions of SOP 98-1 in its fiscal year beginning January 1, 1999. Property and equipment Property and equipment are stated at historical cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the useful lives of the assets, generally five years or less, or the shorter of the lease term or the estimated useful lives of the assets, if applicable. Impairment of long-lived assets The Company evaluates the recoverability of its long-lived assets in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121 requires recognition of impairment of long- lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributed to such assets. Stock-based compensation The Company accounts for stock-based employee compensation arrangements in accordance with provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and complies with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB 25, compensation expense is based on the difference, if any, on the date of grant F-9 INTERWOVEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Information as of June 30, 1999 and for the six months ended June 30, 1998 and 1999 is unaudited between fair value of the Company's stock and the exercise price. The Company accounts for stock issued to non-employees in accordance with the provisions of SFAS No. 123 and the Emerging Issues Task Force Consensus on Issue No. 96-18. Income taxes Income taxes are accounted for using an asset and liability approach, which requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. The measurement of current and deferred tax liabilities and assets are based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. 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 73,333, 1,737,435, 1,527,472 (unaudited), and 1,997,580 (unaudited) as of December 31, 1997 and 1998 and June 30, 1998 and 1999, 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):
Six Months Year Ended December 31, Ended June 30, ------------------------- --------------- 1996 1997 1998 1998 1999 ------- ------- ------- ------ ------- (unaudited) Numerator: Net loss attributable to common stockholders......... (510) (3,209) (7,509) (3,001) (12,578) Denominator: Weighted average shares...... 2,282 2,405 3,949 3,360 5,549 Weighted average unvested shares of Common Stock subject to repurchase....... -- (49) (1,316) (956) (2,114) ------- ------- ------- ------ ------- Denominator for basic and diluted calculation......... 2,282 2,356 2,633 2,404 3,435 Net loss per share: Basic and diluted............ ($ 0.22) ($ 1.36) ($ 2.85) ($1.25) ($ 3.66) ======= ======= ======= ====== =======
F-10 INTERWOVEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Information as of June 30, 1999 and for the six months ended June 30, 1998 and 1999 is unaudited The following table sets forth potential shares of Common Stock that are not included in the diluted net loss per share calculation above because to do so would be anti-dilutive for the periods indicated (in thousands):
Year Ended Six Months December 31, Ended June 30, ----------------- -------------- 1996 1997 1998 1998 1999 ----- ----- ----- -------------- (unaudited) Weighted average effect of Common Stock equivalents.................................. Series A Preferred Stock.................... 796 1,200 878 1,010 747 Series B Preferred Stock.................... -- 1,235 2,107 2,079 2,135 Series C Preferred Stock.................... -- -- 3,092 2,023 4,773 Series D Preferred Stock.................... -- -- 359 -- 2,494 Series E Preferred Stock.................... -- -- -- -- 344 Warrants to purchase mandatorily redeemable convertible preferred stock................ 1 66 71 70 72 Shares of Common Stock subject to repurchase................................. -- 49 1,316 956 2,114 Common Stock options........................ 250 1,480 1,870 2,148 1,074 ----- ----- ----- ------ ------- 1,047 4,030 9,693 8,286 13,753 ===== ===== ===== ====== =======
Pro forma net loss per share (unaudited) 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 to purchase Series B Preferred Stock and automatic conversion of the Company's Series A, B, C, D and E Preferred Stock into shares of the Company's 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 year ended December 31, 1998 and the six months ended June 30, 1999 includes (i) an increase in the weighted average shares used to compute the basic net loss per share of 5,896,280 and 10,564,993 (unaudited), respectively, and (ii) a decrease in the net loss attributable to common stockholders for the accretion of mandatorily redeemable convertible preferred stock of $1,165,000 and $6,350,000 (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 and incremental shares of Common Stock issuable upon the exercise of stock options. Pro forma stockholders' equity (unaudited) Effective upon the closing of the Company's initial public offering, the outstanding shares of Series A, B, C, D and E Preferred Stock will automatically convert into 746,664, 2,134,548, 4,773,161, 2,494,142, and 2,263,136 shares of Common Stock, respectively. The pro forma effects of these transactions are unaudited and have been reflected in the accompanying pro forma balance sheet at June 30, 1999. 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 F-11 INTERWOVEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Information as of June 30, 1999 and for the six months ended June 30, 1998 and 1999 is unaudited assets) during a period from non-owner sources. As of December 31, 1998 and June 30, 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 business activities, management responsibility and geographic location. During all periods presented, the Company operated in a single business segment. Reclassifications Certain reclassifications have been made to the prior year financial statements to conform to the current period presentation. NOTE 2--BALANCE SHEET COMPONENTS (in thousands):
December 31, ------------- June 30, 1997 1998 1999 ------------- ----------- (unaudited) Accounts receivable, net: Accounts receivable............................. $ 140 $ 2,675 $2,173 Less: Allowance for doubtful accounts........... -- (270) (288) ----- ------- ------ $ 140 $ 2,405 $1,885 ===== ======= ======
There were no write-offs against the allowance for doubtful accounts in the years ended December 31, 1997 and 1998 and for the six months ended June 30, 1999 (unaudited).
December 31, -------------- June 30, 1997 1998 1999 ------ ------- ----------- (unaudited) Property and equipment, net: Computer equipment and purchased software.... $ 254 $ 952 $1,505 Furniture and fixtures....................... 10 586 590 Leasehold improvements....................... -- 449 453 ----- ------- ------ 264 1,987 2,548 Less: Accumulated depreciation and amortization................................ (76) (370) (666) ----- ------- ------ $ 188 $ 1,617 $1,882 ===== ======= ======
F-12 INTERWOVEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Information as of June 30, 1999 and for the six months ended June 30, 1998 and 1999 is unaudited Property and equipment includes $38,000, $23,000 and $23,000 (unaudited) of fixed assets under capital leases at December 31, 1997 and 1998 and June 30, 1999, respectively. Accumulated depreciation of such assets was $7,000, $8,000 and $12,000 (unaudited) at December 31, 1997 and 1998 and June 30, 1999, respectively.
December 31, ------------- June 30, 1997 1998 1999 ------------- ----------- (unaudited) Accrued liabilities: Payroll and related expenses..................... $ 59 $ 1,247 $1,063 Other............................................ 110 226 592 ----- ------- ------ $ 169 $ 1,473 $1,655 ===== ======= ======
NOTE 3--DEBT: In June 1999, the Company amended a financing agreement (the "Financing Agreement") originally entered into in June 1998, whereby the bank will loan up to 80% of eligible accounts receivable up to a maximum of $3,000,000 (unaudited) for working capital purposes. Working capital advances accrue interest at the bank's prime rate and are payable monthly with principal due one year subsequent to the date of any advance. The Financing Agreement provides for additional borrowings of up to $1,500,000 to finance equipment purchases. Advances for equipment purchases accrue interest at the bank's prime rate plus .25% and advances are payable monthly for one year subsequent to the date of any advance. Thereafter, the outstanding balance will be due in 36 monthly installments. The Agreement requires the Company to comply with certain financial covenants. The Company was in compliance with all covenants at December 31, 1998 and for the six months ended June 30, 1999 (unaudited). Future minimum principal payments under the Financing Agreement are as follows (in thousands): Year Ending December 31, 1999................................................................ $ 250 2000................................................................ 500 2001................................................................ 500 2002................................................................ 250 ------ $1,500 ======
In January 1997, the Company issued $375,000 of convertible promissory notes payable. The notes bore interest at 6% per year. In connection with the issuance of the notes, the Company issued to the note holders warrants to purchase 82,219 shares of Series B Preferred Stock at $1.29 per share. The warrants expire at the earlier of November 2001 or upon an initial public offering of the Company's Common Stock. The Company recorded a $94,000 discount to the notes for the value of the warrants, which was recognized in 1997 as additional interest expense. In May 1997, the principal amounts and accrued interest outstanding for the notes were converted into 357,182 shares of Series B Preferred Stock (see Note 6). F-13 INTERWOVEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Information as of June 30, 1999 and for the six months ended June 30, 1998 and 1999 is unaudited NOTE 4--COMMITMENTS: The Company leases office space and equipment under noncancelable operating and capital leases with various expiration dates through May 2003. Rent expense for the year ended December 31, 1997 and 1998 and for the six months ended June 30, 1998 and 1999 totaled $52,000, $557,000, $96,000 (unaudited) and $325,000 (unaudited), respectively. Future minimum lease payments under noncancelable operating and capital leases, as of December 31, 1998, are as follows (in thousands):
Capital Operating Sublease Leases Leases Income ------- --------- -------- Year Ending December 31, 1999.......................................... $10 $ 938 $356 2000.......................................... 7 951 211 2001.......................................... -- 979 -- 2002.......................................... -- 1,009 -- 2003.......................................... -- 426 -- --- ------ ---- Total minimum lease payments and sublease income....................................... 17 $4,303 $567 === ====== ==== Less: Amount representing interest............ 2 --- Present value of capital lease obligations.... $15 ===
Restricted cash During fiscal 1998, $605,000 of cash was pledged as collateral on an outstanding letter of credit relating to the building lease agreement and is classified as restricted cash on the balance sheet. The restricted cash will be reduced by $226,875 on the 31st month after the signing of the agreement provided no event of default has occurred. The Company was in compliance with all such covenants at December 31, 1998 and June 30, 1999 (unaudited). NOTE 5--INCOME TAXES: At December 31, 1998, the Company had approximately $7,181,000 of federal and $1,178,000 of state net operating tax loss carryforwards available to reduce future taxable income which expire in 2015 and 2010 for federal and state tax purposes, respectively. Under the Tax Reform Act of 1986, the amounts of and benefits from net operating loss carryforwards may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50%, as defined, over a three year period. F-14 INTERWOVEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Information as of June 30, 1999 and for the six months ended June 30, 1998 and 1999 is unaudited Deferred tax assets consist of the following (in thousands):
December 31, ---------------- June 30, 1997 1998 1999 ------- ------- ----------- (unaudited) Deferred tax assets: Net operating loss carryforwards............. $ 1,105 $ 2,882 $ 4,250 Accruals and reserves........................ 61 235 250 Research credits............................. 40 120 150 Depreciation................................. 60 128 150 ------- ------- ------- 1,266 3,365 4,800 Valuation allowance............................ (1,266) (3,365) (4,800) ------- ------- ------- Net deferred tax assets........................ $ -- $ -- $ -- ======= ======= =======
For financial reporting purposes, the Company has incurred a loss in each year since its inception. Based on the available objective evidence, management believes it is more likely than not that the net deferred tax assets will not be fully realizable. Accordingly, the Company has provided for a full valuation allowance against its net deferred tax assets at December 31, 1997 and 1998 and June 30, 1999 (unaudited). NOTE 6--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK: At December 31, 1998, mandatorily redeemable convertible preferred stock consists of the following (in thousands):
Shares ---------------------- Liquidation Redemption Series Authorized Outstanding Amount Amount ------ ---------- ----------- ----------- ---------- Series A Preferred Stock...... 1,120 1,120 $ 224 $ 626 Series B Preferred Stock...... 3,142 3,040 3,909 4,756 Series C Preferred Stock...... 7,160 7,160 7,726 7,989 Series D Preferred Stock...... 3,741 3,741 7,000 7,093 ------ ------ ------- ------- 15,163 15,061 $18,859 $20,464 ====== ====== ======= =======
At June 30, 1999 (unaudited), mandatorily redeemable convertible preferred stock consists of the following (in thousands):
Shares ---------------------- Liquidation Redemption Series Authorized Outstanding Amount Amount ------ ---------- ----------- ----------- ---------- Series A Preferred Stock...... 1,120 1,120 $ 224 $ 1,095 Series B Preferred Stock...... 3,142 3,040 3,909 6,072 Series C Preferred Stock...... 7,160 7,160 7,726 10,987 Series D Preferred Stock...... 3,741 3,741 7,000 8,660 Series E Preferred Stock...... 3,600 3,395 19,214 18,462 ------ ------ ------- ------- 18,763 18,456 $38,073 $45,276 ====== ====== ======= =======
F-15 INTERWOVEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Information as of June 30, 1999 and for the six months ended June 30, 1998 and 1999 is unaudited The holders of Series A, B, C, and D Preferred Stock have certain rights and privileges as follows: Warrants The Company issued warrants to purchase 20,409, 82,219 and 5,480 in 1996, 1997 and 1998, respectively, shares of Series B Preferred Stock at $1.29 per share to the holders of the warrants. The warrants expire at the earlier of November 2001 or upon an initial public offering of the Company's Common Stock. Voting Each share of Series A, B, C, and D Preferred Stock has voting rights equivalent to Common Stock on an "as if" converted basis. Dividends Holders of Series A, B, C and D Preferred Stock are entitled to receive non- cumulative annual dividends of $0.01, $0.10, $0.09 and $0.15 per share, respectively, when and if declared by the Company's Board of Directors. Dividends on the Series A, B, C and D Preferred Stock shall be payable in preference and prior to any payment of any dividend on the Common Stock. The holders of the Series A, B, C and D will also be entitled to participate in dividends on the Common Stock, when and if declared by the Board of Directors, on an as-converted to Common Stock basis. No dividends have been declared from inception through December 31, 1998. Liquidation In the event of any liquidation, dissolution, winding up or merger where less than 50% of the voting power is maintained by the Company, the holders of the Series A, B, C, and D Preferred Stock shall be entitled to receive, prior and in preference to any distribution to the holders of the Common Stock, an amount equal to $0.20, $1.29, $1.08 and $1.87 per share, respectively, plus any declared but unpaid dividends. Any amounts remaining after such distribution shall be distributed among the holders of Series B, C and D Preferred Stock, and Common Stock on an "as if" converted basis until the holders of Series B, C and D Preferred Stock have received an aggregate liquidation payment of $2.57, $2.16 and $2.81, thereafter any remaining amounts shall be distributed among the holders of Common Stock. Redemption Upon the request of holders of at least 50% of the outstanding shares of Series A, B, C or D Preferred Stock, the shares of all of the preferred stock may be redeemed in four equal installments beginning in May 2002. The redemption price for Series A, B, C and D Preferred Stock will be the greater of the original issuance price for Series A, B, C and D Preferred Stock, $0.20, $1.29, $1.08 and $1.87 per share, respectively, plus any undeclared and unpaid dividends and an amount equal to that amount which would result in the holder of such shares realizing an 8% annually compounded return on the purchase price or the fair market value of Series A, B, C and D Preferred Stock on the first redemption date. Conversion Each share of Series A, C, and D Preferred Stock is convertible at the option of the holder into two-thirds of a share of Common Stock at any time, subject to adjustment for antidilution. Each share of Series B F-16 INTERWOVEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Information as of June 30, 1999 and for the six months ended June 30, 1998 and 1999 is unaudited Preferred Stock is convertible at the option of the holders into .7022705 of a share of Common Stock at any time, subject to adjustment for antidilution. Each share of Series A, B, C and D Preferred Stock will be automatically converted upon an initial public offering of the Company's Common Stock with aggregate proceeds in excess of $20,000,000 and a price per share of not less than $5.79. The Company has reserved sufficient shares of Common Stock for issuance upon conversion of the Series A, B, C and D Preferred Stock. Series E Preferred Stock Each share of Series E Preferred Stock has voting rights equivalent to Common Stock on an "as if" converted basis. Holders of Series E Preferred Stock are entitled to receive non-cumulative annual dividends of $0.45 per share, when and if declared by the Company's Board of Directors. Dividends on the Preferred Stock shall be payable in preference and prior to any payment of any dividend on the Common Stock. The holders of the Series E Preferred Stock will also be entitled to participate in dividends on the Common Stock, when and if declared by the Board of Directors, based on the number of shares of Common Stock held on an as-converted basis. No dividends have been declared from inception through June 30, 1999 (unaudited). In the event of any liquidation, dissolution, winding up or merger where less than 50% of the voting power is maintained by the Company, the holders of the Series E Preferred Stock shall be entitled to receive, prior and in preference to any distribution to the holders of the Common Stock, an amount equal to $5.66 per share, respectively, plus any declared but unpaid dividends. Any amounts remaining after such distribution shall be distributed among the holders of Series E Preferred Stock, and Common Stock on an "as if" converted basis until the holders of Series E have received an aggregate liquidation payment of $8.49, thereafter any remaining amounts shall be distributed among the holders of Common Stock (unaudited). Upon the request of holders of at least 50% of the outstanding shares of Series E Preferred Stock, the shares of all of the preferred stock may be redeemed in four equal installments beginning in May 2002. The redemption price for Series E Preferred Stock will be the greater of the original issuance price for Series E Preferred Stock, $5.66 per share, respectively, plus any undeclared and unpaid dividends and an amount equal to that amount which would result in the holder of such shares realizing an 8% annually compounded return on the purchase price or the fair market value of Series E Preferred Stock on the first redemption date (unaudited). Each share of Series E Preferred Stock is convertible at the option of the holder into two-thirds of a share of Common Stock at any time, subject to adjustment for antidilution. Each share of Series E Preferred Stock will be automatically converted upon an initial public offering of the Company's Common Stock with aggregate proceeds in excess of $20,000,000 and a price per share of not less than $8.49. The Company has reserved sufficient shares of Common Stock for issuance upon conversion of the Series E Preferred Stock (unaudited). NOTE 7--COMMON STOCK: In March 1995, the Company issued 1,933,333 shares of Common Stock to its founder in exchange for $14,500 in total consideration. Additionally, in March 1996, the Company issued 233,333 shares of Common Stock to an employee in consideration of a $3,500 promissory note. In addition, the Company issued a further 200,000 shares of Common Stock in consideration of $3,000 in cash. Under the terms of the stock purchase agreements, the Company has the right to repurchase up to 2,166,667 shares of such Common Stock at the original issue price upon termination. The repurchase rights expired as to 25% of such Common Stock in January 1997 and the remainder expire ratably over a 36 month period thereafter with 586,667 and 315,972 (unaudited) shares of Common Stock subject to repurchase at December 31, 1998 and June 30, 1999. F-17 INTERWOVEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Information as of June 30, 1999 and for the six months ended June 30, 1998 and 1999 is unaudited The Company had reserved shares of Common Stock for issuance as follows (in thousands):
As of June 30, 1999 ----------- (unaudited) Mandatorily redeemable convertible preferred stock: Series A Preferred Stock....................................... 747 Series B Preferred Stock....................................... 2,135 Series C Preferred Stock....................................... 4,773 Series D Preferred Stock....................................... 2,494 Series E Preferred Stock....................................... 2,263 Exercise of options under stock option plans..................... 945 ------ 13,357 ======
Notes receivable from stockholders In March 1998, the Company issued 1,333,333 shares of Common Stock to an officer of the Company in exchange for a $240,000 note receivable. The note bore interest at 6% per year. The note was secured by the underlying stock and is classified as a note receivable from stockholder in the accompanying balance sheet at December 31, 1998. Under the terms of the agreement, the Company has the right to repurchase all of the shares of such stock at the original issue price upon termination. The repurchase rights expire ratably over a 48 month period with 1,055,555 and 888,889 (unaudited) shares of Common Stock subject to repurchase at December 31, 1998 and June 30, 1999, respectively. In June 1999, the note was paid. In April 1999 the Company issued a total 516,667 shares of Common Stock to two officers of the Company in exchange for notes receivable totalling $201,500 (unaudited). The notes bear interest at 6% per year and are due upon the earlier of (i) an acquisition, (ii) an initial public offering, (iii) the employee's termination or (iv) five years. The notes are secured by the underlying stock and are classified as notes receivable from stockholders in the accompanying balance sheet at June 30, 1999. Under the terms of the agreement, the Company has the right to repurchase all of the shares of such stock at the original issue price upon termination. The repurchase rights will expire as to 25% of such Common Stock in April 2000, and the remainder will expire ratably over a 36 month period thereafter with 516,667 (unaudited) shares of Common Stock subject to repurchase at June 30, 1999. NOTE 8--EMPLOYEE STOCK OPTION PLAN: In August 1996, the Company adopted the 1996 Stock Option Plan (the "1996 Plan") and in March 1998 it adopted the 1998 Stock Option Plan (the "1998 Plan") (collectively, the "Plans"). The Plans provide for grants of stock options to employees and consultants of the Company. Options granted under the Plan may be either incentive stock options or nonqualified stock options. Incentive stock options ("ISO") may be granted only to employees (including officers and directors who are also employees) of the Company. Nonqualified stock options may be granted to employees and consultants of the Company. Options under the Plans may be granted for periods of up to ten years and at prices no less than 85% of the estimated fair value of the shares on the date of grant as determined by the Board of Directors, provided, however, that (i) the exercise price of an ISO shall not be less than 100% of the estimated fair value of the F-18 INTERWOVEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Information as of June 30, 1999 and for the six months ended June 30, 1998 and 1999 is unaudited shares on the date of grant and (ii) the exercise price of an ISO granted to a 10% stockholder shall not be less than 110% of the estimated fair value of the shares on the date of grant and are for periods not to exceed five years. Options are immediately exercisable but are subject to repurchase by the Company at the original exercise price. The repurchase feature generally expires for 25% of the shares after the first year of service and then expires ratably over the next 36 months. The following table summarizes the activity under the Plans for the years ended December 31, 1997, 1998 and the six months ended June 30, 1999 (shares in thousands):
Year Ended December 31, Six months --------------------------------- ended June 30, 1997 1998 1999 ---------------- ---------------- ---------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ -------- ------ -------- ------ -------- (unaudited) Outstanding at beginning of period.............. 487 $0.03 1,276 $0.11 622 $0.17 Granted................. 1,074 0.14 824 0.21 1,333 1.09 Canceled................ (185) 0.09 (334) 0.18 (151) 0.18 Exercised............... (100) 0.05 (1,144) 0.13 (859) 0.32 ----- ------ ----- Outstanding at end of period................. 1,276 0.11 622 0.17 945 1.33 ----- ------ ----- Options exercisable at end of period.......... 1,276 622 945 ----- ------ ----- Weighted average fair value of options granted during the period................. $0.03 $0.05 $0.21 ===== ===== =====
The followings table summarizes information about stock options outstanding and exercisable at December 31, 1998 (shares in thousands):
Options Exercisable Options Outstanding at December 31, 1998 at December 31, 1998 ------------------------------------------------ -------------------- Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life (Years) Price Exercisable Price -------- ----------- ------------ -------- ----------- -------- $0.03- 0.09 206 8.0 $ 0.07 206 $0.07 0.15- 0.21 362 9.4 0.19 362 0.19 0.39 54 9.9 0.39 54 0.39 ------------ --- 622 9.0 0.17 622 0.17 ============ ===
F-19 INTERWOVEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Information as of June 30, 1999 and for the six months ended June 30, 1998 and 1999 is unaudited The followings table summarizes information about stock options outstanding and exercisable at June 30, 1999 (unaudited) (shares in thousands):
Options Outstanding at June 30, Options Exercisable 1999 at June 30, 1999 ------------------------------------- ----------------------- Weighted Average Remaining Weighted Weighted Range of Contractual Average Average Exercise Number Life Exercise Number Exercise Prices Outstanding (Years) Price Exercisable Price -------- ----------- ----------- -------- ----------- -------- $0.15-0.21 144 8.9 $0.19 144 $0.19 0.39-1.20 341 9.7 0.72 341 0.72 1.65-2.25 460 10.0 2.14 460 2.14 --- --- 945 9.7 1.33 945 1.33 === ===
Fair value disclosures The Company calculated the minimum fair value of each option grant on the date of grant using the Black-Scholes option-pricing model as prescribed by SFAS No. 123 using the following assumptions:
Year Ended Six Months December 31, Ended --------------- June 30, 1997 1998 1999 ------ ------ ----------- (unaudited) Risk-free interest rates....................... 6.5% 6.5% 5.5% Expected lives (in years)...................... 4.0 4.0 4.0 Dividend yield................................. 0.0 0.0 0.0 Expected volatility............................ 0.0 0.0 0.0
The compensation cost associated with the Company's stock-based compensation plans, determined using the minimum value method prescribed by SFAS No. 123, did not result in a material difference from the reported net income for the years ended December 31, 1997 and 1998 and for the six months ended June 30, 1998 and 1999 (unaudited). Deferred stock-based compensation In connection with certain stock option grants during the year ended December 31, 1998 and the six months ended June 30, 1999, the Company recognized deferred stock-based compensation totaling $1.9 million and $6.7 million (unaudited), respectively, which is being amortized over the vesting periods of the applicable options. Amortization expense recognized during the year ended December 31, 1998 and the six months ended June 30, 1999 totaled approximately $812,000 and $1.7 million (unaudited), respectively. NOTE 9--SUBSEQUENT EVENTS: Stock Split Prior to the effectiveness of the Company's initial public offering, the Company's Board of Directors intends to effect a two-for-three reverse stock split of the outstanding shares of Common Stock. All common share and per share information included in these financial statements have been retroactively adjusted to reflect this stock split. F-20 INTERWOVEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Information as of June 30, 1999 and for the six months ended June 30, 1998 and 1999 is unaudited Employee Stock Purchase Plan In July 1999, the Board adopted, subject to stockholder approval, the 1999 Employee Stock Purchase Plan (the "Purchase Plan") and reserved 300,000 shares of Common Stock for issuance thereunder. On each January 1, the aggregate number of shares reserved for issuance under this plan will increase automatically by a number of shares equal to 1% of the Company's outstanding shares on December 31 of the preceding year. The aggregate number of shares reserved for issuance under the Purchase Plan shall not exceed 3,000,000 shares. The Purchase Plan will become effective on the first business day on which price quotations for the Company's Common Stock are available on the Nasdaq National Market. Employees generally will be eligible to participate in the Purchase Plan if they are customarily employed by the Company for more than 20 hours per week and more than five months in a calendar year and are not (and would not become as a result of being granted an option under the Purchase Plan) 5% stockholders of the Company. Under the Purchase Plan, eligible employees may select a rate of payroll deduction between 2% and 10% of their W- 2 cash compensation subject to certain maximum purchase limitations. Each offering period will have a maximum duration of two years and consists of four six-month Purchase Periods. The first Offering Period is expected to begin on the first business day on which price quotations for the Company's Common Stock are available on the Nasdaq National Market. Depending on the Effective Date, the first Purchase Period may be more or less than six months long. Offering Periods and Purchase Periods thereafter will begin on February 1 and August 1. The price at which the Common Stock is purchased under the Purchase Plan is 85% of the lesser of the fair market value of the Company's Common Stock on the first day of the applicable offering period or on the last day of that purchase period. The Purchase Plan will terminate after a period of ten years unless terminated earlier as permitted by the Purchase Plan. 1999 Equity Incentive Plan In July 1999, the Board adopted, subject to stockholder approval, the 1999 Equity Incentive Plan (the "1999 Plan") and reserved 2,900,000 shares of Common Stock for issuance thereunder. The 1999 Plan authorized the award of options, restricted stock awards and stock bonuses (each an "Award"). No person will be eligible to receive more than 1,000,000 shares in any calendar year pursuant to Awards under the 1999 Plan other than a new employee of the Company who will be eligible to receive no more than 1,500,000 shares in the calendar year in which such employee commences employment. Options granted under the 1999 Plan may be either incentive stock options ("ISO") or nonqualified stock options ("NSO"). ISOs may be granted only to Company employees (including officers and directors who are also employees). NSOs may be granted to Company employees, officers, directors, consultants, independent contractors and advisors of the Company. Options under the Plan may be granted for periods of up to ten years and at prices no less than 85% of the estimated fair value of the shares on the date of grant as determined by the Board of Directors, provided, however, that (i) the exercise price of an ISO may not be less than 100% of the estimated fair value of the shares on the date of grant, and (ii) the exercise price of an ISO granted to a 10% stockholder may not be less than 110% of the estimated fair value of the shares on the date of grant. The maximum term of options granted under the 1999 Plan is ten years. Members of the Board who are not employees of the Company, or any parent, subsidiary or affiliate of the Company, are eligible to participate in the 1999 Plan. The option grants under the 1999 Plan are automatic and nondiscretionary, and the exercise price of the options must be 100% of the fair market value of the Common Stock on the date of grant. Each eligible director who first becomes a member of the Board on or after the effective date of the Registration Statement of which this Prospectus forms a part (the "Effective Date") will initially be granted an option to purchase 20,000 shares (an "Initial Grant") on the date such director first F-21 INTERWOVEN, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Information as of June 30, 1999 and for the six months ended June 30, 1998 and 1999 is unaudited becomes a director. Immediately following each Annual Meeting of the Company, each eligible director will automatically be granted an additional option to purchase 10,000 shares if such director has served continuously as a member of the Board since the date of such director's Initial Grant or, if such director was ineligible to receive an Initial Grant, since the Effective Date. The term of such options is ten years, provided that they will terminate 7 months following the date the director ceases to be a director or a consultant of the Company (twelve months if the termination is due to death or disability). All options granted under the Directors Plan will vest 100% of the shares upon the date of issuance. Acquisition Effective July 1, 1999, the Company acquired all the assets and liabilities of Lexington Software Associates Incorporated, which is a provider of configuration management solutions and development methodologies, including consulting and education. The acquisition has been accounted for using the purchase method of accounting. 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. The purchase price consisted of 88,339 shares of the Company's Series E Preferred Stock (estimated fair value of $500,000), seven-year warrants to purchase 17,668 shares of Series E Preferred Stock at $5.66 per share (estimated fair value of $77,000) and acquisition-related expenses (including legal and accountancy fees) of approximately $223,000. The allocation of the purchase price was as follows: Allocation of Purchase Price Tangible Assets............................................... $ 385,000 Intangible Assets Workforce................................................... $ 500,000 Goodwill.................................................... $ 300,000 Liabilities................................................... $(385,000) --------- $ 800,000 =========
The amortization of the intangible assets will occur over the estimated periods to be benefited. The workforce asset will be amortized on a straight- line basis over two years from the acquisition date, however, retention of the acquired employees will be evaluated in future periods to assess whether accelerated amortization of this asset is warranted. The goodwill is expected to be amortized on a straight-line basis over three years from the acquisition date. F-22 [LOGO OF INTERWOVEN APPEARS HERE] PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The following table sets forth the costs and expenses to be paid by the Registrant in connection with the sale of the shares of common stock being registered hereby. All amounts are estimates except for the Securities and Exchange Commission registration fee, the NASD filing fee and the Nasdaq National Market filing fee. Securities and Exchange Commission registration fee.............. $ 13,900 NASD filing fee.................................................. 5,500 Nasdaq National Market filing fee................................ 95,000 Accounting fees and expenses..................................... 225,000 Legal fees and expenses.......................................... 425,000 Road show expenses............................................... 35,000 Printing and engraving expenses.................................. 250,000 Blue sky fees and expenses....................................... 10,000 Transfer agent and registrar fees and expenses................... 10,000 Miscellaneous.................................................... 120,600 ---------- Total.......................................................... $1,190,000 ==========
Item 14. Indemnification of Directors and Officers. Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation's board of directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Securities Act"). As permitted by the Delaware General Corporation Law, the Registrant's Certificate of Incorporation includes a provision that eliminates the personal liability of its directors for monetary damages for breach of fiduciary duty as a director, except for liability: . for any breach of the director's duty of loyalty to the Registrant or its stockholders, . for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, . under section 174 of the Delaware General Corporation Law (regarding unlawful dividends and stock purchases), or . for any transaction from which the director derived an improper personal benefit. As permitted by the Delaware General Corporation Law, the Registrant's Bylaws provide that: . the Registrant is required to indemnify its directors and officers to the fullest extent permitted by the Delaware General Corporation Law, subject to certain very limited exceptions, . the Registrant may indemnify its other employees and agents as set forth in the Delaware General Corporation Law, . the Registrant is required to advance expenses, as incurred, to its directors and officers in connection with a legal proceeding to the fullest extent permitted by the Delaware General Corporation Law, subject to certain very limited exceptions, and . the rights conferred in the Bylaws are not exclusive. II-1 The Registrant intends to enter into Indemnity Agreements with each of its current directors and officers to give such directors and officers additional contractual assurances regarding the scope of the indemnification set forth in the Registrant's Amended and Restated Certificate of Incorporation and to provide additional procedural protections. At present, there is no pending litigation or proceeding involving a director, officer or employee of the Registrant regarding which indemnification is sought, nor is the Registrant aware of any threatened litigation that may result in claims for indemnification. Reference is also made to Section 7 of the draft Underwriting Agreement to be entered into between the Registrant and the underwriters, which will provide for the indemnification of officers, directors and controlling persons of the Registrant against certain liabilities. The indemnification provisions in the Registrant's Amended and Restated Certificate of Incorporation, Bylaws and the Indemnity Agreements to be entered into between the Registrant and each of its directors and officers may be sufficiently broad to permit indemnification of the Registrant's directors and officers for liabilities arising under the Securities Act. The Registrant maintains directors' and officers' liability insurance. See also the undertakings set out in response to Item 17. Reference is made to the following documents filed as exhibits to this Registration Statement regarding relevant indemnification provisions described above and elsewhere herein:
Exhibit Document Number ---------------- ------ Form of Underwriting Agreement...................................... 1.01 Registrant's Second Amended and Restated Certificate of Incorporation...................................................... 3.03 Registrant's Restated Bylaws, as amended............................ 3.04 Third Amended and Restated Investors' Rights Agreement dated June 10, 1999........................................................... 4.02 Form of Indemnity Agreement......................................... 10.01
Item 15. Recent Sales of Unregistered Securities. Since inception we have issued and sold the following securities: 1. We granted stock options to purchase 4,164,036 shares of our common stock at exercise prices ranging from $0.03 to $10.01 per share to our employees, consultants, directors, and other service providers under our 1996 Stock Option Plan and 1998 Stock Option Plan. Through August 31, 1999, we issued and sold an aggregate of 2,372,629 shares of our common stock to employees, consultants, directors, and other service providers at prices ranging from $0.03 to $10.01 per share under direct issuances or exercises of options granted under our 1996 Stock Option Plan and 1998 Stock Option Plan. All shares purchased under our 1996 Stock Option Plan and 1998 Stock Option Plan are subject to our right to repurchase such shares at their original exercise price. The repurchase feature generally expires for 25% of the shares after the first year of service and then expires ratably over the next 36 months. 2. In March and June 1996, we issued and sold an aggregate of 1,800,000 shares of our Series A Preferred Stock to private investors for an aggregate purchase price of approximately $360,000. In March 1998, we repurchased 680,000 shares of our Series A Preferred Stock at $0.93 per share. The 1,120,000 shares of Series A Preferred Stock outstanding are convertible into 746,664 shares of common stock. 3. In August 1996, we issued a warrant to a certain bank in connection with a loan agreement. The warrant is exercisable for 9,330 shares of Series B Preferred Stock. These shares of Series B Preferred Stock are convertible into 6,552 shares of common stock. 4. In January 1997, in connection with a bridge loan that converted into Series B Preferred Stock, we issued warrants to private investors to purchase 93,298 shares of Series B Preferred Stock at an exercise price of $1.2862 per share. These shares of Series B Preferred Stock are convertible into 65,519 shares of common stock. II-2 5. In May and June 1997, we issued and sold an aggregate of 3,039,505 shares of our Series B Preferred Stock to private investors for an aggregate purchase price of approximately $3,890,566. These shares of Series B Preferred Stock are convertible into 2,134,548 shares of common stock. 6. In March 1998, we issued and sold an aggregate of 6,241,619 shares of our Series C Preferred Stock to private investors for an aggregate purchase price of approximately $6,375,181, and warrants to purchase 918,124 shares of Series C Preferred Stock at an exercise price of $1.2862 per share. In connection with the Series D Preferred Stock financing, all warrants to purchase Series C Preferred Stock were exercised for an aggregate purchase price of approximately $1,180,891. These shares of Series C Preferred Stock are convertible into 4,773,161 shares of common stock. 7. In October, November and December 1998, we issued and sold an aggregate of 3,741,217 shares of our Series D Preferred Stock to private investors for an aggregate purchase price of approximately $6,996,075. These shares of Series D Preferred Stock are convertible into 2,494,142 shares of common stock. 8. In June 1999, we issued and sold an aggregate of 3,394,719 shares of our Series E Preferred Stock to private investors for an aggregate purchase price of approximately $19,214,109. These shares of Series E Preferred Stock are convertible into 2,263,136 shares of common stock. 9. In July 1999, we issued 88,339 shares of Series E Preferred Stock and warrants to purchase 17,668 shares of Series E Preferred Stock to certain stockholders of Lexington Software Associates, Inc. in exchange for their shares of that company. These shares of Series E Preferred Stock are convertible into 58,888 shares of common stock. The shares issuable upon exercise of these warrants are convertible into 11,770 shares of common stock. 10. In July 1999, we issued a warrant to purchase a number of shares of Series E Preferred Stock (for which we have requested confidential treatment) to General Electric Company in connection with a commercial transaction. The shares issuable upon exercise of this warrant are convertible into shares of common stock. All sales of common stock made pursuant to the exercise of stock options were made in reliance on Rule 701 under the Securities Act or on Section 4(2) of the Securities Act. All sales of preferred stock and warrants to purchase preferred stock were made in reliance on Section 4(2) of the Securities Act and/or Regulation D promulgated under the Securities Act. These sales were made without general solicitation or advertising. Each purchaser was a sophisticated investor with access to all relevant information necessary to evaluate the investment and represented to the Registrant that the shares were being acquired for investment. Item 16. Exhibits and Financial Statement Schedules. (a) The following exhibits are filed herewith:
Number Exhibit Title ------ ------------- 1.01** Form of Underwriting Agreement. 2.01 Agreement and Plan of Merger, dated October 1, 1999, between Interwoven, Inc., a California corporation, and the Registrant. 3.01** Registrant's Certificate of Incorporation. 3.02 Registrant's Amended and Restated Certificate of Incorporation. 3.03** Registrant's Second Amended and Restated Certificate of Incorporation (to be filed following the closing of this offering). 3.04 Registrant's Restated Bylaws, as amended. 3.05 Registrant's Certificate of Designation.
II-3
Number Exhibit Title ------ ------------- 4.01** Form of Certificate for Registrant's common stock. 4.02** Third Amended and Restated Investors' Rights Agreement, dated June 10, 1999. 5.01 Opinion of Fenwick & West LLP regarding legality of the securities being registered. 10.01** Form of Indemnity Agreement between Registrant and each of its directors and executive officers. 10.02** 1996 Stock Option Plan and related agreements. 10.03** 1998 Stock Option Plan and related agreements. 10.04** 1999 Equity Incentive Plan and related agreements. 10.05 1999 Employee Stock Purchase Plan and related agreements. 10.06** Regional Prototype Profit Sharing Plan and Trust/Account Standard Plan Adoption Agreement AA #001. 10.07** Employment Agreement between Interwoven, Inc. and Martin W. Brauns dated February 27, 1998. 10.08** Offer Letter to David M. Allen from Interwoven, Inc. dated February 12, 1999. 10.09** Offer Letter to Michael A. Backlund from Interwoven, Inc. dated May 1, 1998. 10.10** Offer Letter to John Chang from Interwoven, Inc. dated January 20, 1997. 10.11** Offer Letter to Jeffrey E. Engelmann from Interwoven, Inc. dated December 11, 1998. 10.12** Offer Letter to Steven Farber from Interwoven, Inc. dated June 14, 1997. 10.13** Offer Letter to Jack S. Jia from Interwoven, Inc. dated January 3, 1997. 10.14** Offer Letter to Peng T. Ong from Interwoven, Inc. dated February 29, 1996. 10.15** Offer Letter to Jozef Ruck from Interwoven, Inc. dated February 18, 1999. 10.16** Confidential Separation Agreement and Release, between Interwoven, Inc. and John Chang dated November 25, 1998. 10.17** Confidential Separation Agreement and Release, between Interwoven, Inc. and Steven Farber dated February 12, 1998. 10.18** Secured Promissory Notes between Interwoven, Inc. and Jeffrey E. Engelmann, dated as of April 19, 1999. 10.19** Secured Promissory Notes between Interwoven, Inc. and Jozef Ruck, dated as of April 21, 1999. 10.20** Build-To-Suit Lease Agreement dated March 18, 1997 between Sunnyvale Partners Limited Partnership and First Data Merchant Services Corporation. 10.21** Sublease dated April 24, 1998 between First Data Merchant Services Corporation and Interwoven, Inc. 10.22** Loan and Security Agreement, dated October 1997, as amended, between Interwoven, Inc. and Silicon Valley Bank. 10.23** Agreement and Plan of Reorganization, dated June 30, 1999, by and among Interwoven, Inc., Lexington Software Associates, Inc. and certain stockholders of Lexington Software Associates, Inc.
II-4
Number Exhibit Title ------ ------------- 10.24+** Standard Sales Agreement effective as of July 28, 1999 between Registrant and General Electric Company. 10.25+** Preferred Stock Warrant to Purchase Shares of Series E Preferred Stock of Registrant. 10.26+** Amended and Restated Loan and Security Agreement dated June 24, 1999, between Silicon Valley Bank and Registrant. 10.27** Intellectual Property Security Agreement dated June 24, 1999, between Silicon Valley Bank and Registrant. 21.01 Subsidiaries of the Registrant 23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01). 23.02 Consent of PricewaterhouseCoopers LLP, independent accountants. 23.03 Consent of International Data Corporation. 24.01** Power of Attorney. 24.02 Power of Attorney for Ronald E.F. Codd. 27.01** Financial Data Schedule.
- --------------------- * To be filed by amendment ** Previously filed + Confidential treatment requested as to certain portions of this exhibit Other financial statement schedules are omitted because the information called for is not required or is shown either in the financial statements or the notes thereto. Item 17. Undertakings. The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described under Item 14 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Amendment to its Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Sunnyvale, State of California, on this 4th day of October, 1999. INTERWOVEN, INC. /s/ David M. Allen By: _________________________________ David M. Allen Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Act, this Amendment to Registration Statement has been signed by the following persons in the capacities and on the date indicated.
Name Title Date ---- ----- ---- *Martin W. Brauns President, Chief Executive October 4, 1999 ______________________________________ Officer (principal Martin W. Brauns executive officer) and a director /s/ David M. Allen Vice President and Chief October 4, 1999 ______________________________________ Financial Officer David M. Allen (principal financial officer and principal accounting officer) Additional Directors: *Peng T. Ong Chairman of the Board October 4, 1999 ______________________________________ Peng T. Ong *Kathryn C. Gould Director October 4, 1999 ______________________________________ Kathryn C. Gould *Mark W. Saul Director October 4, 1999 ______________________________________ Mark W. Saul *Mark C. Thompson Director October 4, 1999 ______________________________________ Mark C. Thompson *Ronald E.F. Codd Director October 4, 1999 ______________________________________ Ronald E.F. Codd
*By:/s/ David M. Allen ____________________________ David M. Allen Attorney-in-fact II-6 EXHIBIT INDEX
Number Exhibit Title ------ ------------- 2.01 Agreement and Plan of Merger, dated October 1, 1999, between Interwoven, Inc., a California corporation, and the Registrant. 3.02 Registrant's Amended and Restated Certificate of Incorporation. 3.04 Registrant's Restated Bylaws, as amended. 3.05 Registrant's Certificate of Designation. 5.01 Opinion of Fenwick & West LLP regarding legality of the securities being registered. 10.05 1999 Employee Stock Purchase Plan and related agreements. 21.01 Subsidiaries of the Registrant. 23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01). 23.02 Consent of PricewaterhouseCoopers LLP, independent accountants. 23.03 Consent of International Data Corporation. 24.02 Power of Attorney for Ronald E.F. Codd.
EX-2.01 2 AGREEMENT AND PLAN OF MERGER Exhibit 2.01 AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (this "Merger Agreement") is made as ---------------- of October 1, 1999 by and between Interwoven, Inc., a California corporation ("Interwoven (CA)"), and Interwoven, Inc., a Delaware corporation ("Interwoven - ----------------- ---------- (DE)"). Interwoven (CA) and Interwoven (DE) are hereinafter sometimes - ---- collectively referred to as the "Constituent Corporations." ------------------------ R E C I T A L S ---------------- A. Interwoven (CA) was incorporated on March 1, 1995. Its current authorized capital stock consists of: (1) 40,000,000 shares of Common Stock, no par value ("Interwoven (CA) Common Stock"), of which 9,864,855 shares are issued ---------------------------- and outstanding; and (2) 25,000,000 shares of Preferred Stock, no par value ("Interwoven (CA) Preferred Stock") of which (i) 1,120,000 shares of Series A - --------------------------------- Preferred Stock, (ii) 3,039,505 shares of Series B Preferred Stock, (iii) 7,159,743 shares of Series C Preferred Stock, (iv) 3,741,217 shares of Series D Preferred Stock and (iv) 3,483,058 shares of Series E Preferred Stock are issued and outstanding. B. Interwoven (DE) was incorporated on July 22, 1999. Its authorized capital stock consists of: (1) 75,000,000 shares of Common Stock, with a par value of $0.001 per share ("Interwoven (DE) Common Stock"), of which 1,000 ---------------------------- shares are issued and outstanding; and (2) 25,000,000 shares of Preferred Stock, $0.001 par value ("Interwoven (DE) Preferred Stock"), none of which shares are ------------------------------- issued and outstanding. C. The respective Boards of Directors of Interwoven (CA) and Interwoven (DE) deem it advisable and to the advantage of each of the Constituent Corporations that Interwoven (CA) merge with and into Interwoven (DE) upon the terms and subject to the conditions set forth in this Merger Agreement for the purpose of effecting a change of the state of incorporation of Interwoven (CA) from California to Delaware. D. The Boards of Directors of each of the Constituent Corporations have approved this Merger Agreement. NOW, THEREFORE, the parties do hereby adopt the plan of reorganization set forth in this Merger Agreement and do hereby agree that Interwoven (CA) shall merge with and into Interwoven (DE) on the following terms, conditions and other provisions: 1. Merger and Effective Time. At the Effective Time (as defined ------------------------- below), Interwoven (CA) shall be merged with and into Interwoven (DE) (the "Merger"), and Interwoven (DE) shall be the surviving corporation of the Merger - ------- (the "Surviving Corporation"). The Merger shall become effective upon the close --------------------- of business on the date when a duly executed copy of this Merger Agreement, along with all required officers' certificates, is filed with the Secretary of State of the State of Delaware, (the "Effective Time"). -------------- 2. Effect of Merger. At the Effective Time, the separate corporate ---------------- existence of Interwoven (CA) shall cease; the corporate identity, existence, powers, rights and immunities of Interwoven (DE) as the Surviving Corporation shall continue unimpaired by the Merger; and Interwoven (DE) shall succeed to and shall possess all the assets, properties, rights, privileges, powers, franchises, immunities and purposes, and be subject to all the debts, liabilities, obligations, restrictions and duties of Interwoven (CA), all without further act or deed. 3. Governing Documents. At the Effective Time, the Certificate of ------------------- Incorporation of Interwoven (DE) in effect immediately prior to the Effective Time shall become the Certificate of Incorporation of the Surviving Corporation and the Bylaws of Interwoven (DE) in effect immediately prior to the Effective Time shall become the Bylaws of the Surviving Corporation. 4. Directors and Officers. At the Effective Time, the directors and ---------------------- officers of Interwoven (DE) shall be and become the directors and officers (holding the same titles and positions) of the Surviving Corporation and after the Effective Time shall serve in accordance with the Certificate of Incorporation and Bylaws of the Surviving Corporation. 5. Conversion of Shares of Interwoven (CA). Subject to the terms and --------------------------------------- conditions of this Agreement, at the Effective Time, each share of Interwoven (CA) Common Stock outstanding immediately prior thereto shall be automatically changed and converted into two-thirds (2/3) of a fully paid and nonassessable, issued and outstanding share of Interwoven (DE) Common Stock. At the Effective Time: each share of Interwoven (CA) Series A Preferred Stock outstanding immediately prior thereto shall be automatically changed and converted into one fully paid and non-assessable, issued and outstanding share of Interwoven (DE) Series A Preferred Stock; each share of Interwoven (CA) Series B Preferred Stock outstanding immediately prior thereto shall be automatically changed and converted into one fully paid and non-assessable, issued and outstanding share of Interwoven (DE) Series B Preferred Stock; each share of Interwoven (CA) Series C Preferred Stock outstanding immediately prior thereto shall be automatically changed and converted into one fully paid and non-assessable, issued and outstanding share of Interwoven (DE) Series C Preferred Stock; each share of Interwoven (CA) Series D Preferred Stock outstanding immediately prior thereto shall be automatically changed and converted into one fully paid and non-assessable, issued and outstanding share of Interwoven (DE) Series D Preferred Stock; each share of Interwoven (CA) Series E Preferred Stock outstanding immediately prior thereto shall be automatically changed and converted into one fully paid and non-assessable, issued and outstanding share of Interwoven (DE) Series E Preferred Stock. 6. Cancellation of Shares of Interwoven (DE). At the Effective Time, ----------------------------------------- all of the previously issued and outstanding shares of Interwoven (DE) Common Stock that were issued and outstanding immediately prior to the Effective Time shall be automatically eliminated and canceled. 7. Stock Certificates. At and after the Effective Time, all of the ------------------ outstanding certificates that, prior to that date, represented shares of Interwoven (CA) Common Stock shall be deemed for all purposes to evidence ownership of and to represent the number of shares of Interwoven (DE) Common Stock into which such shares of Interwoven (CA) Common Stock are converted as provided herein. The registered owner on the books and records of Interwoven 2 (CA) of any such outstanding stock certificate for Interwoven (CA) Common Stock shall, until such certificate shall have been surrendered for transfer or otherwise accounted for to Interwoven (DE) or its transfer agent, be entitled to exercise any voting and other rights with respect to, and to receive any dividend and other distributions upon, the shares of Interwoven (DE) Common Stock evidenced by such outstanding certificate as above provided. 8. Conversion of Options and Warrants. At the Effective Time, all ---------------------------------- outstanding and unexercised portions of all options to purchase a share of Interwoven (CA) Common Stock under the (i) Interwoven (CA) 1996 Stock Option Plan, (ii) Interwoven (CA) 1998 Stock Option Plan, shall become options to purchase two-thirds (2/3) the number of shares of Interwoven (DE) Common Stock (subject to the elimination of fractional shares as provided in Section 9 below) at an exercise price per share equal to 150% of the exercise price per share of the option to purchase Interwoven (CA) Common Stock and shall, to the extent permitted by law and otherwise reasonably practicable, have the same term, exercisability, vesting schedule, status as an "incentive stock option" under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), if ---- applicable, and all other material terms and conditions (including but not limited to the terms and conditions applicable to such options by virtue of the Interwoven (CA) Stock Plans). Continuous employment with Interwoven (CA) will be credited to an optionee for purposes of determining the vesting of the number of shares of Interwoven (DE) Common Stock under a converted Interwoven (CA) option at the Effective Time. Additionally, at the Effective Time, Interwoven (DE) shall adopt and assume the Interwoven (CA) Stock Plans. At the Effective Time, all outstanding and unexercised portions of all warrants to purchase or acquire Interwoven (CA) Preferred Stock shall become warrants to purchase or acquire, on the same terms and conditions, the same number of shares of the same series of Interwoven (DE) Preferred Stock. 9. Fractional Shares. No fractional shares of Interwoven (DE) Common ----------------- Stock or Preferred Stock will be issued in connection with the Merger. In lieu thereof, Interwoven (DE) shall pay each shareholder of Interwoven (CA) who would otherwise be entitled to receive a fractional share of Interwoven Common Stock or Preferred Stock (assuming the aggregation of all shares held by the same holder of more than one stock certificate representing shares of Interwoven (CA) Common Stock or Preferred Stock, as the case may be) a cash amount equal to the applicable fraction multiplied by the fair market value (the "Fair Market ----------- Value") of a share of Interwoven (DE) Common Stock or Preferred Stock, as the case may be. Fair Market Value means, as of any date, the value of one share of Interwoven (DE) Common Stock determined by the Board of Directors of Interwoven (DE) in good faith (the "Fair Market Value Per Share"). --------------------------- Upon exercise of each assumed option of Interwoven (CA) to purchase Interwoven (DE) Common Stock, cash will be paid by Interwoven (DE) in lieu of any fractional share of Interwoven (DE) Common Stock, respectively, issuable upon exercise of such option, and the amount of cash received for such fractional share shall be the Fair Market Value Per Share upon exercise thereof multiplied by the applicable fraction, less the unpaid exercise price per share for such fraction. 3 10. Employee Benefit Plans. At the Effective Time, the obligations ---------------------- of Interwoven (CA) under or with respect to every plan, trust, program and benefit then in effect or administered by Interwoven (CA) for the benefit of the directors, officers and employees of Interwoven (CA) or any of its subsidiaries shall become the lawful obligations of Interwoven (DE) and shall be implemented and administered in the same manner and without interruption until the same are amended or otherwise lawfully altered or terminated. Effective at the Effective Time, Interwoven (DE) hereby expressly adopts and assumes all obligations of Interwoven (CA) under such employee benefit plans. 11. Further Assurances. From time to time, as and when required by ------------------ the Surviving Corporation or by its successors or assigns, there shall be executed and delivered on behalf of Interwoven (CA) such deeds, assignments and other instruments, and there shall be taken or caused to be taken by it all such further action as shall be appropriate, advisable or necessary in order to vest, perfect or confirm, of record or otherwise, in the Surviving Corporation the title to and possession of all property, interests, assets, rights, privileges, immunities, powers, franchises and authority of Interwoven (CA), and otherwise to carry out the purposes of this Merger Agreement. The officers and directors of the Surviving Corporation are fully authorized in the name of and on behalf of Interwoven (CA), or otherwise, to take any and all such actions and to execute and deliver any and all such deeds and other instruments as may be necessary or appropriate to accomplish the foregoing. 12. Condition. The consummation of the Merger is subject to the ---------- approval of this Merger Agreement and the Merger contemplated hereby by the shareholders of Interwoven (CA) and the sole stockholder of Interwoven (DE), prior to the Effective Time. 13. Abandonment. At any time before the Effective Time, this Merger ------------ Agreement may be terminated and the Merger abandoned by the Board of Directors of Interwoven (CA) or Interwoven (DE), notwithstanding approval of this Merger Agreement by the shareholders of Interwoven (CA) and the sole stockholder of Interwoven (DE). 14. Amendment. At any time before the Effective Time, this Merger ---------- Agreement may be amended, modified or supplemented by the Board of Directors of the Constituent Corporations, notwithstanding the approval of this Merger Agreement by the shareholders of Interwoven (CA) and the sole stockholder of Interwoven (DE); provided, however, that any amendment made subsequent to the --------- ------- adoption of this Agreement by the Shareholders of Interwoven (CA) or the sole Stockholder of Interwoven (DE) shall not: (i) alter or change the amount or kind of shares, securities, cash property and/or rights to be received in exchange for or upon conversion of any shares of any class or series of Interwoven (CA); (ii) alter or change any of the terms or conditions of this Merger Agreement if such alteration or change would adversely affect the holders of any shares of any class or series of Interwoven (CA) or Interwoven (DE). 15. Tax-Free Reorganization. The Merger is intended to be a tax-free ----------------------- plan of reorganization within the meaning of Section 368(a)(1)(F) of the Code. 16. Governing Law. This Agreement shall be governed by and construed ------------- under the internal laws of the State of California as applied to agreements among California 4 residents entered into and to be performed entirely within California, without reference to the principles of conflicts of law or choice of laws, except to the extent that the laws of the State of Delaware would apply in matters relating to the internal affairs of Interwoven (DE) and the Merger. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 5 17. Counterparts. In order to facilitate the filing and recording of ------------ this Merger Agreement, it may be executed in any number of counterparts, each of which shall be deemed to be an original. IN WITNESS WHEREOF, this Merger Agreement is hereby executed on behalf of each of the Constituent Corporations and attested by their respective officers hereunto duly authorized. Interwoven, Inc. Interwoven, Inc. a California corporation a Delaware corporation By: /s/ Martin W. Brauns By: /s/ Martin W. Brauns -------------------- -------------------- Martin W. Brauns Martin W. Brauns President and Chief President and Chief Executive Officer Executive Officer ATTEST: ATTEST: - ------ ------ By: /s/ Peng T. Ong By: /s/ Peng T. Ong --------------- --------------- Peng T. Ong Peng T. Ong Secretary Secretary [SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER] 6 EX-3.02 3 REGISTRANT'S AMENDED AND RESTATED CERTIFICATE Exhibit 3.02 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF INTERWOVEN, INC. Interwoven, Inc., a Delaware corporation, hereby certifies that the Amended and Restated Certificate of Incorporation of the corporation attached hereto as Exhibit "A", which is incorporated herein by this reference, has been ----------- duly adopted by the corporation's Board of Directors and stockholders in accordance with Sections 242 and 245 of the Delaware General Corporation Law, with the approval of the corporation's stockholders having been given by written consent without a meeting in accordance with Section 228 of the Delaware General Corporation Law. IN WITNESS WHEREOF, said corporation has caused this Amended and Restated Certificate of Incorporation to be signed by its duly authorized officer. Dated: September 30, 1999 INTERWOVEN, INC. /s/ Martin W. Brauns --------------------------- Martin W. Brauns, President and Chief Executive Officer AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF INTERWOVEN, INC. ARTICLE I The name of the corporation is Interwoven, Inc. ARTICLE II The address of the registered office of the corporation in the State of Delaware is 1013 Centre Road, City of Wilmington, County of New Castle. The name of its registered agent at that address is Corporation Service Company. ARTICLE III The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. ARTICLE IV The total number of shares of all classes of stock which the corporation has authority to issue is 100,000,000 shares, consisting of two classes: 75,000,000 shares of Common Stock, $0.001 par value per share, and 25,000,000 shares of Preferred Stock, $0.001 par value per share. The Board of Directors is authorized, subject to any limitations prescribed by the law of the State of Delaware, to provide for the issuance of the shares of Preferred Stock in one or more series, and, by filing a Certificate of Designation pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, to fix the designation, powers, preferences and rights of the shares of each such series and any qualifications, limitations or restrictions thereof, and to increase or decrease the number of shares of any such series (but not below the number of shares of such series then outstanding). The number of authorized shares of Preferred Stock may also be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the stock of the corporation entitled to vote, unless a vote of any other holders is required pursuant to a Certificate or Certificates establishing a series of Preferred Stock. Except as otherwise expressly provided in any Certificate of Designation designating any series of Preferred Stock pursuant to the foregoing provisions of this Article IV, any new series of Preferred Stock may be designated, fixed and determined as provided herein by the Board of Directors without approval of the holders of Common Stock or the holders of Preferred Stock, or any series thereof, and any such new series may have powers, preferences and rights, including, without limitation, voting rights, dividend rights, liquidation rights, redemption rights and conversion rights, senior to, junior to or pari passu with the rights of the Common Stock, the Preferred Stock, or any future class or series of Preferred Stock or Common Stock. ARTICLE V The Board of Directors of the corporation shall have the power to adopt, amend or repeal the Bylaws of the corporation. ARTICLE VI For the management of the business and for the conduct of the affairs of the corporation, and in further definition, limitation and regulation of the powers of the corporation, of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that: (A) The conduct of the affairs of the corporation shall be managed under the direction of its Board of Directors. The number of directors shall be fixed from time to time exclusively by resolution of the Board of Directors. (B) Election of directors need not be by written ballot unless the Bylaws of the corporation shall so provide. ARTICLE VII To the fullest extent permitted by law, no director of the corporation shall be personally liable for monetary damages for breach of fiduciary duty as a director. Without limiting the effect of the preceding sentence, if the Delaware General Corporation Law is hereafter amended to authorize the further elimination or limitation of the liability of a director, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. Neither any amendment nor repeal of this Article VII, nor the adoption of any provision of this Certificate of Incorporation inconsistent with this Article VII, shall eliminate, reduce or otherwise adversely affect any limitation on the personal liability of a director of the corporation existing at the time of such amendment, repeal or adoption of such an inconsistent provision. EX-3.04 4 REGISTRANT'S RESTATED BYLAWS EXHIBIT 3.04 - -------------------------------------------------------------------------------- RESTATED BYLAWS OF INTERWOVEN, INC. (a Delaware corporation) As Adopted July 22, 1999 and Amended September 20, 1999 - -------------------------------------------------------------------------------- RESTATED BYLAWS OF INTERWOVEN, INC. (a Delaware corporation) TABLE OF CONTENTS
PAGE ---- ARTICLE I - STOCKHOLDERS............................................... 1 Section 1.1: Annual Meetings.................................... 1 Section 1.2: Special Meetings................................... 1 Section 1.3: Notice of Meetings................................. 1 Section 1.4: Adjournments....................................... 1 Section 1.5: Quorum............................................. 2 Section 1.6: Organization....................................... 2 Section 1.7: Voting; Proxies.................................... 2 Section 1.8: Fixing Date for Determination of Stockholders of Record.......................................... 3 Section 1.9: List of Stockholders Entitled to Vote.............. 3 Section 1.10: Action by Written Consent of Stockholders.......... 4 Section 1.11: Inspectors of Elections............................ 5 Section 1.12: Notice of Stockholder Business; Nominations........ 6 ARTICLE II - BOARD OF DIRECTORS........................................ 8 Section 2.1: Number; Qualifications............................. 8 Section 2.2: Election; Resignation; Removal; Vacancies.......... 8
PAGE ---- Section 2.3: Regular Meetings................................... 8 Section 2.4: Special Meetings................................... 9 Section 2.5: Telephonic Meetings Permitted...................... 9 Section 2.6: Quorum; Vote Required for Action................... 9 Section 2.7: Organization....................................... 9 Section 2.8: Written Action by Directors........................ 9 Section 2.9: Powers............................................. 9 Section 2.10: Compensation of Directors.......................... 9 ARTICLE III - COMMITTEES............................................... 10 Section 3.1: Committees......................................... 10 Section 3.2: Committee Rules.................................... 10 ARTICLE IV - OFFICERSA................................................. 11 Section 4.1: Generally.......................................... 11 Section 4.2: Chief Executive Officer............................ 11 Section 4.3: Chairman of the Board.............................. 12 Section 4.4: President.......................................... 12 Section 4.5: Vice President..................................... 12 Section 4.6: Chief Financial Officer............................ 12 Section 4.7: Treasurer.......................................... 12 Section 4.8: Secretary.......................................... 12 Section 4.9: Delegation of Authority............................ 12
PAGE ---- Section 4.10: Removal............................................ 13 ARTICLE V - STOCK...................................................... 13 Section 5.l: Certificates....................................... 13 Section 5.2: Lost, Stolen or Destroyed Stock Certificates; Issuance of New Certificate........................ 13 Section 5.3: Other Regulations.................................. 13 ARTICLE VI - INDEMNIFICATION........................................... 13 Section 6.1: Indemnification of Officers and Directors.......... 13 Section 6.2: Advance of Expenses................................ 14 Section 6.3: Non-Exclusivity of Rights.......................... 14 Section 6.4: Indemnification Contracts.......................... 14 Section 6.5: Effect of Amendment................................ 14 ARTICLE VII - NOTICES.................................................. 15 Section 7.l: Notice............................................. 15 Section 7.2: Waiver of Notice................................... 15 ARTICLE VIII - INTERESTED DIRECTORS.................................... 15 Section 8.1: Interested Directors; Quorum....................... 15 ARTICLE IX - MISCELLANEOUS............................................. 16 Section 9.1: Fiscal Year........................................ 16 Section 9.2: Seal............................................... 16 Section 9.3: Form of Records.................................... 16 Section 9.4: Reliance Upon Books and Records.................... 16
PAGE ---- Section 9.5: Certificate of Incorporation Governs............... 16 Section 9.6: Severability....................................... 16 ARTICLE X - AMENDMENT.................................................. 17 Section 10.1: Amendments......................................... 17
RESTATED BYLAWS OF INTERWOVEN, INC. (a Delaware corporation) As Adopted July 22, 1999 and Amended September 20, 1999 ARTICLE I STOCKHOLDERS Section 1.1: Annual Meetings. An annual meeting of stockholders shall be ----------- --------------- held for the election of directors at such date, time and place, either within or without the State of Delaware, as the Board of Directors shall each year fix. Any other proper business may be transacted at the annual meeting. Section 1.2: Special Meetings. Special meetings of stockholders for any ----------- ---------------- purpose or purposes may be called at any time by the Chairman of the Board, the Chief Executive Officer, the holders of shares of the Corporation that are entitled to cast not less than a ten percent (10%) of the total number of votes entitled to be cast by all stockholders at such meeting (the "Ten Percent ----------- Stockholders"), or by a majority of the members of the Board of Directors. - ------------ Special meetings may not be called by any other person or persons. If a special meeting of stockholders is called by any person or persons other than by a majority of the members of the Board of Directors, then such person or persons shall call such meeting by delivering a written request to call such meeting to each member of the Board of Directors, and the Board of Directors shall then determine the time, date and place of such special meeting, which shall be held not more than one hundred twenty (120) nor less than thirty-five (35) days after the written request to call such special meeting was delivered to each member of the Board of Directors. Following the closing of the corporation's initial public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock to the public (the "Initial Public Offering"), Ten Percent Stockholders may not ----------------------- call a Special Meeting of Stockholders. Section 1.3: Notice of Meetings. Written notice of all meetings of ----------- ------------------ stockholders shall be given stating the place, date and time of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise required by applicable law or the Certificate of Incorporation of the Corporation, such notice shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting. Section 1.4: Adjournments. Any meeting of stockholders may adjourn from ----------- ------------ time to time to reconvene at the same or another place, and notice need not be given of any such adjourned meeting if the time, date and place thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the -------- ------- adjournment is for more than thirty (30) days, or if after the adjournment, a new record date is fixed for the adjourned meeting, then a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. At the adjourned meeting, the Corporation may transact any business that might have been transacted at the original meeting. Section 1.5: Quorum. At each meeting of stockholders, the holders of a ----------- ------ majority of the shares of stock entitled to vote at the meeting, present in person or represented by proxy, shall constitute a quorum for the transaction of business, except if otherwise required by applicable law. If a quorum shall ------ fail to attend any meeting, the chairman of the meeting or the holders of a majority of the shares entitled to vote who are present, in person or by proxy, at the meeting may adjourn the meeting. Shares of the Corporation's stock belonging to the Corporation (or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation are held, directly or indirectly, by the Corporation), shall neither be entitled to vote nor be counted for quorum purposes; provided, however, that the -------- ------- foregoing shall not limit the right of the Corporation or any other corporation to vote any shares of the Corporation's stock held by it in a fiduciary capacity. Section 1.6: Organization. Meetings of stockholders shall be presided ----------- ------------ over by such person as the Board of Directors may designate, or, in the absence of such a person, the Chairman of the Board, or, in the absence of such person, the President of the Corporation, or, in the absence of such person, such person as may be chosen by the holders of a majority of the shares entitled to vote who are present, in person or by proxy, at the meeting. Such person shall be chairman of the meeting and, subject to Section 1.12 hereof, shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seems to him or her to be in order. The Secretary of the Corporation shall act as secretary of the meeting, but in his or her absence, the chairman of the meeting may appoint any person to act as secretary of the meeting. Section 1.7: Voting; Proxies. Unless otherwise provided by law or the ----------- --------------- Certificate of Incorporation of the Corporation, and subject to the provisions of Section 1.8 of these Bylaws, each stockholder shall be entitled to one (1) vote for each share of stock held by such stockholder. Each stockholder entitled to vote at a meeting of stockholders, or to express consent or dissent to corporate action in writing without a meeting, may authorize another person or persons to act for such stockholder by proxy. Such a proxy may be prepared, transmitted and delivered in any manner permitted by applicable law. Voting at meetings of stockholders need not be by written ballot unless such is demanded at the meeting before voting begins by a stockholder or stockholders holding shares representing at least one percent (1%) of the votes entitled to vote at such meeting, or by such stockholder's or stockholders' proxy; provided, -------- however, that an election of directors shall be by written ballot if demand is - ------- so made by any stockholder at the meeting before voting begins. If a vote is to be taken by written ballot, then each such ballot shall state the name of the stockholder or proxy voting and such other information as the chairman of the meeting deems appropriate. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and -2- entitled to vote on the election of directors. Unless otherwise provided by applicable law, the Certificate of Incorporation of the Corporation or these Bylaws, every matter other than the election of directors shall be decided by the affirmative vote of the holders of a majority of the shares of stock entitled to vote thereon that are present in person or represented by proxy at the meeting and are voted for or against the matter. Section 1.8: Fixing Date for Determination of Stockholders of Record. ----------- ------------------------------------------------------- (a) Generally. In order that the Corporation may determine the --------- stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors and which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. If no record date is fixed by the Board of Directors, then the record date shall be as provided by applicable law. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, -------- however, that the Board of Directors may fix a new record date for the adjourned - ------- meeting. (b) Stockholder Request for Action by Written Consent. For such period of ------------------------------------------------- time as stockholders are authorized to act by written consent pursuant to the provisions of the Certificate of Incorporation of the Corporation and Section 1.10 hereof, any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent without a meeting shall, by written notice to the Secretary of the Corporation, request the Board of Directors to fix a record date for such consent. Such request shall include a brief description of the action proposed to be taken. The Board of Directors shall, within ten (10) days after the date on which such a request is received, adopt a resolution fixing the record date. Such record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors within ten (10) days after the date on which such a request is received, then the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in the State of Delaware, to its principal place of business or to any officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by applicable law, then the record date for determining stockholders entitled to consent to corporate action in writing without a meeting -3- shall be at the close of business on the date on which the Board of Directors adopts the resolution taking such prior action. Section 1.9: List of Stockholders Entitled to Vote. A complete list of ----------- ------------------------------------- stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in the name of each stockholder, shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder who is present at the meeting. Section 1.10: Action by Written Consent of Stockholders. ------------ ----------------------------------------- (a) Procedure. Unless otherwise provided by the Certificate of --------- Incorporation of the Corporation, and except as set forth in Section 1.8(b) above, any action required or permitted to be taken at any annual or special meeting of the stockholders may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted; provided, however, that effective immediately after the closing of an -------- ------- underwritten public offering of shares of the Corporation's Common Stock pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission, any action required or permitted to be taken by the Corporation's stockholders shall be taken only at a duly called annual or special meeting of such stockholders, and the Corporation's stockholders shall not be able to act by written consent. For such period of time as written stockholder consents are permitted, such consents shall bear the date of signature of each stockholder who signs the consent and shall be delivered to the Corporation by delivery to its registered office in the State of Delaware, to its principal place of business or to any officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. No written consent shall be effective to take the action set forth therein unless, within sixty (60) days of the earliest dated consent delivered to the Corporation in the manner provided above, written consents signed by a sufficient number of stockholders to take the action set forth therein are delivered to the Corporation in the manner provided above. (b) Notice of Consent. Prompt notice of the taking of corporate action by ----------------- stockholders without a meeting by less than unanimous written consent of the stockholders shall be given to those stockholders who have not consented thereto in writing and, in the case of a Certificate Action (as defined below), if the Delaware General Corporation Law so requires, such notice shall be given prior to filing of the certificate in question. If the action which is consented to requires the filing of a certificate under the Delaware General Corporation Law (a "Certificate Action"), then if the Delaware General Corporation Law so ------------------ requires, the -4- certificate so filed shall state that written stockholder consent has been given in accordance with Section 228 of the Delaware General Corporation Law and that written notice of the taking of corporate action by stockholders without a meeting as described herein has been given as provided in such section. Section 1.11: Inspectors of Elections. ------------ ----------------------- (a) Applicability. Unless otherwise provided in the Corporation's ------------- Certificate of Incorporation or required by the Delaware General Corporation Law, the following provisions of this Section 1.11 shall apply only if and when the Corporation has a class of voting stock that is: (i) listed on a national securities exchange; (ii) authorized for quotation on an interdealer quotation system of a registered national securities association; or (iii) held of record by more than 2,000 stockholders; in all other cases, observance of the provisions of this Section 1.11 shall be optional and at the discretion of the Corporation. (b) Appointment. The Corporation shall, in advance of any meeting of ----------- stockholders, appoint one or more inspectors of election to act at the meeting and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. (c) Inspector's Oath. Each inspector of election, before entering ---------------- upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. (d) Duties of Inspectors. At a meeting of stockholders, the -------------------- inspectors of election shall (i) ascertain the number of shares outstanding and the voting power of each share, (ii) determine the shares represented at a meeting and the validity of proxies and ballots, (iii) count all votes and ballots, (iv) determine and retain for a reasonable period of time a record of the disposition of any challenges made to any determination by the inspectors and (v) certify their determination of the number of shares represented at the meeting and their count of all votes and ballots. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of the duties of the inspectors. (e) Opening and Closing of Polls. The date and time of the opening ---------------------------- and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced by the inspectors at the meeting. No ballot, proxies or votes, nor any revocations thereof or changes thereto, shall be accepted by the inspectors after the closing of the polls unless the Court of Chancery upon application by a stockholder shall determine otherwise. (f) Determinations. In determining the validity and counting of -------------- proxies and ballots, the inspectors shall be limited to an examination of the proxies, any envelopes submitted with those proxies, any information provided in connection with proxies in accordance with Section 212(c)(2) of the Delaware General Corporation Law, the ballots and the regular books and -5- records of the Corporation, except that the inspectors may consider other ------ reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers, their nominees or similar persons that represent more votes than the holder of a proxy is authorized by the record owner to cast or more votes than the stockholder holds of record. If the inspectors consider other reliable information for the limited purpose permitted herein, the inspectors at the time they make their certification of their determinations pursuant to this Section 1.11 shall specify the precise information considered by them, including the person or persons from whom they obtained the information, when the information was obtained, the means by which the information was obtained and the basis for the inspectors' belief that such information is accurate and reliable. Section 1.12: Notice of Stockholder Business; Nominations. ------------ ------------------------------------------- (a) Annual Meeting of Stockholders. ------------------------------ (i) Nominations of persons for election to the Board of Directors and the proposal of business to be considered by the stockholders shall be made at an annual meeting of stockholders (A) pursuant to the Corporation's notice of such meeting, (B) by or at the direction of the Board of Directors or (C) by any stockholder of the Corporation who was a stockholder of record at the time of giving of the notice provided for in this Section 1.12, who is entitled to vote at such meeting and who complies with the notice procedures set forth in this Section 1.12. (ii) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (C) of subparagraph (a)(i) of this Section 1.12, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder's notice must be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the sixtieth (60th) day nor earlier than the close of business on the ninetieth (90th) day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual -------- ------- meeting is more than thirty (30) days before or more than sixty (60) days after such anniversary date, notice by the stockholder, to be timely, must be so delivered not earlier than the close of business on the ninetieth (90th) day prior to such annual meeting and not later than the close of business on the later of the sixtieth (60th) day prior to such annual meeting or the close of business on the tenth (10th) day following the day on which public announcement of the date of such meeting is first made by the Corporation. Such stockholder's notice shall set forth: (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including such person's written consent to being named in ------------ the proxy statement as a nominee and to serving as a director if elected; (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to -6- the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, (1) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (2) the class and number of shares of the Corporation that are owned beneficially and held of record by such stockholder and such beneficial owner. (iii) Notwithstanding anything in the second sentence of subparagraph (a)(ii) of this Section 1.12 to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased board of directors at least seventy (70) days prior to the first anniversary of the preceding year's annual meeting (or, if the annual meeting is held more than thirty (30) days before or sixty (60) days after such anniversary date, at least seventy (70) days prior to such annual meeting), a stockholder's notice required by this Section 1.12 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary of the Corporation at the principal executive office of the Corporation not later than the close of business on the tenth (10th) day following the day on which such public announcement is first made by the Corporation. (b) Special Meetings of Stockholders. Only such business shall be -------------------------------- conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of such meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of such meeting (i) by or at the direction of the Board of Directors or (ii) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice of the special meeting, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 1.12. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Corporation's notice of meeting, if the stockholder's notice required by subparagraph (a)(ii) of this Section 1.12 shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not earlier than the ninetieth (90th) day prior to such special meeting and not later than the close of business on the later of the sixtieth (60th) day prior to such special meeting or the tenth (10th) day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. (c) General. ------- (i) Only such persons who are nominated in accordance with the procedures set forth in this Section 1.12 shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 1.12. Except as otherwise provided by law or these Bylaws, the chairman of the meeting shall have the power and duty to determine -7- whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 1.12 and, if any proposed nomination or business is not in compliance herewith, to declare that such defective proposal or nomination shall be disregarded. (ii) For purposes of this Section 1.12, the term "public ------ announcement" shall mean disclosure in a press release reported by the Dow - ------------ Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to sections 13, 14 or 15(d) of the Exchange Act. (iii) Notwithstanding the foregoing provisions of this Section 1.12, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth herein. Nothing in this Section 1.12 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. ARTICLE II BOARD OF DIRECTORS Section 2.1: Number; Qualifications. The Board of Directors shall consist ----------- ---------------------- of one or more members. The initial number of directors shall be six (6), and thereafter shall be fixed from time to time by resolution of the Board of Directors. No decrease in the authorized number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Directors need not be stockholders of the Corporation. Section 2.2: Election; Resignation; Removal; Vacancies. Effective ----------- ----------------------------------------- immediately on such date, if ever, that the Corporation becomes a listed corporation within the meaning of Section 301.5 of the California Corporations Code, the directors shall be divided, with respect to the time for which they severally hold office, into three classes designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors, with the number of directors in each class to be divided as equally as reasonably possible. The term of office of the Class I directors shall expire at the corporation's first annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class II directors shall expire at the corporation's second annual meeting of stockholders following the closing of the Initial Public Offering, and the term of office of the Class III directors shall expire at the corporation's third annual meeting of stockholders following the closing of the Initial Public Offering. At each annual meeting of stockholders commencing with the first annual meeting of stockholders following the closing of the Initial Public Offering, directors elected to succeed those directors of the class whose terms then expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election. Prior to the closing of the Initial Public Offering, each director shall hold office until the next annual meeting of stockholders and until such director's successor is elected and qualified, or until such director's -8- earlier death, resignation or removal. Any director may resign at any time upon written notice to the Corporation. Subject to the rights of the holders of any series of Preferred Stock, any vacancy occurring in the Board of Directors for any cause, and any newly created directorship resulting from any increase in the authorized number of directors, shall, unless (i) the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by the stockholders, or (ii) as otherwise provided by law, be filled only by the affirmative vote of a majority of the directors then in office, although less than a quorum, or by a sole remaining director, and not by the stockholders. Notwithstanding the preceding sentence, in any election of directors, the stockholders of the corporation shall have the rights set forth in subdivisions (a), (b) and (c) of Section 708 of the California Corporations Code; provided, however, that the rights set forth in this sentence shall -------- ------- terminate to the extent permitted by applicable law immediately on such date, if ever, that the Corporation becomes a listed corporation within the meaning of Section 301.5 of the California Corporations Code. Any director elected in accordance with the two preceding sentences shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred. Subject to the rights of any holders of Preferred Stock, any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors; provided, however, that a director may not be removed without cause if the votes - -------- ------- cast against removal of the director, or not consenting in writing to the removal, would be sufficient to elect the director if voted cumulatively (without regard to whether shares may otherwise be voted cumulatively) at an election at which the same total number of votes were cast (or, if the action is taken by written consent, all shares entitled to vote were voted) and either the number of directors elected at the most recent annual meeting of stockholders, or if greater, the number of directors for whom removal is being sought, were then being elected. Section 2.3: Regular Meetings. Regular meetings of the Board of ----------- ---------------- Directors may be held at such places, within or without the State of Delaware, and at such times as the Board of Directors may from time to time determine. Notice of regular meetings need not be given if the date, times and places thereof are fixed by resolution of the Board of Directors. Section 2.4: Special Meetings. Special meetings of the Board of ----------- ---------------- Directors may be called by the Chairman of the Board, the President or a majority of the members of the Board of Directors then in office and may be held at any time, date or place, within or without the State of Delaware, as the person or persons calling the meeting shall fix. Notice of the time, date and place of such meeting shall be given, orally or in writing, by the person or persons calling the meeting to all directors at least four (4) days before the meeting if the notice is mailed, or at least twenty-four (24) hours before the meeting if such notice is given by telephone, hand-delivery, telegram, telex, mailgram, facsimile or similar communication method. Unless otherwise indicated in the notice, any and all business may be transacted at a special meeting. Section 2.5: Telephonic Meetings Permitted. Members of the Board of ----------- ----------------------------- Directors, or any committee of the Board of Directors, may participate in a meeting of the Board or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting -9- pursuant to conference telephone or similar communications equipment shall constitute presence in person at such meeting. Section 2.6: Quorum; Vote Required for Action. At all meetings of the ----------- -------------------------------- Board of Directors a majority of the total number of authorized directors shall constitute a quorum for the transaction of business. Except as otherwise provided herein or in the Certificate of Incorporation of the Corporation, or required by law, the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. Section 2.7: Organization. Meetings of the Board of Directors shall be ----------- ------------ presided over by the Chairman of the Board, or in his or her absence by the President, or in his or her absence by a chairman chosen at the meeting. The Secretary shall act as secretary of the meeting, but in his or her absence, the chairman of the meeting may appoint any person to act as secretary of the meeting. Section 2.8: Written Action by Directors. Any action required or ----------- --------------------------- permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board of Directors or such committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the Board or committee, respectively. Section 2.9: Powers. The Board of Directors may, except as otherwise ------------ ------ required by law or the Certificate of Incorporation of the Corporation, exercise all such powers and do all such acts and things as may be exercised or done by the Corporation. Section 2.10: Compensation of Directors. Directors, as such, may ------------ ------------------------- receive, pursuant to a resolution of the Board of Directors, fees and other compensation for their services as directors, including without limitation their services as members of committees of the Board of Directors. ARTICLE III COMMITTEES Section 3.1: Committees. The Board of Directors may, by resolution ----------- ---------- passed by a majority of the whole Board of Directors, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of the committee, the member or members thereof present at any meeting of such committee who are not disqualified from voting, whether or not he, she or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of any such absent or disqualified member. Any such committee, to the extent provided in a resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the -10- Corporation and may authorize the seal of the Corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation of the Corporation (except that a committee may, to the extent authorized in the ------ resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors as provided in subsection (a) of Section 151 of the Delaware General Corporation Law, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation, or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation, or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series, adopting an agreement of merger or consolidation under Sections 251 or 252 of the Delaware General Corporation Law, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or amending these Bylaws; and unless the resolution of the Board of Directors expressly so provides, no such committee shall have the power or authority to declare a dividend, authorize the issuance of stock or adopt a certificate of ownership and merger pursuant to section 253 of the Delaware General Corporation Law. Section 3.2: Committee Rules. Unless the Board of Directors otherwise ----------- --------------- provides, each committee designated by the Board of Directors may make, alter and repeal rules for the conduct of its business. In the absence of such rules, each committee shall conduct its business in the same manner as the Board of Directors conducts its business pursuant to Article II of these Bylaws. ARTICLE IV OFFICERS Section 4.1: Generally. The officers of the Corporation shall consist of ----------- --------- a Chief Executive Officer and/or a President, one or more Vice Presidents, a Secretary, a Treasurer and such other officers, including a Chairman of the Board of Directors and/or Chief Financial Officer, as may from time to time be appointed by the Board of Directors. All officers shall be elected by the Board of Directors; provided, however, that the Board of Directors may empower the -------- ------- Chief Executive Officer of the Corporation to appoint officers other than the Chairman of the Board, the Chief Executive Officer, the President, the Chief Financial Officer or the Treasurer. Each officer shall hold office until his or her successor is elected and qualified or until his or her earlier death, resignation or removal. Any number of offices may be held by the same person. Any officer may resign at any time upon written notice to the Corporation. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise may be filled by the Board of Directors. Section 4.2: Chief Executive Officer. Subject to the control of the ----------- ----------------------- Board of Directors and such supervisory powers, if any, as may be given by the Board of Directors, the powers and duties of the Chief Executive Officer of the Corporation are: -11- (a) To act as the general manager and, subject to the control of the Board of Directors, to have general supervision, direction and control of the business and affairs of the Corporation; (b) To preside at all meetings of the stockholders; (c) To call meetings of the stockholders to be held at such times and, subject to the limitations prescribed by law or by these Bylaws, at such places as he or she shall deem proper; and (d) To affix the signature of the Corporation to all deeds, conveyances, mortgages, guarantees, leases, obligations, bonds, certificates and other papers and instruments in writing which have been authorized by the Board of Directors or which, in the judgment of the Chief Executive Officer, should be executed on behalf of the Corporation; to sign certificates for shares of stock of the Corporation; and, subject to the direction of the Board of Directors, to have general charge of the property of the Corporation and to supervise and control all officers, agents and employees of the Corporation. The President shall be the Chief Executive Officer of the Corporation unless the Board of Directors shall designate another officer to be the Chief Executive Officer. If there is no President, and the Board of Directors has not designated any other officer to be the Chief Executive Officer, then the Chairman of the Board shall be the Chief Executive Officer. Section 4.3: Chairman of the Board. The Chairman of the Board shall have ----------- --------------------- the power to preside at all meetings of the Board of Directors and shall have such other powers and duties as provided in these Bylaws and as the Board of Directors may from time to time prescribe. Section 4.4: President. The President shall be the Chief Executive ----------- --------- Officer of the Corporation unless the Board of Directors shall have designated another officer as the Chief Executive Officer of the Corporation. Subject to the provisions of these Bylaws and to the direction of the Board of Directors, and subject to the supervisory powers of the Chief Executive Officer (if the Chief Executive Officer is an officer other than the President), and subject to such supervisory powers and authority as may be given by the Board of Directors to the Chairman of the Board and/or to any other officer, the President shall have the responsibility for the general management and control of the business and affairs of the Corporation and the general supervision and direction of all of the officers, employees and agents of the Corporation (other than the Chief Executive Officer, if the Chief Executive Officer is an officer other than the President) and shall perform all duties and have all powers that are commonly incident to the office of president or that are delegated to the President by the Board of Directors. Section 4.5: Vice President. Each Vice President shall have all such ----------- -------------- powers and duties as are commonly incident to the office of Vice President or that are delegated to him or her by the Board of Directors or the Chief Executive Officer. A Vice President may be designated by -12- the Board to perform the duties and exercise the powers of the Chief Executive Officer in the event of the Chief Executive Officer's absence or disability. Section 4.6: Chief Financial Officer. Subject to the direction of the ----------- ----------------------- Board of Directors and the President, the Chief Financial Officer shall perform all duties and have all powers that are commonly incident to the office of chief financial officer. Section 4.7: Treasurer. The Treasurer shall have custody of all monies ------------ --------- and securities of the Corporation. The Treasurer shall make such disbursements of the funds of the Corporation as are authorized and shall render from time to time an account of all such transactions. The Treasurer shall also perform such other duties and have such other powers as are commonly incident to the office of a treasurer or as the Board of Directors or the President may from time to time prescribe. Section 4.8: Secretary. The Secretary shall issue or cause to be issued ----------- --------- all authorized notices for, and shall keep or cause to be kept, minutes of all meetings of the stockholders and the Board of Directors. The Secretary shall have charge of the corporate minute books and similar records and shall perform such other duties and have such other powers as are commonly incident to the office of secretary or as the Board of Directors or the President may from time to time prescribe. Section 4.9: Delegation of Authority. The Board of Directors may from ----------- ----------------------- time to time delegate the powers or duties of any officer to any other officers or agents, notwithstanding any provision hereof. Section 4.10: Removal. Any officer of the Corporation shall serve at ------------ ------- the pleasure of the Board of Directors and may be removed at any time, with or without cause, by the Board of Directors. Such removal shall be without prejudice to the contractual rights of such officer, if any, with the Corporation. ARTICLE V STOCK Section 5.1: Certificates. Every holder of stock shall be entitled to ----------- ------------ have a certificate signed by or in the name of the Corporation by the Chairman or Vice-Chairman of the Board of Directors, or the President or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, of the Corporation, certifying the number of shares owned by such stockholder in the Corporation. Any or all of the signatures on the certificate may be a facsimile. Section 5.2: Lost, Stolen or Destroyed Stock Certificates; Issuance of ----------- --------------------------------------------------------- New Certificates. The Corporation may issue a new certificate of stock in the - ---------------- place of any certificate previously issued by it that is alleged to have been lost, stolen or destroyed, and the Corporation may require -13- the owner of the lost, stolen or destroyed certificate, or such owner's legal representative, to agree to indemnify the Corporation and/or to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. Section 5.3: Other Regulations. The issue, transfer, conversion and ----------- ----------------- registration of stock certificates shall be governed by such other regulations as the Board of Directors may establish. ARTICLE VI INDEMNIFICATION Section 6.1: Indemnification of Officers and Directors. Each person who ----------- ----------------------------------------- was or is made a party to, or is threatened to be made a party to, or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "proceeding"), by reason of the fact that he ---------- or she (or a person of whom he or she is the legal representative) is or was a director or officer of the Corporation or a Reincorporated Predecessor (as defined below) or is or was serving at the request of the Corporation or a Reincorporated Predecessor (as defined below) as a director or officer of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, shall be indemnified and held harmless by the Corporation to the fullest extent permitted by the Delaware General Corporation Law against all expenses, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes and penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith, and such indemnification shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, -------- ------- that the Corporation shall indemnify any such person seeking indemnity in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation; provided, further, that the Corporation shall not be required -------- ------- to indemnify a person for amounts paid in settlement of a proceeding unless the Corporation consents in writing to such a settlement (such consent not to be unreasonably withheld). As used herein, the term "Reincorporated Predecessor" -------------------------- means a corporation that is merged with and into the Corporation in a statutory merger where (a) the Corporation is the surviving corporation of such merger and (b) the primary purpose of such merger is to change the corporate domicile of the Reincorporated Predecessor, and shall include Interwoven, Inc., a California corporation. Section 6.2: Advance of Expenses. The Corporation shall pay all expenses ----------- ------------------- (including attorneys' fees) incurred by such a director or officer in defending any such proceeding as such expenses are incurred in advance of its final disposition; provided, however, that if the Delaware General Corporation Law -------- ------- then so requires, the payment of such expenses incurred by such a director or officer in advance of the final disposition of such proceeding shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it should be determined ultimately that such director or officer is not -14- entitled to be indemnified under this Article VI or otherwise; and provided, -------- further, that the Corporation shall not be required to advance any expenses to a - ------- person against whom the Corporation directly brings a claim, in a proceeding, alleging that such person has breached his or her duty of loyalty to the Corporation, committed an act or omission not in good faith or that involves intentional misconduct or a knowing violation of law, or derived an improper personal benefit from a transaction. Section 6.3: Non-Exclusivity of Rights. The rights conferred on any ------------ ------------------------- person in this Article VI shall not be exclusive of any other right that such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation of the Corporation, these Bylaws, agreement, vote or consent of stockholders or disinterested directors, or otherwise. Additionally, nothing in this Article VI shall limit the ability of the Corporation, in its discretion, to indemnify or advance expenses to persons whom the Corporation is not obligated to indemnify or advance expenses pursuant to this Article VI. Section 6.4: Indemnification Contracts. The Board of Directors is ----------- ------------------------- authorized to cause the Corporation to enter into indemnification contracts with any director, officer, employee or agent of the Corporation, or any person serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including employee benefit plans, providing indemnification and related rights to such person. Such rights may be greater than those provided in this Article VI. Section 6.5: Effect of Amendment. Any amendment, repeal or modification ----------- ------------------- of any provision of this Article VI shall be prospective only, and shall not adversely affect any right or protection conferred on a person pursuant to this Article VI and existing at the time of such amendment, repeal or modification. ARTICLE VII NOTICES Section 7.1: Notice. Except as otherwise specifically provided herein or ----------- ------ required by law, all notices required to be given pursuant to these Bylaws shall be in writing and may in every instance be effectively given by hand delivery (including use of a delivery service) by depositing such notice in the mail, postage prepaid, or by sending such notice by prepaid telegram, telex, overnight express courier, mailgram or facsimile. Any such notice shall be addressed to the person to whom notice is to be given at such person's address as it appears on the records of the Corporation. The notice shall be deemed given (i) in the case of hand delivery, when received by the person to whom notice is to be given or by any person accepting such notice on behalf of such person, (ii) in the case of delivery by mail, upon deposit in the mail, (iii) in the case of delivery by overnight express courier, on the first business day after such notice is dispatched, and (iv) in the case of delivery via telegram, telex, mailgram or facsimile, when dispatched. -15- Section 7.2: Waiver of Notice. Whenever notice is required to be given ----------- ---------------- under any provision of these Bylaws, a written waiver of notice, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors or members of a committee of directors need be specified in any written waiver of notice. ARTICLE VIII INTERESTED DIRECTORS Section 8.1: Interested Directors; Quorum. No contract or transaction ----------- ---------------------------- between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof that authorizes the contract or transaction, or solely because his, her or their votes are counted for such purpose, if: (i) the material facts as to his, her or their relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; (ii) the material facts as to his, her or their relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (iii) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified by the Board of Directors, a committee thereof or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. ARTICLE IX MISCELLANEOUS Section 9.1: Fiscal Year. The fiscal year of the Corporation shall be ----------- ----------- determined by resolution of the Board of Directors. Section 9.2: Seal. The Board of Directors may provide for a corporate ----------- ---- seal, which shall have the name of the Corporation inscribed thereon and shall otherwise be in such form as may be approved from time to time by the Board of Directors. -16- Section 9.3: Form of Records. Any records maintained by the Corporation ----------- --------------- in the regular course of its business, including its stock ledger, books of account and minute books, may be kept on, or be in the form of, magnetic tape, diskettes, photographs, microphotographs or any other information storage device, provided that the records so kept can be converted into clearly legible -------- form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect the same. Section 9.4: Reliance Upon Books and Records. A member of the Board of ----------- ------------------------------- Directors, or a member of any committee designated by the Board of Directors shall, in the performance of his or her duties, be fully protected in relying in good faith upon records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of the Corporation's officers or employees, or committees of the Board of Directors, or by any other person as to matters the member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation. Section 9.5: Certificate of Incorporation Governs. In the event of any ----------- ------------------------------------ conflict between the provisions of the Corporation's Certificate of Incorporation and Bylaws, the provisions of the Corporation's Certificate of Incorporation shall govern. Section 9.6: Severability. If any provision of these Bylaws shall be held ----------- ------------ to be invalid, illegal, unenforceable or in conflict with the provisions of the Corporation's Certificate of Incorporation, then such provision shall nonetheless be enforced to the maximum extent possible consistent with such holding and the remaining provisions of these Bylaws (including, without limitation, all portions of any section of these Bylaws containing any such provision held to be invalid, illegal, unenforceable or in conflict with the Corporation's Certificate of Incorporation that are not themselves invalid, illegal, unenforceable or in conflict with the Corporation's Certificate of Incorporation) shall remain in full force and effect. ARTICLE X AMENDMENT Section 10.1: Amendments. Stockholders of the Corporation holding a ------------ ---------- majority of the Corporation's outstanding voting stock shall have the power to adopt, amend or repeal Bylaws. To the extent provided in the Corporation's Certificate of Incorporation, the Board of Directors of the Corporation shall also have the power to adopt, amend or repeal Bylaws of the Corporation, except insofar as Bylaws adopted by the stockholders shall otherwise provide. -17- CERTIFICATION OF RESTATED BYLAWS OF INTERWOVEN, INC. (a Delaware corporation) KNOW ALL BY THESE PRESENTS: I, Matthew P. Quilter, certify that I am Assistant Corporate Secretary of Interwoven, Inc., a Delaware corporation (the "Company"), that I am duly ------- authorized to make and deliver this certification and that the attached Bylaws are a true and correct copy of the Bylaws of the Company in effect as of the date of this certificate. Dated: as of September 20, 1999 /s/ Matthew P. Quilter ______________________________________________ Matthew P. Quilter, Assistant Secretary EX-3.05 5 REGISTRANT'S CERTIFICATE OF DESIGNATION EXHIBIT 3.05 INTERWOVEN INC. Certificate of Designation of Preferred Stock Pursuant to Section 151 of the Delaware General Corporation Law Interwoven, Inc., a Delaware corporation, (the "Corporation"), does hereby ----------- certify that, pursuant to the authority contained in Article IV of its Certificate of Incorporation, and in accordance with the provisions of Section 151 of the Delaware General Corporation Law, the Corporation's Board of Directors has duly adopted the following resolution creating five separate series of Preferred Stock designated as Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock. Resolved, that the Corporation hereby designates and creates five (5) separate series of the authorized Preferred Stock designated, respectively, as Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock as follows: A. Series of Preferred Stock. Of the twenty five million (25,000,000) ------------------------- shares of Preferred Stock, par value $0.001 per share, authorized to be issued by the Corporation, 1,120,000 shares are hereby designated as "Series A -------- Preferred Stock," 3,142,133 shares are hereby designated as "Series B - --------------- -------- Preferred Stock," 7,159,743 shares are hereby designated as "Series C - --------------- -------- Preferred Stock", 3,741,217 shares are hereby designated "Series D Preferred - --------------- ------------------ Stock" and 3,600,000 shares are designated "Series E Preferred Stock." The - ----- ------------------------ rights, preferences, privileges and restrictions granted to and imposed upon the respective classes and series of the Corporation's capital stock are set forth below in Article B. B. Rights, Preference and Restrictions of Preferred Stock. The rights, ------------------------------------------------------ preferences, restrictions and other matters relating to the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock are as follows: 1. Definitions. For purposes of this Section B, the following definitions ----------- shall apply: 1.1 "Common Stock" shall mean the Common Stock, $0.001 par value, of ------------ the Corporation. 1.2 "Preferred Stock" shall mean the Series A Preferred Stock, the --------------- Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock and the Series E Preferred Stock. 2. Dividend Rights. --------------- 2.1 The holders of Preferred Stock shall each be entitled to receive, out of any funds legally available therefor, dividends on each outstanding share of Preferred Stock at an annual rate of (i) $0.01 per share of Series A Preferred held by them, adjusted for any combinations, consolidations, subdivisions or stock splits with respect to such shares, payable when and as declared by the Board of Directors, in preference and priority to any payment of any dividend on any shares of Common Stock (other than those payable solely in Common Stock or involving the repurchase of shares of Common Stock from terminated employees, officers, directors, or consultants pursuant to contractual arrangements), (ii) $0.102896 per share of Series B Preferred held by them, adjusted for any combinations, consolidations, subdivisions, or stock splits with respect to such shares, payable when and as declared by the Board of Directors, in preference and priority to any payment of any dividend on any shares of Common Stock (other than those payable solely in Common Stock, or involving the repurchase of shares of Common Stock from terminated employees, officers, directors, or consultants, pursuant to contractual arrangements), (iii) $0.086326 per share of Series C Preferred held by them, adjusted for any combinations, consolidations, subdivisions, or stock splits with respect to such shares, payable when and as declared by the Board of Directors, in preference and priority to any payment of any dividend on any shares of Common Stock (other than those payable solely in Common Stock, or involving the repurchase of shares of Common Stock from terminated employees, officers, directors, or consultants pursuant to contractual arrangements), (iv) $0.149684 per share of Series D Preferred held by them, adjusted for any combinations, consolidations, subdivisions, or stock splits with respect to such shares, payable when and as declared by the Board of Directors, in preference and priority to any payment of any dividend on any shares of Common Stock (other than those payable solely in Common Stock, or involving the repurchase of shares of Common Stock from terminated employees, officers, directors, or consultants pursuant to contractual arrangements) and (v) $0.4528 per share of Series E Preferred held by them, adjusted for any combinations, consolidations, subdivisions, or stock splits with respect to such shares, payable when and as declared by the Board of Directors, in preference and priority to any payment of any dividend on any shares of Common Stock (other than those payable solely in Common Stock, or involving the repurchase of shares of Common Stock from terminated employees, officers, directors, or consultants pursuant to contractual arrangements). No dividends shall be declared on the Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Series E Preferred unless dividends are declared on each such series of Preferred Stock. In the event dividends are paid to the holders of Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series E Preferred that are less than the full amounts to which such holders are entitled pursuant to this Section 2, such holders shall share ratably in the total amount of dividends paid according to the respective amounts which would be payable in respect of the shares held by them if the dividends payable on or with respect to said shares were paid in full. The right to such dividends shall not be cumulative, and no right shall accrue to holders of Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series E -2- Preferred by reason of the fact that dividends on such shares are not declared or paid in any prior year whether or not the earnings of the Corporation in that prior year were sufficient to pay such dividends in whole or in part. The Preferred Stock shall participate on any distribution of dividends on the Common Stock (based on the number of shares of Common Stock into which such share of Preferred Stock is convertible on the date the dividend is declared). In the event that the Corporation shall have declared but unpaid dividends outstanding immediately prior to, and in the event of, a conversion of Preferred Stock (as provided in Section 6 hereof), the Corporation shall, at the option of the holder, pay in cash to the holder(s) of Preferred Stock subject to conversion the full amount of any such dividends or allow such dividends to be converted into Common Stock in accordance with, and pursuant to the terms specified in, Section 6 hereof. 2.2 Dividends shall be paid by forwarding a check, postage prepaid, to the address of each holder (or, in the case of joint holders, to the address of any such holder) of Series E Preferred, Series D Preferred, Series C Preferred, Series B Preferred, and Series A Preferred as shown on the books of the Corporation, or to such other address as such holder specifies for such purpose by written notice to the Corporation. The forwarding of such check shall satisfy all obligations of the Corporation with respect to such dividends, unless such check is not paid upon timely presentation. 3. Liquidation Preference. In the event of any liquidation, dissolution, ---------------------- or winding up of the Corporation (each a "Liquidation Event"), whether voluntary ----------------- or involuntary, distributions to the stockholder of the Corporation shall be made in the following manner. 3.1 The holders of Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of the Common Stock, by reason of their ownership of such stock, an amount per share equal to the sum of (i) $0.20 (the "Original Series A Issue Price") for each share of Series A Preferred then held ----------------------------- by them, adjusted for any combinations, consolidations, subdivisions, or stock splits with respect to such shares and, in addition, all accrued but unpaid dividends on such shares of Series A Preferred (the "Series A Preference"), (ii) ------------------- $1.2862 (the "Original Series B Issue Price") for each share of Series B ----------------------------- Preferred then held by them, adjusted for any combinations, consolidations, subdivisions, or stock splits with respect to such shares and, in addition, all accrued but unpaid dividends on such shares of Series B Preferred (the "Series B -------- Preference"), (iii) $1.079076 (the "Original Series C Issue Price") for each - ---------- ----------------------------- share of Series C Preferred then held by them, adjusted for any combinations, consolidations, subdivisions, or stock splits with respect to such shares and, in addition, all accrued but unpaid dividends on such shares of Series C Preferred (the "Series C Preference"), (iv) $1.87105 (the "Original Series D ------------------- Issue Price") for each share of Series D Preferred then held by them, adjusted for any combinations, consolidations, subdivisions, or stock splits with respect to such shares and, in addition, all accrued but unpaid dividends on such shares of Series D Preferred (the "Series D Preference") and (v) $5.66 (the "Original ------------------- -------- Series E Issue Price") for each share of Series E Preferred then held by them, - -------------------- adjusted for any combinations, consolidations, subdivisions, or stock splits with respect to such shares and, in addition, all accrued but unpaid dividends on such shares of Series E Preferred (the "Series E Preference"). The Series A ------------------- Preferred, Series B -3- Preferred, Series C Preferred, Series D Preferred and Series E Preferred shall rank on a pari passu basis as to the receipt of the respective preferential amounts for each such series upon the occurrence of such event. If the assets and funds thus distributed among the holders of the Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series E Preferred shall be insufficient to permit the payment to such holders of the full aforesaid Series A Preference, Series B Preference, Series C Preference, Series D Preference and Series E Preference, then the entire assets and funds of the Corporation legally available for distribution shall be distributed among the holders of the Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series E Preferred in proportion to the total preferential amount owed to each holder under this Section 3.1. 3.2 After payment of the Series A Preference, Series B Preference, Series C Preference, Series D Preference and Series E Preference has been made to the holders of the Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series E Preferred of the full amounts to which they are entitled pursuant to Section 3.1 above, the remaining assets and funds of the Corporation available for distribution shall be distributed ratably among all holders of Series B Preferred, Series C Preferred, Series D Preferred and Series E Preferred and holders of Common Stock based on the number of shares of Common Stock held by each such holder (assuming conversion of all Series B Preferred, Series C Preferred, Series D Preferred and Series E Preferred). Notwithstanding the foregoing sentence, the right to receive the remaining assets so described shall cease (i) as to the holders of Series B Preferred at such time as the holders of Series B Preferred have received an aggregate of $2.5724 per share of Series B Preferred held by them (including amounts previously paid as the Series B Preference), (ii) as to the holders of Series C Preferred at such time as the holders of Series C Preferred have received an aggregate of $2.158152 per share of Series C Preferred held by them (including amounts previously paid as the Series C Preference), (iii) as to the holders of Series D Preferred at such time as the holders of Series D Preferred have received an aggregate of $2.806575 per share of Series D Preferred held by them (including amounts previously paid as the Series D Preference) and (iv) as to the holders of Series E Preferred at such time as the holders of Series E Preferred have received an aggregate of $8.49 per share of Series E Preferred held by them (including amounts previously paid as the Series E Preference). Thereafter, the remaining assets and funds of the Corporation available for distribution shall be distributed ratably among all holders of Common Stock (including shares of Common Stock into which the Preferred Stock is converted prior to the commencement of the Liquidation Event distribution described in this Section 3). 3.3 Notwithstanding the foregoing Sections 3.1 and 3.2, the entire liquidation amount payable with respect to a share of Series B Preferred, a share of Series C Preferred, a share of Series D Preferred and a share of Series E Preferred upon a liquidation, dissolution or winding up shall, in each instance, be equal to the greater of (i) the amount that would be distributable under Sections 3.1 and 3.2 with respect to such share, and (ii) the amount that would be distributable under Sections 3.1 and 3.2 in respect of the shares of Common Stock issuable upon conversion of such share, assuming that such share were converted into Common Stock pursuant to Section 6.1 immediately prior to such liquidation, dissolution or winding up of the Corporation. -4- 3.4 For purposes of this Section 3, any transaction or series of transactions, including without limitation a merger, consolidation, or other corporate reorganization of the Corporation with or into any other corporation or corporations in which more than fifty percent (50%) of the outstanding voting power of this Corporation is disposed of, or a sale of all or substantially all of the assets of the Corporation, shall be treated as a Liquidation Event, irrespective of the form of payment made in such transaction or series of transactions. 3.5 Each holder of Preferred Stock shall, by virtue of its acceptance of a stock certificate evidencing Preferred Stock, be deemed to have consented to distributions made by this Corporation in connection with the repurchase by this Corporation of its Common Stock pursuant to its agreements with certain of the holders thereof. 3.6 The value of securities and property paid or distributed pursuant to this Section 3 shall be computed at fair market value at the time of payment as determined by the Board of Directors in the good faith exercise of its reasonable business judgment, provided that (i) if such securities are listed on any established stock exchange or a national market system, their fair market value shall be the mean between the high and low prices for such securities as quoted on such system or exchange (or the largest such exchange) for the 5 trading days immediately preceding and including the date the value is to be determined (or if there are no sales for such date, then for the 5 trading days immediately preceding such date), as reported in the Wall Street Journal or ------------------- similar publication, (ii) if such securities are regularly quoted by a recognized securities dealer but selling prices are not reported, their fair market value shall be the mean between the high bid and low asked prices for such securities on the 5 business days immediately preceding and including the date the value is to be determined (or if there are no quoted prices for such dates, then for the 5 last preceding business days on which there were quotes prices), and (iii) if a majority of the directors elected by the holders of Series B Preferred and Series C Preferred pursuant to Section 5.2 hereof (the --- "Preferred Directors") does not approve the Board of Directors' valuation of - -------------------- securities and property paid or distributed, the Corporation shall promptly engage competent independent appraisers from a nationally recognized accounting firm reasonably acceptable to the Preferred Directors (and with no prior business relationship with the Corporation), or such other appraisers which are agreed to by the Board of Directors and the Preferred Directors, to determine the value of such securities and property paid or distributed, which determination shall be final and binding; and provided, further, that if the -------- ------- securities described in (i) or (ii) are subject to restrictions on transfer, the Board of Directors shall apply an appropriate discount in determining the value thereof. 3.6 Nothing hereinabove set forth shall affect in any way the right of each holder of Preferred Stock to convert such shares into Common Stock in accordance with Section 6 hereof at any time prior to the commencement of the distribution of assets and funds described above. 4. Redemption Rights. ----------------- 4.1 Series A Preferred. At the election in writing by the holders of ------------------ more than fifty percent (50%) of the outstanding shares of Series A Preferred, the Corporation shall redeem, -5- on the terms and conditions stated herein, out of funds legally available therefor, all of the Series A Preferred in four (4) annual installments beginning on May 9, 2002 (the "Initial Redemption Date"), and continuing ----------------------- thereafter on the first, second and third anniversaries of the Initial Redemption Date (each a "Series A Redemption Date" and, together with each ------------------------ Series B Redemption Date (as defined below), Series C Redemption Date (as defined below), Series D Redemption Date (as defined below), and Series E Redemption Date (as defined below), a "Redemption Date"), by paying in cash --------------- therefor a sum equal to the greater of (i) the Original Series A Issue Price for each share of Series A Preferred, plus all declared but unpaid dividends thereon (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares) and an amount equal to 8% of the Original Series A Issue Price compounded per annum from the date on which the first share of Series A Preferred was issued to the Series A Redemption Date, and (ii) the fair market value of the Series A Preferred on the Initial Redemption Date as determined in the manner in which the value of a security is determined in Section 3.6 hereof (the "Series A Redemption Price"). The number ------------------------- of shares of Series A Preferred that the Corporation shall be required to redeem under this paragraph (a) on any one Series A Redemption Date shall be equal to the amount determined by dividing (x) the aggregate number of shares of Series A Preferred outstanding immediately prior to the Series A Redemption Date by (y) the number of remaining Series A Redemption Dates (including the Series A Redemption Date to which such calculation applies). 4.2 Series B Preferred. At the election in writing by the holders of ------------------ more than fifty percent (50%) of the outstanding shares of Series B Preferred, the Corporation shall redeem, on the terms and conditions stated herein, out of funds legally available therefor, all of the Series B Preferred in four (4) annual installments beginning on the Initial Redemption Date, and continuing thereafter on the first, second and third anniversaries of the Initial Redemption Date (each a "Series B Redemption Date"), by paying in cash therefor ------------------------ a sum equal to the greater of (i) the Original Series B Issue Price for each share of Series B Preferred, plus all declared but unpaid dividends thereon (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares) and an amount equal to 8% of the Original Series B Issue Price compounded per annum from the date on which the first share of Series B Preferred was issued (the "Series B Original Issue Date") to the ---------------------------- Series B Redemption Date, and (ii) the fair market value of the Series B Preferred on the Initial Redemption Date as determined in the manner in which the value of a security is determined in Section 3.6 hereof (the "Series B -------- Redemption Price"). The number of shares of Series B Preferred that the - ---------------- Corporation shall be required to redeem under this paragraph (b) on any one Series B Redemption Date shall be equal to the amount determined by dividing (x) the aggregate number of shares of Series B Preferred outstanding immediately prior to the Series B Redemption Date by (y) the number of remaining Series B Redemption Dates (including the Series B Redemption Date to which such calculation applies). 4.3 Series C Preferred. At the election in writing by the holders of ------------------ more than fifty percent (50%) of the outstanding shares of Series C Preferred, the Corporation shall redeem, on the terms and conditions stated herein, out of funds legally available therefor, all of the Series C Preferred in four (4) annual installments beginning on the Initial Redemption Date, and continuing thereafter on the first, second and third anniversaries of the Initial Redemption Date -6- (each a "Series C Redemption Date") by paying in cash therefor a sum equal to ------------------------ the greater of (i) the Original Series C Issue Price for each share of Series C Preferred, plus all declared but unpaid dividends thereon (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares) and an amount equal to 8% of the Original Series C Issue Price compounded per annum from the date on which the shares of Series C Preferred to be redeemed were issued (the "Series C Original Issue Date") to the ---------------------------- Series C Redemption Date, and (ii) the fair market value of the Series C Preferred on the Initial Redemption Date as determined in the manner in which the value of a security is determined in Section 3.6 hereof (the "Series C -------- Redemption Price"). The number of shares of Series C Preferred that the - ---------------- Corporation shall be required to redeem under this paragraph (c) on any one Series C Redemption Date shall be equal to the amount determined by dividing (x) the aggregate number of shares of Series C Preferred and standing immediately prior to the Series C Redemption Date by (y) the number of remaining Series C Redemption Dates (including the Series C Redemption Date to which such calculation applies). 4.4 Series D Preferred. At the election in writing by the holders of ------------------ more than fifty percent (50%) of the outstanding shares of Series D Preferred, the Corporation shall redeem, on the terms and conditions stated herein, out of funds legally available therefor, all of the Series D Preferred in four (4) annual installments beginning on the Initial Redemption Date, and continuing thereafter on the first, second and third anniversaries of the Initial Redemption Date (each a "Series D Redemption Date") by paying in cash therefor a ------------------------ sum equal to the greater of (i) the Original Series D Issue Price for each share of Series D Preferred, plus all declared but unpaid dividends thereon (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares) and an amount equal to 8% of the Original Series D Issue Price compounded per annum from the date on which the shares of Series D Preferred to be redeemed were issued (the "Series D Original Issue ----------------------- Date") to the Series D Redemption Date, and (ii) the fair market value of the Series D Preferred on the Initial Redemption Date as determined in the manner in which the value of a security is determined in Section 3.6 hereof (the "Series D -------- Redemption Price"). The number of shares of Series D Preferred that the - ---------------- Corporation shall be required to redeem under this paragraph (d) on any one Series D Redemption Date shall be equal to the amount determined by dividing (x) the aggregate number of shares of Series D Preferred and standing immediately prior to the Series D Redemption Date by (y) the number of remaining Series D Redemption Dates (including the Series D Redemption Date to which such calculation applies). 4.5 Series E Preferred. At the election in writing by the holders of ------------------ more than fifty percent (50%) of the outstanding shares of Series E Preferred, the Corporation shall redeem, on the terms and conditions stated herein, out of funds legally available therefor, all of the Series E Preferred in four (4) annual installments beginning on the Initial Redemption Date, and continuing thereafter on the first, second and third anniversaries of the Initial Redemption Date (each a "Series E Redemption Date") by paying in cash therefor a ------------------------ sum equal to the greater of (i) the Original Series E Issue Price for each share of Series E Preferred, plus all declared but unpaid dividends thereon (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares) and an amount equal to 8% of the Original Series E Issue Price compounded per annum from the date on which the shares of Series -7- E Preferred to be redeemed were issued (the "Series E Original Issue Date") to ---------------------------- the Series E Redemption Date, and (ii) the fair market value of the Series E Preferred on the Initial Redemption Date as determined in the manner in which the value of a security is determined in Section 3.6 hereof (the "Series E -------- Redemption Price"). The number of shares of Series E Preferred that the - ---------------- Corporation shall be required to redeem under this paragraph (d) on any one Series E Redemption Date shall be equal to the amount determined by dividing (x) the aggregate number of shares of Series E Preferred and standing immediately prior to the Series E Redemption Date by (y) the number of remaining Series E Redemption Dates (including the Series E Redemption Date to which such calculation applies). 4.6 The Corporation shall use its best efforts to be legally able to redeem the full number of shares of Preferred Stock to be redeemed on any Redemption Date, including, but not limited to, a sale of the Corporation (by merger or otherwise) or sale of all or substantially all of its assets. In the event that the Corporation is unable to redeem the full number of shares of Preferred Stock to be redeemed on any Redemption Date, the shares not redeemed shall be redeemed by this Corporation as provided in this Section 4 as soon as practicable after funds are legally available therefor. Any redemption effected pursuant to this Section 4.6 shall be made ratably among the holders of the Preferred Stock in proportion to the aggregate Series A Redemption Price, Series B Redemption Price, Series C Redemption Price, Series D Redemption Price and Series E Redemption Price, as applicable, to which each holder is entitled under Sections 4.1, 4.2, 4.3, 4.4 and 4.5. 4.7 If the holders of Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and/or Series E Preferred have elected to have the shares of Preferred Stock that they hold redeemed as provided in Sections 4.1, 4.2, 4.3, 4.4, and 4.5 above, then at least thirty (30) but no more than sixty (60) days prior to each Redemption Date, the Corporation shall give written notice by certified or registered mail, postage prepaid, to all holders of outstanding Preferred Stock whose shares are being redeemed, at the address last shown on the records of the Corporation for such holder, stating such Redemption Date, the Series A Redemption Price, the Series B Redemption Price, the Series C Redemption Price, the Series D Redemption Price and the Series E Redemption Price, as applicable, the then current conversion rate (as provided in Section 6.1)) for such shares, and the date of termination of the right to convert (which date shall not be earlier than (30) days after the written notice by the Corporation has been given) and shall call upon such holder to surrender to the Corporation on such Redemption Date at the place designated in the notice, such holder's certificate or certificates representing the shares to be redeemed. On or after the Redemption Date stated in such notice, the holder of each share of Preferred Stock called for redemption shall surrender the certificate evidencing such shares to the Corporation at the place designated in such notice and shall thereupon be entitled to receive payment of the Series A Redemption Price, Series B Redemption Price, Series C Redemption Price, Series D Redemption Price or Series E Redemption Price, as the case may be, for the shares surrendered. If less than all the shares represented by any such surrendered certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. If such notice of redemption shall have been duly given, and if on such Redemption Date funds necessary for the redemption shall be available therefor, then, as to any certificates evidencing any Preferred Stock so called for redemption and not surrendered, all rights of the holders of such shares so called for -8- redemption and not surrendered shall cease with respect to such shares, except only the right of the holders to receive the Series A Redemption Price, Series B Redemption Price, Series C Redemption Price, Series D Redemption Price and Series E Redemption Price for the Preferred Stock which they hold, without interest, upon surrender of their certificates therefor. 4.8 Notwithstanding anything herein to the contrary, if, on or prior to a Redemption Date (and after a redemption election has been made pursuant to this Section 4), the Corporation deposits, with any bank or trust company in the State of California having aggregate capital and surplus in excess of $100,000,000, as a trust fund, a sum sufficient to redeem on such Redemption Date the shares called for redemption, with irrevocable instructions and authority to the bank or trust company to give the notice of redemption thereof (or to complete the giving of such notice if theretofore commenced) and to pay, on or after the Redemption Date or prior thereto, the Series A Redemption Price, Series B Redemption Price, Series C Redemption Price, Series D Redemption Price and Series E Redemption Price of the shares to their respective holders upon the surrender of their share certificates, then from and after the date of the deposit (although prior to such Redemption Date), the shares so called for redemption on such Redemption Date (but not any subsequent Redemption Date) shall be redeemed. The deposit of such sum shall constitute full payment of such shares to their holders and from and after the date of the deposit such shares shall no longer be outstanding, and the holders thereof shall cease to be stockholders with respect to such shares, and shall have no rights with respect thereto except the right to receive from the bank or trust company payment of the Series A Redemption Price, the Series B Redemption Price, the Series C Redemption Price, Series D Redemption Price and Series E Redemption Price for the Preferred Stock called for redemption on such Redemption Date without interest, upon the surrender of their certificates therefor and the right to convert said shares as provided herein at any time up to but not after the close of business on the fifth day prior to the Redemption Date of such shares (which conversion date will not be earlier than thirty (30) days after the written notice of redemption has been given). Any monies so deposited on account of the Series A Redemption Price, Series B Redemption Price, Series C Redemption Price, Series D Redemption Price and Series E Redemption Price of the Preferred Stock converted into Common Stock subsequent to the making of such deposit shall be repaid to the Corporation forthwith upon the conversion of such Preferred Stock. Any interest accrued on any funds so deposited shall be the property of, and paid to, the Corporation. If the holders of Preferred Stock so called for redemption shall not, at the end of two (2) years after the applicable Redemption Date, have claimed any funds so deposited, such bank or trust company shall thereupon pay over to the Corporation such unclaimed funds, and such bank or trust company shall thereafter be relieved of all responsibility in respect thereof to such holders and such holders shall look only to the Corporation for payment of the Series A Redemption Price, Series B Redemption Price, Series C Redemption Price, Series D Redemption Price and Series E Redemption Price for the Preferred Stock which they hold. 5. Voting Rights. ------------- 5.1 Except as otherwise required by law or hereunder, the holder of each share of Common Stock issued and outstanding shall have one vote and the holder of each share of Preferred Stock shall be entitled to the number of votes equal to the number of shares of -9- Common Stock into which such share of Preferred Stock could be converted at the record date for determination of the stockholders entitled to vote on such matters, or, if no such record date is established, at the date such vote is taken or any written consent of stockholders is solicited, such votes to be counted together with all other shares of stock of the Corporation having general voting power and not separately as a class. Fractional votes by the holders of Preferred Stock shall not, however, be permitted and any fractional voting rights shall (after aggregating all shares into which shares of Preferred Stock held by each holder could be converted) be rounded to the nearest whole number (with one half being rounded upward). Holders of Common Stock and Preferred Stock shall be entitled to notice of any stockholders' meeting in connection with the Bylaws of the Corporation. 5.2 Notwithstanding the provisions of paragraph (a), at each annual or special meeting called for the purpose of electing directors, (i) the holders of the Series B Preferred, voting as a separate class, shall be entitled to elect one (1) member of the Board of Directors for so long as at least 1,000,000 originally issued shares of Series B Preferred remain outstanding (as adjusted for stock dividends, combinations, splits, recapitalizations and the like with respect to such shares) and (ii) the holders of the Series C Preferred, Series D Preferred and Series E Preferred, voting together as a single class, shall be entitled to elect one (1) member of the Board of Directors for so long as at least 1,000,000 originally issued shares of Series C Preferred, Series D Preferred and/or Series E Preferred remain outstanding (as adjusted for stock dividends, combinations, splits, recapitalizations and the like with respect to such shares), (iii) the holders of Common Stock, voting as a separate class, shall be entitled to elect two (2) members of the Board of Directors, and (iv) the holders of Preferred Stock and Common Stock, voting together as a single class and on an as-converted basis, shall be entitled to elect the remaining directors. In the case of any vacancy in the office of a director elected pursuant to clauses (i), (ii), or (iii) of the preceding sentence, a successor shall be elected to hold office for the unexpired term of such director by the affirmative vote of a majority of the shares of such specified group given at a special meeting of such stockholders duly called (or by a written consent in lieu thereof) for that purpose. Subject to Section 141(k) of the Delaware General Corporation Law, any director who shall have been elected by a specified group of stockholders may be removed during the aforesaid term of office, either for or without cause, by, and only by, the holders of a majority of the shares of such specified group, given at the a special meeting of such stockholders duly called (or by a written consent in lieu thereof) for that purpose, and such vacancy thereby created may be filled by the vote of the holders of a majority of shares of such specified group represented at such meeting (or in such consent). 6. Conversion. The holders of Preferred Stock shall have conversion ---------- rights as follows (the "Conversion Rights"): 6.1 Right to Convert. Each share of Preferred Stock shall be ---------------- convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of the Corporation or any transfer agent for such Preferred Stock. Each share of Preferred Stock shall be convertible into such number of fully-paid and non-assessable shares of Common Stock as (i) in the case of the Series A Preferred is determined by dividing the Original Series A Issue Price by the Series A Preferred Conversion Price (the "Series A -------- Conversion Price"), determined - ---------------- -10- as hereinafter provided, in effect at the time of conversion, (ii) in the case of the Series B Preferred is determined by dividing the Original Series B Issue Price by the Series B Preferred Conversion Price (the "Series B Conversion ------------------- Price"), determined as hereinafter provided, in effect at the time of - ----- conversion, (iii) in the case of the Series C Preferred is determined by dividing the Original Series C Issue Price by the Series C Preferred Conversion Price (the "Series C Conversion Price"), determined as hereinafter provided, in ------------------------- effect at the time of conversion, (iv) in the case of the Series D Preferred is determined by dividing the Original Series D Issue Price by the Series D Preferred Conversion Price (the "Series D Conversion Price"), determined as ------------------------- hereinafter provided, in effect at the time of conversion and (v) in the case of the Series E Preferred is determined by dividing the Original Series E Issue Price by the Series E Preferred Conversion Price (the "Series E Conversion ------------------- Price"), determined as hereinafter provided, in effect at the time of - ----- conversion. The initial Series A Preferred Conversion Price shall be $0.20 per share, the initial Series B Conversion Price shall be $1.2862 per share, the initial Series C Conversion Price shall be $1.079076 per share, the initial Series D Conversion Price shall be $1.87105 per share, and the initial Series E Conversion Price shall be $5.66 per share. Each of these Conversion Prices shall be subject to adjustment as provided in accordance with Section 6.4. 6.2 Automatic Conversion. Each share of Series A Preferred, Series B -------------------- Preferred, Series C Preferred, Series D Preferred and Series E Preferred shall automatically be converted into shares of Common Stock at the then effective Conversion Price for such series of Preferred Stock upon the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock for the account of the Corporation to the public with aggregate proceeds to the Company in excess of Twenty Million Dollars ($20,000,000) (before deduction for underwriters commissions and expenses) and a per share price not less than $8.49 per share (appropriately adjusted for any stock combination, stock split, stock dividend, recapitalization, or other similar transaction) (an "Automatic Conversion"). In the event of an Automatic Conversion of the Preferred Stock upon a public offering as aforesaid, the person(s) entitled to receive the Common Stock issuable upon such conversion of Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of securities. 6.3 Mechanics of Conversion. No fractional shares of Common Stock ----------------------- shall be issued upon conversion of Preferred Stock. All shares of Common Stock (including fractions thereof) issuable upon conversion of more than one share of Preferred Stock by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of any fractional share. If, after the aforementioned aggregation, the conversion would result in the issuance of a fraction of a share of Common Stock, the Corporation shall, in lieu of issuing any fractional shares to which the holder would otherwise be entitled, pay cash equal to such fraction multiplied by the then effective Conversion Price for such series of Preferred Stock. Before any holder of Preferred Stock shall be entitled to convert the same into full shares of Common Stock and to receive certificates therefor, such holder shall surrender the certificate or certificate therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Preferred Stock, and shall given written notice to the Corporation at such office that he or she -11- elects to convert the same; provided, however, that in the event of an Automatic Conversion pursuant to Section 6.2, the outstanding shares of Preferred Stock shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent, and provided further that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such Automatic Conversions unless the certificates evidencing such shares of Preferred Stock are either delivered to the Corporation or its transfer agents as provided above, or the holder notifies the Corporation or its transfer agent that such certificates have been lost, stolen, or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates. The Corporation shall, as soon as practicable after such delivery, or such agreement and indemnification in the case of a lost certificate, issue and deliver at such office to such holder of Preferred Stock, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid and check payable to the holder in the amount of any cash amounts payable as the result of a conversion into fractional shares of Common Stock. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. 6.4 Adjustments to Conversion Price. ------------------------------- (i) Adjustments for Dividends, Splits, Subdivisions, ----------------------------------------------- Combinations, or Consolidation of Common Stock. In the event the outstanding ---------------------------------------------- shares of Common Stock shall be increased by stock dividend payable in Common Stock, stock split, subdivision, or other similar transaction occurring after the filing of this Certificate of Designation into a greater number of shares of Common Stock, the Conversion Price then in effect for each series of Preferred Stock shall, concurrently with the effectiveness of such event, be decreased in proportion to the percentage increase in the outstanding number of shares of Common Stock. In the event the outstanding shares of Common Stock shall be decreased by reverse stock split, combination, consolidation, or other similar transaction occurring after the filing of this Certificate of Designation into a lesser number of shares of Common Stock, the Conversion Price then in effect for each series of Preferred Stock shall, concurrently with the effectiveness of such event, be increased in proportion to the percentage decrease in the outstanding number of shares of Common Stock. (ii) Adjustments for Other Distributions. In the event the ----------------------------------- Corporation at any time or from time to time makes, or fixes a record date for the determination of holders of Common Stock entitled to receive, any distribution payable in securities of the Corporation other than shares of Common Stock and other than as otherwise adjusted in this Section 6, then and in each such event provision shall be made so that the holders of Preferred Stock shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of the Corporation which they would have received had their Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, -12- during the period from the date of such event to and including the date of conversion, retained such securities receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section 6 with respect to the rights of the holders of the Preferred Stock. (iii) Adjustments for Reclassification, Exchange and Substitution. ----------------------------------------------------------- If the Common Stock issuable upon conversion of the Preferred Stock shall be changed into the same or a different number of shares of any other class or classes of stock, whether by capital reorganization, reclassification, or otherwise (other than a subdivision or combination of shares provided for above), the Conversion Price then in effect for each series of Preferred Stock shall, concurrently with the effectiveness of such reorganization or reclassification, be proportionately adjusted such that the Preferred Stock shall be convertible into, in lieu of the number of shares of Common Stock which the holders would otherwise have been entitled to receive, a number of shares of such other class or classes of stock equivalent to the number of shares of Common Stock that would have been subject to receipt by the holders upon conversion of such Preferred Stock immediately before that change. (iv) Adjustments of Series B Conversion Price, Series C Conversion ------------------------------------------------------------- Price, Series D Conversion Price and Series E Conversion Price Upon Issuance of - ------------------------------------------------------------------------------- Additional Stock. If the Corporation shall issue "Additional Stock" (as defined - ---------------- below) for a consideration per share less than the Series B Conversion Price, the Series C Conversion Price, the Series D Conversion Price or the Series E Conversion Price then in effect on the date and immediately prior to such issue, then and in each such event, such Conversion Price shall be reduced concurrently with such issue, to a price (calculated to three decimal places) determined by multiplying such Conversion Price by a fraction (1) the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue (including all shares of Common Stock issuable upon conversion of the outstanding Preferred Stock and upon exercise of all outstanding options) plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Stock so issued (or deemed to be issued) would purchase at such Conversion Price; and (2) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue (including all shares of Common Stock issuable upon conversion of the outstanding Preferred Stock and upon exercise of all outstanding options) plus the number of shares of Additional Stock so issued. For purposes of this subsection (iv) "Additional Stock" shall mean all Common Stock issued by the Corporation after the Series B Original Issue Date other than Common Stock issued or issuable at any time (1) upon conversion of the Preferred Stock, (2) up to a total of 5,754,206 shares (net of repurchases and option expirations or terminations) to officers, directors, and employees of, and consultants to, the Corporation after the Series B Original Issue Date as designated and approved by the Board of Directors, or such larger number of shares as may hereafter be approved by the Board of Directors including the affirmative vote of the member elected by the holders of Series B Preferred or the member elected by the holders of Series C Preferred, Series D Preferred and Series E Preferred; (3) in connection with equipment leasing or bank financing transactions approved by the Corporation's Board of Directors; (4) as a dividend or distribution with respect to the Preferred Stock; (5) upon the -13- issuance of shares of Series C Preferred Stock in excess of 5,560,314 shares; or (6) as described in subparagraphs (i), (ii) and (iii) of this Section 4.6 For the purpose of making any adjustment in the Series B Conversion Price, Series C Conversion Price, Series D Conversion Price or Series E Conversion Price as provided above, the consideration received by the Corporation for any issue or sale of Common Stock will be computed: (1) to the extent it consists of cash, as the amount of cash received by the Corporation before deduction of any offering expenses payable by the Corporation and any underwriting or similar commissions, compensation, or concessions paid or allowed by the Corporation in connection with such issue or sale; (2) to the extent it consists of property other than cash, at the fair market value of that property as determined in good faith in the manner in which the value of such property is determined in Section 3.6; and (3) if Common Stock is issued or sold together with other stock or securities or other assets of the Corporation for a consideration which covers both, as the portion of the consideration so received that may be reasonably determined in good faith by the Board of Directors to be allocable to such Common Stock. If the Corporation (1) grants any rights or options to subscribe for, purchase, or otherwise acquire shares of Common Stock, or (2) issues or sells any security convertible into shares of Common Stock, then, in each case, the price per share of Common Stock issuable on the exercise of the rights or options or the conversion of the securities will be determined by dividing the total amount, if any, received or receivable by the Corporation as consideration for the granting of the rights or options or the issue or sale of the convertible securities, plus the minimum aggregate amount of additional consideration payable to the Corporation on exercise or conversion of the securities, by the maximum number of shares of Common Stock issuable on the exercise of conversion. Such granting or issue or sale will be considered to be an issue or sale for cash of the maximum number of shares of Common Stock issuable on exercise or conversion at the price per share determined under this subsection, and the Conversion Price for such Series B Preferred, Series C Preferred, Series D Preferred or Series E Preferred will be adjusted as above provided to reflect (on the basis of that determination) the issue or sale. No further adjustment of the Conversion Price for such Series B Preferred, Series C Preferred, Series D Preferred or Series E Preferred will be made as a result of the actual issuance of shares of Common Stock on the exercise of any such rights or options or the conversion of any such convertible securities. Upon the redemption or repurchase of any such securities or the expiration or termination of the right to convert into, exchange for, or exercise with respect to, Common Stock, the Conversion Price for the Series B Preferred, the Series C Preferred, the Series D Preferred and the Series E Preferred, as applicable, will be readjusted to such price as would have been obtained had the adjustment made upon their issuance been made upon the basis of the issuance of only the number of such securities as were actually converted into, exchanged for, or -14- exercised with respect to, Common Stock. If the purchase price or conversion or exchange rate provided for in any such security changes at any time, then, upon such change becoming effective, the Conversion Price for the Series B Preferred, the Series C Preferred, the Series D Preferred or the Series E Preferred as applicable, then in effect will be readjusted forthwith to such price as would have been obtained had the adjustment made upon the issuance of such securities been made upon the basis of (1) the issuance of only the number of shares of Common Stock theretofore actually delivered upon the conversion, exchange or exercise of such securities, and the total consideration received therefor, and (2) the granting or issuance, at the time of such change, of any such securities then still outstanding for the consideration, if any, received by the Company therefor and to be received on the basis of such changed price or rate. 6.5 No Impairment. Except as provided in Section 7, the Corporation will ------------- not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation but will at all times in good faith assist in the carrying out of all the provisions of this Section 6 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Preferred Stock against impairment. 6.6 Certificate as to Adjustments. Upon the occurrence of each adjustment ----------------------------- or readjustment of the Conversion Price of each series of Preferred Stock pursuant to this Section 6, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Price at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of the Preferred Stock. (a) Notices of Record Date. In the event that this Corporation shall ---------------------- propose at any time: (i) to declare any dividend or distribution upon its Common Stock, whether in cash, property, stock, or other securities, whether or not a regular cash dividend and whether or not out of earnings or earned surplus; (ii) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (iii) to effect any reclassification or recapitalization of its Common Stock outstanding involving a change in the Common Stock; or (iv) to merge or consolidate with or into any other corporation, or sell, lease, or convey all or substantially all its property or business, or to liquidate, dissolve, or wind -15- up; then, in connection with each such event, this Corporation shall send to the holders of the Preferred Stock: (1) at least 20 days' prior written notice of the date on which a record shall be taken for such dividend, distribution, or subscription rights (and specifying the date on which the holders of Common Stock shall be entitled thereto) or for determining rights to vote in respect of the matters referred to in (iii) and (iv) above; and (2) in the case of the matters referred to in (iii) and (iv) above, at least 20 days' prior written notice of the date when the same shall take place (and specifying the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon the occurrence of such event or the record date for the determination of such holders if such record date is earlier). Each such written notice shall be delivered personally or given by first class mail, postage prepaid, addressed to the holders of the Preferred Stock at the address for each such holder as shown on the books of this Corporation. (h) Issue Taxes. The Corporation shall pay any and all issue and other ----------- taxes (other than income taxes) that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of shares of Preferred Stock pursuant hereto; provided, however, that the Corporation shall not be obligated to pay any transfer taxes resulting from any transfer requested by any holder in connection with any such conversion. (i) Reservation of Stock Issuable Upon Conversion. The Corporation --------------------------------------------- shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Preferred Stock such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Preferred Stock, and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose, including, without limitation, engaging in best efforts to obtain the requisite shareholder approval of any necessary amendment to its Articles of Incorporation. (j) Status of Converted Stock. No share of Preferred Stock acquired by ------------------------- the Corporation by reason of redemption, purchase, conversion or otherwise shall be reissued and all such shares shall be cancelled, retired or eliminated from the shares which the Corporation is authorized to issue. 7. Covenants. --------- 7.1 In addition to any other rights provided by law, this Corporation shall not without first obtaining the affirmative vote or written consent of the holders of more than fifty percent (50%) of the outstanding shares of Preferred Stock (voting on an as-converted basis): -16- (i) amend or repeal any provision of, or add any provision to, this Corporation's Certificate of Incorporation if such action would adversely alter or change the preferences, rights, privileges, or powers of, or the restrictions provided for the benefit of or imposed upon, the Preferred Stock; (ii) increase the authorized number of shares of Preferred Stock; (iii) authorize or issue shares of any class or series of stock having any rights, preferences or privileges superior to or on a parity with any rights, preferences or privileges of the Preferred Stock; (iv) undertake any transaction or series of transactions as described in Section 3.4 hereof; or (v) amend the Corporation's Bylaws. 7.2 In addition to any other rights provided by law and in addition to the provisions of Section 7(a), this Corporation shall not without first obtaining the affirmative vote or written consent of the holders of more than sixty percent (60%) of the outstanding shares of Series B Preferred, Series C Preferred, Series D Preferred and Series E Preferred, voting together as a single class and on an as-converted basis: (i) increase the authorized number of shares of Series B Preferred, Series C Preferred, Series D Preferred or Series E Preferred; (ii) amend or repeal any provision of, or add any provision to, this Corporation's Certificate of Incorporation if such action would adversely alter or change the preferences, rights, privileges, or powers of, or the restrictions provided for the benefit of or imposed upon, the Series B Preferred, the Series C Preferred, the Series D Preferred or the Series E Preferred; (iii) pay or declare any dividends on the Common Stock or Preferred Stock; (iv) authorize or issue shares of any class or series of stock having any rights, preferences or privileges superior to any rights, preferences or privileges of the Series B Preferred, the Series C Preferred, the Series D Preferred or the Series E Preferred; (v) undertake any transaction or series of transactions as described in Section 3.4 hereof; or (vi) redeem, repurchase or otherwise acquire (including, without limitation, payment into a sinking fund for such purpose) any share or shares of Common Stock or Preferred Stock; provided, however, that this restriction shall not apply to (A) redemptions in accordance with Section 3 of this Article Fourth, or (B) repurchases by the Company of shares of Common Stock held by employees, officers, directors, consultants, independent contractors, -17- advisors, or other persons performing services for the Company or a subsidiary that are subject to restricted stock purchase agreements or stock option exercise agreements under which the Company has the option to repurchase such shares: (1) at cost, upon the occurrence of certain events, such as the termination of employment or services; or (2) at any price pursuant to the Company's exercise of a right of first refusal to repurchase such shares, and such repurchase is approved by the Board of Directors. 8. Residual Rights. All rights accruing to the outstanding shares of the --------------- Corporation not expressly provided for to the contrary herein shall be vested to the Common Stock. The Common Stock shall not be redeemable. In Witness Whereof, the Corporation has caused this Certificate of Designation to be signed and attested by its duly authorized officer this 1st day of October, 1999. /s/ Martin W. Brauns ----------------------------- Martin W. Brauns, Chief Executive Officer and President I declare under penalty of perjury under the of the State of California, the State of Delaware and the United States of America that the foregoing is true and correct and that this declaration was executed on October 1, 1999 at Sunnyvale, California. /s/ Martin W. Brauns ----------------------------- Martin W. Brauns -18- EX-5.01 6 OPINION OF FENWICK & WEST LLP EXHIBIT 5.01 ------------ October 4, 1999 Interwoven, Inc. 1195 West Fremont Avenue, Suite 2000 Sunnyvale, CA 94087 Ladies and Gentlemen: At your request, we have examined the Registration Statement on Form S-1 (Registration Number 333-83779) (the "Registration Statement") filed by you with the Securities and Exchange Commission (the "Commission") on July 27, 1999, as subsequently amended, in connection with the registration under the Securities Act of 1933, as amended, of an aggregate of up to 3,450,000 shares of your Common Stock (the "Stock"). In rendering this opinion, we have examined the following: (1) the Registration Statement, together with the Exhibits filed as a part thereof; (2) the prospectuses prepared in connection with the Registration Statement; (3) your registration statement on Form 8-A (File Number 000-27389) filed with the Commission on September 20, 1999; (4) the minutes of meetings and actions by written consent of the stockholders and boards of directors that are contained in your minute books and the minute books of your predecessor, Interwoven, Inc., a California corporation ("Interwoven California"), that are in our possession; (5) the stock records for you and Interwoven California that you have provided to us (consisting of a list of stockholders and a list of option and warrant holders respecting your capital and of any rights to purchase capital stock that was prepared by you and dated as of October 1, 1999 verifying the number of such issued and outstanding securities); and (6) a Management Certificate addressed to us and dated of even date herewith executed by the Company containing certain factual and other representations. In our examination of documents for purposes of this opinion, we have assumed, and express no opinion as to, the genuineness of all signatures on original documents, the authenticity and completeness of all documents submitted to us as originals, the conformity to originals and completeness of all documents submitted to us as copies, the legal capacity of all natural persons executing the same, the lack of any undisclosed termination, modification, waiver or amendment to any document reviewed by us and the due authorization, execution and October 4, 1999 Page 2 delivery of all documents where due authorization, execution and delivery are prerequisites to the effectiveness thereof. For the purposes of this opinion, we have relied as to matters of fact solely upon our examination of the documents referred to above and have assumed the current accuracy and completeness of the information obtained from public officials and records referred to above. We are admitted to practice law in the State of California, and we express no opinion herein with respect to the effect of the laws of any jurisdiction other than the existing laws of the United States of America, the State of California and the State of Delaware. In connection with our opinion expressed below, we have assumed that, at or prior to the time of the delivery of any shares of Stock, the Registration Statement will have been declared effective under the Securities Act of 1933, as amended, that the registration will apply to such shares of Stock and will not have been modified or rescinded and that there will not have occurred any change in law affecting the validity or enforceability of such shares of Stock. Based upon the foregoing, it is our opinion that the up to 3,450,000 shares of Stock to be issued and sold by you, when issued and sold in accordance in the manner referred to in the prospectus associated with the Registration Statement, will be validly issued, fully paid and nonassessable. We consent to the use of this opinion as an exhibit to the Registration Statement and further consent to all references to us, if any, in the Registration Statement, the Prospectus constituting a part thereof and any amendments thereto. This opinion speaks only as of its date and we assume no obligation to update this opinion should circumstances change after the date hereof. Very truly yours, /s/ FENWICK & WEST LLP EX-10.05 7 1999 EMPLOYEE STOCK PURCHASE PLAN EXHIBIT 10.05 INTERWOVEN, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN As Adopted July 22, 1999 and Amended September 20, 1999 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 300,000 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 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. 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 twenty-four (24) months duration commencing on May 1 and November 1 of each year and ending on April 30 and October 31 of each year; provided, however, that notwithstanding the foregoing, the first such Offering - -------- ------- Period shall commence on the first business day on which price quotations for the Company's Common Stock are available on the Nasdaq National Market (the "First Offering Date") and shall end on October 31, 2001. Except for the first Offering Period, each Offering Period shall consist of four (4) six month purchase periods (individually, a "Purchase Period") during which payroll deductions of the participants are accumulated under this Plan. The first Offering Period shall consist of no more than five and no fewer than three Purchase Periods, any of which may be greater or less than six months as determined by the Committee. 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 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. 2 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 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 ten 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 increase or 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. 3 (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 or Offering Period, as the case may be. In the event that this Plan has been oversubscribed, all funds not used to purchase 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 as the denominator may be purchased by a participant on any single Purchase 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 Com- 4 mittee 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 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. (c) If the Fair Market Value on the first day of the current Offering Period in which a participant is enrolled is higher than the Fair Market Value on the first day of any subsequent Offering Period, the Company will automatically enroll such participant in the subsequent Offering Period. Any funds accumulated in a participant's account prior to the first day of such subsequent Offering Period will be applied to the purchase of shares on the Purchase Date immediately prior to the first day of such subsequent Offering Period, if any. 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. 5 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. 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. 6 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 an 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 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. 7 INTERWOVEN, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN ENROLLMENT FORM Check One: Complete: [ ] New Enrollment or Re-enrollment Social Security No._______________ [ ] Change Employee No.______________________ [ ] Change in How Shares Are to Be Held in Account [ ] Increase in Payroll Deduction Level [ ] this Purchase Period [ ] next Offering Period [ ] Decrease in Payroll Deduction Level [ ] this Purchase Period [ ] next Offering Period [ ] Suspension of Payroll Deductions for Open Offering Period (Attach Completed Suspension Form) [ ] Withdrawal (Attach Completed Withdrawal Form) [ ] Beneficiary Change
1. Name of Participant________________________________________________________ 2. Shares purchased under the Plan should be held in account with the Plan Broker in my name or in my name together with the name(s) indicated below: Name___________________________ Social Security No._____________________ Name___________________________ Social Security No._____________________ There may be tax consequences for naming individuals other than your spouse on the account in which Shares purchased under the Plan are held. If spouse (circle one): Joint Tenants/Community Property. Please notify the Plan Broker directly to transfer or sell your stock. 3. Payroll Deduction Level (from 2% to 15% in whole percentages):____________ (the percentage deduction will be made from your W-2 compensation including base salary, commissions, overtime, shift premiums, bonuses and draws against commissions) 4. I confirm my spouse's interest (if married) in the community property herein, and I hereby designate the following person(s) as my beneficiary(ies) to receive all payments and/or stock attributable to my interest under the Plan:
NAME *To be divided ADDRESS as follows: ____________________________________ _______________ ____________________________________ Last First M.I. Number Street _____________________________________ _____________________________________ Social Security No. Relationship City State Zip ____________________________________ _______________ _____________________________________ Last First M.I. Number Street ____________________________________ ______________________________________ Social Security No. Relationship City State Zip
* If more than one beneficiary: (1) insert "in equal shares", or (2) insert percentage to be paid to each beneficiary. 5. The information provided on this Enrollment Form will remain in effect unless and until I complete and submit to the Treasury Department a new enrollment form. INTERWOVEN, INC. OFFICE USE: Signature:__________________ Date received by the Treasury Department.:_________________ Name:______________________________ Date entered into system:___________________________________ Date:_______________________________ Please return this completed form to the Treasury Department
INTERWOVEN, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN SUBSCRIPTION AGREEMENT 1. I elect to participate in the Interwoven, Inc. (the "Company") 1999 Employee Stock Purchase Plan (the "Plan") and to subscribe to purchase shares of the Company's Common Stock (the "Shares") in accordance with this Subscription Agreement and the Plan. 2. I authorize payroll deductions from each of my paychecks in that percentage of my base salary, commissions, overtime, shift premiums, bonuses and draws against commissions as shown on my Enrollment Form, in accordance with the Plan. 3. I understand that such payroll deductions shall be accumulated for the purchase of Shares under the Plan at the applicable purchase price determined in accordance with the Plan. I further understand that except as otherwise set forth in the Plan, Shares will be purchased for me automatically at the end of each Purchase Period unless I withdraw from the Plan or otherwise become ineligible to participate in the Plan. 4. I understand that this Subscription Agreement will automatically re-enroll me in all subsequent Offering Periods unless I withdraw from the Plan or I become ineligible to participate in the Plan. 5. I acknowledge that I have a copy of and am familiar with the Company's most recent Prospectus which describes the Plan. A copy of the complete Plan and the Prospectus is on file with the Company. (In the case of the initial Plan Purchase Period, the Prospectus will be on file on the first day of the Offering Period.) 6. I understand that Shares purchased for me under the Plan will be held in a personal account with the Plan Broker unless I request otherwise. 7. I hereby agree to be bound by the terms of the Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Plan. 8. I have read and understood this Subscription Agreement. Signature:_______________________ Name:____________________________ Date:____________________________ Please return this completed form to the Treasury Department. INTERWOVEN, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN NOTICE OF WITHDRAWAL I, _________________________, the undersigned participant in the Offering Period of the Interwoven, Inc. 1999 Employee Stock Purchase Plan (the "Plan") which began on _______________, hereby notify Interwoven, Inc. (the "Company") that I wish to withdraw from the Offering Period. I direct the Company to pay to me as promptly as practicable all payroll deductions credited to my account with respect to such Offering Period. I understand and agree that my participation in the Plan will terminate and no shares will be purchased for me at the end of the Purchase Period so long as I submit this Notice of Withdrawal to the Company at least 15 days prior to the end of the Purchase Period. I understand and agree that if I submit this Notice of Withdrawal to the Company less than 15 days prior to the end of the Purchase Period, shares ---- will be purchased for me at the end of the Purchase Period, and my participation in the Plan will end at the beginning of the next Purchase Period or Offering Period, as the case may be. I further understand that no additional payroll deductions will be made for the purchase of shares in the current Offering Period, and I shall be eligible to participate in succeeding Offering Periods only by timely delivering to the Company a new Subscription Agreement and Enrollment Form. Name and address of Participant (please print): Name:______________________________________________________________________ Street Address or P.O. Box:________________________________________________ City, State ZIP:___________________________________________________________ __________________________________ __________________________________ Signature Date Please return this form to the Treasury Department. INTERWOVEN, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN NOTICE OF SUSPENSION I, _________________________, the undersigned participant in the Offering Period of the Interwoven, Inc. 1999 Employee Stock Purchase Plan (the "Plan") which began on _______________, hereby notify Interwoven, Inc. (the "Company") that I wish to suspend my payroll deductions to the Plan for the remainder of the Offering Period. I understand and agree that my request will be effective beginning with the next payroll period commencing more than 15 days after the Human Resources Department receives this Notice of Suspension. I understand and agree that payroll deductions credited to my account prior to the date this Notice of Suspension is effective will be used to purchase shares on the next Purchase Date. I further understand that no additional payroll deductions will be made for the purchase of shares in the current Offering Period, and I will be eligible to participate in succeeding Offering Periods only by timely delivering to the Company a new Subscription Agreement and Enrollment Form. Name and address of Participant (please print): Name:______________________________________________________________________ Street Address or P.O. Box:________________________________________________ City, State ZIP:___________________________________________________________ _________________________________ ____________________________________ Signature Date Please return this form to the Treasury Department. EX-21.01 8 INTERWOVEN SUBSIDIARIES EXHIBIT 21.01 Interwoven, Inc. has the following subsidiary: Interwoven UK Limited EX-23.02 9 CONSENT OF PRICEWATERHOUSECOOPERS LLP Exhibit 23.02 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1 of our report dated July 15, 1999, relating to the financial statements of Interwoven, Inc., which appears in such Registration Statement. We also consent to the references to us under the headings "Experts" and "Selected Financial Data" in such Registration Statement. /s/ PricewaterhouseCoopers LLP San Jose, California October 4, 1999 EX-23.03 10 CONSENT OF INTERNATIONAL DATA CORPORATION Exhibit 23.03 CONSENT OF INTERNATIONAL DATA CORPORATION We consent to the reference to our company under the captions "Prospectus Summary" and "Business--Industry Background," and to the use of the information extracted from our reports in conjunction therewith, in the registration statement on Form S-1 (Registration No. 333-83779) and the related prospectus of Interwoven, Inc. International Data Corporation By: /s/ Alexa McCloughan ---------------------------- Name: Alexa McCloughan Title: Sr. Vice President New York, New York October 1, 1999 EX-24.02 11 POWER OF ATTORNEY FOR RONALD E.F. CODD Exhibit 24.02 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS that the individual whose signature appears below constitutes and appoints Martin W. Brauns and David M. Allen, and each of them, his true and lawful attorneys-in-fact and agents with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign the registration statement on Form S-1 of Interwoven, Inc., Registration No. 333-83779 (the "Registration Statement"), and any and all amendments (including post-effective amendments) thereto, and to sign any registration statement for the same offering covered by the Registration Statement that is to be effective upon the filing pursuant to Rule 426(b) promulgated under the Securities Act of 1933, as amended, and all post-effective amendments thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done or by virtue hereof. /s/ Ronald E.F. Codd 9/21/99 - ------------------------------------ ----------------------- Ronald E.F. Codd Date -----END PRIVACY-ENHANCED MESSAGE-----