IMANAGE INC - 10-K Annual Report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Act. Yes o No þ

The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing sale price of the registrant’s common stock on June 28, 2002 as reported on the Nasdaq National Market was approximately $49,289,000. Shares of common stock held by each then current executive officer and director and by each person who is known by the registrant to own 5% or more of the outstanding common stock have been excluded from this computation in that such persons may be deemed to have been affiliates of the Company. This determination of affiliate status is not a conclusive determination for other purposes.

The number of shares outstanding of the registrant’s common stock as of March 14, 2003 was approximately 24,246,000.

Parts of the Proxy Statement for Registrant’s 2003 Annual Meeting of Stockholders to be held June 12, 2003 are incorporated by reference in Part III of this Annual Report on Form 10-K.

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements using terminology such as “can,” “may,” “believe,” “designed to,” “will,” “expect,” “plan,” “anticipate,” “estimate,” “potential” or “continue” or the negative thereof or other comparable terminology regarding beliefs, plans, expectations or intentions regarding the future. Forward-looking statements involve risks and uncertainties and actual results could differ materially from those discussed in the forward-looking statements. All forward-looking statements and risk factors included in this document are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement or risk factors.

iManage, Inc. is hereinafter sometimes referred to as “the Registrant,” “the Company,” “iManage,” “we,” and “us.”

iManage, Inc. provides collaborative content management software that enables businesses to manage and collaborate efficiently on critical business content across the extended enterprise. Our product suite, iManage WorkSite, delivers document management, collaboration, workflow and knowledge management accessible through a portal in a single integrated Internet solution. We believe that iManage WorkSite improves communication and process efficiency, providing faster response times and a rapid return on investment for our customers. More than 500,000 users in over 1,200 businesses are utilizing iManage WorkSite.

We were incorporated in Illinois in October 1995 under the name NetRight Technologies, Inc. and we reincorporated in Delaware in December 1996. In April 1999, we changed our name to iManage, Inc. Our principal offices are located at 950 Tower Lane, Suite 500, Foster City, California 94404, and our telephone number at that location is (650) 577-6500. We maintain a website at www.iManage.com. Investors can obtain copies of our filings with the Securities and Exchange Commission from this site free of charge, as well as from the Securities and Exchange Commission website at www.sec.gov.

iManage WorkSite is an integrated application suite that combines document management, collaboration, workflow and knowledge management accessible through a portal in a single integrated Internet solution. Our solution provides a comprehensive set of applications that work in concert with each other and the same underlying server, the iManage WorkSite Server.


	•	Comprehensive and integrated, out-of-the-box solution

	•	Robust security for globally distributed enterprise repositories

	•	Reliable and highly scalable enterprise-class server with multilevel security

	•	Easy access via standard Web browser or Microsoft Windows client interfaces

	•	Rapid application development environment and tools

Initially, we targeted our software solution to the legal industry, but in the last two years, we have extended our comprehensive collaborative content management suite of applications to other vertical markets. In addition to the legal industry, we are targeting prospects in financial services, manufacturing, government and professional services.

We offer two primary application suites — both offer similar core functionality with one focusing on Windows-based businesses and the other focusing on enterprise companies that work on multiple platforms. The primary iManage WorkSite applications consist of Web applications and desktop applications. The iManage WorkSite Web applications provide a central workspace in which an organization can discuss, share and collaborate on business content in a secure environment. Using the Web applications, users can capture, store, reuse and share information and processes with their customers, partners and employees through an intranet, extranet, or the Internet. Instead of recreating content, employees save time and money by leveraging existing data and business processes. By streamlining the retrieval and delivery of information, we believe that iManage WorkSite reduces operating costs while improving overall productivity and project delivery for our customers. The WorkSite Web applications are comprised of the following modules:

iManage WorkDocs. iManage WorkDocs is a Web-based document management system that provides secure access to enterprise-wide business content stored in scalable, distributed repositories. With iManage WorkDocs, users can capture, organize, reuse and share business content with customers, partners and employees around the world using an intranet, extranet or Internet solution. iManage WorkDocs provides for document check-in/check-out, version control, audit trails, archiving, categorization, full text, meta-data searches and other document management functions.

iManage WorkTeam. iManage WorkTeam provides virtual workspaces to members of a project team, wherever they may be located, to discuss and collaborate on all facets of a project quickly and efficiently through the Web. With iManage WorkTeam, an organization can streamline business processes, cut unnecessary travel costs, improve overall employee productivity and accelerate project completion. WorkTeam also enables online meetings within WorkSite.

iManage WorkRoute. iManage WorkRoute automates key business processes and routes critical business documents to geographically dispersed project teams for review, approval and publishing through an enterprise’s intranet or extranet, or the Internet with a standard Web browser. With iManage WorkRoute, an organization can simplify and track workflow and project status, identify bottlenecks, analyze key metrics and detect exceptions, enabling informed decisions and actions.

iManage WorkKnowledge. iManage WorkKnowledge enables businesses to capture, store, reuse and leverage organizational knowledge, best practices, proven methodologies and competencies through sophisticated, unified concept searches across all iManage repositories, as well as other internal and external information sources. With iManage WorkKnowledge, an organization can become more intelligent — delivering knowledge and expertise to the entire enterprise on demand.

iManage WorkPortal. iManage WorkPortal provides each member of the extended enterprise a secure, consolidated view of business content from multiple data sources and applications, including the iManage repositories. By aggregating enterprise data, business intelligence, news feeds, documents and Web content, iManage WorkPortal provides quick and easy access to all relevant content and its context from a single portal page. This can save time, increase productivity and allow for more informed decisions and actions.

iManage DeskSite and iManage MailSite. In addition to the Web-based applications, iManage WorkSite includes two, full-featured desktop document management clients that offer out-of-the-box integration with popular Windows applications:


	•	iManage DeskSite is a desktop document management system that integrates with popular Windows applications such as Microsoft Office and WordPerfect.

	•	iManage MailSite is a desktop application that integrates with popular email systems, including Microsoft Outlook, Lotus Notes and Novell GroupWise. Access of content and document management functionality is available from within Microsoft Outlook.

By combining the familiar user interface of frequently used applications with document management functionality, iManage DeskSite and iManage MailSite enable rapid adoption of document management functions with minimal training.

Additionally, we offer iManage WorkSite Server and a software developer toolkit:

iManage WorkSite Server. iManage WorkSite is powered by a highly flexible and robust enterprise-class server that scales to handle millions of documents and tens of thousands of geographically dispersed users. iManage WorkSite Server features include:


	•	geographically distributed repositories, enhanced system response time and minimized network traffic;

	•	built-in fault tolerance, load balancing and clustering features that ensure iManage WorkSite applications are available at all times;

	•	a powerful, flexible security model that provides controlled access to system functionality and data at the document, user and task level so that only authorized users have access to relevant content; and

	•	comprehensive administrative tools that allow integration with multiple Light-weight Directory Access Protocol servers and enable central control or delegation of administrative tasks to specific roles and users, simplifying the management and maintenance of all iManage WorkSite applications.

iManage WorkSite Development iToolKit. Our applications can be customized with the flexible, standards-based iManage WorkSite Development iToolKit. Software developers with Visual Basic or Common Object Model (“COM”) experience can create new applications with the software development kit to meet an organization’s specific requirements. By supporting open standards such as XML/ XSL, J2EE and COM, we believe the iManage WorkSite Development iToolKit leverages the security, scalability and functionality of the entire iManage WorkSite infrastructure.

While we focus on licensing our software, we also offer a comprehensive selection of services to our customers, including consulting, customer support and training services.

Consulting. We offer standardized professional services to our customers for the deployment of our application suite and the integration of our applications with third-party software. Our service professionals work directly with our customers as well as with resellers and strategic partners. Our consulting services are generally offered on a time and materials basis.

Customer Support. We offer comprehensive customer support, designed to allow our customers to quickly and effectively address technical issues as they arise. Our customer support personnel provide resolution of customer technical inquiries and are available to customers by telephone, email and through our website. We use a customer service automation system to track each customer’s inquiry until it is resolved. Our technical support is generally offered on an annual subscription basis.

Training. We offer a comprehensive training curriculum designed for partners and customers to provide the knowledge and skills to successfully deploy, use and maintain our products. These classes focus on the technical aspects of our products as well as related business issues and processes. We regularly hold our classes in various locations, including our training facilities in Chicago, Illinois and in Europe. We generally charge a daily fee for such classes.

To date, we have licensed our iManage WorkSite software to over 1,200 customers with more than 500,000 users. We have focused our sales and marketing efforts primarily on the legal, financial services, manufacturing, government and professional services markets. For 2002, 2001 and 2000, we derived 71%, 79% and 77% of our license revenues, respectively, from law firms and professional service firms. No single customer accounted for more than 10% of our revenues during 2002, 2001 or 2000.

Our sales strategy consists of engaging senior business and information technology managers at our customer prospects to explain the benefits of our application suite. We emphasize to our prospects the ease of deployment and rapid return on investment of our suite of applications. We hire sales associates that have an understanding of end user needs in our targeted vertical markets.

As of December 31, 2002, our sales organization consisted of 53 managers, account executives, product consultants and business development professionals. We have sales representatives throughout the United States and Europe. A distribution network of over 150 strategic resellers and partners in Australia, Brazil, Canada, France, Germany, New Zealand, the United Kingdom and the United States augments our direct sales force. These partners license our products to end user customers. International partners may also provide the first line of customer support. A number of these partners have built add-on software products to extend the functionality of iManage WorkSite — more than 60 add-on products are available today. In February of 2003, we announced an agreement with Interwoven, an enterprise content management vendor that will integrate iManage WorkSite’s document management and collaboration capabilities into its solution. Interwoven will resell the combined solution.

As of December 31, 2002, our marketing organization consisted of 17 professionals. Our marketing programs focus on creating overall awareness of our collaborative content management software products and services. To generate market awareness, we participate in market research, industry analyst product and strategy updates, press meetings, trade shows, seminars and online webinars, and engage in marketing through our Website to generate qualified sales leads. We use feedback from our customers and market research to determine specific industry segment needs and to define and direct our product development efforts.

Since our inception, we have devoted significant resources to develop our products and technology. We believe that our future success will depend, in large part, on a strong development effort that enhances and extends the features of our application suite. Our product development organization is responsible for product architecture, core technology, product testing, quality assurance, documentation and expanding the ability of our products to operate with leading hardware platforms, operating systems, database management systems and key electronic commerce transaction processing standards.

As of December 31, 2002, we had 69 employees engaged in research, development and quality assurance. Our research and development expenditures were $8.8 million for 2002, $10.4 million for 2001 and $9.1 million for 2000, respectively. All research and development expenditures have been expensed as incurred. We expect to continue to devote substantial resources to our research and development activities.

We have experienced and expect to continue to experience increased competition from current and potential competitors. Many of these companies have greater name recognition, longer operating histories, larger customer bases and significantly greater financial, technical, marketing, sales, distribution and other resources than we have. Our current competitors include:


	•	Companies addressing segments of our market including Documentum, Inc., FileNet Corporation, Hummingbird Ltd., Intraspect Software, Inc., Microsoft Corporation, Open Text Corporation, Stellent, Inc. and NetDocuments, Inc.;

	•	Web content management companies such as Vignette Corporation;

	•	Enterprise Web portal companies such as Plumtree;

	•	Intranet and groupware companies such as BroadVision, Inc., IBM, Microsoft Corporation and Novell, Inc.; and

	•	In-house development efforts by our customers and partners.

We believe that we may face additional competition from operating system vendors, online service providers and client/ server applications and tools vendors. If any of our competitors were to become the industry standard or were to enter into or expand relationships with significantly larger companies through mergers, acquisitions or other similar transactions, our business could be seriously harmed. In addition, potential competitors may bundle their products or incorporate functionality into existing products in a manner that discourages users from purchasing our products.

We believe that the principal competitive factors in the collaborative content management market are:


	•	product functionality and features;

	•	availability of global support;

	•	coverage of direct sales force;

	•	ease and speed of product implementation;

	•	vendor and product reputation;

	•	financial condition of document management and collaboration vendors;

	•	ability of products to support large numbers of concurrent users;

	•	price;

	•	security;

	•	integration capability with established software;

	•	scalability; and

	•	ease of access and use.

Although we believe that we currently compete favorably with respect to most of these factors, our market is relatively new and is evolving rapidly. We may not be able to maintain our competitive position against current and potential competitors.

Our success depends in part on the development and protection of the proprietary aspects of our technology as well as our ability to operate without infringing on the proprietary rights of others. To protect our proprietary technology, we rely primarily on patent, trademark, service mark, trade secret and copyright laws and contractual restrictions.

We require our customers to enter into license agreements that impose restrictions on their ability to reproduce, distribute and use our software. In addition, we seek to avoid disclosure of our trade secrets through a number of means, including restricting access to our source code and object code and requiring those entities and persons with access to agree to confidentiality terms that restrict their use and disclosure. We seek to protect our software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection.

We currently have one U.S. patent issued. We have applied for two others in the United States and we have three pending foreign patent applications. It is possible that no patents will be issued from our currently pending patent applications and that our potential future patents may be found invalid or unenforceable, or may be successfully challenged. It is also possible that any patent issued to us may not provide us with competitive advantages or that we may not develop future proprietary products or technologies that are patentable. Additionally, we have not performed comprehensive analysis of the patents of others that may limit our ability to do business.

We license technologies from several software providers that are embedded into our product. We license Application Builder® from Autonomy, Inc. and Search ’97® from Verity, Inc. for search functionality in the iManage WorkSite Server. These agreements expire in March 2005 and January 2007, respectively, and are renewable with written consent of the parties. Either party may terminate the agreement for cause before the expiration date with 90 days written notice. In addition, we license Outside In Viewer Technology® and Outside In HTML Export® from Stellent, Inc. for file viewing functionality. This agreement expires in December 2004 and is renewable with written consent of the parties. If we cannot renew these licenses, shipments of our products could be delayed until equivalent software could be developed or licensed and integrated into our products. These types of delays could seriously harm our business.

Despite our efforts to protect our proprietary rights and technology, unauthorized parties may attempt to copy aspects of our products or obtain the source code to our software or use other information that we regard as proprietary or could develop software competitive to ours. 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 may become a problem. Our means of protecting our proprietary rights may not be adequate. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. Any such litigation could result in substantial costs and diversion of resources, which could have a material adverse effect on our business, operating results and financial condition.

It is possible that in the future, a third party may file lawsuits claiming that our products infringe its patents or copyrights or misappropriate its trade secrets. Any claims, with or without merit, could be costly and time-consuming to defend, divert our management’s attention or cause product delays. We have only one patent that we could use defensively against any company bringing such a claim. If our product was found to infringe a third party’s proprietary rights, we may be required to enter into royalty or licensing agreements to be able to sell our product. Royalty and licensing agreements, if required, may not be available on terms acceptable to us, if at all, which could harm our business.

As of December 31, 2002, we had 207 full-time employees, of which less than 10% were based outside the United States. Of these employees, 70 were in sales and marketing, 69 were in product development, 42 were in professional services, customer support and training and 26 were in finance, human resources, legal, information systems and administrative functions. Our employees are not represented by any collective bargaining agreements, and we have never experienced a work stoppage. Our future success depends on our ability to attract, motivate and retain highly qualified technical and management personnel.

In February 2002, we moved our principal offices to a leased facility in Foster City, California, which consists of 21,415 square feet under a lease that will expire on September 30, 2008. Our engineering and customer support personnel and our training facility are located in approximately 30,000 square feet of leased facilities in Chicago, Illinois.

On March 21, 2003, we exercised an option to terminate the lease for our facility in Chicago, which as a result will expire on April 30, 2004 and entered into a new facilities lease for approximately 39,000 square feet in the Chicago area on March 17, 2003. In connection with the lease termination, we incurred a lease termination fee of $986,000, which will be charged to expense in the first quarter of 2003. The new facilities lease commences no later than August 1, 2003, is non-cancelable and expires in 2016. Our research and development, customer support, training and certain sales and marketing personnel are expected to relocate to this new facility in August 2003. We expect to charge to expense, upon vacating the facility subject to the terminated lease, the remaining lease payments due under the terminated lease agreement from the date of our occupancy of the new facility to April 30, 2004, which we currently estimate to be $650,000. The new lease agreement provides for cash payments from the landlord sufficient to offset the lease termination fee and provides for a free rent for the initial 12 months of the lease agreement including operating costs, and an additional 2 months of free rent, excluding operating costs, in each of the second, third and fourth years of the lease agreement. The free rent period and the cash payments from the landlord will reduce rental expenses for the new facility on a ratable basis over the term of the new lease.

(S.D.N.Y.), related to In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS) (S.D.N.Y.). On or about April 19, 2002, plaintiffs served an amended complaint. The amended complaint is brought purportedly on behalf of all persons who purchased the Company’s common stock from November 17, 1999 through December 6, 2000. It names as defendants the Company; five of the Company’s present and former officers; and several investment banking firms that served as underwriters of the Company’s initial public offering. The complaint alleges liability under Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 on the grounds that the registration statement for the offering did not disclose that: (1) the underwriters had agreed to allow certain customers to purchase shares in the offering in exchange for excess commissions paid to the underwriters; and (2) the underwriters had arranged for certain customers to purchase additional shares in the aftermarket at predetermined prices. The amended complaint also alleges that false analyst reports were issued. Plaintiffs seek unspecified monetary damages, attorneys’ fees and other costs.

The Company is aware that similar allegations have been made in lawsuits challenging over 300 other public offerings conducted in 1999, 2000 and 2001. All of these cases have been consolidated for pretrial purposes before Judge Shira A. Scheindlin of the Southern District of New York. On July 15, 2002, the Company and its related individual defendants (as well as the other issuers named as defendants) filed a motion to dismiss. Subsequently, the individual defendants stipulated with plaintiffs to dismissal from the case without prejudice, subject to a tolling agreement. On February 19, 2003, the Court ruled on the motions to dismiss. The Court denied the motions to dismiss claims under the Securities Act of 1933 in all but 10 of the cases, including the case involving the Company. The Court denied the motion to dismiss the claim under Section 10(a) of the Securities Exchange Act of 1934 against the Company and 184 other issuer defendants on the basis that the amended complaints in these cases alleged that the respective issuers had acquired companies or conducted follow-on offerings after their initial public offerings.

The Company and certain executive officers are defendants in a complaint filed by a former employee alleging ownership of 18,000 shares of the Company’s common stock that were never issued. The complaint alleges, among other claims, breach of contract, and the plaintiff is seeking damages of approximately $700,000 plus punitive damages of $10 million. While the Company believes that the claims are without merit and intends to vigorously defend the matter, there can be no assurances that this matter will be resolved without costly litigation or in a manner that is not adverse to the Company’s financial position, results of operation or cash flows.

While we believe that the allegations against our officers, directors and us are without merit and intend to contest them vigorously, there can be no assurance that these matters will be resolved without costly litigation or in a manner that is not adverse to our consolidated financial position, results of operations or cash flows. No estimate can be made of the possible loss or range of loss associated with the resolution of these matters.

We held our Annual Meeting of Stockholders in Foster City, California on November 21, 2002. Of the 24,073,644 shares outstanding as of the record date, 18,819,369 were present or represented by proxy at the meeting on November 21, 2002. At this meeting, the following actions were voted upon:


	1.	To elect one Class III director to serve for a three-year term until our Annual Meeting of Stockholders in 2005, or until his successor is elected and qualified:


	2.	To ratify the appointment of PricewaterhouseCoopers LLP as our independent accountants for the year ending December 31, 2002.

Our common stock is listed on the Nasdaq National Market under the symbol “IMAN.”

The following table sets forth, for the periods indicated, the high and low closing sales prices for our common stock for the last eight quarters, all as reported by Nasdaq.

The approximate number of holders of record of the shares of our common stock was 232 as of March 14, 2003. This number does not include stockholders whose shares are held by other entities. The actual number of holders is greater than the number of holders of record. We estimate that there were approximately 2,500 beneficial stockholders of the shares of our common stock as of March 14, 2003.

We have not declared or paid any cash dividends on our capital stock since our incorporation in October 1995, and our current debt facilities prevent us from declaring or paying any dividends. We currently intend to retain future earnings, if any, for use in our business and, therefore, do not anticipate paying any cash dividends in the foreseeable future. See Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

The selected consolidated statement of operations data set forth below for the years ended December 31, 2002, 2001 and 2000 and the selected consolidated balance sheet data as of December 31, 2002, 2001 and 2000 are derived from our consolidated financial statements, which have been audited by PricewaterhouseCoopers LLP, independent accountants, and are included elsewhere in this Annual Report on Form 10-K. The selected consolidated statement of operations data for the years ended December 31, 1999 and 1998 and the selected consolidated balance sheet data as of December 31, 1999 and 1998 are derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K.

This data should be read in conjunction with Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements of iManage, Inc. and the notes thereto appearing in Item 15. in this Annual Report on Form 10-K.

Working capital is defined as the excess of total current assets over total current liabilities.

The following contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions identify such forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements. Factors, which could cause actual results to differ materially, include those set forth in the following discussion, and, in particular, the risks discussed below under the subheading “Factors That May Impact Future Operating Results” and in other documents we file with the Securities and Exchange Commission. Unless required by law, we do not undertake any obligation to update any forward-looking statements or risk factors.

We provide collaborative content management software that enables businesses to manage and collaborate effectively on critical business content across the extended enterprise. Our product suite, iManage WorkSite, delivers document management, collaboration, workflow and knowledge management accessible through a portal in a single integrated Internet solution. We believe that iManage WorkSite improves communication and process efficiency, providing faster response times and a rapid return on investment for our customers. More than 500,000 users in over 1,200 businesses are utilizing iManage WorkSite.

The following table sets forth, for the periods indicated, selected consolidated financial data as a percentage of total revenues:

The following sets forth, for the periods indicated, our revenues (in thousands):

License. License revenues decreased $4.2 million, or 17%, from 2001 to 2002. This decrease was due primarily to lengthening sales cycles and lower information technology spending as our customers and prospects responded to continuing weak economic conditions both domestically and internationally. License revenues increased $4.3 million, or 21%, from 2000 to 2001. This increase was due primarily to the increased volume of sales to both new and existing customers and the successful introduction of our new WorkSite product suite. License revenues accounted for 49%, 63% and 67% of total revenue in 2002, 2001 and 2000, respectively. The decrease in license revenues as a percentage of total revenues in 2002 from 2001 was due to a decline in license revenues, an increase in annual support revenues from our customer installed base associated with the renewal of annual support contracts and our strategy to increase our professional consulting services.

The decrease in license revenues as a percentage of total revenues in 2001 from 2000 was due to the increase in support and service revenues from the growth in our customer installed base associated with the renewal of annual support contracts. We anticipate that license revenues in 2003 as a percentage of total revenues will remain generally consistent with 2002.

Support and Service. Support and service revenues consisted primarily of customer support and, to a lesser extent, training and consulting services. Support and service revenues increased $6.7 million, or 47%, in 2002 from 2001 and $4.5 million, or 46%, in 2001 from 2000. These increases were primarily due to increased customer support revenues from our installed base associated with the renewal of annual support contracts. Support and service revenue was 51%, 37% and 33% of total revenues in 2002, 2001 and 2000, respectively. The increase in support and service revenue as a percentage of total revenues was primarily due to increased customer support revenues associated with the renewal of annual support contracts, an increase in professional consulting services and, in 2002, declining license revenues. We anticipate that support and services revenues will increase in 2003 over 2002 primarily due to higher customer support revenues.

The following sets forth, for the periods indicated, our cost of revenues (in thousands):

License. Cost of license revenues primarily consisted of royalties payable to third parties for software that was either embedded in or bundled with our software products. Cost of license revenues increased $13,000, or 1%, in 2002 from 2001 and $211,000, or 18%, in 2001 from 2000. The increase in cost of license revenues in absolute dollars in 2002 and 2001 was primarily due to the amount of third party software products embedded or bundled with our products. As a percentage of related license revenues, cost of license revenues were 7%, 6% and 6% in 2002, 2001 and 2000, respectively. In 2002 and 2001, our royalty payments to third parties were primarily fixed in nature and were generally not impacted by fluctuations in license revenues. We expect that cost of license revenues in 2003 will remain generally consistent as a percent of related license revenues with 2002. Cost of license revenues as a percentage of related license revenues may fluctuate in the future, however, due to the mix of software products sold, the extent to which third party software products are bundled with our products and amount of license revenues, as many of the third party software products embedded with our software are under fixed fee arrangements.

Support and Service. Cost of support and service revenues primarily consisted of salaries and other personnel-related expenses, costs associated with providing product updates to our customers with active support contracts and depreciation of equipment used in providing customer support, consulting services and training. Cost of support and service revenues increased $1.3 million, or 22%, in 2002 from 2001 and $916,000, or 19%, in 2001 from 2000. These increases were primarily due to personnel-related expenses required by our growing customer installed base and our strategy to increase our consulting services revenues. As a percentage of related revenues, cost of support and service revenue were 33%, 40% and 49% in 2002, 2001 and 2000, respectively. The decrease in cost of support and service revenues as a percentage of the related revenues for the periods prescribed is due to economies of scale associated with supporting our growing customer installed base. We anticipate that cost of support and services will increase in absolute dollars in 2003 to support our growing installed base of customers and remain relatively consistent as a percentage of support and service revenues.

The following sets forth, for the periods indicated, our operating expenses (in thousands):

Sales and Marketing. Sales and marketing expenses consisted primarily of salaries, commissions, benefits and amortization of stock-based compensation for sales and marketing personnel, travel and marketing programs, including customer conferences, promotional materials, trade shows and advertising. Sales and marketing expenses decreased $2.0 million, or 7%, in 2002 from 2001. This decrease was due primarily to a $755,000 reduction in personnel-related costs including salary, commissions and bonuses as a result of decreased license revenues, a $503,000 decrease in stock-based compensation charges, a $470,000 decrease in travel expenses and a $401,000 reduction in seminars and training expenses, which were partially offset by a $104,000 increase in facilities related expenses. Sales and marketing expenses increased $10.7 million, or 60%, in 2001 from 2000. This increase was primarily related to an increase of $8.6 million in our domestic and international sales and marketing personnel expense, $1.3 million in facility charges and $671,000 in travel expense. As a percentage of revenues, sales and marketing expenses were 64%, 74% and 60% in 2002, 2001 and 2000, respectively. We anticipate that sales and marketing expense as a percentage of total revenues will decrease slightly in 2003 from levels posted in 2002.

Research and Development. Research and development expenses consisted primarily of personnel, third party contractors, facilities and related overhead costs associated with our product development and quality assurance activities. Research and development expenses decreased $1.6 million, or 15%, in 2002 from 2001. This decrease was due primarily to a $505,000 decrease in facilities costs associated with the closure of our Utah facility during the third quarter of 2001, a $470,000 decrease in stock-based compensation charges and a $365,000 reduction in consulting services. Research and development expenses increased $1.3 million, or 14%, in 2001 from 2000. This increase was primarily due to an increase in development personnel expense of $972,000 and an increase in facilities and related overhead expense of $512,000 partially offset by a decrease in stock-based compensation charges of $180,000. As a percentage of revenues, research and development expenses were 21%, 27% and 30% in 2002, 2001 and 2000. We expect that research and development expense in 2003 will increase slightly in absolute dollars over 2002.

General and Administrative. General and administrative expenses consisted primarily of personnel and related costs for general corporate functions, including legal, finance, accounting, information technology and human resources as well as insurance and facilities costs. General and administrative expenses decreased $70,000, or 2%, in 2002 from 2001. This decrease was due primarily to a reduction in general office expenses. General and administrative expenses increased $226,000, or 5%, in 2001 from 2000. The increase in 2001 was primarily a result of increased staffing and costs related to building our general and administrative infrastructure. As a percentage of revenues, general and administrative expenses were 11%, 11% and 14% in 2002, 2001 and 2000, respectively. We expect that general and administrative expense will decrease slightly as a percentage of total revenues in 2003 when compared to 2002.

Amortization of Intangible Assets. Intangible assets consist of goodwill, purchased technology and non-compete agreements associated with our acquisition of ThoughtStar, Inc. (“ThoughtStar”) in June 2000 and the acquisition of technologies in 2001. Goodwill and other acquired intangibles of $17.0 million were recorded in connection with the ThoughtStar acquisition and were amortized, prior to adopting Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, over their estimated useful

We adopted SFAS No. 142 as of January 1, 2002, and as a result, ceased amortizing the remaining unamortized balance of goodwill of $3.4 million. In lieu of amortization, we were required to perform an initial review to determine whether the value of our remaining goodwill asset was impaired and periodic impairment reviews annually thereafter. We completed our initial review during the first quarter of 2002 and a year-end review in October 2002. Upon completion of these reviews, no impairment charge was recorded. However, there can be no assurance that a future evaluation will not require an impairment charge to be recorded. We expect to record $35,000 of amortization related to other intangible assets each quarter through September 30, 2003.

Restructuring Charge. In September 2001, we implemented a plan to consolidate our operations and close a facility in Utah. Our restructuring action consisted primarily of the termination of approximately 20 positions in engineering, sales, marketing and administration in the Utah location and exiting the related facility. The functions performed in the Utah facility were combined with our Chicago, Illinois operations. As a result of the restructuring, we recognized a charge of $1.2 million in the third quarter of 2001. The restructuring charge included $694,000 for employee severance, $150,000 for the write-off of intangible assets related to the acquisition of ThoughtStar, $93,000 for the write-off of certain property and equipment and $257,000 related to facility closing costs. There was no remaining restructuring charge accrued at December 31, 2002. At the time of the restructuring, we expected to achieve an annual operating expense savings of approximately $800,000, which were realized in 2002.

Stock-based Compensation. Stock-based compensation charges relate to the options granted to employees prior to our initial public offering, options granted on the acquisition date to ThoughtStar employees, compensation charges related to executive compensation and non-employee consultants. We expensed $544,000, $1.4 million and $2.1 million in 2002, 2001 and 2000, respectively, related to stock-based compensation.

Stock-based compensation charges relate to the following expense classifications in the accompanying consolidated statement of operations (in thousands):

Amortization of stock-based compensation is estimated to total $220,000 for 2003, $71,000 for 2004 and $15,000 for 2005. Amortization of stock-based compensation will be reduced in future periods to the extent options are terminated prior to vesting.

During 2002, 2001 and 2000, we issued options to purchase shares of our common stock to certain employees totaling 300,000, 460,000 and 89,000, respectively, with weighted average exercise prices of $6.27, $0.70 and $0.01 per share, respectively, which were below the fair value of our common stock at the dates of grant. The weighted average fair value of our common stock was $7.65, $2.88 and $11.00 in 2002, 2001 and 2000, respectively. In accordance with the requirements of Accounting Principles Board Opinion (“APB”) No. 25 Accounting for Stock Issued to Employees, we have recorded deferred stock-based compensation for the difference between the exercise price of the stock options and the fair value of our stock on the date of grant. This deferred compensation is amortized to expense over the period during which our right to repurchase the stock lapses or options become exercisable, generally four or five years consistent with the method described in Financial Accounting Standards Board Interpretation (“FIN”) No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Awards Plans. At December 31, 2002, we have

During 2001, we granted options to purchase 28,000 shares of our common stock at exercise prices ranging from $0.01 to $5.09 per share to non-employee engineers for consulting services, when the fair market value of our common stock ranged from $4.40 to $5.09 per share. These options were fully vested upon grant and were valued at a total of $157,000 using the Black-Scholes pricing model with the following assumptions: 10 year terms, volatility ranging from 102% to 132%, discount rate ranging from 4.97% to 5.11% and 0% dividend rate. The value of these options was expensed on the date of grant.

In conjunction with the acquisition of ThoughtStar in June 2000, we granted 89,000 common stock options with an exercise price of $0.01 to former ThoughtStar employees in exchange for 1,648,000 fully vested and exercisable ThoughtStar stock options. On the date of grant, these options had an intrinsic value of $982,000, which was recorded as deferred stock-based compensation and was amortized over the option vesting period of two years. There was no deferred stock-based compensation expense related to these options in 2002 and aggregate compensation expense of $249,000 and $646,000, in 2001 and 2000, respectively. During September 2001, the remaining $87,000 deferred compensation was charged to expense in connection with a restructuring of operations.

Deferred stock-based compensation charges are comprised of the following (in thousands):

Interest income and other was $1.0 million, $1.7 million and $2.6 million in 2002, 2001 and 2000, respectively. Interest income and other decreased $656,000, or 39%, in 2002 from 2001 and $939,000, or 36%, in 2001 from 2000. These decreases were primarily due to lower interest rates on our cash investments and a lower average balance of cash, cash equivalents and short-and long-term investments during the period.

The provision for income taxes recorded in 2002, 2001 and 2000 related primarily to international taxes. As of December 31, 2002, we had approximately $23.7 million of federal and $20.9 million of state net operating loss carryforwards to offset future taxable income. The federal and state tax net operating loss carryforwards are available to reduce future taxable income and expire at various dates through 2022 and 2013, respectively. Management periodically evaluates the recoverability of the deferred tax assets and recognizes the tax benefit only as reassessment demonstrates that these assets are realizable. At such time, it is determined that it is not likely that the assets will be realized. Therefore, we have recorded a full valuation allowance against the deferred income tax assets.

At December 31, 2002, we had cash, cash equivalents and short-term investments of $38.2 million.

Operating Activities. Net cash used in operating activities in 2002 was primarily the result of our net loss of $6.7 million. After excluding the effects of non-cash charges including depreciation and amortization of $2.8 million, deferred stock-based compensation of $442,000, provision for doubtful accounts and sales returns of $523,000 and common stock issued for services of $151,000, the adjusted cash usage was $2.8 million

during 2002. Additional cash was generated from an increase of $1.5 million in deferred revenues, a decrease of $730,000 in accounts receivable and an increase in accounts payable and accrued liabilities of $423,000, partially offset by an increase of $1.5 million in prepaid expenses and other assets.

Net cash used in operating activities in 2001 was primarily the result of our net loss of $19.8 million. After excluding the effects of non-cash charges including depreciation and amortization of $10.6 million, deferred stock-based compensation of $1.3 million, a restructuring charge of $1.2 million, provision for doubtful accounts and sales returns of $574,000 and common stock issued for services of $157,000, the adjusted cash usage was $6.0 million during 2001. Additional cash was generated from an increase in accounts payable and accrued liabilities of $2.3 million, an increase of $1.8 million in deferred revenues, a decrease of $469,000 in accounts receivable and a decrease of $849,000 in prepaid expenses and other assets.

Net cash used in operating activities in 2000 resulted primarily from our net loss of $9.1 million. After excluding the effects of non-cash charges for depreciation and amortization of $6.3 million, deferred stock-based compensation of $2.1 million and the provision for doubtful accounts and sales returns of $264,000, the adjusted cash usage was $424,000 during 2000. Additional cash was used from an increase of $5.3 million in accounts receivable and an increase of $3.0 million in our prepaid expenses and other assets.

A number of non-cash items have been charged to expense and increased our net loss. These items include depreciation and amortization of property and equipment and intangible assets, amortization of deferred stock-based compensation and provisions for doubtful accounts and sales returns. The extent to which these non-cash items increase or decrease in amount and increase or decrease our future operating results will have no corresponding impact on our cash flows.

Our primary source of operating cash flow is the collection of accounts receivable from our customers and the timing of payments to our vendors and service providers. We measure the effectiveness of our collection efforts by an analysis of average accounts receivable days outstanding (“days outstanding”). Days outstanding were 74 days, 90 days and 130 days on December 31, 2002, 2001 and 2000. Our days outstanding decreased in 2002 and 2001 from the prior years’ results due primarily to our focus on customer collection efforts and the change in quarterly revenues throughout the year. Collections of accounts receivable and related days outstanding will fluctuate in future periods due to the timing and amount of our future revenues, payment terms on customer contracts and the effectiveness of our collection efforts.

Our operating cash flows will be impacted in the future based on the timing of payments to our vendors for accounts payable. We endeavor to pay our vendors and service providers in accordance with invoice terms and conditions. The timing of cash payments in future periods will be impacted by the nature of accounts payable arrangements and management’s assessment of our cash inflows.

Investing Activities. Net cash provided by investing activities was $13.6 million in 2002. This primarily resulted from $18.7 million of proceeds received from the maturity and sale of investments, partially offset by $3.2 million to purchase investment securities and $1.9 million to purchase property and equipment.

Net cash used in investing activities was $7.1 million in 2001. This primarily resulted from purchases of investments of $24.8 million and the purchase of property and equipment of $1.0 million, partially offset by $18.7 million in proceeds received from the maturity and sale of investment securities.

Net cash used in investing activities was $20.7 million in 2000. This primarily resulted from purchases of investments of $30.0 million, the acquisition of ThoughtStar, which used $6.1 million, and the purchase of property and equipment of $3.3 million, partially offset by $18.7 million in proceeds received from the maturity and sale of investment securities.

We anticipate that we will continue to purchase property and equipment necessary in the normal course of our business. The amount and timing of these purchases and the related cash outflows in future periods is difficult to predict and is dependent on a number of factors including our hiring of employees, the rate of change of computer hardware and software used in our business and our business outlook.

We have classified our investment portfolio as “available for sale,” and our investments are made with capital preservation and liquidity as our primary objectives. We generally hold investments in commercial

paper, corporate bonds and U.S. government agency securities to maturity; however, we may sell an investment at any time if the quality rating of the investment declines, the yield on the investment is no longer attractive or we are in need of cash. Because we invest only in investment securities that are highly liquid with a ready market, we believe that the purchase, maturity or sale of our investments has no material impact on our overall liquidity.

Financing Activities. Net cash provided by financing activities of $1.0 million in 2002 included $14.5 million of proceeds from bank lines of credit and $1.5 million from the proceeds from issuance of common stock, partially offset by repayments of bank lines of credit of $14.4 million and the repurchase of common stock of $641,000.

Net cash provided by financing activities of $349,000 in 2001 included $12.3 million of proceeds from bank lines of credit and $1.0 million of proceeds from the issuance of common stock, partially offset by repayments of bank lines of credit of $13.0 million.

Net cash provided by financing activities of $5.4 million in 2000 included $4.8 million of proceeds from bank lines of credit, $724,000 of proceeds from the issuance of common stock and $501,000 of proceeds from the payment of notes receivable from stockholders. Partially offsetting these proceeds were repayments of bank lines of credit of $444,000 and repurchases of common stock of $134,000.

Our cash flows from financing activities are primarily the result of borrowing under our lines of credit, cash receipts from the issuance of common stock and our repurchases of common stock. We have used our lines of credit primarily to finance purchases of property and equipment. We anticipate that we will continue to use lines of credit to finance our equipment purchases in the future to the extent that such financing is available to us on acceptable terms.

We receive cash from the exercise of stock options and the sale of stock under our Employee Stock Purchase Plan. While we expect to continue to receive these proceeds in future periods, the timing and amount of such proceeds is difficult to predict and is contingent on a number of factors including the price of our common stock, the number of employees participating in the stock option plans and our Employee Stock Purchase Plan and general market conditions.

In July 2002, we instituted a common stock repurchase program, which terminated on December 31, 2002. Under this program, we repurchased 232,300 shares of our common stock for $581,000. While we have not renewed this program, we may institute a new program if the Board of Directors determines that such a program is appropriate.

Lines of Credit. As of December 31, 2002, we had a revolving line of credit with a bank for $4.0 million, which bears interest at the bank’s prime rate plus 0.50%. Borrowings were limited to $4.0 million minus the amount outstanding under the revolving line of credit and outstanding letters of credit. This line of credit is collateralized by substantially all of our assets. As of December 31, 2002, we borrowed $3.4 million under this facility. In addition, as of December 31, 2002, we had an equipment line of credit with a bank for $6.0 million, which bears interest at the greater of the lending bank’s prime rate plus 0.50% or 4.75%. As of December 31, 2002, we had $2.4 million outstanding under the equipment line of credit.

Both lines of credit contain various restrictive covenants and these restrictions require us to:

(a) maintain unrestricted cash balances including short- and long-term investments greater than $25.0 million;

Net loss is defined as loss after taxes excluding amortization and depreciation expense.

We were in compliance with all of these financial covenants as of December 31, 2002.

We currently anticipate that our cash, cash equivalents and short-term investments, together with our existing lines of credit, will be sufficient to meet our anticipated needs for working capital and capital expenditures for the next 12 months. However, we may be required, or could elect, to seek additional funding at any time. We cannot provide assurance that additional equity or debt financing, if required, will be available on acceptable terms, if at all.

On March 21, 2003, we exercised an option to terminate the lease for our facility in Chicago, Illinois, which as a result will expire on April 30, 2004 and entered into a new facilities lease for approximately 39,000 square feet in the Chicago area on March 17, 2003. In connection with the lease termination, we incurred a lease termination fee of $986,000, which will be charged to expense in the first quarter of 2003. The new facilities lease commences no later than August 1, 2003, is non-cancelable and expires in 2016. Our research and development, customer support, training and certain sales and marketing personnel are expected to relocate to this new facility in August 2003. We expect to charge to expense, upon vacating the facility subject to the terminated lease, the remaining lease payments due under the terminated lease agreement from the date of our occupancy of the new facility to April 30, 2004, which we currently estimate to be $650,000. The new lease agreement provides for cash payments from the landlord sufficient to offset the lease termination fee and provides for a period of free rent for the initial 12 months of the lease agreement including operating costs, and an additional 2 months of free rent, excluding operating costs, in each of the second, third and fourth years of the lease agreement. The free rent period and the cash payments from the landlord will reduce rental expenses for the new facility on a ratable basis over the term of the new lease.

Including the effects of the lease transactions in March 2003, future minimum payments under non-cancelable operating leases and bank lines of credit as of December 31 are as follows (in thousands):

Contingencies. At December 31, 2002, we are the target of several securities class action complaints and other litigation. See Item 3. — Legal Proceedings. Because of uncertainties related to both the amount and range of loss in these matters, we are unable to make a reasonable estimate of the liability and associated cash flow impact that could result from unfavorable outcomes in these actions. We will assess the potential liability and cash flow impact related to these litigation matters as additional information becomes available. The ultimate resolution of these matters could have a material impact on our cash flows.

As a global concern, we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on our consolidated financial results. Our primary exposures relate to non-U.S. dollar-denominated revenues and operating expenses in Europe, Australia and Canada. At the present time, the exposure is not significant; therefore, we are not currently engaged in hedging activity. We do not anticipate significant currency gains or losses in the near term.

We maintain investment portfolio holdings of various issuers, types and maturities. These securities are classified as available-for-sale and, consequently, are recorded on the consolidated balance sheet at fair value

In preparing our consolidated financial statements, we make estimates, assumptions and judgments that can have a significant impact on our revenues, loss from operations and net loss, as well as on the value of certain assets and liabilities on our consolidated balance sheet. We believe that there are several accounting policies that are critical to an understanding of our historical and future performance, as these policies affect the reported amounts of revenues, expenses and significant estimates and judgments applied by management. While there are a number of accounting policies, methods and estimates affecting our financial statements, areas that are particularly significant include:


	•	revenue recognition;

	•	estimating the allowance for doubtful accounts;

	•	assessment of the probability of the outcome of our current litigation;

	•	accounting for income taxes; and

	•	valuation of long-lived assets, intangible assets and goodwill.

Revenue Recognition. Our revenue recognition policy is defined in Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements included in Item 15 of this Annual Report on Form 10-K.

The majority of our software license transactions are executed with our standard software license agreement. From time to time, customers may request that we amend certain terms of our standard agreement or negotiate a software license contract separate from our standard software license agreement. While these software license contracts are few in number in relation to our standard license agreement, these contracts may be material in relation to our total revenues. Negotiation of contractual terms with customers may be protracted, and any deviation from our standard terms can impact our ability to recognize revenues.

Several factors have required us to defer recognition of revenue for a significant period of time after entering into a license agreement. These factors include:


	•	contractual requirements to deliver either unspecified additional products or specified product upgrades for which we do not have vendor-specific objective evidence of fair value;

	•	payment terms due after our normal payment terms;

	•	contracts in which collectibility from the customer is not reasonably assured; and

	•	contracts involving acceptance clauses.

Our contracts may contain multiple elements or may require us to develop additional features or functionality for our customers. In cases where vendor-specific objective evidence exists for all undelivered elements, we account for the delivered elements in accordance with the residual method prescribed by SOP 98-9. This means that we defer revenue equivalent to the fair value of the undelivered elements until such time as the element is delivered to the customer. Fair values for ongoing support obligations are based on separate sales of support renewals sold to customers or on renewal rates quoted in the contracts. Fair value of services, such as training or consulting, is based on the value of stand-alone sales of these services to customers. To the extent that we do not have vendor-specific evidence for undelivered contract elements, revenue is deferred until the undelivered elements are delivered to the customer.

Our customers may request payment terms beyond our normal terms. We evaluate the payment terms associated with each transaction. If a portion of the fee is due after normal payment terms, which range from 30 days to 180 days from invoice date for legal customers and 30 days to 120 days for all others, we recognize the revenue on the payment due date, assuming collection is reasonably assured.

We assess collectibility based on a number of factors, including past transaction history, our previous bad debt experience and the overall credit-worthiness of the customer. We use various financial reporting and rating services to review customer financial viability and request, from time to time, financial statements from our customers. We generally do not require collateral from our customers, and our bad debt experience has not been significant in relation to our overall revenues. If collection is not reasonably assured, revenue is deferred and recognized at the time collection becomes reasonably assured, which is generally upon receipt of cash.

Our license arrangements do not generally include acceptance clauses. However, if an arrangement includes an acceptance provision, acceptance occurs on the earlier of receipt of a written customer acceptance or expiration of the acceptance period.

Substantially all of our customers purchase support contracts at the time they enter into a license arrangement, and some customers may request that we provide training and consulting services. We recognize revenue for support services ratably over the contract term. Training and consulting services are billed based on hourly rates, and generally recognized as revenue as these services are performed. However, at the time of a transaction, we assess whether any services included in the arrangement require us to perform significant work either to alter the underlying software or to build complex interfaces so that the software performs as requested. If these services are included as part of an arrangement, we recognize the entire fee exclusive of the support services, using the percentage of completion method. We estimate the percentage of completion based on an estimate of the total costs estimated to complete the project as a percentage of the costs incurred to date and the estimated costs to complete.

We derived a significant portion of our revenues from resellers of our products under our standard software license agreement. Revenue on shipments to resellers is generally recognized when the resellers sell the product to the end-user customer. We assess the collectibility from resellers based on factors including past transaction history, previous bad debt experience and the overall financial condition and credit worthiness of the reseller. If collection from the reseller is not reasonably assured, revenue is deferred and recognized at the time collection becomes reasonably assured, which is generally upon receipt of cash.

Allowance for Doubtful Accounts. The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amount of assets and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Specifically, our management must make estimates as to the overall collectibility of accounts receivable and provide an allowance for amounts deemed to be uncollectible. Management specifically analyzes its accounts receivable and historical bad debt pattern, customer concentrations, customer credit-worthiness, current economic trends and changes in its customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. At December 31, 2002 and 2001, our allowance for doubtful accounts balance, which related primarily to specific accounts where we believe collection is not probable and to a lesser extent our historical experience applied to accounts receivable not specifically reserved, was $322,000 and $277,000, respectively. These amounts represent 4% and 3% of total accounts receivable at December 31, 2002 and 2001.

Allowance for Sales Returns. From time to time, a customer may return to us some or all of the software purchased. While our software and reseller agreements generally do not provide for a specific right of return, we may accept product returns in certain circumstances. To date, sales returns have been infrequent and not significant in relation to our total revenues. We make an estimate of our expected returns and provide an allowance for sales returns in accordance with SFAS No. 48, Revenue Recognition When Right of Return Exists. In determining the amount of the allowance required, management specifically analyzes its revenue transactions, customer software installation patterns, historical return pattern, current economic trends and changes in its customer payment terms when evaluating the adequacy of the allowance for sales return account. During 2002 and 2001, sales returns as a percentage of license revenues were approximately 2% and 2%, respectively, and generally related to revenues recognized in the prior 90 to 180 days. Our historical estimates of product returns have approximated actual returns. If our sales returns experience were to increase by an additional 1% of license revenues, our allowance for sales returns at December 31, 2002 would increase

Litigation. We are the target of several securities class action complaints and other litigation. Because of uncertainties related to both the amount and range of loss in these matters, our management is unable to make a reasonable estimate of the liability that could result from unfavorable outcomes in these actions. As additional information becomes available, we will assess the potential liability related to our pending litigation and may revise our estimates. Any such assessments and estimation could materially impact our consolidated results of operations and financial position.

Accounting for Income Taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate our income tax liability in each of the jurisdictions in which we do business. This process involves estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items, such as deferred revenues, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess the likelihood that these deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not more likely than not or unknown, we must establish a valuation allowance.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our deferred tax assets. At December 31, 2002, we have recorded a full valuation allowance of $12.2 million against our deferred tax assets, due to uncertainties related to our ability to utilize our deferred tax assets, primarily consisting of certain net operating losses carried forward. The valuation allowance is based on our estimates of taxable income by jurisdiction and the period over which our deferred tax assets will be recoverable.

Valuation of Long-lived Assets, Intangible Assets and Goodwill. We assess the impairment of long-lived assets and intangible assets whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Factors we consider important that could trigger impairment include, but are not limited to, the following:


	•	significant underperformance relative to historical or projected future operating results;

	•	changes in the use of the assets or the strategy for our overall business;

	•	negative industry or general economic trends;

	•	significant decline in our stock price for a sustained period; and

	•	our market capitalization relative to net book value.

When one or more of the above indicators of impairment occurs we estimate the value of property and equipment, long-lived assets and intangible assets to determine whether there is impairment. We measure any impairment based on a projected discounted cash flow method, which requires us to make several estimates including the estimated cash flows associated with the asset, the period over which these cash flows will be generated and a discount rate commensurate with the risk inherent in our business model. These estimates are subjective. If we made different estimates, it could materially impact the estimated fair value of these assets and the conclusions we reached regarding any impairment. To date, we have not identified any triggering events that would require us to perform this analysis.

We are required to perform an impairment review of goodwill on at least an annual basis. This impairment review involves a two-step process as follows:


	•	Step 1 — We compare the fair value of our reporting units to their carrying value, including goodwill. For each reporting unit for which the carrying value, including goodwill, exceeds the unit’s fair value, we move on to Step 2. If a unit’s fair value exceeds the carrying value, no further work is performed and no impairment charge is necessary.


	•	Step 2 — We perform an allocation of the fair value of the reporting unit to its identifiable tangible and non-goodwill intangible assets and liabilities. This derives an implied fair value for the reporting unit’s goodwill. We then compare the implied fair value of the reporting unit’s goodwill with the carrying amount of the reporting unit’s goodwill. If the carrying amount of the reporting unit’s goodwill is greater than the implied fair value of its goodwill, an impairment charge would be recognized for the excess.

We have determined that we have one reporting unit. We performed Step 1 of the goodwill impairment analysis required by SFAS No. 142 as of January 1, 2002. We compared the carrying value of total stockholders’ equity to our market capitalization and concluded that goodwill was not impaired, as our market capitalization exceeded total stockholders’ equity, including goodwill. Accordingly, Step 2 was not performed. We also performed our annual analysis of goodwill on October 1, 2002 and concluded that goodwill was not impaired as our market capitalization exceeded our total stockholders’ equity. We will continue to test for impairment on an annual basis and on an interim basis if an event occurs or circumstances change that would more likely than not reduce the fair value of our reporting unit below its carrying amount. Also, see Note 2 and Note 4 of Notes to Consolidated Financial Statements.

We have incurred losses throughout our operating history and may not be able to achieve profitability.

We have incurred operating losses on a quarterly and annual basis throughout our history. As of December 31, 2002, we had an accumulated deficit of $45.5 million. We must increase our revenues to achieve profitable operations and positive cash flow. If our revenues do not grow, we will not be profitable. In fact, our revenues may decline over corresponding periods resulting in greater operating losses and significant negative cash flows.

Our future success depends on our ability to continue to sell to law firms and other professional service firms.

We derived 71%, 79% and 77% of our license revenues for the year ended December 31, 2002, 2001 and 2000, respectively, from sales to law firms and professional service firms. In order for us to sustain and grow our business, we must continue to successfully sell our software products and services into this vertical market. Failure to successfully sell to law firms and professional service firms will have a significant and adverse affect on our consolidated financial condition and results of operation.

If we do not expand sales of our products to customers other than professional service firms, we may not be able to grow our revenues and our operating results will suffer.

Our future success is dependent on our ability to sell software licenses and services to customers outside of professional service firms, particularly large multi-national corporations in financial services, manufacturing and government. To sell to multi-national corporations, we must devote time and resources to hire and train sales employees to work in industries other than legal and professional service firms. Even if we are successful in hiring and training sales teams, customers in other industries may not perceive the value in or require our collaborative content management software applications.

Our product has a long and unpredictable sales cycle, which makes it difficult to forecast our future results and may cause our operating results to vary significantly.

The period between initial contact with a prospective customer and the licensing of our application suite varies and can range from three to more than twelve months. Additionally, our sales cycle is long and complex as customers consider a number of factors before committing to purchase our application suite. Factors considered by customers when evaluating our application suite include product benefits, cost and time of implementation, return on investment, ability to operate with existing and future computer systems and the ability to accommodate increased transaction volume and product reliability. Customer evaluation, purchasing and budgeting processes vary significantly from company to company. As a result, we spend significant time and resources informing prospective customers about our software products, which may not result in a

completed transaction and may negatively impact our operating margins. Even if iManage WorkSite has been chosen by the customer, completion of the sales transaction is subject to a number of factors, which make our quarterly revenues difficult to forecast. These factors include but are not limited to:


	•	Because the licensing of our software products is often an enterprise-wide decision by our customers that involves many factors, our ability to license our product may be impacted by changes in the strategic importance of collaborative content management projects to our customers, budgetary constraints or changes in customer personnel.

	•	A customer’s internal approval and expenditure authorization process can be difficult and time consuming. Delays in approvals, even after selection of a vendor, could impact the timing and amount of revenues recognized in a quarterly period.

	•	Changes in our sales incentive plans may have an unpredictable impact on our sales cycle and contracting activities.

	•	The number, timing and significance of enhancements to our software products and the introduction of new software by our competitors and us may affect customer-purchasing decisions.

Specifically, throughout 2002, we continued to experience lengthening sales cycles due to increased organizational reviews by sales prospects of software purchases, regardless of transaction size. A continued lengthening in sales cycles and our inability to predict these trends could result in future revenue shortfalls from expectations, which would have a material impact on our operating results and, correspondingly, our stock price.

Declining economic conditions and significant world events, such as the events of September 11, 2001, and the threat of war have affected and could continue to negatively impact our revenues and profits.

Our revenue growth and profitability depend on the overall demand for collaborative content management software platforms and applications. The recession in the United States and declining economic conditions worldwide have, and may continue to, resulted in cutbacks by our customers in the purchase of our software products and services, longer sales cycles and lower average selling prices and postponed or canceled orders. Specifically, we experienced a shortfall in our anticipated revenues for the quarter ended June 30, 2002, which we believe was in part due to slowing information technology spending in reaction to declining economic conditions. To the extent that the current economic downturn continues or increases in severity, we believe demand for our products and services, and therefore future revenues, could be further impacted.

Our financial results could also be significantly impacted by world events. Specifically, our revenues for the third quarter ended September 30, 2001 were negatively impacted by delays in customer orders and longer sales cycles resulting from terrorist attacks on the World Trade Center buildings and the Pentagon. Our revenues and financial results could be negatively impacted to the extent similar events occur or are anticipated to occur, such as the war in the Middle East.

Our revenues will decline significantly if the market does not continue to accept our iManage suite of products.

We derive substantially all of our license and associated service revenues from the WorkSite suite of products. We currently expect to continue to derive a majority of our revenues from these products. If the market does not continue to accept our products, our revenues will decline significantly and negatively affect our operating results. Factors that may affect the market acceptance of these products include the performance, price and total cost of ownership of our products and the availability, functionality and price of competing products and technologies. Many of these factors are beyond our control.

In addition, a significant portion of our revenues is derived from annual support contracts purchased by our existing customers. If our customers do not renew their support contracts or our current renewal rate experience declines, our revenues will decline and negatively affect our operating results.


	*Our costs are relatively fixed in the near term. Therefore, any shortfall in anticipated revenues will adversely affect our operating results.*

Because our operating expenses are based on our expectations for future revenues and are relatively fixed in the short term, any revenue shortfall below expectations, such as the shortfall we experienced for the quarter ended June 30, 2002, will have an immediate and significant adverse effect on our consolidated results of operations and financial condition.


	*Contractual issues may arise during the negotiation process that may delay the anticipated closure of license transactions and our ability to recognize revenue as anticipated.*

Because our solution is mission-critical to many of our customers, the process of contractual negotiation may be protracted. The additional time needed to negotiate mutually acceptable terms that culminate in an agreement to license our products could extend the sales cycle.

Several factors may also require us to defer recognition of license revenue for a significant period of time after entering into a license agreement, including instances in which we are required to deliver either unspecified additional products or specified product upgrades for which we do not have vendor-specific objective evidence of fair value. While we have a standard software license agreement that provides for revenue recognition provided that delivery has taken place, collectibility from the customer is reasonably assured and assuming no significant future obligations or customer acceptance rights exist, customer negotiations and revisions to these terms could impact our ability to recognize revenue at the time of delivery.

In addition, slowdowns or variances from internal expectations in our quarterly license contracting activities may impact our service offerings and may result in lower revenues from our customer training, consulting services and customer support organizations. Our ability to maintain or increase service revenues is highly dependent on our ability to increase the number of license agreements we enter into with customers.


	*Delays in the signing of one or more large license agreements or the loss of a significant customer order could have a material impact on our revenues and results of operations.*

The contract value of individual license agreements can vary significantly. Because a substantial portion of our quarterly revenues is derived from a relatively small number of customers, delays in the signing of one or more large license agreements or the loss of a significant customer order could have a material impact on our revenues and results of operations.


	*Lack of quarterly bookings linearity and seasonality make it difficult for us to predict operating results.*

A significant portion of our license agreements are completed within the final few weeks of each quarter as many customers delay completion of a transaction until the end of a quarter to extract more favorable terms. In addition, our sales cycle is impacted by seasonal factors. Specifically, our historical experience indicates that our sales process and revenues are negatively impacted by the summer season in the third quarter. Additionally, our consulting services are negatively impacted in the fourth quarter due to the holiday season.


	Competition from providers of software enabling content and collaboration management among businesses is increasing, which could cause us to reduce our prices and result in reduced gross margins or loss of market share.

The market for products that enable companies to manage and share content and collaborate throughout an extended enterprise is new, highly fragmented, rapidly changing and increasingly competitive. We expect competition to continue to intensify, which could result in price reductions for our products, reduced gross


	•	companies addressing segments of our market including Documentum, Inc., FileNet Corporation, Hummingbird Ltd., Intraspect Software, Inc., Microsoft Corporation, Open Text Corporation; Stellent, Inc. and NetDocuments, Inc.;

	•	Web content management companies such as Vignette Corporation;

	•	enterprise Web portal companies such as Plumtree;

	•	intranet and groupware companies such as IBM, Microsoft Corporation, and Novell, Inc.; and

	•	in-house development efforts by our customers and partners.

When compared to us, many of these competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial resources. This may place us at a disadvantage in responding to our competitors’ strategies, technological advances, advertising campaigns, strategic partnerships and other initiatives. Competitive pressures and our perceived viability in this market may make it difficult for us to acquire and retain customers, which could reduce our revenues and result in increased operating losses. Competitive pressures may also increase with the consolidation of competitors within our market, such as the recently announced acquisition of eRoom Technology, Inc. by Documentum, Inc. and the acquisition of Epicentric, Inc. by Vignette Corporation.

In recent quarters, some of our competitors have drastically reduced their price proposals in an effort to strengthen their bids and expand their customer bases. Such tactics, even if unsuccessful, could delay decisions by some customers that would otherwise purchase the iManage solution and may reduce the ultimate selling price of our software and services.


	Our revenues from international operations are a significant part of our overall operating results. We may not successfully develop these international markets, which could harm our business.

We have established sales offices in international locations. For the year ended December 31, 2002, revenues from these international operations constituted approximately 20% of our total revenues. We anticipate devoting significant resources and management attention to expanding international opportunities, which subjects us to a number of risks including:


	•	greater difficulty in staffing and managing foreign operations;

	•	expenses associated with foreign operations and compliance with applicable laws;

	•	changes in a specific country’s or region’s political or economic conditions;

	•	expenses associated with localizing our product for foreign countries;

	•	differing intellectual property rights;

	•	protectionist laws and business practices that favor local competitors;

	•	longer sales cycles and collection periods or seasonal reductions in business activity;

	•	multiple, conflicting and changing governmental laws and regulations; and

	•	foreign currency restrictions and exchange rate fluctuations.


	*If we do not maintain and expand our reseller network, we may not be able to grow our revenues and our operating results will suffer.*

We derived 50%, 43% and 54% of our license bookings from resellers of our application suite for the year ended December 31, 2002, 2001 and 2000. Therefore, our future success depends on our ability to attract, retain, motivate and train resellers of our products. Similarly, the financial failure of any of our resellers could result in lower revenues and the write-off of amounts due from the failed reseller.


	Our failure to develop and maintain strong relationships with consulting and system integrator firms and our customers would harm our ability to market our application suite, which could reduce future revenues and increase our expenses.

A portion of our revenues is influenced by the recommendation of our collaborative content management software platform and applications by systems integrators, consulting firms and other third parties that help deploy our application suite for our customers. Losing the support of these third parties may limit our ability to penetrate our existing and potential markets. These third parties are under no obligation to recommend or support our application suite and could recommend or give higher priority to the products and services of other companies or to their own products. Our inability to gain the support of consulting and systems integrator firms or a shift by these companies toward favoring competing products could negatively affect our software license and service revenues.

Some systems integrators also engage in joint marketing and sales efforts with us. If our relationship with these systems integrators fails, we will have to devote substantially more resources to the sales and marketing of our application suite. In many cases, these parties have extensive relationships with our existing and potential customers and influence the decisions of these customers. A number of our competitors have longer and more established relationships with these systems integrators than we do and, as a result, these systems integrators may be more likely to recommend competitors’ products and services and increase our expenses.

We may also be unable to grow our revenues if we do not successfully obtain leads and referrals from our customers. If we are unable to maintain these existing customer relationships or fail to establish additional relationships, we will be required to devote substantially more resources to the sales and marketing of our products. As a result, we are dependent on the willingness of our customers to provide us with introductions, referrals and leads. Our current customer relationships do not afford us any exclusive marketing and distribution rights. In addition, our customers may terminate their relationship with us at any time, pursue relationships with our competitors or develop or acquire products that compete with our products. Even if our customers act as references and provide us with leads and introductions, we may not penetrate additional markets or grow our revenues.


	*Our failure to develop and maintain strong relationships with consulting and system integrator firms would harm our ability to implement our application suite.*

Consulting and system integrators assist our customers with the installation and deployment of our application suite, in addition to competitive products, and perform integration of computer systems and software. If we are unable to develop and maintain relationships with system integrators, we would be required to hire additional personnel to install and maintain our application suite, which would result in higher expense levels and delays in our ability to recognize revenue.


	*If the emerging market for collaborative content management software does not develop as quickly as we expect, our business will suffer.*

The market for our collaborative content management software platform and applications has only recently begun to develop, is rapidly evolving and will likely have an increasing number of competitors. We cannot be certain that a viable market for our products will emerge or be sustainable. If the collaborative content management software market fails to develop, or develops more slowly than expected, demand for our products will be less than anticipated and our business and operating results would be seriously harmed.

Furthermore, to be successful in this emerging market, we must be able to differentiate our business from our competitors through our product and service offerings and brand name recognition. We may not be successful in differentiating our business or achieving widespread market acceptance of our products and services. In addition, enterprises that have already invested substantial resources in other methods of managing their content and collaborative process may be reluctant or slow to adopt a new approach that may replace, limit or compete with their existing systems.


	*If our efforts to enhance existing products and introduce new products in a timely manner are not successful, we may not be able to generate demand for our products.*

Our future success depends on our ability to provide a comprehensive collaborative content management software solution. To provide this comprehensive solution, we must continually develop and introduce high quality, cost-effective products as well as product enhancements on a timely basis. If the market does not accept our new products, our business will suffer and our stock price will likely fall.

Our WorkSite server for Windows-based operating environments, and our compatible applications for this server, became commercially available in June 2001. In addition, the Java-based iManage WorkSite Server MP that supports Windows, Solaris and Linux operating environments, and a compatible version of the iManage WorkSite Web application, became commercially available in the first quarter of 2002. Enhanced features and functionality are expected to be developed, but delays in introducing these enhancements would have a material adverse effect on our business and financial condition.

In the past, we have experienced delays in the commencement of commercial shipments of enhancements to our application suite. To date, these delays have not had a material impact on our revenues. If we are unable to ship or implement new products or enhancements to our application suite when planned or at all, or fail to achieve timely market acceptance of these new products or enhancements, we may suffer lost revenues. Our future operating results will depend on demand for our application suite, including new and enhanced releases that are subsequently introduced.


	*If our products cannot scale to meet the demands of tens of thousands of concurrent users, our targeted customers may not license our solutions, which will cause our revenue to decline.*

Our strategy is to target large organizations that require our collaborative content management software solution because of the significant amounts of information and content that they generate and use. For this strategy to succeed, our software products must be highly scalable and accommodate tens of thousands of concurrent users. If our products cannot scale to accommodate a large number of concurrent users, our target markets will not accept our products and our business and operating results will suffer.

While we have tested the scalability of our products in simulations, we have not observed the performance of our products in the context of a large-scale customer implementation. If our customers cannot successfully implement large-scale deployments, or if they determine that our products cannot accommodate large-scale deployments, our customers will not license our solutions, and this will materially adversely affect our financial condition and operating results.


	*If our product does not operate with a wide variety of hardware, software and operating systems used by our customers, our revenues would be harmed.*

We currently serve a customer base that uses a wide variety of constantly changing hardware, software applications and operating systems. For example, we have designed our products to work with databases and servers developed by Microsoft Corporation, Sun Microsystems, Inc., Oracle Corporation and IBM and software applications including Microsoft Office, WordPerfect, Lotus Notes and Novell GroupWise. We must continually modify and enhance our software products to keep pace with changes in computer hardware and software and database technology as well as emerging technical standards in the software industry. We further believe that our application suite will gain broad market acceptance only if it can support a wide variety of hardware, software applications and systems. If our product is unable to support a variety of these products, our revenues would be harmed. Additionally, customers could delay purchases of our application suite until they determine how our products will operate with these updated platforms or applications.

Currently, our iManage WorkSite suite of products supports Windows, Solaris and Linux operating environments. If other platforms become more widely used, we could be required to convert our server application products to those platforms. We may not succeed in these efforts, and even if we do, potential customers may not choose to license our product.

Our software products are complex and may contain errors that may be detected at any point in the life cycle of the product. We cannot assure you that, despite testing by us, our implementation partners and our current and potential customers, errors will not be found in our products or releases after commencement of commercial shipment, resulting in loss of revenues, delay in market acceptance and sales, product returns, diversion of development resources, injury to our reputation or increased service and warranty costs.

Errors in our application suite may be caused by defects in third-party software incorporated into our application suite. If so, we may not be able to fix these defects without the cooperation of these software providers. Since these defects may not be as significant to our software providers as they are to us, we may not receive the rapid cooperation that we may require. We may not have the contractual right to access the source code of third-party software and, even if we access the source code, we may not be able to fix the defect.

Since our customers use our application suite for critical business applications, any errors, defects or other performance problems of our application suite could result in damage to the businesses of our customers. Consequently, these customers could delay or withhold payment to us for our software and services, which could result in an increase in our provision for doubtful accounts or an increase in collection cycles for accounts receivable, both of which could disappoint investors and result in a significant decline in our stock price. In addition, these customers could seek significant compensation from us for their losses. Even if unsuccessful, a product liability claim brought against us would likely be time consuming and costly and harm our reputation, and thus our ability to license new customers. Even if a suit is not brought, correcting errors in our application suite could increase our expenses.

The market for our products is characterized by rapidly changing technology, evolving industry standards and product introductions and changes in customer demands. Our future success will depend to a substantial degree on our ability to offer products and services that incorporate leading technology and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis. You should be aware that (i) our technology or systems may become obsolete upon the introduction of alternative technologies, such as products that better manage various types of content and enable collaboration; and (ii) we may not have sufficient resources to develop or acquire new technologies or to introduce new products or services capable of competing with future technologies or service offerings.

We rely on software that we license from third parties, including software that is integrated with our internally developed software and used in our products to perform key functions. For example, we license Application Builder from Autonomy, Inc., Search ’97® from Verity, Inc. and Outside In Viewer Technology® and Outside In HTML Export® from Stellent, Inc. The functionality of our iManage WorkSite suite products, therefore, depends on our ability to integrate these third-party technologies into our products. Furthermore, we may license additional software from third parties in the future to add functionality to our products. If our efforts to integrate this third-party software into our products are not successful, our customers may not license our products and our business will suffer.

In addition, we would be seriously harmed if the providers from whom we license software ceased to deliver and support reliable products, enhance their current products or respond to emerging industry standards. Moreover, the third-party software may not continue to be available to us on commercially reasonable terms or at all. Each of these license agreements may be renewed only with the other party’s written consent. The loss of, or inability to maintain or obtain licensed software, could result in shipment delays or reductions. Furthermore, we may be forced to limit the features available in our current or future product offerings. Either alternative could seriously harm our business and operating results.

There have recently been significant regulatory changes, including the Sarbanes-Oxley Act of 2002, and there may be potential new accounting pronouncements or regulatory rulings that will have an impact on our future financial position and results of operations. The Sarbanes-Oxley Act of 2002 and other rule changes and proposed legislative initiatives following several highly publicized corporate accounting and corporate governance failures are likely to increase general and administrative costs. In addition, insurance companies significantly increased insurance rates as a result of high claims over the past year, and our rates for our various insurance policies increased substantially. Further, proposed initiatives may result in changes in accounting rules, including legislative and other proposals to account for employee stock options as an expense. These and other potential changes could materially increase the expenses we report under accounting principles generally accepted in the United States of America and adversely affect our operating results.

Beginning in July 2001, several securities class action complaints were filed against the Company, the underwriters of the Company’s initial public offering, its directors and certain officers in the United States District Court for the Southern District of New York. The cases were consolidated and the litigation is now captioned as In re iManage, Inc. Initial Public Offering Securities Litigation, Civ. No. 01-6277 (SAS) (S.D.N.Y.), related to In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS) (S.D.N.Y.). On or about April 19, 2002, plaintiffs served an amended complaint. The amended complaint is brought purportedly on behalf of all persons who purchased the Company’s common stock from November 17, 1999 through December 6, 2000. It names as defendants the Company; five of the Company’s present and former officers; and several investment banking firms that served as underwriters of the Company’s initial public offering. The complaint alleges liability under Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 on the grounds that the registration statement for the offering did not disclose that: (1) the underwriters had agreed to allow certain customers to purchase shares in the offering in exchange for excess commissions paid to the underwriters; and (2) the underwriters had arranged for certain customers to purchase additional shares in the aftermarket at predetermined prices. The amended complaint also alleges that false analyst reports were issued. Plaintiffs seek unspecified monetary damages, attorneys’ fees and other costs.

While we believe that the allegations against our officers/ directors and us are without merit, and intend to contest them vigorously, there can be no assurance that this matter will be resolved without costly litigation or in a manner that is not adverse to our consolidated financial position, results of operations or cash flows.

Our success depends in part on the development and protection of the proprietary aspects of our technology as well as our ability to operate without infringing on the proprietary rights of others. To protect our proprietary technology, we rely primarily on a combination of trade secret, copyright, trademark and patent laws, as well as confidentiality procedures and contractual restrictions.

To date, we have only one issued patent. We presently have additional United States and foreign patent applications pending. It is possible that some or all of the patents that we have applied for will not be issued, and even if issued, that some or all may be successfully defended. It is also possible that we may not develop proprietary products or technologies that are patentable, that any patent issued to us may not provide us with any competitive advantages or that the patents of others will harm our ability to do business.

Despite our efforts to protect our proprietary rights and technology, unauthorized parties may attempt to copy aspects of our products or obtain the source code to our software or use other information that we regard as proprietary or could develop software competitive to ours. Our means of protecting our proprietary rights may not be adequate, and our competitors may independently develop similar technology or duplicate our product. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. Any such resulting litigation could result in substantial costs and diversion of resources that could have a material adverse effect on our business, operating results and financial condition.

It is possible that in the future, a third party may bring suit claiming that we or our current or future products infringe their patents, trade secrets or copyrights. Any claims, with or without merit, could be costly and time-consuming to defend, divert our management’s attention or cause product delays. We have only one patent that we could use defensively against any company bringing such a claim. If our product was found to infringe a third party’s proprietary rights, we could be required to enter into royalty or licensing agreements to be able to sell our product. Royalty and licensing agreements, if required, may not be available on terms acceptable to us, if at all, which could harm our business.

Our success depends largely on the skills, experience and performance of the members of our senior management and other key personnel, such as Mahmood M. Panjwani, our President and Chief Executive Officer, Rafiq R. Mohammadi, our Chief Technology Officer, and Joseph S. Campbell, our Chief Operating Officer. We may not be successful in attracting or retaining qualified personnel in the future. None of our senior management or other key personnel is bound by an employment agreement setting forth a term of employment. If we lose one or more of these key employees, our business and operating results could be seriously harmed. In addition, our future success will depend largely on our ability to continue attracting and retaining highly skilled personnel. Like other high technology companies, we face intense competition for qualified personnel.

Our historical growth has placed, and is likely to continue to place, a significant strain on our limited resources. To be successful, we will need to implement additional management information systems, improve our operating, administrative, financial and accounting systems and controls, train new employees and maintain close coordination among our executive, research and development, finance, marketing, sales and operations organizations. Any failure to manage growth effectively could seriously harm our business and operating results.

We may need to seek additional funding in the future. We do not know if we will be able to obtain additional financing on favorable terms, if at all. In addition, if we issue equity securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If we cannot raise funds on acceptable terms, if and when needed, we may not be able to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, which could seriously harm our business.

We have $3.4 million in goodwill, $104,000 of intangible assets and $1.7 million of prepaid license royalties. At December 31, 2002, we believe our goodwill, intangible assets and prepaid license royalties are recoverable. However, changes in the economy, the business in which we operate and our own relative performance could change the assumptions used to evaluate the recoverability of these assets. We must continue to monitor those assumptions and their effect on the estimated recoverability of our intangible assets. Any adverse change in our recoverability assumptions could result in the writing down of our intangible assets, which could materially impact our consolidated results of operation and financial position.

Some of our current stockholders hold a substantial number of shares, which they are able to sell in the public market, subject to restrictions under the securities laws and regulations. Sales of a substantial number of shares of our common stock within a short period of time could cause our stock price to fall. Moreover, three of our executive officers have established systematic plans under which they will sell a pre-determined number of shares per quarter, provided that a certain minimum price is obtained. These plans may be perceived poorly in the market, and together with the increased number of shares being made available on the market, these plans may have an adverse effect on our share price. Executive officers and board members may also sell stock outside of the systematic plan at their election. In addition, a fall in our stock price could impair our ability to raise capital through the sale of additional stock.

In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which requires that long-lived assets to be disposed of by sale be measured at the lower of the carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. SFAS No. 144 also expands the reporting of discontinued operations to include components of an entity that have been or will be disposed of rather than limiting such discontinuance to a segment of a business. SFAS No. 144 excludes from the definition of long-lived assets goodwill and other intangibles that are not amortized in accordance with SFAS No. 142. SFAS No. 144 is effective for our year beginning January 1, 2003. The adoption of SFAS No. 144 is not expected to have a material impact on our consolidated financial statements.

In May 2001, the FASB issued SFAS No. 145, which rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, SFAS No. 44, Accounting for Intangible Assets of Motor Carriers, and SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. SFAS No. 145 also amends SFAS No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. As a result of the rescission of SFAS No. 4 and SFAS No. 64, the criteria in APB No. 30, Reporting the Results of Operations, will be used to classify gains and losses from debt extinguishment. SFAS 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. SFAS No. 145 is effective for our year beginning January 1, 2003 with the exception of the lease provisions of the

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities, and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) which previously governed the accounting treatment for restructuring activities. SFAS No. 146 applies to costs associated with an exit activity that does not involve an entity newly acquired in a business combination or with a disposal activity covered by SFAS No. 144. Those costs include, but are not limited to, the following:


	(i) termination benefits provided to current employees who are involuntarily terminated under the terms of a benefit arrangement that, in substance, is not an ongoing benefit arrangement or an individual deferred-compensation contract;

	(ii) costs to terminate a contract that is not a capital lease; and

	(iii) costs to consolidate facilities or relocate employees.

SFAS No. 146 does not apply to costs associated with the retirement of long-lived assets covered by SFAS No. 143. SFAS No. 146 will be applied prospectively and is effective for exit or disposal activities initiated after December 31, 2002. Early adoption is permitted. The adoption of SFAS No. 146 is not expected to have a material impact on our consolidated financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No.123. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in interim financial statements. The transition and interim disclosure requirements of SFAS No. 148 are effective for fiscal years ended and interim periods beginning after December 15, 2002. We have chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25 and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the estimate of the market value of our stock at the date of the grant over the amount an employee must pay to acquire our stock. We have adopted the annual disclosure provisions of SFAS No. 148 in our financial reports for the year ended December 31, 2003 and will adopt the interim disclosure provisions for our financial report for the quarter ended March 31, 2003. As the adoption of this standard involves disclosures only, we do not expect a material impact on our consolidated financial statements.

In November 2002, the FASB issued FASB Interpretation (“FIN”) No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN No. 45 elaborates on the existing disclosure requirements for most guarantees and indemnifications, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee or indemnification, the company must recognize an initial liability for the fair market value of the obligations it assumes under that guarantee or indemnification and must disclose that information in its interim and annual financial statements. Certain disclosure provisions are effective for our year ended December 31, 2002. The initial recognition and measurement provisions of FIN No. 45 apply on a prospective basis to guarantees and indemnifications issued or modified after December 31, 2002. We have adopted the required disclosure provisions of FIN No. 45 as of December 31, 2002 and are currently assessing the impact of the remaining requirements on our consolidated financial statements.

In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. FIN No. 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities

without additional subordinated financial support from other parties. FIN No. 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN No. 46 must be applied for the first interim or annual period beginning after June 15, 2003. In addition, FIN No. 46 requires that we make disclosures in our consolidated financial statements for the year ended December 31, 2002 when we believe it is reasonably possible that we will consolidate or disclose information about variable interest entities after FIN No. 46 becomes effective. At this time, we do not believe it is reasonably possible that we will consolidate or disclose information about variable interest entities. However, we continue to assess the impact of FIN No. 46 on our consolidated financial statements.

Our investment portfolio consisted of fixed income securities of $36.8 million as of December 31, 2002 and $39.8 million as of December 31, 2001. These investment securities are subject to interest rate risk and will decline in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from levels as of December 31, 2002 and December 31, 2001, the decline in the fair value of the portfolio would not be material. Additionally, we have the ability to hold our fixed income investments until maturity and, therefore, we would not expect to recognize an adverse impact on income or cash flows. A summary of our portfolio investments is included in Note 5 — Investments to the consolidated financial statements.

Quantitative and qualitative disclosure about market risk is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7.

We believe that period-to-period comparisons of our consolidated financial results should not be relied upon as an indication of future performance. The operating results of many software companies reflect seasonal trends, and our business, financial condition and results of operations may be affected by such trends in the future. These trends may include higher revenues in the fourth quarter as many customers complete annual budgetary cycles and lower revenues in the summer months when many businesses experience lower sales, particularly in the European market.

The consolidated financial statements required by this item are submitted as a separate section of this Annual Report on Form 10-K. See Item 15.

Certain information required by Part III is omitted from this Annual Report on Form 10-K since we will file a definitive Proxy Statement for our Annual Meeting of Stockholders to be held on June 12, 2003, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended (the “Proxy Statement”), not later than 120 days after the end of the year covered by this Annual Report, and certain information included in the definitive Proxy Statement is incorporated herein by reference.

The information required by this Item is incorporated by reference to the section entitled “Executive Compensation and Other Matters” in our definitive Proxy Statement.

The information required by this Item is incorporated by reference to the section entitled “Proposal Number One — Election of Directors” and “Executive Compensation and Other Matters” in our definitive Proxy Statement.

The information required by this Item is incorporated by reference to the sections entitled “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in our definitive Proxy Statement.

The information required by this Item is incorporated by reference to the section entitled “Certain Relationships and Related Transactions” in our definitive Proxy Statement.

(a) Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), within 90 days of the filing date of this report. Based on their evaluation, our principal executive officer and principal accounting officer concluded that our disclosure controls and procedures are effective.

(b) There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph (a) above.


	Consolidated Balance Sheets at December 31, 2002 and 2001

	Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000

	Consolidated Statements of Stockholders’ Equity and Comprehensive Loss for the years ended December 31, 2002, 2001 and 2000

	Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000

See Index to Exhibits. The exhibits listed in the accompanying Index to Exhibits are filed as part of this Annual Report.

No reports on Form 8-K were filed during the fourth quarter ended December 31, 2002.

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) on page 36 present fairly, in all material respects, the financial position of iManage, Inc. and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) on page 36 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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.

As discussed, in Note 4 to the consolidated financial statements, effective January 1, 2002, the Company changed its method of accounting for goodwill in accordance with Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets.

iManage, Inc. (the “Company”) provides collaborative content management software that enables businesses to manage and collaborate efficiently on critical business content across the extended enterprise. The Company’s product suite, iManage WorkSite, delivers document management, collaboration, workflow and knowledge management in a single integrated Internet solution. The Company believes that iManage WorkSite improves communication and process efficiency, providing faster response times and a rapid return on investment for its customers.

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenues consist primarily of license, support and service revenues from customers, which were primarily attributable to the iManage WorkSite suite of software applications. In addition, the Company receives fees from its customers for providing deployment, integration services and training.

The Company applies the provisions of Statement of Position (“SOP”) No. 97-2, Software Revenue Recognition, as amended by SOP-98-9, Modification of SOP-97-2, Software Revenue Recognition, With Respect to Certain Transactions, to all transactions involving the licensing of its software.

The Company recognizes license revenues when persuasive evidence of an arrangement exists, the software has been delivered, the fee is considered fixed or determinable and collectibility is reasonably assured, assuming no significant future obligations or customer acceptance rights exist. Revenues from subscription license agreements, which include software, rights to future products and maintenance, are recognized ratably over the term of the subscription period. Revenue on shipments to resellers is generally recognized when the resellers sell the product to the end-user customer. For all sales, the Company uses either a binding purchase order or signed license agreement as persuasive evidence of an arrangement.

At the time of the transaction, the Company assesses whether the fee associated with each transaction is fixed and determinable and collection is reasonably assured. The Company evaluates the payment terms associated with each transaction. If a portion of the fee is due after normal payment terms, which range from 30 days to 180 days from invoice date for legal customers and 30 days to 120 days for all others, the Company recognize the revenue on the payment due date, assuming collection is reasonably assured. The Company assesses collectibility based on a number of factors, including past transaction history and the overall credit-worthiness of the customer. The Company generally does not require collateral from its customers. If collection is not reasonably assured, revenue is deferred and recognized at the time collection becomes reasonably assured, which is generally upon receipt of cash.

When contracts contain multiple elements wherein vendor-specific objective evidence exists for all undelivered elements, the Company accounts for the delivered elements in accordance with the residual

method prescribed by SOP 98-9. This means that the Company defers revenue equivalent to the fair value of the undelivered elements until such time as the element is delivered to the customer. Fair values for the ongoing support obligations are based upon separate sales of support renewals sold to customers or upon renewal rates quoted in the contracts. Fair value of services, such as training or consulting, is based on the value of stand-alone sales of these services to customers.

License arrangements do not generally include acceptance clauses. However, if an arrangement includes an acceptance provision, acceptance occurs upon the earlier of receipt of a written customer acceptance or expiration of the acceptance period.

The Company recognizes revenue for support services ratably over the contract term. Training and consulting services are billed based on hourly rates and generally recognized as revenue as these services are performed. However, at the time of a transaction, the Company assesses whether any services included in the arrangement require the performance of significant work either to alter the underlying software or to build complex interfaces so that the software performs as requested. If these services are included as part of an arrangement, the Company recognizes the entire arrangement fee excluding amounts allocated to support services, using the percentage of completion method. The Company estimates the percentage of completion based on an estimate of the total costs estimated to complete the project as a percentage of the costs incurred to date and the estimated costs to complete.

The Company considers all highly liquid investments with original or remaining maturities of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents include money market funds, commercial paper and various deposit accounts. Cash equivalents are recorded at cost, which approximates fair value.

The Company’s investments are classified as “available-for-sale” and are carried at fair value based on quoted market prices. These investments consist of corporate obligations that include commercial paper, corporate bonds and notes and U.S. government agency securities. Those investments with maturities greater than three months at the balance sheet date and less than twelve months are considered short-term investments and those with maturities greater than twelve months at the balance sheet date are considered long-term investments. Realized gains and losses are calculated using the specific identification method. The Company incurred $36,000 of realized gains and no realized losses in 2002 and there were no realized gains and losses in 2001 and 2000. In 2002, 2001 and 2000, unrealized gains (losses) totaled $(176,000), $143,000 and $125,000, respectively. Unrealized gains and losses are included as a separate component of accumulated comprehensive income and stockholders’ equity.

Financial instruments that subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, short-term investments, accounts receivable, long-term investments and bank lines of credit. The Company maintains substantially all of its cash and cash equivalents and short- and long-term investments with two financial institutions domiciled in the United States. The Company performs ongoing evaluations of its customers’ financial condition and generally requires no collateral from its customers on accounts receivable.

For 2002, 2001 and 2000, the Company derived 71%, 79% and 77% of its license revenues, respectively, from law firms and professional service firms. Also, the Company derived 50%, 43% and 54% of its license revenues from resellers of its application suite for 2002, 2001 and 2000.

The Company relies on software licensed from third parties, including software that is integrated with internally developed software and used to perform key functions. These software license agreements expire on

various dates from March 2005 to January 2007 and are renewable with written consent of the parties. Either party may terminate the agreement for cause before the expiration date with written notice. If the Company cannot renew these licenses, shipments of its products could be delayed until equivalent software could be developed or licensed and integrated into its products. These types of delays could seriously harm the Company’s business. In addition, the Company would be seriously harmed if the providers from whom the Company licenses its software ceased to deliver and support reliable products, enhance their current products or respond to emerging industry standards. Moreover, the third-party software may not continue to be available to us on commercially reasonable terms or at all. Each of these license agreements may be renewed only with the other party’s written consent.

The Company has incurred operating losses on a quarterly and annual basis throughout its history. For the years ended December 31, 2002, 2001 and 2000, the Company’s net losses were $6.7 million, $19.8 million and $9.1 million and the Company has $38.2 million in cash, cash equivalents and short-term marketable securities as of December 31, 2002. The Company currently anticipates that its cash and investments, together with its existing lines of credit will be sufficient to meet anticipated needs for working capital and capital expenditures through December 31, 2003. However, the Company may be required, or could elect, to seek additional funding at any time. There can be no assurances that additional equity or debt financing, if required, will be available on acceptable terms, if at all.

Property and equipment are recorded at cost and depreciated using the straight-line method over estimated useful lives of three to five years. Amortization of leasehold improvements is recorded using the straight-line method over the lesser of the estimated useful lives of the assets or the lease term, generally three to five years. Upon the sale or retirement of an asset, the cost and related accumulated depreciation are removed from the consolidated balance sheet and the resulting gain or loss is reflected in operations.

Repair and maintenance expenditures, which are not considered improvements and do not extend the useful life of an asset, are expensed as incurred.

The Company assesses the impairment of identifiable intangible assets and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important that could trigger an impairment review include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the use of the assets or the strategy for the overall business, negative industry or economic trends, a significant decline in the Company’s stock price for a sustained period and its market capitalization relative to net book value. The Company measures any impairment based on a projected discounted cash flow method using a discount rate commensurate with the risk inherent in the Company’s business model.

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, which is effective for years beginning after December 15, 2001. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions upon adoption for the reclassification of certain existing recognized intangible assets as goodwill, reassessment of the useful lives of existing recognized intangible assets, reclassification of certain intangibles out of previously reported goodwill and the testing for impairment of existing goodwill and other intangibles. As of January 1, 2002, the Company adopted SFAS No. 142 and has ceased to amortize $3.4 million of goodwill. In lieu of amortization, the Company is required

to perform an impairment review of its goodwill balance on at least an annual basis and upon the initial adoption of SFAS No. 142. This impairment review involves a two-step process as follows:


	•	Step 1 — The Company compares the fair value of its reporting units to the carrying value, including goodwill. For each reporting unit for which the carrying value, including goodwill, exceeds the unit’s fair value, the Company moves on to Step 2. If a unit’s fair value exceeds the carrying value, no further work is performed and no impairment charge is necessary.

	•	Step 2 — The Company performs an allocation of the fair value of the reporting unit to its identifiable tangible and non-goodwill intangible assets and liabilities. This derives an implied fair value for the reporting unit’s goodwill. The Company then compares the implied fair value of the reporting unit’s goodwill with the carrying amount of the reporting unit’s goodwill. If the carrying amount of the reporting unit’s goodwill is greater than the implied fair value of its goodwill, an impairment charge would be recognized for the excess.

The Company has determined that it has one reporting unit and performed Step 1 of the goodwill impairment analysis required by SFAS No. 142 as of January 1, 2002. The Company compared the carrying value of total stockholders’ equity to the Company’s market capitalization and concluded that goodwill was not impaired, as its market capitalization exceeded total stockholders’ equity, including goodwill. Accordingly, Step 2 was not performed. The Company also performed its annual analysis of goodwill on October 1, 2002 and concluded its goodwill was not impaired as the Company’s market capitalization exceeded its total stockholders’ equity. The Company will continue to test for impairment on an annual basis and on an interim basis if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company’s reporting unit below its carrying amount. Also, see Note 4 — Goodwill and Intangible Assets.

The Company has $3.4 million in goodwill, $104,000 of intangible assets and $1.7 million of prepaid license royalties. At December 31, 2002, the Company believes its goodwill, intangible assets and prepaid license royalties are recoverable. However, changes in the economy, the business in which the Company operates and its relative performance could change the assumptions used to evaluate the recoverability of these assets. The Company must continue to monitor those assumptions and their effect on the estimated recoverability of its intangible assets. Any adverse change in the Company’s recoverability assumptions could result in the writing down of its intangible assets, which could materially impact its consolidated results of operation and financial position.

The Company expenses advertising costs as incurred. Advertising costs expensed for 2002, 2001 and 2000 were $1.8 million, $2.1 million and $1.9 million, respectively.

Costs incurred in the research and development of new software products are expensed as incurred until technological feasibility has been established at which time such costs are capitalized, subject to a net realizable value evaluation. Technology feasibility is established upon the completion of an integrated working model. Costs incurred between completion of the working model and the point at which the product is ready for general release have not been significant. Accordingly, the Company has charged all costs to research and development expense in the period incurred.

The Company accounts for income taxes under the provisions of SFAS No. 109, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts to be recovered.

The Company accounts for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees, and has elected to adopt the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation. The resulting stock-based compensation is amortized over the estimated term of the stock option, generally four years, using an accelerated approach. This accelerated approach is consistent with the method described in Financial Accounting Standards Board Interpretation (“FIN”) No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Awards Plans. Stock-based compensation to non-employees is based on the fair value of the option estimated using the Black-Scholes model on the date of the grant and revalued until vested. Compensation expense resulting from non-employee options is amortized to expense using an accelerated approach.

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for the manner in which public companies report information about operating segments in annual and interim financial statements. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The method for determining the information to report is based on the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance.

The Company’s chief operating decision-maker is considered to be the Chief Executive Officer. The Chief Executive Officer reviews financial information presented for purposes of making operating decisions and assessing financial performance. The financial information is identical to the information presented in the accompanying consolidated statements of operations; the Company had no significant foreign operations through December 31, 2000. For the years ended December 31, 2002 and 2001, revenues derived from customers outside the United States represented 20% and 9% of total revenues, respectively, and consisted primarily of customers in the United Kingdom. On this basis, the Company is organized and operates in a single segment: the design, development and marketing of software solutions.

At December 31, 2002, no customer accounted for more than 10% of the accounts receivable balance while one customer accounted for 16% of the accounts receivable balance at December 31, 2001. No customer accounted for more than 10% of the total revenues in 2002, 2001 and 2000.

The financial statements of foreign subsidiaries are measured using the local currency of the subsidiary as the functional currency. Accordingly, assets and liabilities of the subsidiaries are translated at current rates of exchange at the balance sheet date and all revenue and expense items are translated using weighted-average exchange rates prevailing during the year. The resultant gains or losses from translation are charged or credited to accumulated comprehensive income (loss). Foreign currency transaction gains and losses, which have not been material to date, are included in the consolidated statement of operations.

At December 31, 2002, the Company did not hold any foreign currency derivative instruments.

Other comprehensive income and loss refers to revenues, expenses, gains and losses that under the accounting principles generally accepted in the United States of America are recorded as an element of stockholders’ equity and are excluded from net loss.

Accumulated other comprehensive income (loss)»comprises the following (in thousands):

Basic net loss per common share is computed using the weighted average number of outstanding shares of common stock during the period, excluding shares of restricted stock subject to repurchase. Dilutive net loss per common share is computed using the weighted average number of common shares outstanding during the period and, when dilutive, potential common shares from options to purchase common stock and common stock subject to repurchase, using the treasury stock method.

The following table reconciles net loss to basic and diluted net loss per common share (in thousands, except per share data):

The following potential common shares have been excluded from the calculation of diluted net loss per share for all periods presented because the effect would have been anti-dilutive (in thousands):

In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which requires that long-lived assets to be disposed of by sale be measured at the lower of the carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. SFAS No. 144 also expands the reporting of discontinued operations to include components of an entity that have been or will be disposed of rather than limiting such discontinuance to a segment of a business. SFAS No. 144 excludes from the definition of long-lived assets goodwill and other intangibles that are not amortized in accordance with SFAS No. 142. SFAS No. 144 is effective for the Company’s year beginning January 1, 2003 with the exception of the lease provisions of SFAS No. 144, which are effective for leases entered into after May 15, 2002. The adoption of SFAS No. 144 is not expected to have a material impact on the Company’s consolidated financial statements.

In May 2001, the FASB issued SFAS No. 145, which rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, SFAS No. 44, Accounting for Intangible Assets of Motor Carriers, and SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. SFAS No. 145 also amends SFAS No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. As a result of the rescission of SFAS No. 4 and SFAS No. 64, the criteria in APB No. 30, Reporting the Results of Operations, will be used to classify gains and losses from debt extinguishment. SFAS 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. SFAS No. 145 is effective for the Company’s year beginning January 1, 2003. The adoption of SFAS No. 145 is not expected to have a material impact on the Company’s consolidated financial statements.


	(i) termination benefits provided to current employees who are involuntarily terminated under the terms of a benefit arrangement that, in substance, is not an ongoing benefit arrangement or an individual deferred-compensation contract;

	(ii) costs to terminate a contract that is not a capital lease; and

	(iii) costs to consolidate facilities or relocate employees.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in interim financial statements. The transition and interim disclosure requirements of SFAS No. 148 are effective for years ended after and interim periods beginning after December 15, 2002. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25 and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the estimate of the market value of its stock at the date of the grant over the amount an employee must pay to acquire the Company’s stock. The Company has adopted the annual disclosure provisions of SFAS No. 148 in its financial report for the year ended December 31, 2003 and will adopt the interim disclosure provisions for its financial reports for the quarter ended March 31, 2003. As the adoption of this standard involves disclosures only, the Company does not expect a material impact on its consolidated financial statements.

In November 2002, the FASB issued FIN No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN No. 45 elaborates on the existing disclosure requirements for most guarantees and indemnifications, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee or indemnification, the company must recognize an initial liability for the fair market value of the obligations it assumes under that guarantee or indemnification and must disclose that information in its interim and annual financial statements. Certain disclosure provisions are effective for the Company’s year ended December 31, 2002. The initial recognition and measurement provisions of FIN No. 45 apply on a prospective basis to guarantees and indemnifications issued or modified after December 31, 2002. The Company has adopted the required disclosure provision of FIN No. 45 as of December 31, 2002 and the Company is currently assessing the impact of the remaining requirements on its consolidated financial statements.

In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. FIN No. 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN No. 46 must be applied for the first interim or annual period beginning after June 15, 2003. In addition, FIN No. 46 requires that the Company make disclosures in its consolidated financial statements for the year ended December 31, 2002 when the Company believes it is reasonably possible that it will consolidate or disclose information about variable interest entities after FIN No. 46 becomes effective. At this time, the Company does not believe it is reasonably possible that the Company will consolidate or disclose information about variable interest entities. However, the Company will continue to assess the impact of FIN No. 46 on its consolidated financial statements.

In June 2000, the Company completed the acquisition of ThoughtStar, Inc. (“ThoughtStar”). The Company issued 1,007,000 shares of its common stock with a fair market value on the closing date of $11.0 million and paid cash consideration of $5.2 million for all of the outstanding stock of ThoughtStar, including additional monies loaned prior to the completion of the merger. The Company incurred transaction costs consisting primarily of professional fees of $725,000 and incurred stock issuance costs of $215,000, resulting in a total purchase price of $17.0 million. The acquisition was accounted for as a purchase and, as such, the purchase price was allocated to the assets acquired and the liabilities assumed based on estimated fair values on the date of acquisition. The results of operations of ThoughtStar have been included with the Company’s results of operations since the acquisition date.

The fair value of the assets of ThoughtStar was determined through established valuation techniques used in the software industry. No significant tangible assets or liabilities were acquired. A summary of the consideration exchanged for these assets is as follows (in thousands):

In addition to the consideration noted above, the Company granted 89,000 common stock options with an exercise price of $0.01 to former ThoughtStar employees in exchange for 1,648,000 fully vested and exercisable ThoughtStar stock options. On the date of grant, these options had an intrinsic value of $982,000, which was recorded as deferred stock-based compensation, and was being amortized over the option vesting period of 2 years. At December 31, 2001 and 2000, deferred stock-based compensation related to these stock options totaled $249,000 and $646,000. During September 2001, the remaining $87,000 of deferred stock-based compensation was charged to expense in connection with a restructuring of operations.

Pro forma results of operations for the combined Company for the year ended December 31, 2000 as if the transaction had consummated at the beginning of 2000 are as follows (in thousands, except per share data):

The above amounts are based upon certain assumptions and estimates, which the Company believes are reasonable and does not reflect any benefit from economies that might be achieved from combined operations. The pro forma financial information presented above is not necessarily indicative of either the results of operations that would have occurred had the acquisition taken place at the beginning of the periods presented or of future results of operations of the combined companies.

In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. The Company adopted SFAS No. 142 effective January 1, 2002 and, as a result, ceased to amortize goodwill of $3.4 million. The carrying amount of the goodwill and intangible assets as of December 31, 2002 and 2001 are as follows (in thousands):

The aggregate amortization expense of intangible assets, excluding amortization of goodwill, was $793,000, $1,125,000 and $603,000 for 2002, 2001 and 2000, respectively. The estimated amortization expense of acquired intangible assets is expected to be $104,000 for 2003. At September 30, 2003, the intangible assets will be fully amortized.

The changes in the carrying amount of goodwill for 2002, 2001 and 2000 are as follows (in thousands):

The following table presents net loss and basic and diluted net loss per share as if the goodwill had not been amortized during the periods presented (in thousands, except per share data):

The following is a summary of the Company’s portfolio investments (in thousands):

The following is a summary of the Company’s portfolio investments by contractual maturity (in thousands):

Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method. The estimated useful lives of computer software and equipment are three years. The estimated useful lives of furniture and office equipment are three to five years. Amortization of leasehold improvements is computed using the shorter of the remaining facility lease term or the estimated useful life of the improvements. Depreciation expense was $2.1 million, $2.0 million and $1.6 million in 2002, 2001 and 2000, respectively.

In 2002 and 2001, the Company entered into technology license agreements including non-cancelable minimum payments. The present value of payments under these agreements is recorded as an asset and amortized over the term of the agreements as technological feasibility was established for the product that included the technology. Each of these license agreements may be renewed only with the other party’s written consent. The notes receivable are comprised of loans made to the Company’s Chief Operating Officer in 2002 and former Chief Financial Officer in 2000. See Note 15 — Related Party Transactions.

In September 2001, the Company implemented a plan to consolidate its operations and close a facility in Utah. The restructuring action consisted primarily of the termination of approximately 20 positions in engineering, sales, marketing and administration in the Utah location and exiting the related facility. The functions performed in the Utah facility have been combined with the Company’s Chicago, Illinois operations. As a result of the restructuring, the Company recognized a charge of $1.2 million in the third quarter of 2001. The restructuring charge included $694,000 for employee severance, $150,000 for the write-off of intangible assets related to the acquisition of ThoughtStar, $93,000 for the write-off of certain property and equipment and $257,000 related to facility closing costs. There is no remaining restructuring charge accrued at December 31, 2002.

As of December 31, 2002, the Company had a line of credit agreement with a bank comprised of a revolving line of credit and an equipment line of credit. The line of credit agreement, which is collateralized by substantially all of the Company’s assets, intangible assets and intellectual property, includes covenant restrictions requiring the Company to maintain certain minimum profitability levels and limits the Company’s ability to declare and pay dividends.

The revolving line of credit provides for borrowings of up to $4.0 million, which bears interest at the bank’s prime rate plus 0.50%. Borrowings are limited to $4.0 million minus the amount outstanding under the revolving line of credit and outstanding letters of credit; $202,000 was available at December 31, 2002. At December 31, 2002, the Company had outstanding $3.4 million of borrowings against this facility.

The equipment line of credit, which bears interest at the greater of the prime plus 0.50% or 4.75%, provides for borrowings of up to $6.0 million to finance the purchase of property and equipment. At December 31, 2002 and 2001, amounts outstanding under the equipment line of credit totaled $2.4 million and $2.7 million, respectively. Principal repayment began in March 2000 and will continue through December 2005 in monthly installments of principal and interest. In December 2002, the Company borrowed an additional $1.3 million against this facility. The Company repaid $1.6 million and $1.0 million of principal in 2002 and 2001, respectively, and, at December 31, 2002, $3.6 million was available.

The interest expense was $136,000, $254,000 and $260,000 in 2002, 2001 and 2000, respectively. Cash paid for interest was $149,000, $243,000 and $260,000 in 2002, 2001 and 2000, respectively.

Principal payments due under these line of credit facilities as of December 31, 2002 are as follows (in thousands):

The Company leases its main office facilities in Foster City, California and Chicago, Illinois and various sales offices in the United States and Europe under non-cancelable operating leases, which expire in September 2008 for the Foster City facility and April 2009 for the Chicago facility. Rent expense for 2002, 2001 and 2000 was $1.8 million, $1.6 million and $1.1 million, respectively.

Future minimum lease payments under operating leases as of December 31, 2002 were as follows (in thousands):

The Company has outstanding standby letters of credit totaling $348,000 from a financial institution, in lieu of security deposits for the lease of its main office facilities. No amounts have been drawn against the letter of credit.

While the Company believe that the allegations against its officers/ directors and the Company are without merit, and intend to contest them vigorously, there can be no assurance that these matters will be resolved without costly litigation or in a manner that is not adverse to its consolidated financial position, results of operations or cash flows. No estimate can be made of the possible loss or range of loss associated with the resolution of these matters.

Each share of common stock has the right to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the Board of Directors, subject to the rights of holders of all classes of stock having priority rights as to dividends. No cash dividends have been declared or paid through December 31, 2002.

On July 17, 2002, the Company’s Board of Directors authorized a common stock repurchase program. Under the program, the Company was authorized to repurchase its common shares on the open market from time to time at the discretion of management. The number of shares repurchased and the timing of purchases were based on several factors, including the trading price of the Company’s common stock and general market conditions. The repurchase program was ceased on December 31, 2002. A total of 232,300 shares were repurchased and retired under the program at an aggregate cost of $581,000.

During 2002, the Company issued 38,000 shares of common stock at fair market values of $2.00 to $6.05 per share to an employee for services. On the date of issuance, these shares of common stock had a fair market value of $151,000, which was recorded and expensed as employee stock-based compensation.

The Company preserved the right to repurchase shares from an escrow account based on certain criteria in conjunction with the acquisition of ThoughtStar in 2000. During 2002, the Company reacquired 13,000 shares of common stock at its fair market value of $60,000. The escrow account was settled and dissolved in the first quarter of 2002.

At December 31, 2002, 2001 and 2000, 1,000, 20,000 and 262,000 shares of common stock were subject to the Company’s right of repurchase at the shares’ original issuance price. Weighted average original issuance price per share of these common shares was $0.60, $0.51 and $0.55 at December 31, 2002, 2001 and 2000 respectively. The Company’s right to repurchase these shares lapses ratably over periods through September 2003.

At December 31, 2002, the Company has 2 million authorized shares of preferred stock with a $0.001 par value, of which none were issued and outstanding.

At December 31, 2002, the Company had two stock option plans and an Employee Stock Purchase Plan.

In November 1999, the Company adopted an Employee Stock Purchase Plan (“ESPP”). Under the terms of the ESPP, the maximum aggregate number of shares of common stock that may be issued under the ESPP is 500,000, cumulatively increased on January 1, 2001 and each January 1 thereafter until and including January 1, 2009 by an amount equal to the lesser of (a) two percent (2%) of the issued and outstanding shares of common stock as of the preceding December 31, (b) 500,000 shares or (c) a lesser amount of shares determined by the Board of Directors. During each six-month offering period, employees can choose to have up to 15% of their annual base earnings withheld to purchase the Company’s common stock. The purchase price of the common stock is 85% of the lesser of the fair value as of the beginning or ending of the offering period. A total of 233,000, 157,000 and 69,000 shares of common stock were issued under the ESPP in 2002, 2001 and 2000, respectively, at an average price of $2.82, $4.35 and $8.18 per share in 2002, 2001 and 2000, respectively. At December 31, 2002, 976,000 shares were available for issuance.

The Company has reserved 8,338,610 shares of common stock for issuance under the 1997 Stock Incentive Plan (“1997 Plan”). Automatic annual increases in the shares reserved for issuance occur beginning in 2001 equal to the lesser of 5% of the outstanding common shares of the Company at the last day of the preceding year or a lesser amount as determined by the Board of Directors.

The Board of Directors has the authority to determine to whom options will be granted, the number of shares, the term and exercise price. The options vest and are exercisable at times and increments as specified by the Board of Directors and expire ten years from date of grant. Options granted under the 1997 Plan generally become exercisable 25% one year after the date of the option holder’s date of employment and thereafter ratably over three years.

Under the 1997 Plan, non-employee directors receive an automatic grant of 30,000 options to purchase common shares upon their initial election or re-election to the Board of Directors. Stock option grants to non-employee directors vest over a three-year period.

The Company has reserved 2,150,000 shares of common stock for issuance under the 2000 Non-Officer Stock Option Plan (“2000 Plan”). Options may be granted at the discretion of the Board of Directors to eligible employees and consultants.

The Board of Directors has the authority to determine to whom options will be granted, the number of shares, the term and the exercise price. The exercise price shall generally not be less than 85% of the fair market value of the Company’s stock on the grant date of the option. Options granted under the 2000 Plan generally become exercisable 25% one year after the date of the option holder’s date of employment and thereafter ratably over three years and expire ten years from the date of the grant.

Activity under the Company’s stock option plans is as follows (in thousands, except per share data):

The following table summarizes information about stock options as of December 31, 2002 (option amounts in thousands):

Stock-based compensation charges relate to the following expense classifications in the accompanying consolidated statement of operations (in thousands):

Amortization of stock-based compensation will be reduced in future periods to the extent options are terminated prior to full vesting.

During 2002, 2001 and 2000, the Company issued options to purchase shares of its common stock to certain employees totaling 300,000, 460,000 and 89,000, respectively, under the 1997 Plan and outside the 1997 Plan with weighted average exercise prices of $6.27, $0.70, and $0.01 per share, respectively, which were below the fair value of the Company’s common stock at the date of grant. The weighted average fair value of the underlying common stock was $7.65, $2.88 and $11.00 in 2002, 2001 and 2000, respectively. In accordance with the requirements of APB No. 25, the Company has recorded deferred stock-based compensation for the difference between the exercise price of the stock options and the fair value of the Company’s stock on the date of grant. This deferred compensation is amortized to expense over the period during which the Company’s right to repurchase the stock lapses or options become exercisable, generally four or five years consistent with the method described in FIN No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Awards Plans. At December 31, 2002, the Company had recorded deferred stock-based compensation related to these options in an amount of $12.6 million, of which $612,000, $1.5 million and $2.9 million had been amortized to expense during 2002, 2001 and 2000, respectively.

During 2001, the Company granted options to purchase 28,000 shares of its common stock at exercise prices ranging from $0.01 to $5.09 per share to non-employee engineers for consulting services, when the fair market value of the Company’s common stock ranged from $4.40 to $5.09 per share. These options were fully vested upon grant and were valued at a total of $157,000 using the Black-Scholes pricing model with the following assumptions: 10 year terms, volatility ranging from 102% to 132%, discount rate ranging from 4.97% to 5.11% and 0% dividend rate. This $157,000 was expensed immediately as the options related to services provided prior to the grant date.

Deferred stock-based compensation charges are comprised of the following categories (in thousands):

In August 1999, a non-officer of the Company exercised options to purchase 77,000 common shares in exchange for a full recourse note receivable of $33,000. The note receivable is due in August 2003 and bears interest at 5.37%.

In June 1999, a former officer of the Company exercised options to purchase 180,000 common shares in exchange for a full recourse note receivable of $297,000. The note accrues interest at the rate of 4.9% per year and was due on July 26, 2001. The due date has been extended to September 1, 2003. See Note 15 — Related Party Transactions.

The Company has adopted the disclosure only provisions of SFAS No. 123. Had compensation cost been determined based on the fair value at the grant date for the awards for 2002, 2001 and 2000, the Company’s

net loss and basic and diluted net loss per common share would have been as follows (in thousands, except per share amounts):

As the provisions of SFAS No. 123 have been applied only to stock options granted since the 1997 Plan’s inception, the impact of the pro forma stock-based compensation cost will likely continue to increase, as the vesting period for the Company’s options and the period over which the stock-based compensation is charged to expense is generally four years.

The estimated weighted average value of options granted under the Plan, during 2002, 2001 and 2000 was $3.75, $2.72 and $3.77 per share, respectively. The value of each is estimated on the date of grant using the Black-Scholes option valuation method, with the following weighted-average assumptions:

The estimated weighted-average value of purchase rights granted under the ESPP during 2002, 2001 and 2000 was $1.89, $2.44 and $8.18 per share. The fair value of each stock purchase right granted under the ESPP is estimated using the Black-Scholes option valuation method, with the following weighted-average assumptions:

The aggregate fair value of purchase rights granted in 2002, 2001 and 2000 was $391,000, $332,000 and $729,000, respectively.

The Company sponsors an employee retirement plan intended to qualify under Section 401(k) of the Internal Revenue Code. Eligible employees may contribute up to 20% of eligible compensation, subject to annual limitations, and are fully vested in their own contributions. The Company made matching contributions

of 25% up to the first 6% of the employee’s compensation, which is contributed and vests ratably over a four-year period. Annual amounts contributed by the Company under the plan are $222,000, $180,000 and $141,000 in 2002, 2001 and 2000, respectively.

The individual components of the Company’s deferred tax assets are as follows (in thousands):

The net increases in the valuation allowance for 2002, 2001 and 2000 were $3.7 million, $5.1 million and $1.2 million, respectively.

The principal items accounting for the difference between income tax provision at the U.S. statutory rate and the provision for income taxes reflected in the consolidated statements of operations are as follows:

At December 31, 2002, the Company has net operating loss carryforwards available to reduce future income subject to income taxes for federal and state income tax purposes of approximately $23.7 million and $20.9 million, respectively. Deferred tax assets and the related valuation allowance include approximately $1.1 million related to certain U.S. operating loss carryforwards resulting from the exercise of stock options; the tax benefit, if recognized, will be accounted for as a credit to additional paid-in capital rather than a reduction of income tax expense.

Net operating loss carryforwards expire from 2003 to 2022. In addition, the Company has research and development tax credit carryforwards of approximately $1.5 million for federal income tax purposes and $1.0 million for state income tax purposes at December 31, 2002, which expire from 2013 to 2022.

Pursuant to the provisions of Section 382 of the Internal Revenue Code, utilization of net operating losses is subject to annual limitations due to a greater than 50% change in ownership of the Company which occurred during 1998 and 1999.

Cash paid for income taxes was $82,000, $62,000 and $122,000 in 2002, 2001 and 2000, respectively.

The Company’s Chief Executive Officer is the owner of a consulting company, which subleased space from the Company and provided recruiting services to the Company. In addition, the Company reimbursed the consulting company for certain travel expenses and other services incurred on its behalf and for the use of certain assets. The Company discontinued the sublease and recruiting activities during the third quarter of 2002. Additionally, the Company engaged certain of the consulting company’s consultants to provide software development services. In 2002 and 2001, the charges related to consulting and other service expense were limited to the salary, employer taxes and travel expenses of the related consultant, who was hired by the Company in December of 2002.

Amounts included in net loss which were paid, received or due to or from this related party are as follows (in thousands):

On April 2, 2002, the Company made a loan of $750,000 to its Chief Operating Officer for the purchase of his primary residence. The loan bears interest at 5% per annum and principal and interest are due on the earlier of (i) April 2, 2007, (ii) the date six months following his voluntary resignation or termination for cause or (iii) any event of default under the collateralized note evidencing the loan. If the Chief Operating Officer exercises common stock options and sells the related common stock, 50% of the proceeds of the sale must be applied to the amount due under the loan. The loan is collateralized by (i) the shares or proceeds realized by the Chief Operating Officer upon the exercise of options to purchase the Company’s common stock, and (ii) a second deed of trust on the personal residence of the Chief Operating Officer. As of December 31, 2002, the principal balance of the loan was $641,000 and was included in Other Assets in the Company’s consolidated balance sheet. See Note 7 — Other Assets

On April 5, 2000, the Company made a loan to its former Chief Financial Officer of $1.0 million. The loan bears interest at 5% per annum and principal and interest will become due on the earlier of December 31, 2008 or the date upon which the former Chief Financial Officer will have the ability to sell common stock, subject to Company policy, if applicable, at a price of $20 per share or higher. The loan is collateralized by 165,000 shares of the Company’s common stock currently beneficially owned by the former Chief Financial Officer. As of December 31, 2002, the principal balance of the loan was $1.0 million and was included in Other Assets in the Company’s consolidated financial statements. See Note 7 — Other Assets.

In June 1999, the Company granted its former Vice President of Business Development an option to purchase 180,000 shares of the Company’s common stock at an exercise price of $1.65 per share. In July 1999, the former officer exercised the option in full with funds the Company loaned her under a full recourse promissory note approved by the Board of Directors. The promissory note accrues interest at the rate of 4.9% per year and was due on July 26, 2001. The due date has been extended to September 1, 2003. See Note 12 — Stockholders’ Equity.

The Company’s chief operating decision-maker is considered to be the Chief Executive Officer. The Chief Executive Officer reviews financial information presented for purposes of making operating decisions and assessing financial performance. The financial information is identical to the information presented in the accompanying consolidated statements of operations and the Company had no significant foreign operations through December 31, 2000. For 2002 and 2001, revenues derived from customers outside the United States represented 20% and 9% of total revenues, respectively, and consisted primarily of customers in the United Kingdom. On this basis, the Company is organized and operates in a single segment: the design, development and marketing of software solutions.

At December 31, 2002, no customer accounted for more than 10% of the Company’s accounts receivable balance, while one customer accounted for 16% of the accounts receivable balance at December 31, 2001. No customer accounted for more than 10% of total revenues in 2002, 2001 and 2000.

On March 21, 2003, the Company exercised an option to terminate the lease for its facility in Chicago, Illinois which as a result will expire on April 30, 2004 and entered into a new facilities lease for approximately 39,000 square feet in the Chicago area on March 17, 2003. In connection with the lease termination, the Company incurred a lease termination fee of $986,000, which will be charged to expense in the first quarter of 2003. The new facilities lease commences no later than August 1, 2003, is non-cancelable and expires in 2016. The Company’s research and development, customer support, training and certain sales and marketing personnel are expected to relocate to this new facility in August 2003. The Company expects to charge to expense, upon vacating the facility subject to the terminated lease, the remaining lease payments due under the terminated lease agreement from the date of occupancy of the new facility to April 30, 2004, which is currently estimated to be $650,000. The new lease agreement provides for cash payments from the landlord sufficient to offset the lease termination fee and provides for a period of free rent for the initial 12 months of the lease agreement including operating costs, and an additional 2 months of free rent, excluding operating costs, in each of the second, third and fourth years of the lease agreement. The free rent period and the cash payments from the landlord will reduce rental expenses for the new facility on a ratable basis over the term of the new lease

Future minimum lease payments, including the effects of these transactions are as follows (in thousands):

The Company obtained a $1.0 million standby letter of credit from a financial institution on March 17, 2003, in lieu of security deposits for lease office space. No amounts have been drawn against the letter of credit.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 26, 2003.


	By:	/s/ MAHMOOD M. PANJWANI



	Mahmood M. Panjwani
	President, Chief Executive Officer
	and Chairman of the Board

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Mahmood M. Panjwani and John E. Calonico, Jr., and each or any one of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the 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 connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming our signatures as they may be signed by ours said attorney-in-fact and any and all amendments to this Annual Report on Form 10-K.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons in the capacities and on the dates indicated.

I, Mahmood M. Panjwani, Chief Executive Officer of the registrant, certify that:


	1.	I have reviewed this Annual Report on Form 10-K of iManage, Inc.;

	2.	Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report;

	3.	Based on my knowledge, the consolidated financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report;

	4.	The registrant’s other certifying officer and I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:


	(a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared;

	(b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this Annual Report (the “Evaluation Date”); and

	(c)	presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;


	5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the Audit Committee of the registrant’s Board of Directors (or persons performing the equivalent function):


	(a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


	6.	The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect the internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

I, John E. Calonico, Jr., Chief Financial Officer of the registrant, certify that:


	1.	I have reviewed this Annual Report on Form 10-K of iManage, Inc.;

	2.	Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report;

	3.	Based on my knowledge, the consolidated financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report;

	4.	The registrant’s other certifying officer and I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:


	(a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared;

	(b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this Annual Report (the “Evaluation Date”); and

	(c)	presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;


	5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the Audit Committee of the registrant’s Board of Directors (or persons performing the equivalent function):


	(a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


	6.	The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect the internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


	**	Filed with the Registrant’s Registration Statement on Form S-1 (File No. 333-86353) on September 1, 1999, as amended.


***	Filed with the Registrant’s Report on Form 10-K for the year ended December 31, 2000.


	†	Filed with the Registrant’s Report on Form 10-K for the year ended December 31, 2001 filed on March 29, 2002.


	††	Filed with the Registrant’s Report on Form 10-K/ A for the year ended December 31, 2001 filed on April 30, 2002.


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the year ended December 31, 2002

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Delaware		36-4043595
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


PART I
	Item 1. Business
	Item 2. Properties
	Item 3. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
PART II
	Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters
	Item 6. Selected Consolidated Financial Data
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A. Quantitative and Qualitative Disclosures About Market Risk
	Item 8. Financial Statements and Supplementary Data
	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
	Item 10. Directors and Executive Officers of the Registrant
	Item 11. Executive Compensation
	Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
	Item 13. Certain Relationships and Related Transactions
	Item 14. Controls and Procedures
PART IV
	Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
SIGNATURES
EXHIBITS TO FORM 10-K ANNUAL REPORT
EXHIBIT 10.17
EXHIBIT 10.18
EXHIBIT 21
EXHIBIT 23.1
EXHIBIT 99.1
EXHIBIT 99.2


		Page
		No.

PART I
Item 1.	Business		2
Item 2.	Properties		7
Item 3.	Legal Proceedings		7
Item 4.	Submission of Matters to a Vote of Security Holders		8
PART II
Item 5.	Market for the Registrant’s Common Equity and Related Stockholder Matters		9
Item 6.	Selected Consolidated Financial Data		9
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		33
Item 8.	Financial Statements and Supplementary Data		33
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		35
PART III
Item 10.	Directors and Executive Officers of the Registrant		35
Item 11.	Executive Compensation		35
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		35
Item 13.	Certain Relationships and Related Transactions		35
Item 14.	Controls and Procedures		35
PART IV
Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K		36
Signatures			64
Certifications			65


			Authority
	For		Withheld

Bob L. Corey		18,788,713		30,656


Item 4.	*Submission of Matters to a Vote of Security Holders*


Item 5.	*Market for the Registrant’s Common Equity and Related Stockholder Matters*


		High		Low

Year ended December 31, 2002:
	Fourth quarter	$	3.20	$	1.95
	Third quarter	$	3.00	$	1.75
	Second quarter	$	7.00	$	2.65
	First quarter	$	8.19	$	5.82
Year ended December 31, 2001:
	Fourth quarter	$	7.89	$	3.90
	Third quarter	$	5.43	$	3.70
	Second quarter	$	4.40	$	1.50
	First quarter	$	7.44	$	1.97



		Years Ended December 31,

		2002			2001			2000			1999			1998


		(In thousands, except per share amounts)
Selected Consolidated Statement of Operations Data:
	Total revenues	$	41,326		$	38,862		$	30,008		$	18,570		$	7,741
	Loss from operations		(7,598	)		(21,310	)		(11,611	)		(3,461	)		(2,979	)
	Net loss		(6,664	)		(19,750	)		(9,114	)		(2,775	)		(2,840	)
	Basic and diluted net loss per common share		(0.28	)		(0.85	)		(0.41	)		(0.28	)		(0.38	)
	Shares used in computing basic and diluted net loss per common share		23,988			23,288			22,130			9,988			7,455



		December 31,

		2002		2001		2000		1999		1998


		(In thousands)
Selected Consolidated Balance Sheet Data:
	Cash, cash equivalents and short-term investments	$	38,156	$	33,607	$	35,696	$	51,013	$	7,617
	Working capital		24,274		22,980		31,127		43,843		6,119
	Total assets		57,669		60,858		73,347		63,921		13,495
	Bank lines of credit, less current portion		1,010		1,412		2,345		1,388		—
	Total stockholders’ equity		31,688		36,963		53,737		48,828		7,360


Item 7.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*


	Borrowing		Non Cancelable
	Under Bank		Operating
	Lines of Credit		Leases		Total

2002	$	4,808	$	1,497	$	6,305
2003		666		1,144		1,810
2004		344		1,382		1,726
2005		—		1,424		1,424
2006		—		1,466		1,466
Thereafter		—		7,082		7,082

	$	5,818	$	13,995	$	19,813


	*If we are unable to respond to rapid market changes due to changing technology and evolving industry standards, our future success will be adversely affected.*


	*Our products may lack essential functionality if we are unable to obtain and maintain licenses to third-party software and applications.*


	*Legislative actions, higher insurance cost and potential new accounting pronouncements are likely to impact our future financial position and results of operations.*


Item 3.	*Legal Proceedings*


For	Against		Abstain

18,806,963		10,274		2,132


	*We are the target of several securities class action complaints and other litigation, which could result in substantial costs and divert management attention and resources.*


	If we are unable to protect our intellectual property or become subject to intellectual property infringement claims, we may lose a valuable asset or incur costly and time-consuming litigation.


	*We may be unable to retain our key personnel and attract additional qualified personnel to operate and expand our business.*


	*Our revenues will not increase if we fail to successfully manage our growth and expansion.*


	*We may be unable to meet our future capital requirements, which would limit our ability to grow.*


	*There may be sales of a substantial amount of our common stock in the near future that could cause our stock price to fall.*


Item 7A.	*Quantitative and Qualitative Disclosures About Market Risk*


Item 8.	*Financial Statements and Supplementary Data*



	Three Months Ended

	December 31,			September 30,			June 30,			March 31,
	2002			2002			2002			2002


	(In thousands, except per share amounts)
Total revenues	$	10,338		$	9,591		$	9,620		$	11,777
Gross profit		8,225			7,466			7,410			9,828
Total operating expenses		9,590			10,202			10,371			10,364
Loss from operations		(1,365	)		(2,736	)		(2,961	)		(536	)
Net loss		(1,222	)		(2,479	)		(2,656	)		(307	)
Basic and diluted net loss per common share		(0.05	)		(0.10	)		(0.11	)		(0.01	)
Shares used in computing basic and diluted net loss per common share		24,110			24,161			23,961			23,706


Item 9.	*Changes in and Disagreements with Accountants on Accounting and Financial Disclosure*


Item 10.	*Directors and Executive Officers of the Registrant*


Item 12.	*Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters*


Item 13.	*Certain Relationships and Related Transactions*


Item 15.	*Exhibits, Financial Statement Schedules and Reports on Form 8-K*


	Independent Accountants’ Report

	Consolidated Financial Statements:


		Balance at		Additions				Balance
		Beginning		Charged to				at End
Description		of Period		Expenses		Write-offs		of Period


		(In thousands)
Allowance for doubtful accounts:
	Year ended December 31, 2002	$	277	$	155	$	110	$	322
	Year ended December 31, 2001	$	248	$	91	$	62	$	277
	Year ended December 31, 2000	$	135	$	164	$	51	$	248
Allowance for sales returns:
	Year ended December 31, 2002	$	142	$	368	$	319	$	191
	Year ended December 31, 2001	$	134	$	483	$	475	$	142
	Year ended December 31, 2000	$	77	$	100	$	43	$	134
Deferred tax valuation allowance:
	Year ended December 31, 2002	$	8,536	$	3,667	$	—	$	12,203
	Year ended December 31, 2001	$	3,403	$	5,133	$	—	$	8,536
	Year ended December 31, 2000	$	2,237	$	1,166	$	—	$	3,403



			Common Stock					Additional			Deferred						Accumulated			Total
								Paid-in			Stock-based			Notes			Comprehensive			Accumulated			Stockholders’
			Shares			Amount		Capital			Compensation			Receivable			Income			Deficit			Equity

Balances, December 31, 1999				21,916		$	22	$	63,863		$	(4,046	)	$	(1,002	)	$	(42	)	$	(9,967	)	$	48,828
Components of comprehensive loss:
	Net loss			—			—		—			—			—			—			(9,114	)		(9,114	)
	Other comprehensive income			—			—		—			—			—			70			—			70

		Comprehensive loss		—			—		—			—			—			—			—			(9,044	)
Exercise of common stock options				322			—		149			—			11			—			—			160
Stock issued for acquisition, net of expenses				1,007			1		10,820			—			—			—			—			10,821
Additional expenses of initial public offering				—			—		(93	)		—			—			—			—			(93	)
Repurchase of common stock				(149	)		—		(134	)		—			—			—			—			(134	)
Stock issued under employee stock purchase plan				69			—		564			—			—			—			—			564
Deferred stock-based compensation				—			—		982			(982	)		—			—			—			—
Amortization of deferred stock-based compensation				—			—		(777	)		2,911			—			—			—			2,134
Cancellation of options upon termination				—			—		(832	)		832			—			—			—			—
Repayment of notes receivable				—			—		—			—			501			—			—			501

Balances, December 31, 2000				23,165			23		74,542			(1,285	)		(490	)		28			(19,081	)		53,737
Components of comprehensive loss:
	Net loss			—			—		—			—			—			—			(19,750	)		(19,750	)
	Other comprehensive income			—			—		—			—			—			108			—			108

		Comprehensive loss		—			—		—			—			—			—			—			(19,642	)
Exercise of common stock options				296			1		363			—			—			—			—			364
Stock issued for acquisition, net of expenses				67			—		255			—			—			—			—			255
Repurchase of common stock				(78	)		—		(33	)		—			—			—			—			(33	)
Stock issued under employee stock purchase plan				157			—		686			—			—			—			—			686
Deferred stock-based compensation				—			—		1,000			(1,000	)		—			—			—			—
Amortization of deferred stock-based compensation				—			—		(249	)		1,541			—			—			—			1,292
Stock options issued in exchange for services				—			—		157			—			—			—			—			157
Deferred compensation related to restructuring				—			—		—			87			—			—			—			87
Cancellation of options upon termination				—			—		(102	)		102			—			—			—			—
Repayment of notes receivable				—			—		—			—			60			—			—			60

Balances, December 31, 2001				23,607			24		76,619			(555	)		(430	)		136			(38,831	)		36,963
Components of comprehensive loss:
	Net loss			—			—		—			—			—			—			(6,664	)		(6,664	)
	Other comprehensive loss			—			—		—			—			—			(114	)		—			(114	)

		Comprehensive loss		—			—		—			—			—			—			—			(6,778	)
Exercise of common stock options				457			—		794			—			—			—			—			794
Stock issued in exchange for services				38			—		151			—			—			—			—			151
Repurchase of common stock				(245	)		—		(641	)		—			—			—			—			(641	)
Stock issued under employee stock purchase plan				233			—		657			—			—			—			—			657
Deferred stock-based compensation				—			—		413			(413	)		—			—			—			—
Amortization of deferred stock-based compensation				—			—		(170	)		612			—			—			—			442
Cancellation of options upon termination				—			—		(50	)		50			—			—			—			—
Repayment of notes receivable				—			—		—			—			100			—			—			100

Balances, December 31, 2002				24,090		$	24	$	77,773		$	(306	)	$	(330	)	$	22		$	(45,495	)	$	31,688


	*Cash, Cash Equivalents and Short- and Long-Term Investments*


	*Impairment of Goodwill, Other Intangible Assets and Long-Lived Assets*


Total purchase price		$	16,961

Assets acquired:
	Purchased technology	$	1,900
	Assembled workforce		400
	Non-compete agreements		400
	Goodwill		14,261

		$	16,961