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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
(No Fee Required)
For the fiscal year ended December 31, 1999
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(No Fee Required)
For the transition period from to
Commission file number 000-27389
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INTERWOVEN, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0523543
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1195 West Fremont Avenue, Suite, 2000, Sunnyvale, CA 94087
(408) 774-2000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value;
Preferred Share Purchase Rights, $0.001 par value;
Registered on the NASDAQ National Market
(Title of Class)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 22, 2000 was approximately $1,923,273,917 (based on the
last reported sale price of $139.625 on March 22, 2000 on the NASDAQ Stock
Market).
The number of shares of Common Stock outstanding as of March 22, 2000 was
23,901,589.
DOCUMENTS INCORPORATED BY REFERENCE
Document Form 10-K Reference
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Proxy Statement for Registrant's 2000 Annual Part III, Items 10-13
Meeting of Stockholders
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INTERWOVEN, INC.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1. Business....................................................... 3
Item 2. Properties..................................................... 15
Item 3. Legal Proceedings.............................................. 15
Item 4. Submission Of Matters To A Vote Of Security Holders............ 15
Item 4a. Officers Of The Registrant..................................... 15
PART II
Item 5. Market For Registrant's Common Stock And Related Stockholder
Matters........................................................ 18
Item 6. Selected Financial Data........................................ 20
Item 7. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations.......................................... 20
Item 7A. Quantitative And Qualitative Disclosures About Market Risk..... 33
Item 8. Financial Statements And Supplementary Data.................... 34
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............. 36
Item 11. Executive Compensation......................................... 36
Item 12. Security Ownership Of Certain Beneficial Owners And
Management..................................................... 36
Item 13. Certain Relationships And Related Transactions................. 36
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules And
Reports On Form 8-K............................................ 37
Exhibit Index.................................................. 37
Signatures..................................................... 40
Financial Statements........................................... 41
Financial Statements Schedule.................................. 41
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PART I
ITEM 1. BUSINESS
The discussion in this Form 10-K contains forward-looking statements that
involve risks and uncertainties. The statements contained in this Form 10-K
that are not purely historical are 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
regarding expectations, beliefs, intentions or strategies regarding the future.
All forward-looking statements included in this document are based on the
information available to the Company on the date hereof, and the Company
assumes no obligation to update any such forward-looking statement. Actual
results could differ materially from the results discussed herein. Factors that
might cause or contribute to such differences include, but are not limited to,
those discussed in Factors Affecting Future Results of this document. The
Factors Affecting Future Results set forth in other reports or documents we
file from time to time with the Securities and Exchange Commission, such as the
quarterly reports on Form 10-Q should also be reviewed.
Overview
Interwoven is a provider of software products and services that help
businesses and other organizations manage the information that makes up the
content of their web sites. In the Internet industry this is often referred to
as "web content management." Our flagship software product, TeamSite, is
designed to help customers develop, maintain and extend large web sites that
are essential to their businesses. TeamSite incorporates widely accepted
Internet industry standards and is designed with an open architecture that
allows it to support a wide variety of web authoring tools and web application
servers. Using TeamSite, our customers can manage web content, control the
versions of their web sites, manage web site contribution and content approval
processes, and develop eBusiness applications. TeamSite allows large numbers of
contributors across an enterprise to add web content in a carefully-managed
process. In addition, our OpenDeploy product allows customers to automate the
distribution of web content across multiple web sites. By using our products,
businesses can accelerate their time-to-web, lower web operating costs,
establish a differentiated presence on the web and attract and retain
customers. Currently, we have licensed our software products to 175 customers
operating in a broad range of industries. Our customers include AltaVista,
AT&T/TCI, BellSouth, Best Buy, Cisco Systems, eBay, E*Trade, FedEx, Gap,
General Electric, the U.S. Department of Education, USWeb/CKS,
Viacom/Nickelodeon and Yahoo!/GeoCities.
Industry Background
The use of the Internet to communicate and conduct business is increasing
rapidly. Companies are accelerating their movement to the Internet to
capitalize on new business opportunities, reach broader consumer audiences and
reduce operational costs. Forrester Research estimates that the business-to-
consumer Internet commerce market in the U.S. will grow from $7.8 billion in
1998 to $108.0 billion in 2003. In addition, Forrester Research estimates that
the business-to-business Internet commerce market in the U.S. will grow from
$43.1 billion in 1998 to $1.3 trillion in 2003. In this Form 10-K we refer to
business-to-business and business-to-consumer Internet commerce as "e-
commerce."
Migrating to the Web. As leading companies demonstrate revenue growth and
achieve competitive advantage by using the Internet, chief executives and other
senior corporate decision makers are realizing that eBusiness initiatives are
critical for the success of their businesses. As a result, many companies are
developing eBusiness applications to enable them to market and sell products
and services to consumers online, offer web-based customer self-service
programs, implement business-to-business supply chain management solutions, and
migrate other operational functions online. IDC estimates that spending on
software applications and services for Internet commerce will grow from $7.8
billion in 1998 to $53.8 billion in 2002. In this prospectus we refer to the
use of the Internet to conduct business generally as "Internet commerce" or
"eBusiness."
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Moving Online Successfully. To compete online and to capitalize on Internet
revenue opportunities, businesses must rapidly build a differentiated presence
on the web and must continuously maintain and extend that presence. Since
first-mover advantage is amplified on the web, companies must deploy high
quality eBusiness applications quickly to create an online brand and establish
a loyal base of customers. Accelerating the time required to develop and deploy
eBusiness applications, or time-to-web, is essential to attracting customers
and generating revenue opportunities. In addition, to retain customers, a
company must differentiate its web site from competing sites by offering rich,
accurate and relevant content. Once customers discover value in a web site,
they may be less likely to visit competing web sites. Web site reliability is
also important, since customers are only a click away from competitors' sites
and may lose patience with an incomplete or non-functioning web site. Moreover,
poor quality web sites can easily damage a business' online brand.
Evolving Web Sites. As a result of this competitive environment and the
available online business opportunities, web sites have rapidly evolved from
simple online corporate brochures to complex online storefronts. Early web
sites contained relatively limited content, consisting primarily of static text
and simple graphics. This content was infrequently updated and web sites
required only a few developers to build and maintain them. Today, companies are
seeking to differentiate their online presence and to become leaders on the
Internet by transforming their businesses through sophisticated eBusinesses
applications featuring content-rich web sites. In many cases, the content on
these web sites must be updated on a daily or hourly basis to meet consumer
expectations and to exploit emerging business opportunities. For example, a
large online retailer may need to showcase tens of thousands of products
through the use of graphic images and product descriptions. All of this
information must be continuously refreshed as products are introduced or
discontinued and as descriptive product information is revised. As the volume
of web content has grown and sophisticated eBusiness applications have emerged,
the responsibility for the development and management of web content has
shifted from a few developers in small web teams to many contributors working
in different departments across the enterprise. Furthermore, the large number
of web authoring tools and web application servers required by these
applications have contributed to the increasing technological complexity
involved in developing these web sites.
Managing Web Content. Web content, such as high-resolution graphics, audio
segments, video clips, hyperlinked text and executable software, is the basis
for every web page and most eBusiness applications. IDC estimates that the
number of web pages will grow from 925 million in 1998 to 13.1 billion in 2003.
In addition, complex eBusiness initiatives may contain hundreds of thousands of
web pages. This dramatic growth in content has created a strong need for
solutions to content management problems. These solutions must be highly
automated to accommodate the volume, complexity and variability of this web
content. In addition, these solutions must leverage existing investments in
information technology, be highly scalable, and enable participation by
increasing numbers of content contributors. IDC estimates that one of the
markets in which we participate, which IDC refers to as the "web development
life-cycle management software" market, will grow from $76.4 million in 1998 to
$1.6 billion in 2003.
Market Opportunity. Until recently, businesses have attempted to satisfy
their web content management needs largely through in-house solutions. In-house
solutions can be expensive and difficult to maintain, which can increase the
risk of delaying the launch of important eBusiness initiatives. For example,
in-house solutions may need to be extensively re-engineered each time a new web
authoring tool or eBusiness application is introduced. Other businesses have
used third-party solutions, typically turning to either workgroup software or
web publishing software. Workgroup software is generally designed to enable
small groups of developers to manage relatively simple web sites. They
generally do not scale to support large numbers of contributors or the
increasing complexity and volume of web content. Using workgroup software may
impair a company's ability to deliver up-to-date and accurate web content. Web
publishing software is generally designed only to collect and display
information on a web site, and because it is often proprietary, does not
accommodate many popular web authoring tools or web application servers. In
addition, other third-party solutions do not allow large numbers of
contributors to add content to a web site, do not allow web teams to work on
applications simultaneously, and do not integrate new web technologies easily,
thereby slowing the deployment of eBusiness initiatives.
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With the proliferation of eBusiness initiatives, the need has emerged for a
common infrastructure, or "platform," that can enable large and diverse groups
of content contributors, accommodate popular web authoring tools, and integrate
to leading web application servers. An open architecture for such a platform
enables customers to leverage their existing investments in information
technology and facilitates rapid adoption of new web technologies and
standards.
The Interwoven Solution
Interwoven provides web content management software that serves as a
platform from which its customers may develop multiple eBusiness applications.
Our software products are specifically designed to help our customers rapidly
and efficiently build, maintain and extend large web sites and eBusiness
initiatives that are essential to their businesses.
A multi-layer graphical representation of web software positioning from
development to delivery. The top layer consists of four boxes. The box on the
far left reads "Customer Relationship Management." The next box to the right
reads "Electronic Commerce." The next box to the right reads "Knowledge
Management." The next box to the right reads "Global Supply Chain." The layer
immediately below the top layer reads "Web Application Servers." The next layer
down contains the Interwoven logo and reads "Deploy," "QA" and "Develop" and a
description to the left of the layer reads "Content Management." The next layer
down reads "Web Authoring Tools." The bottom layer consists of three boxes. The
box on the far left reads "Non-Technical Contributors." The next box to the
right reads "Business Contributors." The next box to the right reads "Technical
Contributors."
Our products offer customers the following primary benefits:
Accelerate eBusiness Revenue Opportunities. Our products enable customers to
migrate their businesses to the web rapidly, thereby increasing their ability
to generate more revenues and compete more effectively. Today, the volume and
complexity of web content and the number of eBusiness applications continue to
grow so rapidly that it can be difficult for businesses to meet their web site
development schedules. Our products enable customers to develop and deploy
multiple eBusiness applications simultaneously. This approach allows companies
to complete their eBusiness initiatives more rapidly. In addition, our products
allow content contributors to perform quality assurance functions on content
modifications, which significantly reduces testing time.
Reduce Cost of Web Operations. Complex web sites can consist of up to
hundreds of thousands of pages containing both static and dynamic content
supplied by departments throughout the enterprise. As a result, these sites can
be expensive to deploy and manage. Our products lower the costs of web
operations primarily by reducing the dependency on specialized web development
personnel and by improving operating efficiency through automation of workflow
processes, such as task assignment, routing, and approval. Automated workflow
processes can reduce the time required to assemble, test and validate new web
content. In addition, our products support evolving web standards and our open
architecture is compatible with third-party web authoring tools and web
application servers. As a result, businesses can productively leverage their
existing information technology infrastructure.
Create Highly Differentiated Web Sites. To attract and retain online
customers, today's leading web sites continuously enhance their users' online
experience. Businesses seek to achieve this by introducing new web technologies
and refreshing content frequently. The open architecture of our products
facilitates rapid integration of new web technologies and simultaneous
development of multiple eBusiness applications, such as global supply chain
management, customer relationship management, knowledge management and e-
commerce applications. In addition, our products are highly scalable,
permitting the collaborative efforts of hundreds of contributors to be
coordinated as the need arises.
Improve Web Site Quality. Protecting brand and image online has become
critical for companies doing business on the Internet. Non-functioning or poor
quality sites can significantly harm a business' online brand.
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With TeamSite, companies can create reliable, high-quality web sites. TeamSite
enables our customers to conduct comprehensive testing of the entire web site
as it is built, updated or extended. In addition, TeamSite promotes individual
accountability, and faster and more accurate authoring, by enabling all web
developers and content contributors to control their own portion of the quality
assurance and test process. This improves a site's overall quality. By using
sophisticated workflow processes to maintain quality control, TeamSite also
ensures that no unauthorized or unapproved content or application is deployed
to the customer's site.
The Interwoven Strategy
Our goal is to establish our software as the platform of choice for web
content management across the enterprise. To achieve this goal, we intend to
pursue the following key strategies:
Establish Position as a Leading Provider of Content Management Software
Products. We intend to establish our leadership in content management solutions
by continuing to offer comprehensive, easy-to-use software products. Our
feature-rich products address our customers' complete eBusiness life-cycle
needs as they build, maintain and extend their web sites. We intend to extend
that leadership position by introducing enhanced web content management
products that assist our customers in accelerating their eBusiness initiatives,
and aggressively increasing our sales and marketing efforts.
Become the Preferred Web Development Platform for Industry-Leading Internet
Technology Vendors. We intend to increase demand for our products among the
customers of industry-leading Internet technology vendors. We intend to do so
by providing a robust web development platform to complement their own
eBusiness production applications. Unlike existing closed-architecture, or
proprietary products, our products are designed to integrate easily with the
products of industry-leading technology providers. This is attractive to
Internet technology vendors because it expands their markets and eliminates
costly integration and customization. We intend to continue to strengthen our
existing relationships with vendors such as Art Technology Group, Bluestone,
BroadVision, IBM, InterWorld, Microsoft and Netscape. We also intend to enter
into additional relationships with other leading technology providers,
including additional reseller relationships. We believe our products can become
widely adopted as a standard web development platform across Internet
technology vendors.
Expand Relationships with Systems Integrators and Internet Professional
Services Firms. We have begun establishing relationships with leading systems
integrators, such as Andersen Consulting and KPMG, and Internet professional
services firms, such as USWeb/CKS and iXL. These firms provide consulting
services to assist their clients in designing and developing eBusiness
applications. Our existing relationships with the leading systems integrators
and Internet professional services firms have allowed us to expand our market
reach and increase our access to senior decision makers. These firms have
significant influence on a customer's technology selection, and their
recommendations represent significant endorsements. We intend to continue to
expand and build additional relationships with key systems integrators and
Internet professional services firms.
Extend our Technology Leadership Through Adherence to Industry
Standards. Our products integrate easily and cost-effectively with web
authoring tools and web application servers offered by other Internet
technology vendors. In addition, our products have been designed to meet the
demanding openness and scalability required of Internet software products. Our
open architecture supports web authoring tools and web application servers that
adhere to industry standards. The scalability of our products allows customers
to manage hundreds of thousands of computer files that contain web content and
enables hundreds of employees throughout the enterprise to contribute web
content. We intend to continue to invest significantly in research and
development to increase the functionality of our products while adopting
industry standards. We also intend to continue to participate actively in the
promotion of industry standards, such as XML.
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Increase International Sales. As the Internet adoption rate accelerates
overseas, we believe that significant international market demand will exist
for content management solutions, especially in Europe and Asia. We intend to
devote significant resources to penetrate international markets. To that end,
we have begun expanding our overseas direct and indirect sales channels and our
international marketing presence. We have recently opened an office in
Australia and the United Kingdom, and intend to open additional offices in
Europe and the Pacific Rim during the next twelve months.
Products and Services
Our product line consists of TeamSite, our web content management product,
and OpenDeploy, our web content replication and syndication product. We
generally license our products on a per-server and per-user basis and
occasionally on an enterprise or site license basis. We also provide services,
including professional services, maintenance and support.
The following table highlights the features of our products:
Product Description Server Platforms
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Server-based content management
TeamSite 4.2 application . Sun Solaris
. allows numerous developers and . Windows NT
contributors to add content to
a web site
. interoperates with leading web
authoring tools and web
application servers
. SmartContext Editing allows
direct edits to web site
content through a simple
browser interface
. supports simultaneous eBusiness
application development and
deployment
. offers real-time testing
capability and sophisticated
workflow processes
. offers comprehensive file
versioning and whole-site
versioning
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Server-based content templating
TeamSite application . Sun Solaris
. allows content contribution
Templating using standard templates . Windows NT
. promotes participation from
non-technical contributors
. allows contribution through
standard web browsers
. optional software module
licensed with TeamSite
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TeamSite Reporting and auditing application . Sun Solaris
. allows administrators to
Global Report monitor system activity . Windows NT
Center . delivers sophisticated
reporting and auditing
functionality
. optional software module
licensed with TeamSite
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Content replication and
OpenDeploy 4.2.0 distribution application . Sun Solaris
. transfers content among . Windows NT
multiple web servers
simultaneously . IBM AIX
. enables automated scheduling of . Silicon Graphics IRIX
web site updates
. ensures conformity of web site .Linux
roll-out
. offers secure and transactional
content deployment over the
Internet
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TeamSite--Content Management
Our flagship product, TeamSite, is a software product that is designed to
develop, maintain and extend large web sites.
Web Content Management. TeamSite is designed to version, manage and control
all web content. It supports parallel, distributed content contribution across
the enterprise. TeamSite allows large numbers of contributors across an
enterprise to add web content in a carefully-managed process. TeamSite is
compatible with leading web authoring tools and web application servers,
allowing businesses to leverage existing investments in information technology
systems, content and expertise. This enables a faster time-to-web for eBusiness
initiatives. TeamSite captures and stores the history of all modifications to
the web content. These content histories, or versions, are managed and tracked
for individual web files and for whole web sites.
Workflow. TeamSite is designed for a diverse group of users, including non-
technical and technical users, participating in building and contributing
content to the web site operations. To facilitate the management of these web
content contributors, TeamSite automates workflow processes such as task
assignment, resource scheduling, content routing, content approval and web site
release.
Web Application Development. TeamSite provides programmers with a software
development system that accommodates their choice of software development
tools. TeamSite's computer file versioning features allow programmers to track
software code modifications. Using TeamSite, programmers can reduce the time
required to build, install and test the developed software code by working in a
copy of the running web site.
The architecture of TeamSite enables businesses to implement it without
making significant changes to their existing web content or systems
architecture, resulting in rapid implementation. Additionally, TeamSite's open
architecture allows customers to use their preferred web content authoring
software, web application servers and other web-based technologies. TeamSite
currently operates on Sun Solaris and Microsoft Windows NT operating systems.
TeamSite was first shipped in May 1997. We first shipped the current version of
TeamSite, TeamSite 4.0, in October 1999.
We also license optional software modules with TeamSite that extend its
functionality. TeamSite Templating allows web content to be contributed using
customer-defined templates, thereby eliminating the need for contributors to be
familiar with HTML or client-side applications. TeamSite Global Report Center
enables TeamSite administrators to generate reports on web operations activity.
OpenDeploy--Content Replication and Syndication
Our OpenDeploy software product transfers web content from development to
production web servers. OpenDeploy allows users automatically and precisely to
distribute the same web content to numerous servers that can be located in one
or multiple sites. This "synchronizes" web content so that regardless of which
server your request for a web page reaches, you view the same content. By
automating this process, businesses can maximize the availability of their web
sites and minimize the time required for users to access content offered by
those sites. Customers using OpenDeploy can also automate the scheduled
deployment of content. We believe that OpenDeploy provides the most effective
method for distribution and integration of dynamic content across web sites.
OpenDeploy is typically licensed with TeamSite by our customers, but it may
be used on a stand-alone basis. OpenDeploy encrypts content for secure transfer
over TCP/IP. The version of OpenDeploy shipped within the United States uses
128-bit SSL encryption. Due to U.S. export regulations, the international
version does not utilize encryption. OpenDeploy operates on Sun Solaris,
Microsoft Windows NT, IBM AIX and Silicon Graphics IRIX, and Linux operating
systems. We first shipped OpenDeploy in January 1998. The current version of
OpenDeploy 3.1.2, was first shipped in November 1999.
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Interwoven Services
Our services organization consists of 60 professional employees who utilize
a comprehensive methodology to deliver our web content management products to
our customers. These services professionals may configure each solution they
deliver to meet the specific needs of the customer. We sell our services in
conjunction with licenses of our software products. These services include:
. needs analysis and web operations strategy;
. software installation and configuration support;
. project management;
. workflow mapping;
. content and web site release management; and
. education and training.
In addition to professional services, we offer various levels of product
maintenance to our customers. Maintenance services are typically subject to an
annual, renewable contract and are typically priced as a percentage of product
license fees. Customers under maintenance contracts receive technical product
support and product upgrades as they are released throughout the life of the
maintenance contracts.
Technology
We believe that our technology offers our customers and partners a highly-
scalable web content management solution that is implemented through an open
architecture that incorporates widely accepted Internet industry standards and
supports a wide variety of web-based software applications. Our products are
specifically designed for the web. Our customers typically use our technology
as the platform to manage their enterprise-wide web content operations.
Collaboration Through Work Areas, Staging Areas and Editions. TeamSite
provides a virtual work area for each contributor. A virtual work area is a
local, desktop web site representation that appears to a contributor as a
complete, fully-functioning web site. This provides web developers and
contributors the ability to see changes instantaneously in the development
environment as they would appear in the actual production site. This approach
improves quality by promoting individual accountability, allowing web
developers to discover costly bugs and helping web contributors prevent
deployment of inaccurate content to the production site. Users submit revised
content from work areas to a common staging area, a pre-production version of
the web site which consolidates web site changes. After the consolidated
changes in the staging area are approved, the next edition of the production
site can be authorized and deployed. This content management process makes
site-level rollbacks, site recovery and site audits possible.
Content Versioning. TeamSite captures the history of modifications to web
content within each contributors' work area as well as the content within the
common staging area. Our comprehensive content versioning technology allows
customers to record and manage all web content modifications and capture
complete histories of all web files. TeamSite Global Report can then be used to
audit and report on historical changes made to a company's web files and site.
Whole-Site Versioning. An extension of our techniques for content versioning
allows TeamSite to capture editions of the entire web site. As the content for
an edition of an entire web site is approved, a full version of this site can
be captured and recorded providing a complete history of whole site editions.
This provides customers with an effective way to review and roll back to
previous editions of their web sites as necessary for audit, disaster recovery
and compliance requirements.
Concurrent Development. TeamSite supports multiple contributors working on a
single project, and multiple teams working on many projects simultaneously, by
utilizing a technique we refer to as branching. A
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development branch typically consists of many work areas connected to one
staging area. Branches, for example, might represent a company's intranet and
extranet sites. When required, the content within these independent branches
can be synchronized.
Templating
Our TeamSite Templating module enables non-technical content contributors to
add content through customer-specific style templates, allowing a preferred
look and feel to be leveraged where desired.
Product Features
Open Architecture. Our architecture incorporates widely accepted Internet
industry standards and supports a wide variety of web-based software
applications to integrate into our customers' heterogeneous environments. As a
result, TeamSite also integrates with commercially available content web
authoring tools and web application servers that adhere to industry standards.
This allows our customers' content contributors to use their favorite web
authoring software. For example, a graphics designer may use Adobe Photoshop, a
layout expert may use Macromedia Dreamweaver, and a non-technical contributor
may use Microsoft Office 2000, to add content to a site. In addition,
TeamSite's browser interface has been developed primarily in Java and
JavaScript.
Project Management and Workflow. TeamSite allows customers to manage web
development tasks through automated workflow processes, such as task
assignment, resource scheduling, routing and approval. This enables TeamSite
users to build, enforce and automate the business processes necessary to
maintain high-quality web sites.
Ease of Use. Our SmartContext Editing feature provides non-technical users
with a simple and efficient interface for contributing content as they browse
through the web site. With SmartContext Editing, non-technical contributors are
only required to be familiar with a web browser. For web sites with many
content contributors, TeamSite offers an easy to use, sophisticated technique
for tracking multiple content changes and merging them to a single file.
Deployment and Content Syndication. OpenDeploy allows customers to deploy
content to numerous web sites through a single transaction to ensure consistent
site roll-outs. In addition, it can be used to deploy and run application
programs automatically as well as to replicate content from relational
databases. OpenDeploy can also be used in an encrypted mode for the secure
deployment of content over the Internet.
Scalability, Performance and Availability
Scalability and Performance. TeamSite uses a multi-threaded approach to
promote faster server performance through parallel software code execution. It
also uses C++ and object-oriented programming to promote scalability and
performance. In addition, OpenDeploy can distribute content to a single or to
multiple production web servers simultaneously. This content replication
functionality meets the requirements for the most demanding web sites that are
often located on geographically dispersed servers.
Availability. Our design also promotes reliability and availability by
allowing customers to employ their normal data backup and recovery tools. In
addition, critical data is duplicated, providing the necessary redundancy for
data recovery to minimize the potential for data loss.
Industry Standards
Open to All Files, Tools and Applications. Unlike proprietary, closed
implementations, our products have been developed to accommodate industry
leading Internet technologies, such as XML and Java, and other
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evolving industry standards. The TeamSite server presents its content through
popular file management systems such as Unix Network File System and Microsoft
Windows Network File System.
eXtensible Markup Language. XML provides customers the ability to integrate
new applications and data with other XML-compliant technologies and legacy
applications. Together with companies such as Microsoft and IBM, we are a
sponsoring member of OASIS, an industry association promoting XML standards.
Our products use and support XML, and promote XML for data and content
exchange.
Customers
Our products and services are marketed and sold to a diverse group of
customers operating in a broad range of industries. Our customers include both
established companies migrating their operations online and new companies
formed specifically to deliver products and services over the Internet. These
customers typically consider the web and their web operations to be critical to
their future success.
As of December 31, 1999, 175 companies had licensed our products. In 1999,
no customer accounted for ten percent or more of our total revenues. The
following table is a representative list of our customers. Each of these
customers had purchased more than $100,000 in licenses and services from us.
Technology Telecommunications/Utilities Retail
AIM Technology Alltel Asimba
AltaVista AT&T/TCI Asset Depot.com
Ascend/Lucent Azurix Best Buy
Canon Computer Systems BellSouth Birthday Express.com
Cisco Systems Interpath Bizbuyer
Consensus Pennyslvania Power & Light Brandwise.com
Doublebill.com Salt River Project eBay
Electronic Arts Sempra Energy eBookers.com
Hitachi Gap
Honeywell International Consulting Services Learning Curve International
How 2 HQ Lowes
iNextv American Management Systems National Automotive
Intraware Cenquest Parts Association
LookSmart Dahlin, Smith & White Paper Exchange
MicroAge Hewitt Associates Petopia
NCR iXL Petstore.com
Network Associates MacLaren McCan PlanetRx.com
Nortel Networks Opus 360 Royal Caribbean
Novell Origin International Cruises
PMC Sierra Single Source IT Service Master
Storagetek Targetbase Shoplink
Sun Microsystems USWeb/CKS SmallOffice.com
TechRepublic Tesco
Tivoli VitaminShoppe.com
Xerox Walgreens
Yahoo!/GeoCities
11
Financial Services Media/Entertainment Industrial/Transportation
ABN Amro Ancestry.com American Airlines
AG Edwards Ask Jeeves Boeing
AON Service ChipCenter Carlson Companies
FleetBoston Clubmom Clorox
Barclays Global CondeNet FedEx
Block Financial Discovery Online General Electric
Credit Suisse Earthweb Gordon Food Services
First Boston Educational Testing ServicePhoenix Group
Charles Schwab Egreetings United Airlines
Channel Point HearMe.com Whirlpool
Edward Jones & Co Hearst New Media W.W. Grainger
E*TRADE Hungry Minds Yellow Services
Fidelity Investment Lawloop.com Government/Professional
Ford Motor Credit Los Angeles Times American Bar
Frank Russell Loquesa.com Association
John Hancock Mars Music.com Federal Bureau of
Minnesota Life Monster.com Prisons
Sun Bank U.S. Department of
Justice
MTVN-Online
Health myPlay
U.S. Department of
National Public
Baxter Healthcare Radio/Minnesota Education
Blue Cross California Public Radio U.S. Postal Service
Empire Blue Cross and Blue Shield
Netflicks.com
Healthstream PhotoDisc
Kaiser Quokka Sports
PacificCare SmartAge
Principal Life Insurance Sega
Tavolo
Viacom/Nickelodeon
whynotu.com
Technology Vendors and Service Providers
Technology Vendors
To ensure that our products are well integrated with related web
technologies, we work with vendors of web authoring tools and web application
servers. Web authoring tools, such as Macromedia's Dreamweaver, Microsoft's
Office 2000 and Adobe's Photoshop, provide the content that we manage. Web
application servers, such as Akamai's FreeFlow, Art Technology Group's Dynamo,
Bluestone's Sapphire/Web, BroadVision's One-to-One Commerce, IBM's Net.Commerce
and Websphere, Interworld's Commerce Exchange, Intershop's efinity, Microsoft's
SiteServer and net.Genesis' net.Analysis, distribute the content managed by our
software over the Internet. We have developed specific product interfaces for
some of these companies, such as software and service modules for BroadVision
and ATG, and some companies refer customers to us or resell our products.
BroadVision and Bluestone, for example, resell our products.
Service Providers
We work with leading systems integrators, including Andersen Consulting,
Cambridge Technology Partners, Computer Sciences Corporation, EDS, Ernst &
Young, and KPMG, and Internet professional services firms, including
Agency.com, AnswerThink, iXL and USWeb/CKS. Our prospective customers
frequently retain the services of these firms for the delivery and
implementation of eBusiness applications, and these firms
12
may recommend a content management solution as part of the eBusiness
application they deliver. We intend to devote significant resources to develop
these relationships further.
We believe that these relationships with these entities are essential as we
continue to seek to integrate our products with current and future web
technologies and deploy and implement our solution at customer sites. Our
relationships with technology providers and service providers are not binding,
however, and can be terminated by these providers at any time.
Sales and Marketing
To date, we have sold our products and services primarily through our direct
sales force in North America and Europe. As of December 31, 1999, we had 67
professionals in our direct sales force, of which 63 were located in the United
States and 4 were in Europe. We intend to increase the size of our direct sales
force and establish additional sales offices domestically and internationally.
In May 1999, we opened our first international sales office in the United
Kingdom to support the management of direct and indirect sales channels in
Europe.
We are also aggressively developing our indirect sales channel by expanding
our relationships with leading Internet technology vendors, Internet
professional services firms and systems integrators that recommend and, when
appropriate, resell our products. For example, BroadVision and Bluestone
currently resell our products.
We believe that demand is increasing for content management solutions such
as those we sell. We may not be able to expand our sales and marketing staff,
either domestically or internationally, to take advantage of any increase in
demand for those solutions. Our failure to expand our sales and marketing
organization or other distribution channels could materially adversely affect
our business. See "Factors Affecting Future Results--We must attract and retain
qualified personnel, which is particularly difficult for us because we compete
with other Internet-related software companies and are located in the San
Francisco Bay area where competition for personnel is extremely intense."
Research and Development
We invest significantly in research and development to enhance our current
products, and develop new products. Our research and development expenses were
$884,000 in 1997, $1.8 million in 1998 and $4.2 million in 1999. We expect that
we will increase our product development expenditures substantially in the
future. As of December 31, 1999, 36 employees were engaged in research and
development activities and we plan to continue to hire additional engineers to
further our research and development activities. Our business could be harmed
if we were not able to hire and retain the required number of engineers. See
"Factors Affecting Future Results--We must attract and retain qualified
personnel, which is particularly difficult for us because we compete with other
Internet-related software companies and are located in the San Francisco Bay
area where competition for personnel is extremely intense."
We may fail to complete our product development efforts within our
anticipated schedules, and even if completed, the products developed may not
have the features necessary to make them successful in the marketplace. Future
delays or problems in the development or marketing of product enhancements or
new products could harm our business. See "Factors Affecting Future Results--
Difficulties in introducing new products and upgrades in a timely manner will
make market acceptance of our products less likely."
13
Competition
The market for content management solutions is rapidly emerging and is
characterized by intense competition. We expect existing competition and
competition from new market entrants to increase dramatically. A growing number
of companies are vying to provide web content management solutions. In this
market, new products are frequently introduced and existing products are often
enhanced. In addition, new companies, or alliances among existing companies,
may be formed that may rapidly achieve a significant market position.
Potential customers may have developed in-house solutions which might make
it more difficult for us to sell products to them. We compete with third-party
content management solution providers, primarily Vignette, and, to a lesser
extent, with workgroup solutions, and content publishing application providers.
We may face increased competition from these providers in the future. Other
potential competitors include client/server software vendors which are
developing or extending existing products which address our market. In
addition, although we currently partner with a number of companies that provide
complementary products such as web tools, enterprise document repositories and
web servers, they may introduce competitive products in the future. Other large
software companies, such as Microsoft and IBM, may also introduce competitive
products. Many of our existing and potential competitors have greater
technical, marketing and financial resources than we do.
We believe that competitive factors in the web content management industry
include:
. the quality, scalability and reliability of software;
. functionality that enables a broad base of contributors to add and
modify web content;
. interoperability with all leading web authoring tools and web
application servers based on industry standards;
. ability to provide advanced workflow functionality;
. the ability to leverage existing information technology infrastructure;
and
. adherence to emerging industry standards, including XML.
We believe our products compete favorably on each of these factors.
Proprietary Rights and Licensing
Our success depends upon our ability to maintain the proprietary aspects of
our technology and operate without infringing the proprietary rights of others.
We rely on a combination of patent, trademark, trade secret and copyright law,
and contractual restrictions, to protect the proprietary aspects of our
technology. We seek to protect our source code for our software, documentation
and other written materials under trade secret and copyright laws. We currently
do not have any issued United States or foreign patents, but we have applied
for one U.S. patent. It is possible that a patent will not issue from our
currently pending patent application. These legal protections afford only
limited protection for our technology. Our license agreements impose
restrictions on our customers' ability to utilize our software. We also seek to
protect our intellectual property by requiring employees and consultants with
access to our proprietary information to execute confidentiality agreements
with us and by restricting access to our source code. There can be no assurance
that all employees or consultants have signed or could sign these agreements.
Due to rapid technological change, we believe that factors such as the
technological and creative skills of our personnel, new product developments
and enhancements to existing products are equally as important as the various
legal protections of our technology to establishing and maintaining a
technology leadership position.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult and while we are unable to determine the extent to which piracy of
our software exists, software piracy can be expected to be a persistent
problem. Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets, to determine the validity and
scope of the proprietary rights of others or to defend against claims of
infringement or invalidity. However, the laws of many countries do not protect
our proprietary rights to as great an extent as do the laws of the United
States.
14
Any resulting litigation could result in substantial costs and diversion of
resources and could seriously harm our business, operating results and
financial condition. There can be no assurance that our means of protecting our
proprietary rights will be adequate or that our competitors will not
independently develop similar technology. Any failure by us to meaningfully
protect our property could seriously harm our business, operating results and
financial condition.
To date, we have not been notified that our products infringe the
proprietary rights of third parties, but there can be no assurance that third
parties will not claim infringement by us with respect to our current or future
products. We expect that developers of web-based commerce software products
will increasingly be subject to infringement claims as the number of products
and competitors in our industry segment grows and as the functionality of
products in different segments of the software industry increasingly overlaps.
Any claims, with or without merit, could be time-consuming to defend, result in
costly litigation, divert management's attention and resources, cause product
shipment delays or require us to enter into royalty or licensing agreements.
These royalty or licensing agreements, if required, may not be available on
terms acceptable to us or at all. A successful infringement claim against us
and our inability to license the infringed technology or develop or license
technology with comparable functionality could seriously harm our business,
financial condition and operating results. See "Factors Affecting Future
Results--We might not be able to protect and enforce our intellectual property
rights, a loss of which could harm our business."
ITEM 2. PROPERTIES.
Our principal office occupies approximately 40,000 square feet in Sunnyvale,
California, under a lease that expires in August 2003. In addition, we also
lease sales and service offices in the metropolitan areas of Atlanta, Boston,
Chicago, Dallas, London, Los Angeles, New York City, Seattle and Washington,
D.C. We believe that our existing facilities will be adequate for our current
needs.
ITEM 3. LEGAL PROCEEDINGS.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On October 1, 1999, the Company obtained written consents of stockholders to
amend the Company's certificate of incorporation. The proposal received the
following votes:
For Against Abstain Broker Non-Vote
------------- ------------------ ------------------ ------------------
13,198,590 0 0 N/A
ITEM 4A. OFFICERS OF THE REGISTRANT.
The following table presents information regarding our executive officers as
of December 31, 1999.
Name Age Position
---- --- --------
Martin W. Brauns......... 40 President, Chief Executive Officer and Director
David M. Allen........... 41 Vice President and Chief Financial Officer
Michael A. Backlund...... 45 Senior Vice President of Worldwide Sales and
Field Operations
Jeffrey E. Engelmann..... 38 Vice President of Product Marketing and
Technology Partnerships
Jack S. Jia.............. 36 Vice President of Engineering
Jozef Ruck............... 48 Vice President of Corporate and Channels
Marketing
John Van Siclen.......... 43 Vice President of Corporate Development
15
Martin W. Brauns has served as our President, Chief Executive Officer and
member of the Board of Directors since March 1998. Before joining Interwoven,
Mr. Brauns served as President and Chief Operating Officer of Sqribe
Technologies, Inc., a software company from July 1997 to November 1997. From
March 1996 to June 1997, Mr. Brauns served in a number of positions, including
most recently as Vice President of North American Sales, at Informix Software,
Inc., a software company. From 1992 to January 1996, Mr. Brauns served as Vice
President of Worldwide Sales of Adaptec Inc., a hardware and software
manufacturer. Mr. Brauns holds a Bachelor of Science in international business
and a Master of Business Administration from San Jose State University.
David M. Allen has served as our Vice President and Chief Financial Officer
since joining Interwoven in March 1999. Before joining Interwoven, Mr. Allen
served as Vice President and Chief Financial Officer of Object Systems
Integrators, Inc., a telecommunications network management company, from July
1996 to March 1999. From 1985 to July 1996, he served in a number of positions,
including most recently as Vice President and Chief Financial Officer, at
Telecommunications Techniques Corporation, a communications test equipment
manufacturing company. Mr. Allen holds a Bachelor of Science in accounting from
the University of Maryland.
Michael A. Backlund has served as our Senior Vice President of Worldwide
Sales and Field Operations since October 1999. From May 1998 to October 1999,
he served as our Vice President of Worldwide Sales. From January 1997 to May
1998, Mr. Backlund served in a number of positions at Computer Associates
International, a software company, including most recently as Vice President of
Divisional Sales. Prior to joining Interwoven, he was a founder of CMS
Communications, Inc., a telecommunications equipment company, and served in a
number of capacities from August 1986 to December 1996, including most recently
as Vice President of Sales and Marketing. Mr. Backlund holds a Bachelor of Arts
and a Master of Arts in economics from the University of Southern California.
Jeffrey E. Engelmann has served as our Vice President of Product Marketing
and Technology Partnerships since January 2000. From January 1999 through
December 1999, he served as our Vice President of Business Development. Before
joining Interwoven in January 1999, Mr. Engelmann served as Executive
Operations Officer of the Internet division of IBM. From 1991 to December 1997,
he served in a number of development, consulting and sales positions within
IBM, including most recently as Business Unit Executive of eBusiness Solution
Sales. Mr. Engelmann holds a Bachelor of Science in chemical engineering and an
Bachelor of Arts in computer science from the University of Wisconsin at
Madison.
Jack S. Jia has served in a variety of positions, including most recently as
our Vice President of Engineering, since joining Interwoven in January 1997.
Prior to joining Interwoven, Mr. Jia was a founder of V-Max America, Inc., a
computer distribution company, and served as the Chief Executive Officer from
June 1993 to October 1998. From May 1995 to January 1997, he served as a
Project Manager at Silicon Graphics, Inc., a computer systems company, and from
January 1993 to May 1995, he served in a number of senior engineering positions
at Sun Microsystems, Inc., a computer systems company. Mr. Jia holds a Bachelor
of Science in electrical engineering and a Master of Science in computer
science from the Northern Jiao-Tong University, Beijing, a Master of Science in
electrical engineering from Polytechnic University of New York, and a Master of
Business Administration from Santa Clara University.
Jozef Ruck has served as our Vice President of Corporate and Channels
Marketing since January 2000. From March 1999 through December 1999, he served
as our Vice President of Marketing. From April 1997 to April 1999, Mr. Ruck
served in a number of positions at Genesys Telecommunications Laboratories, a
call center software company, including most recently as Vice President of
Customer Marketing. From September 1994 to March 1997, he served in a number of
positions, including most recently as Western Region Sales Director, at Network
Appliance, Inc., a data storage company. Mr. Ruck holds a Bachelor of Science
in mechanical engineering from Oregon State University and a Master of Business
Administration from Santa Clara University.
16
John Van Siclen has served as our Vice President of Corporate Development
since joining Interwoven in December 1999. Before he joined Interwoven, Mr. Van
Siclen served as President and Chief Executive Officer of Perspecta, Inc., a
start-up Internet software company, from February 1997 to November 1999.
Perspecta was acquired by Excite@Home in October 1999. From February 1996 to
February 1997, Mr. Van Siclen served as Vice President, Alternate Channels at
Informix Software, Inc., a database software company. From 1990 through January
1996, Mr. Van Siclen held various sales and marketing management positions,
including, most recently, Vice President of Worldwide Sales and Marketing at
NetFrame Systems, a network systems company. Mr. Van Siclen holds a Bachelor of
Arts in history from Princeton University.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
Price Range of Common Stock
Our common stock has been quoted on the Nasdaq National Market under the
symbol "IWOV" since our initial public offering on October 8, 1999. Before
then, there was no public market for our common stock. The following table
shows, for the periods indicated, the high and low prices per share of our
common stock.
Price
--------------
High Low
------- ------
1999:
Fourth quarter (starting October 8, 1999)................ $177.88 $36.75
As of December 31, 1999, we had approximately 239 stockholders of record.
This does not include the number of persons whose stock is in nominee or
"street name" accounts through brokers.
On March 22, 2000 the closing sale price of the Common Stock was $139.625
per share. On that date, there were 249 holders of record.
Dividends
We have never declared or paid cash dividends on our common stock or other
securities, and we do not anticipate paying a cash dividend in the foreseeable
future. Our lines of credit currently prohibit the payment of dividends.
Use of Proceeds from Sales of Registered Securities.
Our initial public offering of Common Stock was effected through a
registration statement on Form S-1 (Registration No. 333-83779) that was
declared effective by the SEC on October 7, 1999 and pursuant to which we sold
an aggregate of 3,622,500 shares of our Common Stock.
As of December 31,1999, we had used the estimated aggregate net proceeds of
$56.2 million from our initial public offering as follows:
Construction of plant, building and facilities: $ --
Purchase and installation of machinery and equipment: --
Purchases of real estate: --
Acquisition of other businesses: --
Repayment of indebtedness: 1.3 million
Working capital: --
Short-term investments: 38.4 million
Long-term investments: 16.5 million
Other purposes: --
The foregoing amounts represent our best estimate of our use of proceeds for
the period indicated. No such payments were made to our directors or officers
or their associates, holders of 10% or more of any class of our equity
securities or to our affiliates.
Recent Sales of Unregistered Securities
From January 1, 1999 to June 30, 1999, we granted stock options to purchase
1,333,257 shares of our common stock at exercise prices ranging from $0.39 to
$2.25 per share to our employees, consultants, directors,
18
and other service providers under our 1998 Stock Option Plan. During the period
from January 1, 1999 to June 30, 1999, covered by this report, we issued and
sold an aggregate of 858,697 shares of our common stock to employees,
consultants, directors and other service providers at exercise prices ranging
from $0.03 to $2.25 per share under direct issuances or exercises of options
granted under our 1996 Stock Option Plan and 1998 Stock Option Plan. These
securities were not registered under the Securities Act of 1933, as amended
(the Securities Act") in reliance upon the exception provided by Section 4(2)
of the Securities Act and/or Rule 701 promulgated thereunder for transactions
by an issuer not involving a public offering. All shares purchased under our
1996 Stock Option Plan and 1998 Stock Option Plan are subject to our right to
repurchase such shares at their original exercise price. The repurchase feature
generally expires for 25% of the shares after the first year of service then
expires ratably over the next 36 months.
During the period from October 1, 1999 to October 7, 1999, we granted stock
options to purchase 241,238 shares of our common stock at exercise prices
ranging from $11.00 to $17.00 per share to our employees, consultants,
directors, and other service providers under our 1998 Stock Option Plan. During
the period from October 1, 1999 to October 7, 1999, we issued and sold an
aggregate of 125,914 shares of our common stock to employees, consultants,
directors, and other service providers at exercise prices ranging from $0.18 to
$14.00 per share under direct issuances or exercises of options granted under
our 1996 Stock Option Plan and 1998 Stock Option Plan. These securities were
not registered under the Securities Act in reliance upon the exception provided
by Section 4(2) of the Securities Act and/or Rule 701 promulgated thereunder
for transactions by an issuer not involving a public offering. All shares
purchased under our 1996 Stock Option Plan and 1998 Stock Option Plan are
subject to our right to repurchase such shares at their original exercise
price. The repurchase feature generally expires for 25% of the shares after the
first year of service then expires ratably over the next 36 months.
On October 7, 1999, the Company issued to private investors 88,439 and 4,335
shares of Series B Preferred Stock, upon exercise of warrants to purchase
Series B Preferred Stock issued in January 1997, for an aggregate cash
consideration of approximately $113,750 and upon a net exercise, respectively.
These shares of Series B Preferred Stock converted automatically to 62,107 and
3,044 shares of common stock respectively, upon the closing of the Company's
initial public offering on October 14, 1999. These securities were not
registered under the Securities Act in reliance upon the exception provided by
Section 4(2) of the Securities Act and/or Regulation D promulgated thereunder
for transactions by an issuer not involving a public offering.
19
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data is qualified in its
entirety by, and should be read in conjunction with, the Consolidated Financial
Statements of the Company and the Notes thereto and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained elsewhere in this Form 10-K. The selected consolidated financial data
as of and for each of the four years in the period ended December 31, 1999 have
been derived from the audited Consolidated Financial Statements of the Company.
Year Ended December 31,
------------------------------------
1996 1997 1998 1999
------- ------- -------- --------
(in thousands, except per share
amounts)
Consolidated Statement of Operations
Data:
Revenues................................ $ 0 $ 168 $ 4,003 $ 16,806
Gross profit............................ -- 73 2,670 10,049
Total operating expenses................ 520 2,933 9,165 27,065
Loss from operations.................... (520) (2,860) (6,495) (17,016)
Net loss................................ (510) (2,948) (6,344) (15,655)
Net loss per share
Basic and diluted..................... $ (0.22) $ (1.36) $ (2.85) $ (3.79)
Weighted average shares-basic and
diluted.............................. 2,282 2,356 2,633 7,618
Pro forma net loss per share:
Basic and diluted..................... $ (0.74) $ (0.96)
Weighted average shares-basic and
diluted.............................. 8,530 16,334
Year Ended December 31,
------------------------------------
1996 1997 1998 1999
------- ------- -------- --------
(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-
investments............................ $ 17 $ 1,019 $ 9,022 $ 55,648
Working capital......................... (208) 792 8,844 54,413
Total assets............................ 92 1,384 13,908 83,079
Long-term debt and capital lease
obligations, less current portion...... -- 87 1,257 --
Manditorily redeemable convertible
preferred stock........................ 385 4,627 20,464 --
Total shareholders' equity (deficit).... (525) (3,734) (10,752) 75,340
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with "Selected Consolidated Financial
Data" and our Consolidated Financial Statements and Notes appearing elsewhere
in this Form 10-K.
Overview
Interwoven was incorporated in March 1995 to provide software products and
services for web content management. Designed specifically for the web, our
products allow large teams of people across an enterprise to contribute and
edit web content on a collaborative basis, reducing the time-to-web for
critical eBusiness initiatives. From March 1995 through March 1997, we were a
development stage company conducting research and development for our initial
products. In May 1997, we shipped the first version of our principal product,
TeamSite. We have subsequently developed and released enhanced versions of
TeamSite and have introduced related products. As of December 31, 1999, we had
sold our products and services to 175 customers. We market and sell our
products primarily through a direct sales force and augment our sales efforts
through relationships with systems integrators and other strategic partners. We
are headquartered in Sunnyvale,
20
California and maintain additional offices in the metropolitan areas of
Atlanta, Boston, Chicago, Dallas, Los Angeles, New York City, Seattle and
Washington, D.C. Our revenues to date have been derived exclusively from
accounts in North America. In May 1999, we opened an office in the United
Kingdom. We had 205 employees as of December 31, 1999.
We derive revenues from the license of our software products and from
services we provide to our customers. To date, we have derived virtually all of
our license revenues from licenses of TeamSite. License revenues are recognized
when persuasive evidence of an agreement exists, the product has been
delivered, no significant post-delivery obligations remain, the license fee is
fixed or determinable and collection of the fee is probable. Services revenues
consist of professional services and maintenance fees. Professional services
primarily consist of software installation and integration, business process
consulting and training. We generally bill our professional services customers
on a time and materials basis and recognize revenues as the services are
performed. Maintenance agreements are typically priced based on a percentage of
the product license fee, and typically have a one-year term that is renewable
annually. Services provided to customers under maintenance agreements include
technical product support and an unspecified number of product upgrades as
released by us during the term of a maintenance agreement. Revenues from
maintenance support agreements are recognized ratably over the term of the
agreement.
Since inception, we have incurred substantial costs to develop our
technology and products, to recruit and train personnel for our engineering,
sales and marketing and services organizations, and to establish an
administrative organization. As a result, we have incurred net losses in each
quarter since inception and, as of December 31, 1999, had an accumulated
deficit of $26.0 million. We anticipate that our cost of services revenues and
operating expenses will increase substantially in future quarters as we grow
our services organization to support an increased level and expanded number of
services offered, increase our sales and marketing operations, develop new
distribution channels, fund greater levels of research and development, and
improve operational and financial systems. Accordingly, we expect to incur
additional losses for the foreseeable future as we continue to expand our
operations. In addition, our limited operating history makes the prediction of
future results of operations difficult and, accordingly, there can be no
assurance that we will achieve or sustain profitability.
Results of Operations
This report contains forward-looking statements that involve risks and
uncertainties. The statements contained in this report that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding our
expectations, beliefs, intentions or strategies regarding the future. All
forward-looking statements included in this document are based on the
information available to us on the date hereof, and the Company assumes no
obligation to update any such forward-looking statements. The Company's actual
results may differ materially from the results discussed herein. Factors that
might cause such a difference include, but are not limited to, those discussed
in "Factors Affecting Future Results".
21
The following table sets forth, as a percentage of total revenue,
consolidated statement of operations data for the periods indicated.
Year Ended
December 31,
--------------------
1997 1998 1999
------ ---- ----
Revenues:
License................... 50 % 79 % 64 %
Services.................. 50 21 36
------ ---- ----
Total revenues.......... 100 100 100
Cost of revenues:
License................... -- 1 1
Services.................. 57 32 39
------ ---- ----
Total cost of revenues.. 57 33 40
Gross profit................ 43 67 60
Operating expenses:
Research and development.. 526 45 25
Sales and marketing....... 904 120 93
General and
administrative........... 315 43 19
Amortization of deferred
stock-based
compensation............. -- 20 22
Amortization of acquired
intangible assets........ -- -- 2
------ ---- ----
Total operating
expenses............... 1,745 228 161
------ ---- ----
Loss from operations........ (1,702) (161) (101)
Interest and other income
(expense), net............. (52) 4 8
------ ---- ----
Net loss.................... (1,754)% (157)% (93)%
====== ==== ====
Revenue
Years Ended December 31, 1997, 1998 and 1999
Revenues
Total revenues increased from $168,000 in 1997 to $4.0 million in 1998 and
to $16.8 million in 1999, representing increases of 2,283% from 1997 to 1998
and 320% from 1998 to 1999. These increases were attributable to greater market
acceptance of our software products after their introduction in 1997 and an
increase in the number of sales and marketing staff, resulting in an increased
number of customers.
License. License revenues increased from $84,000 in 1997 to $3.2 million in
1998 and to $10.7 million in 1999. This represents increases of 1,790% from
1997 to 1998 and 237% from 1998 to 1999. License revenues represented 50%, 79%
and 64% of total revenues, respectively, in those periods. The increases in
license revenues reflect growth from the low level of revenue in 1997, our
first year in which we licensed our products. The decline in the percentage of
total revenues represented by license revenues from 1998 to 1999 reflects the
more rapid growth of services revenues due to a growing customer base.
Services. Services revenues increased from $84,000 in 1997 to $827,000 in
1998 and to $6.1 million in 1999. This represents increases of 885% from 1997
to 1998 and 638% from 1998 to 1999. Services revenues represented 50%, 21% and
36% of total revenues, respectively, in those periods. The increase in services
revenues from 1998 to 1999 reflects an increase in both professional services
and maintenance fees generated from an expanded number of customers who
licensed our products.
22
Cost of Revenues
License. We had no cost of license revenues in 1997. Cost of license
revenues increased from $59,000 in 1998 to $181,000 in 1999 and represented 2%
of license revenues in both 1998 and 1999, respectively. The increase in cost
of license revenues reflects increased sales of third-party products sold in
conjunction with our software products. Cost of license revenues includes
expenses incurred to manufacture, package and distribute software products and
related documentation, as well as costs of licensing third-party software sold
in conjunction with our software products. The increase in cost of license
revenues, in absolute dollars, reflects increased sales of our product.
Services. Cost of services revenues consists primarily of salary and related
costs of our professional services, training, maintenance and support staffs,
as well as subcontractor expenses. Cost of services revenues increased from
$95,000 in 1997 to $1.3 million in 1998 and to $6.6 million in 1999. Cost of
services revenues represented 113%, 154% and 108% of services revenues,
respectively, in those periods. This increase was due to an increase in
absolute dollars in the number of in-house staff from 3 in 1997 to 11 in 1998
and to 60 in 1999, and a $45,000 increase in subcontractor expenses.
We expect our cost of services revenues to increase in dollar amounts as a
result of the increased staffing of our professional services organization due
to our acquisition of Lexington Software in July 1999 and through our continued
expansion of our services staff and consulting organizations. Since services
revenues have substantially lower margins than license revenues, this expansion
would reduce our gross margins if our license revenues were not to increase
significantly. We expect cost of services revenues as a percentage of services
revenues to vary from period to period depending on the mix of services we
provide, whether the services are performed by our in-house staff or
subcontractors, and on the overall utilization rates of professional services
staff.
Gross Profit
Gross profit increased from $73,000 in 1997 to $2.7 million in 1998 and to
$10.0 million in 1999, representing 43%, 67% and 60% of total revenues,
respectively, in those periods. These increases in absolute dollars reflected
increased license and services revenues from a growing customer base. The
decrease in gross profit percentage was a result of the expansion of our
professional services organization. We have made and will continue to make
investments in our professional services organization to increase the capacity
of that organization to meet the demand for services from our customers. We
expect gross profit as a percentage of total revenues to fluctuate from period
to period as a result of changes in the relative proportions of license and
services revenues.
Operating Expenses
Research and Development. Research and development expenses consist
primarily of personnel and related costs to support product development.
Research and development expenses increased from $884,000 in 1997 to $1.8
million in 1998 and to $4.2 million in 1999. Research and development expenses
represented 526%, 45% and 25% of total revenues in 1997, 1998 and 1999,
respectively. These increases in dollar amounts were primarily due to increases
in the number of product development personnel. We believe that continued
investment in research and development is critical to our strategic objectives,
and we expect that the dollar amounts of research and development expenses will
increase in future periods. To date, all software development costs have been
expensed in the period incurred.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and related costs for sales and marketing personnel, sales
commissions, travel and marketing programs. Sales and marketing expenses
increased from $1.5 million in 1997 to $4.8 million in 1998 and to $15.6
million in 1999. Sales and marketing expenses represented 904%, 120% and 93% of
total revenues in 1997, 1998 and 1999, respectively. The increase in dollar
amounts from 1997 to 1998 reflects increases in sale and marketing personnel
costs of
23
$1.4 million, higher sales commissions and bonuses of $900,000 and increased
marketing related costs of $200,000. The increase in dollar amounts from 1998
to 1999 reflects increases in sale and marketing personnel costs of $4.1
million, higher sales commissions and bonuses of $3.2 million and increased
marketing related costs of $652,000. We expect to continue to invest heavily in
sales and marketing in order to expand our customer base and increase brand
awareness. We also anticipate that sales and marketing expenses as a percentage
of total revenues will fluctuate from period to period depending primarily on
when we hire new sales personnel, the timing of new marketing programs and the
levels of revenues in each period.
General and Administrative. General and administrative expenses consist
primarily of salaries and related costs for accounting, human resources, legal
and other administrative functions, as well as provisions for doubtful
accounts. General and administrative expenses increased from $530,000 in 1997
to $1.7 million in 1998 and to $3.2 million in 1999, representing 315%, 43% and
20% of total revenues in 1997, 1998 and 1999, respectively. This increase in
dollar amounts reflects additional staffing of these functions to support
expanded operations during this same period. We expect general and
administrative expenses to increase in dollar amounts as we add personnel to
support expanding operations, incur additional costs related to the growth of
our business, and assume the reporting requirements of a public company.
Amortization of Deferred Stock-Based Compensation. In 1998 and 1999, we
recorded deferred stock-based compensation of $1.9 million and $7.3 million in
connection with stock options granted during 1998 and 1999, respectively. These
amounts represent the difference between the exercise price of stock options
granted during those periods and the deemed fair value of our common stock at
the time of the grants. Amortization of deferred stock-based compensation was
$812,000 and $3.7 million for 1998 and 1999, respectively. We expect per
quarter amortization related to these options of approximately $500,000 and
$750,000 during 2000, between $270,000 and $400,000 during 2001, between
$100,000 and $185,000 during 2002 and $50,000 in the quarter ended March 31,
2003.
Amortization of Acquired Intangible Assets. In July of 1999, we recorded
intangible assets of approximately $800,000 in connection with the acquisition
of Lexington Software. Goodwill related to this transaction approximated
$300,000 and intangible assets related to the workforce of Lexington Software
approximated $500,000 of the purchase price. The total purchase price for this
acquisition was approximately $800,000. The purchase price was allocated to the
tangible and intangible assets acquired and liabilities assumed based upon
their respective fair values at the acquisition date. Amortization of acquired
intangible assets was $377,000 for the year ended December 31, 1999.
Interest and Other Income (Expense), Net
Interest and other income (expense), net, increased from a net interest
expense of $88,000 in 1997 to a net interest income of $151,000 in 1998 and to
a net interest income of $1.4 million in 1999. The increase from 1997 to 1998
was due to increased interest income earned from cash balances on hand as a
result of sales of our preferred stock in March, October, November and December
1998, partially offset by interest expense during the current year. The
increase from 1998 to 1999 was due to increased interest income earned from
cash balances on hand as a result of the sale of our preferred stock in June
1999 and our Initial Public Offering in October of 1999, partially offset by
increased interest expense.
Income Taxes
As of December 31, 1999, we had approximately $16.9 million of federal and
$9.7 million of state net operating loss carryforwards available to reduce
future taxable income. These net operating loss carryforwards begin to expire
in 2010 and 2003 for federal and state tax purposes, respectively. Under the
Tax Reform Act of 1986, the amounts of and benefits from net operating loss
carryforwards may be impaired or limited. Events which cause limitation in the
amount of net operating losses that we may utilize in any one year include, but
are not limited to, a cumulative ownership change of more than 50%, as defined,
over a three year period. We have provided a full valuation allowance on the
deferred tax asset because of the uncertainty regarding its
24
realization. Our accounting for deferred taxes under Statement of Financial
Accounting Standards No. 109 involves the evaluation of a number of factors
concerning the realizability of our deferred tax assets. In concluding that a
full valuation allowance was required, management primarily considered factors
such as our history of operating losses and expected future losses and the
nature of our deferred tax assets. See Note 6 of Notes to Consolidated
Financial Statements.
Liquidity and Capital Resources
In October 1999, we completed the initial public offering of our common
stock and realized net proceeds from the offering of approximately $56.2
million. Before our initial public offering, we funded our operations through
private sales of equity securities. We raised a total of $37.0 million, net of
offering costs, from the issuance of preferred stock. At December 31, 1999, our
sources of liquidity consisted of $72.1 million in cash, cash equivalents and
investments and $54.4 million in working capital. We have a $3.0 million line
of credit with Silicon Valley Bank, which bears interest at the bank's prime
rate, which was 7.75% at December 31, 1999, plus 0.25%. At December 31, 1999,
the line of credit was unused. The lines of credit are secured by all of our
tangible and intangible assets, and contain financial covenants including; a
quick asset ratio, excluding deferred maintenance revenue, of at least 2:1; a
liquidity ratio of unrestricted cash plus 80% of eligible accounts receivable
minus outstanding advances divided by loans outstanding of not less than 1.5:1;
and a covenant that quarterly net losses will not exceed a threshold based on
projected annual revenues. We intend to maintain the line of credit. We are
currently in compliance with all related financial covenants and restrictions.
Net cash used in operating activities was $2.7 million in 1997, $6.0 million
in 1998 and $9.7 million in 1999. Net cash used in operating activities in
1997, 1998 and 1999 reflected increasing net losses and, to a lesser extent,
accounts receivable, offset in part by increases in accrued liabilities.
From inception, our investing activities have consisted primarily of
purchases of property and equipment, principally computer hardware and software
for our growing number of employees. Capital expenditures, including those
under capital leases, totaled $176,000, $1.7 million and $2.4 million in 1997,
1998 and 1999, respectively. We expect that capital expenditures will increase
with our anticipated growth in operations, infrastructure and personnel. As
December 31, 1999 we had no material capital expenditure commitments.
During 1999, our investing activities have consisted of purchases of short-
term and long-term investments. To date, we have not invested in derivative
securities or any other financial instruments that involve a high level of
complexity or risk. We expect that, in the future, cash in excess of current
requirements will continue to be invested in high credit quality, interest-
bearing securities.
The Company considers all highly liquid investments with a maturity from
date of purchase of three months or less to be cash equivalents. Cash and cash
equivalents consist primarily of cash on deposit with banks and high quality
money market instruments. All other liquid investments are classified as short-
term or long-term investments. Short-term and long-term investments consist of
commerical paper and corporate bonds.
Management determines the appropriate classification of investment
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. At December 31, 1999, all investment securities were
designated as available-for-sale. Available-for-sale securities are carried at
fair value, using available market information and appropriate valuation
methodologies, with unrealized gains and losses reported in stockholders'
equity.
Realized gains and losses and declines in value judged to be other-than-
temporary on available-for-sale securities are included in the statements of
income. There have been no such transactions in the year ended December 31,
1999. The cost of securities sold is based on the specific identification
method. Interest and dividends on securities classified as available-for-sale
are included in interest income.
At December 31, 1999, the Company's available-for-sale securities consisted
of the following: Commercial paper $29.7 million; corporate notes $3.2 million,
corporate bonds $18.9 million, medium term
25
notes $6.3 million and United States government agencies $8.1 million and money
market funds $5.8 million. Of these securities, $10.9 million, $44.7 million
and $16.4 million was classified as cash equivalents, short-term investments
and long-term investments, respectively.
As of December 31, 1999 the difference between the fair value and the
amortized cost of available-for-sale securities was insignificant; therefore,
no unrealized gains or losses were recorded in stockholders' equity. For the
year ended December 31, 1999, realized gains and losses were not material. As
of December 31, 1999 the contractual maturity of the investments did not exceed
eighteen months.
Net cash provided by financing activities in 1997, 1998 and 1999 was $3.9
million, $15.8 million and $75.2 million, respectively. Net cash provided by
financing activities reflected primarily the proceeds of issuances of preferred
stock in each of these periods, and, in 1999, included proceeds from our
initial public offering.
On February 1, 2000, we completed our follow-on offering of common stock. We
sold a total of 1,000,000 shares at a price of $161.00 per share. The offering
resulted in net proceeds to us of approximately $152.3 million, net of an
underwriting discount of $7.7 million and estimated offering expenses of $1.0
million.
We believe that the current cash, cash equivalents, investments and funds
available under existing credit facilities, will be sufficient to meet our
working capital requirements for at least the next 24 months. Thereafter, we
may require additional funds to support our working capital requirements or for
other purposes and may seek to raise additional funds through public or private
equity financing or from other sources. There can be no assurance that
additional financing will be available on acceptable terms, if at all. If
adequate funds are not available or are not available on acceptable terms, we
may be unable to develop or enhance our products, take advantage of future
opportunities, or respond to competitive pressures or unanticipated
requirements, which could have a material adverse effect on our business,
financial condition and operating results.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivatives
and Hedging Activities." SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. In July 1999, the
Financial Accounting Standards Board issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133," which deferred the effective date until the first
fiscal quarter ending June 30, 2000. We have not engaged in significant hedging
activities or invested in derivative instruments.
26
FACTORS AFFECTING FUTURE RESULTS
In addition to other information in this Annual Report on Form 10-K, the
following factors should be carefully considered in evaluating Interwoven and
our business.
Our operating history is limited, so it will be difficult for you to evaluate
our business in making an investment decision.
We were incorporated in March 1995 and have a limited operating history. We
are still in the early stages of our development, which makes the evaluation of
our business operations and our prospects difficult. We shipped our first
product in May 1997. Since that time, we have derived substantially all of our
revenues from licensing our TeamSite product and related services. In
evaluating our common stock, you should consider the risks and difficulties
frequently encountered by early stage companies in new and rapidly evolving
markets, particularly those companies whose businesses depend on the Internet.
These risks and difficulties, as they apply to us in particular, include:
. potential fluctuations in operating results and uncertain growth rates;
. limited market acceptance of our products;
. concentration of our revenues in a single product;
. our dependence on a small number of orders for most of our revenue;
. our need to expand our direct sales forces and indirect sales channels;
. our need to manage rapidly expanding operations; and
. our need to attract and train qualified personnel.
If we do not increase our license revenues significantly, we will fail to
achieve profitability.
We have incurred net losses in each quarter since our inception, and we
expect our net losses to increase. We incurred net losses of $2.9 million in
1997, $6.3 million in 1998 and $15.7 million in 1999. As of December 31, 1999,
we had an accumulated deficit of approximately $26.0 million. To compete
effectively, we plan to continue to invest aggressively to expand our sales and
marketing, research and development, and professional services organizations.
As a result, if we are to achieve profitability we will need to increase our
revenues significantly, particularly our license revenues. We cannot predict
when we will become profitable, if at all.
Our operating results fluctuate widely and are difficult to predict, so we may
fail to satisfy the expectations of investors or market analysts and our stock
price may decline.
Our quarterly operating results have fluctuated significantly in the past,
and we expect them to continue to fluctuate unpredictably in the future. It is
possible that in some future periods our results of operations may not meet or
exceed the expectations of public market analysts and investors. If this
occurs, the price of our common stock is likely to decline.
Our quarterly results depend on a small number of large orders, so the loss of
any single large order could harm those results and cause our stock price to
drop.
Each quarter, we derive a significant portion of our license revenues from a
small number of relatively large orders. As a result, our operating results
could suffer if any large orders are delayed or cancelled in any future period.
In the first, second, third and fourth quarters of 1999, our top five customers
accounted for 41%, 30%, 30% and 26% respectively, of the total revenue in those
quarters. We expect that we will continue to depend upon a small number of
large orders for a significant portion of our license revenues.
27
We face significant competition, which could make it difficult to acquire and
retain customers and inhibit any future growth.
We expect the competition in the market in which we operate to persist and
intensify in the future. Competitive pressures may seriously harm our business
and results of operations if they inhibit our future growth, or require us to
hold down or reduce prices, or increase our operating costs. Our competitors
include:
. potential customers that utilize in-house development efforts;
. developers of software that directly addresses the need for web content
management, such as Vignette.
In addition, other enterprise software companies such as Rational Software and
Documentum have announced plans to enter our market. We also face potential
competition from companies--for example, Microsoft and IBM--that may decide in
the future to enter our market. Many of our existing and potential competitors
have longer operating histories, greater name recognition, larger customer
bases and significantly greater financial, technical and marketing resources
than we do. Many of these companies can also leverage extensive customer bases
and adopt aggressive pricing policies to gain market share. Potential
competitors may bundle their products in a manner that discourages users from
purchasing our products. Barriers to entering the web content management
software market are relatively low.
Because the market for our products is new, we do not know whether existing and
potential customers will purchase our products in sufficient quantity for us to
achieve profitability.
The market for web content management software in which we sell is new and
rapidly evolving. While we have licensed our products to 175 customers, we
expect that we will continue to need intensive marketing and sales efforts to
educate prospective clients about the uses and benefits of our products and
services. Various factors could inhibit the growth of the market, and market
acceptance of our products and services. In particular, potential customers
that have invested substantial resources in other methods of conducting
business over the Internet may be reluctant to adopt a new approach that may
replace, limit or compete with their existing systems. We cannot be certain
that a viable market for our products will emerge, or if it does emerge, that
it will be sustainable.
Our lengthy sales cycle makes it particularly difficult for us to forecast
revenue, requires us to incur high costs of sales, and aggravates the
variability of quarterly fluctuations.
The time between our initial contact with a potential customer and the
ultimate sale, which we refer to as our sales cycle, typically ranges between
three and nine months depending largely on the customer. If we do not shorten
our sales cycle, it will be difficult for us to reduce sales and marketing
expenses. In addition, as a result of our lengthy sales cycle, we have only a
limited ability to forecast the timing and size of specific sales. This makes
it more difficult to predict quarterly financial performance, or to achieve it,
and any delay in completing sales in a particular quarter could harm our
business and cause our operating results to vary significantly.
We rely heavily on sales of one product, so if it does not achieve market
acceptance we are likely to experience larger losses.
Since 1997, we have generated substantially all of our revenues from
licenses of, and services related to, our TeamSite product. We believe that
revenues generated from TeamSite will continue to account for a large portion
of our revenues for the foreseeable future. A decline in the price of TeamSite,
or our inability to increase license sales of TeamSite, would harm our business
and operating results more seriously than it would if we had several different
products and services to sell. In addition, our future financial performance
will depend upon successfully developing and selling enhanced versions of
TeamSite. If we fail to deliver product enhancements or new products that
customers want it will be more difficult for us to succeed.
28
We depend on our direct sales force to sell our products, so future growth will
be constrained by our ability to hire and train new sales personnel.
We sell our products primarily through our direct sales force, and we expect
to continue to do so in the future. Our ability to sell more products is
limited by our ability to hire and train direct sales personnel, and we believe
that there is significant competition for direct sales personnel with the
advanced sales skills and technical knowledge that we need. Some of our
competitors may have greater resources to hire personnel with that skill and
knowledge. If we are not able to hire experienced and competent sales
personnel, our business would be harmed. Furthermore, because we depend on our
direct sales force, any turnover in our sales force can significantly harm our
operating results. Sales force turnover tends to slow sales efforts until
replacement personnel can be recruited and trained to become productive. See
"--We must attract and retain qualified personnel, which is particularly
difficult for us because we compete with other Internet-related software
companies and are located in the San Francisco Bay area where competition for
personnel is extremely intense."
If we do not develop our indirect sales channel, we will be less likely to
increase our revenues.
If we do not develop indirect sales channels, we may miss sales
opportunities that might be available through these other channels. For
example, domestic and international resellers may be able to reach new
customers more quickly or more effectively than our direct sales force.
Although we are currently investing and plan to continue to invest significant
resources to develop these indirect sales channels, we may not succeed in
establishing a channel that can market our products effectively and provide
timely and cost-effective customer support and services. In addition, we may
not be able to manage conflicts across our various sales channels, and our
focus on increasing sales through our indirect channel may divert management
resources and attention from direct sales.
We must attract and retain qualified personnel, which is particularly difficult
for us because we compete with other Internet-related software companies and
are located in the San Francisco Bay area where competition for personnel is
extremely intense.
Our success depends on our ability to attract and retain qualified,
experienced employees. We compete for experienced engineering, sales and
consulting personnel with Internet professional services firms, software
vendors, consulting and professional services companies. It is also
particularly difficult to recruit and retain personnel in the San Francisco Bay
area, where we are located. Although we provide compensation packages that
include incentive stock options, cash incentives and other employee benefits,
the volatility and current market price of our common stock may make it
difficult for us to attract, assimilate and retain highly qualified employees
in the future. In addition, our customers generally purchase consulting and
implementation services. While we have recently established relationships with
some third-party service providers, we continue to be the primary provider of
these services. It is difficult and expensive to recruit, train and retain
qualified personnel to perform these services, and we may from time to time
have inadequate levels of staffing to perform these services. As a result, our
growth could be limited due to our lack of capacity to provide those services,
or we could experience deterioration in service levels or decreased customer
satisfaction, any of which would harm our business.
If we do not improve our operational systems on a timely basis, we will be more
likely to fail to manage our growth properly.
We have expanded our operations rapidly in recent years. We intend to
continue to expand our operational systems for the foreseeable future to pursue
existing and potential market opportunities. This rapid growth places a
significant demand on management and operational resources. In order to manage
our growth, we need to implement and improve our operational systems,
procedures and controls on a timely basis. If we fail to implement and improve
these systems in a timely manner, our business will be seriously harmed.
29
Difficulties in introducing new products and upgrades in a timely manner will
make market acceptance of our products less likely.
The market for our products is characterized by rapid technological change,
frequent new product introductions and Internet-related technology
enhancements, uncertain product life cycles, changes in customer demands and
evolving industry standards. We expect to add new content management
functionality to our product offerings by internal development, and possibly by
acquisition. Content management technology is more complex than most software,
and new products or product enhancements can require long development and
testing periods. Any delays in developing and releasing new products could harm
our business. New products or upgrades may not be released according to
schedule or may contain defects when released. Either situation could result in
adverse publicity, loss of sales, delay in market acceptance of our products or
customer claims against us, any of which could harm our business. If we do not
develop, license or acquire new software products, or deliver enhancements to
existing products on a timely and cost-effective basis, our business will be
harmed.
Our products might not be compatible with all major platforms, which could
limit our revenues.
Our products currently operate on the Microsoft Windows NT and Sun Solaris
operating systems. In addition, our products are required to interoperate with
leading web content authoring tools and web application servers. We must
continually modify and enhance our products to keep pace with changes in these
applications and operating systems. If our products were to be incompatible
with a popular new operating system or Internet business application, our
business would be harmed. In addition, uncertainties related to the timing and
nature of new product announcements, introductions or modifications by vendors
of operating systems, browsers, back-office applications, and other Internet-
related applications, could also harm our business.
We have no significant experience conducting operations internationally, which
may make it more difficult than we expect to expand overseas and may increase
the costs of doing so.
To date, we have derived all of our revenues from sales to North American
customers. We plan to expand our international operations in the future. There
are many barriers to competing successfully in the international arena,
including:
. costs of customizing products for foreign countries;
. restrictions on the use of software encryption technology;
. dependence on local vendors;
. compliance with multiple, conflicting and changing governmental laws and
regulations;
. longer sales cycles; and
. import and export restrictions and tariffs.
As a result of these competitive barriers, we cannot assure you that we will be
able to market, sell and deliver our products and services in international
markets.
If we fail to establish and maintain strategic relationships, the market
acceptance of our products, and our profitablity, may suffer.
To offer products and services to a larger customer base our direct sales
force depends on strategic partnerships and marketing alliances to obtain
customer leads, referrals and distribution. If we are unable to maintain our
existing strategic relationships or fail to enter into additional strategic
relationships, our ability to increase our sales and reduce expenses will be
harmed. We would also lose anticipated customer introductions and co-marketing
benefits. Our success depends in part on the success of our strategic partners
and their ability to market our products and services successfully. In
addition, our strategic partners may not regard us as
30
significant for their own businesses. Therefore, they could reduce their
commitment to us or terminate their respective relationships with us, pursue
other partnerships or relationships, or attempt to develop or acquire products
or services that compete with our products and services. Even if we succeed in
establishing these relationships, they may not result in additional customers
or revenues.
If our services revenues do not grow substantially, our total revenues are
unlikely to increase.
Our services revenues represent a significant component of our total
revenues--21% of total revenues for 1998 and 36% of total revenues for 1999. We
anticipate that services revenues will continue to represent a significant
percentage of total revenues in the future. To a large extent, the level of
services revenues depends upon our ability to license products which generate
follow-on services revenue. Additionally, services revenues growth depends on
ongoing renewals of maintenance and service contracts. Moreover, if third-party
organizations such as systems integrators become proficient in installing or
servicing our products, our services revenues could decline. Our ability to
increase services revenues will depend in large part on our ability to increase
the capacity of our professional services organization, including our ability
to recruit, train and retain a sufficient number of qualified personnel.
We might not be able to protect and enforce our intellectual property rights, a
loss of which could harm our business.
We depend upon our proprietary technology, and rely on a combination of
patent, copyright and trademark laws, trade secrets, confidentiality procedures
and contractual provisions to protect it. We currently do not have any issued
United States or foreign patents, but we have applied for one U.S. patent. It
is possible that a patent will not issue from our currently pending patent
application or any future patent application we may file. We have also
restricted customer access to our source code and required all employees to
enter into confidentiality and invention assignment agreements. Despite our
efforts to protect our proprietary technology, unauthorized parties may attempt
to copy aspects of our products or to obtain and use information that we regard
as proprietary. In addition, the laws of some foreign countries do not protect
our proprietary rights as effectively as the laws of the United States, and we
expect that it will become more difficult to monitor use of our products as we
increase our international presence. In addition, third parties may claim that
our products infringe theirs.
Our failure to deliver defect-free software could result in greater losses and
harmful publicity.
Our software products are complex and have in the past and may in the future
contain defects or failures that may be detected at any point in the product's
life. We have discovered software defects in the past in some of our products
after their release. Although past defects have not had a material effect on
our results of operations, in the future we may experience delays or lost
revenue caused by new defects. Despite our testing, defects and errors may
still be found in new or existing products, and may result in delayed or lost
revenues, loss of market share, failure to achieve acceptance, reduced customer
satisfaction, diversion of development resources and damage to our reputation.
As has occurred in the past, new releases of products or product enhancements
may require us to provide additional services under our maintenance contracts
to ensure proper installation and implementation. Moreover, third parties may
develop and spread computer viruses that may damage the functionality of our
software products. Any damage to or interruption in the performance of our
software could also harm our business.
Defects in our products may result in customer claims against us that could
cause unanticipated losses.
Because customers rely on our products for business critical processes,
defects or errors in our products or services might result in tort or warranty
claims. It is possible that the limitation of liability provisions in our
contracts will not be effective as a result of existing or future federal,
state or local laws or ordinances or unfavorable judicial decisions. We have
not experienced any product liability claims like this to date, but we could in
the future. Further, although we maintain errors and omissions insurance, this
insurance coverage may
31
not be adequate to cover us. A successful product liability claim could harm
our business. Even defending a product liability suit, regardless of its
merits, could harm our business because it entails substantial expense and
diverts the time and attention of key management personnel.
Acquisitions may harm our business by being more difficult than expected to
integrate or by diverting management's attention.
In July 1999, we acquired Lexington Software Associates, a software
consulting company, to help support our existing customer base and to help
attract and retain new customers. As part of our business strategy, we may seek
to acquire or invest in additional businesses, products or technologies that we
feel could complement or expand our business. If we identify an appropriate
acquisition opportunity, we might be unable to negotiate the terms of that
acquisition successfully, finance it, or integrate it into our existing
business and operations. We may also be unable to select, manage or absorb any
future acquisitions successfully. Further, the negotiation of potential
acquisitions, as well as the integration of an acquired business, would divert
management time and other resources. We may have to use a substantial portion
of our available cash, including proceeds of this offering, to consummate an
acquisition. On the other hand, if we consummate acquisitions through an
exchange of our securities, our stockholders could suffer significant dilution.
In addition, we cannot assure you that any particular acquisition, even if
successfully completed, will ultimately benefit our business.
If widespread Internet adoption does not continue, or if the Internet cannot
accommodate continued growth, our business will be harmed because it depends on
growth in the use of the Internet.
Acceptance of our products depends upon continued adoption of the Internet
for commerce. As is typical in the case of an emerging industry characterized
by rapidly changing technology, evolving industry standards and frequent new
product and service introductions, demand for and acceptance of recently
introduced products and services are subject to a high level of uncertainty. To
the extent that businesses do not consider the Internet a viable commercial
medium, our customer base may not grow. In addition, critical issues concerning
the commercial use of the Internet remain unresolved and may affect the growth
of Internet use. The adoption of the Internet for commerce, communications and
access to content, particularly by those who have historically relied upon
alternative methods, generally requires understanding and accepting new ways of
conducting business and exchanging information. In particular, companies that
have already invested substantial resources in other means of conducting
commerce and exchanging information may be particularly reluctant or slow to
adopt a new, Internet-based strategy that may render their existing
infrastructure obsolete. If the use of the Internet fails to develop or
develops more slowly than expected, our business may be seriously harmed.
To the extent that there is an increase in Internet use, an increase in
frequency of use or an increase in the required bandwidth of users, the
Internet infrastructure may not be able to support the demands placed upon it.
In addition, the Internet could lose its viability as a commercial medium due
to delays in development or adoption of new standards or protocols required to
handle increased levels of Internet activity. Changes in, or insufficient
availability of, telecommunications or similar services to support the Internet
also could result in slower response times and could adversely impact use of
the Internet generally. If use of the Internet does not continue to grow or
grows more slowly than expected, or if the Internet infrastructure, standards,
protocols or complementary products, services or facilities do not effectively
support any growth that may occur, our business would be seriously harmed.
There is substantial risk that future regulations could be enacted that either
directly restrict our business or indirectly impact our business by limiting
the growth of Internet commerce.
As Internet commerce evolves, we expect that federal, state or foreign
agencies will adopt new legislation or regulations covering issues such as user
privacy, pricing, content and quality of products and services. If enacted,
these laws, rules or regulations could indirectly harm us to the extent that
they impact our customers
32
and potential customers. We cannot predict if or how any future legislation or
regulations would impact our business. Although many of these regulations may
not apply to our business directly, we expect that laws regulating or affecting
commerce on the Internet could indirectly harm our business.
Year 2000 problems with our products may increase our costs.
Our products are generally integrated into enterprise computer systems
involving sophisticated hardware and complex software products, which may not
be Year 2000 compliant. We may in the future be subject to claims based on Year
2000 problems in other parties' products, Year 2000 problems alleged to be
found in our products, Year 2000-related issues arising from the integration of
multiple products within an overall system, or other similar claims. The total
cost of Year 2000 compliance may be material and may harm our business.
We have various mechanisms in place to discourage takeover attempts, which
might tend to suppress our stock price.
Provisions of our certificate of incorporation and bylaws that may
discourage, delay or prevent a change in control include:
. we are authorized to issue "blank check" preferred stock, which could be
issued by our board of directors to increase the number of outstanding
shares and thwart a takeover attempt;
. we provide for the election of only one-third of our directors at each
annual meeting of stockholders, which slows turnover on the board of
directors;
. we limit who may call special meetings of stockholders;
. we prohibit stockholder action by written consent, so all stockholder
actions must be taken at a meeting of our stockholders; and
. we require advance notice for nominations for election to the board of
directors or for proposing matters that can be acted upon by
stockholders at stockholder meetings.
If a significant number of shares become available for sale and are sold in a
short period of time, the market price of our stock could decline.
Shareholders holding approximately 13,172,575 shares of common stock will
for the first time be able to resell these shares commencing in April 2000,
when lock-up agreements in connection with our initial and follow-on public
offerings expire. If many of these shares are sold when they become available
for resale, the market price of our common stock may decline.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk
The primary objective of our investment activities is to preserve principal
while at the same time maximizing yields without significantly increasing risk.
To achieve this objective, we maintains our portfolio of cash equivalents and
short-term and long-term investments in a variety of securities, including both
government and corporate obligations and money market funds. As of December 31,
1999, approximately 77% of our total portfolio matures in one year or less,
with the reminder maturing in less than two years. See Note 1 of Notes to
Consolidated Financial Statements.
33
The following table presents the amounts of cash equivalents and short-term
and long-term investments that are subject to interest rate risk by year of
expected maturity and average interest rates as of December 31, 1999:
Fair
2000 2001 Total Value
------- ------- ------- -------
(in thousands)
Cash equivalents and short-term and long-
term investments........................... $44,665 $16,464 $61,129 $61,129
Average interest rates...................... 5.5% 6%
We did not hold derivative financial instruments as of December 31, 1999,
and have never held such instruments in the past. In addition, we had no
outstanding debt as of December 31, 1999.
Foreign Currency Risk
Currently the majority of our sales and expenses are denominated in U.S.
dollars, as a result we have experienced no significant foreign exchange gains
and losses to date. While we do expect to effect some transactions in foreign
currencies in 2000, we do not anticipate that foreign exchange gains or losses
will be significant. We have not engaged in foreign currency hedging activities
to date.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is submitted as a separate section of this Form
10-K. See Part IV, Item 14 of this Form 10-K for a listing of financial
statements presented in the section entitled "Financial Statements."
QUARTERLY CONSOLIDATED FINANCIAL DATA
Three Months Ended
--------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- -------- --------- -------- --------- -------- --------- --------
(in thousands)
Consolidated Statement
of Operations Data:
Revenues:
License................ $ 187 $ 437 $ 946 $ 1,606 $ 1,360 $ 1,898 $ 2,556 $ 4,892
Services............... 44 218 277 288 742 1,004 1,701 2,653
----- -------- -------- -------- -------- -------- ------- -------
Total revenues....... 231 655 1,223 1,894 2,102 2,902 4,257 7,545
Cost of revenues:
License................ -- -- 19 40 15 104 28 34
Services............... 75 275 441 483 549 880 2,113 3,034
----- -------- -------- -------- -------- -------- ------- -------
Total cost of
revenues............ 75 275 460 523 564 984 2,141 3,068
Gross profit............ 156 380 763 1,371 1,538 1,918 2,116 4,477
Operating expenses:
Research and
development........... 282 453 492 570 779 922 1,229 1,269
Sales and marketing.... 473 884 1,603 1,857 2,287 2,938 3,833 6,524
General and
administrative........ 185 387 563 604 598 646 833 1,143
Amortization of
deferred stock-based
compensation.......... 151 196 217 248 640 1,028 1,017 1,002
Amortization of
acquired intangible
assets................ -- -- -- -- -- -- 249 128
----- -------- -------- -------- -------- -------- ------- -------
Total operating
expenses............ 1,091 1,920 2,875 3,279 4,304 5,534 7,161 10,066
----- -------- -------- -------- -------- -------- ------- -------
Loss from operations.... (935) (1,540) (2,112) (1,908) (2,766) (3,616) (5,045) (5,589)
Interest and other
income (expense), net.. 4 53 32 62 65 89 262 945
----- -------- -------- -------- -------- -------- ------- -------
Net loss................ $(931) $ (1,487) $ (2,080) $ (1,846) $ (2,701) $ (3,527) $(4,783) $(4,644)
===== ======== ======== ======== ======== ======== ======= =======
34
Three Months Ended
---------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 First Second Third Fourth
--------- -------- --------- -------- --------- -------- --------- --------
Consolidated Statement
of Operations Data:
Revenues:
License................ 81 % 67 % 77 % 85 % 65 % 65 % 60 % 65 %
Services............... 19 33 23 15 35 35 40 35
---- ---- ---- ---- ---- ---- ---- ---
Total revenues....... 100 100 100 100 100 100 100 100
Cost of revenues:
License................ -- -- 2 2 1 4 1 1
Services............... 32 42 36 26 26 30 49 40
---- ---- ---- ---- ---- ---- ---- ---
Total cost of
revenues............ 32 42 38 28 27 34 50 41
Gross profit............ 68 58 62 72 73 66 50 59
Operating expenses:
Research and
development........... 122 69 40 30 37 32 29 17
Sales and marketing.... 205 135 131 98 109 101 90 86
General and
administrative........ 80 59 46 32 28 22 19 15
Amortization of
deferred stock-based
compensation.......... 65 30 18 13 30 35 24 13
Amortization of
acquired intangible
assets................ -- -- -- -- -- -- 6 2
---- ---- ---- ---- ---- ---- ---- ---
Total operating
expenses............ 472 293 235 173 204 190 168 133
---- ---- ---- ---- ---- ---- ---- ---
Loss from operations.... (404) (235) (173) (101) (131) (124) (118) (74)
Interest and other
income (expense), net.. 2 8 3 3 3 3 6 13
---- ---- ---- ---- ---- ---- ---- ---
Net loss................ (402)% (227)% (170)% (98)% (128)% (121)% (112)% (61)%
==== ==== ==== ==== ==== ==== ==== ===
As a result of our limited operating history and the emerging nature of the
market for web content management software and services in which we compete, it
is difficult for us to forecast our revenues or earnings accurately. It is
possible that in some future periods our results of operations may not meet or
exceed the expectations of public market analysts and investors. If this
occurs, the price of our common stock is likely to decline. Factors that have
caused our results to fluctuate in the past, and we likely to cause
fluctuations in the future, include:
. the size of customer orders and the timing of product and service
deliveries;
. variability in the mix of products and services sold;
. our ability to retain our current customers and attract new customers;
. the amount and timing of operating costs relating to expansion of our
business, including our planned international expansion;
. the announcement or introduction of new products or services by us or
our competitors;
. our ability to attract and retain personnel, particularly management,
engineering and sales personnel and technical consultants;
. our ability to upgrade and develop our systems and infrastructure to
accommodate our growth; and
. costs related to acquisition of technologies or businesses.
In addition, our products are typically shipped when orders are received, so
license backlog at the beginning of any quarter in the past has represented
only a small portion of expected license revenues for that quarter. Moreover,
we typically recognize a substantial percentage of revenues in the last month
of the quarter, frequently in the last week or even the last days of the
quarter. As a result, at the beginning of a quarter we have no assurance about
the levels of sales in that quarter, and the delay or cancellation of any large
orders can result in a significant shortfall from anticipated revenues. These
factors make license revenues in any quarter difficult to forecast. Since our
expenses are relatively fixed in the near term, any shortfall from anticipated
revenues could result in significant variations in operating results from
quarter to quarter and harm to our business.
As a result of these and other factors, we believe that period-to-period
comparisons of our results of operations may not be meaningful and should not
be relied upon as indicators of our future performance.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to directors may be found under the caption
"Election of Directors" as set forth in the Company's definitive proxy
statement for its 2000 annual stockholders' meeting. That information is
incorporated herein by reference.
Information concerning executive officers is included in Part I under the
caption "Item 4A. Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to this item may be found under the caption
"Executive Compensation" as set forth in the Company's definitive proxy
statement for its 2000 annual stockholders' meeting. That information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to this item may be found under the caption
"Security Ownership of Certain Beneficial Owners and Management" as set forth
in the Company's definitive proxy statement for its 2000 annual stockholders'
meeting. That information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to this item may be found under the caption
"Certain Relationships and Related Transactions" as set forth in the Company's
definitive proxy statement for its 2000 annual stockholders' meeting. That
information is incorporated herein by reference.
36
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
a) 1. Consolidated Financial Statements
The following consolidated financial statements are included in item 8 and
are filed as part of this Form 10-K:
.Consolidated Balance Sheets as of December 31, 1998 and 1999
.Consolidated Statement of Operations for each of the three years
ended December 31, 1997, 1998 and 1999
.Consolidated Statement of Changes in Stockholders' Deficit for each
of the three years ended December 31, 1997, 1998 and 1999
.Consolidated Statement of Cash Flows for each of the three years
ended December 31, 1997, 1998 and 1999
.Notes to Consolidated Financial Statements
2. Financial Statements Schedule
Schedules not listed above have been omitted because they are not applicable
or required, or the information required to be set forth therein is included in
the Consolidated Financial Statements or Notes thereto.
3. Exhibits
The following exhibits are filed as part of this report:
Incorporated by
Reference
--------------- Filed
Number Exhibit Title Form Date Number Herewith
------ ------------- ---- ---- ------ --------
2.01 Agreement and Plan of Merger, dated S-1 07/27/99 2.01
October 1, 1999, between Interwoven,
Inc., a California corporation, and
the Registrant
3.01 Registrant's Third Amended and Restated S-1 12/17/99 3.03
Certificate of Incorporation
3.02 Registrant's Restated Bylaws, as S-1 07/27/99 3.04
amended
4.01 Form of Certificate for Registrant's S-1 07/27/99 4.01
common stock
4.02 Third Amended and Restated Investors' S-1 07/27/99 4.023
Rights Agreement, dated June 10, 1999
4.03 Form of Consent concerning the Third S-1 07/27/99 4.03
Amended and Restated Investors' Rights
Agreement dated June 10, 1999
4.04 Form of Amendment to Third Amended and S-1 12/17/99 4.04
Restated Investor's Rights Agreement,
dated June 10, 1999
10.01 Form of Indemnity Agreement between S-1 07/27/99 10.01
Registrant and each of its directors
and executive officers
10.02* 1996 Stock Option Plan and related S-1 07/27/99 10.02
agreements
10.03* 1998 Stock Option Plan and related S-1 07/27/99 10.03
agreements
10.04* 1999 Equity Incentive Plan and related S-1 07/27/99 10.04
agreements
10.05* 1999 Employee Stock Purchase Plan and S-1 07/27/99 10.05
related agreements
10.06 Regional Prototype Profit Sharing Plan S-1 07/27/99 10.06
and Trust/Account Standard Plan
Adoption Agreement AA #001
37
Incorporated by
Reference
-------------------- Filed
Number Exhibit Title Form Date Number Herewith
------ ------------- ---- ---- ------ --------
10.07* Employment Agreement between S-1 07/27/99 10.07
Interwoven, Inc. and Martin W. Brauns
dated February 27, 1998
10.08* Offer Letter to David M. Allen from S-1 07/27/99 10.08
Interwoven, Inc. dated February 12,
1999
10.09* Offer Letter to Michael A. Backlund S-1 07/27/99 10.09
from Interwoven, Inc. dated May 1,
1998
10.10* Offer Letter to John Chang from S-1 07/27/99 10.10
Interwoven, Inc. dated January 20,
1997
10.11* Offer Letter to Jeffrey E. Engelmann S-1 07/27/99 10.11
from Interwoven, Inc. dated December
11, 1998
10.12* Offer Letter to Steven Farber from S-1 07/27/99 10.12
Interwoven, Inc. dated June 14, 1997
10.13* Offer Letter to Jack S. Jia from S-1 07/27/99 10.13
Interwoven, Inc. dated January 3, 1997
10.14* Offer Letter to Peng T. Ong from S-1 07/27/99 10.14
Interwoven, Inc. dated February 29,
1996
10.15* Offer Letter to Jozef Ruck from S-1 07/27/99 10.15
Interwoven, Inc. dated February 18,
1999
10.16* Confidential Separation Agreement and S-1 07/27/99 10.16
Release, between Interwoven, Inc. and
John Chang dated November 25, 1998
10.17* Confidential Separation Agreement and S-1 07/27/99 10.17
Release, between Interwoven, Inc. and
Steven Farber dated February 12, 1998
10.18* Secured Promissory Notes between S-1 07/27/99 10.18
Interwoven, Inc. and Jeffrey E.
Engelmann, dated as of April 19, 1999
10.19* Secured Promissory Notes between S-1 07/27/99 10.19
Interwoven, Inc. and Jozef Ruck, dated
as of April 21, 1999
10.20 Build-To-Suit Lease Agreement dated S-1 07/27/99 10.20
March 18, 1997 between Sunnyvale
Partners Limited Partnership and First
Data Merchant Services Corporation
10.21 Sublease dated April 24, 1998 between S-1 07/27/99 10.21
First Data Merchant Services
Corporation and Interwoven, Inc.
10.22 Loan and Security Agreement, dated S-1 07/27/99 10.22
October 1997, as amended, between
Interwoven, Inc. and Silicon Valley
Bank
10.23 Agreement and Plan of Reorganization, S-1 07/27/99 10.23
dated June 30, 1999, by and among
Interwoven, Inc., Lexington Software
Associates, Inc. and certain
stockholders of Lexington Software
Associates, Inc.
10.24+ Standard Sales Agreement effective as S-1 07/27/99 10.24
of July 28, 1999 between Registrant
and General Electric Company
10.25+ Preferred Stock Warrant to Purchase S-1 07/27/99 10.25
Shares of Series E Preferred Stock of
Registrant
10.26+ Amended and Restated Loan and Security S-1 07/27/99 10.26
Agreement dated June 24, 1999, between
Silicon Valley Bank and Registrant
38
Incorporated by
Reference
-------------------- Filed
Number Exhibit Title Form Date Number Herewith
------ ------------- ---- ---- ------ --------
10.27 Intellectual Property Security S-1 07/27/99 10.27
Agreement dated June 24, 1999, between
Silicon Valley Bank and Registrant
10.28* Amendment to Secured Promissory Note S-1 07/27/99 10.28
between Interwoven, Inc. and Jeffrey
E. Engelmann, dated as of October 5,
1999
10.29* Amendment to Secured Promissory Note S-1 07/27/99 10.29
between Interwoven, Inc. and Jozef
Ruck, dated as of October 5, 1999
10.30* Offer Letter to John Van Siclen from S-1 12/17/99 10.30
Interwoven, Inc. dated December 17,
1999
10.31 Assignment of Lease between beyond.com S-1 12/17/99 10.31
and Interwoven, Inc.
21.01 Subsidiaries of the Registrant S-1 12/17/99 21.01
23.01 Consent of PricewaterhouseCoopers LLP, X
independent accountants
27.01 Financial Data Schedule (Edgar only) X
- --------
* Management contract, compensatory plan or arrangement
+ Portions of this exhibit have been omitted pursuant to an order granting
confidential treatment.
39
SIGNATURES
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.
INTERWOVEN, INC.
/s/ David M. Allen
By: _________________________________
David M. Allen
Vice President and Chief
Financial Officer
Each person whose signature appears below constitutes and appoints Martin W.
Brauns and David M. Allen, and each of them, as his or her true and lawful
attorneys-in-fact, each with the power of substitution, for him or her in any
and all capacities, to sign amendments to this Report on Form 10-K, and to file
the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorneys-in-fact, or their substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Martin W. Brauns President, Chief Executive March 28, 2000
______________________________________ Officer (principal
Martin W. Brauns executive officer) and a
director
/s/ David M. Allen Vice President and Chief March 28, 2000
______________________________________ Financial Officer
David M. Allen (principal financial
officer and principal
accounting officer)
Additional Directors:
/s/ Peng T. Ong Chairman of the Board March 28, 2000
______________________________________
Peng T. Ong
/s/ Kathryn C. Gould Director March 28, 2000
______________________________________
Kathryn C. Gould
/s/ Mark C. Thompson Director March 28, 2000
______________________________________
Mark C. Thompson
/s/ Ronald E.F. Codd Director March 28, 2000
______________________________________
Ronald E.F. Codd
40
Financial Statements
As required under Item 8 Financial Statement and Supplementary Data, the
Consolidated Financial Statements of the Registrant are provided in this
separate section. The Consolidated Financial Statements included in this
Section are as follows:
Financial Statement Description
Page
-----
.Consolidated Balance Sheet as of December 31, 1998 and 1999......... 43
.Consolidated Statement of Operations for each of the three years
ended
December 31, 1997, 1998 and 1999.................................. 44
.Consolidated Statement of Stockholders' Equity (Deficit) for each of
the
three years ended December 31, 1997, 1998 and 1999................ 45
.Consolidated Statement of Cash Flows for each of the three years
ended December 31, 1997, 1998 and 1999............................ 46
.Notes to Consolidated Financial Statements.......................... 47-61
41
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Interwoven, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' deficit and of cash
flows present fairly, in all material respects, the financial position of
Interwoven, Inc. and its subsidiary at December 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
January 28, 2000, except for Note 10,
which is dated February 1, 2000
42
INTERWOVEN, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
December 31,
------------------
1998 1999
-------- --------
Assets
Current assets:
Cash and cash equivalents................................ $ 9,022 $ 10,983
Short-term investments................................... -- 44,665
Accounts receivable, net................................. 2,405 5,158
Prepaid expenses......................................... 179 787
Other current assets..................................... 80 559
-------- --------
Total current assets................................... 11,686 62,152
Investments................................................ -- 16,464
Property and equipment, net................................ 1,617 3,145
Intangible assets, net..................................... -- 416
Restricted cash............................................ 605 605
Other assets............................................... -- 297
-------- --------
$ 13,908 $ 83,079
======== ========
Liabilities, Mandatorily Redeemable Convertible Preferred
Stock and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable......................................... $ 484 $ 834
Accrued liabilities...................................... 1,473 4,966
Debt and leases, current................................. 258 --
Deferred revenue, current................................ 627 1,939
-------- --------
Total current liabilities.............................. 2,842 7,739
Debt and leases, long-term................................. 1,257 --
Deferred revenue, long-term................................ 97 --
-------- --------
4,196 7,739
Mandatorily redeemable convertible preferred stock 15,163
and 18,763 shares authorized, respectively; 15,060 and
18,455 shares issued and outstanding, respectively........ 20,464 --
Commitments (Note 4)
Stockholders' Equity (Deficit):
Preferred stock, $0.001 par value, 5,000 shares
authorized, no shares issued or outstanding; no shares
authorized, issued or outstanding....................... -- --
Common Stock, 16,667 and 100,000 shares authorized,
respectively; 4,909 and 22,886 issued and outstanding... 5 23
Additional paid-in capital............................... 881 106,214
Notes receivable from stockholders....................... (240) (202)
Deferred stock-based compensation........................ (1,090) (4,732)
Accumulated deficit...................................... (10,308) (25,963)
-------- --------
Total stockholders' equity (deficit)................... (10,752) 75,340
-------- --------
$ 13,908 $ 83,079
======== ========
See accompanying notes to consolidated financial statements.
43
INTERWOVEN, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
Years Ended December 31,
--------------------------
1997 1998 1999
------- ------- --------
Revenues:
License......................................... $ 84 $ 3,176 $ 10,706
Services........................................ 84 827 6,100
------- ------- --------
Total revenues................................ 168 4,003 16,806
------- ------- --------
Cost of revenues:
License......................................... -- 59 181
Services........................................ 95 1,274 6,576
------- ------- --------
Total cost of revenues........................ 95 1,333 6,757
------- ------- --------
Gross profit...................................... 73 2,670 10,049
------- ------- --------
Operating expenses:
Research and development........................ 884 1,797 4,199
Sales and marketing............................. 1,519 4,817 15,582
General and administrative...................... 530 1,739 3,220
Amortization of deferred stock-based
compensation................................... -- 812 3,687
Amortization of acquired intangible assets...... -- -- 377
------- ------- --------
Total operating expenses...................... 2,933 9,165 27,065
------- ------- --------
Loss from operations.............................. (2,860) (6,495) (17,016)
Interest and other income (expense), net.......... (88) 151 1,361
------- ------- --------
Net loss.......................................... (2,948) (6,344) (15,655)
======= ======= ========
Accretion of mandatorily redeemable convertible
preferred
stock to redemption value ....................... (261) (1,165) (13,227)
------- ------- --------
Net loss attributable to common stockholders...... $(3,209) $(7,509) $(28,882)
======= ======= ========
Basic and diluted net loss per share (Note 1)..... $ (1.36) $ (2.85) $ (3.79)
======= ======= ========
Shares used in computing basic and diluted net
loss per share................................... 2,356 2,633 7,618
======= ======= ========
Pro forma basic and diluted net loss per share
(Note 1)......................................... $ (0.74) $ (0.96)
======= ========
Shares used in computing pro forma basic and
diluted net loss per share....................... 8,530 16,334
======= ========
See accompanying notes to consolidated financial statements.
44
INTERWOVEN, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
Note
Common Stock Additional Receivable Deferred
-------------- Paid-In from Stock-Based Accumulated
Shares Amount Capital Stockholders Compensation Deficit Total
------ ------ ---------- ------------ ------------ ----------- --------
Balance at December 31,
1996................... 2,366 2 19 (3) -- (543) (525)
Repurchase of Common
Stock.................. (33) -- (5) -- -- -- (5)
Issuance of Common Stock
on exercise of stock
options................ 100 1 4 -- -- -- 5
Accretion of mandatorily
redeemable convertible
preferred stock........ -- -- (261) -- -- -- (261)
Net loss................ -- -- -- -- -- (2,948) (2,948)
------ --- -------- ----- ------- -------- --------
Balance at December 31,
1997................... 2,433 3 (243) (3) -- (3,491) (3,734)
Issuance of Common Stock
for notes receivable... 1,333 1 239 (240) -- -- --
Note repayment.......... -- -- -- 3 -- -- 3
Repurchase shares of
Series A mandatorily
redeemable convertible
preferred stock........ -- -- -- -- -- (473) (473)
Accretion of mandatorily
redeemable convertible
preferred stock........ -- -- (1,165) -- -- -- (1,165)
Issuance of Common Stock
on exercise of stock
options................ 1,143 1 148 -- -- -- 149
Deferred stock-based
compensation........... -- -- 1,902 -- (1,902) -- --
Amortization of stock-
based compensation..... -- -- -- -- 812 -- 812
Net loss................ -- -- -- -- -- (6,344) (6,344)
------ --- -------- ----- ------- -------- --------
Balance at December 31,
1998................... 4,909 $ 5 $ 881 $(240) $(1,090) $(10,308) $(10,752)
====== === ======== ===== ======= ======== ========
Common Stock issued upon
initial public
offering, net of
issuance costs of
approximately $1.2
million................ 3,623 3 56,241 -- -- -- 56,244
Mandatorily redeemable
convertible preferred
stock converted to
Common Stock........... 12,470 12 52,984 -- -- -- 52,996
Issuance of Common Stock
for services........... 9 -- 27 -- -- -- 27
Issuance of Common Stock
for notes receivable... 517 -- 202 (202) -- -- --
Repurchase of Common
Stock.................. (104) -- (11) -- -- (11)
Note repayment.......... -- -- -- 240 -- -- 240
Accretion of mandatorily
redeemable convertible
preferred stock........ -- -- (13,227) -- -- -- (13,227)
Issuance of Common Stock
on exercise of stock
options................ 1,397 3 1,675 -- -- -- 1,678
Exercise of Series B
warrants into Common
Stock.................. 65 -- 114 -- -- -- 114
Deferred stock-based
compensation........... -- -- 7,328 -- (7,328) -- --
Amortization of stock-
based compensation..... -- -- -- -- 3,686 -- 3,686
Net loss................ -- -- -- -- -- (15,655) (15,655)
------ --- -------- ----- ------- -------- --------
Balance at December 31,
1999................... 22,886 $23 $106,214 $(202) $(4,732) $(25,963) $ 75,340
====== === ======== ===== ======= ======== ========
See accompanying notes to consolidated financial statements.
45
INTERWOVEN, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year Ended December 31,
--------------------------
1997 1998 1999
------- ------- --------
Cash flows used in operating activities:
Net loss.......................................... $(2,948) $(6,344) $(15,655)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................... 56 294 883
Amortization of deferred stock-based compensa-
tion........................................... -- 812 3,687
Amortization of acquired intangible assets...... -- -- 378
Issuance of Common Stock for services........... -- -- 27
Non-cash interest expense....................... 135 -- --
Provisions for doubtful accounts................ -- 270 18
Changes in assets and liabilities:
Accounts receivable............................. (140) (2,535) (2,598)
Prepaid expenses and other assets............... (30) (222) (1,384)
Restricted cash................................. -- (605) --
Accounts payable................................ 96 271 350
Accrued liabilities............................. 121 1,304 3,368
Deferred revenue................................ -- 724 1,215
------- ------- --------
Net cash used in operating activities......... (2,710) (6,031) (9,711)
------- ------- --------
Cash flows from investing activities:
Purchase of property and equipment................ (138) (1,723) (2,411)
Purchases of investments.......................... -- -- (73,116)
Maturities of investments......................... -- -- 11,987
------- ------- --------
Net cash used in investing activities......... (138) (1,723) (63,540)
Cash flows from financing activities:
Proceeds from (repurchases of) Series A Preferred
Stock, net....................................... -- (632) --
Proceeds from Series B Preferred Stock, net....... 3,415 -- --
Proceeds from Series C Preferred Stock, net....... -- 7,887 --
Proceeds from Series D Preferred Stock, net....... -- 6,944 --
Proceeds from Series E Preferred Stock, net....... -- -- 18,462
Proceeds from exercise of Series B warrant into
Common Stock..................................... -- -- 114
Proceeds from exercise of stock options........... 5 149 1,677
Proceeds from notes payable, net of discount...... 375 -- --
Proceeds from issuance of Common Stock for ini-
tial public offering............................. -- -- 56,244
Repayment (issuance) of stockholders loans........ (11) 3 240
Proceeds from bank borrowings..................... 76 1,500 --
Repurchase of Common Stock........................ (5) -- (11)
Principal payments of debt and leases............. (5) (94) (1,514)
------- ------- --------
Net cash provided by financing activities..... 3,850 15,757 75,212
------- ------- --------
Net increase in cash and cash equivalents.......... 1,002 8,003 1,961
Cash and cash equivalents at beginning of period... 17 1,019 9,022
------- ------- --------
Cash and cash equivalents at end of period......... $ 1,019 $ 9,022 $ 10,983
======= ======= ========
Supplemental cash flow disclosures:
Cash paid for interest............................ $ -- $ 41 $ 111
======= ======= ========
Supplemental non-cash activity:
Property and equipment leases..................... $ 38 $ -- $ --
======= ======= ========
Common Stock issued for notes receivable.......... $ -- $ 240 $ 202
======= ======= ========
Common Stock issued for services.................. $ -- $ -- $ 27
======= ======= ========
Series B Preferred Stock issued upon conversion
of convertible notes payable and accrued
interest......................................... $ 460 $ -- $ --
======= ======= ========
Issuance of warrants to purchase Series B Pre-
ferred Stock..................................... $ 106 $ -- $ --
======= ======= ========
See accompanying notes to consolidated financial statements.
46
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company and Summary of Significant Accounting Policies:
The Company
Interwoven, Inc. (the "Company") is a leading provider of software products
and services that help businesses and other organizations manage the
information that makes up the content of their web sites. In the Internet
industry this is often referred to as "web content management." Our flagship
software product, TeamSite, is designed to help customers develop, maintain and
extend large web sites that are essential to their businesses. The Company also
markets and sells its software products and services through its wholly owned
subsidiary in the United Kingdom.
Reincorporation
In June 1999, the Company's Board of Directors authorized the
reincorporation of the Company in the State of Delaware. As a result of the
reincorporation, the Company is authorized to issue 100,000,000 shares of
$0.001 par value Common Stock and 5,000,000 shares of $0.001 par value
Preferred Stock. The Board of Directors has the authority to issue undesignated
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof. Share and per share information for each
of the periods presented has been retroactively adjusted to reflect the
reincorporation.
Initial Public Offering
On October 14, 1999, the Company completed its initial public offering of
Common Stock. A total of 3,622,500 shares were sold by the Company at a price
of $17.00 per share. The offering resulted in net proceeds to the Company of
approximately $56.2 million, net of the underwriting discount of $4.3 million
and estimated offering expenses of $1.2 million. At the closing of the
offering, all issued and outstanding shares of the Company's Mandatorily
Redeemable Convertible Preferred Stock were converted into an aggregate of
12,470,539 shares of Common Stock.
Stock Split
Prior to the effectiveness of the Company's initial public offering, the
Company's Board of Directors effected a two-for-three reverse stock split of
the outstanding shares of Common Stock. All common share and per share
information included in these financial statements have been retroactively
adjusted to reflect this stock split.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary after elimination of all significant
intercompany accounts and transactions.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
47
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue recognition
In October 1997 and March 1998, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position No. 97-2, "Software Revenue
Recognition" ("SOP No. 97-2") and Statement of Position No. 98-4, "Deferral of
the Effective Date of a Provision of SOP No. 97-2" ("SOP No. 98-4"). SOP 98-4
deferred for one year the application of certain provisions of SOP 97-2. In
December 1998, the AICPA issued Statement of Position No. 98-9, "Modification
of SOP No. 97-2 with Respect to Certain Transactions" ("SOP No. 98-9"), which
is effective for transactions entered into beginning April 1, 1999. SOP 98-9
extends the effective date of SOP 98-4 and provides additional interpretive
guidance. The adoption of SOP 97-2, SOP 98-4 and SOP 98-9 have not had and are
not expected to have a material impact on the Company's results of operations,
financial position or cash flows.
The Company's revenues are derived from licenses of its software products
and from services the Company provides to its customers. Revenues are
recognized for the various contract elements based upon vendor-specific
objective evidence of fair value of each element.
License revenues are recognized when persuasive evidence of an agreement
exists, the product has been delivered, no significant post-delivery
obligations remain, the license fee is fixed or determinable and collection of
the fee is probable. The Company does not offer product return rights to
resellers or end users.
Services revenues consist of professional services and maintenance fees.
Professional services primarily consists of software installation and
integration, business process consulting and training. Professional services
are billed on a time and materials basis and revenues are recognized as the
services are performed. Maintenance agreements are typically priced based on a
percentage of the product license fee and have a one-year term, renewable
annually. Services provided to customers under maintenance agreements include
technical product support and unspecified product upgrades. Deferred revenues
from advanced payments for maintenance agreements are recognized ratably over
the term of the agreement, which is typically one year.
Cash, cash equivalents, and investments
The Company considers all highly liquid investments with a maturity from the
date of purchase of three months or less to be cash equivalents. Cash and cash
equivalents consist primarily of cash on deposit with banks and high quality
money market instruments. All other liquid investments are classified as either
short-term or long-term investments. Short-term investments and long-term
investments consist of commercial paper and corporate bonds.
Management determines the appropriate classification of investment
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. At December 31, 1999, all investment securities were
designated as available-for-sale. Available-for-sale securities are carried at
fair value, using available market information and appropriate valuation
methodologies, with unrealized gains and losses reported in stockholders'
equity.
Realized gains and losses and declines in value judged to be other-than-
temporary on available-for-sale securities are included in the statement of
operations. There have been no such transactions in the year ended December 31,
1999. The cost of securities sold is based on the specific identification
method. Interest on securities classified as available-for-sale are included in
interest income within the consolidated statement of operations.
At December 31, 1999, the Company's available-for-sale securities consisted
of the following: Commercial paper $29.7 million; corporate notes $3.2 million,
corporate bonds $18.9 million, medium term
48
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
notes $6.3 million and United States government agencies $8.1 million and money
market funds $5.8 million. Of these securities, $10.9 million, $44.7 million
and $16.4 million was classified as cash equivalents, short-term investments
and long-term investments, respectively.
As of December 31, 1999 the difference between the fair value and the
amortized cost of available-for-sale securities was insignificant; therefore,
no unrealized gains or losses were recorded in stockholders' equity. For the
year ended December 31, 1999, there were no realized gains and losses.
Concentration of credit risk
Financial instruments, which potentially subject the Company to a
concentration of credit risk, consist primarily of cash and cash equivalents,
short-term and long-term investments and accounts receivable. The Company
limits its exposure to credit loss by placing its cash and cash equivalents
with a major financial institution. The Company's accounts receivable are
derived from revenues earned from customers located in the U.S. and are
denominated in U.S. dollars. The Company performs ongoing credit evaluations of
its customers' financial condition and, generally, requires no collateral from
its customers. The Company maintains an allowance for doubtful accounts
receivable based upon expected collectibility of accounts receivable.
The following table summarizes the revenues from customers in excess of 10%
of the total revenues.
Year ended
December 31,
----------------
1997 1998 1999
---- ---- ----
Company A.................................................... 20% -- % -- %
Company B.................................................... 20% -- % -- %
Company C.................................................... 18% -- % -- %
Company D.................................................... 11% -- % -- %
Company E.................................................... 10% -- % -- %
Company F.................................................... -- % 13% -- %
At December 31, 1997, Company A, B and C accounted for 25%, 22% and 21% of
total accounts receivable, respectively. At December 31, 1998, Company F
accounted for 10% of total accounts receivable. At December 31, 1999 no
customer accounted for 10% of total accounts receivable.
Fair value of instruments
The Company's financial instruments including cash and cash equivalents,
short-term investments, long-term investments accounts receivable and accounts
payable, are carried at cost, which approximate fair value due to the short-
term maturity of these instruments. Debt and capital lease obligations are
carried at cost, which approximates fair value due to the proximity of the
implicit rates of these financial instruments and the prevailing market rates
for similar instruments.
Software development costs
Software development costs incurred in the research and development of new
products and enhancements to existing products are charged to expense as
incurred. Software development costs are capitalized after technological
feasibility has been established. The period between achievement of
technological feasibility, which the Company defines as the establishment of a
working model, until the general availability of such software to customers,
has been short and software development costs qualifying for capitalization
have been insignificant. Accordingly, the Company has not capitalized any
software development costs since its inception.
49
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Capitalization of internal-use software costs
The Company recognizes costs of software developed or purchased for
internal-use in accordance with the Statement of Position ("SOP") 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." As such, the Company expenses all costs incurred that relate to
planning and post implementation phases of development. Costs incurred in the
development and implementation phase are capitalized and recognized over their
estimated useful life, which generally is three years. The balance of internal-
use software costs capitalized as of December 31, 1999 totaled $601,198. The
unamortized balance as of December 31, 1999 totaled $447,275.
Property and equipment
Property and equipment are stated at historical cost less accumulated
depreciation and amortization. Depreciation and amortization are computed using
the straight-line method over the useful lives of the assets, generally five
years or less, or the shorter of the lease term or the estimated useful lives
of the assets, if applicable.
Impairment of long-lived assets
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of." SFAS No. 121 requires recognition of impairment of long-
lived assets in the event the net book value of such assets exceeds the future
undiscounted cash flows attributed to such assets.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB 25, compensation expense is based on the difference,
if any, on the date of grant between fair value of the Company's stock and the
exercise price. The Company accounts for stock issued to non-employees in
accordance with the provisions of SFAS No. 123 and the Emerging Issues Task
Force Consensus on Issue No. 96-18.
Income taxes
Income taxes are accounted for using an asset and liability approach, which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets are
based on provisions of the enacted tax law; the effects of future changes in
tax laws or rates are not anticipated. The measurement of deferred tax assets
is reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
Net loss per share
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share" and SEC Staff Accounting Bulletin ("SAB") No. 98. Under
the provisions of SFAS No. 128 and SAB No. 98, basic net loss per share is
computed by dividing the net loss attributed to common stockholders for the
period
50
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
by the weighted average number of shares of Common Stock outstanding during the
period excluding shares of Common Stock subject to repurchase. Such shares of
Common Stock subject to repurchase aggregated 73,333, 1,737,435, and 2,154,779
as of December 31, 1997, 1998 and 1999, respectively.
The following table sets forth the computation of basic and diluted net loss
per share for the periods indicated (in thousands, except per share amounts):
Year Ended December 31,
-------------------------------
1997 1998 1999
------- ------- --------
Numerator:
Net loss attributable to common
stockholders................................ (3,209) (7,509) (28,882)
Denominator:
Weighted average shares...................... 2,405 3,949 8,975
Weighted average unvested shares of Common
Stock subject to repurchase................. (49) (1,316) (1,357)
------- ------- --------
Denominator for basic and diluted
calculation................................. 2,356 2,633 7,618
Net loss per share:
Basic and diluted............................ $ (1.36) $ (2.85) $ (3.79)
The following table sets forth potential shares of Common Stock that are not
included in the diluted net loss per share calculation above because to do so
would be anti-dilutive for the periods indicated (in thousands):
Year Ended December 31,
-----------------------
1997 1998 1999
------- ------- -------
Weighted average effect of Common Stock equivalents.... 1,200 878 --
Series A Preferred Stock............................. 1,235 2,107 --
Series B Preferred Stock............................. -- 3,092 --
Series C Preferred Stock............................. -- 359 --
Series D Preferred Stock............................. -- -- --
Series E Preferred Stock............................. -- -- --
Warrants to purchase mandatorily redeemable
convertible preferred stock......................... 66 71 --
Shares of common Stock subject to repurchase......... 49 1,316 1,357
Common Stock options................................. 1,480 1,870 545
------- ------- -------
4,030 9,693 1,902
======= ======= =======
Pro forma net loss per share
Pro forma net loss per share is computed using the weighted average number
of shares of Common Stock outstanding, including the pro forma effects of the
exercise of warrants to purchase Series B Preferred Stock and automatic
conversion of the Company's Series A, B, C, D and E Preferred Stock into shares
of the Company's Common Stock effective upon the closing of the Company's
initial public offering as if such conversion occurred at the beginning of the
period, or at the date of issuance, if later. The resulting pro forma
adjustment for the years ended December 31, 1998 and 1999 includes (i) an
increase in the weighted average shares used to compute the basic net loss per
share of 5,896,280 and 8,715,374, respectively, and (ii) a decrease in the net
loss attributable to common stockholders for the accretion of mandatorily
redeemable convertible preferred stock of $1,165,000 and $13,227,000,
respectively. The calculation of diluted net loss per share
51
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
excludes potential shares of Common Stock as their effect would be
antidilutive. Pro forma potential Common Stock consists of Common Stock subject
to repurchase rights and incremental shares of Common Stock issuable upon the
exercise of stock options.
Comprehensive income
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. As of December 31, 1998 and December
31, 1999, the Company had not had any transactions that were required to be
reported in comprehensive income.
Segment information
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
131, "Disclosure About Segments of an Enterprise and Related Information." The
Company identifies its operating segment based on business activities,
management responsibility and geographic location. During all periods
presented, the Company operated in a single business segment. Through December
31, 1999, foreign operations revenues or investments in the foreign operation
long-lived assets have not been significant.
Reclassifications
Certain reclassifications have been made to the prior year financial
statements to conform to the current period presentation.
Note 2--Acquisition
Effective July 1, 1999, the Company acquired all the assets and liabilities
of Lexington Software Associates Incorporated, which is a provider of
configuration management solutions and development methodologies, including
consulting and education. The acquisition has been accounted for using the
purchase method of accounting. The total purchase price for this acquisition
was approximately $800,000. The purchase price was allocated to the tangible
and intangible assets acquired and liabilities assumed based upon their
respective fair values at the acquisition date. The purchase price consisted of
88,339 shares of the Company's Series E Preferred Stock (estimated fair value
of $500,000), seven-year warrants to purchase 17,668 shares of Series E
Preferred Stock at $5.66 per share (estimated fair value of $77,000) and
acquisition-related expenses (including legal and accountancy fees) of
approximately $223,000. The allocation of the purchase price was as follows:
Allocation of Purchase Price
Tangible Assets................................................. $ 385,000
Intangible Assets...............................................
Workforce..................................................... 500,000
Goodwill...................................................... 300,000
Liabilities..................................................... (385,000)
---------
$ 800,000
=========
The amortization of the intangible assets will occur over the estimated
periods to be benefited. The workforce asset will be amortized on the straight-
line basis over two years from the acquisition date, however,
52
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
retention of the acquired employees will be evaluated in future periods to
assess whether accelerated amortization of this asset is warranted. The
goodwill is expected to be amortized on a straight-line basis over three years
from the acquisition date. Amortization of acquired intangible asset was
$377,000 for the year ended December 31, 1999.
Note 3--Balance sheet components (in thousands):
December 31,
---------------
1998 1999
------ -------
Accounts receivable, net:
Accounts receivable....................................... $2,675 $ 5,446
Less: Allowance for doubtful accounts..................... (270) (288)
------ -------
$2,405 $ 5,158
====== =======
There were no write-offs against the allowance for doubtful accounts in the
years ended December 31, 1998 and 1999.
December 31,
---------------
1998 1999
------ -------
Property and equipment, net:
Computer equipment and software........................... $ 952 $ 2,944
Furniture and fixtures.................................... 586 953
Leasehold improvements.................................... 449 501
------ -------
1,987 4,398
Less: Accumulated depreciation and amortization........... (370) (1,253)
------ -------
$1,617 $ 3,145
====== =======
Property and equipment includes $23,000 and $0 of fixed assets under capital
leases at December 31, 1998 and 1999, respectively. Accumulated depreciation of
such assets was $8,000 and $0 at December 31, 1998 and 1999, respectively.
December 31,
-------------
1998 1999
------ ------
Accrued liabilities:
Payroll and related expenses................................ $1,247 $3,506
Other....................................................... 226 1,460
------ ------
$1,473 $4,966
====== ======
Note 4--Debt:
In June 1999, the Company amended a financing agreement (the "Financing
Agreement") originally entered into in June 1998, whereby the bank will loan up
to 80% of eligible accounts receivable up to a maximum of $3,000,000 for
working capital purposes. Working capital advances accrue interest at the
bank's prime rate and are payable monthly with principal due one year
subsequent to the date of any advance. The Financing Agreement provides for
additional borrowings of up to $1,500,000 to finance equipment purchases.
Advances for equipment purchases accrue interest at the bank's prime rate plus
.25% and advances are payable
53
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
monthly for one year subsequent to the date of any advance. Thereafter, the
outstanding balance will be due in 36 monthly installments. The Agreement
requires the Company to comply with certain financial covenants. The Company
was in compliance with all covenants at December 31, 1998. On November 24,
1999, the Company repaid its equipment financing agreement with Silicon Valley
Bank. The amount repaid totaled approximately $1.3 million.
In January 1997, the Company issued $375,000 of convertible promissory notes
payable. The notes bore interest at 6% per year. In connection with the
issuance of the notes, the Company issued to the note holders warrants to
purchase 82,219 shares of Series B Preferred Stock at $1.29 per share. The
warrants expire at the earlier of November 2001 or upon an initial public
offering of the Company's Common Stock. The Company recorded a $94,000 discount
to the notes for the value of the warrants, which was recognized in 1997 as
additional interest expense.
In May 1997, the principal amounts and accrued interest outstanding for the
notes were converted into 357,182 shares of Series B Preferred Stock and
ultimately converted into Common Stock at the closing of the Company's initial
public offering.
Note 5--Commitments:
The Company leases office space and equipment under non-cancellable
operating leases with various expiration dates through August 2003. Rent
expense for the year ended December 31, 1997, 1998 and 1999 totaled $52,000,
$557,000, and $1,341,182, respectively.
Future minimum lease payments under noncancelable operating and capital
leases, as of December 31, 1999, are as follows (in thousands):
Capital Operating Sublease
Year Ending December 31, Leases Leases Income
------------------------ ------- --------- --------
2000............................................ $-- $ 3,045 $1,074
2001............................................ -- 3,027 927
2002............................................ -- 3,134 955
2003............................................ -- 1,522 647
2004............................................ -- -- --
---- ------- ------
Total minimum lease payments and sublease
income......................................... -- $10,728 $3,603
======= ======
Less: Amount representing interest.............. --
----
Present value of capital lease obligations...... $--
====
Restricted cash
During fiscal 1998, $605,000 of cash was pledged as collateral on an
outstanding letter of credit relating to the building lease agreement and is
classified as restricted cash on the balance sheet. The restricted cash will be
reduced by $226,875 on the 31st month after the signing of the agreement
provided no event of default has occurred. The Company was in compliance with
all such covenants at December 31, 1998 and December 31, 1999.
Note 6--Income Taxes:
At December 31, 1999, the Company had approximately $16,900,000 of federal
and $9,700,000 of state net operating tax loss carryforwards available to
reduce future taxable income which expire in 2010 and 2003
54
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for federal and state tax purposes, respectively. Under the Tax Reform Act of
1986, the amounts of and benefits from net operating loss carryforwards may be
impaired or limited in certain circumstances. Events which cause limitations in
the amount of net operating losses that the Company may utilize in any one year
include, but are not limited to, a cumulative ownership change of more than
50%, as defined, over a three year period.
Deferred tax assets consist of the following (in thousands):
December 31,
-------------------------
1997 1998 1999
------- ------- -------
Deferred tax assets:
Net operating loss carryforwards................ $ 1,105 $ 2,882 $ 6,319
Accruals and reserves........................... 61 235 1,090
Research credits................................ 40 120 414
Depreciation.................................... 60 128 0
------- ------- -------
1,266 3,365 7,823
Valuation allowance............................... (1,266) (3,365) (7,736)
------- ------- -------
Net deferred tax assets:.......................... 0 0 87
Deferred tax liabilities:
Depreciation.................................... 0 0 19
Non-deductible intangible assets................ 0 0 68
------- ------- -------
Net deferred tax liabilities...................... 0 0 87
Net deferred tax assets........................... $ -- $ -- $ --
======= ======= =======
The acquisition of Lexington Software Associates was structured as a tax-
free acquisition of stock, therefore, the differences between the recognized
fair values of acquired net assets and their historical tax bases are not
deductible for tax purposes. A deferred tax liability has been recognized for
the differences between assigned fair values of intangibles for book purposes
and the tax bases of such assets.
For financial reporting purposes, the Company has incurred losses in each
year since its inception. Based on the available objective evidence, management
believes it is more likely than not that the net deferred tax assets will not
be fully realizable. Accordingly, the Company has provided for a valuation
allowance against its net deferred tax assets at December 31, 1997, 1998 and
1999.
Note 7--Mandatorily Redeemable Convertible Preferred Stock:
At December 31, 1998, mandatorily redeemable convertible preferred stock
consisted of the following (in thousands):
Shares
---------------------- Liquidation Redemption
Series Authorized Outstanding Amount Amount
- ------ ---------- ----------- ----------- ----------
Series A Preferred Stock......... 1,120 1,120 $ 224 $ 626
Series B Preferred Stock......... 3,142 3,040 3,909 4,756
Series C Preferred Stock......... 7,160 7,160 7,726 7,989
Series D Preferred Stock......... 3,741 3,741 7,000 7,093
------ ------ ------- -------
15,163 15,061 $18,859 $20,464
====== ====== ======= =======
55
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The holders of Series A, B, C and D Preferred Stock had certain rights and
privileges as follows:
Warrants
The Company issued warrants to purchase 20,409, 82,219 and 5,480 in 1996,
1997 and 1998, respectively, shares of Series B Preferred Stock at $1.29 per
share to the holders of the warrants. The warrants expire at the earlier of
November 2001 or upon an initial public offering of the Company's Common Stock.
Voting
Each share of Series A, B, C and D Preferred Stock had voting rights
equivalent to Common Stock on an "as if" converted basis.
Dividends
Holders of Series A, B, C and D Preferred Stock were entitled to receive
non-cumulative annual dividends of $0.01, $0.10, $0.09 and $0.15 per share,
respectively, when and if declared by the Company's Board of Directors.
Dividends on the Series A, B, C and D Preferred Stock would have been payable
in preference and prior to any payment of any dividend on the Common Stock. The
holders of the Series A, B, C and D would also have been entitled to
participate in dividends on the Common Stock, when and if declared by the Board
of Directors, on an as-converted to Common Stock basis. No dividends have been
declared from inception through October 1999 when the Series A, B, C and D
Preferred Stock were converted into Common Stock.
Liquidation
In the event of any liquidation, dissolution, winding up or merger where
less than 50% of the voting power is maintained by the Company, the holders of
the Series A, B, C and D Preferred Stock would have been entitled to receive,
prior and in preference to any distribution to the holders of the Common Stock,
an amount equal to $0.20, $1.29, $1.08 and $1.87 per share, respectively, plus
any declared but unpaid dividends. Any amounts remaining after such
distribution would have been distributed among the holders of Series B, C and D
Preferred Stock, and Common Stock on an "as if" converted basis until the
holders of Series B, C and D Preferred Stock had received an aggregate
liquidation payment of $2.57, $2.16 and $2.81, thereafter any remaining amounts
would have been distributed among the holders of Common Stock.
Redemption
Upon the request of holders of at least 50% of the outstanding shares of
Series A, B, C or D Preferred Stock, the shares of all of the preferred stock
could have been redeemed in four equal installments beginning in May 2002. The
redemption price for Series A, B, C and D Preferred Stock would have been the
greater of the original issuance price for Series A, B, C and D Preferred
Stock, $0.20, $1.29, $1.08 and $1.87 per share, respectively, plus any
undeclared and unpaid dividends and an amount equal to that amount which would
result in the holder of such shares realizing an 8% annually compounded return
on the purchase price or the fair market value of Series A, B, C and D
Preferred Stock on the first redemption date.
Conversion
Each share of Series A, C and D Preferred Stock was convertible at the
option of the holder into two-thirds of a share of Common Stock at any time,
subject to adjustment for antidilution. Each share of Series B Preferred Stock
was convertible at the option of the holders into .7022705 of a share of Common
Stock at any
56
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
time, subject to adjustment for antidilution. All shares of Series A, B, C and
D Preferred Stock were automatically converted upon the October 1999 initial
public offering of the Company's Common Stock.
Series E Preferred Stock
Each share of Series E Preferred Stock had voting rights equivalent to
Common Stock on an "as if" converted basis. Holders of Series E Preferred Stock
were entitled to receive non-cumulative annual dividends of $0.45 per share,
when and if declared by the Company's Board of Directors. Dividends on the
Preferred Stock would have been payable in preference and prior to any payment
of any dividend on the Common Stock. The holders of the Series E Preferred
Stock would have been entitled to participate in dividends on the Common Stock,
when and if declared by the Board of Directors, based on the number of shares
of Common Stock held on an as-converted basis. No dividends were declared on
the preferred stock.
In the event of any liquidation, dissolution, winding up or merger where
less than 50% of the voting power is maintained by the Company, the holders of
the Series E Preferred Stock would have been entitled to receive, prior and in
preference to any distribution to the holders of the Common Stock, an amount
equal to $5.66 per share, respectively, plus any declared but unpaid dividends.
Any amounts remaining after such distribution would have been distributed among
the holders of Series E Preferred Stock, and Common Stock on an "as if"
converted basis until the holders of Series E received an aggregate liquidation
payment of $8.49, thereafter any remaining amounts would have been distributed
among the holders of Common Stock.
Upon the request of holders of at least 50% of the outstanding shares of
Series E Preferred Stock, the shares of all of the preferred stock would have
been redeemed in four equal installments beginning in May 2002. The redemption
price for Series E Preferred Stock would have been the greater of the original
issuance price for Series E Preferred Stock, $5.66 per share, respectively,
plus any undeclared and unpaid dividends and an amount equal to that amount
which would result in the holder of such shares realizing an 8% annually
compounded return on the purchase price or the fair market value of Series E
Preferred Stock on the first redemption date.
Each share of Series E Preferred Stock was convertible at the option of the
holder into two-thirds of a share of Common Stock at any time, subject to
adjustment for antidilution. Each share of Series E Preferred Stock was
automatically converted upon the Company's initial public offering of Common
Stock.
Conversion of Preferred Stock
Effective upon the closing of the Company's initial public offering, the
outstanding shares of Series A, B, C, D and E Preferred Stock were converted
into 746,664, 2,134,548, 4,773,161, 2,494,142, and 2,322,024 shares of Common
Stock, respectively.
Note 8--Common Stock:
In March 1995, the Company issued 1,933,333 shares of Common Stock to its
founder in exchange for $14,500 in total consideration. Additionally, in March
1996, the Company issued 233,333 shares of Common Stock to an employee in
consideration of a $3,500 promissory note. In addition, the Company issued a
further 200,000 shares of Common Stock in consideration of $3,000 in cash.
Under the terms of the stock purchase agreements, the Company has the right to
repurchase up to 2,166,667 shares of such Common Stock at the original issue
price upon termination. The repurchase rights expired as to 25% of such Common
Stock in January 1997 and the remainder expire ratably over a 36 month period
thereafter with 586,667 and 61,805 shares of Common Stock subject to repurchase
at December 31, 1998 and 1999, respectively.
Notes receivable from stockholders
In March 1998, the Company issued 1,333,333 shares of Common Stock to an
officer of the Company in exchange for a $240,000 note receivable. The note
bore interest at 6% per year. The note was secured by the
57
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
underlying stock and is classified as a note receivable from stockholder in the
accompanying balance sheet at December 31, 1998. Under the terms of the
agreement, the Company has the right to repurchase all of the shares of such
stock at the original issue price upon termination. The repurchase rights
expire ratably over a 48 month period with 1,055,555 and 722,221 shares of
Common Stock subject to repurchase at December 31, 1998 and 1999, respectively.
In June 1999, the note was paid.
In April 1999 the Company issued a total 516,667 shares of Common Stock to
two officers of the Company in exchange for notes receivable totalling
$201,500. The notes bears interest at the rate of 6% per year. The principal
sum of the notes will become due and payable in eighteen equal monthly
installments beginning in October 2000. The notes are secured by the underlying
stock and are classified as notes receivable from stockholders in the
accompanying balance sheet at December 31, 1999. Under the terms of the
agreement, the Company has the right to repurchase all of the shares of such
stock at the original issue price upon termination. The repurchase rights will
expire as to 25% of such Common Stock in April 2000, and the remainder will
expire ratably over a 36 month period thereafter with 516,667 shares of Common
Stock subject to repurchase at December 31, 1999.
Note 9--Employee Stock Option Plan:
Prior Stock Option Plans
The Company's 1996 Stock Option Plan and 1998 Stock Option Plan provide for
the issuance of options to acquire 3,766,666 shares of common stock. These
plans provide for the grant of incentive stock options to employees and
nonqualified stock options to employees, directors and other eligible
participants. Options granted under the Plans vest at variable rates, typically
four years, determined by the Board of Directors and remain exercisable for a
period not to exceed ten years. All of the shares of common stock that were
available for issuance when the 1999 Equity Incentive Plan became effective,
became available for issuance under the 1999 Equity Incentive Plan.
1999 Equity Incentive Plan
In July 1999, the Board adopted and in September 1999, the stockholders
approved, the 1999 Equity Incentive Plan (the "1999 Plan") and reserved
2,900,000 shares of Common Stock for issuance thereunder. The 1999 Plan
authorized the award of options, restricted stock awards and stock bonuses
(each an "Award"). No person will be eligible to receive more than 1,000,000
shares in any calendar year pursuant to Awards under the 1999 Plan other than a
new employee of the Company who will be eligible to receive no more than
1,500,000 shares in the calendar year in which such employee commences
employment. Options granted under the 1999 Plan may be either incentive stock
options ("ISO") or nonqualified stock options ("NSO"). ISOs may be granted only
to Company employees (including officers and directors who are also employees).
NSOs may be granted to Company employees, officers, directors, consultants,
independent contractors and advisors of the Company.
Options under the Plan may be granted for periods of up to ten years and at
prices no less than 85% of the estimated fair value of the shares on the date
of grant as determined by the Board of Directors, provided, however, that (i)
the exercise price of an ISO may not be less than 100% of the estimated fair
value of the shares on the date of grant, and (ii) the exercise price of an ISO
granted to a 10% stockholder may not be less than 110% of the estimated fair
value of the shares on the date of grant. The maximum term of options granted
under the 1999 Plan is ten years.
58
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Members of the Board who are not employees of the Company, or any parent,
subsidiary or affiliate of the Company, are eligible to participate in the 1999
Plan. The option grants under the 1999 Plan are automatic and nondiscretionary,
and the exercise price of the options must be 100% of the fair market value of
the Common Stock on the date of grant. Each eligible director who first becomes
a member of the Board on or after the effective date of October 8, 1999 forms a
part (the "Effective Date") will initially be granted an option to purchase
20,000 shares (an "Initial Grant") on the date such director first becomes a
director. Immediately following each Annual Meeting of the Company, each
eligible director will automatically be granted an additional option to
purchase 10,000 shares if such director has served continuously as a member of
the Board since the date of such director's Initial Grant or, if such director
was ineligible to receive an Initial Grant, since the Effective Date. The term
of such options is ten years, provided that they will terminate three months
following the date the director ceases to be a director or a consultant of the
Company (twelve months if the termination is due to death or disability). All
options granted under the Directors Plan will vest 100% of the shares upon the
date of issuance.
Plan Activity
The following table summarizes the activity under the 1996, 1998 and 1999
Plans for the years ended December 31, 1997, 1998 and 1999 (shares in
thousands):
Year Ended December 31,
--------------------------------------------------------------------------
1997 1998 1999
------------------------ ------------------------ ------------------------
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ ---------------- ------ ---------------- ------ ----------------
Outstanding at beginning
of year................ 487 $0.03 1,276 $0.11 622 $ 0.17
Granted................. 1,074 0.14 824 0.21 2,587 24.42
Canceled................ (185) 0.09 (334) 0.18 (264) 1.43
Exercised............... (100) 0.05 (1,144) 0.13 (1,397) 1.20
----- ------ ------
Outstanding at end of
year................... 1,276 0.11 622 0.17 1,548 39.56
----- ------ ------
Options exercisable at
end of year............ 1,276 622 1,548
===== ====== ======
Weighted average fair
value of options
granted during the
year................... $0.03 $0.05 $39.56
===== ===== ======
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1999 (shares in thousands):
Options Exercisable at
Options Outstanding at December 31, 1999 December 31, 1999
-------------------------------------------------- ----------------------------
Weighted Average
Range of Number Remaining Contractual Weighted Average Number Weighted Average
Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
- --------------- ----------- --------------------- ---------------- ----------- ----------------
$ 0.15-2.25 425 9.2 $ 1.46 425 $ 1.46
7.64-10.01 439 9.6 8.90 439 8.90
11.00-99.00 244 9.8 15.46 235 12.87
103.38-123.75 440 10.0 120.38 -- --
----- -----
1,548 9.6 39.56 1,099 6.87
===== =====
59
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair value disclosures
The Company calculated the minimum fair value of each option grant on the
date of grant using the Black-Scholes option-pricing model as prescribed by
SFAS No. 123 using the following assumptions:
Year Ended
December 31,
----------------
1997 1998 1999
---- ---- ----
Risk-free interest rates................................... 6.5% 6.5% 5.5%
Expected lives (in years).................................. 4.0 4.0 4.0
Dividend yield............................................. 0.0 0.0 0.0
Expected volatility........................................ 0.0 0.0 80.0%
The compensation cost associated with the Company's stock-based compensation
plans, determined using the fair value method prescribed by SFAS No. 123, did
not result in a material difference from the reported net income for the years
ended December 31, 1997, 1998 and 1999.
Employee Stock Purchase Plan
In July 1999, the Board adopted and in September 1999, the stockholders
approved, the 1999 Employee Stock Purchase Plan (the "Purchase Plan") and
reserved 300,000 shares of Common Stock for issuance thereunder. On each
January 1, the aggregate number of shares reserved for issuance under this plan
will increase automatically by a number of shares equal to 1% of the Company's
outstanding shares on December 31 of the preceding year. The aggregate number
of shares reserved for issuance under the Purchase Plan shall not exceed
3,000,000 shares. The Purchase Plan will become effective on the first business
day on which price quotations for the Company's Common Stock are available on
the Nasdaq National Market. Employees generally will be eligible to participate
in the Purchase Plan if they are customarily employed by the Company for more
than 20 hours per week and more than five months in a calendar year and are not
(and would not become as a result of being granted an option under the Purchase
Plan) 5% stockholders of the Company. Under the Purchase Plan, eligible
employees may select a rate of payroll deduction between 2% and 10% of their W-
2 cash compensation subject to certain maximum purchase limitations. Each
offering period will have a maximum duration of two years and consists of four
six-month Purchase Periods. The first Offering Period is expected to begin on
the first business day on which price quotations for the Company's Common Stock
are available on the Nasdaq National Market. Depending on the Effective Date,
the first Purchase Period may be more or less than six months long. Offering
Periods and Purchase Periods thereafter will begin on February 1 and August 1.
The price at which the Common Stock is purchased under the Purchase Plan is 85%
of the lesser of the fair market value of the Company's Common Stock on the
first day of the applicable offering period or on the last day of that purchase
period. The Purchase Plan will terminate after a period of ten years unless
terminated earlier as permitted by the Purchase Plan.
Deferred stock-based compensation
In connection with certain stock option grants during the years ended
December 31, 1998 and 1999, the Company recognized deferred stock-based
compensation totaling $1.9 million and $7.3 million, respectively, which is
being amortized over the vesting periods of the applicable options.
Amortization expense recognized during the year ended December 31, 1998 and
1999 totaled approximately $812,000 and $3.7 million, respectively.
60
INTERWOVEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 10--Subsequent Events:
Follow-on offering
On February 1, 2000, we completed our follow-on offering of common stock. We
sold a total of 1,000,000 shares at a price of $161.00 per share. The offering
resulted in net proceeds to us of approximately $152.3 million, net of an
underwriting discount of $7.7 million and estimated offering expenses of $1.0
million.
61