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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
DECEMBER 31, 2001.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
PERIOD FROM
_____________________ TO _____________________.
COMMISSION FILE NUMBER 0-19817.
STELLENT, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 41-1652566
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7777 GOLDEN TRIANGLE DRIVE, EDEN PRAIRIE, MINNESOTA 55344-3736
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(952) 903-2000
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common Stock, $.01 par value -
22,422,042 shares as of February 4, 2002.
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INDEX
STELLENT, INC.
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - December 31, 2001 and March 31, 2001.........................3
Condensed Consolidated Statements of Operations - Three and
nine months ended December 31, 2001 and 2000.........................................................4
Condensed Consolidated Statements of Cash Flows - Nine months
ended December 31, 2001 and 2000.....................................................................5
Notes to Condensed Consolidated Financial Statements.................................................6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.....................................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........................................22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................................................23
SIGNATURES....................................................................................................24
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STELLENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
DECEMBER 31, MARCH 31,
2001 2001
---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents ................................. $ 12,307 $ 14,355
Short-term marketable securities........................... 67,041 81,262
Accounts receivable, net................................... 27,649 21,403
Prepaid royalties.......................................... 3,088 2,231
Prepaid expenses, notes and other.......................... 11,077 3,468
--------------- ---------------
Total current assets......................................... 121,162 122,719
Long-term marketable securities.............................. 14,842 10,893
Property and equipment, net.................................. 6,398 4,051
Prepaid royalties, net of current............................ 3,385 2,074
Other intangible assets, net................................. 26,148 31,118
Deferred income taxes........................................ 6,410 4,894
Investments in and notes with other companies................ 8,273 5,571
Other........................................................ 1,866 266
--------------- ---------------
Total assets................................................. $ 188,484 $ 181,586
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 2,375 $ 1,380
Deferred revenues.......................................... 6,150 5,942
Commissions payable........................................ 2,434 2,226
Accrued expenses and other................................. 3,697 3,951
--------------- ---------------
Total current liabilities.................................... 14,656 13,499
Deferred revenue, net of current portion..................... 245 606
Other........................................................ 887 37
--------------- ---------------
Total liabilities............................................ 15,788 14,142
--------------- ---------------
Shareholders' equity
Common stock, 22,400 and 21,984 shares issued and
outstanding, respectively................................ 224 220
Additional paid-in capital................................. 195,687 187,512
Accumulated deficit........................................ (25,085) (20,204)
Accumulated other comprehensive income (loss).............. 1,870 (84)
--------------- ---------------
Total shareholders' equity................................. 172,696 167,444
--------------- ---------------
Total liabilities and shareholders' equity................... $ 188,484 $ 181,586
=============== ===============
See accompanying notes.
Note: The balance sheet at March 31, 2001 has been derived from audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements.
3
STELLENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- -------------------------
2001 2000 2001 2000
------------ ----------- ----------- -----------
Revenues:
Product licenses........................ $ 21,563 $ 15,903 $ 58,603 $ 36,097
Services................................ 5,005 3,633 15,731 8,523
------------ ----------- ----------- -----------
Total revenues............................ 26,568 19,536 74,334 44,620
------------ ----------- ----------- -----------
Cost of revenues:
Product licenses........................ 1,569 1,131 3,487 2,630
Services................................ 3,463 1,938 10,034 4,647
------------ ----------- ----------- -----------
Total cost of revenues.................... 5,032 3,069 13,521 7,277
------------ ----------- ----------- -----------
Gross profit.............................. 21,536 16,467 60,813 37,343
------------ ----------- ----------- -----------
Operating expenses:
Sales and marketing..................... 12,827 8,564 35,682 19,365
General and administrative.............. 2,603 2,588 7,510 6,332
Research and development................ 4,211 2,783 12,957 6,489
Acquisition and related costs........... -- 185 -- 775
Amortization of acquired intangible
assets and other...................... 3,395 3,381 10,260 7,010
Write-off of in-process research and
development........................... -- -- -- 10,400
------------ ----------- ----------- -----------
Total operating expenses.................. 23,036 17,501 66,409 50,371
------------ ----------- ----------- -----------
Loss from operations...................... (1,500) (1,034) (5,596) (13,028)
Other:
Interest income, net.................... 699 1,577 2,938 5,546
Investment impairment................... -- (400) (2,223) (400)
------------ ----------- ----------- -----------
Net income/(loss)......................... $ (801) $ 143 $ (4,881) $ (7,882)
============ =========== =========== ===========
Net income/(loss) per common share - Basic $ (0.04) $ 0.01 $ (0.22) $ (0.37)
Net income/(loss) per common share -
Diluted................................... $ (0.04) $ 0.01 $ (0.22) $ (0.37)
Weighted average common shares outstanding
- Basic................................. 22,336 21,552 22,260 21,359
Weighted average common shares outstanding
- Diluted............................... 22,336 23,849 22,260 21,359
See accompanying notes.
4
STELLENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
-------------------------
2001 2000
----------- -----------
OPERATING ACTIVITIES:
Net loss................................................................ $ (4,881) $ (7,882)
Adjustments to reconcile net loss to cash provided by/(used in)
operating activities:
Depreciation and amortization......................................... 1,171 1,154
Amortization of intangible assets and other........................... 10,260 7,010
Write-off of in-process research and development ..................... -- 10,400
Investment impairment................................................. 2,223 --
Other................................................................. -- (1,740)
Tax benefit from employee stock option exercises......................... 1,516 1,750
Changes in operating assets and liabilities, net of amounts acquired:
Accounts receivable..................................................... (6,246) (7,506)
Prepaid expenses and other current assets............................... (6,788) (1,345)
Accounts payable and other liabilities ................................. 1,845 (2,569)
Accrued liabilities .................................................... (165) 2,391
Deferred revenue........................................................ (153) (640)
Accrued commissions..................................................... 208 1,082
Income taxes payable ................................................... (1,516) (1,750)
-------- --------
Net cash flows provided by (used in) operating activities............... (2,526) 355
-------- --------
INVESTING ACTIVITIES:
Purchases and maturities of marketable securities, net.................. 10,272 32,526
Purchases of fixed assets............................................... (2,965) (1,760)
Acquisitions, net of cash acquired ..................................... (100) (54,521)
Purchases of investments in and notes with other companies.............. (6,555) (1,735)
Other................................................................... (1,336) (1,021)
-------- --------
Net cash flows used in investing activities............................. (684) (26,511)
-------- --------
FINANCING ACTIVITIES:
Issuance of common stock, net of offering expenses...................... -- 22,708
Proceeds from exercise of stock options and warrants.................... 3,326 2,691
Purchase of common stock................................................ (2,578) --
Other................................................................... 455 (175)
-------- --------
Net cash flows provided by financing activities......................... 1,203 25,224
-------- --------
Cumulative effect of foreign currency translation adjustment............... (41) --
-------- --------
Net decrease in cash....................................................... (2,048) (932)
Cash and equivalents, beginning of period.................................. 14,355 8,859
-------- --------
Cash and equivalents, end of period........................................ $ 12,307 $ 7,927
======== ========
Non-cash financing activity - Issuance of common stock for acquisition..... $ 5,496 $ --
Non-cash investing activity - Unrealized gain on investment................ $ 1,870 $ --
See accompanying notes.
5
STELLENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS
Stellent, Inc., (formerly IntraNet Solutions, Inc.) is a leading provider
of business content management solutions, providing browser-based Web and
wireless access to content-centric business Web sites and content-supported
e-business applications. Stellent's products enable customers to rapidly deploy
business Web sites by automating the content contribution, editing, management,
and publishing processors for these sites.
With headquarters in Eden Prairie, Minnesota, the company maintains offices
throughout the United States, Europe, and Australia. The company currently has
more than 1,500 customers, primarily located throughout the United States and
Europe.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with Regulation S-X pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations,
although management believes that the disclosures are adequate to make the
information presented not misleading.
In the opinion of management, the unaudited condensed consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position as of
December 31, 2001 and March 31, 2001 and the results of operations for the three
and nine months ended December 31, 2001 and 2000 and cash flows for the nine
months ended December 31, 2001 and 2000. The results of operations for the three
and nine months ended December 31, 2001 are not necessarily indicative of the
results for the full year.
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.
Revenue Recognition: The Company derives all of its revenues from licenses
of our software products and related services. Product license revenue is
recognized when evidence of a purchase arrangement exists, the product has been
shipped and accepted by the customer, the fee is determinable and collectible,
and no significant obligations remain related to implementation. Revenues for
services consist of fees from consulting and maintenance. Consulting services
include needs assessment, software integration, security analysis, application
development and fixed price schedule. Our clients typically purchase annual
maintenance agreements, and we price maintenance agreements based on a
percentage of the product license fee. Clients purchasing maintenance
agreements receive product upgrades. Web-based technical support and telephone
hot-line support. We recognize revenues from maintenance agreements ratably
over the term of the agreement, typically one year.
6
Cash and Equivalents: The Company considers all short-term, highly liquid
investments that are readily convertible into known amounts of cash and have
original maturities of three months or less to be cash equivalents.
Short-term Marketable Securities: Investments in debt securities with a
remaining maturity of three months to one year are classified as short-term
marketable securities. Management determines the appropriate classification of
debt securities at the time of purchase and reevaluates such designation as of
each balance sheet date. The book value of the investments approximates their
estimated market value. As of December 31, 2001 the Company's investments were
in commercial paper and U.S. Government Agency securities. All investments are
held to maturity.
Reclassifications: Certain reclassifications have been made to the
consolidated statements of cash flows for the nine month period ending December
31, 2000 to conform with the presentation used at December 31, 2001. Certain
reclassifications have been made to the March 31, 2001 consolidated balance
sheet to conform with the presentation at December 31, 2001. The
reclassifications had no effect on total assets, total liabilities or
stockholders equity as previously reported.
Net Income per Common Share: The Company's basic net income per share
amounts have been computed by dividing net income by the weighted average number
of outstanding common shares. The Company's diluted net income per share is
computed by dividing net income by the weighted average number of outstanding
common shares and common share equivalents relating to stock options and
warrants, when dilutive.
3. ACQUISITIONS
On July 10, 2000, the Company acquired the Information Exchange Division
(IED, now called Stellent Software Components Division or SCD) of EBT
International, Inc. ("EBTI") formerly Inso Corporation. SCD is the market leader
in Web conversion and mobile device viewing technologies and applications. The
transaction was accounted for under the purchase method of accounting. The
Company paid aggregate consideration to EBTI in the transaction of $55 million
in cash. The Company recorded approximately $15 million in goodwill and
approximately $36 million in other intangible assets, including approximately
$10.4 million of in-process research and development, which was expensed when
the acquisition was recorded.
On July 10, 2001, the Company acquired select assets of RESoft, a leading
provider of end-to-end content management solutions for the real estate and
legal industries, for 200,000 shares of Stellent common stock. The acquisition
was valued at approximately $5.6 million, including acquisition costs. This
acquisition has been accounted for under the purchase method of accounting, and
approximately $4.6 million of the purchase price was allocated to goodwill, $0.5
million to intangible assets and $0.5 million to fixed assets.
4. INCOME TAXES
Deferred income taxes reflect the effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and amounts used for income tax purposes. A valuation allowance of approximately
$20.7 million has been established for a portion of the deferred tax asset to
reflect its anticipated ability to be realized.
7
For the periods presented, the financial statements reflect an effective tax
rate of zero, due to the utilization of net operating loss carry forwards and
adjustment of the deferred tax valuation allowance.
5. INVESTMENTS IN OTHER COMPANIES
We hold investments in eight non-public start-up technology companies,
owning approximately 5% to 12% of these companies, and in one public technology
company listed on Nasdaq, Active IQ, in which we own 8.5%. These investments are
all accounted for using the cost method of accounting. Investments in these
companies are made with the intention of giving us opportunities to have new
technologies developed for us or to give us leverage into certain vertical
markets that we may not otherwise be able to obtain on our own. The totals of
all these investments at December 31, 2001 are approximately $6.4 million.
Because we have an investment in a publicly traded company, we adjust our
investment value of this company up or down depending upon its current value at
the end of a quarter based upon the price per share as listed on Nasdaq. At
December 31, 2001, the market value of our equity in Active IQ was approximately
$1.9 million more than our investment value of $1.2 million. The offsetting
amount does not effect our condensed consolidated statements of operations but
is shown as "accumulated other comprehensive income (loss)" in the shareholders'
equity section on the condensed consolidated balance sheet. During the three
months ended December 31, 2001, the Company recognized license revenue of $1.5
million with Active IQ, as we licensed our technology to them for use in certain
ASP vertical markets. At December 31, 2001, we had an accounts receivable
balance from Active IQ of $1.0 million. We believe that the terms of this
arrangement are comparable to those given to other companies. Our initial
investment in Active IQ was made in the quarter ended December 31, 1999, with
subsequent investments made through December 31, 2000. No officers or directors
of the Company have an ownership or other financial interest in Active IQ.
Revenue recognized for the nine months ended December 31, 2001 from our other
related parties was approximately $0.175 million in the quarter ended June 30,
2001 and $0.225 million in the quarter ended September 30, 2001, of which all
amounts have been collected.
6. NOTE RECEIVABLE
In December 2001, we entered into a note receivable transaction with one
of our partners for $3.5 million. This note was 100% collateralized by all of
the assets of the partner and by an unaffiliated accredited investor. We have
received payment of $0.5 million and expect collection of the remaining balance
in the near term.
7. NEW ACCOUNTING STANDARDS
BUSINESS COMBINATIONS AND GOODWILL AND INTANGIBLE ASSETS
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142,
Goodwill and Intangible Assets. SFAS 141 is effective for all business
combinations completed after June 30, 2001. SFAS 142 is effective for fiscal
years beginning after December 15, 2001; however, certain provisions of this
Statement apply to goodwill and other intangible assets acquired between July 1,
2001 and the effective date of SFAS 142. Major provisions of these Statements
and their effective dates for the Company are as follows:
o Intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other
legal rights or are separable from the acquired entity and can be
sold, transferred, licensed, rented or exchanged, either individually
or as part of a related contract, asset or liability.
o Goodwill, as well as intangible assets with indefinite lives,
acquired after June 30, 2001, will not be amortized. Effective April
1, 2002, all previously recognized goodwill and intangible assets
with indefinite lives will no longer be subject to amortization.
o Effective April 1, 2002, goodwill and intangible assets with
indefinite lives will be tested for impairment annually and whenever
there is an impairment indicator.
o All acquired goodwill must be assigned to reporting units for
purposes of impairment testing and segment reporting.
The Company will continue to amortize goodwill and intangible assets
recognized prior to July 1, 2001, under its current method until April 1,
2002,at which time annual and quarterly goodwill amortization of approximately
$5.3 million and $1.3 million, respectively, and annual and quarterly
amortization of approximately $1.0 million and $0.25 million, respectively,
relating to intangible assets with indefinite lives will no longer be
recognized. By March 31, 2003 the Company will have completed a transitional
fair value based impairment test of goodwill as of April 1, 2002. By June 30,
2002, the Company will have completed a transitional impairment test of all
intangible assets with indefinite lives. Management does not anticipate that the
transitional valuation will result in a material reclassification between
goodwill and intangible assets with definite lives. Impairment losses, if any,
resulting from the transitional testing will be recognized in the quarter ended
June 30, 2002, as a cumulative effect of a change in accounting principle.
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
In September 2001, the FASB issued Statement of Financial Accounting
Standards 144, Accounting for the Impairment or Disposal of Long-lived Assets
(SFAS 144). This statement supercedes SFAS 121, Accounting for the Impairment of
Long Lived Assets and for Long-lived assets to be disposed of, and the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, Reporting the Results of Operations - Reporting the Effects of the Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for the disposal of a segment of a business.
SFAS 144 combines the two accounting models for disposals of long-lived
assets from SFAS 121 and APB 30. SFAS 144 also resolves implementation issues
related to SFAS 121. This statement is effective for financial statements issued
for fiscal years beginning after December 15, 2001, and interim periods within
those fiscal years, with early application encouraged. This statement is not
anticipated to have a current material effect on the financial statements of the
company, but could have a future financial statement effect on the company in
the event that an asset impairment has occurred.
8
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Stellent, Inc., is a leading provider of business content management
solutions, providing browser-based Web and wireless access to content-centric
business Web sites and content-supported e-business applications. Stellent's
products enable customers to rapidly deploy business Web sites by automating
the content contribution, editing, management, and publishing processes for
these sites. Business and Web content from a wide variety of enterprise
sources, including desktop applications, business applications, and templates,
is automatically converted to output formats. These output formats, which
include XML, HTML, WML, cHTML, and PDF, allow content to be viewed on the Web
with just a standard browser or on a wireless device. Personalization and
compatibility with corporate security models ensure that users access only the
information they need. Our customers are primarily located throughout the
United States and Europe.
We derive all of our revenues from licenses of our software products and
related services. Product license revenue is recognized when evidence of a
purchase arrangement exists, the product has been shipped and accepted by the
customer, the fee is determinable and collectible, and no significant
obligations remain related to implementation. Revenues for services consist of
fees from consulting and maintenance. Consulting services include needs
assessment, software integration, security analysis, application development and
training. We bill consulting fees either on a time and materials basis or on a
fixed price schedule. Our clients typically purchase annual maintenance
agreements, and we price maintenance agreements based on a percentage of the
product license fee. Clients purchasing maintenance agreements receive product
upgrades, Web-based technical support and telephone hot-line support. We
recognize revenues from maintenance agreements ratably over the term of the
agreement, typically one year.
Cost of revenues consists of technology royalties, costs to manufacture,
package and distribute our products and related documentation, as well as
personnel and other expenses related to providing services. Sales and marketing
expenses consist primarily of employee salaries, commissions, and costs
associated with marketing programs such as advertising, public relations and
trade shows. Research and development expenses consist primarily of salaries and
related costs associated with the development of new products, the enhancement
of existing products and the performance of quality assurance and documentation
activities. General and administrative expenses consist primarily of salaries
and other personnel-related costs for executive, financial, human resources,
information services and other administrative personnel, as well as legal,
accounting, insurance costs and provisions for doubtful accounts.
Since our inception, we have incurred substantial costs to develop and
acquire our technology and products, to recruit and train personnel for our
sales and marketing, research and development and services departments, and to
establish an administrative organization. As a result, we had an accumulated
deficit of $25.1 million at
9
December 31, 2001. We anticipate that our operating expenses will increase in
future quarters as we increase our international operations, increase our sales
and marketing operations, develop new distribution channels, fund greater levels
of research and development, broaden services and improve operational and
financial systems. In addition, our limited operating history makes it difficult
for us to predict future operating results. We cannot be certain that we will
sustain revenue growth or profitability.
FORWARD-LOOKING STATEMENTS
The information presented in this Item contains forward-looking statements
within the meaning of the safe harbor provisions of Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements are subject to
risks and uncertainties, including those discussed under "Risk Factors" below,
that could cause actual results to differ materially from those projected.
Because actual results may differ, readers are cautioned not to place undue
reliance on these forward-looking statements.
RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 2001 COMPARED TO THREE
MONTHS ENDED DECEMBER 31, 2000
REVENUES
Total revenues increased by $7.1 million, or 36%, to $26.6 million for the
three months ended December 31, 2001 from $19.5 million for the three months
ended December 31, 2000. The increase in revenues was attributable to the
organic expansion of our customer base, increased sales to existing customers
both from our direct sales force and through our partners, and an increase in
the number of large enterprise transactions during the quarter.
Product Licenses. Revenues for product licenses increased by $5.7 million,
or 36%, to $21.6 million for the three months ended December 31, 2001 from $15.9
million for the three months ended December 31, 2000. The increase in revenues
for product licenses was attributable to the expansion of our customer base,
increased sales to existing customers both from our direct sales force and
through our partners and an increase in the number of large enterprise
transactions during the quarter.
Services. Revenues for services increased by $1.4 million or 39%, to $5.0
million for the three months ended December 31, 2001 from $3.6 million for the
three months ended December 31, 2000. The increase in revenues for services was
primarily attributable to a larger installed base of products.
COST OF REVENUES AND GROSS PROFIT
Total cost of revenues increased by $1.9 million or 64%, to $5.0 million
for the three months ended December 31, 2001 from $3.1 million for the three
months ended December 31, 2000. Total cost of revenues as a percentage of total
revenues was 19% for the three months ended December 31, 2001 compared to 16%
for the three months ended December 31, 2000. Gross profit increased by $5.0
million, or 31%, to $21.5 million for the three months ended December 31, 2001
from $16.5 million for the three months ended December 31, 2000. Total gross
profit as a percentage of total revenues was 81% for the three months ended
December 31, 2001 compared to 84% for the three months ended December 31, 2000.
The increase in gross profit dollars was primarily due to increased revenues for
product licenses and services. The percentage decrease in gross profit as a
percentage of revenues was primarily due to a decrease in gross profit as a
percentage of revenue in our services.
Product Licenses. Cost of revenues for product licenses increased $0.5
million for the three months ended December 31, 2001 to $1.6 million from $1.1
for the three months ended December 31, 2000. Gross profit as a percentage of
revenues for product licenses remained consistent at 93% for the three months
ended December 31, 2001 and 2000.
10
Services. Cost of revenues for services increased by $1.6 million or 79%,
to $3.5 million for the three months ended December 31, 2001 from $1.9 million
for the three months ended December 31, 2000. Gross profit as a percentage of
revenues for services was 31% for the three months ended December 31, 2001
compared to 47% for the three months ended December 31, 2000. The decrease in
the gross profit as a percentage of revenues for services was primarily due to
increased employee headcount and other staffing costs for consulting services
personnel associated with increased training for our partners for which we
receive minimal revenue, and an increase in the amount of services work
performed by our partners, which typically would have been performed by us and
which led to under-utilization of certain of our employees.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased by $4.2
million, or 50%, to $12.8 million for the three months ended December 31, 2001
from $8.6 million for the three months ended December 31, 2000. Sales and
marketing expenses as a percentage of total revenues were 48% for the three
months ended December 31, 2001 compared to 44% for the three months ended
December 31, 2000. The increase in sales and marketing expense as a percentage
of revenue was primarily due to increased staffing and marketing expenses for
advertising and branding associated with changing our name.
General and Administrative. General and administrative expenses remained
flat at $2.6 million for the three months ended December 31, 2001 and 2000.
General and administrative expenses as a percentage of total revenues were 10%
for the three months ended December 31, 2001 compared to 13% for the three
months ended December 31, 2000. General and administrative expenses decreased as
a percentage of revenues due primarily to an increase in total revenues with
certain expenses remaining constant as well as a reduced rate of increase to our
provision for doubtful accounts.
Research and Development. Research and development expenses increased by
$1.4 million, or 51%, to $4.2 million for the three months ended December 31,
2001 from $2.8 million for the three months ended December 31, 2000. Research
and development expenses as a percentage of total revenues were 16% for the
three months ended December 31, 2001 compared to 14% for the three months ended
December 31, 2000. The increase in research and development expenses as a
percentage of revenue was primarily due to increases in staffing and related
costs to support product enhancements.
Amortization of Intangibles. A portion of the purchase price of SCD was
allocated to excess cost over fair value of net assets acquired, core
technology, customer base, software, trademarks and other intangibles, and is
being amortized over the assets' estimated useful lives of three years. A
portion of the purchase price of RESoft was allocated to certain intangible
assets, such as trademarks, and is also being amortized over their useful lives
of three years. Intangible amortization and other expense was $3.4 million for
the three month periods ended December 31, 2001 and 2000. See the discussion in
the notes to the condensed consolidated financial statements regarding the
adoption of new accounting pronouncements involving the amortization of
intangible assets.
OTHER INCOME, NET
Net interest income was $0.7 million for the three months ended December
31, 2001 compared to net interest income of $1.6 million for the three months
ended December 31, 2000. Net interest income for the three months ended December
31, 2001 and 2000 was primarily related to short-term investments purchased with
the proceeds of our public stock offerings completed in June 1999 and March
2000. The decrease in net interest income was primarily due to the decrease in
funds invested following the purchase of the SCD division from EBTI on July 10,
2000 as well as decreases in the interest rates earned by invested funds
resulting from decreases in market interest rates.
11
Investment Impairment. During the quarter ended December 31, 2000, the
Company determined that a permanent decline in the value of an investment in
another company had occurred due to the poor financial performance and cash flow
of the company. As a result, the Company recorded a write-down on the investment
in the company of approximately $0.4 million.
RESULTS OF OPERATIONS - NINE MONTHS ENDED DECEMBER 31, 2001 COMPARED TO NINE
MONTHS ENDED DECEMBER 31, 2000
REVENUES
Total revenues increased by $29.7 million, or 67%, to $74.3 million for the
nine months ended December 31, 2001 from $44.6 million for the nine months ended
December 31, 2000. The increase in revenues was attributable to the acquisition
of SCD in July 2000, organic expansion of our customer base and increased sales
to existing customers both from our direct sales force and through our partners
and an increase in the number of large enterprise transactions during the
current fiscal year.
Product Licenses. Revenues for product licenses increased by $22.5 million,
or 62%, to $58.6 million for the nine months ended December 31, 2001 from $36.1
million for the nine months ended December 31, 2000. The increase in revenues
for product licenses was attributable to the acquisition of SCD in July 2000,
the expansion of our customer base and increased sales to existing customers
both from our direct sales force and through our partners and an increase in the
number of large enterprise transactions during the current fiscal year.
Services. Revenues for services increased by $7.2 million or 85%, to $15.7
million for the nine months ended December 31, 2001 from $8.5 million for the
nine months ended December 31, 2000. The increase in revenues for services was
primarily attributable to a larger installed base of products including the
acquisition of SCD in July 2000.
COST OF REVENUES AND GROSS PROFIT
Total cost of revenues increased by $6.2 million or 86%, to $13.5 million
for the nine months ended December 31, 2001 from $7.3 million for the nine
months ended December 31, 2000. Total cost of revenues as a percentage of total
revenues was 18% for the nine months ended December 31, 2001 compared to 16% for
the nine months ended December 31, 2000. Gross profit increased by $23.5
million, or 63%, to $60.8 million for the nine months ended December 31, 2001
from $37.3 million for the nine months ended December 31, 2000. Total gross
profit as a percentage of total revenues was 82% for the nine months ended
December 31, 2001 compared to 84% for the nine months ended December 31, 2000.
The increase in gross profit dollars was primarily due to increased revenues for
product licenses and services.
Product Licenses. Cost of revenues for product licenses increased by $0.9
million, or 33%, to $3.5 million for the nine months ended December 31, 2001
from $2.6 million for the nine months ended December 31, 2000. Gross profit as a
percentage of revenues for product licenses was 94% for the nine months ended
December 31, 2001 compared to 93% for the nine months ended December 31, 2000.
The increase in the gross profit as a percentage of revenues was primarily
attributable to certain royalty costs remaining constant while revenue has
increased.
Services. Cost of revenues for services increased by $5.4 million or 116%,
to $10.0 million for the nine months ended December 31, 2001 from $4.6 million
for the nine months ended December 31, 2000. Gross profit as a percentage of
12
revenues for services was 36% for the nine months ended December 31, 2001
compared to 45% for the nine months ended December 31, 2000. The decrease in the
gross profit as a percentage of revenues for services was primarily due to
increased employee headcount and other staffing costs for consulting services
personnel associated with increased training for our partners for which we
receive minimal revenue, and an increase in the amount of services work
performed by our partners, which typically would have been performed by us and
which led to under-utilization of certain of our employees.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased by $16.3
million, or 84%, to $35.7 million for the nine months ended December 31, 2001
from $19.4 million for the nine months ended December 31, 2000. Sales and
marketing expenses as a percentage of total revenues were 48% for the nine
months ended December 31, 2001 compared to 43% for the nine months ended
December 31, 2000. The increase in sales and marketing expense as a percentage
of revenue was primarily due to increased staffing and marketing expenses for
advertising and branding associated with changing our name.
General and Administrative. General and administrative expenses increased
by $1.2 million or 19%, to $7.5 million for the nine months ended December 31,
2001 from $6.3 million for the nine months ended December 31, 2000. General and
administrative expenses as a percentage of total revenues were 10% for the nine
months ended December 31, 2001 compared to 14% for the nine months ended
December 31, 2000. General and administrative expenses decreased as a percentage
of revenues due primarily to an increase in total revenues with certain expenses
remaining constant as well as a reduced rate of increase to our provision for
doubtful accounts.
Research and Development. Research and development expenses increased by
$6.5 million, or 100% to $13.0 million for the nine months ended December 31,
2001 from $6.5 million for the nine months ended December 31, 2000. Research and
development expenses as a percentage of total revenues were 17% for the nine
months ended December 31, 2001 compared to 15% for the nine months ended
December 31, 2000. The increase in research and development expenses was
primarily due to the acquisition of SCD and increases in staffing and related
costs to support product enhancements.
Purchased In-process Research and Development and Acquisition-Related
Charges. In connection with our acquisitions, primarily SCD, we incurred certain
costs. A portion of the purchase price, $10.4 million, was allocated to
in-process research and development and was expensed.
Amortization of Intangibles. A portion of the purchase price of SCD was
allocated to excess cost over fair value of net assets acquired, core
technology, customer base, software, trademarks and other intangibles, and is
being amortized over the assets' estimated useful lives, of three years. A
portion of the purchase price of RESoft was allocated to certain intangible
assets, such as trademarks, and is also being amortized over their useful lives
of three years. Intangible amortization and other expense was $10.3 million for
the nine month period ended December 31, 2001.
OTHER INCOME, NET
Net interest income was $2.9 million for the nine months ended December 31,
2001 compared to net interest income of $5.5 million for the nine months ended
December 31, 2000. Net interest income for the nine months ended December 31,
2001 and 2000 was primarily related to short-term investments purchased with the
proceeds of our public stock offerings completed in June 1999 and March 2000.
The decrease in net interest income was primarily due to the decrease in funds
invested following the purchase of the SCD division from EBTI on July 10, 2000
as well as decreases in the interest rates earned by invested funds resulting
from decreases in market interest rates.
13
Investment Impairment. During the quarter ended September 30, 2001 and the
quarter ended December 31, 2000, the Company determined that a permanent decline
in the value of several of its investments in and notes with other companies had
occurred due to the poor financial performance and cash flow of these companies.
As a result, the Company recorded a write-down on the investments in and notes
with these companies of approximately $2.2 million and $0.4 million for the nine
months ended December 31, 2001 and 2000, respectively.
NET OPERATING LOSS CARRYFORWARDS
As of March 31, 2001 we had net operating loss carryforwards of
approximately $43.8 million. The net operating loss carryforwards will expire at
various dates beginning in 2011, if not utilized. The Tax Reform Act of 1986
imposes substantial restrictions on the utilization of net operating losses and
tax credits in the event of an "ownership change" of a corporation. Our ability
to utilize net operating loss carryforwards on an annual basis will be limited
as a result of "ownership changes" in connection with the sale of equity
securities. We have provided a valuation allowance of approximately $18.5
million on a portion of the deferred tax asset because of the uncertainty
regarding its realization. Our accounting for deferred taxes and the valuation
allowance involves the evaluation of a number of factors such as our history of
operating losses, potential future losses and the nature of assets and
liabilities giving rise to deferred taxes.
Although realization of the net deferred tax asset is not assured, the
Company believes based on its projections of future taxable income, that it is
more likely than not that the net deferred tax asset will be realized. The
amount of net deferred tax assets considered realizable however, could be
adjusted in the future based on changes in conditions or assumptions.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations and satisfied our capital expenditure
requirements primarily through operating revenues and public offerings of
securities. Net cash used by operating activities was $2.5 million for the nine
months ended December 31, 2001, compared to net cash provided by operating
activities of $0.4 million for the nine months ended December 31, 2000. The
change in cash flow from operations is primarily due to the increases in
accounts receivable, prepaid royalties and prepaid expenses and other current
assets. Accounts receivable have increased with increasing revenues. Our prepaid
royalties increased because we entered into several software arrangements
requiring up-front payments in order to lock-in royalty rates or gain access to
technology in order to expand our product lines. Our prepaid expenses, notes and
other increased relating primarily to prepayments that we have made for
consulting services for development of next generation technology, issuance of a
note and inventory purchases.
To date, we have invested our capital expenditures primarily in property
and equipment, consisting largely of computer hardware and software. Capital
expenditures for the nine months ended December 31, 2001 and 2000 were $3.0
million and $1.8 million, respectively. We have also entered into capital and
operating leases for facilities and equipment. We expect that our capital
expenditures will increase as our employee base grows.
As of December 31, 2001, we had $ 12.3 million in cash and equivalents,
$81.9 million in marketable securities and $106.5 million in working capital.
Net cash provided by financing activities was $1.2 million for the nine months
ended December 31, 2001 and $25.2 million for the nine months ended December 31,
2000. In the nine months ended December 31, 2001 we used approximately $2.6
million in cash to repurchase 181,000 of our shares on the open market.
14
We currently believe that the cash and equivalents and marketable
securities on hand will be sufficient to meet our working capital requirements
for the foreseeable future. After that time, we may require additional funds to
support our working capital requirements or for other purposes and may seek to
raise such additional funds through public or private equity financings or from
other sources. We cannot be certain that additional financing will be available
on terms favorable to us, or on any terms, or that any additional financing will
not be dilutive.
The Company continues to evaluate potential strategic acquisitions that
could utilize equity and, or, cash resources. Such opportunities could develop
quickly due to market and competitive factors.
RELATED PARTY TRANSACTIONS
We hold investments in eight non-public start-up technology companies,
owning approximately 5% to 12% of these companies, and in one public technology
company listed on Nasdaq, Active IQ, in which we own 8.5%. These investments are
all accounted for using the cost method of accounting. Investments in these
companies are made with the intention of giving us opportunities to have new
technologies developed for us or to give us leverage into certain vertical
markets that we may not otherwise be able to obtain on our own. The totals of
all these investments at December 31, 2001 are approximately $6.4 million.
Because we have an investment in a publicly traded company, we adjust our
investment value of this company up or down depending upon its current value at
the end of a quarter based upon the price per share as listed on Nasdaq. At
December 31, 2001, the market value of our equity in Active IQ was approximately
$1.9 million more than our investment value of $1.2 million. The offsetting
amount does not effect our condensed consolidated statements of operations but
is shown as "accumulated other comprehensive income (loss)" in the shareholders'
equity section on the condensed consolidated balance sheet. During the three
months ended December 31, 2001, the Company recognized license revenue of $1.5
million with Active IQ, as we licensed our technology to them for use in certain
ASP vertical markets. At December 31, 2001, we had an accounts receivable
balance from Active IQ of $1.0 million. We believe that the terms of this
arrangement are comparable to those given to other companies. Our initial
investment in Active IQ was made in the quarter ended December 31, 1999, with
subsequent investments made through December 31, 2000. No officers or directors
of the Company have an ownership or other financial interest in Active IQ.
Revenue recognized for the nine months ended December 31, 2001 from our other
related parties was approximately $0.175 million in the quarter ended June 30,
2001 and $0.225 million in the quarter ended September 30, 2001, of which all
amounts have been collected.
PRO FORMA NET INCOME PER COMMON SHARE
The Company's pro forma basic net income per share is computed by dividing
pro forma net income by the weighted average number of outstanding common shares
and the Company's pro forma diluted net income per share is computed by dividing
pro forma net income by the weighted average number of outstanding common shares
and common share equivalents relating to stock options and warrants, when
dilutive. Common stock equivalent shares consist of stock options and warrants
(using the treasury stock method). The accompanying pro forma supplemental
financial information is presented for informational purposes only and is not a
substitute for the historical financial information presented in accordance with
accounting principles generally accepted in the United States.
STELLENT, INC.
PRO FORMA SUPPLEMENTAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- ---------------------------
SUPPLEMENTAL INFORMATION: 2001 2000 2001 2000
----------- ------------ ------------ -----------
Net income (loss).......................... $ (801) $ 143 $ (4,881) $ (7,882)
Add back charges:
Amortization of acquired intangible
assets and other....................... 3,395 3,381 10,260 7,010
Write-off of in-process research and
development............................ -- -- -- 10,400
Acquisition and related costs............ -- 185 -- 775
Investment impairment ................... -- 400 2,223 400
----------- ------------ ------------ -----------
Total add back charges..................... 3,395 3,966 12,483 18,585
----------- ------------ ------------ -----------
Pro forma net income before pro forma
income taxes............................ 2,594 4,109 7,602 10,703
Pro forma income taxes..................... (908) (1,438) (2,661) (3,746)
----------- ------------ ------------ -----------
Pro forma net income....................... $ 1,686 $ 2,671 $ 4,941 $ 6,957
=========== ============ ============ ===========
Pro forma basic net income per share....... $ 0.08 $ 0.12 $ 0.22 $ 0.33
Pro forma diluted net income per share..... $ 0.07 $ 0.11 $ 0.21 $ 0.30
Weighted average common shares outstanding
- Basic.................................. 22,336 21,552 22,260 21,359
Weighted average common shares outstanding
- Diluted................................ 23,864 23,849 23,745 23,499
The accompanying supplemental financial information is presented for
informational purposes only and is not a substitute for the historical financial
information presented in accordance with accounting principles generally
accepted in the United States.
Pro forma net income per share is computed using the weighted average number of
shares of Common Stock outstanding. The Company has included the dilutive effect
of options and warrants for common stock as calculated using the treasury stock
method.
15
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
BUSINESS COMBINATIONS AND GOODWILL AND INTANGIBLE ASSETS
In July 2001, the FASB issued Statement of Financial Accounting Standards
(SFAS) 141 Business Combinations and SFAS 142 Goodwill and Intangible Assets.
These pronouncements, among other things, eliminate the pooling-of-interest
method of accounting for business combinations and eliminate the amortization of
goodwill for financial reporting purposes. However, goodwill will then be tested
for impairment annually or whenever an impairment indicator arises. SFAS 142 is
effective for the Company April 1, 2002. As of April 1, 2002, the amortization
of certain of the Company's intangible assets related to goodwill and workforce
with an original cost of approximately $19 million and an estimated net
unamortized value of approximately $8 million as of April 1, 2002 will cease and
only future impairments of these assets as they occur will be recorded. These
assets were acquired in July 2000 and are currently being amortized over their
estimated useful life of three years.
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
In September 2001, the FASB issued Statement of Financial Accounting
Standards 144, Accounting for the Impairment or Disposal of Long-lived Assets
(SFAS 144). This statement supercedes SFAS 121, Accounting for the Impairment of
Long Lived Assets and for Long-lived Assets to be Disposed of, and the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, Reporting the Results of Operations - Reporting the Effects of the Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for the disposal of a segment of a business.
SFAS 144 combines the two accounting models for disposals of long-lived
assets from SFAS 121 and APB 30. SFAS 144 also resolves implementation issues
related to SFAS 121. This statement is effective for financial statements issued
for fiscal years beginning after December 15, 2001, and interim periods within
those fiscal years, with early application encouraged. This statement is not
anticipated to have a current material effect on the financial statements of the
company, but could have a future financial statement effect on the company in
the event that an asset impairment has occurred.
RISK FACTORS
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q for the third quarter ended December 31, 2001 contains
certain forward looking statements within the meaning of Section 21E of the
Exchange Act. Such forward-looking statements are based on the beliefs of the
Company's management as well as on assumptions made by and information currently
available to the Company at the time such statements were made. When used in
this Form 10-Q, the words "anticipate", "believe", "estimate", "expect",
"intend" and similar expressions, as they relate to the Company, are intended to
identify such forward-looking statements. Although the Company believes these
statements are reasonable, readers of this Form 10-Q should be aware that actual
results could differ materially from those projected by such forward-looking
statements as a result of the risk factors listed below and set forth in the
Company's Annual Report on Form 10-K for fiscal year 2001 ("Form 10-K") under
the caption "Risk Factors." Readers of this Form 10-Q should consider carefully
the factors listed below and under the caption "Risk Factors" in the Company's
Form 10-K, as well as the other information and data contained in this Form
10-Q. The Company cautions the reader, however, that such list of factors under
16
the caption "Risk Factors" in the Company's Form 10-K may not be exhaustive and
that those or other factors, many of which are outside of the Company's control,
could have a material adverse effect on the Company and its results of
operations. All forward-looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by the
cautionary statements set forth hereunder and under the caption "Risk Factors"
in the Company's Form 10-K. We undertake no obligation to update publicly any
forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
FLUCTUATIONS IN OUR OPERATING RESULTS MAY MAKE IT DIFFICULT TO PREDICT OUR
FUTURE PERFORMANCE.
While our products and services are not seasonal, our revenues and
operating results are difficult to predict and may fluctuate significantly from
quarter to quarter. If our quarterly revenues or operating results fall below
the expectations of investors or securities analysts, the price of our common
stock could fall substantially. A large part of our sales typically occurs in
the last month of a quarter, frequently in the last week or even the last days
of the quarter. If these sales were delayed from one quarter to the next for any
reason, our operating results could fluctuate dramatically. In addition, our
sales cycles may vary, making the timing of sales difficult to predict.
Furthermore, our infrastructure costs are generally fixed. As a result, modest
fluctuations in revenues between quarters may cause large fluctuations in
operating results. These factors all tend to make the timing of revenues
unpredictable and may lead to high period-to-period fluctuations in operating
results.
Our quarterly revenues and operating results may fluctuate for several
additional reasons, many of which are outside of our control, including the
following:
o demand for our products and services;
o the timing of new product introductions and sales of our products
and services;
o unexpected delays in introducing new products and services;
o increased expenses, whether related to sales and marketing, research
and development or administration;
o changes in the rapidly evolving market for Web content management
solutions;
o the mix of revenues from product licenses and services, as well as
the mix of products licensed;
o the mix of services provided and whether services are provided by our
staff or third-party contractors;
o the mix of domestic and international sales;
o costs related to possible acquisitions of technology or businesses;
o general economic conditions; and
o public announcements by our competitors.
17
OUR SUCCESS DEPENDS ON OUR ABILITY TO EXPAND OUR SALES FORCE AND DISTRIBUTION
CHANNELS.
To increase our market share and revenues, we must increase the size of our
sales force and the number of our partners. Our failure to do so may have a
material adverse effect on our business, operating results and financial
condition. There is intense competition for sales personnel in our business, and
we cannot be sure that we will be successful in attracting, integrating,
motivating and retaining new sales personnel. Our existing or future partners
may choose to devote greater resources to marketing and supporting the products
of other companies. In addition, we will need to resolve potential conflicts, if
any, among our sales force and partners.
POTENTIAL ACQUISITIONS MAY BE DIFFICULT TO COMPLETE OR TO INTEGRATE AND MAY
DIVERT MANAGEMENT'S ATTENTION.
We may seek to acquire or invest in businesses, products or technologies
that are complementary to our business. If we identify an appropriate
acquisition opportunity, we may be unable to negotiate favorable terms for that
acquisition, successfully finance the acquisition or integrate the new business
or products into our existing business and operations. In addition, the
negotiation of potential acquisitions and the integration of acquired businesses
or products may divert management time and resources from our existing business
and operations. To finance acquisitions, we may use a substantial portion of our
available cash or we may issue additional securities, which would cause
ownership dilution to our shareholders.
WE MAY NOT BE PROFITABLE IN THE FUTURE.
Our revenues may not grow in future periods, may not grow at past rates and
we may not sustain our quarterly pro forma profitability. If we do not sustain
our recent pro forma profitability, the market price of our stock may fall. Our
ability to sustain our recent pro forma profitable operations depends upon many
factors beyond our direct control. These factors include, but are not limited
to:
o the demand for our products;
o our ability to quickly introduce new products;
o the level of product and price competition;
o our ability to control costs; and
o general economic conditions.
THE INTENSE COMPETITION IN OUR INDUSTRY MAY REDUCE OUR FUTURE SALES AND PROFITS.
The market for our products is highly competitive and is likely to become
more competitive. We may not be able to compete successfully in our chosen
marketplace, which may have a material adverse effect on our business, operating
results and financial condition. Additional competition may cause pricing
pressure, reduced sales and margins, or prevent our products from gaining and
sustaining market acceptance. Many of our current and potential competitors have
18
greater name recognition, access to larger customer bases, and substantially
more resources than we have. Competitors with greater resources than ours may be
able to respond more quickly than we can to new opportunities, changing
technology, product standards or customer requirements.
WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH.
Any failure to properly manage our growth may have a material adverse
effect on our business, operating results and financial condition. The rapid
growth that we have experienced places significant challenges on our management,
administrative and operational resources. To properly manage this growth, we
must, among other things, implement and improve additional and existing
administrative, financial and operational systems, procedures and controls on a
timely basis. We will also need to expand our finance, administrative and
operations staff. We may not be able to complete the improvements to our
systems, procedures and controls necessary to support our future operations in a
timely manner. Management may not be able to hire, train, integrate, retain,
motivate and manage required personnel and may not be able to successfully
identify, manage and exploit existing and potential market opportunities. In
connection with our expansion, we plan to increase our operating expenses to
expand our sales and marketing operations, develop new distribution channels,
fund greater levels of research and development, broaden services and support
and improve operational and financial systems. Our failure to generate
additional revenue commensurate with an increase in operating expenses during
any fiscal period could have a material adverse effect on our financial results
for that period.
WE DEPEND ON THE CONTINUED SERVICE OF OUR KEY PERSONNEL.
We are a small company and depend greatly on the knowledge and experience
of our senior management team and other key personnel. If we lose any of these
key personnel, our business, operating results and financial condition could be
materially adversely affected. We must hire additional employees to meet our
business plan and alleviate the negative effect that the loss of a senior
manager could have on us. Our success will depend in part on our ability to
attract and retain additional personnel with the highly specialized expertise
necessary to engineer, design and support our products and services. Like other
software companies, we face intense competition for qualified personnel. We may
not be able to attract or retain such personnel.
WE HAVE RELIED AND EXPECT TO CONTINUE TO RELY ON SALES OF OUR CONTENT
MANAGEMENT, CONVERSION AND VIEWING SOFTWARE PRODUCTS FOR OUR REVENUES.
We currently derive all of our revenues from product licenses and services
associated with our suite of content management, conversion and viewing software
products. The market for content management and viewing software products is new
and rapidly evolving. We cannot be certain that a viable market for our products
will emerge, or if it does emerge, that it will be sustainable. If we do not
continue to increase revenues related to our existing products or generate
revenues from new products and services, our business, operating results and
financial condition may be materially adversely affected. We will continue to
depend on revenues related to new and enhanced versions of our software products
for the foreseeable future. Our success will largely depend on our ability to
increase sales from existing products and generate sales from product
enhancements and new products.
We cannot be certain that we will be successful in upgrading and marketing
our existing products or that we will be successful in developing and marketing
new products and services. The market for our products is highly competitive and
subject to rapid technological change. Technological advances could make our
19
products less attractive to customers and adversely affect our business. In
addition, complex software product development involves certain inherent risks,
including risks that errors may be found in a product enhancement or new product
after its release, even after extensive testing, and the risk that discovered
errors may not be corrected in a timely manner.
OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR PROPRIETARY TECHNOLOGY.
If we are unable to protect our intellectual property, or incur significant
expense in doing so, our business, operating results and financial condition may
be materially adversely affected. Any steps we take to protect our intellectual
property may be inadequate, time consuming and expensive. We currently have no
patents or pending patent applications. Without significant patent or copyright
protection, we may be vulnerable to competitors who develop functionally
equivalent products. We may also be subject to claims that our current products
infringe on the intellectual property rights of others. Any such claim may have
a material adverse effect on our business, operating results and financial
condition.
We anticipate that software product developers will be increasingly subject
to infringement claims due to growth in the number of products and competitors
in our industry, and the overlap in functionality of products in different
industries. Any infringement claim, regardless of its merit, could be
time-consuming, expensive to defend, or require us to enter into royalty or
licensing agreements. Such royalty or licensing agreements may not be available
on commercially favorable terms, or at all. We are not currently involved in any
intellectual property litigation.
We rely on trade secret protection, confidentiality procedures and
contractual provisions to protect our proprietary information. Despite our
attempts to protect our confidential and proprietary information, others may
gain access to this information. Alternatively, other companies may
independently develop substantially equivalent information.
OUR PRODUCTS MAY NOT BE COMPATIBLE WITH COMMERCIAL WEB BROWSERS AND
OPERATING SYSTEMS.
Our products utilize interfaces that are compatible with commercial Web
browsers. In addition, our Stellent Content Management System is a server-based
system written in Java that functions in both Windows NT and UNIX environments.
We must continually modify our products to conform to commercial Web browsers
and operating systems. If our products were to become incompatible with
commercial Web browsers and operating systems, our business would be harmed. In
addition, uncertainty related to the timing and nature of product introductions
or modifications by vendors of Web browsers and operating systems may have a
material adverse effect on our business, operating results and financial
condition.
WE COULD BE SUBJECT TO PRODUCT LIABILITY CLAIMS IF OUR PRODUCTS FAIL TO PERFORM
TO SPECIFICATIONS.
If software errors or design defects in our products cause damage to
customers' data and our agreements do not protect us from related product
liability claims, our business, operating results and financial condition may be
materially adversely affected. In addition, we could be subject to product
liability claims if our security features fail to prevent unauthorized third
parties from entering our customers' intranet, extranet or Internet Web sites.
Our software products are complex and sophisticated and may contain design
defects or software errors that are difficult to detect and correct. Errors,
20
bugs or viruses spread by third parties may result in the loss of market
acceptance or the loss of customer data. Our agreements with customers that
attempt to limit our exposure to product liability claims may not be enforceable
in certain jurisdictions where we operate.
FUTURE REGULATIONS COULD BE ADOPTED THAT RESTRICT OUR BUSINESS.
Federal, state or foreign agencies may adopt new legislation or regulations
governing the use and quality of Web content. We cannot predict if or how any
future laws or regulations would impact our business and operations. Even though
these laws and regulations may not apply to our business directly, they could
indirectly harm us to the extent that they impact our customers and potential
customers.
SIGNIFICANT FLUCTUATION IN THE MARKET PRICE OF OUR COMMON STOCK COULD RESULT IN
SECURITIES LITIGATION AGAINST US.
In the past, securities class action litigation has been brought against
publicly held companies following periods of volatility in the price of their
securities. If we were subject to such litigation due to volatility in our stock
price, we may incur substantial costs. Such litigation could divert the
attention of our senior management away from our business, which could have a
material adverse effect on our business, operating results and financial
condition.
The market price of our common stock has fluctuated significantly in the
past and may do so in the future. The market price of our common stock may be
affected by each of the following factors, many of which are outside of our
control:
o variations in quarterly operating results;
o changes in estimates by securities analysts;
o changes in market valuations of companies in our industry;
o announcements by us of significant events, such as major sales,
acquisitions of businesses or losses of major customers;
o additions or departures of key personnel; and
o sales of our equity securities.
OUR PERFORMANCE WILL DEPEND ON THE CONTINUING GROWTH AND ACCEPTANCE OF THE WEB.
Our products are designed to be used with intranets, extranets and the
Internet. If the use of these methods of electronic communication does not grow,
our business, operating results and financial condition may be materially
adversely affected. Continued growth in the use of the Web will require ongoing
and widespread interest in its capabilities for communication and commerce. Its
growth will also require maintenance and expansion of the infrastructure
supporting its use and the development of performance improvements, such as high
speed modems. The Web infrastructure may not be able to support the demands
placed on it by continued growth. The ongoing development of corporate intranets
depends on continuation of the trend toward network-based computing and on the
willingness of businesses to reengineer the processes used to create, store,
manage and distribute their data. All of these factors are outside of our
control.
21
OUR EXISTING SHAREHOLDERS HAVE SIGNIFICANT INFLUENCE OVER US.
Robert F. Olson, our Chairman, holds approximately 9.8% of our outstanding
common stock. Accordingly, Mr. Olson is able to exercise significant control
over the affairs of Stellent. Additionally, our directors and executive officers
beneficially own approximately 10.0% of our common stock. These persons have
significant influence over Stellent's affairs, including approval of the
acquisition or disposition of assets, future issuances of common stock or other
securities and the authorization of dividends on our common stock. Our directors
and executive officers could use their stock ownership to delay, defer or
prevent a change in control of Stellent, depriving shareholders of the
opportunity to sell their stock at a price in excess of the prevailing market
price.
WE CAN ISSUE SHARES OF PREFERRED STOCK WITHOUT SHAREHOLDER APPROVAL, WHICH COULD
ADVERSELY AFFECT THE RIGHTS OF COMMON SHAREHOLDERS.
Our Articles of Incorporation permit us to establish the rights,
privileges, preferences and restrictions, including voting rights, of unissued
shares of our capital stock and to issue such shares without approval from our
shareholders. The rights of holders of our common stock may suffer as a result
of the rights granted to holders of preferred stock that may be issued in the
future. In addition, we could issue preferred stock to prevent a change in
control of Stellent, depriving shareholders of an opportunity to sell their
stock at a price in excess of the prevailing market price.
CERTAIN PROVISIONS OF MINNESOTA LAW MAY MAKE A TAKEOVER OF STELLENT DIFFICULT,
DEPRIVING SHAREHOLDERS OF OPPORTUNITIES TO SELL SHARES AT ABOVE-MARKET PRICES.
Certain provisions of Minnesota law may have the effect of discouraging
attempts to acquire Stellent without the approval of our Board of Directors.
Consequently, our shareholders may lose opportunities to sell their stock for a
price in excess of the prevailing market price.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our interest income on cash and marketable securities is affected by
changes in interest rates in the United States. Through December 31, 2001,
changes in these rates have had a significant effect on the Company. Interest
rates earned on invested funds have fallen by over 50% since December 2000. The
Company believes that there may be future exposure to interest rate market risk.
Our investments are held in commercial paper which are affected by equity
price market risk and other factors. The Company does not anticipate that
exposure to these risks will have a material impact on the Company, due to the
nature of its investments.
The Company has no history of, and does not anticipate in the future,
investing in derivative financial instruments. Many transactions with
international customers are entered into in U.S. dollars, precluding the need
for foreign currency hedges. Any transactions that are currently entered into in
foreign currency are not deemed material to the financial statements. Thus, the
exposure to market risk is not material.
22
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A.) EXHIBITS
EXHIBIT INDEX
FILE DESCRIPTION REFERENCE
------- ------------ ---------
3.1 Amended and Restated Articles of Incorporated by reference to Exhibit 3.1
Incorporation, as amended of the Registrant's Form 8-K dated August 29, 2001
3.2 Bylaws Incorporated by reference to Exhibit 4.2 of
the Registrant's Registration Statement on Form S-8,
File No. 333-75828.
4.7 Warrant to purchase 225,000 shares of Incorporated by reference to Exhibit 4.7 of the
common stock to Merrill, Lynch, Pierce, Registrant's Form 10-K for the year ended
Fenner & Smith dated February 22, 2000 March 31, 2001.
10.4 Stellent, Inc. 1994-1997 Stock Option Incorporated by reference to Exhibit A of
and Compensation Plan* the Registrant's Definitive Proxy
Statement Schedule 14A, filed with the
Securities and Exchange Commission July 28, 1998
10.28 InfoAccess, Inc. 1990 Stock Option Plan Incorporated by reference to Exhibit 99.1
as amended September 29, 1999 of the Registrant's statement on Form S-8,
File No. 333-90843
10.29 InfoAccess, Inc. 1995 Stock Option Plan Incorporated by reference to Exhibit 99.2
as amended September 29, 1999 of the Registrant's statement on Form S-8,
File No. 333-90843
10.30 Employment Agreement Dated August 1, Incorporated by reference to Exhibit
1999, by and between the Registrant and 10.30 of the Registrant's Form 10-Q for
Robert F. Olson* the quarter ended September 30, 1999
10.31 Stellent, Inc. 1999 Employee Incorporated by reference to Exhibit
Stock Option and compensation plan 10.31 of the Registrant's Form 10-Q for
the three months ended September 30, 1999
10.32 Agreement and Plan of Merger among Incorporated by reference to Exhibit 2 to
Stellent, Inc., IntraNet Chicago the Registrant's Current Report on Form 8-K
Acquisition Corporation, IntraNet Kansas dated July 10, 2000
City Acquisition Corporation, Inso
Chicago Corporation, Inso Kansas City
Corporation and Inso Corporation, dated
as of July 10, 2000
10.33 Stellent, Inc. 2000 Stock Incentive Incorporated by reference to Exhibit B to
Plan* the Registrant's Definitive Proxy
statement on Schedule 14A, filed with the
Securities and Exchange Commission on
July 25, 2000
10.34 Stellent, Inc. 2000 Employee Incorporated by reference to Exhibit 99 of the
Stock Incentive Plan Registrant's Registration Statement on Form S-8,
File No. 333-75828.
10.35 Stellent, Inc. 1997 Directors Stock Incorporated by reference to Exhibit B of
Option Plan* the Registrant's Definitive Proxy
Statement Schedule 14A, filed with the
Securities and Exchange Commission July 28, 1998
10.36 Stellent, Inc. Employee Stock Purchase Incorporated by reference to Exhibit A of
Plan* the Registrant's Definitive Proxy
Statement filed with the Securities and
Exchange Commission July 29, 1999
10.37 Employment Agreement Dated April 1, Incorporated by reference to Exhibit 10.37
2001 by and between the Registrant of the Registrant's Form 10-Q for the quarter
and Gregg A. Waldon* ended June 30, 2001
10.38 Employment Agreement Dated October 1, Incorporated by reference to Exhibit 10.38
2001 by and between the Registrant of the Registrant's Form 10-Q for the quarter
and Vernon J. Hanzlik* ended September 30, 2001
10.39 Employment Agreement Dated May 10, Incorporated by reference to Exhibit 10.39
2001 by and between the Registrant of the Registrant's Form 10-Q for the quarter
and Scott Norder* ended September 30, 2001
10.40 Employment Agreement Dated June 14, Incorporated by reference to Exhibit 10.40
2000 by and between the Registrant of the Registrant's Form 10-Q for the quarter
and Robin Pederson* ended September 30, 2001
10.41 Employment Agreement Dated April 1, Incorporated by reference to Exhibit 10.41
2001 by and between the Registrant of the Registrant's Form 10-Q for the quarter
and Daniel Ryan* ended September 30, 2001
10.42 Employment Agreement Dated March 9, Incorporated by reference to Exhibit 10.42
2001 by and between the Registrant Form of the Registrant's Form 10-Q for the quarter
and Mitch Berg* ended September 30, 2001
11.1 Computation of Earnings Per Share Electronic Transmission
*Management contract, compensation plan or arrangement.
(B) REPORTS ON FORM 8-K
No current reports on Form 8-K were filed during the period.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Stellent, Inc.
-----------------------------------------
(Registrant)
Date: February 14, 2002 By: /s/ Vern Hanzlik
-----------------------------------------
Vern Hanzlik,
President and Chief Executive Officer
(Principal Executive Officer)
Date: February 14, 2002 By: /s/ Gregg A. Waldon
-----------------------------------------
Gregg A. Waldon
Chief Financial Officer,
Secretary and Treasurer
(Principal Financial and Accounting
Officer)
24
EXHIBITS
FILE DESCRIPTION REFERENCE
------ ----------- ---------
3.1 Amended and Restated Articles of Incorporated by reference to Exhibit 3.1
Incorporation, as amended of the Registrant's Form 8-K dated August 29, 2001
3.2 Bylaws Incorporated by reference to Exhibit 4.2 of
the Registrant's Registration Statement on Form S-8,
File No. 333-75828.
4.7 Warrant to purchase 225,000 shares of Incorporated by reference to Exhibit 4.7 of the
common stock to Merrill, Lynch, Pierce, Registrant's Form 10-K for the year ended
Fenner & Smith dated February 22, 2000 March 31, 2001.
10.4 Stellent, Inc. 1994-1997 Stock Option Incorporated by reference to Exhibit A of
and Compensation Plan* the Registrant's Definitive Proxy
Statement Schedule 14A, filed with the
Securities and Exchange Commission July 28, 1998
10.28 InfoAccess, Inc. 1990 Stock Option Plan Incorporated by reference to Exhibit 99.1
as amended September 29, 1999 of the Registrant's statement on Form S-8,
File No. 333-90843
10.29 InfoAccess, Inc. 1995 Stock Option Plan Incorporated by reference to Exhibit 99.2
as amended September 29, 1999 of the Registrant's statement on Form S-8,
File No. 333-90843
10.30 Employment Agreement Dated August 1, Incorporated by reference to Exhibit
1999, by and between the Registrant and 10.30 of the Registrant's Form 10-Q for
Robert F. Olson* the quarter ended September 30, 1999
10.31 Stellent, Inc. 1999 Employee Incorporated by reference to Exhibit
Stock Option and compensation plan 10.31 of the Registrant's Form 10-Q for
the three months ended September 30, 1999
10.32 Agreement and Plan of Merger among Incorporated by reference to Exhibit 2 to
Stellent, Inc., IntraNet Chicago the Registrant's Current Report on Form 8-K
Acquisition Corporation, IntraNet Kansas dated July 10, 2000
City Acquisition Corporation, Inso
Chicago Corporation, Inso Kansas City
Corporation and Inso Corporation, dated
as of July 10, 2000
10.33 Stellent, Inc. 2000 Stock Incentive Incorporated by reference to Exhibit B to
Plan* the Registrant's Definitive Proxy
statement on Schedule 14A, filed with the
Securities and Exchange Commission on
July 25, 2000
10.34 Stellent, Inc. 2000 Employee Incorporated by reference to Exhibit 99 of the
Stock Incentive Plan Registrant's Registration Statement on Form S-8,
File No. 333-75828.
10.35 Stellent, Inc. 1997 Directors Stock Incorporated by reference to Exhibit B of
Option Plan* the Registrant's Definitive Proxy
Statement Schedule 14A, filed with the
Securities and Exchange Commission July 28, 1998
10.36 Stellent, Inc. Employee Stock Purchase Incorporated by reference to Exhibit A of
Plan* the Registrant's Definitive Proxy
Statement filed with the Securities and
Exchange Commission July 29, 1999
10.37 Employment Agreement Dated April 1, Incorporated by reference to Exhibit 10.37
2001 by and between the Registrant of the Registrant's Form 10-Q for the quarter
and Gregg A. Waldon* ended June 30, 2001
10.38 Employment Agreement Dated October 1, Incorporated by reference to Exhibit 10.38
2001 by and between the Registrant of the Registrant's Form 10-Q for the quarter
and Vernon J. Hanzlik* ended September 30, 2001
10.39 Employment Agreement Dated May 10, Incorporated by reference to Exhibit 10.39
2001 by and between the Registrant of the Registrant's Form 10-Q for the quarter
and Scott Norder* ended September 30, 2001
10.40 Employment Agreement Dated June 14, Incorporated by reference to Exhibit 10.40
2000 by and between the Registrant of the Registrant's Form 10-Q for the quarter
and Robin Pederson* ended September 30, 2001
10.41 Employment Agreement Dated April 1, Incorporated by reference to Exhibit 10.41
2001 by and between the Registrant of the Registrant's Form 10-Q for the quarter
and Daniel Ryan* ended September 30, 2001
10.42 Employment Agreement Dated March 9, Incorporated by reference to Exhibit 10.42
2001 by and between the Registrant Form of the Registrant's Form 10-Q for the quarter
and Mitch Berg* ended September 30, 2001
11.1 Computation of Earnings Per Share Electronic Transmission
* Management contract, compensation plan or arrangement.
25