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 JUNE 30, 2002.
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 - 22,406,830 shares as of August 6, 2002.
1
STELLENT, INC.
FORM 10-Q
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -- June 30, 2002 and March 31, 2002.................. 3
Condensed Consolidated Statements of Operations - Three months ended
June 30, 2002 and 2001..................................................................... 4
Condensed Consolidated Statements of Cash Flows -- Three months ended
June 30, 2002 and 2001..................................................................... 5
Notes to the Condensed Consolidated Financial Statements................................... 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations........................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................. 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ......................................................................... 24
Item 2. Changes in Securities and Use of Proceeds.................................................. 24
Item 3. Defaults upon Senior Securities............................................................ 24
Item 4. Submission of Matters to a Vote of Security Holders........................................ 24
Item 5. Other Information.......................................................................... 24
Item 6. Exhibits and Reports on Form 8-K........................................................... 24
SIGNATURES........................................................................................... 25
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STELLENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
JUNE 30, MARCH 31,
2002 2002
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents .................... $ 8,302 $ 15,493
Short-term marketable securities ............. 58,824 72,985
Trade accounts receivable, net ............... 17,104 18,576
Prepaid royalties ............................ 3,186 3,383
Prepaid expenses and other current assets .... 6,426 6,229
--------- ---------
Total current assets ........................... 93,842 116,666
Long-term marketable securities ................ 20,862 7,680
Property and equipment, net .................... 6,309 6,054
Investments and notes in other companies ....... 2,409 3,122
Prepaid royalties, net of current .............. 2,690 3,011
Goodwill, net .................................. 12,703 11,332
Other acquired intangible assets, net .......... 10,739 11,356
Deferred income taxes .......................... 4,894 4,894
Other .......................................... 1,910 1,811
--------- ---------
Total assets ................................... $ 156,358 $ 165,926
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................. $ 2,387 $ 2,264
Deferred revenues ............................ 6,519 6,556
Commissions payable .......................... 938 1,000
Accrued expenses and other ................... 4,328 3,996
--------- ---------
Total current liabilities ...................... 14,172 13,816
Deferred revenue, net of current portion ....... 123 123
--------- ---------
Total liabilities .............................. 14,295 13,939
--------- ---------
Shareholders' equity
Common stock ................................. 224 224
Additional paid-in capital ................... 194,204 194,197
Accumulated other comprehensive income (loss) (252) 68
Accumulated deficit .......................... (52,113) (42,502)
--------- ---------
Total shareholders' equity ..................... 142,063 151,987
--------- ---------
Total liabilities and shareholders' equity ..... $ 156,358 $ 165,926
========= =========
Note: The balance sheet at March 31, 2002 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.
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
STELLENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
2002 2001
-------- --------
Revenues:
Product licenses ............................... $ 11,118 $ 19,072
Services ....................................... 5,937 5,527
-------- --------
Total revenues ................................... 17,055 24,599
-------- --------
Cost of revenues:
Product licenses ............................... 1,799 1,071
Amortization of capitalized software from
acquisitions ................................. 474 233
Services ....................................... 3,076 2,984
-------- --------
Total cost of revenues ........................... 5,349 4,288
-------- --------
Gross profit ..................................... 11,706 20,311
-------- --------
Operating expenses:
Sales and marketing ............................ 10,307 11,277
General and administrative ..................... 2,722 2,432
Research and development ....................... 4,724 4,151
Amortization of intangible assets from
acquisitions and other........................ 1,661 3,148
Restructuring charges .......................... 2,504 --
-------- --------
Total operating expenses ......................... 21,918 21,008
-------- --------
Loss from operations ............................. (10,212) (697)
Other:
Interest income, net ........................... 601 1,258
-------- --------
Net income (loss) ................................ $ (9,611) $ 561
======== ========
Net income (loss) per common share -- Basic ...... $ (0.43) $ 0.03
Net income (loss) per common share -- Diluted .... $ (0.43) $ 0.02
Weighted average shares outstanding -- Basic ..... 22,363 22,081
Weighted average shares outstanding -- Diluted ... 22,363 23,753
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
4
STELLENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
-----------------------
2002 2001
-------- --------
OPERATING ACTIVITIES:
Net income (loss) .............................................................. $ (9,611) $ 561
Adjustments to reconcile net income (loss) to cash used in operating activities:
Depreciation and amortization ................................................ 895 267
Amortization of intangible assets, acquisition expense and other ............. 2,135 3,381
Noncash restructuring charges ................................................ 82 --
Tax benefit from employee stock option exercises ............................. -- 823
Other ........................................................................ 76 --
CHANGES IN OPERATING ASSETS AND LIABILITIES, NET OF AMOUNTS ACQUIRED:
Accounts receivable ............................................................ 1,472 (3,463)
Prepaid expenses and other current assets ...................................... 321 (2,549)
Accounts payable and other liabilities ......................................... 123 1,254
Accrued liabilities ............................................................ 354 (1,141)
Deferred revenue ............................................................... (361) 254
Accrued commissions ............................................................ (62) (570)
Income taxes payable ........................................................... -- (823)
-------- --------
Net cash flows used in operating activities .................................... (4,576) (2,006)
-------- --------
INVESTING ACTIVITIES:
(Purchases) and maturities of marketable securities, net ....................... 979 (4,621)
Purchases of fixed assets ...................................................... (812) (1,827)
Acquisition .................................................................... (2,790) --
(Purchases) and sales of investments in and notes with other companies ......... 56 (1,394)
Other .......................................................................... (293) (971)
-------- --------
Net cash flows used in investing activities .................................... (2,860) (8,813)
-------- --------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants ........................... 7 1,612
Other .......................................................................... (40) (39)
-------- --------
Net cash flows provided by (used in) financing activities ...................... (33) 1,573
-------- --------
Cumulative effect of foreign currency translation adjustment ...................... 278 (203)
-------- --------
Net decrease in cash .............................................................. (7,191) (9,449)
Cash and equivalents, beginning of period ......................................... 15,493 14,355
-------- --------
Cash and equivalents, end of period ............................................... $ 8,302 $ 4,906
======== ========
Non-cash investing activity -- Unrealized gain (loss) on investment ............... $ (581) $ 85
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
5
STELLENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions in
Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments have been recorded
as necessary to present fairly the Company's consolidated financial position,
results of operations and cash flow for the periods presented. These financial
statements should be read in conjunction with the Company's audited consolidated
financial statements included in the Company's Fiscal Year 2002 Annual Report on
Form 10-K. The consolidated results of operations for the period ended June 30,
2002 are not necessarily indicative of the results that may be expected for any
future period.
NOTE 2. USE OF ESTIMATES
The preparation of these financial statements requires that the Company make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosures of contingent assets and
liabilities. On an ongoing basis, the Company evaluates its estimates including
those related to revenue recognition, allowance for bad debts, income taxes,
commission expense accrual, and useful lives of intangible assets and property
and equipment, among others. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results could differ from the
estimates made by management with respect to these items and other items that
require management's estimates.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 currently derives all of its revenues from
licenses of software products and related services. The Company recognizes
revenue in accordance with Statement of Position (SOP) 97-2, Software Revenue
Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue
Recognition with Respect to Certain Transactions, and Securities and Exchange
Commission Staff Accounting Bulletin 101, Revenue Recognition in Financial
Statements.
Product license revenue is recognized under SOP 97-2 when (i) persuasive
evidence of an arrangement exists, for example, a signed agreement or purchase
order, (ii) delivery has occurred, as evidenced by shipping documents and
customer acceptance, (iii) the fee is fixed or determinable and payable within
twelve months, (iv) collectibility is probable and supported by credit checks or
past payment history, and the arrangement does not require services that are
essential to the functionality of the software. Services revenue consists of
fees from consulting and post-contract customer support. Consulting services
include needs assessment, software integration, security analysis, application
development and training. The Company bills consulting fees either on a time and
materials basis or on a fixed-price schedule. The Company's customers typically
purchase maintenance agreements annually, and the Company prices maintenance
agreements based on a percentage of the product license fee. Customers
purchasing maintenance agreements receive product upgrades, Web-based technical
support and telephone hot-line support. The Company recognizes revenue from
maintenance agreements ratably over the term of the agreement, typically one
year.
Customer advances and billed amounts due from customers in excess of revenue
recognized are recorded as deferred revenue.
Cost of Revenues: The Company expenses all manufacturing, packaging and
distribution costs associated with product license revenue as cost of revenues.
The Company also expenses all technical support service costs associated with
service revenue as cost of revenues.
Cash and Equivalents: The Company considers all short-term, highly liquid
investments that are readily convertible
6
STELLENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
into known amounts of cash and have original maturities of three months or less
to be cash equivalents.
Marketable Securities: Investments in debt securities with a remaining maturity
of one year or less at the date of purchase are classified as short-term
marketable securities. Investments in debt securities with a remaining maturity
of greater than one year are classified as long-term marketable securities. All
investments are classified as held to maturity and recorded at amortized cost as
the Company has the ability and positive intent to hold to maturity.
Investments in and Notes with Other Companies: Investments in other equity
securities and related notes with other companies in the software industry are
classified as long-term as the Company anticipates holding them for more than
one year. The Company holds a less than 20% interest in, and does not directly
or indirectly exert significant influence over, any of the respective investees.
One of these investments is publicly traded and is deemed by management to be
available for sale. The Company uses the specific identification method to
determine cost and fair value for computing gains and losses. Accordingly, this
investment is reported at fair value with net unrealized gains or losses
reported within shareholders' equity as accumulated other comprehensive income
(loss). No sales of available for sale investments have occurred through June
30, 2002. Investments in other companies also include investments in several
non-public, start-up technology companies for which the Company uses the cost
method of accounting.
Accounts Receivable: One customer accounted for 10% or more of the Company's
revenues for the three months ended June 30, 2002 and no customer accounted for
10% or more of the Company's revenues for the three months ended June 30, 2001.
Credit is extended based on an evaluation of the customer's financial condition
and a cash deposit is generally not required. The Company estimates its probable
losses on trade receivables on an ongoing basis and provides for anticipated
losses in the period in which the revenues are recognized. Credit losses have
historically been within management's expectations.
Property and Equipment: Property and equipment, including leasehold
improvements, are recorded at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets, ranging from
two to eight years, or the life of the lease for leasehold improvements,
whichever is shorter. Maintenance, repairs and minor renewals are expensed when
incurred.
Goodwill and Other Acquired Intangible Assets: On July 20, 2001, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill
and Other Intangible Assets." SFAS No. 141 is effective for all business
combinations completed after June 30, 2001. SFAS No. 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 No. 142.
As a result of adopting SFAS No. 141 and SFAS No. 142, the Company's accounting
policies for goodwill and other intangibles changed effective April 1, 2002 as
described below:
Goodwill: The Company recognizes the excess cost of an acquired entity over the
net amount assigned to assets acquired and liabilities assumed as goodwill.
Goodwill will be tested for impairment on an annual basis and between annual
tests whenever there is an impairment indicated. Impairment losses will be
recognized whenever the implied fair value of goodwill is less than its carrying
value. Prior to April 1, 2002, goodwill was amortized on a straight-line basis
over three years. Beginning April 1, 2002, goodwill is no longer amortized.
Other acquired intangible assets: The Company recognizes an acquired intangible
apart from goodwill whenever the asset arises from contractual or other legal
rights, or whenever it is capable of being separated or divided from the
acquired entity and sold, transferred, licensed, rented, or exchanged, either
individually or in combination with a related contract, asset, or liability. An
intangible other than goodwill is amortized over its estimated useful life
unless that life is determined to be indefinite. Currently, other acquired
intangible assets, representing core technology, customer base, capitalized
software, trademarks, and other intangible assets acquired through business
acquisitions, have been amortized on a straight line basis over three or four
years. On April 1, 2002 upon adoption of SFAS 141 and SFAS 142 amortization of
workforce, which had previously been classified as an other acquired intangible
asset, ceased and the net unamortized balance of approximately $1.4 million was
re-characterized as goodwill.
7
STELLENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Impairment losses are recognized if the carrying amount of an intangible subject
to amortization is not recoverable from expected future cash flows and its
carrying amount exceeds its fair value. Currently, intangible amortization,
which includes amortization of capitalized software and intangible assets from
acquisitions, is expected to be approximately $8.5 million for the year-ended
March 31, 2003.
The Company has completed a transitional impairment test of goodwill as of April
1, 2002. No impairment losses resulted from this transitional impairment testing
during the quarter ended June 30, 2002.
The following is a summary of what reported net earnings would have been in all
periods presented, exclusive of amortization expense recognized in those periods
related to goodwill and intangible assets no longer being amortized.
THREE MONTHS ENDED JUNE 30,
-----------------------------------------
(In thousands)
2002 2001
---------------- ---------------
Net income(loss), as reported $ (9,611) $ 561
Adjustments:
Amortization of goodwill -- 1,268
Amortization of acquired workforce -- 250
---------------- ---------------
Net loss, as adjusted $ (9,611) $ 2,079
================ ===============
Basic net income(loss) per share, as reported $ (0.43) $ 0.03
Amortization of goodwill -- 0.05
Amortization of acquired workforce -- 0.01
---------------- ---------------
Basic net income(loss) per share, as adjusted $ (0.43) $ 0.09
================ ===============
Diluted net income(loss) per share, as reported $ (0.43) $ 0.02
Amortization of goodwill -- 0.05
Amortization of acquired workforce -- 0.01
---------------- ---------------
Diluted net income(loss) per share, as adjusted $ (0.43) $ 0.08
================ ===============
As of June 30, 2002 and March 31, 2002, the company's balances of goodwill and
other acquired intangibles were as follows (in thousands):
June 30, 2002 March 31, 2002
------------- --------------
Goodwill, gross .................................... $ 20,676 $ 20,676
Re-characterization of workforce, net .............. 1,371 --
-------- --------
Adjusted goodwill .................................. 22,047 20,676
Accumulated amortization ........................... (9,344) (9,344)
-------- --------
Goodwill, net ...................................... $ 12,703 $ 11,332
======== ========
Other acquired amortizable intangibles, gross ...... $ 27,346 $ 26,085
Re-characterization of workforce, net to Goodwill.. (1,371) --
-------- --------
25,975 26,085
Accumulated amortization ........................... (15,236) (14,729)
-------- --------
Other acquired amortizable intangibles, net ........ $ 10,739 $ 11,356
======== ========
8
STELLENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Impairment of Indefinite-Lived Assets: The Company evaluates the recoverability
of its long-lived assets, including goodwill, in accordance with Statement of
Financial Accounting Standards 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 that events
or circumstances indicate an impairment may have occurred and when net book
value of such assets exceeds the future undiscounted cash flows attributed to
such assets.
In September 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement supercedes SFAS 121 and was
effective April 1, 2002 for the Company. This statement did not have a material
effect on the financial statements of the Company, but could have a future
effect in the event that an asset impairment occurs.
Software Development Costs: Software development costs may be capitalized once
the technological feasibility of the project is established. The amount of
software development costs that may be capitalized is subject to limitations
based on the net realizable value of the potential product. Typically the period
between achieving technological feasibility of the Company's products and the
general availability of the products has been short. Consequently, prior to
fiscal year 2002, software development costs qualifying for capitalization were
immaterial and were generally expensed to research and development costs.
As of June 30, 2002, the Company has approximately $1.9 million of capitalized
software, net of accumulated amortization of approximately $0.5 million. We are
generally amortizing this asset into Cost of Revenues over a three year period.
The capitalized software primarily relates to software purchased from a third
party or developed for the Company by a third party. The capitalized software is
broken down into four main projects, as follows:
- the Content Categorizer is a module sold by us for use in contributing
large amounts of text-based content. This software was purchased in the
June 30, 2001 quarter;
- the ExtraSite Server is a server sold by us and built on J2EE
architecture for high-end web site consumption. We contracted with an
outside independent entity to build this for the Company. The product
was generally released in the June 30, 2002 quarter;
- the localization of certain of the Content Management Suite of products
into French and German was done by an outside entity. These products
were generally released in the September 30, 2001 quarter; and
- the OEM group purchased third party software to enhance the Company's
development of multiple viewing and conversion products.
Translation of Foreign Currencies: Foreign currency assets and liabilities of
the Company's international subsidiaries are translated using the exchange rates
in effect at the balance sheet date. Results of operations are translated using
the average exchange rates prevailing throughout the year. The effects of
exchange rate fluctuations on translating foreign currency assets and
liabilities into U.S. dollars are accumulated as part of the foreign currency
translation adjustment in shareholders' equity.
Comprehensive Income (Loss): Comprehensive income (loss) includes foreign
currency translation adjustments and unrealized gains or losses on the Company's
available-for-sale securities.
Advertising: The Company expenses the cost of advertising as it is incurred.
In June 2001, the Emerging Issues Task Force (EITF) issued EITF Issue No. 00-25,
Vendor Income Statement Characterization of Consideration Paid to a Reseller of
the Vendor's Products. This issue is effective for periods beginning after
December 15, 2001 and addresses whether consideration from a vendor to a
reseller is (a) an adjustment of the selling prices of the vendor's products and
should be deducted from revenue when recognized or (b) a cost incurred by the
vendor for assets or services received from the reseller and should be included
as a cost or expense when recognized. The Company enters into cooperative
advertising programs with some of its resellers. When the Company receives an
identifiable benefit in return for consideration, and the Company can reasonably
estimate the fair value of the benefit received, the cooperative advertising is
accounted for as advertising expense. If the fair value cannot be estimated or
an identifiable benefit is not received the cooperative advertising is accounted
9
STELLENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
for as a reduction of revenue. EITF 00-25, was adopted by the Company on April
1, 2002, and did not have a material effect on its consolidated financial
statements as the Company's cooperative advertising was already being accounted
for as required by EITF 00-25.
Stock-based Compensation: The Company utilizes the intrinsic value method for
stock-based compensation. Under this method, compensation expense is recognized
for the amount by which the market price of the common stock on the date of
grant exceeds the exercise price of an option.
Fair Value of Financial Instruments: The Company's financial instruments
including cash and cash equivalents, short-term marketable securities, long-term
marketable securities, accounts receivable and accounts payable, are carried at
cost, which approximates fair value due to the short-term maturity of these
instruments.
Reclassifications: Certain reclassifications have been made to the fiscal 2002
comparative financial statements to conform to the presentation used in fiscal
2003 first quarter financial statements. These reclassifications had no effect
on total assets or net income as previously reported.
NOTE 4. BASIC AND DILUTED NET LOSS PER SHARE
Basic net income (loss) per share is computed using the weighted average number
of shares of common stock. Diluted net income/(loss) per share is computed using
the weighted average number of shares of common stock and common equivalent
shares outstanding during the period. Common equivalent shares consist of stock
options (using the treasury stock method). Common equivalent shares are excluded
from the computation if their effect is anti-dilutive.
Weighted average options to purchase shares of common stock were outstanding
during the three months ended June 30, 2002 and 2001 but were excluded from the
computation of diluted net loss per share if either the options exercise price
was greater than the average market price of the common shares or inclusion of
such options would have been anti-dilutive. For the quarter ended June 30, 2002,
the Company incurred net losses and therefore, basic and diluted per share
amounts are the same as all common equivalent shares are anti-dilutive.
NOTE 5. RESTRUCTURING CHARGES
In the first quarter of fiscal 2003, in connection with management's plan to
reduce costs and improve operating efficiencies, the Company recorded a
restructuring charge of approximately $2.5 million. The restructuring charge was
comprised primarily of severance pay and benefits related to the involuntary
termination of approximately 50 employees of approximately $2.1 million with the
remaining $0.4 million related to the closing of facilities and other exit
costs. At June 30, 2002, $0.7 million had been accrued and remained to be paid
in connection with these charges.
The Company's restructuring charge in the quarter ended June 30, 2002 included
an accrual of approximately $0.1 million for future lease payments, net of
estimated sublease income that relates excess leased space. The Company based
the accrual and its estimate of sublease income on consultations with real
estate professionals in each of the markets where the properties are located to
determine the best estimate of the accrual. However, if real estate markets
continue to worsen and the Company is not able to sublease the properties as
expected, additional adjustments to the accrual may be required, which would
result in additional restructuring costs in the period in which such
determination is made. Likewise, if the real estate market strengthens, and the
Company is able to sublease the properties earlier or at more favorable rates
than projected, adjustments to the accrual may be required that would increase
net income in the period in which such determination is made.
NOTE 6. SHAREHOLDER RIGHTS PLAN
On May 29, 2002, the Company's Board of Directors approved, adopted and entered
into, a shareholder rights plan. The plan is similar to plans adopted by many
other companies, and was not adopted in response to any attempt to acquire the
Company.
The plan is designed to enable the Company's stockholders to realize the full
value of their investment by providing for fair and equal treatment of all
stockholders in the event that an unsolicited attempt is made to acquire the
10
STELLENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
company. Adoption of the shareholder rights plan is intended to guard
shareholders against abusive and coercive takeover tactics.
Under the plan, shareholders of record as of the close of business on June 13,
2002, will receive one right to purchase one-hundredth of a share of a newly
created series of preferred stock at an exercise price of $75. The rights will
be issued as a nontaxable dividend and will expire on June 13, 2012, unless
earlier redeemed or exchanged. The rights are not immediately exercisable and
will become exercisable only upon the occurrence of a person or group acquiring
fifteen percent or more of the Company's common stock. If a person or group
acquires fifteen percent or more of the Company's common stock, then all rights
holders except the acquirer will be entitled to acquire shares of the Company's
common stock having a value of twice the exercise price. The intended effect
will be to discourage acquisitions of fifteen percent or more of the Company's
common stock without negotiation with the board of directors.
NOTE 7. ACQUISITION
On April 3, 2002, the Company acquired certain assets and assumed certain
liabilities of Kinecta Corporation, a provider of software infrastructure for
digital networks, for approximately $2.5 million in cash.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The following discussion contains forward-looking statements regarding the
Company, its business, prospects and results of operations that are subject to
certain risks and uncertainties posed by many factors and events that could
cause the Companys actual business, prospects and results of operations to
differ materially from those that may be anticipated by such forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed herein as well as those discussed under
the caption Risk Factors. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
report. The Company undertakes no obligation to revise any forward-looking
statements in order to reflect events or circumstances that may subsequently
arise. Readers are urged to carefully review and consider the various
disclosures made by the Company in this report and in the Company's other
reports filed with the Securities and Exchange Commission that advise interested
parties of the risks and factors that may affect the Company's business.
OVERVIEW
We develop, market, and service content management software with the primary
focus of helping organizations derive maximum value from their content that
exists in the normal course of business such as Microsoft Office documents, Web
pages, images, graphics, multimedia, CAD, and other files. Customers deploy
Stellent Content Management System to help them leverage this enterprise content
while streamlining the process of obtaining or accessing content from content
creators and delivering it to content consumers --employees, partners, and
customers -- so that informed, timely decisions can be made. In order to
accomplish this mission, Stellent Content Management System fits seamlessly into
existing business processes as well as into the IT infrastructure. Stellent
Content Management System can be deployed to satisfy immediate needs at a line
of business or departmental level as well as strategic needs at an enterprise
level. Our customers are primarily located throughout the United States and
Europe. We are responsible for developing our current business which was founded
in 1990. In July 1996, we merged with and into a publicly traded corporation,
which was organized under Minnesota law in November 1989. In September 1999, we
acquired InfoAccess, Inc. in a transaction accounted for as a
pooling-of-interests. In July 2000, we acquired the Information Exchange
Division (now called Software Components Division or SCD) of eBT International,
Inc. (formerly Inso Corporation) in a transaction accounted for as a purchase.
In July 2001, we acquired select assets of RESoft, a leading provider of
end-to-end content management solutions for the real estate and legal
industries. This acquisition has been accounted for under the purchase method of
accounting. On August 29, 2001, we changed our name to Stellent, Inc.
CRITICAL ACCOUNTING POLICIES AND JUDGMENTS
Certain of our accounting policies are particularly important to develop an
understanding of our financial position and results of operations. Application
of many of these policies requires management to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses
and related disclosures. In general, these estimates or judgments are based on
the historical experience of our management, prevailing industry trends,
information provided by our customers, and information available from other
outside sources, each as appropriate. Actual results may differ from these
estimates. The Company believes the following critical accounting policies
relate to the more significant judgments and estimates used in the preparation
of its consolidated financial statements.
Revenue Recognition: We currently derive all of our revenue from licenses of
software products and related services. We recognize revenue in accordance with
Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by
SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to
Certain Transactions, and Securities and Exchange Commission Staff Accounting
Bulletin 101, Revenue Recognition in Financial Statements.
Product license revenue is recognized under SOP 97-2 when (i) persuasive
evidence of an arrangement exists, for example, a signed agreement or purchase
order, (ii) delivery has occurred, as evidenced by shipping documents and
customer acceptance, (iii) the fee is fixed or determinable and payable within
twelve months, (iv) collectibility is probable and supported by credit checks or
past payment history, and the arrangement does not require services that are
essential to the functionality of the software. Services revenue consists of
fees from consulting and post-contract customer support. 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 customers typically purchase
post-contract customer support agreements annually, and our prices of post-
12
contract customer support agreements are based on a percentage of the product
license fee. Customers purchasing post-contract customer support agreements
receive product upgrades, Web-based technical support and telephone hot-line
support. We recognize revenue from maintenance agreements ratably over the term
of the agreement, typically one year.
Expenses: 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.
Software Development Cost: Software development costs may be capitalized once
the technological feasibility of the project is established. The amount of
software development costs that may be capitalized is subject to limitations
based on the net realizable value of the potential product. Typically the period
between achieving technological feasibility of our products and the general
availability of the products has been short. Consequently, prior to fiscal year
2002, software development costs qualifying for capitalization were immaterial
and were generally expensed to research and development costs.
Other: Since our inception through June 30, 2002, 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 $52.1 million at June 30, 2002.
Beginning in 2002, we have implemented several cost cutting measures, including
a reduction in work force of approximately 17% since our December 2001 quarter.
These cost controlling and reducing measures are in response to the current
economic slowdown both in the United States and internationally and were
primarily in the research and development, marketing and general and
administrative areas. However, we are continuing to invest in the sales area in
order to expand our customer base and anticipate that, with evidence of a
sustained recovery of the United States and international economies, we would
continue to invest further across all areas of our company. Because of this, we
anticipate that the percentage of expenses as compared to total revenues
represented by sales and marketing expenses, research and development expenses
and general and administrative expenses will fluctuate from period to period
depending primarily on when we hire new personnel, the timing of certain sales
and marketing programs, the research programs that we put in place and the
potential expansion of operations. 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.
AMORTIZATION OF INTANGIBLES
We have acquired several companies or business assets since our inception. Under
U.S. generally accepted accounting principles, we have accounted for certain of
these acquisitions using the purchase method of accounting. We recorded cash
paid and the market value of our common stock issued in connection with them and
the amount of direct transaction costs as the cost of acquiring these entities.
That cost is allocated among the individual assets acquired and liabilities
assumed, including various identifiable intangible assets such as goodwill,
in-process research and development, acquired technology, acquired workforce and
covenants not to compete, based on their respective fair values. We allocated
the excess of the purchase price over the fair value of the net assets to
goodwill. The impact of purchase accounting on our results of operations has
been significant. During June 2001, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142
Goodwill and Other Intangible Assets, which became effective for us on April 1,
2002. As a result of the issuance of SFAS No. 142, we ceased amortizing $12.7
million of goodwill and other indefinite-lived assets as of April 1, 2002. In
lieu of amortization of these assets, we are required to perform an initial
impairment test of our goodwill in 2002 and annual impairment test thereafter.
We completed this review during the first quarter of 2002. Amortization of
goodwill and intangibles assets associated with business acquisitions was $2.1
million and $3.4 million in the three months ended June 30, 2002 and 2001
respectively. We currently have not recorded an impairment charge based upon the
initial impairment test.
13
We assess the impairment of identifiable intangibles, indefinite-lived assets
and related goodwill whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. Factors we consider important which
could trigger an impairment include the following: significant underperformance
of operating results relative to the expected historical or projected future
operating results; significant changes in the manner of the use of the acquired
assets or the strategy for our overall business; significant negative industry
or economic trends; our stock price for a sustained period of time; and our
market capitalization relative to our net book value.
When we determine that the carrying value of intangibles, indefinite-lived
assets and related goodwill may not be recoverable based on the existence of one
or more of the above factors, we measure any impairment based on the following
methodology:
Step 1. We will compare the fair value of our reporting units to the carrying
value, including goodwill, of each of those units. For each reporting unit where
the carrying value, including goodwill, exceeds the units fair value, we will
move on step two as described below. If a units fair value exceeds the carrying
value, no impairment charge is necessary.
Step 2. We will perform an allocation of the fair value of the reporting units
to its identifiable tangible and non-goodwill intangible assets and liabilities.
This will derive an implied fair value for the reporting units goodwill. We will
then compare the implied fair value of the reporting units goodwill with the
carrying amount of the reporting units goodwill. If the carrying amount of the
reporting units goodwill is greater than the implied fair value of its goodwill,
an impairment loss must be recognized for the excess of such amount.
We completed our transitional impairment test during the first quarter of fiscal
year 2002. We did not record an impairment charge upon the completion of the
initial review. Any impairment loss resulting from testing in the future will be
recognized as a change in accounting principle.
RESULTS OF OPERATIONS
The following table lists, for the periods indicated, our statement of
operations data as a percentage of total revenues:
THREE MONTHS ENDED JUNE 30,
---------------------------
2002 2001
--------- ---------
Revenues:
Product licenses 65% 78%
Services 35 22
--- ---
Total revenues 100 100
=== ===
Cost of revenues:
Product licenses 11 4
Amortization of capitalized software from acquisitions 2 1
Services 18 12
--- ---
Total cost of revenues 31 17
--- ---
Gross profit 69 83
Operating expenses:
Sales and marketing 60 46
General and administrative 16 10
Research and development 28 17
Amortization of intangible assets from acquisitions and other 10 13
Restructuring charges 15 --
--- ---
Total operating expenses 129 86
--- ---
Loss from operations (60) (3)
Interest income and other, net 4 5
--- ---
Net income (loss) (56)% 2%
=== ===
14
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
REVENUES
Total revenues decreased by $7.5 million, or 31%, to $17.1 million for the three
months ended June 30, 2002 from $24.6 million for the three months ended June
30, 2001. The decrease in revenues was primarily attributable to the worldwide
economic slowdown, which has resulted in a reduction in overall spending in
information technology initiatives.
Product Licenses. Revenues for product licenses decreased by $8.0 million, or
42%, to $11.1 million for the three months ended June 30, 2002 from $19.1
million for the three months ended June 30, 2001. The decrease in revenues for
product licenses was primarily attributable to delays in customer spending as a
result of the general slowdown in the worldwide economy which has resulted in a
reduction in overall spending in information technology initiatives.
Services. Revenues for services, consisting of consulting services, training and
post contract customer support, increased by $0.4 million or 7%, to $5.9 million
for the three months ended June 30, 2002 from $5.5 million for the three months
ended June 30, 2001. Expressed as a percentage of total services revenue,
consulting services and training revenues were approximately 42% and
post-contract customer support was 58% in the June 30, 2002 quarter,
respectively, and 52% and 48% in the June 30, 2001 quarter, respectively. The
increase in revenues for services was primarily attributable to a larger
installed base of products.
COST OF REVENUES
Total cost of revenues increased by $1.0 million or 25% to $5.3 million for the
three months ended June 30, 2002 from $4.3 million for the three months ended
June 30, 2001. Total cost of revenues as a percentage of total revenues was 31%
for the three months ended June 30, 2002 compared to 17% for the three months
ended June 30, 2001. Gross profit decreased by $8.6 million, or 42%, to $11.7
million for the three months ended June 30, 2002 from $20.3 million for the
three months ended June 30, 2001. Total gross profit as a percentage of total
revenues was 69% for the three months ended June 30, 2002 compared to 83% for
the three months ended June 30, 2001. The decrease in gross profit dollars was
primarily due to decreased revenues for product licenses.
Product Licenses. Cost of revenues for product licenses increased $0.7 million
for the three months ended June 30, 2002 to $1.8 million from $1.1 million for
the three months ended June 30, 2001. The increase in cost of revenues for
product licenses was primarily attributable to the increased amortization of
prepaid royalties and the increased amortization of capitalized software
developed for us by a third party or purchased from a third party. The fixed
costs associated with the amortization of these prepaid royalties and
capitalized software was approximately $0.6 million in the June 30, 2002
quarter.
Amortization of capitalized software from acquisitions. Cost of revenues related
to amortization of capitalized software from acquisitions increased $0.2 million
for the three months ended June 30, 2002 to $0.4 million from $0.2 million for
the three months ended June 30, 2001. The increase in cost of revenues for
amortization of capitalized software from acquisitions was primarily
attributable to the amortization of capitalized software obtained in the
acquisition of the assets of Kinecta Corporation in April 2002.
Overall, gross profit as a percentage of revenues for product licenses decreased
to 80% for the three months ended June 30, 2002 from 93% for the three months
ended June 30, 2001. The decrease in gross profit dollars and percentage is
primarily due to the reduction in revenues and the increase in cost of revenues
for product license revenue.
Services. Cost of revenues, consisting of primarily personnel for consulting
services, training and post-contract customer support, increased by $0.1 million
or 3%, to $3.1 million for the three months ended June 30, 2002 from $3.0
million for the three months ended June 30, 2001. Expressed as a percentage of
total services costs, consulting services and training costs were approximately
67% and post-contract customer support 33% in the June 30, 2002 quarter,
respectively, and 74% and 26% in the June 30, 2001 quarter, respectively. Gross
profit as a percentage of revenues for services was 48% for the three months
ended June 30, 2002 compared to 46% for the three months ended June 30, 2001.
The increase in the gross profit as a percentage of revenues for services was
primarily due to increased utilization of consulting services personnel.
15
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses decreased by $1.0 million, or
9%, to $10.3 million for the three months ended June 30, 2002 from $11.3 million
for the three months ended June 30, 2001. Sales and marketing expenses as a
percentage of total revenues were 60% for the three months ended June 30, 2002
compared to 46% for the three months ended June 30, 2001. The decrease in sales
and marketing expense was primarily due to reduced commission expense and
decreased staffing related to the restructuring of our company during the
quarter ended June 30, 2002.
General and Administrative. General and administrative expenses increased $0.3
million, or 12% to $2.7 million for the three months ended June 30, 2002 from
$2.4 million for the three months ended June 30, 2001. General and
administrative expenses as a percentage of total revenues were 16% for the three
months ended June 30, 2002 compared to 10% for the three months ended June 30,
2001. General and administrative expenses increased as a percentage of revenues
due primarily to the decrease in product license revenues as a result of the
worldwide economic slowdown, which has resulted in a reduction in overall
spending in information technology initiatives.
Research and Development. Research and development expenses increased by $0.6
million, or 14%, to $4.7 million for the three months ended June 30, 2002 from
$4.1 million for the three months ended June 30, 2001. Research and development
expenses as a percentage of total revenues were 28% for the three months ended
June 30, 2002 compared to 17% for the three months ended June 30, 2001. The
increase in research and development expenses was primarily due to increases in
staffing and 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 $1.7 million for
the three month periods ended June 30, 2002 and $3.1 million for the three
months ended June 30, 2001. 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 $0.6 million for the three months ended June 30, 2002
compared to net interest income of $1.3 million for the three months ended June
30, 2001. Net interest income for the three months ended June 30, 2002 and 2001
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 decreases in the interest rates
earned by invested funds resulting from decreases in market interest rates,
which have declined approximately 50% since June 2001.
NET OPERATING LOSS CARRYFORWARDS
As of March 31, 2002 we had net operating loss carryforwards of approximately
$53.4 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 $33.9 million as of June
30, 2002 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.
16
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations and satisfied our capital expenditure requirements
primarily through operating revenues, private placements and public offerings of
securities. Net cash used in operating activities was $4.6 million for the three
months ended June 30, 2002, compared to net cash used by operating activities of
$2.0 million for the three months ended June 30, 2001. The change in cash flow
from operations is primarily due to the net loss in the period ended June 30,
2002.
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 June 30, 2002 and 2001 were $0.8 million
and $1.8 million, respectively. We have also entered into capital and operating
leases for facilities and equipment.
As of June 30, 2002 we had $8.3 million in cash and equivalents, $79.7 million
in marketable securities and $79.7 million in working capital. Net cash used in
financing activities was not material for the three months ended June 30, 2002
and net cash provided by financing activities was approximately $1.6 million for
the three months ended June 30, 2001.
We currently believe that the cash and equivalents and marketable securities on
hand will be sufficient to meet our working capital requirements through our
fiscal year 2003 and for the foreseeable future thereafter. 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.
PRO FORMA NET INCOME/(LOSS) PER COMMON SHARE
In connection with our earnings releases and investor conference calls we
provide supplemental consolidated financial information that excludes from our
reported earnings and earnings per share the effects of certain expenses such as
the amortization of goodwill and intangibles and a special charge associated
with the restructuring of our organization. This supplemental consolidated
financial information is reported as pro forma earnings and earnings per share
in addition to information that is reported based on generally accepted
accounting principles in the United States (GAAP). We believe that such pro
forma operating results better reflect our operational performance by providing
a more meaningful measure of our ongoing operations. However, we urge readers to
review and consider carefully the GAAP financial information contained within
our SEC filings and in our earnings releases.
THREE MONTHS ENDED
JUNE 30,
Supplemental information: 2002 2001
-------- --------
Net income (loss) ......................................... $ (9,611) $ 561
Add back charges:
Amortization of acquired intangible assets and other .... 1,661 3,148
Amortization of capitalized software from acquisitions... 474 233
Restructuring charges ................................... 2,504 --
-------- --------
Total add back charges .................................... 4,639 3,381
-------- --------
Pro forma net income (loss) before pro forma income taxes.. (4,972) 3,942
Pro forma income taxes .................................... -- (1,380)
-------- --------
Pro forma net income (loss) ............................... $ (4,972) $ 2,562
======== ========
Pro forma basic net income (loss) per share ............... $ (0.22) $ 0.12
Pro forma diluted net income (loss) per share ............. $ (0.22) $ 0.11
Weighted average common shares outstanding -- Basic ....... 22,363 22,081
Weighted average common shares outstanding -- Diluted ..... 22,363 23,753
17
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. Periods with pro forma loss before income taxes do
not include a tax benefit.
NEW ACCOUNTING PRONOUNCEMENTS
Goodwill and other Acquired Intangible Assets: On July 20, 2001, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill
and Other Intangible Assets." SFAS No. 141 is effective for all business
combinations completed after June 30, 2001. SFAS No. 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 No. 142.
As a result of adopting SFAS No. 141 and SFAS No. 142, the Company's accounting
policies for goodwill and other intangibles changed effective April 1, 2002 as
described below:
Goodwill: The Company recognizes the excess cost of an acquired entity over the
net amount assigned to assets acquired and liabilities assumed as goodwill.
Goodwill will be tested for impairment on an annual basis and between annual
tests whenever there is an impairment indicated. Impairment losses will be
recognized whenever the implied fair value of goodwill is less than its carrying
value. Prior to April 1, 2002, goodwill was amortized on a straight-line basis
over three years. Beginning April 1, 2002, goodwill is no longer amortized.
Other acquired intangible assets: The Company recognizes an acquired intangible
apart from goodwill whenever the asset arises from contractual or other legal
rights, or whenever it is capable of being separated or divided from the
acquired entity and sold, transferred, licensed, rented, or exchanged, either
individually or in combination with a related contract, asset, or liability. An
intangible other than goodwill is amortized over its estimated useful life
unless that life is determined to be indefinite. Currently, other acquired
intangible assets, representing core technology, customer base, capitalized
software, trademarks, and other intangible assets acquired through business
acquisitions, have been amortized on a straight line basis over three or four
years. On April 1, 2002 upon adoption of SFAS 141 and SFAS 142 amortization of
workforce, which had previously been classified as an other acquired intangible
asset, ceased and the net unamortized balance of approximately $1.4 million was
re-characterized as goodwill. Impairment losses are recognized if the carrying
amount of an intangible subject to amortization is not recoverable from expected
future cash flows and its carrying amount exceeds its fair value. Currently,
intangible amortization is expected to be approximately $8.5 million for the
year-ended March 31, 2003.
The Company has completed a transitional impairment test of goodwill as of April
1, 2002. No impairment losses resulted from this transitional impairment testing
during the quarter ended June 30, 2002.
The following is a summary of what reported net earnings would have been in all
periods presented, exclusive of amortization expense recognized in those periods
related to goodwill and intangible assets no longer being amortized.
THREE MONTHS ENDED JUNE 30,
---------------------------
(In thousands)
2002 2001
------- -------
Net income(loss), as reported ............... $(9,611) $ 561
Adjustments:
Amortization of goodwill .................... -- 1,268
Amortization of acquired workforce .......... -- 250
------- -------
Net loss, as adjusted ....................... $(9,611) $ 2,079
======= =======
18
Basic net income(loss) per share, as reported $ (0.43) $ 0.03
Amortization of goodwill .................... -- 0.05
Amortization of acquired workforce .......... -- 0.01
-------- --------
Basic net income(loss) per share, as adjusted . $ (0.43) $ 0.09
======== ========
Diluted net income(loss) per share, as reported $ (0.43) $ 0.02
Amortization of goodwill ...................... -- 0.05
Amortization of acquired workforce ............ -- 0.01
-------- --------
Diluted net income(loss) per share, as adjusted $ (0.43) $ 0.08
======== ========
As of June 30, 2002 and March 31, 2002, the company's balances of goodwill and
other acquired intangibles were as follows (in thousands):
June 30, 2002 March 31, 2002
------------- --------------
Goodwill, gross .................................. $ 20,676 $ 20,676
Re-characterization of workforce, net ............ 1,371 --
-------- --------
Adjusted goodwill ................................ 22,047 20,676
Accumulated amortization ......................... (9,344) (9,344)
-------- --------
Goodwill, net .................................... $ 12,703 $ 11,332
======== ========
Other acquired amortizable intangibles, gross .... $ 27,346 $ 26,085
Re-characterization of workforce, net to Goodwill (1,371) --
-------- --------
25,975 26,085
Accumulated amortization ......................... (15,236) (14,729)
-------- --------
Other acquired amortizable intangibles, net ...... $ 10,739 $ 11,356
======== ========
Impairment of Long-Lived Asset: In September 2001, the FASB issued SFAS 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. This statement
supercedes SFAS 121 and was effective April 1, 2002 for us. This statement did
not have a current material effect on the financial statements of us, but could
have a future effect in the event that an asset impairment has occurred.
Consideration Paid to Reseller: In June 2001, the Emerging Issues Task Force
(EITF) issued EITF Issue No. 00-25, Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendor's Products. This issue is
effective for periods beginning after December 15, 2001 and addresses whether
consideration from a vendor to a reseller is (a) an adjustment of the selling
prices of the vendor's products and should be deducted from revenue when
recognized or (b) a cost incurred by the vendor for assets or services received
from the reseller and should be included as a cost or expense when recognized.
We enter into cooperative advertising programs with some of our resellers. When
we receive an identifiable benefit in return for consideration, and we can
reasonably estimate the fair value of the benefit received, the cooperative
advertising is accounted for as advertising expense. If the fair value cannot be
estimated or an identifiable benefit is not received the cooperative advertising
is accounted for as a reduction of revenue. EITF 00-25, was adopted by us on
April 1, 2002, and did not have a material effect on our consolidated financial
statements.
RISK FACTORS
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q for the quarter ended June 30, 2002 contains certain
forward-looking statements within the meaning of the safe harbor provisions of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such forward-looking statements are
based on the beliefs of our management as well as on assumptions made by and
information currently available to us 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 us, are intended to
identify such forward-looking statements. Although we believe 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. Readers of this Form 10-Q should
consider carefully the factors listed below, as well as the other information
and data contained in this Form 10-Q. We caution the reader, however, that such
list of factors under the caption "Risk Factors" in the our Form 10-Q may not be
exhaustive and that those or other factors, many of which are
19
outside of the our control, could have a material adverse effect on us and our
results of operations. All forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements set forth hereunder. 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:
- demand for our products and services;
- the timing of new product introductions and sales of our products and
services;
- unexpected delays in introducing new products and services;
- increased expenses, whether related to sales and marketing, research
and development or administration;
- changes in the rapidly evolving market for Web content management
solutions;
- the mix of revenues from product licenses and services, as well as the
mix of products licensed;
- the mix of services provided and whether services are provided by our
staff or third-party contractors;
- the mix of domestic and international sales;
- costs related to possible acquisitions of technology or businesses;
- general economic conditions; and
- public announcements by our competitors.
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 distribution channel 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 distribution channel 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
distribution channel 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 dilution
to our shareholders.
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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 achieve quarterly pro forma profitability. If we do not regain our
recent pro forma profitability, the market price of our stock may fall. Our
ability to regain our recent pro forma profitable operations depends upon many
factors beyond our direct control. These factors include, but are not limited
to:
- the demand for our products;
- our ability to quickly introduce new products;
- the level of product and price competition;
- our ability to control costs; and
- 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
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 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 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 may 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 any expansion, we may
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. 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
AND VIEWING SOFTWARE PRODUCTS FOR OUR REVENUES.
We currently derive all of our revenues from product licenses and services
associated with our system of content management 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.
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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
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, 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.
22
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:
- variations in quarterly operating results;
- changes in estimates by securities analysts;
- changes in market valuations of companies in our industry;
- announcements by us of significant events, such as major sales,
- acquisitions of businesses or losses of major customers;
- additions or departures of key personnel; and
- 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.
OUR EXISTING SHAREHOLDERS HAVE SIGNIFICANT INFLUENCE OVER US.
As of June 30, 2002, Robert F. Olson, our Chairman, holds approximately 10.1% of
our outstanding common stock. Accordingly, Mr. Olson is able to exercise
significant control over our affairs. As a group, our directors and executive
officers beneficially own approximately 14.5% of our common stock. These persons
have significant influence over our 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 our company, 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 our
company, depriving shareholders of an opportunity to sell their stock at a price
in excess of the prevailing market price.
OUR SHAREHOLDER RIGHTS PLAN AND CERTAIN PROVISIONS OF MINNESOTA LAW MAY MAKE A
TAKEOVER OF STELLENT DIFFICULT, DEPRIVING SHAREHOLDERS OF OPPORTUNITIES TO SELL
SHARES AT ABOVE-MARKET PRICES.
Our shareholder rights plan and 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
23
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 June 30, 2002, changes in these
rates have had a significant effect on our company. Interest rates earned on
invested funds have fallen by over 50% since June 2001. We believe that there
may be future exposure to interest rate market risk.
Our investments are held in commercial paper which is affected by equity price
market risk and other factors. We do not anticipate that exposure to these risks
will have a material impact on us, due to the nature of our investments.
We have no history of, and do not anticipate in the future, investing in
derivative financial instruments. Most 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed with this report.
FILE DESCRIPTION REFERENCE
99 Certification pursuant to 18 U.S.C. Electronic Transmission
Section 1350, as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
A Current Report on Form 8-K dated May 29, 2002 was filed reporting the
adoption by the registrant of a shareholder rights plan.
24
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: August 14, 2002 By: /s/ Vernon J. Hanzlik
--------------------------------------------
Vernon J. Hanzlik,
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 2002 By: /s/ Gregg A. Waldon
--------------------------------------------
Gregg A. Waldon
Chief Financial Officer,
Secretary and Treasurer
(Principal Financial and Accounting Officer)
25
FILE DESCRIPTION REFERENCE
99 Certification pursuant to 18 U.S.C. Electronic Transmission
Section 1350, as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
26