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Filed Pursuant to Rule 424(b)(4)
Registration Statement No. 333-86353
LOGO
3,600,000 SHARES
COMMON STOCK
This is our initial public offering. Our common stock has been approved for
quotation on the Nasdaq National Market under the symbol IMAN. The initial
public offering price is $11.00 per share.
-------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 4.
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PER SHARE TOTAL
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Public offering price....................................... $11.00 $39,600,000
Underwriting discounts and commissions...................... $ 0.77 $ 2,772,000
Proceeds to iManage......................................... $10.23 $36,828,000
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
iManage has granted the underwriters a 30-day option to purchase up to an
additional 540,000 shares of common stock to cover any over-allotments.
BancBoston Robertson Stephens Inc. expects to deliver the shares of common stock
to purchasers on November 22, 1999.
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ROBERTSON STEPHENS
U.S. BANCORP PIPER JAFFRAY
C.E. UNTERBERG, TOWBIN
THE DATE OF THIS PROSPECTUS IS NOVEMBER 17, 1999
<PAGE> 2
Description of Graphics
INSIDE FRONT COVER:
There is a large yellow letter "i" centered in the middle of the page against a
white background. The word "iManage" appears on the bottom right corner of the
page.
GATEFOLD:
On the left side of the page are the words "unified content." Below these words
is a large circle which contains within it a picture of a telephone positioned
at twelve o'clock, a group of people positioned at three o'clock, a stack of
documents positioned at six o'clock and an envelope with the letter "e" coming
out of it positioned at nine o'clock. Around the circle are the words
"voicemail," "new media," "collaboration," "documents," "faxes" and "e-mail."
The large circle is the dot on a large letter "i." To the right of the large
circle are the words "on demand," and "scalable." Two lines connect the large
circle to a smaller circle which contains within it a picture of a telephone
positioned at twelve o'clock, a group of people positioned at three o'clock, a
stack of documents positioned at six o'clock and an envelope with the letter "e"
coming out of it positioned at nine o'clock. The smaller circle is connected by
a line to other smaller circles containing the same four pictures within them.
The other smaller circles are connected by a line to additional circles. There
are a total of twenty-two smaller circles. Each of these twenty-two circles sits
atop a high rise office building. Some of the lines connecting the circles have
words printed on them. The following words appear on some of the lines:
"www.europe.com," "www.support.com," "www.department.com," "www.customer.com,"
"www.supplier.com" and "www.division.com." Above the buildings and circles are
the words "Extended Enterprise" and below the buildings and the circles are the
words "e-business content and collaboration management."
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UNTIL DECEMBER 13, 1999, ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND IN CONNECTION WITH UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 1
Risk Factors................................................ 4
Special Note Regarding Forward-Looking Statements........... 13
Use of Proceeds............................................. 14
Dividend Policy............................................. 14
Capitalization.............................................. 15
Dilution.................................................... 16
Selected Financial Data..................................... 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 18
Business.................................................... 32
Management.................................................. 44
Related Party Transactions.................................. 53
Principal Stockholders...................................... 59
Description of Capital Stock................................ 62
Shares Eligible for Future Sale............................. 66
Underwriting................................................ 68
Legal Matters............................................... 70
Experts..................................................... 70
Where You Can Find Additional Information................... 70
Index to Financial Statements............................... F-1
</TABLE>
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PROSPECTUS SUMMARY
You should read this summary together with the entire prospectus, including
the more detailed information in our financial statements and accompanying notes
appearing elsewhere in this prospectus. You should rely only on the information
contained in this prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus. We are offering to
sell, and seeking offers to buy, shares of common stock only in jurisdictions
where offers and sales are permitted. The information contained in this
prospectus is accurate only as of the date of this prospectus, regardless of the
time of delivery of this prospectus or of any sale of our common stock. In this
prospectus, iManage, we, us and our refer to iManage, Inc. and all entities
owned or controlled by iManage, Inc. except where it is clear that the term
means only the parent company.
iMANAGE, INC.
We provide content and collaboration management software for enterprises
engaged in electronic business, or e-business. Our software provides a web-based
unified content platform, that is, it brings together various forms of
information and content, including graphics, video, text, audio and data, and
manages, organizes and delivers this information and content in a centralized
manner throughout the extended enterprise. Our software has been designed to
address the needs of a broad range of markets, such as financial services,
retail, manufacturing and distribution, banking and professional services,
though initially we targeted substantially all of our sales and marketing
efforts on the legal applications market.
With the growing pervasiveness of the Internet, organizations are
increasingly engaging in e-business transactions. To enable these transactions,
organizations are developing intranets, which are web-based technologies
designed to disseminate, exchange and manage information internally, and
extranets, which are web-based technologies designed to extend the enterprise
and enable direct collaboration with partners, customers and service providers.
As a result of these developments in electronic business, or e-business, there
has been a dramatic increase in the amount of information available to the
average employee. The overwhelming amount and variety of information that may be
disseminated in e-business transactions threatens an enterprise's ability to
deliver the right information to the right person at the right time.
Our comprehensive e-business content and collaboration management software
(a) offers a scalable and reliable platform; (b) ensures timely delivery of
relevant information; and (c) provides security and accountability. We sell our
software products, including the iManage infoCommerce Server, iManage infoLink,
iManage infoLook, and iManage infoRite, through our direct sales force and a
network of strategic partners and systems integrators.
Our objective is to be the leading provider of e-business content and
collaboration management software. Key elements of our strategy to achieve this
objective include:
- capturing additional market share;
- leveraging our installed customer base;
- expanding key business relationships;
- maintaining our technological leadership; and
- strengthening our international presence.
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We were originally incorporated in Illinois in October 1995 under the name
NetRight Technologies, Inc. and we reincorporated in Delaware in December 1996.
In April 1999, we changed our name from NetRight Technologies, Inc. to iManage,
Inc. Our principal offices are located at 2121 South El Camino Real, Suite 400,
San Mateo, California 94403. Our telephone number is (650) 356-1166. Our web
site address is located at www.iManage.com, but the information on our web site
does not constitute a part of this prospectus.
iManage is a registered trademark of iManage, Inc. This prospectus contains
other trade names, trademarks and service marks of iManage, Inc. and of other
companies.
THE OFFERING
Common stock offered by iManage................. 3,600,000 shares
Common stock to be outstanding after the
offering........................................ 21,447,791 shares
Use of proceeds................................. For general corporate
purposes, capital
expenditures and working
capital. See "Use of
Proceeds" on page 14.
Nasdaq National Market symbol................... IMAN
The number of shares of our common stock outstanding after the offering is
based on shares outstanding as of September 30, 1999 and does not include
1,076,939 shares of common stock subject to options outstanding under our equity
incentive plans as of September 30, 1999. The number of shares outstanding also
assumes the conversion of all our outstanding shares of preferred stock into
8,033,117 shares of common stock.
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SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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NINE MONTH PERIOD
PERIOD FROM ENDED
OCTOBER 10, 1995 YEAR ENDED DECEMBER 31, SEPTEMBER 30,
(INCEPTION) TO -------------------------- -----------------
DECEMBER 31, 1995 1996 1997 1998 1998 1999
----------------- ------ ------- ------- ------- -------
(UNAUDITED)
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STATEMENTS OF OPERATIONS DATA:
Total revenues......................... $ -- $ 74 $ 1,530 $ 7,741 $ 4,810 $12,704
Gross profit........................... -- 32 1,231 6,114 3,760 10,308
Loss from operations................... (64) (688) (3,609) (2,979) (2,623) (2,736)
Net loss............................... (64) (692) (3,596) (2,840) (2,562) (2,433)
Net loss per share -- basic and
diluted.............................. $(0.01) $(0.12) $ (0.57) $ (0.38) $ (0.35) $ (0.29)
Shares used in net loss per
share -- basic and diluted........... 6,000 6,004 6,292 7,455 7,363 8,386
Pro forma net loss per share -- basic
and diluted.......................... $ (0.21) $ (0.15)
Shares used in pro forma net loss per
share -- basic and diluted........... 13,489 16,419
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SEPTEMBER 30, 1999
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PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- ----------- -----------
(UNAUDITED)
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BALANCE SHEET DATA:
Cash, cash equivalents and short term investments.... $15,080 $15,080 $50,908
Working capital...................................... 7,407 7,407 43,235
Total assets......................................... 21,550 21,550 57,378
Long-term debt....................................... 1,806 1,806 1,806
Total stockholders' equity........................... 7,954 7,954 43,782
</TABLE>
The pro forma data give effect to the conversion of all of our outstanding
shares of preferred stock into common stock upon the closing of this offering.
The pro forma as adjusted data give effect to the sale of the 3,600,000 shares
of common stock that we are offering under this prospectus at an initial public
offering price of $11.00 per share and after deducting the estimated
underwriting discounts and commissions and estimated offering expenses. See
"Capitalization" on page 15.
Unless otherwise indicated, all information contained in this prospectus
assumes:
- no exercise of the underwriters' over-allotment option, and
- the conversion of each outstanding share of preferred stock into one
share of common stock immediately before the consummation of this
offering.
This prospectus includes statistical data regarding the Internet industry.
These data are taken or derived from information published by sources, including
the Delphi Group. Although we believe that these data are generally indicative
of the matters reflected in those reports, these data are inherently imprecise,
and we caution you not to place undue reliance on these data.
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RISK FACTORS
You should carefully consider the risks described below, together with all
of the other information included in this prospectus, before you decide to buy
our common stock. If any of the following risks actually occur, our business,
financial condition and operating results could be seriously harmed, the trading
price of our common stock could decline and you may lose all or part of your
investment.
OUR LIMITED OPERATING HISTORY MAY PREVENT US FROM ACHIEVING SUCCESS IN OUR
BUSINESS.
We were founded in October 1995 and began shipping our first product in
October 1996. Because of our limited operating results, we have limited insight
into trends that may emerge and affect our business. As a result, an evaluation
of our prospects is difficult to make. The potential revenues and income of our
business and many of the markets we intend to target are unproven.
We face significant risks because of our limited operating history,
including:
- we have a limited number of product offerings and will need to
successfully introduce new products and enhance our existing offering,
with, for example, an enhanced version of iManage infoLink, which we
expect to release in October 1999 and an enhanced version of iManage
infoCommerce Server, which we expect to release by the end of the first
quarter of 2000;
- we need to sell additional licenses and software products to our existing
customers and expand our customer base beyond legal and other
professional service firms; and
- we need to expand our sales and marketing and customer support
organization to focus on a broad range of markets and build strategic
relationships with information technology consultants, systems
integrators and unified messaging original equipment manufacturers to
increase sales.
If we do not successfully address any of these and other challenges, our
business and operating results will be seriously harmed.
WE HAVE AN ACCUMULATED DEFICIT OF APPROXIMATELY $9.6 MILLION AS OF SEPTEMBER 30,
1999 AND MAY NOT BE ABLE TO ACHIEVE PROFITABILITY.
Our failure to significantly increase our total revenues would seriously
harm our business and operating results. We incurred net losses of $692,000 in
1996, $3.6 million in 1997, $2.8 million in 1998 and $2.4 million for the nine
month period ended September 30, 1999. As of September 30, 1999, we had an
accumulated deficit of approximately $9.6 million.
To increase our revenues, we must incur significant expenses to increase
our research and development, sales and marketing and general and administrative
resources. If our revenues do not grow to offset these increased expenses, we
will not be profitable. We may not be able to sustain our recent revenue growth
rates. In fact, we may not have any revenue growth, and our revenues could
decline.
OUR QUARTERLY OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT. IF WE
FAIL TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS OR INVESTORS, THE MARKET
PRICE OF OUR COMMON STOCK MAY DECREASE SIGNIFICANTLY.
Our quarterly operating results have varied significantly in the past and
will likely vary significantly in the future. As a result, we believe that
period-to-period comparisons of our operating
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results are not meaningful and should not be relied upon as indicators of our
future performance. In the future, our operating results may be below the
expectations of securities analysts and investors. Our failure to meet these
expectations would likely cause the price of our common stock to decline.
Operating results vary depending on a number of factors, including:
- the size, timing, terms and fluctuations of customer orders; and
- the timing of the introduction or enhancement of products by us.
In addition, depending on the manner in which we sell existing or future
products, this could have the effect of extending the length of time over which
we recognize revenues. Our quarterly revenues could be significantly affected
based on how applicable accounting standards are amended or interpreted over
time.
Furthermore, our expense levels are relatively fixed and are based, in
part, on expectations of future revenues. Therefore, if revenue levels fall
below our expectations, our net loss will increase because only a small portion
of our expenses vary with our revenues.
OUR REVENUES WILL DECLINE SIGNIFICANTLY IF THE MARKET DOES NOT CONTINUE TO
ACCEPT OUR IMANAGE SUITE OF PRODUCTS.
In 1998 and the nine month period ended September 30, 1999, we derived all
of our license revenues from the sale of licenses for our iManage infoCommerce
Server, iManage infoRite and iManage infoLink products. We currently expect to
continue to derive substantially all of our license revenues from these
products. If the market does not continue to accept these products, our revenues
will decline significantly and this could negatively affect our operating
results. Factors that may affect the market acceptance of these products include
the performance, price and total cost of ownership of our products and the
availability, functionality and price of competing products and technologies.
Many of these factors are beyond our control.
WE HAVE ALWAYS BEEN HEAVILY DEPENDENT UPON LAW FIRM CUSTOMERS. IF WE DO NOT
EXPAND SALES OF OUR PRODUCTS TO OTHER CUSTOMERS, WE MAY NOT BE ABLE TO GROW OUR
REVENUES CONSISTENT WITH PAST GROWTH RATES AND OUR OPERATING RESULTS WILL
SUFFER.
We derived 89.0% of our total revenues in 1998 and 94.0% of our total
revenues for the nine month period ended September 30, 1999 from the sale of
licenses to law firms and professional service firms. As of September 30, 1999,
81.0% of our customers were law firms or professional service firms. Since
January 1, 1998, 49 of our top 50 customers, in terms of billings, were law
firms or professional service firms. Our future success is substantially
dependent on our ability to sell a significant number of licenses to customers
in other businesses, particularly large multi-national corporations. To sell a
significant number of licenses to these businesses, we must devote time and
resources to train our sales employees to work in industries outside law firms
and professional service firms. We may not be successful in our efforts. Unlike
law firms and professional service organizations, customers in other industries,
including large multi-national corporations, may not require or perceive the
value of our content and collaboration management solution. If we cannot license
our products to customers in other industries, our business could be
significantly adversely affected.
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WE MAY BE UNABLE TO PENETRATE ADDITIONAL MARKETS AND GROW OUR REVENUES IF WE DO
NOT SUCCESSFULLY OBTAIN LEADS OR REFERRALS FROM OUR CUSTOMERS.
To increase sales of our e-business content and collaboration management
solution and grow our total revenues, we will try to obtain leads or referrals
from our current customers. If we are unable to maintain these existing customer
relationships, or fail to establish additional relationships, we will have to
devote substantially more resources, both financial and personnel, to the sales
and marketing of our products. As a result, our success depends in part on the
ultimate success of these current relationships and the willingness of our
customers to provide us with these introductions, referrals and leads. Our
current customer relationships do not, and any future relationships we establish
may not, afford us any exclusive marketing or distribution rights. In addition,
at any time, our customers may terminate their relationships with us, pursue
other relationships with our competitors or develop or acquire products that
compete with our products. Even if our customers provide us with leads and
introductions, we may not penetrate additional markets or grow our revenues.
IF THE EMERGING MARKET FOR E-BUSINESS CONTENT AND COLLABORATION MANAGEMENT
SOFTWARE DOES NOT DEVELOP AS QUICKLY AS WE EXPECT, OUR BUSINESS WILL SUFFER.
The market for e-business content and collaboration management software has
only recently begun to develop, is rapidly evolving and will likely have an
increasing number of competitors. We cannot be certain that a viable market for
our products will emerge or be sustainable. If the e-business content and
collaboration management market fails to develop, or develops more slowly than
expected, demand for our products will be less than anticipated and our business
and operating results would be seriously harmed.
Furthermore, to be successful in this emerging market, we must be able to
differentiate our business from our competitors through our product and service
offerings and brand name recognition. We may not be successful in
differentiating our business or achieving widespread market acceptance of our
products and services. In addition, enterprises that have already invested
substantial resources in other methods of managing their content and
collaborative process may be reluctant or slow to adopt a new approach that may
replace, limit or compete with their existing systems.
DUE TO OUR LENGTHY AND VARIABLE SALES CYCLE, WE MAY NOT BE ABLE TO PREDICT WHEN
OR IF SALES WILL BE MADE AND WE MAY EXPERIENCE UNPLANNED SHORTFALLS IN REVENUES.
Our products have an unpredictable sales cycle that contributes to the
uncertainty of our future operating results. Customers often view the purchase
of our products as a significant and strategic decision, and this decision
typically involves a considerable commitment of resources and is influenced by
the customers' budget cycles. Selling our products also requires us to educate
potential customers on their use and benefits because our e-business content and
collaboration management software is a new category of product. As a result, our
products have a lengthy sales cycle, which has historically ranged from
approximately two to six months.
As potential customers evaluate our products and before they place an order
with us, we typically expend significant sales and marketing expenses. Larger
customers may purchase our products as part of multiple, simultaneous purchasing
decisions, which may result in additional unplanned administrative processing
and other delays in our product sales. If sales forecasted from a specific
customer for a particular quarter are not realized, we may experience unplanned
shortfalls in revenues. As a result, we have only a limited ability to forecast
the timing and size of sales of our products.
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COMPETITION FROM PROVIDERS OF SOFTWARE ENABLING CONTENT AND COLLABORATION
MANAGEMENT AMONG BUSINESSES MAY INCREASE, WHICH COULD CAUSE US TO REDUCE OUR
PRICES, AND RESULT IN REDUCED GROSS MARGINS OR LOSS OF MARKET SHARE.
The market for products that enable companies to manage and share content
and collaborate throughout an extended enterprise is new, highly fragmented,
rapidly changing and increasingly competitive. We expect competition to continue
to intensify, which could result in price reductions for our products, reduced
gross margins and loss of market share, any of which would have a material
adverse effect on our business and financial condition.
IF OUR EFFORTS TO ENHANCE EXISTING PRODUCTS AND INTRODUCE NEW PRODUCTS ARE NOT
SUCCESSFUL, WE MAY NOT BE ABLE TO GENERATE DEMAND FOR OUR PRODUCTS.
Our future success depends on our ability to provide a comprehensive
e-business content and collaboration management solution. To provide this
comprehensive solution, we must continually develop and introduce high quality,
cost-effective products as well as product enhancements on a timely basis. In
August 1999, we shipped iManage infoLook, a product that integrates with
Microsoft Outlook. Our future revenue growth will depend significantly on the
success of this new product. To date, we have only tested this product with a
limited number of customers, and we delayed its release two months to
incorporate customer-specific functionality. Therefore, we cannot guarantee that
this product will gain widespread market acceptance. If the market does not
accept iManage infoLook or other new products, our business will suffer and our
stock price will likely fall.
In addition, while our current product offerings have the ability to manage
many types of content, such as graphics, video, text, audio and data, we are
dependent upon third parties to develop additional interfaces that will enable
the deposit of other types of structured relational data, particularly data
generated by enterprise resource planning systems, into the iManage e-business
Server. These third parties may not be able to develop these technologies, and
we may therefore not be able to continue to offer a comprehensive e-business
content and collaboration management solution. Our failure to offer a
comprehensive solution would seriously harm our business.
IF OUR PRODUCTS CANNOT SCALE TO MEET THE DEMANDS OF THOUSANDS OF CONCURRENT
USERS, OUR TARGETED CUSTOMERS MAY NOT LICENSE OUR SOLUTIONS, WHICH WILL CAUSE
OUR REVENUE TO DECLINE.
Our strategy is to target large organizations that, because of the
significant amounts of information and content that they generate and use,
require our e-business content and collaboration management solution. For this
strategy to succeed, our software products must be highly scalable; that is,
they must be able to accommodate thousands of concurrent users. If our products
cannot scale to accommodate a large number of concurrent users, our target
markets will not accept our products and our business and operating results will
suffer.
While we and independent test laboratories have tested the scalability of
our products in simulations, we have not had the opportunity to observe the
performance of our products in the context of an actual large-scale, that is,
tens to hundreds of thousands of concurrent users, customer implementation. If
our customers cannot successfully implement large-scale deployments, or if they
determine that our products cannot accommodate large-scale deployments, our
customers will not license our solutions and this will materially adversely
affect our financial condition and operating results.
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OUR PRODUCTS MIGHT NOT BE COMPATIBLE WITH ALL MAJOR PLATFORMS, WHICH COULD
INHIBIT SALES AND HARM OUR BUSINESS.
We must continually modify and enhance our products to keep pace with
changes in computer hardware and software and database technology, as well as
emerging technical standards in the software industry. For example, we have
designed our products to work with databases and servers such as Informix,
Oracle and SQL Server and software applications including Microsoft Office,
Lotus Notes and Novell GroupWise. Any changes to these platforms could require
us to modify our products and could cause us to delay releasing a product until
the updated version of that platform or application has been released. As a
result, customers could delay purchases until they determine how our products
will operate with these updated platforms or applications.
In addition, our iManage infoCommerce Server runs on the Windows NT
platform. If a customer does not currently use the Windows NT platform and does
not choose to adopt this platform, we will be unable to license our products to
this customer. Furthermore, some of our products do not run on other popular
operating systems, such as the UNIX operating system. If another platform
becomes more widely used, we could be required to convert our product to that
platform. We may not succeed in these efforts, and even if we do, potential
customers may not choose to license our product.
DEFECTS IN OUR SOFTWARE PRODUCTS COULD DIMINISH DEMAND FOR OUR PRODUCTS.
Our software products are complex and may contain errors, including year
2000-related errors, that may be detected at any point in the life of the
product. We cannot assure you that, despite testing by us, our implementation
partners and our current and potential customers, errors will not be found in
new products or releases after shipment, resulting in loss of revenues, delay in
market acceptance and sales, diversion of development resources, injury to our
reputation or increased service and warranty costs. If any of these were to
occur, our business would be adversely affected and our stock price could fall.
Because our products are generally used in systems with other vendors'
products, they must integrate successfully with these existing systems. System
errors, whether caused by our products or those of another vendor, could
adversely affect the market acceptance of our products, and any necessary
revisions could cause us to incur significant expenses.
IF WE ARE UNABLE TO RESPOND TO RAPID MARKET CHANGES DUE TO CHANGING TECHNOLOGY
AND EVOLVING INDUSTRY STANDARDS, OUR FUTURE SUCCESS WILL BE ADVERSELY AFFECTED.
The market for our products is characterized by rapidly changing
technology, evolving industry standards, frequent new service and product
introductions and changes in customer demands. Our future success will depend to
a substantial degree on our ability to offer products and services that
incorporate leading technology, and respond to technological advances and
emerging industry standards and practices on a timely and cost-effective basis.
You should be aware that:
- our technology or systems may become obsolete upon the introduction of
alternative technologies, such as products that better manage various
types of content; and
- we may not have sufficient resources to develop or acquire new
technologies or to introduce new products or services capable of
competing with future technologies or service offerings.
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OUR PRODUCTS MAY LACK ESSENTIAL FUNCTIONALITY IF WE ARE UNABLE TO OBTAIN AND
MAINTAIN LICENSES TO THIRD-PARTY SOFTWARE AND APPLICATIONS.
We rely on software that we license from third parties, including software
that is integrated with internally developed software and used in our products
to perform key functions. For example, we license Search '97 from Verity, Inc.
and we license Outside In Viewer Technology and Outside In HTML Export from INSO
Corporation. The functionality of our products therefore depends on our ability
to integrate these third-party technologies into our products. Furthermore, we
may license additional software from third parties in the future to add
functionality to our products. If our efforts to integrate this third-party
software into our products are not successful, our customers may not license our
products and our business will suffer.
In addition, we would be seriously harmed if the providers from whom we
license software ceased to deliver and support reliable products, enhance their
current products or respond to emerging industry standards. Moreover, the
third-party software may not continue to be available to us on commercially
reasonable terms or at all. Our license agreement with Verity terminates in
January 2003 and our agreement with INSO terminates in December 2001. Each of
these license agreements may be renewed only with the other party's written
consent. The loss of, or inability to maintain or obtain licensed software,
could result in shipment delays or reductions. Furthermore, we might be forced
to limit the features available in our current or future product offerings.
Either alternative could seriously harm our business and operating results.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WE COULD LOSE MARKET
SHARE, INCUR COSTLY LITIGATION EXPENSES OR LOSE VALUABLE ASSETS.
We believe that our continued success depends on protecting our proprietary
technology. We rely on a combination of patent, trademark, service mark, trade
secret and copyright law and contractual restrictions to protect the proprietary
aspects of our technology. In addition, we enter into confidentiality or license
agreements with our employees and consultants, and control access to and
distribution of our software, documentation and other proprietary information.
These legal and practical protections afford only limited protection. Despite
our efforts to protect our proprietary rights, unauthorized parties may attempt
to copy aspects of our products or to obtain and use our proprietary
information. These attempts, if successful, could cause us to lose market share
and thus harm our business and operating results. Litigation may be necessary to
enforce our intellectual property rights, to protect our trade secrets and to
determine the validity and scope of the proprietary rights of others. Any
litigation could result in substantial costs and diversion of resources and
could seriously harm our business and operating results. In addition, as we
expand our international sales, we may find that the laws of many countries,
particularly those in the Asia/Pacific region, do not protect our proprietary
rights to as great an extent as the laws of the United States.
OTHERS MAY BRING INFRINGEMENT CLAIMS AGAINST US WHICH COULD BE TIME CONSUMING
AND EXPENSIVE FOR US TO DEFEND.
Other companies, including our competitors, may obtain patents or other
proprietary rights that would prevent, limit or interfere with our ability to
make, use or sell our products. For example, we may discover that third parties
have developed similar or competing technologies to manage, organize and deliver
information and content. As a result, we may be found to infringe on the
proprietary rights of others. Furthermore, companies in the software market are
increasingly bringing suits that allege infringement of their proprietary
rights, particularly patent rights. We could incur substantial
9
<PAGE> 13
costs to defend any litigation, and intellectual property litigation could force
us to do one or more of the following:
- cease using key aspects of our e-business content and collaboration
management solution that incorporate the challenged intellectual
property;
- obtain a license from the holder of the infringed intellectual property
right; and
- redesign some or all of our products to avoid infringing.
In the event of a successful claim of infringement against us and our
failure or inability to license the infringed technology, our business and
operating results would be significantly harmed.
WE COULD BE SUBJECT TO PRODUCT LIABILITY CLAIMS IF OUR CUSTOMERS' INFORMATION OR
CONTENT IS DAMAGED THROUGH THE USE OF OUR PRODUCTS.
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, financial condition and operating results may be
materially adversely affected. Errors, bugs or viruses 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 jurisdictions where we operate.
WE MAY BE UNABLE TO RETAIN OUR CURRENT KEY PERSONNEL AND ATTRACT ADDITIONAL
QUALIFIED PERSONNEL TO OPERATE AND EXPAND OUR BUSINESS.
Our success depends largely on the skills, experience and performance of
the members of our senior management and other key personnel, such as Mahmood
Panjwani, our president and chief executive officer, and Rafiq Mohammadi, our
chief technology officer. We may not be successful in attracting, assimilating
or retaining qualified personnel in the future. None of our senior management or
other key personnel is bound by an employment agreement. If we lose one or more
of these key employees, our business and operating results could be seriously
harmed. In addition, our future success will depend largely on our ability to
continue attracting and retaining highly skilled personnel. Like other
high-technology companies, we face intense competition for qualified personnel.
OUR TOTAL REVENUES WILL NOT INCREASE IF WE FAIL TO SUCCESSFULLY MANAGE OUR
GROWTH AND EXPANSION.
Our historical growth has placed, and any further growth is likely to
continue to place, a significant strain on our limited resources. We have grown
from 29 employees at January 1, 1998 to 93 employees at September 30, 1999. To
be successful, we will need to implement additional management information
systems, improve our operating, administrative, financial and accounting systems
and controls, train new employees and maintain close coordination among our
executive, research and development, accounting, finance, marketing, sales and
operations organizations. Any failure to manage growth effectively could
seriously harm our business and operating results.
AS WE EXPAND OUR OPERATIONS INTERNATIONALLY, WE WILL FACE SIGNIFICANT RISKS IN
DOING BUSINESS IN FOREIGN COUNTRIES.
A key component to our business strategy is to expand our existing sales
and marketing activities internationally, particularly in Asia, Australia, New
Zealand and the United Kingdom. If our efforts
10
<PAGE> 14
are successful, we will be subject to a number of risks associated with
international business activities, including:
- costs of customizing our products for foreign countries, including
localization, translation and conversion to international and other
foreign technology standards;
- compliance with multiple, conflicting and changing governmental laws and
regulations, including changes in regulatory requirements that may limit
our ability to sell our software in particular countries;
- import and export restrictions, tariffs and greater difficulty in
collecting accounts receivable; and
- foreign currency-related risks if a significant portion of our revenues
become denominated in foreign currencies.
Our failure to successfully address any of these risks will hurt our operations
and may prevent our total revenues from growing.
YEAR 2000 COMPLIANCE COSTS AND RISKS ARE DIFFICULT TO ASSESS AND COULD RESULT IN
DELAY OR LOSS OF REVENUES, DIVERSION OF DEVELOPMENT RESOURCES, DAMAGE TO OUR
REPUTATION OR INCREASED SERVICE, WARRANTY OR LITIGATION COSTS.
Our internally-developed proprietary systems could be substantially
impaired or cease to operate if they cannot recognize date information correctly
when the year changes to 2000. In addition, we rely on information technology
supplied by third parties. Year 2000 problems experienced by us or any of these
third parties could materially adversely affect our business. Furthermore, the
Internet could face serious disruptions arising from the year 2000 problem.
We believe that many of our customers and potential customers have
implemented policies that prohibit or strongly discourage making changes or
additions to their internal computer systems until after January 1, 2000. We
will experience fewer sales if potential customers who might otherwise purchase
our products delay the purchase and implementation of our product until after
January 1, 2000 in an effort to stabilize their internal computer systems to
cope with the year 2000 problem or because their information technology budgets
have been diverted to address year 2000 issues. If our potential customers delay
purchasing or implementing our products as a result of the year 2000 problem,
our business will be seriously harmed. In addition, because the revenues from
some of our customers are recognized on a ratable basis, any implementation
delays by these customers caused by their needs to address year 2000 issues will
affect our ability to recognize these revenues.
Given the pervasive nature of the year 2000 problem, we cannot guarantee
that disruptions in other industries and market segments will not adversely
affect our business. We have not completed our year 2000 investigation and
overall compliance initiative. The costs related to year 2000 compliance, which
thus far have not been material, could ultimately be significant and may harm
our business.
FUTURE ACQUISITIONS MAY BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE
STOCKHOLDER VALUE OR DIVERT MANAGEMENT ATTENTION.
As part of our business strategy, we may find it necessary to acquire
additional businesses, products or technologies that we feel could complement or
expand our business, increase our market coverage, enhance our technical
capabilities or offer other types of growth opportunities. If we identify an
appropriate acquisition candidate, we may not be able to successfully negotiate
the terms of the acquisition, finance the acquisition, or integrate the acquired
business, products or technologies into
11
<PAGE> 15
our existing business and operations. Furthermore, completing a potential
acquisition and integrating an acquired business will cause significant
diversions of management time and other resources. Since we have never acquired
another business, we may experience unexpected difficulties and obstacles in
acquiring and integrating new operations.
If we consummate a significant acquisition in which the consideration
consists of stock or other securities, your equity could be significantly
diluted. If we were to proceed with a significant acquisition in which the
consideration included cash, we could be required to use a substantial portion
of our available cash, including proceeds of this offering, to consummate that
acquisition. Acquisition financing may not be available on favorable terms, if
at all. In addition, we may be required to amortize significant amounts of
goodwill and other intangible assets in connection with future acquisitions,
which would seriously harm our operating results.
OUR EXECUTIVE OFFICERS, DIRECTORS AND MAJOR STOCKHOLDERS WILL RETAIN SIGNIFICANT
CONTROL OVER IMANAGE AFTER THIS OFFERING, WHICH MAY LEAD TO CONFLICTS WITH OTHER
STOCKHOLDERS OVER CORPORATE GOVERNANCE MATTERS.
Upon completion of this offering, our executive officers, directors and
principal stockholders will beneficially own approximately 60.9% of our
outstanding common stock. As a result, these stockholders will be able to
exercise control over all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions, which
could have the effect of delaying or preventing a third party from acquiring
control over or merging with us. We also plan to reserve up to 5% of the shares
offered in this offering under a directed share program in which our executive
officers, directors, principal stockholders, employees, business associates and
related persons may be able to purchase shares in this offering at the initial
public offering price. This program may further increase the amount of stock
held by persons whose interests are closely aligned with management's interests.
OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT
OR ABOVE THE INITIAL PUBLIC OFFERING PRICE.
The initial public offering price for our common stock was determined
through negotiations between the underwriters and us. If you purchase shares of
common stock, an active trading market may not develop and you may not be able
to resell those shares at or above the initial public offering price. The market
price of our common stock may fluctuate significantly in response to a number of
factors, some of which are beyond our control, including:
- quarterly fluctuations in operating results;
- changes in financial estimates or recommendations by securities analysts;
- announcements by us or our competitors of financial results, new
products, significant technological innovations, contracts, acquisitions,
strategic partnerships, joint ventures, capital commitments or other
events;
- additions or departures of key personnel;
- any future sales of our common stock or other securities; and
- stock market price and volume fluctuations, which are particularly common
among securities of Internet-related companies.
In addition, the stock market has experienced extreme volatility that often
has been unrelated to the performance of particular companies. These market
fluctuations may cause our stock price to fall regardless of our performance.
12
<PAGE> 16
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS WHICH WOULD LIMIT OUR
ABILITY TO GROW.
We may need to seek additional funding in the future. We do not know if we
will be able to obtain additional financing on favorable terms, if at all. In
addition, if we issue equity securities, stockholders may experience additional
dilution or the new equity securities may have rights, preferences or privileges
senior to those of existing holders of common stock. If we cannot raise funds on
acceptable terms, if and when needed, we may not be able to develop or enhance
our products, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements, which could seriously harm our
business.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under Prospectus Summary, Risk Factors, Management's
Discussion and Analysis of Financial Condition and Results of Operations,
Business and elsewhere in this prospectus constitute forward-looking statements.
In some cases, you can identify forward-looking statements by terms such as may,
will, should, expect, plan, intend, forecast, anticipate, believe, estimate,
predict, potential, continue or the negative of these terms or other comparable
terminology. The forward-looking statements contained in this prospectus involve
known and unknown risks, uncertainties and situations that may cause our or our
industry's actual results, level of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by these statements. These factors include
those listed under "Risk Factors" and elsewhere in this prospectus.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. You should not place undue reliance on
these forward-looking statements.
13
<PAGE> 17
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 3,600,000 shares of
common stock we are offering will be approximately $35,828,000, at an initial
public offering price of $11.00 per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses. If the
underwriters' over-allotment option is exercised in full, we estimate that our
net proceeds will be approximately $41,352,200.
The principal purposes of this offering are to obtain additional capital,
to create a public market for our common stock, to enhance our ability to
acquire other businesses, products or technologies, and to facilitate future
access to public equity markets. We intend to use the proceeds for working
capital, capital expenditures and other general corporate purposes. We may also
use a portion of the net proceeds from this offering to acquire or invest in
businesses, technologies or products that are complementary to our business. We
currently have no commitments or agreements for any acquisitions. Pending our
use of the net proceeds, we intend to invest them in short-term, interest
bearing, investment grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock and
do not currently anticipate paying these cash dividends. We currently anticipate
that we will retain all of our future earnings for use in the development and
expansion of our business and for general corporate purposes. Any determination
to pay dividends in the future will be at the discretion of our board of
directors and will depend upon our financial condition, operating results and
other relevant factors as determined by the board of directors, in its
discretion. Additionally, we have entered into loan agreements with creditors
that restrict our ability to pay dividends.
14
<PAGE> 18
CAPITALIZATION
The following table presents the capitalization of iManage as of September
30, 1999:
- on an actual basis;
- on a pro forma basis to reflect the conversion of each outstanding share
of preferred stock into one share of common stock upon the closing of
this offering; and
- on a pro forma as adjusted basis to reflect the sale of 3,600,000 shares
of common stock that we are offering at an initial public offering price
of $11.00 per share after deducting estimated underwriting discounts and
commissions and our estimated offering expenses and the application of
the net proceeds we receive from this offering. The pro forma as adjusted
information reflects none of the 1,076,939 shares of common stock
issuable upon exercise of outstanding options at September 30, 1999 at a
weighted average exercise price of $1.00.
This table should be read in conjunction with our financial statements and
related notes and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- ---------- ------------
(UNAUDITED AND IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
Long-term debt............................................ $ 1,806 $ 1,806 $ 1,806
------- ------- -------
Stockholders' equity:
Preferred stock; 8,153,708 shares authorized, actual;
2,000,000 shares authorized, pro forma and pro forma
as adjusted; 8,033,117 shares issued and outstanding,
actual; none issued or outstanding, pro forma and pro
forma as adjusted.................................... 8 -- --
Common stock; 20,000,000 shares authorized, actual;
100,000,000 shares authorized, pro forma and pro
forma as adjusted; 9,814,674 shares issued and
outstanding, actual; 17,847,791 issued and
outstanding, pro forma; 21,447,791 shares issued and
outstanding, pro forma as adjusted................... 10 18 22
Additional paid-in capital.............................. 22,497 22,497 58,321
Deferred stock-based compensation....................... (3,934) (3,934) (3,934)
Notes receivable for common stock....................... (1,002) (1,002) (1,002)
Accumulated deficit..................................... (9,625) (9,625) (9,625)
------- ------- -------
Total stockholders' equity...................... 7,954 7,954 43,782
------- ------- -------
Total capitalization............................ $ 9,760 $ 9,760 $45,588
======= ======= =======
</TABLE>
15
<PAGE> 19
DILUTION
If you invest in our common stock, your interest will be diluted in an
amount equal to the difference between:
- the public offering price per share of our common stock and
- the pro forma net tangible book value per share of our common stock after
this offering.
The pro forma net tangible book value per share after this offering equals:
- the net tangible book value, which is tangible assets less total
liabilities, divided by
- the number of outstanding shares of common stock after the offering,
which will include 8,033,117 shares of common stock from the conversion
of preferred stock upon consummation of this offering.
Our pro forma net tangible book value as of September 30, 1999 was
approximately $7,478,000, or $0.42 per share of common stock. If you participate
in this offering, you will pay $11.00 per share, which substantially exceeds
$0.42 per share.
The pro forma as adjusted net tangible book value per share takes into
account the estimated net proceeds from this offering. Based upon an initial
public offering price of $11.00 per share and after deducting the estimated
underwriting discounts and commissions and estimated offering expenses, our pro
forma as adjusted net tangible book value as of September 30, 1999 would have
been approximately $43,306,000, or $2.02 per share. This represents an immediate
increase in pro forma as adjusted net tangible book value of $1.60 per share to
existing stockholders and an immediate dilution of $8.98 per share to investors
purchasing common stock in this offering. The following table illustrates the
per share dilution:
<TABLE>
<CAPTION>
ASSUMING NO
EXERCISE OF
OVER-ALLOTMENT
OPTION
--------------
<S> <C> <C>
Initial public offering price per share..................... $11.00
Pro forma net tangible book value per share as of September
30, 1999.................................................... $ 0.42
Increase per share attributable to new investors.......... 1.60
-------
Pro forma as adjusted net tangible book value per share
after the offering........................................ 2.02
------
Dilution per share to new investors......................... $ 8.98
======
</TABLE>
The following table summarizes as of September 30, 1999, on the pro forma
basis described above, the number of shares of common stock purchased from us,
the total consideration paid and the average price per share paid by existing
stockholders and by investors purchasing shares of common stock in this
offering, before deducting the estimated underwriting discounts and commissions
and estimated offering expenses. Additionally, as detailed below, new investors
purchasing shares in this offering at the initial public offering price will
contribute 75.8% of the total consideration paid to us but will own only 16.8%
of our shares.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PAID PER SHARE
---------- ------- ----------- ------- --------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... 17,847,791 83.2% $12,615,000 24.2% $ 0.71
New investors....................... 3,600,000 16.8% $39,600,000 75.8% 11.00
---------- ----- ----------- -----
Total..................... 21,447,791 100.0% $52,215,000 100.0%
========== ===== =========== =====
</TABLE>
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<PAGE> 20
SELECTED FINANCIAL DATA
The following data have been derived from financial statements audited
by
PricewaterhouseCoopers LLP, independent accountants, except for the data for the
nine month periods ended September 30, 1998 and 1999. Balance sheets at December
31, 1997 and 1998, the related statements of operations and of cash flows for
the three years ended December 31, 1998 and related notes appear elsewhere in
this prospectus. The statement of operations data for the period from October
10, 1995, our inception, through December 31, 1995 and the balance sheet data as
of December 31, 1995 and 1996 are derived from audited financial statements not
included in this prospectus.
The selected financial data presented below contains only a portion of
iManage's financial statements and should be read in conjunction with the
financial statements and related notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
NINE MONTH
PERIOD FROM PERIOD ENDED
OCTOBER 10, 1995 YEAR ENDED DECEMBER 31, SEPTEMBER 30,
(INCEPTION) TO -------------------------- -----------------
DECEMBER 31, 1995 1996 1997 1998 1998 1999
----------------- ------ ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
License............................................. $ -- $ 70 $ 1,172 $ 6,509 $ 4,044 $ 9,750
Support and services................................ -- 4 358 1,232 766 2,954
------ ------ ------- ------- ------- -------
Total revenues............................... -- 74 1,530 7,741 4,810 12,704
------ ------ ------- ------- ------- -------
Cost of revenues:
License............................................. -- 4 136 414 261 538
Support and services................................ -- 38 163 1,213 789 1,858
------ ------ ------- ------- ------- -------
Total cost of revenues....................... -- 42 299 1,627 1,050 2,396
------ ------ ------- ------- ------- -------
Gross profit.......................................... -- 32 1,231 6,114 3,760 10,308
Operating expenses:
Sales and marketing................................. 19 335 1,120 4,393 3,010 5,818
Research and development............................ 24 113 935 2,351 1,653 2,931
General and administrative.......................... 21 272 706 1,295 908 1,527
Stock-based compensation............................ -- -- 2,079 1,054 812 2,768
------ ------ ------- ------- ------- -------
Total operating expenses..................... 64 720 4,840 9,093 6,383 13,044
------ ------ ------- ------- ------- -------
Loss from operations.................................. (64) (688) (3,609) (2,979) (2,623) (2,736)
Interest income (expense), net........................ -- (4) 13 139 61 332
------ ------ ------- ------- ------- -------
Loss before provision for income taxes................ (64) (692) (3,596) (2,840) (2,562) (2,404)
------ ------ ------- ------- ------- -------
Provision for income taxes............................ -- -- -- -- -- 29
------ ------ ------- ------- ------- -------
Net loss.............................................. $ (64) $ (692) $(3,596) $(2,840) $(2,562) $(2,433)
====== ====== ======= ======= ======= =======
Net loss per share -- basic and diluted............... $(0.01) $(0.12) $ (0.57) $ (0.38) $ (0.35) $ (0.29)
Shares used in net loss per share -- basic and
diluted............................................. 6,000 6,004 6,292 7,455 7,363 8,386
Pro forma net loss per share -- basic and diluted..... $ (0.21) $ (0.15)
Shares used in pro forma net loss per share -- basic
and diluted......................................... 13,489 16,419
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------ SEPTEMBER 30,
1995 1996 1997 1998 1999
---- ---- ------ ------- -------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEETS DATA:
Cash, cash equivalents and short term investments........... $ 10 $359 $1,789 $ 7,617 $15,080
Working capital (deficit)................................... (18) 17 1,740 6,119 7,407
Total assets................................................ 44 511 3,260 13,495 21,550
Long-term debt.............................................. -- -- -- -- 1,806
Total stockholders' equity.................................. 17 90 1,986 7,360 7,954
</TABLE>
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<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We supply e-business content and collaboration management software that
provides organizations with a web-based unified content platform that manages,
organizes and delivers relevant information from a variety of sources in a
centralized manner throughout the extended enterprise. We believe we are a
leading provider of e-business content and collaboration management software,
based on the number of customers we serve and the features our software
provides. Since 1996, we have licensed our products to over 400 customers for
use by over 100,000 end users.
We were incorporated in October 1995 and commenced operations shortly after
that time. During the period October 1995 through September 1996 we were a
development stage company and had no revenues. Our operating activities during
this period related primarily to developing our product, building our corporate
infrastructure and raising capital. In October 1996, we released the first
version of our iManage infoCommerce Server and iManage infoRite,and sold them
through a small sales force and support staff. In June 1997, we enhanced our
iManage suite of products and shipped iManage infoLink. In March 1998, we
released an enhanced version of iManage infoCommerce Server. We began shipping
our iManage infoLook in August 1999.
Our total revenues, which consist of software license revenues and support
and services revenues, totaled $74,000 in 1996, $1.5 million in 1997, $7.7
million in 1998 and $12.7 million for the nine month period ended September 30,
1999. Through September 30, 1999, substantially all of our total revenues were
derived from licenses of the iManage infoCommerce Server, iManage infoRite and
iManage infoLink and related services. We currently expect that substantially
all of our total revenues will be derived from our iManage infoCommerce Server,
iManage infoRite and iManage infoLink product lines and related services. Our
license revenues are based on the number of users and servers. Support and
services revenues consist of customer support, training and consulting.
Customers who license our products generally purchase support contracts, which
are billed on a subscription basis typically covering a 12-month period.
Training services are billed on a per student or per class session basis and
consulting is customarily billed at a fixed daily rate plus our out-of-pocket
expenses.
We market our software and services primarily through our direct sales
organization, resellers and system integrators in the United States and Canada,
and through distributors in the United Kingdom and Australia. Revenues from
iManage infoCommerce Server, iManage infoRite and iManage infoLink licenses and
services to customers outside the United States and Canada have been
insignificant to date.
Through 1997, we recognized revenues based on the American Institute of
Certified Public Accountants Statement of Position 91-1. Commencing in 1998, we
began recognizing revenues based on the American Institute of Certified Public
Accountants Statement of Position 97-2, Software Revenue Recognition, or SOP
97-2, as amended by Statement of Position 98-4. Further implementation
guidelines relating to these standards may result in unanticipated changes in
our revenue recognition practices, and these changes could affect our future
revenues and earnings.
We recognize license revenues upon shipment if a signed contract exists,
the fee is fixed and determinable, collection of resulting receivables is
probable and product returns are reasonably estimable and if applicable,
acceptance criteria have been met. Provisions for estimated warranty costs and
sale returns are recorded at the time of shipment.
For contracts with multiple obligations, for example, deliverable and
undeliverable products, support and other service, we allocate revenues to the
undelivered element of the contract based on
18
<PAGE> 22
objective evidence of its fair value. This objective evidence is the sales price
of the element when sold separately by us. We generally do not allow the right
of return but have accepted returns in isolated instances when resellers, system
integrators and distributors have incorrectly ordered product. We recognize
revenues allocated to undelivered products when the criteria for license
revenues described above are met. We recognize support and services revenues,
including amounts allocated from contracts with multiple obligations and for
ongoing customer support, ratably over the period of the support contract. Our
support and service arrangements entitle customers to telephone support and
unspecified upgrades and enhancements. Payments for support and services are
generally made in advance and are non-refundable. For revenues allocated to
training and consulting services or derived from the separate sales of these
services, we recognize revenues as the related services are performed.
Our cost of license revenues includes royalties due to third parties for
integrated technology, the cost of manuals and product documentation, production
media used to deliver our products and packaging costs. Our cost of support and
services revenues includes salaries and related expenses for the customer
support and training organization and an allocation of overhead expenses.
Our operating expenses are classified as sales and marketing, research and
development, general and administrative and stock-based compensation. We
classify all charges to these operating expense categories based on the nature
of the expenditures. Although each category includes expenses that are unique to
the category type, there are common recurring expenditures that are typically
included in all operating expense categories, including salaries, employee
benefits, incentive compensation, bonuses, travel costs, professional fees,
telephone, communication and rent and allocated facilities costs. The sales and
marketing category of operating expenses includes additional expenditures
specific to the sales group, such as commissions, and expenditures specific to
the marketing group, including public relations and advertising, trade shows and
marketing collateral materials. In the development of our new products and
enhancements of existing products, the technological feasibility of the software
is not established until substantially all product development is complete.
Historically, software development costs eligible for capitalization have been
insignificant, and we have expensed all costs related to internal research and
development as we have incurred them.
In connection with the granting of stock options to our employees and
consultants, we have recorded deferred stock-based compensation totaling
approximately $9.5 million through September 30, 1999, of which approximately
$3.9 million remains to be amortized. This amount represents the difference
between the exercise price and the current estimated fair value of our common
stock on the date these stock options were granted. This amount is included as
part of stockholders' equity and is being amortized by charges to operations
over the vesting period of the options, consistent with the method described in
Financial Accounting Standards Board, or FASB, Interpretation No. 28. We
recognized stock-based compensation expense of approximately $2.1 million in
1997, $1.1 million in 1998, and approximately $2.8 million for the nine month
period ended September 30, 1999, which includes stock-based compensation expense
amounts for services provided before the grant date of the options. Future
compensation expense from options granted through September 30, 1999 is
estimated to be approximately $775,000 for the remainder of 1999, $2.0 million
for 2000, $811,000 for 2001, $297,000 for 2002 and $29,000 for 2003.
We anticipate that our operating expenses will increase substantially as we
intend to continue to incur significant research and development costs and
invest heavily in the expansion of our sales, marketing and support
organizations to build an infrastructure to support our long-term growth
strategy. The number of our full-time employees increased from 59 as of December
31, 1998 to 93 as of September 30, 1999. We will seek to hire additional
employees in the future. As a result of investments relating to the expansion of
our business, we have incurred net losses in each quarter since inception and,
as of September 30, 1999, had an accumulated deficit of $9.6 million. To achieve
profitability, we will have to increase our total revenues significantly. We
cannot assure you that we will ever attain or maintain profitability.
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<PAGE> 23
In view of the rapidly changing nature of our market and our limited
operating history, we believe that period-to-period comparisons of our revenues
and operating results are not necessarily meaningful and should not be relied
upon as indicative of future performance. Our historic revenue growth rates are
not necessarily sustainable or indicative of our future growth. Our prospects
must be considered in light of the risks, expenses and difficulties frequently
encountered by companies in early stages of development, particularly companies
in new and rapidly evolving markets. We cannot assure you we will be successful
in addressing these risks and difficulties.
RESULTS OF OPERATIONS
The following table presents our statement of operations data as a
percentage of total revenues for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTH
PERIOD ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- --------------
1996 1997 1998 1998 1999
------- ------- ------ ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
License.......................................... 94.6% 76.6% 84.1% 84.1% 76.7%
Support and services............................. 5.4 23.4 15.9 15.9 23.3
------- ------- ------ ----- -----
Total revenues............................ 100.0 100.0 100.0 100.0 100.0
------- ------- ------ ----- -----
Cost of revenues:
License.......................................... 5.4 8.9 5.3 5.4 4.2
Support and services............................. 51.4 10.7 15.7 16.4 14.6
------- ------- ------ ----- -----
Total cost of revenues.................... 56.8 19.5 21.0 21.8 18.8
------- ------- ------ ----- -----
Gross profit....................................... 43.2 80.5 79.0 78.2 81.2
Operating expenses:
Sales and marketing.............................. 452.7 73.2 56.7 62.6 45.8
Research and development......................... 152.7 61.1 30.4 34.4 23.1
General and administrative....................... 367.6 46.1 16.7 18.9 12.0
Stock-based compensation......................... 0.0 135.9 13.6 16.9 21.8
------- ------- ------ ----- -----
Total operating expenses.................. 973.0 316.3 117.5 132.8 102.7
------- ------- ------ ----- -----
Loss from operations............................... (929.7) (235.9) (38.5) (54.6) (21.5)
Interest income (expense), net..................... (5.4) 0.8 1.8 1.3 2.6
------- ------- ------ ----- -----
Loss before provision for income taxes............. (935.1) (235.0) (36.7) (53.3) (18.9)
------- ------- ------ ----- -----
Provision for income taxes......................... 0.0 0.0 0.0 0.0 0.2
------- ------- ------ ----- -----
Net loss........................................... (935.1)% (235.0)% (36.7)% (53.3)% (19.1)%
======= ======= ====== ===== =====
</TABLE>
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 AND 1999
REVENUES
Our total revenues are derived from software licenses and related support
and services. Our revenues were $4.8 million for the nine month period ended
September 30, 1998 and $12.7 million for the nine month period ended September
30, 1999, representing an increase of $7.9 million, or 164.1%. International
revenues were not significant for the nine month period ended September 30, 1998
and 1999.
20
<PAGE> 24
License Revenues. Our license revenues were $4.0 million for the nine month
period ended September 30, 1998 and $9.8 million for the nine month period ended
September 30, 1999, representing an increase of $5.8 million, or 141.1%. License
revenues represented 84.1% of total revenues for the nine month period ended
September 30, 1998 and 76.7% of total revenues for the nine month period ended
September 30, 1999. This increase was primarily a result of increased sales of
iManage infoCommerce Server, iManage infoRite and iManage infoLink, reflecting
the increased market acceptance of these products, as well as increases in the
size and productivity of the sales force and our resellers.
Support and Services Revenues. Support and services revenues consist
primarily of support and, to a lesser extent, training and consulting services
associated with the increase in licenses of iManage infoCommerce Server, iManage
infoRite and iManage infoLink during these periods. Our support and services
revenues were $766,000 for the nine month period ended September 30, 1998 and
$3.0 million for the nine month period ended September 30, 1999, representing an
increase of $2.2 million, or 285.6%. Support and services revenues represented
15.9% of total revenues for the nine month period ended September 30, 1998 and
23.3% of total revenues for the nine month period ended September 30, 1999. The
increase in support and services revenues for the nine month period ended
September 30, 1999 compared to the nine month period ended September 30, 1998
was primarily a result of increased licenses of iManage infoCommerce Server,
iManage infoRite and iManage infoLink in 1999. We expect that the proportion of
our support and services revenues to total revenues will fluctuate in the
future, depending in part on the level and nature of license revenues as well as
the number of support contracts sold and the level of training and consulting
revenues.
COST OF REVENUES
Cost of License Revenues. Cost of license revenues was $261,000 for the
nine month period ended September 30, 1998 and $538,000 for the nine month
period ended September 30, 1999, representing an increase of $277,000, or
106.1%. This increase was principally a result of increased royalties owed to
third parties for integrated technologies as a result of additional third-party
technology arrangements entered into during 1999. Cost of license revenues
represented 6.4% of license revenues for the nine month period ended September
30, 1998 and 5.5% for the nine month period ended September 30, 1999. We expect
that the cost of license revenues will fluctuate as a percentage of license
revenues in the future depending in part on the demand for our current products.
Cost of Support and Services Revenues. Cost of support and services
revenues was $789,000 for the nine month period ended September 30, 1998 and
$1.9 million for the nine month period ended September 30, 1999, representing an
increase of $1,069,000, or 135.5%. This increase was primarily a result of an
increase of $523,000 in technical support and training personnel costs and
headcount, an increase of $357,000 in facility-related overhead costs and an
increase of $209,000 in travel-related costs, all of which were necessary to
manage and support our growing customer base. Cost of support and services
revenues was 103.0% of support and services revenues for the nine month period
ended September 30, 1998 and 62.9% for the nine month period ended September 30,
1999. Cost of support and services revenues as a percentage of support and
services revenues may vary between periods due to the customer support services
versus the mix of training and consulting services we provide.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses were $3.0 million for the
nine month period ended September 30, 1998 and $5.8 million for the nine month
period ended September 30, 1999, representing an increase of $2.8 million, or
93.3%. This increase was primarily a result of investments
21
<PAGE> 25
in sales and marketing, which included an increase of $1.5 million in
personnel-related costs to recruit and hire sales and marketing personnel, an
increase of $257,000 in facility-related overhead expenses and an increase of
$345,000 in professional service expenses primarily related to third-party
consultants. Sales and marketing employees increased from 20 as of September 30,
1998 to 32 as of September 30, 1999, an increase of 12, or 60.0%. Sales and
marketing expenses represented 62.6% of total revenues for the nine month period
ended September 30, 1998 and 45.8% for the nine month period ended September 30,
1999. We believe that a significant increase in our sales and marketing efforts
is essential for us to maintain our market position and further increase
acceptance of our products. Therefore, we anticipate that sales and marketing
expenses will increase in absolute dollars but may fluctuate as a percentage of
total revenues in future periods.
Research and Development. Research and development expenses were $1.7
million for the nine month period ended September 30, 1998 and $2.9 million for
the nine month period ended September 30, 1999, representing an increase of $1.2
million, or 77.3%. This increase was primarily a result of an increase in the
number of software developers, program management, documentation personnel and
outside contractors we use to support development of our products. Our research
and development employees increased from 14 as of September 30, 1998 to 27 as of
September 30, 1999, an increase of 13, or 92.9%. Research and development costs
represented 34.4% of total revenues for the nine month period ended September
30, 1998 and 23.1% for the nine month period ended September 30, 1999. We
believe that significant increases in our research and development investment
are essential for us to maintain our market position, to continue to expand our
product line and to enhance the unified content technology platform for our
suite of products. Therefore, we anticipate that we will continue to invest
significantly in product research and development, and as a result, our research
and development expenses are likely to increase in absolute dollars in future
periods.
General and Administrative. General and administrative expenses were
$908,000 for the nine month period ended September 30, 1998 and $1.5 million for
the nine month period ended September 30, 1999, representing an increase of
$619,000, or 68.2%. This increase was primarily a result of an increase of
$350,000 related to additional finance, executive, information services and
human resources personnel needed to support the growth of our business, an
increase of $181,000 in facility-related overhead costs and an increase of
$58,000 in outside contractors expense associated with expanded human resources
programs. General and administrative costs represented 18.9% of our total
revenues for the nine month period ended September 30, 1998 and 12.0% for the
nine month period ended September 30, 1999. We believe that our general and
administrative expenses will continue to increase in absolute dollars as a
result of the continued expansion of our administrative staff and expenses
associated with being a public company.
Interest Income (Expense), Net. Interest income was $71,000 for the nine
month period ended September 30, 1998 and $382,000 for the nine month period
ended September 30, 1999, representing an increase of $311,000, or 438.0%. This
increase reflects the higher cash and short-term investment base as a result of
proceeds we received in September 1998 from the issuance of our series C
preferred stock and borrowings under our equipment line of credit in March 1999,
in addition to the generation of cash from operations during 1999. Interest
expense was $10,000 for the nine month period ended September 30, 1998 and
$50,000 for the nine month period ended September 30, 1999, with the increase
primarily the result of borrowings under our equipment line of credit in March
and September 1999.
Provision for Income Taxes. As of September 30, 1999, we had estimated net
operating loss carryforwards for federal and state income tax reporting purposes
which expire through 2018. The U.S. tax laws contain provisions that limit the
use in any future period of net operating loss and credit carryforwards upon the
occurrence of events, such as a significant change in ownership
22
<PAGE> 26
interests. We had deferred tax assets, including our net operating loss
carryforwards and tax credits, against which a valuation allowance has been
recorded for the entire deferred tax asset as a result of uncertainties
regarding the realization of the asset balance.
YEAR ENDED DECEMBER 31, 1996, 1997 AND 1998
REVENUES
Our revenues were $74,000 in 1996, $1.5 million in 1997 and $7.7 million in
1998, representing increases of $1.4 million, or 1,927.0%, from 1996 to 1997,
and $6.2 million, or 413.3%, from 1997 to 1998.
License Revenues. Our license revenues were $70,000 in 1996, $1.2 million
in 1997 and $6.5 million in 1998, representing increases of $1.1 million, or
1,614.3%, from 1996 to 1997 and $5.3 million, or 441.7%, from 1997 to 1998.
License revenues represented 94.6% of our total revenues in 1996, 76.6% in 1997
and 84.1% in 1998. The increase in our license revenues from 1996 to 1997 was
primarily the result of the initial shipment in October 1996 of iManage
infoCommerce Server, iManage infoRite and iManage infoLink. The increase in our
license revenues from 1997 to 1998 was primarily due to increased market
acceptance of these products and increased prices for these products.
Support and Services Revenues. Our support and services revenues were
$4,000 in 1996, $358,000 in 1997 and $1.2 million in 1998, representing
increases of $354,000 from 1996 to 1997 and $842,000, or 235.2%, from 1997 to
1998. In 1997 and 1998, support and services revenues consisted primarily of
customer support and, to a lesser extent, training services, associated with the
increasing license revenues during these periods. Support and services revenues
represented 5.4% of our total revenues in 1996, 23.4% in 1997 and 15.9% in 1998.
The increase in absolute dollars in support and services revenues from 1997 to
1998 reflects increasing licenses of our iManage infoCommerce Server, iManage
infoRite and iManage infoLink.
COST OF REVENUES
Cost of License Revenues. Cost of license revenues was $4,000 in 1996,
$136,000 in 1997 and $414,000 in 1998, representing increases of $132,000, or
3,300.0%, from 1996 to 1997 and $278,000, or 204.4%, from 1997 to 1998. The
increase from 1996 to 1997 was a result of increased costs of production of
manuals and other media associated with the increasing license revenues during
this period. The increase in 1997 to 1998 was a result of increased royalties to
third parties for technology integrated into our iManage infoCommerce Server in
the fourth quarter of 1997 and the first quarter of 1998. Cost of license
revenues as a percentage of license revenues was 5.7% for 1996, 11.6% for 1997
and 6.4% for 1998.
Cost of Support and Services Revenues. Cost of support and services
revenues was $38,000 in 1996, $163,000 in 1997 and $1.2 million in 1998,
representing increases of $125,000, or 328.9%, from 1996 to 1997 and $1.0
million, or 636.2%, from 1997 to 1998. The increases from 1996 to 1998 resulted
primarily from an increase of $94,000 in 1997 and an increase of $689,000 in
1998 related to personnel-related expenses from increases in technical support
and training personnel and an increase of $213,000 in 1998 related to increases
in travel-related costs to manage and support our growing customer base. Cost of
support and services revenues as a percentage of support and services revenues
was 950.0% for 1996, 45.5% for 1997 and 98.5% for 1998.
23
<PAGE> 27
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses were $335,000 in 1996,
$1.1 million in 1997 and $4.4 million in 1998, representing increases of
$765,000, or 228.4%, from 1996 to 1997 and $3.3 million, or 300.0%, from 1997 to
1998. The increases from 1996 through 1998 primarily reflected investments in
our sales and marketing infrastructure, which included an increase of $406,000
in 1997 and an increase of $2.3 million in 1998 related to significant
personnel-related expenses including salaries, benefits and commissions,
recruiting fees, and related costs of hiring sales management, sales
representatives, sales engineers and marketing personnel. Sales and marketing
employees totaled three as of December 31, 1996, nine as of December 31, 1997
and 23 as of December 31, 1998, representing increases of 200.0% from 1996 to
1997 and 155.6% from 1997 to 1998. The increase in sales and marketing expenses
from 1997 to 1998 also reflected an increase of $399,000 in travel and
entertainment expenses, an increase of $340,000 in public relations and trade
show expenses, and an increase of $201,000 in facility-related overhead costs.
Sales and marketing expenses as a percentage of total revenues were 452.7% for
1996, 73.2% for 1997 and 56.7% for 1998. The decreases in sales and marketing
expenses as a percentage of total revenues from 1996 through 1998 reflected the
more rapid growth of our total revenues compared to the growth of sales and
marketing expenses in these periods.
Research and Development. Research and development expenses were $113,000
in 1996, $935,000 in 1997 and $2.4 million in 1998, representing increases of
$822,000, or 727.4%, from 1996 to 1997 and $1.5 million, or 156.7% from 1997 to
1998. The increases from 1996 through 1998 were primarily related to increased
personnel costs resulting from the increase in the wage rates, benefits and the
number of software developers and quality assurance personnel and third-party
consultants to support our product development and testing activities related to
the development of iManage infoRite, iManage infoLink and iManage infoLook as
well as enhancements to iManage infoCommerce Server. Our research and
development employees totaled three as of December 31, 1996, 12 as of December
31, 1997 and 16 as of December 31, 1998, representing increases of 300.0% from
1996 to 1997 and 33.3% from 1997 to 1998. Research and development costs as a
percentage of total revenues were 152.7.% in 1996, 61.1% in 1997 and 30.4% in
1998. The decreases in research and development expenses as a percentage of
total revenues from 1996 through 1998 reflected increases in our total revenues.
General and Administrative. General and administrative expenses were
$272,000 in 1996, $706,000 in 1997 and $1.3 million in 1998, representing
increases of $434,000, or 159.6%, from 1996 to 1997 and $594,000, or 84.1%, from
1997 to 1998. The increases from 1996 through 1998 were primarily the result of
increased personnel costs of $177,000 in 1997 and $339,000 in 1998 resulting
from additional finance, executive and administrative personnel and increases of
$69,000 in 1997 and $245,000 in 1998 in professional service costs, primarily
accounting and legal, to support the growth of our business during these
periods. General and administrative costs, as a percentage of total revenues
were 367.6% in 1996, 46.1% in 1997 and 16.7% in 1998.
Interest Income (Expense), Net. Interest income (expense), net was $(4,000)
in 1996, $13,000 in 1997 and $139,000 in 1998, representing increases of
$17,000, or 425.0%, from 1996 to 1997, and $126,000, or 969.2%, from 1997 to
1998. The increases from 1996 through 1998 were primarily the result of the
higher invested cash base as a result of proceeds received from the issuance of
our series A, B and C preferred stock.
Provision for Income Taxes. We have not recorded a provision for federal
and state income taxes because we have experienced net losses since inception
which has resulted in deferred tax assets. We have recorded a valuation
allowance for the entire deferred tax asset as a result of uncertainties
regarding the realization of the asset balance.
24
<PAGE> 28
QUARTERLY RESULTS OF OPERATIONS
The following table presents unaudited statement of operations data for the
seven quarters ended September 30, 1999, as well as such data expressed as a
percentage of our total revenues for the periods indicated. We have derived this
unaudited information on a basis consistent with our audited financial
statements and, in the opinion of our management, it reflects all normal
recurring adjustments considered necessary for a fair presentation of our
financial position and operating results for the quarters presented. Our
quarterly results have in the past been, and may in the future be, subject to
significant fluctuations. As a result, we believe that results of operations for
interim periods should not be relied upon as any indication of the results to be
expected in any future period.
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
-----------------------------------------------------------------------
MAR 31, JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30,
1998 1998 1998 1998 1999 1999 1999
------- -------- -------- ------- ------- -------- --------
(UNAUDITED AND IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
License............................. $ 564 $1,285 $2,195 $2,465 $2,805 $ 3,354 $3,591
Support and services................ 206 178 382 466 774 941 1,239
------- ------ ------ ------ ------ ------- ------
Total revenues............... 770 1,463 2,577 2,931 3,579 4,295 4,830
------- ------ ------ ------ ------ ------- ------
Cost of revenues:
License............................. 53 97 112 152 149 178 211
Support and services................ 233 266 289 425 526 647 685
------- ------ ------ ------ ------ ------- ------
Total cost of revenues....... 286 363 401 577 675 825 896
------- ------ ------ ------ ------ ------- ------
Gross profit.......................... 484 1,100 2,176 2,354 2,904 3,470 3,934
------- ------ ------ ------ ------ ------- ------
Operating expenses:
Sales and marketing................. 810 988 1,212 1,383 1,707 1,970 2,141
Research and development............ 487 571 595 698 900 984 1,047
General and administrative.......... 280 297 331 387 440 498 589
Stock-based compensation............ 249 173 390 242 527 1,464 777
------- ------ ------ ------ ------ ------- ------
Total operating expenses..... 1,826 2,029 2,528 2,710 3,574 4,916 4,554
------- ------ ------ ------ ------ ------- ------
Loss from operations.................. (1,342) (929) (352) (356) (670) (1,446) (620)
Interest income (expense), net........ 2 32 27 78 77 109 146
------- ------ ------ ------ ------ ------- ------
Loss before provision for income
taxes............................... (1,340) (897) (325) (278) (593) (1,337) (474)
------- ------ ------ ------ ------ ------- ------
Provision for income taxes............ -- -- -- -- 1 3 25
------- ------ ------ ------ ------ ------- ------
Net loss.............................. $(1,340) $ (897) $ (325) $ (278) $ (594) $(1,340) $ (499)
======= ====== ====== ====== ====== ======= ======
</TABLE>
25
<PAGE> 29
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
-----------------------------------------------------------------------------
MAR 31, JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30,
1998 1998 1998 1998 1999 1999 1999
------- -------- -------- ------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
As a percentage of total
revenues:
Revenues:
License....................... 73.2% 87.8% 85.2% 84.1% 78.4% 78.1% 74.3%
Support and services.......... 26.8 12.2 14.8 15.9 21.6 21.9 25.7
------- ------ ------ ------ ------ ------- -----
Total revenues......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------- ------ ------ ------ ------ ------- -----
Cost of revenues:
License....................... 6.9 6.6 4.3 5.2 4.2 4.1 4.4
Support and services.......... 30.3 18.2 11.2 14.5 14.7 15.1 14.2
------- ------ ------ ------ ------ ------- -----
Total cost of
revenues............. 37.1 24.8 15.6 19.7 18.9 19.2 18.6
------- ------ ------ ------ ------ ------- -----
Gross profit.................... 62.9 75.2 84.4 80.3 81.1 80.8 81.4
------- ------ ------ ------ ------ ------- -----
Operating expenses:
Sales and marketing........... 105.2 67.5 47.0 47.2 47.7 45.9 44.3
Research and development...... 63.2 39.0 23.1 23.8 25.1 22.9 21.7
General and administrative.... 36.4 20.3 12.8 13.2 12.3 11.6 12.2
Stock-based compensation...... 32.3 11.8 15.1 8.3 14.7 34.1 16.1
------- ------ ------ ------ ------ ------- -----
Total operating
expenses............. 237.1 138.7 98.1 92.5 99.9 114.5 94.3
------- ------ ------ ------ ------ ------- -----
Loss from operations............ (174.3) (63.5) (13.7) (12.2) (18.7) (33.7) (12.9)
Interest income (expense),
net........................... 0.3 2.2 1.0 2.7 2.2 2.5 3.0
------- ------ ------ ------ ------ ------- -----
Loss before provision for income
taxes......................... (174.0) (61.3) (12.6) (9.5) (16.6) (31.1) (9.9)
------- ------ ------ ------ ------ ------- -----
Provision for income taxes...... 0.0 0.0 0.0 0.0 0.0 0.1 0.6
------- ------ ------ ------ ------ ------- -----
Net loss........................ (174.0)% (61.3)% (12.6)% (9.5)% (16.6)% (31.2)% (10.3)%
======= ====== ====== ====== ====== ======= =====
</TABLE>
Revenues. Our total revenues increased in each of the seven quarterly
periods presented above. The increase in total revenues in these periods
reflects the increase in the number of customers and increased sales following
our release of enhancements to our iManage infoCommerce Server in March 1998.
Since June 30, 1998, our license revenues have decreased as a percentage of our
total revenues as our support and services revenues have increased with the
increase in our customer base.
Cost of Revenues. Cost of revenues increased in each of the seven quarterly
periods ended September 30, 1999 as a result of the growth of revenues.
Operating Expenses. Operating expenses increased significantly in each of
the seven quarterly periods presented above, except the quarter ended September
30, 1999, as a result of increased sales and marketing expenses associated with
higher numbers of personnel, use of independent contractors and other third
parties for development of our products, recruiting and related hiring expenses
for additional senior management in our sales and marketing, general and
administrative, and research and development organizations and stock-based
compensation expense. The decrease in operating expenses from the quarter ended
June 30, 1999 to the quarter ended September 30, 1999 was the result of
decreased amortization of stock-based compensation in the quarter ended
September 30, 1999.
Our quarterly operating results have varied widely in the past, and we
expect that they will continue to fluctuate in the future. We believe that our
period-to-period operating results are not meaningful, and you should not rely
on them as indicative of our future performance. Although we have experienced
significant revenue growth recently, our revenues might not continue to grow and
26
<PAGE> 30
we might not become or remain profitable in the future. Our future operating
results will depend on many factors, including:
- the size, timing, terms and fluctuations of customer orders, particularly
large orders from a limited number of customers, especially in markets
outside the legal applications market where we have traditionally focused
our sales and marketing efforts;
- our ability to expand our relationships with information technology
consultants, system integrators and unified messaging original equipment
manufacturers;
- the timing of the introduction or enhancement of products by us, such as
the release of enhanced versions of our iManage infoLink in October 1999
and our iManage infoCommerce Server planned for the end of the first
quarter of 2000, and the release of new or enhanced products by our
competitors; and
- changes in technology, industry standards or customer preferences, such
as customers placing a lower priority on content and collaboration
management.
We have in the past experienced delays in the planned release dates of our
new software products or upgrades and have discovered software defects in our
new products after their introduction. Our new products or upgrades may not be
released according to schedule, or when released may contain defects. Either of
these situations could result in adverse publicity, loss of revenues, delay in
market acceptance or claims by customers brought against us, any of which could
harm our business. In addition, the timing of individual sales has been
difficult for us to predict, and large individual sales have, in some cases,
occurred in quarters after the time we anticipated that they would occur. The
loss or deferral of one or more significant sales may harm our quarterly
operating results.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operations primarily through sales of
convertible preferred stock, resulting in net proceeds of $10.9 million through
September 30, 1999. To a lesser extent, we have financed our operations through
lending arrangements. As of September 30, 1999, we had cash, cash equivalents
and short-term investments of $15.1 million and approximately $2.5 million of
available borrowings under a line of credit.
Net cash used in operating activities was $412,000 in 1996, $1.8 million in
1997 and $622,000 in 1998. For the nine month period ended September 30, 1999,
net cash provided by operations was $6.6 million. For the 1996, 1997 and 1998
periods, net cash used by operating activities was primarily a result of funding
ongoing operations. Net cash provided by operations in the nine month period
ended September 30, 1999 was primarily the result of increasing sales of our
iManage suite of products, receipt of cash associated with license and support
and service revenues in advance of revenue recognition and non-cash charges
associated with stock-based compensation expense.
Since inception, our investing activities have consisted of purchases of
property and equipment and, in 1999, the purchase of short-term investments. Net
cash used in investing activities totaled $59,000 in 1996, $192,000 in 1997,
$431,000 in 1998 and $6.9 million in the nine month period ended September 30,
1999. We finance the acquisition of property and equipment, which largely
consists of computer hardware and software and furniture and fixtures for our
increasing employee base as well as for our management information systems,
primarily through a line of credit. We anticipate that we will experience an
increase in our capital expenditures consistent with our anticipated growth in
operations, infrastructure and personnel. We do not expect to incur significant
costs to make our products or internal information systems year 2000 compliant
because we believe our products and information systems are designed to function
properly through and beyond the year 2000.
27
<PAGE> 31
Our financing activities provided $820,000 in 1996, $3.4 million in 1997,
$6.9 million in 1998 and $2.3 million in the nine month period ended September
30, 1999. In 1996, cash provided by financing activities consisted primarily of
$625,000 received in connection with the sale of series A preferred stock. In
1997, cash provided by financing activities consisted primarily of $3.4 million
received in connection with the sale of series A and series B preferred stock.
In 1998, cash provided by financing activities consisted primarily of $7.0
million received in connection with the sale of series B and series C preferred
stock. In the nine month period ended September 30, 1999, cash provided by
financing activities consisted primarily of $2.0 million of proceeds under our
equipment line of credit.
As of September 30, 1999, we had a revolving line of credit with a bank for
$5.0 million, which bears interest at the lending bank's prime rate plus 0.25%.
Borrowings were limited to the lesser of 80% of eligible accounts receivable or
$5.0 million and were secured by substantially all of our assets. As of
September 30, 1999, we had not borrowed under the revolving line of credit. We
could borrow approximately $2.5 million under this line as of September 30,
1999. In addition, as of September 30, 1999, we had an equipment line of credit
with a bank for $2.0 million, which bears interest at the lending bank's prime
rate plus 0.5%. As of September 30, 1999, we had borrowed the full $2.0 million
under the equipment line of credit. Both lines of credit include covenant
restrictions requiring us to (a) maintain a monthly quick assets to current
liabilities ratio of at least two to one; (b) to maintain a minimum
profitability level requiring that we not incur a net loss in any quarter of a
fiscal year, except we are permitted to incur a loss of $150,000 in one quarter
per fiscal year, and (c) limit our ability to declare and pay dividends. We were
in violation of the profitability covenant at June 30, 1999 and received a
waiver from the bank for our violation through June 30, 1999. This profitability
covenant was amended for all future periods to require profitability in all
quarters of a fiscal year, with the one quarter allowable net loss of $150,000.
The profitability, however, is to be determined based upon our operating
results, excluding charges for software development and non-cash charges for
amortization of stock-based compensation. We were in compliance with these
amended covenants at September 30, 1999.
We currently anticipate that the net proceeds of this offering, together
with our existing lines of credit and available funds, will be sufficient to
meet our anticipated needs for working capital and capital expenditures at least
through the next 12 to 24 months. However, we may be required, or could elect,
to seek additional funding before that time. Our future capital requirements
will depend on many factors, including our future revenue, the timing and extent
of spending to support product development efforts and expansion of sales,
general and administrative activities, the timing of introductions of new
products and market acceptance of our products. We cannot assure you that
additional equity or debt financing, if required, will be available on
acceptable terms or at all.
YEAR 2000 COMPLIANCE
Background of Year 2000 Issues. Many currently installed computer systems
and software products are unable to distinguish between twentieth century dates
and twenty-first century dates because the systems were developed using two
digits rather than four to determine the applicable year. For example, computer
programs that have date-sensitive software may recognize a date using 00 as the
year 1900 rather than the year 2000. This error could result in system failures
or miscalculations causing disruptions of operations, including a temporary
inability to process transactions, send invoices or engage in similar normal
business activities. As a result, many companies' software and computer systems
may need to be upgraded or replaced to comply with these year 2000 requirements.
State of Readiness. We have completed our assessment of the potential
overall impact of the impending century change on our business. Based on this
assessment, we believe the current versions of our software products are year
2000 compliant. By year 2000 compliant, we mean that our software
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products, when used with accurate date data and according to their associated
documentation, are capable of properly processing date data from, into and
between the 20th and 21st centuries, including the years 1999, 2000 and leap
years, provided that all other products, such as hardware, software and
firmware, used with our products properly exchange date data with them. However,
our products are generally integrated into enterprise systems involving
sophisticated hardware and complex software products that we cannot adequately
evaluate for year 2000 compliance. We may face claims based on year 2000
problems in other companies' products, or issues arising from the integration of
multiple products within an overall system even if our products are otherwise
year 2000 compliant. Although we have not been a party to any litigation or
arbitration proceeding involving our products or services related to year 2000
compliance issues, we may in the future be required to defend our products or
services in these proceedings, or to negotiate resolutions of claims based on
year 2000 issues. The costs of defending and resolving year 2000-related
disputes, regardless of the merits of these disputes, and any liability we may
have for year 2000-related damages, including consequential damages, could
substantially harm our business.
We have completed our review of internal management information and other
computer systems to identify any year 2000 problems. To date, we have not
encountered any material year 2000 problems with our internal management
information or computer systems or any other equipment that might be subject to
these problems. We believe that the Verity and INSO software that we incorporate
into our iManage infoCommerce Server are year 2000 compliant based on
information that each of them has provided to us. We are beginning to
communicate with our other external vendors that supply us with other software
and information systems and with our significant suppliers to determine their
year 2000 readiness. We have completed our year 2000 investigation of our major
vendors and suppliers and overall compliance initiative.
Costs. To date, we have not incurred any material costs directly associated
with our year 2000 compliance efforts, except for compensation expenses
associated with our salaried employees who have devoted some of their time to
our year 2000 assessment and remediation efforts. We do not expect the total
cost of year 2000 problems to be material to our business. However, we will
continue to evaluate new versions of our software products, new software and
information systems provided to us by third parties and any new infrastructure
systems that we acquire to determine whether they are year 2000 compliant.
Despite our current assessment, we may not identify and correct all significant
year 2000 problems on a timely basis. Year 2000 compliance efforts may involve
significant time and expense and unremediated problems could substantially harm
our business.
Risks. We are not currently aware of any year 2000 readiness problems
relating to our internally developed proprietary systems that would
substantially harm our business. We may discover year 2000 readiness problems in
these systems that will require substantial revision. In addition, third-party
software, hardware or services incorporated into our material systems may need
to be revised or replaced, all of which could be time-consuming and expensive.
Our failure to fix or replace our internally developed proprietary software or
third-party software, hardware or services on a timely basis could result in
lost revenues, increased operating costs, the loss of customers and other
business interruptions, any of which could substantially harm our business.
Moreover, our failure to adequately address year 2000 readiness issues in our
internally developed proprietary software could result in claims of
mismanagement, misrepresentation or breach of contract and related litigation,
which could be costly and time-consuming to defend.
In addition, we believe that year 2000 issues may affect the purchasing
patterns of customers and potential customers, as companies expend significant
resources to correct or upgrade their current software systems for year 2000
compliance or defer additional software purchases until after 2000. As a result,
some customers and potential customers may have more limited budgets available
to purchase software products such as those offered by us, and others may choose
to refrain from
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changes in their information technology environment until after January 1, 2000.
To the extent year 2000 issues cause significant delay in, or cancellation of,
purchases of our products or services, our business would be materially
adversely affected.
Finally, governmental agencies, telephone and utility companies, Internet
access companies, third-party service providers and others outside of our
control may not be year 2000 ready. The failure by these entities to be year
2000 ready could result in a systemic failure beyond our control, such as a
prolonged Internet, telecommunications or electrical failure, which could also
prevent us from delivering our services to our customers, decrease the use of
the Internet or prevent users from accessing web sites.
Contingency Plan. We have not yet completed development of our contingency
plans. The results of our year 2000 simulation testing and the responses
received from third-party vendors and service providers will be taken into
account in determining the nature and extent of any contingency plans we adopt.
We currently anticipate that we will complete development of our contingency
plans within the next few months.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1998, AcSEC released Statement of Position 98-9 or SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition. SOP 98-9 amends SOP 97-2
to require that an entity recognize revenue for multiple element arrangements by
means of the residual method when (1) there is no vendor-specific objective
evidence, or VSOE, of the fair values of all the undelivered elements that are
not accounted for by means of long-term contract accounting, (2) VSOE of fair
value does not exist for one or more of the delivered elements and (3) all
revenue recognition criteria of SOP 97-2, other than the requirement for VSOE of
the fair value of each delivered element, are satisfied. The provisions of SOP
No. 98-9 that extend the deferral of various paragraphs of SOP 97-2 became
effective December 15, 1998. These paragraphs of SOP 97-2 and SOP 98-9 will be
effective for transactions that are entered into in fiscal years beginning after
March 15, 1999. Retroactive application is prohibited. We are currently
evaluating the impact of the requirements of SOP 98-9 and the effects, if any,
on our current revenue recognition policies.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities. SFAS
133 requires that all derivatives be recognized at fair value in the statement
of financial position, and that the corresponding gains or losses be reported
either in the statement of operations or as a component of comprehensive income,
depending on the type of hedging relationship that exists. In July 1999, the
Financial Accounting Standard Boards issued SFAS No. 137, or SFAS 137,
Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of SFAS No. 133. SFAS 137 deferred the effective date of SFAS 133
until the first fiscal quarter beginning after June 15, 2000. We do not
currently hold derivative instruments or engage in hedging activities. We are
continuing to evaluate the impact of the requirements of SFAS No. 133 and SFAS
No. 137 will have on our financial statements and related disclosures.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in the United States and market our products in North
America, and to a lesser extent in Europe and Asia/Pacific regions. As a result,
our financial results could be affected by changes in foreign currency exchange
rates or weak economic conditions in foreign markets. Because all of our
revenues are currently denominated in U.S. dollars, a strengthening of the
dollar could make our products less competitive in foreign markets. Our interest
income is sensitive to
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changes in the general level of U.S. interest rates, particularly since the
majority of our investments are in short-term instruments. Our interest expense
is also sensitive to changes in the general level of U.S. interest rates. Due to
the short-term nature of our investments, we believe that there is not a
material risk exposure.
ISSUES RELATED TO THE EUROPEAN MONETARY CONVERSION
On January 1, 1999, member states of the European Economic Community, or
the EEC, fixed their currencies to a new currency, the euro. On that day, the
euro became a functional legal currency within these countries. Furthermore,
during the three years beginning on January 1, 1999, business in these EEC
member states will be conducted in both the existing national currency, such as
the Netherlands guilder, French franc or Deutsche mark, and the euro. Companies
operating in or conducting business in EEC member states will need to ensure
that their financial and other software systems are capable of processing
transactions and properly handling the existing currencies, as well as the euro.
We are still assessing the impact that the euro will have on our internal
systems and products. While we believe our enterprise-wide information systems
will be euro-compliant, we have not tested these systems. We have not determined
the costs related to any euro-related problems that may arise in the future.
These problems may materially adversely affect our business, operating results
and financial condition.
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BUSINESS
COMPANY OVERVIEW
We provide e-business content and collaboration management software. Our
software provides a web-based unified content platform that manages, organizes
and delivers relevant information from a variety of sources in a centralized
manner throughout the extended enterprise. We believe that our solution features
a highly scalable, reliable and robust platform designed to provide security,
accountability and the timely delivery of relevant information, content and
documents. Our core technology architecture has been developed over the last
four years and has been deployed in over 500 customers, including: Airtouch
Communications, Inc., America Online, Inc., Charles Schwab & Company, Inc.,
Cleary, Gottlieb, Steen & Hamilton, Cravath, Swaine & Moore, Fried, Frank,
Harris, Shriver & Jacobson, Marriott International, Inc., Morgan, Lewis &
Bockius LLP, Wal-Mart Stores Inc., and Wilson, Sonsini, Goodrich & Rosati, Inc.,
Professional Corporation.
INDUSTRY BACKGROUND
The Internet is having a dramatic and pervasive impact on the way that many
organizations conduct business. Organizations worldwide are looking for new and
innovative ways to use the Internet to gain competitive advantages. For example,
organizations are employing web-based technologies to disseminate, exchange and
manage information internally through corporate intranets to enable
collaboration among employees. Organizations are also using web-based
technologies to develop corporate extranets that extend the enterprise and
enable it to collaborate directly with its partners, customers and service
providers. According to a recent survey from the Delphi Group, collaborative
information management, that is, the dissemination, exchange and management of
information across an extended enterprise, is the number one priority of
corporate information technology departments. The use of web-based technologies
has led to the development of an electronic business environment, or e-business,
where the dynamic exchange, timely dissemination and use of information is
essential to conducting business.
The development of e-business has led to a dramatic increase in the amount
of information available to the average employee. This increase in information
has not only transformed the business world but has also introduced new
complexities and challenges as employees struggle to cope with the volume and
diversity of information that they are required to process on a daily basis. The
average employee receives a broad range of information, content and documents
through a variety of sources including email, voicemail, enterprise and desktop
applications, facsimiles and photocopies, the Internet, and intranet and
extranet web sites. In addition, the growth of e-business has resulted in a
proliferation of the various forms in which employees receive and exchange
information. These new forms include media such as graphics, video, text, audio
and data. The e-business requirement that the right information be delivered to
the right person at the right time is threatened by the overwhelming amount and
variety of information that is now disseminated through these disparate media
sources.
Most companies have ineffective approaches for addressing the challenge of
ensuring that the right information gets to the right person at the right time.
In the absence of a comprehensive e-business solution, organizations have
generally adopted one of two approaches. Organizations have either developed a
custom approach through a combination of email and intranet and extranet web
sites or used packaged applications that are not specifically designed to meet
the requirements of e-business. Organizations that have implemented a custom
approach often fail to achieve the integrated delivery and management of
critical information and content for several reasons. Email, while easy-to-use
and convenient, lacks effective collaboration and project management, control,
accountability
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and security, and is not integrated with intranet information and content.
Intranets and extranets, while more effective mechanisms for disseminating
information, typically lack the scalable content management infrastructure to
ensure that posted information is accurate, up-to-date, organized and actually
viewed by the intended audience.
Alternatively, other organizations have attempted to address the
information challenges of e-business by deploying a variety of packaged
applications, including enterprise information portals, web-based information
delivery systems, and knowledge and document management solutions. Enterprise
information portals and web-based information delivery systems are effective
means of accessing and distributing information. However, they lack the
comprehensive infrastructure to manage and organize all forms of information,
content and documents and to enable collaboration and project management across
the extended enterprise. Client-server based knowledge and document management
systems are capable of organizing and storing documents but are expensive to
maintain and are not designed to deliver and exchange information over the web
to thousands of concurrent users. As the custom approach and use of packaged
applications demonstrate, there is no comprehensive solution that addresses the
key aspects of content and collaboration management to enable more effective
information management, organization and delivery across the extended
enterprise.
SOLUTION
We provide e-business content and collaboration management software. Our
solution provides a web-based unified content platform that manages, organizes
and delivers relevant information from a variety of sources in a centralized
manner throughout the extended enterprise.
Our solution provides the following key benefits:
Comprehensive E-Business Content and Collaboration Management. Our iManage
infoCommerce Server provides a comprehensive e-business content and
collaboration management solution that addresses key aspects of managing,
organizing and delivering information and content to the right person at the
right time throughout the extended enterprise. Our server provides users with a
centralized online location to access content, such as graphics, video, text,
audio and data. In addition to offering a robust underlying content management
infrastructure, our solution is designed to ensure effective content access,
delivery and notification based on relevance to particular projects, processes
and individuals. We believe our comprehensive solution enables our customers to
more effectively collaborate and exchange information over the web.
Highly Scalable, Reliable and Robust Platform. We believe our solution
features a highly scalable, reliable and robust platform. We have developed our
underlying architecture over the last four years and have deployed our solution
in over 500 customers. Our software has been designed to accommodate the demands
of e-business and to scale to tens of thousands of concurrent users and millions
of information objects. For example, in a single customer deployment, our
solution scaled to accommodate over 3.8 million information objects and 2,400
concurrent users in over 14 geographic locations across the world.
Timely Delivery of Relevant Information. Our solution ensures the timely
delivery of relevant information by notifying the appropriate users of the
information and providing them with access to the information through the web
and email. For example, with the release of iManage infoLook in August 1999, a
user can specify business rules or profiles so that new information is delivered
only to those individuals who meet the criteria that the user specifies. Through
the use of rules and profiles, a user can limit the information he receives to
meet his specified criteria. The delivery of and access to relevant information
is immediate through our automatic publication and notification features. This
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functionality is designed to ensure that the right information is delivered to
the right person at the right time.
Security and Accountability. Our solution offers the ability to centrally
enforce security privileges based on individual or group access level
permissions within an organization or across the extended enterprise. For
example, rather than attaching documents to email, which is a highly insecure
method of distributing information, our solution only sends a link to the
content which resides on a secure content server. This approach enhances
security in contrast to other forms of information distribution. The use of
links also ensures accountability by preserving control of the content in a
single location. As a result, organizations using our solution can now track
when documents were sent, when they were received and reviewed, when project
folders were accessed and who accessed them.
Our solution has been designed to address the needs of a broad range of
markets, such as financial services, retail, manufacturing and distribution,
banking and professional services. Initially, we targeted substantially all of
our sales and marketing efforts on the legal applications market. The customers
in this market require management and organization of a large volume of critical
information in a scalable and secure environment. We now intend to leverage on
our success and experience in the legal applications market to market our
solution to other markets.
STRATEGY
Our objective is to become the leading provider of e-business content and
collaboration management software. Key elements of our strategy to achieve this
objective include:
Capture Market Share. Our strategy is to become the market leader in
providing software to enable unified e-business content and collaboration
management over the Internet. As our customers deploy our solution, their
customers, partners and service providers will be exposed to the benefits and
functionality of our products. We believe that the introduction of our products
to these non-customers will accelerate industry recognition and adoption of our
products. As more and more organizations deploy our e-business solution, we
believe that the management, organization and delivery of relevant information
will improve, which will drive greater usage.
Leverage Installed Customer Base. We believe there are significant
opportunities to leverage the use of our products throughout our current
customer base. Our corporate customers generally deploy our products initially
on a departmental basis and we believe that initial customer satisfaction with
these deployments will lead to significant opportunities for enterprise-wide
adoption. In addition, most companies and professional service firms, including
our customers, are just beginning to exploit the business opportunities that the
web has created. As they increasingly migrate their business processes to the
web, we believe they will need additional licenses of our software to support
and enable e-business content and collaboration applications.
Expand and Leverage Key Business Relationships. To accelerate the
acceptance of our solution and to promote the adoption of e-business content and
collaboration management over the web, we intend to develop over the next 12
months additional cooperative alliances and relationships with leading
information technology consultants, system integrators and unified messaging
original equipment manufacturers. We believe that these alliances and
relationships will provide additional marketing and sales channels for our
products, enable us to more rapidly incorporate additional functions and
platforms into our e-business suite of products, and facilitate the successful
deployment of customer applications.
Maintain Technological Leadership. We believe that we offer the most
complete e-business content and collaboration management solution available
today. We have devoted significant resources
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to developing our solution over the last four years. We intend to extend our
leadership position by continuing to enhance our technology through significant
investment in research and development activities. We also plan over the next 12
months to expand our unified content platform by integrating content from new
media sources including facsimile machines, photocopiers, voicemail systems and
scanners.
Strengthen International Presence. We believe that there will be
significant international opportunities for our products and services and intend
to strengthen our global sales, marketing and distribution efforts to address
the range of markets and applications for our e-business content and
collaboration management solution. We currently have a direct sales presence in
the U.S., Canada and the United Kingdom. In the Asia/Pacific region, we sell our
products through third-party distributors. During the next 12 months, we intend
to aggressively strengthen our international presence by adding direct sales
personnel and increasing our indirect sales channels to fully capitalize on
international market opportunities.
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IMANAGE PRODUCTS
Our iManage suite of e-business content and collaboration management
products, which we have developed over the last four years, provides a
comprehensive set of application modules that work in concert with each other
and the same underlying server. Our current product line consists of the iManage
infoCommerce Server and iManage infoLink, iManage infoLook and iManage infoRite
application modules.
The following table describes the major features and benefits of our
iManage suite of products.
<TABLE>
<S> <C> <C>
- -------------------------------------------------------------------------------------------------
PRODUCT FEATURES BENEFITS
- -------------------------------------------------------------------------------------------------
iManage infoCommerce Application server Ensures server uptime by splitting server
Server failover processes across multiple servers so that if
Content and collaboration any one server fails, users are automatically
server routed to the next available server.
Transaction Ensures all server transactions are completed
processing in full or the information is restored to the
previous state before the transaction
commenced.
Content indexing Allows users to use search criteria to find
specific information.
Roles-based security Protects content from unauthorized access and
allows users to be assigned security privileges
based on their role in an organization.
- -------------------------------------------------------------------------------------------------
iManage infoLook Auto-notification Automatically alerts subscribers when new
Microsoft Outlook content has been contributed to a project
folder.
integration module Auto-publishing Automates the process of publishing content to
an intranet, extranet or Internet web site.
Link/URL routing Allows users to email links and uniform
resource locators, or URLs, to specific server
content instead of physically transferring
content by email, ensuring system security,
accountability and network efficiency.
Rules-based Provides the ability to route to specific
processing project folders incoming email, content and
facsimiles based on specific user defined
rules.
- -------------------------------------------------------------------------------------------------
iManage infoLink Security-based Enables navigation through project folders and
Web-portal module navigation review of content based on security privileges.
User-definable Allows content from multiple projects to be
search folders dynamically grouped together using search
criteria.
Secured content Allows secure content contribution into iManage
contribution repositories securely over the Internet.
- -------------------------------------------------------------------------------------------------
iManage infoRite Content profiling Adds context to content and enables users to
Content-authoring module and history track usage of content and access history.
Integrated online Allows users to search the content of iManage
research repositories and online information services.
Microsoft Office Provides access to iManage repositories and the
integration ability to submit content directly from within
Microsoft Word, Excel and PowerPoint products.
Content relationship Enables information to be grouped so that users
grouping can track information that is relevant to a
project, process or individual.
- -------------------------------------------------------------------------------------------------
</TABLE>
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Our iManage infoCommerce Server provides the core functionality of our
content and collaboration management solution. Each of our application modules,
iManage infoLook, iManage infoLink and iManage infoRite, works in conjunction
with the iManage infoCommerce Server and with one another. Each of these modules
delivers additional functionality for different client configurations and
applications. An organization can elect to use any combination of iManage
infoLink, iManage infoLook and iManage infoRite with the iManage infoCommerce
Server as its needs dictate. Additionally, multiple organizations using iManage
infoLink with iManage infoCommerce Server enjoy the benefits of using an iManage
virtual private network upon which they can collaborate and share information.
iManage infoLook, our newest module, integrates with Microsoft Outlook and
enables users to manage, organize and deliver e-business information, content
and documents through the familiar, easy-to-use Outlook environment. iManage
infoLink is a web-based user interface that provides full access to all iManage
infoCommerce Server content through a web browser. iManage infoRite is a
dedicated content-authoring interface that integrates with Microsoft Office
publishing tools, such as Excel, Word and PowerPoint and is designed for heavy
publishing uses. These application modules allow different users with different
interfaces to share and exchange information and content. The overall objective
in the design of each element of the iManage suite of products is to provide a
simplified mechanism to enable intra-business and business-to-business content
and collaboration management capabilities for organizations over their existing
email, intranet and Internet networks.
We also provide the following products:
iManage Notes Module. The iManage Notes Module enables users of the Lotus
Notes application environment to integrate their Notes content and email
correspondence directly into an iManage e-business Server repository.
iManage GroupWise Module. The iManage GroupWise Module enables users of the
Novell GroupWise application environment to integrate their GroupWise content
and email correspondence directly into an iManage e-business Server repository.
iManage Software Development Kit, or SDK. iManage SDK is a software
development kit developed primarily for third-party developers who wish to
integrate their applications with iManage infoCommerce Server repositories.
Software integrators also use the iManage SDK to develop their own applications
based on the iManage suite of e-business content and collaboration management
products.
Our products are licensed to customers on a per server and a per user
basis. We do not license our products on a concurrent user basis, nor are they
available on a rental or service basis. However, we are reviewing both
subscription and services-based licensing models for possible adoption in future
product offerings.
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Technology Platform.
The following illustrates how our e-business content and collaboration
management software manages, organizes and delivers information from a variety
of sources throughout the extended enterprise.
[iManage Components Architecture Graphic]
The iManage suite of products incorporates a number of open industry
standards as well as proprietary technologies that ensure our broad industry
suitability to e-business collaboration and content applications. The following
is a list of technologies that are employed within our products to meet the
requirements of the market and provide competitive advantages to our products:
MAPI Store Provider interface, or MSP. The MSP interface integrates
Microsoft Outlook to our repositories and functionality to enable Outlook to
work with the iManage infoCommerce Server as if it were a Microsoft Exchange
server. This integration allows us to seamlessly route and forward email,
voicemail and other content into the iManage infoCommerce Server directly from
Outlook.
NT and NDS directory service support. Our products incorporate a highly
sophisticated security management system. This system integrates with the
existing directories of Microsoft Windows NT and Novell NDS so that users of NT
and Novell networks can automatically be listed as users of the iManage system.
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JAVA, HTML and Active Server Page support. We developed web interfaces to
support the most widely used web application and content technologies, namely
JAVA, HTML and Active Server Pages, or ASP. Using these technologies, we have
designed interfaces so that users of Microsoft Internet Explorer and Netscape
Navigator web browsers, as well as other browsers, can access information
contained within iManage infoCommerce Server repositories.
Microsoft Office 2000 integration. We designed interfaces to our server
that enable users of Microsoft Office 2000 and previous Microsoft Office
versions to contribute content directly to the iManage repositories. This
integration enables authors of information, which is to be published on an
intranet, extranet or Internet site, to remain within the authoring tool of
choice, such as Excel, Word or PowerPoint, and save their content directly to
the iManage repository.
Component Object Model, or COM, support. We employed COM as our standard
means of integrating each component of our solution into other components and
the operating environment itself. COM has become a development standard for all
Microsoft Windows applications and an efficient means to develop new modular
functionality for our products.
International support. To date, our software has been translated and
localized into German for distribution in Germany. We expect to provide
additional language conversions to ensure our products can be distributed in
additional non-English speaking international markets.
SALES AND MARKETING
We sell our software products through our direct sales force and a network
of strategic partners and systems integrators. As of September 30, 1999, we
employed 32 people in our sales, marketing and business development
organization. Our distribution network of over 150 reseller partners and systems
integrators complements our direct sales force and represents us in Australia,
Canada, New Zealand, the United Kingdom and the United States. Our application
specialists provide pre-sales support and post-sales implementation for our
customers.
Our marketing programs focus on creating overall awareness of e-business
content and collaboration management. To generate market awareness, we
participate in market research, industry analyst product and strategy updates,
trade shows and seminars and engage in web site marketing to generate qualified
sales leads. We utilize market research in a formal feedback process to
determine specific industry segment needs, which we use to define and direct our
product development efforts.
Our sales process consists of engaging senior management, primarily chief
information and chief technology officers, at our potential customers to explain
the benefits of our solution. With our technical professionals and systems
integration partners, we assess the specific needs of the enterprise and create
demonstrations and proposals to satisfy customer requirements. We have certified
and trained approximately 500 third-party consultants to assist our customers in
the technical implementation of our solution.
We believe that strategic alliances will be increasingly important in
marketing and selling our solution and developing customer applications. Over
the next 12 months, we intend to broaden the number of alliances we have with
key systems integrators. Furthermore, we intend during the next 12 months to
aggressively expand our sales and marketing staff and devote substantial
resources to our sales and marketing activities.
CUSTOMERS
We have licensed our products to over 500 customers. To date, we have
focused our sales and marketing resources primarily on law firms. We derived
89.0% of our total revenues in 1998 and
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94.0% of our total revenues in the nine month period ended September 30, 1999
from the sale of licenses to law firms and professional service firms. The
following table lists our top twenty law firm customers, in terms of billings,
since January 1, 1998 and our non-law firm customers that have purchased
licenses in excess of $50,000 since January 1, 1998.
<TABLE>
<S> <C>
Airtouch Communications Inc. Minter Ellison
America Online, Inc. Morgan, Lewis & Bockius LLP
Charles Schwab & Company, Inc. Motorola
City of Phoenix National Association of Securities Dealers
Choice One Communications Paul, Weiss, Rifkind, Wharton & Garrison
Cleary, Gottlieb, Steen & Hamilton Pillsbury Madison & Sutro LLP
Commodities Corporation LLC Ropes & Gray
Cravath, Swaine & Moore Sidley & Austin
Federal Home Loan Bank Chicago State of California
Fraser Milner State of Indiana
Fried, Frank, Harris, Shriver & Jacobson Stoel Rives LLP
Gibson, Dunn & Crutcher LLP TIAA-CREF
Herbert Smith Vinson & Elkins L.L.P.
Jenkens & Gilchrist, A Professional Wal-Mart Stores Inc.
Corporation Wilmer, Cutler & Pickering
Lane Powell Spears Lubersky LLP Wilson, Sonsini, Goodrich & Rosati,
Marriott International, Inc. Professional Corporation
Mayer, Brown & Platt
McDermott, Will & Emery
</TABLE>
In 1996, Hahn Loeser & Parks accounted for 31% of our total revenues, MBL
Life Assurance Corporation accounted for 15% of our total revenues, McFall
Sherwood & Sheehy accounted for 10% of our total revenues and Norfolk Southern
accounted for 11% of our total revenues. There were no customers that accounted
for more than 10% of our total revenues for 1997, 1998 or the nine month period
ended September 30, 1999.
CUSTOMER SERVICE, TRAINING AND SUPPORT
We believe that customer satisfaction is essential for our long-term
success. Our technical support group provides dependable and timely resolution
of customer technical inquiries and is available to customers by telephone,
email and over the web. We use a customer service automation system to track
each customer's inquiry until it is resolved. Our training services group
delivers education and training to our customers and partners. We offer a
comprehensive series of classes to our customers to provide them with the
knowledge and skills to successfully deploy, use and maintain our products.
These courses focus on the technical aspects of our products as well as related
business issues and processes. We regularly hold our classes in various
locations throughout the United States and in our training facilities at our
research and development headquarters in Chicago, Illinois. Our customer support
and training organization consisted of 19 employees at September 30, 1999.
RESEARCH AND DEVELOPMENT
We believe that our future success will depend in large part on our ability
to enhance our product family, develop new products, maintain technological
leadership, and satisfy an evolving range of customer requirements for
large-scale interactive online content and collaboration management
applications. Our product development organization is responsible for product
architecture, core technology, product testing, quality assurance, documentation
and expanding the ability of our products to operate with leading hardware
platforms, operating systems, database management systems, and key electronic
commerce transaction processing standards. As of September 30, 1999, our product
development organization consisted of 27 employees.
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<PAGE> 44
We believe that our product development team and core technologies
represent a significant competitive advantage. Our product development team
includes key members of other past research and development organizations that
have developed scalable, reliable, critical online applications. We believe our
technically skilled, quality-oriented and highly productive development
organization is a key component of the success of our new product offerings. We
must attract and retain highly qualified employees to further our product
development efforts. Our business and operating results could be seriously
harmed if we are not able to hire and retain a sufficient number of these
individuals.
Our research and development expenditures were approximately $113,000 for
1996, $935,000 for 1997, $2.4 million for 1998 and $2.9 million for the nine
month period ended September 30, 1999. All research and development expenditures
have been expensed as incurred. We expect to continue to devote substantial
resources to our research and development activities.
COMPETITION
We have experienced and expect to continue to experience increased
competition from current and potential competitors. Many of these companies have
greater name recognition, longer operating histories, larger customer bases and
significantly greater financial, technical, marketing, public relations, sales,
distribution and other resources than we have. We expect to face competition
from these and other competitors, including:
- companies addressing segments of our market including Agile Software
Corporation, BackWeb Technologies Ltd., Documentum, Inc., Hummingbird
Communications Ltd., Marimba, Inc., Open Text Corporation, TIBCO Software
Inc. and Verity, Inc.;
- intranet and groupware companies including IBM and its subsidiary, Lotus
Development Corporation, Microsoft and Novell; and
- in-house development efforts by our customers and potential customers or
partners.
We believe that we may face additional competition from operating system
vendors, online service providers, client/server applications and tools vendors
and enterprise information portal companies. If any of our competitors were to
become the industry standard or were to enter into or expand relationships with
significantly larger companies through mergers, acquisitions or other similar
transactions, our business could be seriously harmed. In addition, potential
competitors may bundle their products or incorporate functionality into existing
products in a manner that discourages users from purchasing our products.
We believe that the principal competitive factors in the e-business content
and collaboration management market are:
- product performance, features, functionality and reliability;
- price/performance characteristics;
- timeliness of new product introductions;
- adoption of emerging industry standards;
- brand name; and
- access to customers.
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<PAGE> 45
We believe we compete favorably with our competitors on each of the above
factors. However, because many of our existing and potential competitors have
greater name recognition, longer operating histories, larger customer bases and
significantly greater financial, technical, marketing, public relations, sales,
distribution and other resources, they may have stronger brand names and access
to more customers than we do. These competitors may be able to undertake more
extensive marketing campaigns, adopt more aggressive pricing policies and make
more attractive offers to distribution partners than we can. To remain
competitive, we believe we must invest significant resources in enhancing our
current products and developing new ones, and maintain customer satisfaction. If
we fail to do so, our products will not compete favorably with those of our
competitors and our business will be significantly harmed.
We expect that competition will continue to increase and that our primary
competitors may not have entered the market yet. Increased competition could
result in price reductions, fewer customer orders, reduced gross margin and loss
of market share, any of which could cause our operating results to suffer.
INTELLECTUAL PROPERTY
We believe that our success and ability to compete is dependent on our
ability to develop and protect our technology. To protect our proprietary
technology, we rely primarily on patent, trademark, service mark, trade secret
and copyright laws and contractual restrictions.
Most of our customers' use of our software is governed by shrink-wrap or
signed written license agreements. We also enter into written agreements with
each of our channel partners for the distribution of our products. In addition,
we seek to avoid disclosure of our trade secrets by requiring each of our
employees and others with access to our proprietary information to execute
confidentiality agreements with us. We protect our software, documentation and
other written materials under trade secret and copyright laws, which afford only
limited protection.
We currently have no issued U.S. patents, we have applied for one U.S.
patent and we have two pending foreign patent applications. It is possible that
no patents will be issued from our currently pending patent applications and
that our potential future patents may be found invalid or unenforceable, or may
be successfully challenged. It is also possible that any patent issued to us may
not provide us with any competitive advantages or that we may not develop future
proprietary products or technologies that are patentable. Additionally, we have
not performed any comprehensive analysis of patents of others that may limit our
ability to do business.
Despite our efforts to protect our proprietary rights, we may be unable to
prevent others from infringing upon or misappropriating our intellectual
property. Any steps we take to protect our intellectual property may be
inadequate, time consuming and expensive. In addition, the laws of some foreign
countries do not protect our proprietary rights to as great an extent as the
laws of the United States.
Substantial litigation regarding intellectual property rights exists in the
software industry. To date, we have not been notified that our technologies
infringe the proprietary rights of anyone. We cannot assure you that others will
not claim that we have infringed proprietary rights relating to past, current or
future technologies. We expect that we could become subject to intellectual
property infringement claims as the number of our competitors grows and our
services overlap with competitive offerings. These claims, even if without
merit, could be expensive, time-consuming to defend, divert management's
attention from the operation of iManage and cause product shipment delays. If we
become liable for infringing intellectual property rights, we would be required
to pay a substantial damage award and to develop non-infringing technology,
obtain a license or cease selling
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<PAGE> 46
the products that contain the infringing intellectual property. We may be unable
to develop non-infringing technology or obtain a license on commercially
reasonable terms, if at all.
We license indexing and searching technologies from third parties. We
cannot assure you that these technology licenses will not infringe the
proprietary rights of others or will continue to be available to us on
commercially reasonable terms, if at all. We license Search '97 from Verity,
Inc. for search functionality in the iManage infoCommerce Server. This agreement
expires in January 2003 and is renewable with the written agreement of the
parties. Either party may terminate the agreement for cause before the
expiration date with 90 days written notice. In addition, we license Outside In
Viewer Technology and Outside In HTML Export from INSO Corporation for file-
viewing functionality in our solution. This agreement expires in December 2001
and is renewable with the written consent of the parties. Either party may
terminate the agreement for cause before the expiration date. If we cannot renew
these licenses, shipments of our products could be delayed until equivalent
software could be developed or licensed and integrated into our products. These
types of delays could seriously harm our business.
EMPLOYEES
As of September 30, 1999, we had 93 full-time employees. Of these
employees, 27 were in product development, 32 in sales, marketing and business
development, 19 in customer support and training and 15 in finance and
administration. None of our employees is subject to a collective bargaining
agreement. We believe our relations with our employees are good. Our future
success depends on our ability to attract, motivate and retain highly qualified
technical and management personnel. From time to time we also employ independent
contractors to support our product development, sales, marketing and business
development organizations.
FACILITIES
Our principal offices are located in a leased facility in San Mateo,
California and consists of approximately 12,000 square feet under a three-year
lease that expires in 2001. We are in the process of securing an additional
12,000 square feet in this facility, which we expect to finalize in the fourth
quarter of 1999. Our engineering and customer support personnel and our training
facility are located in a leased facility in Chicago, Illinois. This facility
consists of approximately 14,000 square feet and our lease is non-cancelable
through 2004 and expires in 2009. We exercised an option to lease approximately
7,000 additional square feet in this facility. We believe that our existing
facilities are adequate for our current needs and that suitable additional or
alternative space will be available in the future on commercially reasonable
terms.
LEGAL PROCEEDINGS
We are not presently involved in any legal proceedings.
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<PAGE> 47
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table provides information concerning directors and executive
officers of iManage as of September 30, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Mahmood Panjwani........................ 40 President, Chief Executive Officer and
Chairman of the Board of Directors
Owen Carton............................. 34 Vice President, Marketing and Strategic
Planning
Mark Culhane............................ 39 Chief Financial Officer and Secretary
Rafiq Mohammadi......................... 39 Chief Technology Officer, Vice
President, Engineering and Director
Shamshad Rashid......................... 39 Vice President, Business Development
Philip Uchno............................ 44 Vice President, Worldwide Sales
Mark Perry.............................. 56 Director(1)(2)
Moez Virani............................. 44 Director(1)(2)
DuWayne Peterson........................ 67 Director(1)(2)
</TABLE>
- -------------------------
(1) Member of audit committee
(2) Member of compensation committee
Mahmood Panjwani is a co-founder of iManage and has served as our
president, chief executive officer and chairman of our board of directors since
October 1995. In August 1988, Mr. Panjwani founded Q-Image Corporation, a
consulting services company, and served as its president and chairman of the
board of directors until December 1997.
Owen Carton has served as our vice president, marketing and strategic
planning since July 1998. Before joining iManage, from November 1996 to June
1998, Mr. Carton was vice president, marketing at FrontOffice Technologies,
Inc., a messaging and knowledge management software company. From 1993 to 1996,
Mr. Carton was vice president, marketing for Timeline Inc., a financial
analysis, budgeting and reporting systems company. From 1985 to 1993, Mr. Carton
held various senior level product marketing positions for Microsoft Corporation.
Mark Culhane has served as our chief financial officer and secretary since
September 1998. From June 1992 to December 1997, Mr. Culhane held various
positions at SciClone Pharmaceuticals, a publicly-held life science company, his
last position being that of SciClone's chief financial officer, vice president,
finance and administration and secretary from May 1994 through December 1997.
From 1982 to the time that Mr. Culhane joined SciClone, he held various
positions at Price Waterhouse LLP, now known as PricewaterhouseCoopers LLP, most
recently as senior manager. Mr. Culhane is a certified public accountant.
Rafiq Mohammadi is a co-founder of iManage and has served as our chief
technology officer and director since October 1995. Between 1985 and 1995, Mr.
Mohammadi co-founded and served as president of M/H Manage, a company that
developed and distributed software that converted documents between different
platforms and formats.
Shamshad Rashid is a co-founder of iManage and has served as our vice
president, business development since October 1995. Ms. Rashid served as vice
president, operations at Q-Image, and has served as its president since December
1997.
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<PAGE> 48
Philip Uchno has served as our vice president, worldwide sales since May
1999. From 1989 to the time he joined iManage, Mr. Uchno was employed by Silicon
Graphics, Inc. where he began as a regional sales manager and then director,
telecommunications marketing. In July 1997, Mr. Uchno became Silicon Graphics'
vice-president, Asia-Pacific field operations and held that position until July
1998 when he was appointed vice president, manufacturing industry marketing.
Mark Perry has been one of our directors since September 1998. From October
1995 to May 1996, Mr. Perry was a consultant to New Enterprise Associates, a
venture capital firm and one of our major stockholders. Mr. Perry is currently
serving as a general partner at New Enterprise Associates, a position he has
held since June 1996. From May 1994 to December 1995, Mr. Perry was president
and chief executive officer of ViewStar Corporation, a client/server software
company. From 1985 to April 1994, Mr. Perry worked at Silicon Graphics where he
last held the position of vice-chairman. Mr. Perry serves on the boards of
directors of Exabyte Corporation, a network storage and backup company, and
Hyperion Solutions Corporation, an analytic application software company, as
well as on the boards of directors of several private companies.
Moez Virani has been one of our directors since December 1996. Mr. Virani
has been a partner at Mohr Davidow Ventures, a venture capital firm, since July
1999. From January 1998 to June 1999, Mr. Virani served as the chief financial
officer of Ziff-Davis Events, Inc., a media company. From February 1995 to
December 1998, Mr. Virani was the chief financial officer and chief operating
officer of SOFTBANK Forums, Inc., a wholly-owned subsidiary of SOFTBANK, Inc.
From 1984 to 1995, Mr. Virani worked for Sun Microsystems in a variety of
domestic and international finance positions.
DuWayne Peterson has been one of our directors since September 1999. Mr.
Peterson is currently serving as president of DuWayne Peterson Associates, a
consulting and advisory firm specializing in information technology. From June
1986 to June 1991, Mr. Peterson served as executive vice president and chief
information officer for Merrill Lynch. From March 1977 to June 1986 he served as
executive vice president of Security Pacific Corporation and chairman and chief
executive officer of Security Pacific Automation Company. He has also held
senior information technology management positions at Citibank and RCA. Mr.
Peterson serves on the board of directors of IFS International, an electronic
banking software company, as well as on the boards of directors of several
private companies.
BOARD COMPOSITION
Effective upon the closing of this offering, our certificate of
incorporation and bylaws will provide for a board of directors that is divided
into three classes:
- Class I, whose term will expire at the annual meeting of stockholders
expected to be held in April 2000;
- Class II, whose term will expire at the annual meeting of stockholders
expected to be held in April 2001; and
- Class III, whose term will expire at the annual meeting of stockholders
expected to be held in April 2002.
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<PAGE> 49
As a result, only one class of directors will be elected at each annual
meeting of stockholders, with the other classes continuing for the remainder of
their terms. Effective upon the closing of this offering, the following
individuals will serve as our directors:
- Rafiq Mohammadi and Moez Virani will be our Class I directors;
- Mahmood Panjwani and DuWayne Peterson will be our Class II directors; and
- Mark Perry will be our Class III director.
BOARD COMPENSATION
Our directors do not receive cash compensation for their services as
directors and do not currently receive any reimbursement for expenses incurred
in attending board and board committee meetings.
Our amended 1997 option plan will provide that upon each nonemployee
director's initial election or appointment, he will automatically receive a
nonstatutory stock option to purchase 30,000 shares of common stock. As long as
the director continues to serve on the board, one-third of the option shares
will vest after one year and the remaining two-thirds will vest in equal monthly
increments over the following two years. In addition, beginning with our annual
stockholders meeting in 2001, when a nonemployee director is reelected to the
board, the director will automatically be granted a nonstatutory stock option to
purchase shares of common stock equal to (a) 10,000 multiplied by (b) the number
of years of the director's elected term. For example, if a director is reelected
to a three year term, the size of the option grant would be 30,000 shares.
Similarly, an option grant would be for 20,000 shares for a director reelected
to a two year term and 10,000 shares for a director reelected to a one year
term. Each of these additional options will vest in equal monthly increments
over the director's elected term. A director will not receive an additional
option if at the time of the director's reelection to the board, the director
has served on the board for less than one year. Each option granted to a
nonemployee director will have a per share exercise price equal to the fair
market value of a share of common stock on the grant date. Each option granted
to a nonemployee director will have a term of 10 years. Vesting of nonemployee
director options will accelerate in full if a change in control occurs before
the option becomes fully vested.
BOARD COMMITTEES
Our board of directors has an audit committee and a compensation committee.
AUDIT COMMITTEE. The audit committee reviews the results and scope of the
annual audit and meets with our independent auditors to review our internal
accounting policies and procedures.
COMPENSATION COMMITTEE. The compensation committee reviews and makes
recommendations to our board of directors on our general and specific
compensation policies and practices and administers our amended 1997 stock
option plan and 1999 employee stock purchase plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the compensation committee has at any time since our
formation been one of our officers or employees. None of our executive officers
currently serves, or in the past has served, as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving on our board of directors or compensation committee. Before the
creation of our compensation committee, all compensation decisions were made by
our full board of directors. Neither Mr. Panjwani nor Mr. Mohammadi participated
in discussions by our board of directors regarding his own compensation.
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<PAGE> 50
EXECUTIVE COMPENSATION
The following table presents the compensation paid to or earned by our
chief executive officer and our other four most highly compensated executive
officers whose salary and bonus for the fiscal year ended December 31, 1998
exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL AWARDS
COMPENSATION ---------------------
------------------ SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(#)
--------------------------- ---- -------- ------- ---------------------
<S> <C> <C> <C> <C>
Mahmood Panjwani.............................. 1998 $120,000 $84,066 --
President and Chief Executive Officer
Owen Carton(1)................................ 1998 67,708 15,000 305,000
Vice President, Marketing and
Strategic Planning
Mark Culhane(2)............................... 1998 35,000 10,000 180,000
Chief Financial Officer and Secretary
Rafiq Mohammadi............................... 1998 120,000 -- --
Vice President, Engineering and Chief
Technology Officer
Shamshad Rashid............................... 1998 100,000 -- --
Vice President, Business Development
</TABLE>
- -------------------------
(1) Mr. Carton joined us in July 1998. His annual salary is $150,000.
(2) Mr. Culhane joined us in September 1998. His annual salary is $140,000.
OPTIONS GRANTS IN LAST FISCAL YEAR
The following table presents the grants of stock options under and outside
of our amended 1997 stock option plan during 1998 to our chief executive officer
and our other four most highly compensated executive officers. The options
granted to the individuals listed below are immediately exercisable and are
either incentive stock options or nonqualified stock options. We have a right to
repurchase these shares upon termination of the individual's employment with us.
Our repurchase right generally lapses on 25% of the shares subject to the option
one year from the date of grant and on 2.083% of the shares subject to the
option for each following month. In November 1998, our board of directors
approved acceleration of vesting for options granted to Mark Culhane, our chief
financial officer, upon a change of control of iManage. Options expire ten years
from the date of grant. Options were granted at an exercise price equal to the
fair market value of our common stock, as determined by our board of directors,
on the date of grant. The following table is based on the grant of options to
purchase a total of 1,147,325 shares of our common stock during 1998.
The 5% and 10% assumed annual rates of stock price appreciation are
required by the rules of the Securities and Exchange Commission and do not
represent our estimate or projection of future common stock prices. Unless the
market price of the common stock appreciates over the option term, no value will
be realized from the option grants made to the executive officers. Actual gains,
if any,
47
<PAGE> 51
on stock option exercises will be dependent on the future performance of our
common stock. The assumed 5% and 10% rates of stock appreciation are based on
the offering price of $11.00 per share.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF % OF POTENTIAL REALIZABLE VALUE
SECURITIES TOTAL AT ASSUMED ANNUAL RATES
UNDERLYING OPTIONS OF STOCK PRICE APPRECIATION
OPTIONS GRANTED TO EXERCISE FOR OPTION TERM
GRANTED EMPLOYEES IN OR BASE EXPIRATION ---------------------------
NAME (#) FISCAL YEAR PRICE ($/SH) DATE 5% ($) 10% ($)
---- ---------- ------------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Mahmood Panjwani..... -- -- -- -- -- --
Owen Carton.......... 305,000 26.6% $0.30 07/27/08 $5,373,442 $8,610,506
Mark Culhane......... 180,000 15.7 0.40 10/13/08 3,153,211 5,063,610
Rafiq Mohammadi...... -- -- -- -- -- --
Shamshad Rashid...... -- -- -- -- -- --
</TABLE>
OPTION EXERCISES AND HOLDINGS
The following table presents the number of shares acquired and the value
realized upon exercise of stock options during 1998 and the number of shares of
common stock subject to vested and unvested stock options held as of December
31, 1998 by our chief executive officer and our other four most highly
compensated executive officers. Also presented are values of in-the-money
options, which represent the positive difference between the exercise price of
each outstanding stock option and a fair market value on December 31, 1998 of
$0.40 per share.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT THE-MONEY OPTIONS AT
SHARES FY-END (#) FY-END ($)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mahmood Panjwani..... -- -- -- -- -- --
Owen Carton.......... -- -- 305,000 -- $ 91,500 --
Mark Culhane......... 180,000 -- -- -- -- --
Rafiq Mohammadi...... -- -- -- -- -- --
Shamshad Rashid...... -- -- -- -- -- --
</TABLE>
CHANGE OF CONTROL AND SEVERANCE ARRANGEMENTS
In July 1998, we entered into a letter agreement with Owen Carton that
provides that if he is terminated by us without cause, Mr. Carton will be
entitled to receive six months of his base salary paid consistent with our
normal payroll practices.
In September 1998, we entered into a letter agreement with Mark Culhane
that provides that if, within 12 months following a transfer of control of
iManage, he is constructively terminated, Mr. Culhane will be entitled to
receive six months of his base salary to be paid under our normal payroll
practices. In addition, Mr. Culhane's options will immediately accelerate in an
amount equal to the lesser of (A) 60% of the total number of his shares subject
to options as of the date of the constructive termination or (B) the number of
his remaining unvested shares subject to options as of the date of the
constructive termination.
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<PAGE> 52
In May 1999, we entered into a letter agreement with Philip Uchno that
provides that if, within 12 months following a transfer of control of iManage,
he is constructively terminated, Mr. Uchno's options will immediately accelerate
in an amount equal to 50% of his remaining unvested options as of the date of
the constructive termination. If at any time on or before May 5, 2000 we
terminate Mr. Uchno without cause, his options will vest based on the number of
full months of service he has provided to iManage as of the date of his
termination. If at any time on or before May 5, 2000 Mr. Uchno terminates his
employment with us for any reason, or if we terminate his employment for cause,
we will have the right to repurchase his vested options at the original option
price.
STOCK OPTION PLANS
AMENDED 1997 STOCK OPTION PLAN
Our amended 1997 stock option plan was adopted by our board of directors in
June 1997 and approved by our stockholders in June 1997 and has been amended
from time to time. A total of 6,000,000 shares of common stock have been
reserved for issuance under the amended 1997 stock option plan. The share
reserve will automatically be increased on the first day of each fiscal year
beginning on and after December 31, 2000 by the lesser of:
- 1,200,000 shares;
- 5% of the number of shares of our common stock that was issued and
outstanding on the last day of the immediately preceding fiscal year; or
- a lesser number of shares as determined by our board of directors or a
committee of our board of directors.
Under the amended 1997 stock option plan, all of our employees or employees
of a subsidiary, all directors who are not our employees or employees of a
subsidiary and any independent contractor or advisor who performs services for
us or a subsidiary are eligible to receive nonstatutory stock options. Employees
are also eligible to receive incentive stock options intended to qualify under
Section 422 of the Internal Revenue Code of 1986. The amended 1997 stock option
plan is administered by our board of directors, which selects the persons who
will receive options, determines the number of shares in each option and
prescribes other terms and conditions, including the type of consideration to be
paid to us upon exercise and vesting schedules, in connection with each option.
However, this responsibility may be delegated to a committee at the option of
our board of directors.
The exercise price of nonstatutory stock options granted under the amended
1997 stock option plan must be at least 85% of the fair market value of our
common stock on the date of grant. The exercise price under incentive stock
options cannot be lower than 100% of the fair market value of our common stock
on the date of grant and, in the case of incentive stock options granted to 10%
stockholders, not less than 110% of the fair market value. The term of an option
cannot exceed ten years, and the term of an incentive stock option granted to a
10% stockholder cannot exceed five years. An individual's options generally
expire not later than 30 days following a termination of employment or six
months following the individual's termination date if the termination was due to
his death or disability.
Options granted under the amendment 1997 stock option plan generally vest
over four years, although the board or committee may specify a different vesting
schedule for a particular grant. Options granted under the amended 1997 stock
option plan are generally nontransferable other than by will or the laws of
descent and distribution, although the board or committee may grant nonstatutory
stock options which allow for limited transferability.
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<PAGE> 53
In the event of a change in control of iManage, the acquiring or successor
corporation may assume or substitute for the outstanding options granted under
the amended 1997 stock option plan. The outstanding options will terminate if
these options are not exercised or assumed or substituted for by the acquiring
or successor corporation.
Under our amended 1997 stock option plan, as of September 30, 1999, there
were outstanding options to purchase 1,076,939 shares of common stock at
exercise prices ranging from $0.20 to $4.50 per share, or a weighted average
exercise price per share of $1.00. Options to acquire 3,343,594 shares have been
exercised. As of September 30, 1999, a total of 1,579,467 shares of common stock
were available for future option grants. If any option granted under the amended
1997 stock option plan expires, terminates or is canceled for any reason, or if
we repurchase shares of stock issued subject to a right of repurchase, the
shares allocable to the unexercised option or the repurchased shares will become
available for further issuance for grants under the amended 1997 stock option
plan.
1999 EMPLOYEE STOCK PURCHASE PLAN
Our 1999 employee stock purchase plan was adopted by our board of directors
in August 1999 and approved by our stockholders in October 1999. This plan will
be effective upon the completion of this offering. Initially, a total of 500,000
shares of common stock will be reserved for issuance under the purchase plan,
none of which will be issued as of the effective date of this offering. The
share reserve will automatically increase on January 1, 2001, and on each
following January 1 until and including January 1, 2009, by an amount equal to
the lesser of:
- 500,000 shares;
- 2% of the number of shares of our common stock that was issued and
outstanding on the last day of the immediately preceding fiscal year; or
- a lesser number of shares as determined by our board of directors or a
committee of our board of directors.
The purchase plan, which is intended to qualify under Section 423 of the
Internal Revenue Code of 1986, will be administered by our board of directors or
by a committee of our board of directors. Employees, including our officers and
directors who are also employees, of iManage or any subsidiary designated by our
board of directors for participation in the purchase plan, will be eligible to
participate in the purchase plan if they are customarily employed for more than
20 hours per week and more than five months per year. Eligible employees will be
able to participate at the start of any offering period.
Each offering of common stock under the purchase plan is for a period of
six months. An offering period will generally commence on the first days of
August and February of each year and end on the last days of the following July
and January. However, the first offering period will commence on the date of
this prospectus and will end on the last day of January 2002. This initial
offering period will be comprised of six-month purchase periods, although the
first purchase period of the initial offering period will commence on the date
of this prospectus and end on July 31, 2000. Shares are purchased on the last
day of each purchase period of the initial offering period and on the last day
of each subsequent six-month offering period. The board may establish a
different term for one or more offerings or purchase periods or different
commencement or ending dates for an offering or a purchase period.
The purchase plan will permit eligible employees to purchase shares of
common stock through payroll deductions at a price equal to 85% of the lower of
the fair market value of our common stock on (a) the first day of the offering
period or (b) the purchase date. Participants generally may not
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<PAGE> 54
purchase more than 2,500 shares on any purchase date or purchase stock having a
value, measured at the beginning of the offering period, greater than $25,000 in
any calendar year. In the event of a change in control of iManage, our board of
directors may adjust the last day of the then current offering period to a date
on or before the change in control, or the acquiring corporation may assume or
replace the outstanding purchase rights under the purchase plan.
401(k) Plan
We sponsor a tax-qualified employee savings and retirement plan intended to
qualify under Section 401 of the Internal Revenue Code, or a 401(k) plan.
Employees who are at least 21 years old and who performed at least one hour of
service for us are generally eligible to participate and may enter the plan as
of the first day of any calendar quarter. Participants may make pre-tax
contributions to the plan of up to 20% of their eligible compensation, subject
to a statutorily prescribed annual limit, which was $10,000 in calendar year
1998. Each participant is fully vested in his contributions and the investment
earnings on these contributions at all times. The 401(k) plan does not currently
permit us to make matching contributions on behalf of participants.
Contributions by the participants or us to the plan, and the income earned on
these contributions, are generally not taxable to the participants until
withdrawn. Contributions are generally deductible by us when made. The 401(k)
plan assets are held in trust. The trustee of the 401(k) plan invests the assets
of the plan in various investment options as directed by the participants.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS
We have adopted provisions in our certificate of incorporation, which the
Delaware General Corporation Law permits, which provide that our directors shall
not be personally liable to us or our stockholders for monetary damages
resulting from a violation of the directors' duty to act with care and in the
best interests of the stockholders, except for liability:
- for acts or omissions that are not in good faith, are deliberately
improper or are known to be illegal;
- under Section 174 of the Delaware General Corporation Law relating to
improper dividends or distributions; or
- for any transaction from which the director obtained an improper personal
benefit.
This limitation of liability does not affect the availability of equitable
remedies, including injunctive relief or rescission.
Our bylaws authorize us to indemnify our officers, directors, employees and
agents to the extent permitted by the Delaware General Corporation Law. Section
145 of the Delaware General Corporation Law empowers us to enter into
indemnification agreements with our officers, directors, employees and agents.
Before the completion of this offering, we intend to enter into separate
indemnification agreements with each of our current directors and executive
officers which may, in some cases, be broader than the specific indemnification
provisions allowed by the Delaware General Corporation Law. The indemnification
agreements will require us to indemnify the executive officers and directors
against liabilities that may arise by reason of status or service as directors
or executive officers and to advance expenses they spend as a result of any
proceeding against them for which they could be indemnified to the fully extent
permitted by the Delaware General Corporation Law.
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<PAGE> 55
We intend to obtain liability insurance for our directors and officers and
intend to obtain a rider to extend that coverage for public securities matters.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of iManage where indemnification will be
required or permitted, and we are not aware of any threatened litigation or
proceeding that may result in a claim for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, executive officers or persons controlling
iManage, we have been informed that in the opinion of the Securities and
Exchange Commission this indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.
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<PAGE> 56
RELATED PARTY TRANSACTIONS
Since our inception in October 1995, there has not been, nor is there
currently planned, any transaction or series of similar transactions to which
iManage was or is a party in which the amount involved exceeds $60,000 and in
which any director, executive officer or holder of more than 5% of iManage's
capital stock or any member of their immediate family had or will have a direct
or indirect material interest other than agreements which are described under
the caption "Management" and the transactions described below.
SALE OF STOCK TO INSIDERS
The following directors, executive officers, holders of more than 5% of a
class of voting securities and members of these persons' immediate families
purchased shares of our series A preferred stock, series B preferred stock,
series C preferred stock or common stock:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
STOCKHOLDER PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
----------- --------------- --------------- --------------- ------------
<S> <C> <C> <C> <C>
Anthelion Capital LLC............ 352,113 -- -- 75,000
Neil Araujo...................... -- -- -- 750,000
Zia Bhatti and related
individuals(1)................. -- -- -- 748,000
Owen Carton and related
individuals(2)................. -- -- -- 305,000
Mark Culhane and related
entities(3).................... -- -- -- 180,000
Entities and individuals
affiliated with Louis Leitz
Digital Systems
GmbH & Co...................... -- 1,273,885 -- 20,000
Rafiq Mohammadi and related
individuals(4)................. -- -- -- 2,833,334
Entities associated with New
Enterprise Associates.......... -- 1,034,401 1,705,599 --
Entities and individuals
affiliated with
Mahmood Panjwani and Shamshad
Rashid(5)...................... 64,506 -- -- 3,354,875
Raj-Dak Investments LLC and
related entities............... 281,690 -- -- 50,000
Iqbal Sadruddin.................. 257,434 -- -- 70,567
Philip Uchno..................... -- -- -- 230,000
Entities and individuals
affiliated with C.E. Unterberg,
Towbin, L.P., formerly known as
Unterberg Harris, L.P.......... 1,267,605 764,326 -- --
Entities and individuals
affiliated with Moez Virani.... 206,417 -- -- 123,513
</TABLE>
- -------------------------
(1) Includes:
(a) 706,000 shares of common stock held jointly by Zia Bhatti and Rabia Z.
Bhatti;
(b) 10,000 shares of common stock held by Aadil Zia Bhatti, Mr. Bhatti's
son;
(c) 4,000 shares of common stock held by Barkatulla Bhatti, Mr. Bhatti's
father;
(d) 4,000 shares of common stock held by Mahmooda Bhatti, Mr. Bhatti's
mother;
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<PAGE> 57
(e) 2,000 shares of common stock held by Sana Ullah Bhatti, Mr. Bhatti's
brother;
(f) 2,000 shares of common stock held by Zaka Ullah Bhatti, Mr. Bhatti's
brother;
(g) 2,000 shares of common stock held by Ata Ullah Bhatti, Mr. Bhatti's
brother;
(h) 2,000 shares of common stock held by Khalikd Naeem Khwaja; Mr. Bhatti's
cousin;
(i) 4,000 shares of common stock held by Azhar Pirzada, Ms. Bhatti's
father;
(j) 4,000 shares of common stock held by Aarifa Pirzada, Ms. Bhatti's
mother;
(k) 2,000 shares of common stock held by Aisha Nadeem, Ms. Bhatti's sister;
(l) 2,000 shares of common stock held by Asad Pirzada, Ms. Bhatti's
brother;
(m) 2,000 shares of common stock held by Faisal Pirzada, Ms. Bhatti's
brother; and
(n) 2,000 shares of common stock held by Fatima Pirzada, Ms. Bhatti's
sister.
(2) Includes:
(a) 800 shares of common stock held jointly by Rafael E. Blanco and Ligia
J. Serrano. the brother-in-law and sister-in-law of Mr. Carton; and
(b) 280 shares of common stock held jointly by Louis F. Blanco and Irene M.
Blanco, a nephew and niece of Mr. Carton.
(3) Includes:
(a) 5,000 shares held by Mark and Michele Culhane as trustees of the
Michael D. Culhane 1999 Irrevocable Trust;
(b) 5,000 shares held by Mark and Michele Culhane as trustees of the
Maxwell A. Culhane 1999 Irrevocable Trust; and
(c) 5,000 shares held by Mark and Michele Culhane as trustees of the Monica
G. Culhane 1999 Irrevocable Trust.
(4) Includes:
(a) 10,000 shares of common stock held by Razak Habib, Mr. Mohammadi's
father;
(b) 10,000 shares of common stock held by Noorbanu Razak, Mr. Mohammadi's
mother;
(c) 10,000 shares of common stock held by Razaali Razak, Mr. Mohammadi's
brother;
(d) 5,000 shares of common stock held by Kimberli Ann Brison, Mr.
Mohammadi's sister-in-law;
(e) 2,500 shares of common stock held by Jeffery Morgan Brooke, Mr.
Mohammadi's brother-in-law;
(f) 10,000 shares of common stock held by Judith Anne Brooke, Mr.
Mohammadi's mother-in-law;
(g) 2,500 shares of common stock held by Allen Frederick Brooke, Mr.
Mohammadi's brother-in-law;
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<PAGE> 58
(h) 5,000 shares of common stock held by Julie Marie Miner, Mr.
Mohammadi's sister-in-law; and
(i) 5,000 shares of common stock held by Sherri Stephanie Brooke, Mr.
Mohammadi's sister-in-law.
(5) Includes:
(a) 29,295 shares of series A preferred stock held jointly by Akber
Panjwani and Karim Panjwani, both brothers of Mr. Panjwani;
(b) 6,000 shares of common stock held by Akber Panjwani and his spouse as
custodians for their children;
(c) 21,000 shares of common stock held jointly by Akber Panjwani and his
spouse;
(d) 9,000 shares of common stock held by Karim Panjwani and his spouse as
custodians for their children;
(e) 6,000 shares of common stock held jointly by Karim Panjwani and his
spouse;
(f) 53,000 shares of common stock held by Sherbanu Panjwani, Mr.
Panjwani's mother;
(g) 174,875 shares of common stock held by Samia Rashid, the sister of Ms.
Shamshad Rashid;
(h) 3,000 shares of common stock held by Samia Rashid's husband;
(i) 9,000 shares of common stock held by Aftab Rashid, the brother of Ms.
Shamshad Rashid, and his spouse as custodians for their children;
(j) 6,000 shares of common stock held jointly by Aftab Rashid and his
spouse;
(k) 9,000 shares of common stock held by Altaf Rashid, the brother of Ms.
Shamshad Rashid, and his spouse as custodians for their children;
(l) 6,000 shares of common stock held jointly by Altaf Rashid and his
spouse;
(m) 6,000 shares of common stock held by Naushad Rashid, the brother of Ms.
Shamshad Rashid, and his spouse as custodians for their children;
(n) 6,000 shares of common stock held jointly by Naushad Rashid and his
spouse;
(o) 35,211 shares of series A preferred stock held by Naushad Rashid;
(p) 6,000 shares of common stock held by Yasmeen Rashid, the sister of Ms.
Shamshad Rashid; and
(q) 56,000 shares of common stock held by Zohra and Noor Ali Rashid, the
mother and father of Ms. Shamshad Rashid.
The following is a summary of sales of our preferred and common stock that
are presented in the table above:
Series A financing. Between December 27, 1996 and August 28, 1997, we sold
a total of 2,853,708 shares of series A preferred stock at a price of $0.71 per
share.
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<PAGE> 59
Series B financing. Between December 15, 1997 and July 31, 1998, we sold a
total of 3,200,000 shares of series B preferred stock at a price of $1.57 per
share.
Series C financing. Between September 28, 1998 and November 30, 1998, we
sold a total of 1,979,409 shares of our series C preferred stock at a price of
$2.10 per share. 100,000 of these shares were issued for $210,000 in pre-paid
rent for our San Mateo facility. Immediately before the closing of this
offering, all outstanding shares of series A preferred stock, series B preferred
stock and series C preferred stock will automatically convert into shares of
common stock on a one-for-one basis.
Sales of Common Stock.
- On October 10, 1995, we sold to each of Mahmood Panjwani and Rafiq
Mohammadi 3,000,000 shares of common stock at a price of $0.000165 per
share.
- On December 27, 1996, we sold a total of 291,080 shares of common stock
at a price of $0.071 per share.
- In February 1998, Mr. Araujo and Mr. Bhatti each exercised an option to
acquire 750,000 shares of common stock at a price of $0.20 per share.
- Of the 75,000 shares of common stock shown as held by Anthelion Capital
LLC, 50,000 shares are owned by Amit Shah and 25,000 shares are owned by
Amit Parikh, both principals of Anthelion Capital LLC.
- Messrs. Shah and Parikh each acquired their shares upon exercise of
options granted at a price of $0.20 per share.
- The 20,000 shares of common stock shown as held by Louis Leitz Digital
Systems GmbH & Co. are owned by Harold Raetzsch, acquired upon exercise
of an option granted at $0.30 per share.
- All other holders of common stock listed in the table above acquired
their shares upon exercise of stock options as described below.
OPTION GRANTS TO DIRECTORS AND EXECUTIVE OFFICERS
In November 1997, we granted to Moez Virani, one of our directors, an
option to purchase a total of 50,000 shares of common stock at an exercise price
of $0.20 per share. In March 1999, we granted Mr. Virani an additional option to
purchase 25,000 shares of common stock at an exercise of $0.60 per share. Mr.
Virani has exercised both options.
In July 1998, we granted to Owen Carton, our vice president, marketing and
strategic planning, an option to purchase 305,000 shares of common stock at an
exercise price of $0.30 per share. Mr. Carton exercised options to purchase
177,917 shares in April 1999 and 127,083 shares in May 1999 with funds we loaned
him under two full recourse promissory notes approved by our board of directors.
The April 1999 promissory note accrues interest at 4.71% and is due on March 31,
2003. The May 1999 promissory note accrues interest at 4.83% and is due on May
30, 2003.
In September 1998, we granted to Mark Perry, one of our directors, an
option to purchase 100,000 shares of common stock at an exercise price of $0.40
per share. Mr. Perry has not exercised the option.
In October 1998, we granted to Mark Culhane, our chief financial officer
and secretary, options to purchase 180,000 shares of common stock at an exercise
price of $0.40 per share. In November 1998, Mr. Culhane exercised the option in
full with funds we loaned him under a full recourse
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<PAGE> 60
promissory note approved by our board of directors. The promissory note accrues
interest at the rate of 4.51% per year and is due on November 12, 2002.
In May 1999, we granted to Philip Uchno, our vice president, worldwide
sales, an option to purchase 230,000 shares of common stock at an exercise price
of $0.90 per share. In July 1999, Mr. Uchno exercised the option in full with
funds we loaned him under a full recourse promissory note approved by our board
of directors. The promissory note accrues interest at the rate of 5.22% per year
and is due on July 31, 2003.
In June 1999, we granted to Shamshad Rashid, our vice president, business
development, an option to purchase 180,000 shares of common at an exercise price
of $1.65 per share. In July 1999, Ms. Rashid exercised the option in full with
funds we loaned her under a full recourse promissory note approved by our board
of directors. The promissory note accrues interest at the rate of 4.9% per year
and is due on July 26, 2001.
In November 1999, we granted options to purchase shares of common stock at
an exercise price of $9.00 per share to the following executive officers:
<TABLE>
<S> <C>
- Mahmood Panjwani 100,000 shares
- Owen Carton 50,000 shares
- Mark Culhane 50,000 shares
- Rafiq Mohammadi 50,000 shares
- Shamshad Rashid 50,000 shares
- Philip Uchno 10,000 shares
</TABLE>
None of the above options have been exercised.
OTHER INSIDER ARRANGEMENTS
Before founding iManage, Mahmood Panjwani, our president and chief
executive officer, and Shamshad Rashid, our vice president, business development
and Mr. Panjwani's spouse, operated Q-Image Corporation, a consulting services
company founded by Mr. Panjwani. Mr. Panjwani served as president of Q-Image
from August 1988 to December 1997. Ms. Rashid has continued her involvement with
Q-Image where she has served as president since December 1997. Ms. Rashid
estimates that she dedicates approximately 95% of her time to iManage.
Currently, Mr. Panjwani and Ms. Rashid jointly hold a 90% ownership in Q-Image.
From 1995 until late 1998, we subleased office space in Sunnyvale,
California from Q-Image. During 1998, we paid a total of $54,000 in rent to
Q-Image. In November 1998, we moved to our current location in San Mateo,
California and we terminated our sublease arrangement with Q-Image for the
Sunnyvale facility. Q-Image now subleases office space from us in our San Mateo
facility for $84,600 per year for 1999 and $91,650 per year for 2000 under a
written sublease agreement.
Since 1997, we have engaged Q-Image for personnel recruiting services under
an arrangement where we pay Q-Image a placement fee amounting to 25% of the base
salary of the candidates we hire. During 1998, we paid a total of $101,575 in
placement fees to Q-Image under the terms of a written agreement. Although this
written agreement expired in August 1999, we are currently negotiating with
Q-Image to renew the agreement. During the nine month period ended September 30,
1999, we paid a total of $155,250 in placement fees to Q-Image.
We are presently utilizing the services of several full-time consultants
who were referred to us by Q-Image. Under our current arrangement with Q-Image,
we pay fees to Q-Image equivalent to the
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<PAGE> 61
salaries and incentive pay of these consultants. We also pay additional fees to
Q-Image to cover the cost of employee benefits provided by Q-Image to these
individuals. We have in the past, and may in the future, hire consultants from
Q-Image as full-time iManage employees. During 1998 we paid Q-Image $365,826 for
the services of these consultants and $461,141 for the nine month period ended
September 30, 1999.
Mahmood Panjwani loaned us $25,000 on November 14, 1996, $10,000 on
December 12, 1996 and $15,000 on December 19, 1996. Each loan accrued interest
at the rate of 10% per year and was repaid in full on September 14, 1998.
Rafiq Mohammadi loaned us $24,010 on October 10, 1995 and $5,000 on June
25, 1996. Each loan accrued interest at the rate of 10% per year. Mr. Mohammadi
was repaid $10,000 of this loan in two installments of $7,000 in May 1997 and
$3,000 in August 1997, and the balance was repaid in full on September 14, 1998.
On November 4, 1999, we repurchased 166,666 shares of common stock from Mr.
Mohammadi at a price of $4.50 per share for a total repurchase price of
$749,997. The number of shares repurchased represents less than 10% of the
shares held by Mr. Mohammadi immediately before the repurchase.
All of the transactions described above were approved by disinterested
directors of the board of directors. As a result, we believe those transactions
were made on terms no less favorable to us than could have been obtained from
unaffiliated third parties. We intend that all future transactions, including
the agreements with Q-Image and loans between us and our officers, directors and
principal stockholders and their affiliates, will be approved by a majority of
the board of directors. In addition, we intend that all of these future
transactions will take place on terms no less favorable to us than could be
obtained from unaffiliated third parties.
INDEMNIFICATION AGREEMENTS
We intend to enter into indemnification agreements with each of our
directors and officers. These agreements will require us to indemnify these
individuals to the fullest extent permitted by the Delaware General Corporation
Law.
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<PAGE> 62
PRINCIPAL STOCKHOLDERS
The following table presents information concerning the beneficial
ownership of the shares of our common stock as of September 30, 1999, and as
adjusted to reflect the sale of shares of common stock in this offering assuming
(a) 17,847,791 shares of common stock outstanding as of September 30, 1999 and
21,447,791 shares outstanding immediately following the completion of this
offering, (b) conversion of all of iManage's outstanding shares of convertible
preferred stock into common stock and (c) no exercise of the underwriters'
over-allotment option, by:
- each person we know to be the beneficial owner of 5% or more of the
outstanding shares of common stock;
- each executive officer listed in the summary compensation table above;
- each of our directors; and
- all executive officers and directors of iManage as a group.
Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and generally includes voting or investment power over
securities. Except in cases where community property laws apply or as indicated
in the footnotes to this table, we believe that each stockholder identified in
the table possesses sole voting and investment power over all shares of common
stock shown as beneficially owned by the stockholder. Shares of common stock
subject to options that are currently exercisable or exercisable within 60 days
of September 30, 1999 are considered outstanding and beneficially owned by the
person holding the options for the purpose of computing the percentage ownership
of that person but are not treated as outstanding for the purpose of computing
the percentage ownership of any other person. Unless indicated below, the
address of each individual listed below is 2121 South El Camino Real, Suite 400,
San Mateo, California 94403.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
-------------------------
NUMBER OF SHARES BEFORE AFTER THE
NAME AND ADDRESS BENEFICIALLY OWNED THE OFFERING OFFERING
---------------- ------------------ ------------ ---------
<S> <C> <C> <C>
NAMED EXECUTIVE OFFICERS AND DIRECTORS
Rafiq Mohammadi(1)................................. 2,940,000 16.5% 13.7%
Mahmood Panjwani(2)................................ 2,978,000 16.7 13.9
Shamshad Rashid(3)................................. 2,978,000 16.7 13.9
Mark Perry(4)...................................... 2,840,000 15.8 13.2
c/o New Enterprise Associates
2490 Sand Hill Road
Menlo Park, CA 94025
Moez Virani(5)..................................... 329,930 1.9 1.5
c/o Mohr Davidow Ventures
2775 Sand Hill Road, Suite 240
Menlo Park, CA 94025
Owen Carton(6)..................................... 303,920 1.7 1.4
Mark Culhane(7).................................... 180,000 1.0 *
OTHER 5% STOCKHOLDERS
New Enterprise Associates(8)....................... 2,740,000 15.4 12.8
Attn: Mark Perry
2490 Sand Hill Road
Menlo Park, CA 94025
Entities and individuals associated with C.E.
Unterberg, Towbin, L.P.(9)....................... 2,031,931 11.4 9.5
Swiss Bank Tower
10 East 50th Street
New York, NY 10022
Entities and individuals associated with Louis
Leitz Digital Systems GmbH & Co.(10)............. 1,293,885 7.2 6.0
Seimenstrasse 64,
70469 Stuttgart Germany
All executive officers and directors as a group (8
persons)(11)..................................... 9,801,850 54.6 45.5
</TABLE>
- ------------------------
* Less than 1%
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<PAGE> 63
(1) Includes:
(a) 10,000 shares of common stock held by Razak Habib, Mr. Mohammadi's
father;
(b) 10,000 shares of common stock held by Noorbanu Razaak, Mr. Mohammadi's
mother;
(c) 10,000 shares of common stock held by Razaali Razak, Mr. Mohammadi's
brother;
(d) 5,000 shares of common stock held by Kimberly Ann Brison, Mr.
Mohammadi's sister-in-law;
(e) 2,500 shares of common stock held by Jeffery Morgan Brooke, Mr.
Mohammadi's brother-in-law;
(f) 10,000 shares of common stock held by Judith Anne Brooke, Mr.
Mohammadi's mother-in-law;
(g) 2,500 shares of common stock held by Allen Frederick Brooke, Mr.
Mohammadi's brother-in-law;
(h) 5,000 shares of common stock held by Julie Marie Miner, Mr. Mohammadi's
sister-in-law; and
(i) 5,000 shares of common stock held by Sherri Stephanie Brooke, Mr.
Mohammadi's sister-in-law.
(2) Includes:
(a) 2,648,000 shares held in joint tenancy with Ms. Rashid, Mr. Panjwani's
wife;
(b) 50,000 shares held by Mr. Panjwani and Ms. Rashid as the trustees of
the Danyal M. Panjwani Trust;
(c) 100,000 shares held by Mr. Panjwani and Ms. Rashid as the trustees of
the Panjwani Irrevocable Trust dated December 31, 1998; and
(d) 82,500 shares subject to a right of repurchase in favor of iManage
which lapses over time.
(3) Includes:
(a) 2,648,000 shares held in joint tenancy with Mr. Panjwani, Ms. Rashid's
husband;
(b) 50,000 shares registered held by Mr. Panjwani and Ms. Rashid as the
trustees of the Danyal M. Panjwani Trust;
(c) 100,000 shares held by Mr. Panjwani and Ms. Rashid as the trustees of
the Panjwani Irrevocable Trust dated December 31, 1998; and
(d) 82,500 shares subject to a right of repurchase in favor of iManage
which lapses over time.
(4) Includes:
(a) 100,000 shares subject to options held by Mark Perry that are
exercisable within 60 days of September 30, 1999, all of which are
subject to a right of repurchase in favor of iManage which lapses over
time;
(b) 2,783 shares held by NEA Ventures 1998, Limited Partnership;
(c) 27,828 shares held by NEA Presidents Fund, L.P.; and
(d) 2,709,389 shares held by New Enterprise Associates VIII, Limited
Partnership.
Mr. Perry is a general partner of New Enterprise Associates and a director
of iManage. Mr. Perry disclaims beneficial ownership of shares held by
these entities, except for his proportional interest arising from his
partnership interest in New Enterprise Associates.
(5) Includes 254,930 shares registered in the name of the Moez R. Virani and
Vivienne Virani, TTEES of the Virani Fam 93 Rev Tr Dtd 11/24/93.
(6) Includes:
(a) 108,021 shares subject to a right of repurchase in favor of iManage
which lapses over time;
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<PAGE> 64
(b) 800 shares of common stock held jointly by Rafael E. Blanco and Ligia
J. Serrano; the brother-in-law and sister-in-law of Mr. Carton; and
(c) 280 shares of common stock held jointly by Louis F. Blanco and Irene M.
Blanco, as nephew and niece of Mr. Carton.
(7) Includes:
(a) 142,500 shares subject to a right of repurchase in favor of iManage
which lapses over time;
(b) 5,000 shares held by Mark and Michele Culhane as trustees of the
Michael D. Culhane 1999 Irrevocable Trust;
(c) 5,000 shares held by Mark and Michele Culhane as trustees of the
Maxwell A. Culhane 1999 Irrevocable Trust; and
(d) 5,000 shares held by Mark and Michele Culhane as trustees of the Monica
G. Culhane 1999 Irrevocable Trust.
(8) Includes:
(a) 2,783 shares held by NEA Ventures 1998, Limited Partnership;
(b) 27,828 shares held by NEA Presidents Fund, L.P.; and
(c) 2,709,389 shares held by New Enterprise Associates VIII, Limited
Partnership.
Mr. Perry is a general partner of New Enterprise Associates and has
dispositive and voting power for these shares.
(9) Includes:
(a) 127,388 shares held by C.E. Unterberg, Towbin LLC;
(b) 1,016,786 shares held by Unterberg Harris Private Equity Partners,
L.P.;
(c) 323,940 shares held by C.E. Unterberg, Towbin, L.P.;
(d) 217,177 shares held by Unterberg Harris Private Equity Partners, C.V.;
(e) 63,694 shares held by A. Robert Towbin, a managing director of C.E.
Unterberg, Towbin L.P.; and
(f) an aggregate of 282,946 shares held by seven trusts and two 401(k)
profit sharing accounts, all of which have beneficiaries or trustees
who are affiliated with C.E. Unterberg, Towbin L.P. or the principals
of C.E. Unterberg, Towbin L.P.
(10) Includes 20,000 shares held by Harold Raetzsch, a former executive officer
of Louis Leitz Digital Systems GmbH & Co.'s U.S. subsidiary.
(11) Includes:
(a) 762,864 shares subject to a right of repurchase in favor of iManage
which lapses over time; and
(b) 100,000 shares subject to options that are exercisable within 60 days
of September 30, 1999.
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<PAGE> 65
DESCRIPTION OF CAPITAL STOCK
Immediately following the closing of this offering, our authorized capital
stock will consist of 100,000,000 shares of common stock and 2,000,000 shares of
preferred stock. As of September 30, 1999, and assuming the conversion of all
outstanding preferred stock into common stock upon the closing of this offering,
there were outstanding 17,847,791 shares of common stock held of record by
approximately 165 stockholders and options to purchase 1,076,939 shares of
common stock.
Immediately following the closing of this offering, we intend to amend and
restate our certificate of incorporation and our bylaws. Our certificate of
incorporation, bylaws and rights agreement, including all of its amendments,
described below, are included as exhibits to the registration statement of which
this prospectus forms a part.
COMMON STOCK
Dividend Rights. Subject to preferences that may apply to shares of
preferred stock outstanding at the time, the holders of outstanding shares of
common stock are entitled to receive dividends out of assets legally available
at the times and in the amounts as our board of directors may from time to time
determine.
Voting Rights. Each common stockholder is entitled to one vote for each
share of common stock held on all matters submitted to a vote of stockholders.
Cumulative voting for the election of directors is not provided for in our
certificate of incorporation, which means that the holders of a majority of the
shares voted can elect all of the directors then standing for election.
No Preemptive or Similar Rights. Our common stock is not entitled to
preemptive rights and is not subject to conversion or redemption.
Right to Receive Liquidation Distributions. Upon our liquidation,
dissolution or winding-up, the assets legally available for distribution to our
stockholders are distributable ratably among the holders of our common stock and
any participating preferred stock outstanding at that time after payment of
liquidation preferences, if any, on any outstanding preferred stock and payment
of other claims of creditors. Each outstanding share of common stock is, and all
shares of common stock to be outstanding upon completion of this offering will
be, fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, each outstanding share of series A
preferred stock, series B preferred stock and series C preferred stock will be
converted into one share of common stock. See note 6 to our financial statements
for a description of the preferred stock.
Following the offering, we will be authorized, subject to the limits
imposed by the Delaware General Corporation Law, to issue preferred stock in one
or more series, to establish from time to time the number of shares to be
included in each series, to fix the rights, preferences and privileges of the
shares of each wholly unissued series and any of its qualifications, limitations
or restrictions. Our board of directors can also increase or decrease the number
of shares of any series, but not below the number of shares of that series then
outstanding, without any further vote or action by the stockholders.
Our board of directors may authorize the issuance of preferred stock with
voting or conversion rights that could adversely affect the voting power or
other rights of the holders of our common stock. The issuance of preferred
stock, while providing flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of delaying, deferring or
preventing a change in control of iManage and may cause the market price of our
common stock to decline or impair the voting and other rights of the holders of
our common stock. We have no current plans to issue any shares of preferred
stock.
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<PAGE> 66
REGISTRATION RIGHTS
The holders of approximately 8,033,117 shares of preferred stock have the
right to require us to register their shares with the Securities and Exchange
Commission so that those shares may be publicly resold or to include their
shares in any registration statement we file.
Demand registration rights
- At any time after December 31, 2001, stockholders with registration
rights can request that we file a registration statement so that they can
publicly sell their shares. The underwriters of any underwritten offering
will have the right to limit the number of shares to be included in the
filed registration statement.
- At any time six months after the closing of this offering, the holders of
at least 30% of the shares having registration rights have the right to
demand that we file a registration statement on a form other than Form
S-3, as long as the aggregate amount of securities to be sold under the
registration statement exceeds $7.5 million.
- If we are eligible to file a registration statement on Form S-3, the
holders of at least 10% of the shares having registration rights have the
right to demand that we file a registration statement on Form S-3, as
long as the amount of securities to be sold under the registration
statement exceeds $500,000.
We will be required to file two registration statements on a form other
than Form S-3 for the holders of at least 30% of shares having registration
rights. If we are eligible to file a registration statement on Form S-3, we are
not required to file more than one registration statement during any 12-month
period. We may postpone the filing of a registration statement for up to 60 days
once in a 12-month period if we determine that the filing would be seriously
detrimental to us or our stockholders.
Piggyback registration rights
If we register any securities for public sale, stockholders with
registration rights will have the right to include their shares in the
registration statement. The underwriters of any underwritten offering will have
the right to limit the number of shares to be included in the registration
statement.
Expenses of registration
We will pay all expenses relating to any demand or piggyback registration.
However, we will not pay for the expenses of any demand registration if the
request is subsequently withdrawn by the holders of a majority of the shares
having registration rights, subject to very limited exceptions.
Expiration of registration rights
The registration rights described above will expire six years after this
offering is completed. The registration rights will terminate earlier for a
particular stockholder if that holder can resell all of its securities in a
three-month period under Rule 144 of the Securities Act and we are subject to
the reporting requirements of the Securities Exchange Act of 1934.
DELAWARE ANTI-TAKEOVER LAW AND CHARTER PROVISIONS
The provisions of the Delaware General Corporation Law, our certificate of
incorporation and our bylaws described below may have the effect of delaying,
deferring or discouraging another person from acquiring control of us.
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<PAGE> 67
We will be subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. This section prevents Delaware
corporations from engaging, under limited circumstances, in a business
combination, which includes a merger or sale of more than 10% of the
corporation's assets, with any interested stockholder, which is a stockholder
who owns 15% or more of the corporation's outstanding voting stock, as well as
affiliates and associates of stockholders, for three years following the date
that the stockholder became an interested stockholder unless:
- the transaction is approved by the board before the date the interested
stockholder attained that status;
- upon the closing of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced; or
- on or after the date the business combination is approved by the board
and authorized at an annual or special meeting of stockholders by at
least two-thirds of the outstanding voting stock that is not owned by the
interested stockholder.
A Delaware corporation may opt out of this provision with an express
provision in its original certificate of incorporation or an express provision
in its certificate of incorporation or bylaws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares.
However, we have not opted out of this provision. This provision of the Delaware
General Corporation Law could prohibit or delay mergers or other takeover or
change-in-control attempts and may discourage attempts to acquire us.
CHARTER AND BYLAWS
Charter
Upon the closing of this offering, our certificate of incorporation will
provide that all stockholder actions must be effected at a duly-called annual or
special meeting and not by a consent in writing. Our certificate of
incorporation will also require the approval of our board of directors to adopt,
amend or repeal our bylaws. In addition, our certificate of incorporation will
permit the stockholders to adopt, amend or repeal our bylaws only upon the
affirmative vote of the holders of at least two-thirds of the voting power of
all then outstanding shares of stock entitled to vote.
Directors will be removable for cause only by stockholders holding a
majority of the then outstanding shares of stock entitled to vote. Vacancies on
the board of directors resulting from death, resignation, removal or other
reason may be filled by a majority of the directors then in office, even if less
than a quorum. Vacancies from newly created directorships must be filled by a
majority of the directors then in office. Lastly, the provisions in the
certificate of incorporation described above and other provisions pertaining to
the limitation of liability and indemnification of directors will be able to be
amended or repealed only with the affirmative vote of the holders of at least
two-thirds of the voting power of all then outstanding shares of stock entitled
to vote.
These provisions may have the effect of deterring hostile takeovers or
delaying changes in the control or management of iManage, which could have an
adverse effect on the market price of our common stock.
Bylaws
Upon the closing of this offering, our bylaws will also contain many of the
provisions in our certificate of incorporation described above. Our bylaws will
not permit stockholders to call a special meeting. In addition, our bylaws will
establish an advance notice procedure for matters to be brought before an annual
or special meeting of our stockholders, including the election of directors.
Business
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<PAGE> 68
permitted to be conducted at any annual meeting or special meeting of
stockholders will be limited to business properly brought before the meeting.
Our bylaws will also provide that we will indemnify officers and directors
against losses that they may incur in investigations and legal proceedings
resulting from their services to us, which may include services in connection
with takeover defense measures. These provisions may have the effect of
preventing changes in our management.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Our certificate of incorporation limits the liability of directors to the
fullest extent permitted by the Delaware General Corporation Law. In addition,
our certificate of incorporation and bylaws provide that we will indemnify our
directors and officers to the fullest extent permitted by the Delaware General
Corporation Law. We intend to enter into separate indemnification agreements
with our directors and executive officers that provide them indemnification
protection if our certificate of incorporation is subsequently amended.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is BankBoston, N.A.
The address of our transfer agent and registrar is 150 Royall Street, Canton, MA
02021, and its telephone number at this location is (781) 575-2469.
LISTING
Our common stock has been approved for listing on the Nasdaq National
Market under the trading name IMAN.
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<PAGE> 69
SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has been no public market for our common stock.
Future sales of substantial amounts of our common stock, including shares issued
upon exercise of outstanding options, in the public market after this offering
could adversely affect market prices prevailing from time to time. Furthermore,
as described below, no shares currently outstanding will be available for sale
immediately after this offering due to contractual and legal restrictions on
resale. Nevertheless, sales of substantial amounts of our common stock in the
public market after the restrictions lapse could adversely affect the prevailing
market price and our ability to raise equity capital in the future.
- Upon the closing of this offering, we will have outstanding an aggregate
of approximately shares of common stock, assuming conversion of all
outstanding preferred stock and based on common stock outstanding as of
September 30, 1999, and assuming no exercise of the underwriters'
over-allotment option or exercise of outstanding options.
- Of these shares, the shares of common stock to be sold in this offering
will be freely tradable without restriction or further registration under
the Securities Act, unless the shares are held by affiliates of iManage,
defined as persons who directly or indirectly control or are controlled
by or are under common control with iManage.
All remaining shares held by our existing stockholders were issued and sold
by iManage in private transactions and are eligible for public sale as follows:
<TABLE>
<CAPTION>
APPROXIMATE
NUMBER OF SHARES
DATE THAT MAY BE SOLD COMMENT
---- ---------------- -------
<S> <C> <C>
Date of this prospectus..................... 0 Freely tradable shares
181 days after the date of this 14,324,197 Restricted securities held for
prospectus.................................. at least one year may be sold
under Rule 144
</TABLE>
LOCK-UP AGREEMENTS
All of our officers and directors and substantially all of our security
holders have signed lock-up agreements under which they agreed not to sell,
dispose of, loan, pledge or grant any rights to any shares of common stock or
any securities convertible into or exercisable or exchangeable for shares of
common stock without the prior written consent of BancBoston Robertson Stephens
for a period of 180 days after the date of this prospectus.
BancBoston Robertson Stephens may choose to release some of these shares
from these restrictions before the expiration of this 180-day period, although
it has no current intention to do so.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 214,478 shares immediately after this offering; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 for the sale.
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<PAGE> 70
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
RULE 144(k)
Under Rule 144(k), a person who has not been one of our affiliates at any
time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, is entitled to sell those
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Therefore, unless otherwise
restricted, shares that have been held by a non-affiliate for at least two years
may be sold in the open market immediately after the lock-up agreements expire.
RULE 701
Any employee, officer or director of, or consultant to, us who purchased
his shares under a written compensatory plan or contract may be entitled to sell
his shares in reliance on Rule 701. Rule 701 permits affiliates to sell their
Rule 701 shares under Rule 144 without complying with the holding period
requirements of Rule 144. Rule 701 further provides that non-affiliates may sell
these shares in reliance on Rule 144 without having to comply with the holding
period, public information, volume limitation or notice provisions of Rule 144.
All holders of Rule 701 shares are required to wait until 90 days after the date
of this prospectus before selling those shares. However, all shares issued under
Rule 701 are subject to lock-up agreements and will only become eligible for
sale when the 180-day lock-up agreements expire.
REGISTRATION RIGHTS
Upon completion of this offering, the holders of 8,033,117 shares of common
stock, or their transferees, will have the right, exercisable under specific
circumstances, to register those shares under the Securities Act. If these
shares are registered, they will be freely tradable without restriction under
the Securities Act.
STOCK OPTIONS
We intend to file one or more registration statements on Form S-8 under the
Securities Act to register approximately 3,156,406 shares of common stock issued
under our stock option and employee stock purchase plans. These registration
statements are expected to be filed soon after the date of this prospectus and
will automatically become effective upon filing. Shares registered under these
registration statements will be available for sale in the open market, unless
the shares are subject to vesting restrictions with iManage or the lock-up
restrictions described above.
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<PAGE> 71
UNDERWRITING
The underwriters named below have entered into an underwriting agreement
with us to purchase the number of shares of common stock listed opposite their
names below. The underwriters are obligated to purchase and pay for all the
shares listed below if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ----------
<S> <C>
BancBoston Robertson Stephens Inc. ......................... 1,815,000
U.S. Bancorp Piper Jaffray Inc. ............................ 990,000
C.E. Unterberg, Towbin...................................... 495,000
Brean Murray & Co., Inc. ................................... 75,000
E*TRADE Securities, Inc. ................................... 75,000
Legg Mason Wood Walker, Incorporated........................ 75,000
H.C. Wainwright & Co., Inc. ................................ 75,000
----------
Total............................................. 3,600,000
==========
</TABLE>
The underwriters initially propose to offer the shares of common stock
directly to the public at the initial public offering price presented on the
cover page of this prospectus. Any shares sold by the underwriters to securities
dealers may be sold at a discount of up to $0.47 per share from the initial
public offering price. The underwriters may allow, and the dealers may re-allow,
to other dealers a discount of up to $0.10 per share from the initial public
offering price. After the initial offering of the common stock, the public
offering price and other selling terms may be changed by the representatives of
the underwriters at any time without notice. The underwriters do not intend to
confirm sales to any accounts over which they exercise discretionary authority.
Over-Allotment Option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 540,000 additional shares of common stock at the same price per
share as we will receive for the 3,600,000 shares that the underwriters have
agreed to purchase. To the extent this option is exercised, each of the
underwriters will become obligated, subject to various conditions, to purchase
approximately the same percentage of these additional shares that the number of
shares of common stock to be purchased by it shown in the above table represents
as a percentage of the 3,600,000 shares in this offering. If purchased, these
additional shares will be sold by the underwriters on the same terms as those on
which the 3,600,000 shares are being sold.
Qualified Independent Underwriter. The offering is being conducted under
Rule 2720 of the National Association of Securities Dealers, Inc. which provides
that when an NASD member firm participates in the offering of equity securities
of a company with whom the member has a conflict of interest, the initial public
offering price can be no higher than that recommended by a qualified independent
underwriter. C.E. Unterberg, Towbin is considered to have a conflict of interest
because some entities affiliated with C.E. Unterberg, Towbin own more than 10%
of our capital stock. BancBoston Robertson Stephens is serving as the qualified
independent underwriter in the offering and will recommend a price in compliance
with the requirements of Rule 2720. BancBoston Robertson Stephens has performed
due diligence investigations and reviewed and participated in the preparation of
the prospectus and the registration statement of which this prospectus forms a
part. BancBoston Robertson Stephens will receive no additional compensation in
its capacity as the qualified independent underwriter.
Indemnification. The underwriting agreement contains covenants of indemnity
among the underwriters and us against specified civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Lock-Up Agreement. Each of our officers, directors and substantially all
security holders have agreed with the representatives and us, for a period of
180 days after the effective date of this
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<PAGE> 72
prospectus, not to dispose of or hedge any shares of common stock, or securities
convertible into or exchangeable for shares of common stock, now owned or later
acquired by them without the prior written consent of BancBoston Robertson
Stephens. BancBoston Robertson Stephens may, in its sole discretion and at any
time without notice, release all or any portion of the securities subject to
lock-up agreements. All of the shares of common stock subject to the lock-up
agreements will be eligible for sale in the public market upon the expiration of
the lock-up agreements, subject to holding period, volume limitations and other
conditions of Rule 144.
Future Sales. In addition, we have agreed that for 180 days following the
effective date of this prospectus, we will not, without the prior written
consent of BancBoston Robertson Stephens, dispose of or hedge any shares of
common stock, or any securities convertible into, exercisable for or
exchangeable for shares of common stock. However, the following are examples of
exceptions to this agreement:
- sale of shares in this offering;
- the issuance of common stock upon the exercise of outstanding options;
- our issuance of options or shares under existing stock option or stock
purchase plans; and
- issuances of stock in connection with acquisitions.
No Prior Public Market. Before this offering, there was no public market
for our common stock. Consequently, the initial public offering price for the
common stock in this offering was determined through negotiations among us and
the representatives of the underwriters. The factors considered in these
negotiations included prevailing market conditions, our financial information,
the market valuation of other companies that we and the representatives believe
to be comparable to us, estimates of our business potential and the business
potential of the industry in which we compete, an assessment of our management,
our past and present operation and the prospects for our future revenues.
Stabilization. The representatives have advised us that, based on
Regulation M under the Exchange Act, some persons participating in this offering
may engage in any of the following transactions:
- stabilizing bid, a bid for or the purchase of common stock on behalf of
the underwriters that is intended to fix or maintain the price of the
common stock;
- syndicate covering transaction, a bid for the purchase of common stock on
behalf of the underwriters to reduce a short position incurred by the
underwriters in connection with the offering; and
- penalty bid, an arrangement that permits the representatives to reclaim
the selling concession otherwise accruing to an underwriter or syndicate
member in connection with the offering if the common stock originally
sold by the underwriter or syndicate member is purchased by the
representatives in a syndicate covering transaction, and has therefore
not been effectively placed by this underwriter or syndicate member.
These transactions may be effected on the Nasdaq National Market and, if
commenced, may be discontinued at any time.
Internet Distribution. A copy of the prospectus in electronic format will
be made available on the internet web site hosted by E*TRADE Securities, Inc.
E*TRADE will accept conditional offers to purchase shares from all of its
customers that pass and complete an online eligibility profile. If the demand
for shares from the customers of E*TRADE exceeds the amount of shares allocated
to it, E*TRADE will use a random allocation methodology to distribute shares in
even lots of 100 shares/customer. E*TRADE will provide customers a period after
effectiveness and pricing during which they will continue to have the right to
cancel their conditional offers. E*TRADE will cancel its existing book of
conditional offers and resolicit new conditional offers or have customers
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<PAGE> 73
reconfirm their existing conditional offers if the offering is priced outside
the anticipated price range indicated in the preliminary prospectus.
Directed Shares. The underwriters have reserved for sale at the initial
public offering price up to 5% of the common stock in this offering for
individuals designated by us who have expressed an interest in purchasing shares
of common stock in this offering. The number of shares available for sale to the
general public will be reduced to the extent these persons purchase the reserved
shares. The underwriters will offer any reserved shares not so purchased to the
general public on the same basis as other shares in this offering described
above.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Gray Cary Ware & Freidenrich LLP, Palo Alto, California. Various
legal matters in connection with this offering will be passed upon for the
underwriters by Brobeck, Phleger & Harrison LLP, Palo Alto, California. As of
September 30, 1999, an investment partnership and an associate attorney at Gray
Cary Ware & Freidenrich LLP beneficially owned an aggregate of 61,402 shares of
our common stock. Gary Cary is one of our customers.
EXPERTS
The financial statements as of December 31, 1997 and 1998 and for each of
the three years in the period ended December 31, 1998 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act that registers the shares of our common stock to be sold in this
offering. The registration statement, including the attached exhibits and
schedules, contain additional relevant information about us and our capital
stock. The rules and regulations of the SEC allow us to omit various information
included in the registration statement from this document.
In addition, upon completion of this offering, we will become subject to
the reporting and information requirements of the Exchange Act and, as a result,
will file periodic reports, proxy statements and other information with the SEC.
You may read and copy this information at the following public reference rooms
of the SEC:
<TABLE>
<S> <C> <C>
450 Fifth Street, N.W. 7 World Trade Center 500 West Madison Street
Room 1024 Suite 1300 Suite 1400
Washington, D.C. 20549 New York, NY 10048 Chicago, IL 60661-2511
</TABLE>
You may also obtain copies of this information by mail from the public
reference section of the SEC, 450 Fifth St., N.W., Room 1024, Washington, D.C.
20549, at prescribed rates. You may obtain information on the operation of the
public reference rooms by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an internet website that contains reports, proxy
statements and other information about issuers, like iManage, who file
electronically with the SEC. The address of that website is http://www.sec.gov.
We intend to furnish our stockholders with annual reports containing
audited financial statements, and make available to our stockholders quarterly
reports for the first three quarters of each fiscal year containing unaudited
interim financial information.
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IMANAGE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Equity.......................... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 75
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of iManage, Inc. (formerly NetRight Technologies, Inc.)
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of iManage, Inc. (formerly NetRight
Technologies, Inc.) at December 31, 1997 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
August 20, 1999, except as to
Note 10, which is as of August 30, 1999
F-2
<PAGE> 76
IMANAGE, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------ SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1999 1999
------- ------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,789 $ 7,617 $ 9,587
Short-term investments.................................... -- -- 5,493
Trade accounts receivable, net of allowance for doubtful
accounts of $75 in 1997, $175 in 1998 and $193 at
September 30, 1999...................................... 1,124 4,194 3,916
Other current assets...................................... 101 443 201
------- ------- -------
Total current assets................................ 3,014 12,254 19,197
Property and equipment, net................................. 237 483 1,479
Other assets................................................ 9 758 874
------- ------- -------
Total assets........................................ $ 3,260 $13,495 $21,550
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 188 $ 595 $ 859
Accrued liabilities....................................... 347 2,190 1,882
Advances from stockholders................................ 69 -- --
Equipment line of credit, current portion................. -- -- 194
Deferred revenue.......................................... 670 3,350 8,855
------- ------- -------
Total current liabilities........................... 1,274 6,135 11,790
Equipment line of credit, less current portion.............. -- -- 1,806
------- ------- -------
Total liabilities................................... 1,274 6,135 13,596
------- ------- -------
Commitments (Note 4)
Stockholders' Equity:
Preferred stock; $0.001 par value; authorized: 8,154
shares; issued and outstanding: 4,128 shares in 1997,
8,033 shares in 1998, 8,033 shares at September 30, 1999
and zero shares pro forma (Liquidation value:
$11,207)................................................ 4 8 8 $ --
Common stock, $0.001 par value; authorized: 20,000,000
shares; issued and outstanding: 6,516 shares in 1997,
8,198 shares in 1998, 9,815 shares at September 30, 1999
and 17,848 shares pro forma............................. 6 7 10 18
Additional paid-in capital................................ 6,810 15,679 22,497 22,497
Deferred stock-based compensation......................... (482) (770) (3,934) (3,934)
Notes receivable for common stock......................... -- (372) (1,002) (1,002)
Accumulated deficit....................................... (4,352) (7,192) (9,625) (9,625)
------- ------- ------- -------
Total stockholders' equity.......................... 1,986 7,360 7,954 $ 7,954
------- ------- ------- =======
Total liabilities and stockholders' equity.......... $ 3,260 $13,495 $21,550
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 77
IMANAGE, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------- --------------------
1996 1997 1998 1998 1999
------ ------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Licenses.................................. $ 70 $ 1,172 $ 6,509 $ 4,044 $ 9,750
Support and services.................... 4 358 1,232 766 2,954
------ ------- ------- ------- -------
Total revenues....................... 74 1,530 7,741 4,810 12,704
------ ------- ------- ------- -------
Cost of revenues:
Licenses................................ 4 136 414 $ 261 $ 538
Support and services.................... 38 163 1,213 789 1,858
------ ------- ------- ------- -------
Total cost of revenues............... 42 299 1,627 1,050 2,396
------ ------- ------- ------- -------
Gross profit.............................. 32 1,231 6,114 3,760 10,308
Operating expenses:
Sales and marketing..................... 335 1,120 4,393 3,010 5,818
Research and development................ 113 935 2,351 1,653 2,931
General and administrative.............. 272 706 1,295 908 1,527
Stock-based compensation................ -- 2,079 1,054 812 2,768
------ ------- ------- ------- -------
Total operating expenses............. 720 4,840 9,093 6,383 13,044
------ ------- ------- ------- -------
Loss from operations...................... (688) (3,609) (2,979) (2,623) (2,736)
Interest income........................... -- 22 153 71 382
Interest expense.......................... (4) (9) (14) (10) (50)
------ ------- ------- ------- -------
Loss before provision for income taxes.... (692) (3,596) (2,840) (2,562) (2,404)
------ ------- ------- ------- -------
Provision for income taxes................ -- -- -- -- 29
------ ------- ------- ------- -------
Net loss.................................. $ (692) $(3,596) $(2,840) $(2,562) $(2,433)
====== ======= ======= ======= =======
Net loss per share -- basic and diluted... $(0.12) $ (0.57) $ (0.38) $ (0.35) $ (0.29)
====== ======= ======= ======= =======
Shares used in net loss per share -- basic
and diluted............................. 6,004 6,292 7,455 7,363 8,386
====== ======= ======= ======= =======
Pro forma net loss per share -- basic and
diluted (unaudited)..................... $ (0.21) $ (0.15)
======= =======
Shares used in pro forma net loss per
share -- basic and diluted
(unaudited)............................. 13,489 16,419
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 78
iMANAGE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED FOR
--------------- --------------- PAID-IN STOCK-BASED COMMON ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STOCK DEFICIT TOTAL
------ ------ ------ ------ ---------- ------------ ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1996.... -- $ -- 6,000 $ 6 $ 75 $ -- $ -- $ (64) $ 17
Issuance of Series A
preferred stock, net of
issuance costs of $5......... 886 1 -- -- 624 -- -- -- 625
Issuance of common stock..... -- -- 291 -- 20 -- -- -- 20
Capital contributed from
stockholders................ -- -- -- -- 120 -- -- -- 120
Net loss..................... -- -- -- -- -- -- -- (692) (692)
----- ---- ----- --- ------- ------- ------- ------- -------
Balances, December 31,
1996........................ 886 1 6,291 6 839 -- -- (756) 90
Issuance of Series A
preferred stock, net of
issuance costs of $17....... 1,968 2 -- -- 1,377 -- -- -- 1,379
Issuance of Series B
preferred stock, net of
issuance costs of $11....... 1,274 1 -- -- 1,988 -- -- -- 1,989
Exercise of common stock
options..................... -- -- 225 -- 45 -- -- -- 45
Options issued in exchange
for services................ -- -- -- -- 47 -- -- -- 47
Deferred stock-based
compensation................ -- -- -- -- 2,368 (2,368) -- -- --
Amortization of deferred
stock-based compensation.... -- -- -- -- -- 1,951 -- -- 1,951
Deferred non-employee
stock-based compensation.... -- -- -- -- 146 (146) -- -- --
Amortization of non-employee
stock-based compensation.... -- -- -- -- -- 81 -- -- 81
Net loss..................... -- -- -- -- -- -- -- (3,596) (3,596)
----- ---- ----- --- ------- ------- ------- ------- -------
Balances, December 31,
1997........................ 4,128 4 6,516 6 6,810 (482) -- (4,352) 1,986
Issuance of Series B
Preferred Stock, net of
issuance costs of $17....... 1,926 2 -- -- 3,005 -- -- -- 3,007
Issuance of Series C
preferred stock, net of
issuance costs of $4........ 1,879 2 -- -- 3,941 -- -- -- 3,943
Issuance of Series C
preferred stock to prepay
rent........................ 100 -- -- -- 210 -- -- -- 210
Exercise of common stock
options..................... -- -- 1,682 1 371 -- (372) -- --
Options issued in exchange
for services................ -- -- -- -- 89 -- -- -- 89
Deferred stock-based
compensation................ -- -- -- -- 1,204 (1,204) -- -- --
Amortization of deferred
stock-based compensation.... -- -- -- -- -- 866 -- -- 866
Deferred non-employee
stock-based compensation.... -- -- -- -- 49 (49) -- -- --
Amortization of non-employee
stock-based compensation.... -- -- -- -- -- 99 -- -- 99
Net loss..................... -- -- -- -- -- -- -- (2,840) (2,840)
----- ---- ----- --- ------- ------- ------- ------- -------
Balances, December 31,
1998........................ 8,033 8 8,198 7 15,679 (770) (372) (7,192) 7,360
Exercise of common stock
options..................... -- -- 1,617 3 886 -- (630) -- 259
Options issued in exchange
for services................ -- -- -- -- 208 -- -- -- 208
Deferred stock-based
compensation................ -- -- -- -- 5,710 (5,710) -- -- --
Amortization of deferred
stock-based compensation.... -- -- -- -- -- 2,532 -- -- 2,532
Deferred non-employee
stock-based compensation.... -- -- -- -- 14 (14) -- -- --
Amortization of non-employee
stock-based compensation.... -- -- -- -- -- 28 -- -- 28
Net loss..................... -- -- -- -- -- -- -- (2,433) (2,433)
----- ---- ----- --- ------- ------- ------- ------- -------
Balances, September 30,
1999........................ 8,033 $ 8 9,815 $10 $22,497 $(3,934) $(1,002) $(9,625) $ 7,954
===== ==== ===== === ======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 79
IMANAGE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ------------------
1996 1997 1998 1998 1999
----- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(692) $(3,596) $(2,840) $(2,562) $(2,433)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization........................... 19 61 313 127 366
Amortization of prepaid rent............................ -- -- 12 -- 212
Amortization of deferred stock-based compensation....... -- 2,032 965 766 2,560
Stock issued for services............................... -- 47 89 47 208
Provision for doubtful accounts......................... 10 65 100 124 18
Changes in operating assets and liabilities:
Trade accounts receivable............................. (79) (1,170) (3,195) (4,761) 259
Accounts payable...................................... 178 6 407 241 264
Accrued liabilities................................... 80 284 1,868 1,310 (307)
Deferred revenue...................................... 81 589 2,680 3,870 5,505
Other assets.......................................... (9) (99) (1,021) (103) (87)
----- ------- ------- ------- -------
Net cash (used in) provided by operating
activities....................................... (412) (1,781) (622) (941) 6,565
----- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (59) (192) (431) (359) (1,362)
Purchases of short-term investments....................... -- -- -- -- (5,492)
----- ------- ------- ------- -------
Net cash used in investing activities.............. (59) (192) (431) (359) (6,854)
----- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) advances and loans from
stockholders............................................ 55 (10) (69) (69) --
Proceeds from equipment line of credit.................... -- -- -- -- 2,000
Contributed capital....................................... 120 -- -- -- --
Issuance of common stock, net............................. 20 45 -- -- 259
Issuance of preferred stock, net.......................... 625 3,368 6,950 6,950 --
----- ------- ------- ------- -------
Net cash provided by financing activities.......... 820 3,403 6,881 6,881 2,259
----- ------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 349 1,430 5,828 5,581 1,970
Cash and cash equivalents at beginning of period............ 10 359 1,789 1,789 7,617
----- ------- ------- ------- -------
Cash and cash equivalents at end of period.................. $ 359 $ 1,789 $ 7,617 $ 7,370 $ 9,587
===== ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ -- $ 2 $ 17
===== ======= =======
Cash paid for income taxes................................ $ $ 3 $ 2
===== ======= =======
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES:
Issuance of common stock in exchange for notes
receivable.............................................. $ -- $ -- $ 372 $ 300 $ 630
===== ======= ======= ======= =======
Issuance of Series C preferred stock to prepay rent....... $ -- $ -- $ 210 $ -- --
===== ======= ======= ======= =======
Deferred stock based compensation......................... $ -- $ 2,514 $ 1,253 $ 933 $ 5,724
===== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 80
IMANAGE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND NATURE OF OPERATIONS:
NATURE OF OPERATIONS
iManage, Inc. (formerly NetRight Technologies, Inc.) (the "Company")
supplies e-business content and collaboration management software that provides
organizations with a web-based unified content platform that enables them to
manage, organize and deliver information in a centralized manner throughout the
extended enterprise. The Company markets and sells its software and services
primarily through its direct sales organization, resellers and system
integrators in the United States and Canada and through distributors in the
United Kingdom and Australia. In 1996, 1997, 1998 and the nine month period
ended September 30, 1999, 87%, 58%, 55%, and 69% of revenues, respectively, were
through resellers. The Company's license and support and services revenues to
date have substantially been derived from the sale of iManage's suite of
products, including iManage infoCommerce Server, iManage infoLink, iManage
infoLook and iManage infoRite, to customers primarily located in the United
States.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
UNAUDITED INTERIM RESULTS
The accompanying interim financial statements for the nine month period
ended September 30, 1998 and 1999, together with the related notes, are
unaudited. The unaudited interim financial statements have been prepared on the
same basis as the financial statements for 1996, 1997 and 1998 and, in the
opinion of management, reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly the Company's financial
position at September 30, 1999 and its results of operations and its cash flows
for the nine month period ended September 30, 1998 and 1999 and its changes in
stockholders' equity for the nine month period ended September 30, 1999.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS
Cash equivalents represent commercial paper, money market funds, cash and
time deposits with original or remaining maturities at the date of purchase of
three months or less. The carrying amounts reported for cash and cash
equivalents are considered to approximate fair values based upon the short
maturities of those financial instruments.
Short-term investments are classified as available for sale and have
maturities of one year or less as of the date of the balance sheet. The carrying
amount of the Company's short term investments, which comprise commercial paper
and corporate debt obligations, approximates fair value. Realized gains and
losses on short-term investments are calculated using the specific
identification method. There were no realized gains and losses in 1998 and no
unrealized holding gains and losses at December 31, 1998. Realized gains and
losses in the nine month period ended September 30, 1999 and unrealized holding
gains and losses at September 30, 1999 were not significant.
F-7
<PAGE> 81
IMANAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The carrying amounts of certain of the Company's other financial
instruments including accounts receivable, accounts payable and accrued expenses
approximate fair value due to their short maturities. The carrying amounts of
notes payable under the equipment line of credit approximates fair value based
on the terms of similar borrowing arrangements available to the Company.
CERTAIN RISKS AND CONCENTRATIONS
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents,
short-term investments and accounts receivable. The Company maintains
substantially all of its cash and cash equivalent balances and short-term
investments with two major financial institutions domiciled in the United
States. The Company performs ongoing credit evaluations of its customers,
generally does not require collateral of its customers and maintains allowances
for potential credit losses.
Three customers accounted for 40% of trade accounts receivable at December
31, 1997. Two different customers accounted for 33% of trade accounts receivable
at December 31, 1998. A sixth customer accounted for 16% of trade accounts
receivable at September 30, 1999. Four customers accounted for 67% of the
Company's total revenues for 1996. There were no customers that accounted for
more than 10% of revenues for 1997 and 1998 or for the nine month period ended
September 30, 1999, respectively. Additionally, 58%, 84%, 89% and 94% of the
Company's revenues for the years ended December 31, 1996, 1997 and 1998 and the
nine month period ended September 30, 1999 were derived from law firms.
The Company relies on software licensed from third parties, including
software that is integrated with internally developed software and used in the
Company's products to perform key functions. The functionality of the Company's
products, therefore, depends on its ability to integrate these third party
technologies into its products.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight-line method over estimated useful lives of three years. Depreciation
for leasehold improvements is recorded using the straight-line method over the
lesser of the estimated useful lives of the assets or the lease term, generally
three years. Upon sale or retirement of assets, cost and related accumulated
depreciation are removed from the balance sheet and the resulting gain or loss
is reflected in operations.
LONG-LIVED ASSETS
The Company reviews property and equipment for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability is measured by comparison of its carrying
amount to future net cash flows the assets are expected to generate. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
projected discounted future cash flows arising from the asset.
SOFTWARE DEVELOPMENT COSTS
Costs related to research and development of new software products are
charged to research and development expenses as incurred. Software development
costs are capitalized beginning when a product's technological feasibility has
been established, which to date has been when the Company
F-8
<PAGE> 82
IMANAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
has a working model of the software, and ending, when a product is available for
general release to customers. Substantially all development costs are incurred
prior to establishing a working model. As a result, the Company has not
capitalized any software development costs since such costs have not been
significant.
REVENUE RECOGNITION
The Company's revenues are derived from two sources as follows: (i)
software license revenue, derived primarily from product sales on a per server
and per user basis, including software modules, to end users, resellers, systems
integrators and distributors and (ii) support and services revenue, derived
primarily from providing customer support and software updates and training and
consulting services to end users. The Company adopted the provisions of
Statement of Position 97-2, or SOP 97-2, "Software Revenue Recognition," as
amended by Statement of Position 98-4, "Deferral of the Effective Date of
Certain Provisions of SOP 97-2," effective January 1, 1998. SOP 97-2 supersedes
Statement of Position 91-1, "Software Revenue Recognition," and delineates the
accounting for software license and support and services revenues. Under SOP
97-2, the Company recognizes license revenues upon shipment of a product master,
which allows the customer to make the number of copies specified in the contract
if a signed contract exists, the fee is fixed and determinable, collection of
resulting receivables is probable and product returns are reasonably estimable
and, if applicable, acceptance criteria have been met. Provisions for estimated
warranty costs and sales returns are recorded at the time of shipment.
For contracts with multiple obligations (e.g. deliverable and undeliverable
products, support and other services), the Company allocates revenues to the
undelivered element of the contract based on objective evidence of its fair
value. This objective evidence is the sales price of the element when sold
separately by the Company. The Company generally does not allow the right of
return but has accepted returns in isolated instances when resellers, system
integrators and distributors have incorrectly ordered product. The Company
recognizes revenues allocated to undelivered products when the criteria for
license revenues set forth above are met. The Company recognizes support and
services revenues, including amounts allocated from contracts with multiple
obligations and for ongoing customer support, ratably over the period of the
support contract. The Company's support and service arrangements entitle
customers to telephone support and unspecified upgrades and enhancements.
Payments for support and services are generally made in advance and are
non-refundable. For revenues allocated to training and consulting services or
derived from the separate sales of these services, the Company recognizes
revenues as the related services are performed.
Through 1997, the Company recognized license revenues upon shipment if
remaining obligations were insignificant, collection of the resulting receivable
was probable and if applicable, acceptance criteria were met. Provisions for
estimated warranty costs, estimated sales returns and insignificant vendor
obligations were recorded at the time products were shipped. Service and support
revenues, including revenues allocated from contracts including software
licenses, were recognized ratably over the period of the service and support
agreements. Training and consulting revenues were recognized as the related
services were performed.
As of December 31, 1998 and September 30, 1999, deferred revenue included
advance payments received for support and services and license revenues received
or due under the terms of the contracts for which customer acceptance had not
been received or vendor specific objective evidence was not available for
elements of the contracts.
F-9
<PAGE> 83
IMANAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES
Income taxes are accounted for using the liability method under which
deferred tax assets and liabilities are determined based on differences between
the financial statement and tax bases of assets and liabilities using enacted
tax rates in effect for the period in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
From October 10, 1995 to December 26, 1996, the Company was organized as a
S corporation, which is a conduit entity for income tax purposes. Subsequent to
December 26, 1996, the Company was organized as a C corporation and was
therefore liable for income taxes.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25 or APB 25,
"Accounting for Stock Issued to Employees" and has elected to adopt the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123, or SFAS 123, "Accounting for Stock-Based Compensation."
ADVERTISING
The Company expenses advertising costs as incurred. During 1996, 1997 and
1998, the Company incurred $83,000, $88,000 and $286,000 of advertising cost,
respectively.
SEGMENTS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, or SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company operates in one disclosable
segment, using one measurement of profitability for its business. Although the
Company has sales outside the United States, such sales are not significant. All
long-lived assets are maintained in the United States.
COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. There were no differences between net loss for 1996,
1997 and 1998 and the nine month period ended September 30, 1998 and 1999 and
comprehensive loss for each of these periods.
INTERNAL USE SOFTWARE COSTS
Effective January 1, 1999, the Company adopted Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Through December 31, 1998 and September 30, 1999, the Company has
not incurred any costs which would be required to be capitalized under the
provisions of this standard.
START-UP COSTS
Effective January 1, 1999, the Company adopted the provisions of Statement
of Position 98-5, or SOP 98-5, "Reporting on the Costs of Start-Up Activities."
The adoption of SOP 98-5 had no
F-10
<PAGE> 84
IMANAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
impact on the Company's financial statements as the Company has expensed all
costs of start-up activities and organizational costs as incurred.
NET LOSS PER SHARE
Basic net loss per share is computed based on the weighted average number
of shares outstanding during the period. Diluted net loss per share is also
computed based on the weighted average number of shares outstanding during the
period. Diluted net loss per share does not include the weighted average effect
of dilutive potential common shares including convertible preferred stock,
options to purchase common stock and common stock subject to repurchase in any
period presented because the effect is antidilutive.
The following table presents information necessary to reconcile basic and
diluted net loss per common and common equivalent share (in thousands):
<TABLE>
<CAPTION>
NINE MONTH PERIOD
ENDED SEPTEMBER 30,
-------------------
1996 1997 1998 1998 1999
------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss................................................. $ (692) $ (3,596) $ (2,840) $(2,562) $(2,433)
Shares used in net loss per share -- basic and diluted... 6,004 6,292 7,455 7,363 8,386
------- -------- -------- ------- -------
Net loss per share -- basic and diluted.................. $ (0.12) $ (0.57) $ (0.38) $ (0.35) $ (0.29)
======= ======== ======== ======= =======
Anti-Dilutive Securities:
Convertible preferred stock............................ 886 4,128 8,033 7,933 8,033
Options to purchase common stock....................... -- 2,174 1,602 1,572 1,077
Common stock subject to repurchase..................... -- 150 428 347 763
------- -------- -------- ------- -------
886 6,452 10,063 9,852 9,873
======= ======== ======== ======= =======
</TABLE>
PRO FORMA NET LOSS PER SHARE AND PRO FORMA STOCKHOLDERS' EQUITY (UNAUDITED)
Pro forma basic and diluted net loss per common share has been computed as
described above and also gives effect to weighted average common equivalent
shares from preferred stock that will automatically convert upon the closing of
the Company's initial public offering using the as-if-converted method for 1998
and the nine month period ended September 30, 1999.
A reconciliation of the numerator and denominator used in the calculation
of pro forma basic and diluted net loss per common share follows (in thousands
except per share data):
<TABLE>
<CAPTION>
NINE MONTH
PERIOD ENDED
SEPTEMBER 30,
1998 1999
------- -------------
<S> <C> <C>
Net loss.................................................... $(2,840) $(2,433)
------- -------
Shares used in net loss per common share, basic and
diluted..................................................... 7,455 8,386
Adjustments to reflect the effect of the assumed conversion
of the preferred stock.................................... 6,034 8,033
------- -------
Shares used in pro forma net loss per common share, basic
and diluted............................................... 13,489 16,419
------- -------
Pro forma net loss per common share, basic and diluted...... $ (0.21) $ (0.15)
======= =======
</TABLE>
F-11
<PAGE> 85
IMANAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
If the offering contemplated by this prospectus is consummated, all of the
convertible preferred stock outstanding as of the closing date will
automatically be converted into an aggregate of approximately 8,033,000 shares
of common stock, based on the shares of convertible preferred stock outstanding
at September 30, 1999. Unaudited pro forma stockholders' equity at September 30,
1999, as adjusted for the conversion of convertible preferred stock, is
disclosed on the balance sheet.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1998, AcSEC released Statement of Position 98-9 or SOP 98-9,
Modification of SOP 97-2, "Software Revenue Recognition." SOP 98-9 amends SOP
97-2 to require that an entity recognize revenue for multiple element
arrangements by means of the "residual method" when (1) there is no
vendor-specific objective evidence ("VSOE") of the fair values of all the
undelivered elements that are not accounted for by means of long-term contract
accounting, (2) VSOE of fair value does not exist for one or more of the
delivered elements, and (3) all revenue recognition criteria of SOP 97-2 (other
than the requirement for VSOE of the fair value of each delivered element) are
satisfied. The provisions of SOP No. 98-9 that extend the deferral of certain
paragraphs of SOP 97-2 became effective December 15, 1998. These paragraphs of
SOP 97-2 and SOP 98-9 will be effective for transactions that are entered into
in fiscal years beginning after March 15, 1999. Retroactive application is
prohibited. The Company is currently evaluating the impact of the requirements
of SOP 98-9 and the effects, if any, on its current revenue recognition
policies.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities. SFAS
133 requires that all derivatives be recognized at fair value in the statement
of financial position, and that the corresponding gains or losses be reported
either in the statement of operations or as a component of comprehensive income,
depending on the type of hedging relationship that exists. In July, 1999, the
Financial Accounting Standard Boards issued SFAS No. 137, or "SFAS 137,"
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of SFAS No. 133." SFAS 137 deferred the effective date of SFAS
133 until the first fiscal quarter beginning after June 15, 2000. The Company
does not currently hold derivative instruments or engage in hedging activities.
The Company is continuing to evaluate the impact of the requirements of SFAS No.
133 and SFAS No. 137 will have on its financial statements and related
disclosures.
F-12
<PAGE> 86
IMANAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- BALANCE SHEET ACCOUNTS:
FINANCIAL INSTRUMENTS:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1997 1998
-------------------- --------------------
COST FAIR VALUE COST FAIR VALUE
------ ----------- ------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CASH AND CASH EQUIVALENTS
Cash................................................ $ -- $ -- $ 57 $ 57
Time deposits....................................... 1,789 1,789 4,842 4,842
Money market........................................ -- -- 2,718 2,718
Commercial paper.................................... -- -- -- --
------ ------ ------ ------
$1,789 $1,789 $7,617 $7,617
====== ====== ====== ======
</TABLE>
PROPERTY AND EQUIPMENT, NET:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1998
----- -----
(IN THOUSANDS)
<S> <C> <C>
Furniture and fixtures...................................... $ 64 $198
Computer software and equipment............................. 253 550
Leasehold improvements...................................... -- --
---- ----
317 748
Less accumulated depreciation............................... 80 265
---- ----
$237 $483
==== ====
</TABLE>
Depreciation expense was $19,000, $60,000 and $185,000 for 1996, 1997 and
1998, respectively.
OTHER ASSETS:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1998
----- -----
(IN THOUSANDS)
<S> <C> <C>
Technology licenses......................................... $-- $725
Less accumulated amortization............................... -- (128)
-- ----
-- 597
-- ----
Other assets................................................ 9 161
-- ----
$9 $758
== ====
</TABLE>
In 1998, the Company entered into technology license agreements including
non-cancelable minimum payments. The present value of payments under these
agreements is recorded as an asset and amortized over the terms of the
agreements (generally three years) as the technological feasibility had been
established for the product, which included the technology.
F-13
<PAGE> 87
IMANAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ACCRUED LIABILITIES:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1998
---- ------
(IN THOUSANDS)
<S> <C> <C>
Technology licenses......................................... $ 50 $ 425
Payroll and related......................................... 198 1,276
Other....................................................... 99 489
---- ------
$347 $2,190
==== ======
</TABLE>
NOTE 4 -- COMMITMENTS:
The Company leases its office facilities in San Mateo, California and
Chicago, Illinois under non-cancelable operating leases which expire on December
31, 2001 and April 30, 2004, respectively.
Under the terms of the San Mateo lease, the Company issued 100,000 shares
of series C preferred stock in lieu of future rental payments (see Note 6). In
addition, the lease has two one year options to extend upon six months written
notice to the landlord.
Under the terms of the Chicago lease, there is an option to extend the term
of the lease for 5 years.
Future minimum payments under the non-cancelable operating leases as of
December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING
---------
<S> <C>
YEAR
1999........................................................ $ 556
2000...................................................... 546
2001...................................................... 567
2002...................................................... 145
2003...................................................... 153
and thereafter............................................ 425
------
$2,392
======
</TABLE>
Rent expense was $30,000, $111,000 and $216,000 for 1996, 1997 and 1998,
respectively. See Note 8 for sublease income received.
NOTE 5 -- LINE OF CREDIT AGREEMENT:
In March 1999, the Company entered into a line of credit agreement with a
bank, comprised of a revolving line of credit and an equipment line of credit.
The line of credit agreement, which is collateralized by substantially all of
the Company's assets, intangible assets and intellectual property, includes
covenant restrictions requiring the Company to maintain certain minimum
financial ratios and profitability levels and limits the Company's ability to
declare and pay dividends. The Company was in violation of the profitability
covenant at June 30, 1999 and received a waiver and an amendment of certain
covenants from its bank. The Company was in compliance with these covenants at
September 30, 1999.
F-14
<PAGE> 88
IMANAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The revolving line of credit provides for borrowings of up to $5,000,000,
which can be used at the discretion of the Company through March 31, 2000.
Borrowings are limited to the lesser of 80% of eligible accounts receivable or
$5,000,000, bear interest at prime plus 0.25% and are due at March 31, 2000. At
September 30, 1999, no amounts have been drawn against this facility.
The equipment line of credit, which bears interest at prime plus 0.50%,
provides for borrowings of up to $2,000,000 to finance the Company's purchases
of property and equipment. At September 30, 1999, $2,000,000 has been drawn
against this facility. Principal repayment begins in February 2000 and continues
through February 2002 in equal monthly installments of principal and interest.
Principal payments due under the facility as of September 30, 1999 are as
follows (in thousands):
<TABLE>
<S> <C>
THREE MONTH PERIOD ENDING DECEMBER 31, 1999................. $ --
YEAR ENDING DECEMBER 31,
2000...................................................... 612
2001...................................................... 666
2002...................................................... 666
2003...................................................... 56
------
$2,000
======
</TABLE>
NOTE 6 -- STOCKHOLDERS' EQUITY:
CONVERTIBLE PREFERRED STOCK
At December 31, 1998 and September 30, 1999, the amounts, terms and value
of series A convertible ("series A"), series B convertible ("series B") and
series C convertible ("series C") preferred stock are as follows (in thousands):
<TABLE>
<CAPTION>
COMMON
STOCK
ISSUED AND NET RESERVED FOR
SERIES AUTHORIZED OUTSTANDING PROCEEDS CONVERSION
------ ---------- ----------- -------- ------------
<S> <C> <C> <C> <C>
A....................... 2,854 2,854 $ 2,004 2,854
B....................... 3,200 3,200 4,996 3,200
C....................... 2,100 1,979 4,153 1,979
----- ----- ------- -----
8,154 8,033 $11,153 8,033
===== ===== ======= =====
</TABLE>
Other rights, privileges and preferences of series A, series B and series C
preferred stock are as follows:
VOTING RIGHTS
Holders of series A, series B and series C preferred stock are entitled to
one vote for each share of common stock into which each share of preferred stock
could be converted. The holders of the outstanding shares of series A, series B
and series C preferred stock shall vote with the holders of the common stock
upon the election of directors. The consent of the holders of a majority of the
preferred stock, voting together as a single class, shall be required for any
action that (i) amends or repeals any provision of the Company's Certificate of
Incorporation if such action would materially
F-15
<PAGE> 89
IMANAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
and adversely change the rights, preferences or privileges of a class of
preferred stock; (ii) authorizes or issues shares of any class of stock having
any preference or priority as to dividends or assets superior to or on a parity
with a class of the preferred stock; (iii) pays or declares any dividends on any
junior securities; (iv) authorizes a merger, sale of substantially all the
assets of the Company, recapitalization or reorganization of the Company.
DIVIDENDS
The holders of series A, series B and series C preferred stock are entitled
to receive noncumulative dividends as and when declared by the Board of
Directors, prior and in preference to any declaration or payment of any dividend
on the common stock of the Company. The dividends shall be at the rate of 10% of
the series A, series B and series C preferred stock per share liquidation
preference per annum. No dividends have been declared as of December 31, 1998
and September 30, 1999.
CONVERSION RIGHTS
Shares of series A, series B and series C preferred stock are convertible
into common stock at the option of the holder, or automatically upon a public
offering with proceeds of at least $12,000,000 and at an offering price of at
least $5.00 per share, or upon the election of the holders of a majority of the
then outstanding shares of series A, series B and series C preferred stock
voting together or separately as a class. Each share of preferred stock shall be
convertible into the number of fully paid and non-assessable shares of common
stock, which results from dividing the purchase price per share for each series
of preferred stock into the per share conversion price applicable to each series
at the time of conversion. The conversion price per share is subject to
adjustments for the issuance of additional shares to other than employees,
contractors or members of the Board of Directors at a price less than the
conversion price. The purchase price and initial conversion price per share of
series A, series B and series C preferred stock is $0.71, $1.57 and $2.10,
respectively. As of December 31, 1998 and September 30, 1999, each outstanding
share of preferred stock is convertible into one share of common stock.
LIQUIDATION
In the event of liquidation or sale of the Company, holders of shares of
series A, series B and series C preferred stock are entitled to receive in
preference over common stockholders, an amount of $0.71, $1.57 and $2.10, per
share, respectively, including any declared but unpaid dividends. After the
payment of the applicable liquidation preference to the holders of the series A,
series B and series C preferred stock, the remaining assets are to be
distributed to the holders of series A and series C preferred and common stock,
until the series A preferred stockholders have received an additional amount
equal to $1.42 per share and the series C preferred stockholders have received
an additional amount equal to $1.05 per share. Thereafter, any remaining assets
shall be distributed ratably to the holders of common stock.
OTHER RIGHTS
The holders of series A, series B and series C preferred stock have certain
piggy-back and demand registration rights which terminate six years after an
initial public offering by the Company. The holders of preferred stock have the
right in the event the Company proposes to offer equity securities to any person
to purchase a portion of the shares so as to maintain their percentage ownership
of preferred stock. The holders of preferred stock also have the right of first
refusal on a
F-16
<PAGE> 90
IMANAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
pro rata basis with respect to sales by the founders of shares of the Company's
common stock. These rights terminate upon an initial public offering by the
Company.
ISSUANCE OF PREFERRED STOCK IN EXCHANGE FOR RENT
In November 1998, the Company issued 100,000 shares of series C preferred
stock in conjunction with an office lease agreement. The Company determined the
fair value of the stock was $210,000, which was the price paid per share by the
third party investors for the series C preferred stock in November 1998
multiplied by the number of shares issued. This amount has been recorded as
prepaid rent and is being amortized on a straight-line basis over the term of
the lease. As of December 31, 1998 and September 30, 1999, approximately
$216,000 and zero, respectively, representing the unamortized portion of prepaid
rent, are included in other current assets.
COMMON STOCK
Each share of common stock has the right to one vote. The holders of common
stock are also entitled to receive dividends whenever funds are legally
available and when declared by the Board of Directors, subject to prior rights
of holders of all classes of stock outstanding having priority rights as to
dividends. No dividends have been declared or paid on the Company's common stock
as of December 31, 1998 or September 30, 1999.
At December 31, 1997 and 1998 and September 30, 1999, 150,000, 428,000 and
763,000 outstanding shares of common stock were subject to the Company's right
of repurchase at the shares' original issuance price, respectively. Weighted
average original issuance price of these shares was $0.20 per share and the
Company's right to repurchase these shares lapses ratably over periods through
September 2003.
STOCK OPTION PLAN
The Company has reserved 5,000,000 shares of common stock for issuance
under the 1997 Stock Incentive Plan (the "Plan"). Under the Plan, the Board of
Directors may issue incentive stock options to employees and nonqualified stock
options to consultants or nonemployee directors of the Company, and stock
purchase rights to employees or nonemployee directors of, or consultants to, the
Company. The Board of Directors has the authority to determine to whom options
will be granted, the number of shares, the term and exercise price, which cannot
be less than fair market value at date of grant for incentive stock options or
85% of fair market value for nonqualified stock options. If an employee owns
stock representing more than 10% of the outstanding shares, the price of each
share shall be at least 110% of fair market value, as determined by the Board of
Directors. The options vest and are exercisable at times and increments as
specified by the Board of Directors, and expire ten years from date of grant.
Options granted under the Plan generally vest and become exercisable 25% one
year after the date of the optionholders' date of employment and thereafter
ratably over three years.
F-17
<PAGE> 91
IMANAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Activity under the Plan does not include options to purchase 180,000 shares
of common stock granted outside the plan in 1998 and is as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE NUMBER OF EXERCISE EXERCISE
FOR GRANT SHARES PRICE PRICE
--------- --------- ------------- --------
<S> <C> <C> <C> <C>
Shares reserved at plan inception.............. 3,600
Options granted................................ (2,401) 2,401 $ 0.20 $0.20
Options exercised.............................. (225) 0.20 0.20
Options canceled............................... 2 (2) 0.20 0.20
------ ------
Balances, December 31, 1997.................... 1,201 2,174 0.20 0.20
Additional shares reserved..................... 400 -- -- --
Options granted................................ (967) 967 0.30 - 0.40 0.32
Options exercised.............................. -- (1,502) 0.20 0.20
Options canceled............................... 19 (19) 0.20 - 0.30 0.28
------ ------
Balances, December 31, 1998.................... 653 1,620 0.20 - 0.40 0.27
Additional shares reserved..................... 2,000 -- -- --
Options granted................................ (1,125) 1,125 0.60 - 4.50 1.37
Options exercised.............................. -- (1,617) 0.20 - 1.65 0.54
Options canceled............................... 51 (51) 0.30 - 1.50 0.81
------ ------
Balances, September 30, 1999................... 1,579 1,077 $0.20 - $4.50 $1.00
====== ====== ============= =====
</TABLE>
The options outstanding and currently exercisable by exercise price at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS CURRENTLY
- ------------------------------------------------ EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE AVERAGE
EXERCISE SHARES CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE IN YEARS PRICE EXERCISABLE PRICE
- -------- ----------- ------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.20 668,000 8.5 $0.20 465,000 $0.20
$0.30 759,000 9.5 $0.30 233,000 $0.30
$0.40 193,000 9.9 $0.40 77,000 $0.40
--------- -------
1,620,000 9.1 $0.27 775,000 $0.24
========= =======
</TABLE>
At December 31, 1997, options to purchase 1,152,000 shares of the Company's
common stock were exercisable at a weighted average exercise price of $0.20 per
share.
During 1998, the Company granted options to purchase 180,000 shares of the
Company's common stock at an exercise price of $0.40 per share to an officer of
the Company, which were issued outside the terms of the Plan and were
immediately exercisable. The weighted average fair value of these options was
$1.80 per common stock option. Shares issued upon exercise of these options,
however, are subject to the Company's right of repurchase, which lapse as to 25%
of the shares one and two years from the date of grant for 150,000 and 30,000
shares, respectively and thereafter, ratably over three years. The options
expire ten years from the date of grant. During
F-18
<PAGE> 92
IMANAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
November 1998 and as permitted by the option agreement, these options were
exercised in exchange for a full recourse note receivable from the officer
totaling $72,000 due November 12, 2002.
In September 1998, two other non-officer employees exercised options issued
under the Plan to purchase 1,500,000 shares of the Company's common stock at
$0.20 per share in exchange for full recourse notes receivable totaling $300,000
that are payable in equal installments through September 1, 2001. These notes
receivable bear interest at 4.5% to 4.83% per annum.
In April and May 1999, an officer of the Company exercised options to
purchase approximately 178,000 and 127,000 common shares, respectively, in
exchange for two full recourse notes receivable of approximately $53,000 and
$39,000, respectively. These notes receivable are due in March and May 2003 and
bear interest at 4.71% and 4.83%, respectively.
In March 1999, a non-officer of the Company exercised options to purchase
172,000 common shares in exchange for a full recourse note receivable of
approximately $34,000, which is due in March 2003 and bears interest at 4.57%.
In July 1999, two officers of the Company exercised options to purchase
230,000 and 180,000 shares of common stock, respectively, in exchange for full
recourse notes receivable of approximately $207,000 and $297,000, respectively.
These notes receivable are due in July 2003 and July 2001 and bear interest at
5.22% and 4.90%, respectively. Additionally, three non-officers exercised
options to purchase common shares in exchange for full recourse notes receivable
totaling approximately $100,000. These notes receivable are due in July through
August 2003 and bear interest at rates ranging between 5.22% and 5.37%.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure only provision of SFAS 123. Had
compensation cost been determined for options issued under the Plan and outside
the Plan based on the fair value of the options at the grant date for awards in
1997 and 1998 consistent with the provisions of SFAS 123, the Company's net loss
would have been increased to the pro forma amounts indicated below (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Net loss:
As reported................................................. $(3,596) $(2,840)
======= =======
Pro forma................................................. $(3,686) $(2,882)
======= =======
Net loss per share -- basic and diluted as reported......... $ (0.57) $ (0.38)
======= =======
Net loss per share -- basic and diluted pro-forma........... $ (0.59) $ (0.39)
======= =======
</TABLE>
As the provisions of SFAS 123 have only been applied to stock options
granted since the Plan's inception in 1997, the impact of the pro forma stock
compensation cost will likely continue to increase as the vesting period for the
Company's options and the period over which the stock compensation is charged to
expense is generally four to five years.
F-19
<PAGE> 93
IMANAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The estimated weighted average minimum value of options granted during 1997
and 1998 was $0.05 and $0.06 per share, respectively. The minimum value of each
option grant is estimated on the date of grant using the minimum value method
with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1997 1998
-------- ----------
<S> <C> <C>
Expected life of option..................................... 5 years 5 years
Risk-free interest rate..................................... 5.66% 4.96%
Dividend yield.............................................. 0% 0%
</TABLE>
DEFERRED STOCK COMPENSATION
During 1997 and 1998 and the nine month period ended September 30, 1999,
the Company issued options to purchase its common stock to certain employees
totaling 2,401,000, 967,000 and 1,127,000, respectively under the Plan and
outside the Plan with weighted average exercise prices of $0.20, $0.32 and $1.40
per share, respectively, which are below the deemed fair value of the Company's
common stock at the date of grant. The weighted average deemed fair value of the
underlying common stock was $1.26, $1.47 and $6.61 in 1997 and 1998, and the
nine month period ended September 30, 1999, respectively. In accordance with the
requirements of APB 25, the Company has recorded deferred stock based
compensation for the difference between the exercise price of the stock options
and the deemed fair value of the Company's stock at the date of grant. This
deferred compensation is amortized to expense over the period during which the
Company's right to repurchase the stock lapses or options become exercisable,
generally four or five years consistent with the method described in FASB
Interpretation No. 28. At December 31, 1998, the Company had recorded deferred
compensation related to these options in an amount of $3,572,000, of which
$1,951,000 and $866,000 had been amortized to expense during 1997 and 1998,
respectively. In the nine month period ended September 30, 1999, an additional
$5,710,000 in deferred compensation was recorded for continuing option grants to
employees with exercise prices below the deemed fair value. Also during this
period, the Company amortized $2,532,000 of this deferred stock based
compensation.
Future compensation expense from options granted through September 30, 1999
is estimated to be $775,000, $2,022,000, $811,000, $297,000 and $29,000 for the
remainder of 1999, 2000, 2001, 2002 and 2003, respectively.
DEFERRED NON-EMPLOYEE STOCK-BASED COMPENSATION
In November 1997, the Company granted 165,000 options to purchase common
stock at an exercise price of $0.20 per share to various non-employee engineers
for consulting services, when the deemed fair market value of the Company's
common stock was $1.26 per share. Approximately 40,000 of these options were
100% vested upon grant and were valued at $47,000 using the Black-Scholes
pricing model with the following assumptions: 10 year term, 55% volatility,
5.73% discount rate and 0% dividend rate. This $47,000 was expensed immediately
as these options related to services provided prior to the grant date. The
remaining options were 50% vested at the grant date with the other 50% vesting
monthly over the next two years. Accordingly, these shares were valued under the
Black-Scholes pricing model with the same assumptions as those above at
$146,000, which was amortized in accordance with the vesting terms. Subsequent
to the initial valuation, these remaining options have been accounted for under
variable accounting, which requires that the fair value of the options be
remeasured at each balance sheet date using the Black-Scholes pricing model.
F-20
<PAGE> 94
IMANAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
An additional $10,000 and $3,000 in deferred compensation has been recorded in
1998 and the nine month period ended September 30, 1999, respectively, related
to these options.
In 1998, the Company granted approximately 76,000 options to purchase
common stock at exercise prices ranging between $0.30 and $0.40 per share to
various non-employee engineers for consulting services, when the deemed fair
market value of the Company's common stock ranged from $1.30 to $1.90 per share.
Approximately 51,000 of these options were 100% vested upon grant and were
valued at a total of $89,000 using the Black-Scholes pricing model with the
following assumptions: 5 - 10 year terms, 55% volatility, 5.73% discount rate
and 0% dividend rate. This $89,000 was expensed immediately as these options
related to services provided prior to the grant date. The remaining options were
50% vested at the grant date with the other 50% vesting monthly over the next
two years. Accordingly, these shares were valued under the Black-Scholes pricing
model with the same assumptions as those above at $39,000, which was amortized
in accordance with the vesting terms. Subsequent to the initial valuation, these
remaining options have been accounted for under variable accounting, which
requires their fair value to be remeasured at each balance sheet date using the
Black-Scholes pricing model. An additional $11,000 in deferred compensation has
been recorded in the nine month period ended September 30, 1999 related to these
options.
In the first nine months of 1999, the Company granted options to purchase
common stock at exercise prices ranging from $0.60 to $1.50 per share to various
non-employee engineers for consulting services, when the deemed fair market
value of the Company's common stock ranged from $4.29 to $7.41 per share. These
options were 100% vested upon grant and were valued at a total of $208,000 using
the Black-Scholes pricing model with the following assumptions: 10 year terms,
55% volatility, 5.73% discount rate and 0% dividend rate. This $208,000 was
expensed immediately as these options related to services provided prior to the
grant date.
NOTE 7 -- INCOME TAXES:
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets are as followed (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1998
----- -------
<S> <C> <C>
Net operating loss carryforwards............................ $ 521 $ 991
Deferred compensation....................................... 53 140
Depreciation................................................ 5 64
Allowance for doubtful accounts............................. 47 87
Accrued liabilities......................................... 23 265
Research and development credit............................. 62 195
----- -------
Total deferred tax assets................................... 711 1,742
Less valuation allowance.................................... (711) (1,742)
----- -------
Net deferred tax asset.................................... $ -- $ --
===== =======
</TABLE>
The valuation allowance increased by $683,000 and $1,031,000 for 1997 and
1998, respectively.
Due to uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has placed a valuation allowance
against its deferred tax assets. At such time as it is determined that it is
more likely than not that the deferred tax assets are realizable, the valuation
allowance will be reduced.
F-21
<PAGE> 95
IMANAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The principal items accounting for the difference between income tax
benefit at the U.S. statutory rate and the provision for income taxes reflected
in the statement of operations are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate...................................... 34% 34% 34%
State taxes................................................. 6 6 5
Tax credits................................................. -- 2 5
Other....................................................... -- -- 4
Deferred compensation....................................... -- (22) (12)
Net operating losses and tax credits, not benefited......... (40) (20) (36)
--- --- ---
--% --% --%
=== === ===
</TABLE>
At December 31, 1998, the Company has federal and state net operating loss
carryforwards of approximately $2,579,000 and $2,276,000 available to reduce
future taxable income, which expire through 2002 and 2018, respectively. In
addition, the Company has research and development tax credit carryforwards of
approximately $136,000 for federal income tax purposes and $88,000 for Illinois
purposes at December 31, 1998, which expire in 2012 to 2018.
Pursuant to the provisions of Section 382 of the Internal Revenue Code,
utilization of the NOLs are subject to annual limitations due to a greater than
50% change in the ownership of the Company which occurred during 1997 and 1998.
NOTE 8 -- RELATED PARTY TRANSACTIONS:
In 1995 and 1996, the Company borrowed a total of $29,000 from one of its
stockholders for working capital purposes at a 10% interest rate and received
advances from another stockholder totaling $50,000. Such notes and advances and
the related accrued interest were repaid $10,000 in 1997 and $69,000 in 1998.
One of the founders and shareholders of the Company is the owner of a
consulting company which subleased space to the Company and provided other
services including accounting and payroll assistance and employee recruitment in
1997 and 1998. In addition, Company reimbursed the consulting company for
certain travel expenses and janitorial services incurred on its behalf and for
the use of certain assets in 1997 and 1998.
In 1999, the Company subleased office space to this consulting company.
Additionally, the Company hired certain of the consulting company's consultants
to provide software development services in 1999.
Amounts included in net loss which were paid, received or due to or from
this related party are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Sublease rent expense....................................... $18 $ 45 $ 54
Sublease rent income........................................ -- -- --
Consulting and other service expense........................ 70 284 467
</TABLE>
F-22
<PAGE> 96
IMANAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The total amounts of related party receivable and payables in other assets
and accounts payable at period end are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1998
---- ----
<S> <C> <C>
Receivables................................................. $-- $--
Payables.................................................... 27 --
</TABLE>
NOTE 9 -- 401(k) PLAN
The Company sponsors an employee savings and retirement plan intended to
qualify under section 401(k) of the Internal Revenue Code. Eligible employees,
at least 21 years old and having completed 1 hour of service, may contribute up
to 20% of eligible compensation, subject to annual limitations, and are fully
vested in their own contributions. The Company is not permitted to make matching
contributions, but can make discretionary contributions. To date, no such
discretionary contributions have been made by the Company.
NOTE 10 -- SUBSEQUENT EVENTS
On August 30, 1999 the Board of Directors approved the initial public
offering of the Company's Common Stock resulting in gross proceeds of up to
$40,000,000. Additionally, the Board approved a change in the authorized shares
of common stock and preferred stock to 100,000,000 and 2,000,000, respectively.
This change is to be effective immediately prior to the effective date of the
contemplated public offering and after the anticipated conversion to common
stock of the outstanding preferred shares.
The Board also approved, subject to stockholder approval, an increase in
the number of authorized shares under the 1997 Stock Option Plan to 6,000,000,
with automatic annual increases beginning in 2001 of the lesser of (i) 1,200,000
shares, (ii) 5% of the outstanding common stock of the Company at the last day
of the preceding year, or (iii) a lesser amount as determined by the Board.
Additionally, automatic grants for non-employee directors were approved as
follows: (i) initial grants of options to purchase common shares to vest over
three years for any newly elected directors following the initial public
offering, and (ii) annual grants of options to purchase common stock to be
granted at the Company's annual meeting which will vest over one year.
Finally, the Board approved, subject to stockholder approval, the 1999
Employee Stock Purchase Plan ("Purchase Plan"). A total of 500,000 shares of
common stock has been reserved for issuance under the Purchase Plan, which is
subject to annual increases. The Purchase Plan allows for eligible employees to
purchase a limited number of shares of the Company's common stock at 85% of the
fair market value during certain plan-defined periods.
UNAUDITED SUBSEQUENT EVENTS
In November 1999, the Company purchased approximately 167,000 shares of
outstanding common stock back from an officer of the Company for approximately
$750,000. These shares will be recorded as treasury shares by the Company.
F-23
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