<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2000 or
(TM) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to __________________
COMMISSION FILE NUMBER 0-28041
---------------
iMANAGE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 36-4043595
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
</TABLE>
2121 SOUTH EL CAMINO REAL, SUITE 400, SAN MATEO, CALIFORNIA 94403
(Address of principal executive offices, zip code)
(650) 356-1166
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No (TM)
At November 14, 2000, there were 23,158,942 shares of the registrant's
common stock, $.001 par value, outstanding.
================================================================================
<PAGE> 2
iMANAGE, INC.
Table of Contents
<TABLE>
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets:
December 31, 1999 and September 30, 2000.......................................1
Condensed Consolidated Statements of Operations and Other Comprehensive Loss:
Three and Nine Months Ended September 30, 1999 and September 30, 2000..........2
Condensed Consolidated Statements of Cash Flows:
Nine Months Ended September 30, 1999 and September 30, 2000....................3
Notes to Condensed Consolidated Financial Statements.................................4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......7
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................18
PART II OTHER INFORMATION
Item 3. Defaults Upon Senior Securities...........................................................20
Item 6. Exhibits and Reports on Form 8-K..........................................................20
SIGNATURES.........................................................................................21
</TABLE>
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
iMANAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------- -------------
1999 2000
----------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................................ $ 47,985 $ 24,480
Short-term investments ........................................................... 3,028 14,975
Trade accounts receivable, net ................................................... 5,704 7,710
Other current assets ............................................................. 831 2,673
-------- --------
Total current assets .................................................... 57,548 49,838
Property and equipment, net ......................................................... 1,913 3,309
Long-term investments ............................................................... 3,223 5,567
Goodwill and other intangible assets ................................................ -- 14,630
Other assets ........................................................................ 1,237 1,934
-------- --------
Total assets ............................................................ $ 63,921 $ 75,278
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................. $ 1,627 $ 365
Accrued liabilities .............................................................. 2,398 2,795
Bank lines of credit, current portion ............................................ 612 4,791
Deferred revenue ................................................................. 9,068 8,101
-------- --------
Total current liabilities ............................................... 13,705 16,052
Bank lines of credit, less current portion .......................................... 1,388 1,110
-------- --------
Total liabilities ....................................................... 15,093 17,162
-------- --------
Commitments
Stockholders' Equity:
Common stock and additional paid-in capital ...................................... 63,885 75,584
Deferred stock-based compensation ................................................ (4,046) (2,290)
Notes receivable for common stock ................................................ (1,002) (712)
Accumulated other comprehensive gain (loss) ...................................... (42) 59
Accumulated deficit .............................................................. (9,967) (14,525)
-------- --------
Total stockholders' equity .............................................. 48,828 58,116
-------- --------
Total liabilities and stockholders' equity .............................. $ 63,921 $ 75,278
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
1
<PAGE> 4
iMANAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
OTHER COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Licenses ...................................................................... $ 3,591 $ 3,574 $ 9,750 $ 15,291
Support and services .......................................................... 1,239 2,799 2,954 6,703
-------- -------- -------- --------
Total revenues ........................................................ 4,830 6,373 12,704 21,994
-------- -------- -------- --------
Cost of revenues:
Licenses ...................................................................... 211 248 538 854
Support and services (inclusive of stock-based compensation expense of
$65 and $21 for the three months ended September 30, 1999 and 2000,
respectively, and $95 and $112 for the nine months ended September 30,
1999 and 2000, respectively) .................................................. 750 1,305 1,953 3,522
-------- -------- -------- --------
Total cost of revenues ................................................ 961 1,553 2,491 4,376
-------- -------- -------- --------
Gross profit ...................................................................... 3,869 4,820 10,213 17,618
-------- -------- -------- --------
Operating expenses:
Sales and marketing (inclusive of stock-based compensation expense of
$450 and $294 for the three months ended September 30, 1999 and 2000,
respectively, and $1,900 and $1,137 for the nine months ended September
30, 1999 and 2000, respectively) .............................................. 2,591 4,244 7,718 12,722
Research and development (inclusive of stock-based compensation expense of
$164 and $209 for the three months ended September 30, 1999 and 2000,
respectively, and $338 and $505 for the nine months ended September 30, 1999
and 2000, respectively) ....................................................... 1,211 2,438 3,269 6,038
General and administrative (inclusive of stock-based compensation expense of
$98 and $50 for the three months ended September 30, 1999 and 2000,
respectively, and $435 and $275 the nine months ended September 30, 1999 and
2000, respectively) ........................................................... 687 997 1,962 3,042
Amortization of goodwill and other intangibles ................................ -- 2,120 -- 2,330
-------- -------- -------- --------
Total operating expenses .............................................. 4,489 9,799 12,949 24,132
-------- -------- -------- --------
Loss from operations .............................................................. (620) (4,979) (2,736) (6,514)
Interest income ................................................................... 178 610 382 2,172
Interest expense .................................................................. (32) (83) (50) (183)
Other expense ..................................................................... -- (29) -- (13)
-------- -------- -------- --------
Loss before provision for income taxes ............................................ (474) (4,481) (2,404) (4,538)
-------- -------- -------- --------
Provision for income taxes ........................................................ 25 (48) 29 20
-------- -------- -------- --------
Net loss .......................................................................... $ (499) $ (4,433) (2,433) $ (4,558)
-------- -------- -------- --------
Other comprehensive loss: ......................................................... -- (122) -- (101)
-------- -------- -------- --------
Comprehensive loss ................................................................ $ (499) $ (4,555) $ (2,433) $ (4,659)
======== ======== ======== ========
Net loss per share -- basic and diluted ........................................... $ (0.06) $ (0.19) $ (0.29) $ (0.21)
======== ======== ======== ========
Shares used in net loss per share -- basic and diluted ............................ 8,929 22,764 8,386 21,859
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
2
<PAGE> 5
iMANAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 2000
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................................................... $ (2,433) $ (4,558)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization .............................................................. 578 1,121
Amortization of goodwill and other intangibles ............................................. -- 2,330
Amortization of deferred stock-based compensation .......................................... 2,560 2,029
Stock issued for services .................................................................. 208 --
Provision for doubtful accounts ............................................................ 18 205
Changes in operating assets and liabilities (in 2000, net of effects of acquisitions):
Trade accounts receivable ............................................................. 259 (2,211)
Other current assets .................................................................. -- (574)
Other assets .......................................................................... (87) (1,965)
Accounts payable ...................................................................... 264 (1,262)
Accrued liabilities ................................................................... (307) 397
Deferred revenue ...................................................................... 5,505 (967)
-------- --------
Net cash provided by (used in) operating activities ............................... 6,565 (5,455)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .......................................................... (1,362) (2,517)
Purchases of investments, net ................................................................ (5,492) (14,190)
Acquisition of business, net of cash acquired ................................................ -- (6,140)
-------- --------
Net cash used in investing activities ............................................. (6,854) (22,847)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of equipment line of credit ........................................................ -- (278)
Proceeds from bank lines of credit ........................................................... 2,000 4,179
Repayment of note receivable ................................................................. -- 290
Issuance of common stock, net ................................................................ 259 135
Stock based compensation from ESPP purchase .................................................. -- 564
Payment for additional initial public offering expenses ...................................... -- (93)
-------- --------
Net cash provided by financing activities ......................................... 2,259 4,797
-------- --------
Net increase (decrease) in cash and cash equivalents ......................................... 1,970 (23,505)
Cash and cash equivalents at beginning of period ............................................. 7,617 47,985
-------- --------
Cash and cash equivalents at end of period ................................................... $ 9,587 $ 24,480
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest ....................................................................... $ 50 $ 183
======== ========
Cash paid for income taxes ................................................................... $ 29 $ 70
======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES:
Issuance of common stock in exchange for notes receivable .................................... $ 630 $ --
======== ========
Issuance of common stock for business acquisition ............................................ $ -- $ 11,036
======== ========
Deferred stock-based compensation ............................................................ $ 5,724 $ 273
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE> 6
iMANAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared by
iManage, Inc., a Delaware company, (the "Company"), pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in consolidated financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. However,
the Company believes that the disclosures are adequate to make the information
presented not misleading. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and the
notes included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
The balance sheet as of December 31, 1999 has been derived from audited
financial statements but does not include all disclosures required by generally
accepted accounting principles. Such disclosures are contained in our Annual
Report on Form 10-K.
The unaudited condensed consolidated financial statements reflect all
adjustments (which include only normal, recurring adjustments) that are, in the
opinion of management, necessary to state fairly the results for the periods
presented. The results for such periods are not necessarily indicative of the
results to be expected for the full year.
The preparation of condensed consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the condensed consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Certain amounts in the condensed consolidated financial statements as of
December 31, 1999 and for the nine months ended September 30, 1999, have been
reclassified to conform to the 2000 presentation.
NET LOSS PER SHARE
The following table presents information necessary to reconcile basic and
diluted net loss per common and common equivalent share (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss .................................... $ (499) $ (4,433) $ (2,433) $ (4,558)
Weighted average shares outstanding ......... 8,929 22,764 8,386 21,859
-------- -------- -------- --------
Net loss per share -- basic and diluted ..... $ (0.06) $ (0.19) $ (0.29) $ (0.21)
======== ======== ======== ========
Anti-Dilutive Securities:
Convertible preferred stock ............. 8,033 -- 8,033 --
Options to purchase common stock ........ 1,077 1,313 1,077 1,313
Common stock subject to repurchase ...... 763 459 763 565
-------- -------- -------- --------
9,873 1,772 9,873 1,878
======== ======== ======== ========
</TABLE>
4
<PAGE> 7
The weighted average exercise price of stock options outstanding was
$1.00 and $4.75 as of September 30, 1999 and 2000, respectively. The weighted
average repurchase price of unvested stock was $0.70 and $0.67 as of September
30, 1999 and 2000, respectively.
DEFERRED STOCK COMPENSATION
The Company uses the intrinsic value method of accounting for stock-based
compensation. Accordingly, no compensation cost is recognized for certain stock
options to purchase the Company's common stock when the exercise price exceeds
the fair value of the underlying common stock as of the grant date for each
stock option. With respect to the stock options granted since inception through
December 31, 1999, the Company recorded deferred stock compensation of $10.4
million for the difference at the grant date between the exercise price and the
fair value of the common stock underlying the options. In June 2000 the Company
granted stock options in connection with the ThoughtStar acquisition; the
Company recorded deferred compensation of $982,000 for the difference at the
grant date between the exercise price and the fair value of the common stock
underlying the options. These amounts are being amortized in accordance with
Financial Accounting Standards Board Interpretation No. 28 over the vesting
period of the individual options, generally 4 years.
LINE OF CREDIT AGREEMENT
In March 1999, the Company entered into lines of credit agreement with a
bank, comprised of a revolving line of credit and an equipment line of credit.
The line of credit agreement is collateralized by substantially all of the
Company's assets, intangible assets and intellectual property.
The revolving line of credit, as amended, provides for borrowings of up
to $4.0 million, which can be used at the discretion of the Company through
March 31, 2001. Borrowings bear interest at prime plus 0.25% and are due at
March 31, 2001. At September 30, 2000, approximately $3.0 million had been drawn
against this facility.
The equipment line of credit, as amended, bears interest at prime plus
0.50% and provides for borrowings of up to $4.0 million to finance the Company's
purchases of property and equipment. At September 30, 2000, $2.9 million had
been drawn against this facility.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, or FASB, 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 loss, 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 year beginning after June 15, 2000.
The Company does not currently hold derivative instruments or engage in hedging
activities. The Company is currently evaluating the impact SFAS 133 and SFAS 137
will have on its financial position and results of operations.
In December 1999, Staff Accounting Bulletin No. 101, or SAB 101, was
issued to summarize the Securities and Exchange Commission's (SEC) views in
applying generally accepted accounting principles to revenue recognition in
financial statements. On October 31, 2000, the SEC issued SAB 101, Revenue
Recognition in Financial Statement--Frequently Asked Questions (FAQ). SAB 101
becomes effective in the Company's quarter ended December 31, 2000. The Company
is currently evaluating the impact SAB 101 and the FAQ will have on its
financial position and results of operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, or FIN 44, "Accounting for Certain Transactions Involving
Stock Compensation an Interpretation of APB 25," which clarifies the application
of Opinion 25 for (a) the definition of an employee for purposes of applying
Opinion 25, (b) the criteria for determining whether a plan qualifies as a
non-compensatory plan, (c) the accounting consequence of various modifications
to the terms of a previously fixed stock option or award, and (d) the accounting
for an
5
<PAGE> 8
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000 but certain conclusions cover specific events that occur
after either December 15, 1998 or January 12, 2000. The adoption of the
provisions of FIN 44 did not have a material effect on our financial position
and results of operations.
RELATED PARTY TRANSACTIONS
One of the founders and principal stockholders of the Company is the
owner of a consulting company that subleased space from the Company and provided
other services including consulting and employee recruitment in 1999 and 2000.
In addition, the Company reimbursed the consulting company for certain travel
expenses and other services incurred on its behalf and for the use of certain
assets in 1999 and 2000. 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 or received from this
related party are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sublease rent income ........................ $ 21 $ 23 $ 63 $ 69
Consulting and other service expense ........ 187 101 489 380
</TABLE>
ACQUISITION
On June 21, 2000, the Company completed the acquisition of THOUGHTSTAR,
Inc. ("ThoughtStar"). The Company issued 1,006,717 shares of its common stock
with a fair market value of $11.0 million and paid cash consideration of $5.2
million for all of the outstanding stock of ThoughtStar, including additional
monies loaned prior to the completion of the merger and incurred transaction
costs consisting primarily of professional fees of $700,000, resulting in a
total purchase price of $16.9 million. The acquisition was accounted for as a
purchase business combination, which means that the purchase price was allocated
to the assets acquired and liabilities assumed based on the estimated fair
values at the date of acquisition. The results of operations of ThoughtStar have
been included with the Company's results of operations since June 21, 2000, the
date of acquisition.
The fair value of the assets of ThoughtStar was determined through
established valuation techniques used in the software industry. A summary of the
consideration exchanged for these assets is as follows (in thousands):
<TABLE>
<S> <C>
Total purchase price $16,961
=======
Assets acquired:
Purchased technology ......... $ 1,900
Assembled workforce .......... 400
Non-compete agreements ....... 400
Goodwill ..................... 14,261
-------
$16,961
=======
</TABLE>
Amounts allocated to goodwill, assembled work force and non-compete
agreements are amortized on a straight-line over basis two years. At September
30, 2000, accumulated amortization related to these items totaled $2,330,000.
6
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our 1999 Annual Report
on Form 10K and our condensed consolidated financial statements and related
notes appearing elsewhere in this report. This discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions.
The actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, such as those set
forth under "Factors That May Impact Future Results" and the risks discussed in
our other SEC filings, including our registration statement on Form S-1 declared
effective November 17, 1999 by the SEC (File No. 333-86353) and in our 1999
Annual Report on Form 10-K filed with the SEC.
OVERVIEW
We are a leading provider of e-business content and collaboration
software platforms and applications for enterprises engaged in information
commerce as part of their e-business strategy. The Company's products provide a
centralized web-based unified content platform for information and collaboration
management, both for internal use and for use across 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 930
customers for use by over 194,000 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 iManage infoCommerce Server and iManage infoRite, and 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 iManage infoLook in August 1999 and in the fourth quarter of 1999 we
released an enhanced version of iManage infoLink.
Through September 30, 2000, substantially all of our total revenues were
derived from licenses of the iManage suite of applications and related services.
Our license revenues are generally based on the number of users and servers and
can be licensed on either a perpetual or subscription license basis. 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.
In connection with our acquisition of Thoughtstar on June 21, 2000, we
recorded goodwill and intangibles of approximately $17.0 million, which is being
amortized to expense over its estimated useful life of two years. For the three
and nine month period ending September 30, 2000, we recognized approximately
$2,120,000 and $2,330,000 in expense, respectively. At September 30, 2000,
approximately $14.6 million remains to be amortized and will be charged to
operations through 2002.
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 119 as of
December 31, 1999 to 195 as of September 30, 2000. We will seek to hire
additional employees in the future. To achieve profitability, we will have to
increase our total revenues significantly. We cannot assure you that we will
ever attain or maintain profitability.
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.
7
<PAGE> 10
REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- % -------------------- %
1999 2000 CHANGE 1999 2000 CHANGE
------- ------- ------ ------- ------- ------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
License $ 3,591 $ 3,574 (0.5) $ 9,750 $15,291 56.8
Support and services 1,239 2,799 125.9 2,954 6,703 126.9
------- ------- ------- -------
Total revenues $ 4,830 $ 6,373 31.9 $12,704 $21,994 73.1
======= ======= ======= =======
</TABLE>
Sources of revenue as a percent of
total revenue
<TABLE>
<CAPTION>
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
License 74.3% 56.1% 76.7% 69.5%
Support and services 25.7% 43.9% 23.3% 30.5%
</TABLE>
License Revenues. Our license revenues decreased $0.02 million, or
(0.5)%, for the three months ended September 30, 2000 and increased $5.54
million, or 56.8%, for the nine months ended September 30, 2000 as compared to
the corresponding periods in 1999. The revenue for the three months ended
September 30, 2000 is relatively flat compared to the three months ending
September 30, 1999. The increase in the nine month period is primarily due to
increased market acceptance of our suite of products and increased prices for
these products.
Support and Services Revenues. Our support and services revenues
increased $1.6 million or 125.9% and $3.7 million, or 126.9%, for the three and
nine months ended September 30, 2000, respectively, as compared to the
corresponding periods in 1999. Support and services revenues consisted primarily
of customer support and, to a lesser extent, training and consulting services,
associated with the increasing license revenues during these periods. The
increase in absolute dollars in support and services revenues for the above
periods reflects the increasing customer installation base of iManage suite of
products.
COST OF REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ % ------------------ %
1999 2000 CHANGE 1999 2000 CHANGE
------ ------ ---- ------ ------ ------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
License $ 211 $ 248 17.5 $ 538 $ 854 58.7
Support and services 750 1,305 74.0 1,953 3,522 80.3
</TABLE>
Cost of revenues as a percent of
related revenue
<TABLE>
<CAPTION>
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
License 5.9% 6.9% 5.5% 5.6%
Support and services 60.5% 46.6% 66.1% 52.5%
</TABLE>
Cost of License Revenues. Cost of license revenues increased $37,000, or
17.5%, for the three months ended September 30, 2000 and $316,000, or 58.7%, for
the nine months ended September 30, 2000. The cost for the three months ended
September 30, 2000 is relatively flat compared to the corresponding period in
1999. The increase in the nine month period is primarily due to increased costs
of media associated with the increasing customer base as well as increasing
license revenues during this period.
Cost of Support and Services Revenues. Cost of support and services
revenues increased $555,000, or 74.0%, for the three months ended September 30,
2000, as compared to the same period in 1999, which is primarily due to $424,000
increase in personnel-related expenses and $55,000 in travel expenses. For the
nine months ended September 30, 2000 expenses increased 1.6 million, or 80.3%,
which resulted primarily from an increase of $341,000 in personnel-related
expenses and $119,000 from increases in technical support costs, an increase of
$157,000 in increased facilities-related overhead costs and an increase of
$434,000 in other overhead allocation. Cost of support and services revenues
also include stock-based
8
<PAGE> 11
compensation of $65,000 for the three months ended September, 30, 1999 and
$95,000 for the nine months ended September 30, 1999, and $21,000 and $112,000
for the respective periods in 2000.
OPERATING EXPENSES, INTEREST INCOME AND TAXES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- % ------------------ %
1999 2000 CHANGE 1999 2000 CHANGE
---- ---- ------ ---- ---- ------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Sales and marketing $ 2,591 $ 4,244 63.8 $7,718 $12,722 64.8
Research and development 1,211 2,438 101.3 3,269 6,038 84.7
General and administrative 687 997 45.1 1,962 3,042 55.0
Net interest and other expense 146 498 241.1 332 1,976 495.2
Provision for income taxes 25 (48) (292.0) 29 20 (31.0)
Amortization of goodwill and other intangibles -- 2,120 -- -- 2,330 --
</TABLE>
Operating expenses as a percent of
total revenues
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales and marketing 53.6% 66.6% 60.8% 57.8%
Research and development 25.1% 38.3% 25.7% 27.5%
General and administrative 14.2% 15.6% 15.4% 13.8%
Net interest and other expense 3.0% 7.8% 2.6% 9.0%
Provision for income taxes 0.5% (0.8%) 0.2% 0.1%
</TABLE>
Sales and Marketing. Sales and marketing expenses increased $1.7 million
for the three months ended September 30, 2000 and $5.0 million for the nine
months ended September 30, 2000 as compared to the corresponding periods in
1999. This increase primarily reflected investments in our sales and marketing
infrastructure, which included an increase of $2.2 million 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 32 as of September 30, 1999, and 69 as of September
30, 2000, representing an increase of 115.6%. For the nine months ended
September 30, 2000, the increase in sales and marketing expenses also reflected
an increase of $674,000 in travel and entertainment expenses, an increase of
$1.2 in public relations and trade show expenses, and an increase of $1.0
million in overhead allocation. Sales and marketing expenses also include
stock-based compensation of $450,000 for the three months ended September 30,
1999 and $1.9 million for the nine months ended September 30, 1999, and $294,000
and $1.1 million for the respective periods in 2000.
Research and Development. Research and development expenses increased
$1.2 and $2.8 million for the three and nine months ended September 30, 2000
as compared to the corresponding periods in 1999. This increase was 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 27 as of September 30,
1999, and 61 as of September 30, 2000, representing an increase of 126.0%.
Research and development expenses also include stock-based compensation of
$164,000 for the three months ended September 30, 1999 and $338,000 for the nine
months ended September 30, 1999, and $209,000 and $505,000 for the respective
periods in 2000.
General and Administrative. General and administrative expenses increased
$310,000 for the three months ended September 30, 2000 and $1.1 million for the
nine months ended September 30, 2000 as compared to the
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<PAGE> 12
corresponding periods in 1999. This increase was primarily the result of
increased personnel costs of $456,000 resulting from additional finance,
executive and administrative personnel and increases of $336,000 in professional
service costs, primarily accounting and legal, as a result of the Company
becoming subject to reporting and regulatory filing requirements following our
initial public offering in the fourth quarter of 1999, acquisition of
ThoughtStar and to support the growth of our business during these periods.
General and administrative expenses also include stock-based compensation of
$98,000 for the three months ended September 30, 1999 and $435,000 for the nine
months ended September 30, 1999, and $50,000 and $275,000 for the respective
periods in 2000.
Net Interest Income. Net interest income increased $352,000 and $1.6
million for the three and nine months ended September 30, 2000 as compared to
the corresponding periods in 1999, reflecting higher invested cash balances as a
result of proceeds received from our initial public offering in the fourth
quarter of 1999, which was invested for the full period ending September 30,
2000, offset by interest expense from our equipment line of credit.
Provision for Income Taxes. Income taxes are accounted for in accordance
with Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", which requires recognition of deferred tax liabilities and assets for
the expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the temporary difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized. The Company has only provided for
state income tax in certain states in which it has operations and does not have
net operating losses carry forwards. We will continue to evaluate on a quarterly
basis whether the deferred tax asset is recoverable.
LIQUIDITY AND CAPITAL RESOURCES
In November 1999 we completed the initial public offering of our common
stock and realized net proceeds from the offering of approximately $41.2
million. Prior to the offering, we had 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, 2000, we had cash, cash
equivalents and available for sale marketable securities of $45.0 million and
approximately $1.1 million of available borrowings under a line of credit.
Net cash provided by operating activities was $6.6 million for the nine
months ended September 30, 1999; $5.4 million was used by operating activities
for the nine months ended September 30, 2000. Cash used by operating activities
was primarily a result of payment of expenses associated with the Company's
initial public offering, which were reflected as liabilities at December 31,
1999 and offset by increases in accounts receivable as a result of increasing
revenues. Cash used by operations for the nine months 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 and goodwill resulting from the ThoughtStar acquisition.
Net cash used in investing activities totaled $6.9 million for the nine
months ended September 30, 1999 and $22.8 million for the nine months ended
September 30, 2000. Associated costs with the acquisition of ThoughtStar
included $5.9 million for the purchase of ThoughtStar and an additional $216,000
for related filing fees. Our property and equipment purchases largely consist of
computer hardware and software and furniture and fixtures for our increasing
employee base as well as for our management information systems. We anticipate
that we will experience an increase in our capital expenditures consistent with
our anticipated growth in operations, infrastructure and personnel. Our long
term marketable securities purchases largely consist of liquid U.S. government
treasury obligations and corporate short-term notes that mature between one and
two years.
Our financing activities provided $2.3 million and $4.8 million for the
nine months ended September 30, 1999 and 2000 respectively, and were primarily
related to proceeds from our bank lines of credit.
As of September 30, 2000, we had a revolving line of credit with a bank
for $4.0 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 $4.0 million and were secured by substantially all of our assets.
As of September 30, 2000, we have
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<PAGE> 13
borrowed approximately $3.0 million. In addition, as of September 30, 2000, we
had an equipment line of credit with a bank for $4.0 million, which bears
interest at the lending bank's prime rate plus 0.5%. As of September 30, 2000,
we had borrowed $2.9 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) maintain a quarterly minimum operating level requiring that we not
incur a net loss, as defined, greater than $1 million; and
(c) limit our ability to declare and pay dividends.
The net loss, as defined, is determined based upon our operating results,
excluding non-cash charges, such as amortization of goodwill, depreciation, and
stock-based compensation. For the quarter ended September 30, 2000, we were in
default of the covenant to maintain a quarterly minimum operating level;
however, the lending bank waived our default for that quarter. The bank's waiver
does not waive our compliance with the covenant for other dates.
We currently anticipate that the net proceeds of our initial public
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 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.
In June 1998, the Financial Accounting Standards Board, or FASB, 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 loss, 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 year beginning after June
15, 2000. The Company does not currently hold derivative instruments or engage
in hedging activities. The Company is currently evaluating the impact SFAS 133
and SFAS 137 will have on its financial position and results of operations.
In December 1999, Staff Accounting Bulletin No. 101, or SAB 101, was
issued to summarize the Security and Exchange Commission's (SEC) views in
applying generally accepted accounting principles to revenue recognition in
financial statements. On October 31, 2000 the SEC issued SAB 10, Revenue
Recognition in Financial Statements--Frequently Asked Questions (FAQ). SAB 101
becomes effective in the Company's quarter ended December 31, 2000. The Company
is currently evaluating the impact SAB 101 and the FAQ will have on its
financial position and results of operations.
FACTORS THAT MAY IMPACT FUTURE RESULTS
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 and lack of experience
with enterprise wide sales, 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
continue to successfully introduce new products and enhance our
existing product offerings;
- we need to expand our customer base beyond legal and other
professional service firms to include other businesses,
particularly large multi-national corporations, and sell
additional licenses and software products to our existing
customers; 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 independent software vendors,
information technology consultants, systems integrators, original
equipment manufacturers and others 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 $14.5 million as of
September 30, 2000 and may not be able to achieve profitability.
11
<PAGE> 14
Our failure to significantly increase our total revenues would seriously
harm our business and operating results. 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, as was the case noted in the
three months ended September 30, 2000.
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 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 further. 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.
Also, the adoption of our subscription licensing model, which requires
the recognition of license revenue over the term of the agreement, may result in
lower quarterly revenues in the period when the products were sold when compared
to quarters in which subscription licenses were not sold.
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 varies with our revenues.
Our revenues will decline significantly if the market does not continue
to accept our iManage suite of products.
In the nine months ending September 30, 1999 and September 30, 2000, we
derived substantially 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 a majority 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 customer, particularly large
multi-national corporations, we may not be able to grow our revenues consistent
with past growth rates and our operating results will suffer.
We derived 94% and 71% of our total revenues in the nine months ending
September 30, 1999 and September 30, 2000, respectively, from the sale of
licenses to law firms and professional service firms. We do not expect to see
any significant growth in these markets; therefore, 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 software
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<PAGE> 15
platform and applications. If we cannot license our products to customers in
other industries, our business could be significantly adversely affected.
We may be unable to penetrate additional markets and grow our revenues if
we do not successfully obtain leads or referrals from our marketing activities,
new partnerships, alliances and customers.
To increase sales of our e-business content and collaboration software
platform and applications and grow our total revenues, we will try to obtain
leads or referrals from our marketing activities, new partnerships and
alliances, and current customers. If we are not successful in these marketing
activities, 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 activities, including current relationships and the
willingness of our customers to provide us with these introductions, referrals
and leads. Our current customer relationships are not, and any future
relationships we establish may not, be exclusive arrangements and 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.
If the emerging market for e-business content and collaboration software
does not develop as quickly as we expect, our business will suffer.
The market for e-business content and collaboration software platform and
applications has only recently begun to develop, is rapidly evolving and will
likely have an increasing number of competitors. We cannot be certain that a
viable market for our products will emerge or be sustainable. If the e-business
content and collaboration software market fails to develop, or develops more
slowly than expected, demand for our products will be less than anticipated and
our business and operating results would be seriously harmed.
Furthermore, to be successful in this emerging market, we must be able to
differentiate our business from our competitors through our product and service
offerings and brand name recognition. We may not be successful in
differentiating our business or achieving widespread market acceptance of our
products and services. In addition, enterprises that have already invested
substantial resources in other methods of managing their content and
collaborative process may be reluctant or slow to adopt a new approach that may
replace, limit or compete with their existing systems.
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 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 nine months. We are finding that the sales cycle in the enterprise wide
market is lengthier than in our traditional legal and professional services
market. Thus, as we enter these multi-national corporations our sales cycle will
increase.
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.
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.
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<PAGE> 16
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 software solution. To provide this
comprehensive solution, we must continually develop and introduce high quality,
cost-effective products as well as product enhancements on a timely basis. If
the market does not accept our new products, our business will suffer and our
stock price will likely fall.
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
infoCommerce 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 software 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 software 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 independent test laboratories and we 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.
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, iManage infoCommerce Server runs on the Windows NT or
Windows 2000 platform. If a customer does not currently use these platforms and
does not choose to adopt these platforms, we will be unable to license our
products to this customer. Furthermore, some of our products do not yet 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.
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<PAGE> 17
Our software products are complex and may contain 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 enable collaboration;
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.
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 2004. 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
15
<PAGE> 18
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 enable collaborative 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
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 software 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 119 employees at December 31, 1999 to 195 employees at September 30, 2000.
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
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<PAGE> 19
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,
Europe, New Zealand and the United Kingdom. If our efforts 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.
The ThoughtStar acquisition presents risks to our business.
On June 21, 2000, we completed the acquisition of THOUGHTSTAR, Inc. This
acquisition could present the following risks:
- difficulties in the assimilation of acquired personnel,
operations, technologies or products of ThoughtStar;
- difficulty in retaining key personnel;
- the failure to realize the synergies and other perceived
advantages resulting from the acquisition;
- unanticipated costs associated with the acquisition;
- diversion of management's attention from our other business
concerns; and
- adverse effects on our existing business relationships with
suppliers and customers.
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 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. 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 to consummate that acquisition. Acquisition financing
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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.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY 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 substantially 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.
INTEREST RATE RISK
Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our investments are in
short-term instruments, including money market funds and commercial paper, and
long-term investments which mature between one and two years. Our interest
expense is also sensitive to changes in the general level of U.S. interest rates
because the interest rate charged varies with the prime rate. Due to the nature
of our investments, we believe that there is not a material risk exposure.
The table below presents the carrying value and related weighted average
interest rates by year of maturity of our investment portfolio.
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<TABLE>
<CAPTION>
2000 2001
---------------------- ----------------------
CARRYING AVERAGE CARRYING AVERAGE
VALUE INTEREST RATE VALUE INTEREST RATE
-------- ------------- -------- -------------
(in thousands, except interest rates)
<S> <C> <C> <C> <C>
Investment securities:
Cash equivalents $24,480 5.51% $ -- ---%
======= =======
Short-term investments $14,975 6.82% $45,022 6.82%
======= =======
Long-term investments $ 5,567 7.08% $ -- ---%
======= =======
Debt:
Bank Line of Credit $ 3,000 9.75% $ -- ---%
======= =======
Equipment Line of Credit $ 2,901 9.50% $ 1,110 9.50%
======= =======
</TABLE>
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PART II OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of September 30, 2000, we were party to a Loan and Security Agreement dated
March 31, 1999 between Silicon Valley Bank and the Company, which provided for a
revolving line of credit of $4.0 million and an equipment line of credit for
$4.0 million. As of September 30, 2000, approximately $3.0 million was
outstanding under the revolving line of credit and $2.9 million was outstanding
under the equipment line of credit.
The Agreement includes a covenant requiring us to maintain a quarterly minimum
operating level such that we not incur a net loss, as defined, of greater than
$1.0 million. The net loss, as defined, is determined based upon our operating
results, excluding non-cash charges, such as amortization of goodwill,
depreciation, and stock-based compensation. For the quarter ended September 30,
2000, we were in default of the covenant; however, the lending bank waived our
default for that quarter. The bank's waiver does not waive our compliance with
the covenant for other dates.
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Index to Exhibits on page 22 hereof. The exhibits listed in
the accompanying Index to Exhibits are filed as part of this report.
(b) Reports on Form 8-K
We filed a current report on Form 8-K with the Securities and
Exchange Commission on July 6, 2000 to report the consummation of our
merger with THOUGHTSTAR, Inc. We filed an amendment to this current
report on Form 8-K with the Securities and Exchange Commission on August
14, 2000 with the required financial information.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934 the Company has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Mateo,
County of San Mateo, State of California, on the 14th day of November 2000.
iMANAGE, INC.
By: /s/ MAHMOOD PANJWANI
-----------------------------------------
Mahmood Panjwani
President and Chief Executive Officer
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<PAGE> 24
iMANAGE, INC.
EXHIBITS
TO
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
3.1* Restated Certificate of Incorporation of iManage, Inc.
3.2* Amended and Restated Bylaws of iManage, Inc.
3.3** Charter Documents of iManage Limited.
3.4*** Charter Documents of iManage S.A.R.L.
4.1**** Rights Agreement dated December 27, 1996, as amended to date.
10.1* Form of Indemnification Agreement for directors and executive officers.
10.2* 1997 Stock Option Plan and forms of Incentive Stock Option Agreement and Nonstatutory Stock Option Agreement thereunder.
10.3* 1999 Employee Stock Purchase Plan and form of subscription agreement thereunder.
10.4*** Loan and Security Agreement dated March 31, 1999 between Silicon Valley Bank and the Company, as amended to date.
10.5** Office Lease for 2121 S. El Camino Real, San Mateo, California between Cornerstone Properties I, LLC and the Company
dated November 30, 1998, as amended to date.
10.6* Office Building Lease for 55 East Monroe Street between TST 55 East Monroe, LLC and the Company dated January 1999, as
amended to date.
10.7* Sublease between the Company and Q-Image Corporation dated December 5, 1998.
10.9 September 24, 2000 Amendment of Silicon Valley Bank under Loan and
Security Agreement dated March 31, 1999.
10.10 Waiver dated October 31, by Silicon Valley Bank under Loan and
Security Agreement dated March 31, 1999.
27.1 Financial Data Schedule.
</TABLE>
----------
* As filed with iManage, Inc.'s Registration Statement on Form S-1 (File
No. 333-86353) on September 1, 1999, as amended.
** As filed with iManage, Inc.'s Report on Form 10-K for the year ended
December 31, 1999 on March 22, 2000.
*** As filed with iManage, Inc.'s Report on Form 10-Q for the three month
period ended March 31, 2000 on May 21, 2000.
**** As filed with iManage, Inc.'s Report on Form 8-K dated July 6, 2000.
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