| INTERWOVEN INC ITEM 1A RISK FACTORS We operate in a dynamic and rapidly changing business environment that involves many risks and uncertainties |
| In this section, we discuss factors that could cause, or contribute to causing, actual results to differ materially from what we expect or from any historical patterns or trends |
| As you evaluate our business, you should consider the risks and uncertainties described below, as well as cautionary language elsewhere in this Annual Report on Form 10-K and in our subsequent filings with the Securities and Exchange Commission |
| We have incurred losses throughout our operating history and may not be able to achieve consistent profitability |
| Prior to 2005, when we reported net income for the first time on an annual basis, we had incurred operating losses throughout our history |
| As of December 31, 2005, we had an accumulated deficit of dlra406dtta4 million |
| In 2006, we expect that new rules governing our accounting for stock options will increase our expenses by a substantial amount |
| We must increase both our license and support and service revenues to achieve and sustain profitable operations and positive cash flows |
| Otherwise, the price of our common stock is likely to decline |
| In addition, if revenues decline, resulting in greater operating losses and significant negative cash flows, our business could fail and the price of our common stock would decline |
| Many factors can cause our operating results to fluctuate and if we fail to satisfy the expectations of investors or securities analysts, our stock price may decline |
| Our quarterly and annual operating results have fluctuated significantly in the past and we expect unpredictable fluctuations in the future |
| The main factors impacting these fluctuations are likely to be: • the discretionary nature of our customers’ purchases and their budget cycles; • the inherent complexity, length and associated unpredictability of our sales cycle; • the success or failure of any of our product offerings to meet with customer acceptance; • delays in recognizing revenue from license transactions; • timing of new product releases; • timing of large customer orders; 8 _________________________________________________________________ [70]Table of Contents • changes in competitors’ product offerings; • sales force capacity and the influence of resellers and systems integrator partners; • our ability to integrate newly acquired products with our existing products and effectively sell newly acquired products; and • the level of our sales incentive and commission related expenses |
| Further, because we experience seasonal variations in our operating results as part of our normal business cycle, we believe that quarterly comparisons of our operating results are not necessarily meaningful and that you should not rely on the results of one quarter as an indication of our future performance |
| If our results of operations do not meet our public forecasts or the expectations of securities analysts and investors, the price of our common stock is likely to decline |
| Sales cycles for our products are generally long and unpredictable, so it is difficult to forecast our future results |
| The length of our sales cycle — the period between initial contact with a prospective customer and the licensing of our software applications — typically ranges from six to twelve months and can be more than twelve months |
| In recent quarters, we have experienced a lengthening of our sales cycle partly because we have been successful at selling multiple products to customers that were initially interested in a single product |
| These kinds of orders are complex and difficult to complete because prospective customers generally consider a number of factors before committing to purchase a suite of products or applications |
| Prospective customers consider many factors in evaluating our software, and the length of time a customer devotes to evaluation, purchasing and budgeting processes vary significantly from company to company |
| Even if a customer chooses to buy our software products or services, many factors affect the timing of completion of the transaction as defined under accounting principles generally accepted in the United States of America, which makes our revenues difficult to forecast |
| These factors include the following: • Licensing of our software products is often an enterprise-wide decision by our customers that involves many customer-specific factors, so our ability to make a sale may be affected by changes in the strategic importance of a particular project to a customer, its budgetary constraints or changes in customer personnel |
| • Customer approval and expenditure authorization processes can be difficult and time consuming, and delays in the process could impact the timing and amount of revenues recognized in a quarter |
| • Changes in our sales incentive plans may have unexpected effects on our sales cycle and contracting activities |
| • The significance and timing of our software enhancements, and the introduction of new software by our competitors, may affect customer purchases |
| Over the last several years, our sales cycles have been affected by increased customer scrutiny of software purchases regardless of transaction size |
| Specifically, we experienced several delayed software license orders at the end of the second quarter of 2005, representing a larger cumulative value of delayed transactions than experienced in recent quarters |
| A continued lengthening of our sales cycles or our inability to predict these trends could result in lower than expected future revenue, which would have an adverse impact on our consolidated operating results and could cause our stock price to decline |
| Our sales incentive plans are primarily based on quarterly and annual quotas for sales representatives and some sales support personnel, and include accelerated commission rates if a representative exceeds the sales quota |
| The concentration of sales orders with a small number of sales representatives has resulted, and in the future may result, in commission expense exceeding forecasted levels and high sales and marketing expenses |
| 9 _________________________________________________________________ [71]Table of Contents Our revenues depend on a small number of products and markets, so our results are vulnerable to unexpected shifts in demand |
| For the years ended December 31, 2005, 2004 and 2003, we believe that a significant portion of our total revenue was derived from our WorkSite and TeamSite products and related services, and we expect this to be the case in future periods |
| Accordingly, any decline in the demand for these products or services will have a material and adverse effect on our consolidated financial results |
| We also derive a significant portion of our revenues from a few vertical markets |
| In particular, our WorkSite product is primarily sold to professional service organizations, such as law firms, accounting firms and corporate legal departments |
| In order to sustain and grow our business, we must continue to sell our software products and services into these vertical markets |
| Shifts in the dynamics of these vertical markets, such as new product introductions by our competitors, could seriously harm our prospects |
| To increase our sales outside our core vertical markets, for example to large multi-national corporations in financial services, manufacturing, telecommunications and governmental entities, requires us to devote time and resources to hire and train sales employees familiar with those industries |
| Even if we are successful in hiring and training sales teams, customers in other industries may not need or sufficiently value our products |
| The timing of large customer orders may have a significant impact on our consolidated financial results from period to period |
| Our ability to achieve our forecasted quarterly earnings is dependent on achieving an aggregate dollar value of license transactions in the mid to high six-figure range |
| From time to time, we receive large customer orders that have a significant impact on our consolidated financial results in the period in which the order is recognized as revenue |
| We had four, three and two individual license transaction in excess of dlra1dtta0 million in 2005, 2004 and 2003, respectively |
| Because it is difficult for us to accurately predict the timing of large customer orders, our consolidated financial results are likely to vary materially from quarter to quarter based on the receipt of such orders and their ultimate recognition as revenue |
| Additionally, the loss or delay of an anticipated large order in a given quarterly period could result in a shortfall of revenues from anticipated levels |
| Any shortfall in revenues from levels anticipated by our stockholders and securities analysts could have a material and adverse impact on the trading price of our common stock |
| Contractual issues may arise during the negotiation process that may delay anticipated transactions and revenue |
| Because our software and solutions are often a critical element to the information technology systems of our customers, the process of contractual negotiation is often protracted |
| The additional time needed to negotiate mutually acceptable terms that culminate in an agreement to license our products can extend the sales cycle |
| Several factors may also require us to defer recognition of license revenue for a significant period of time after entering into a license agreement, including instances in which we are required to deliver either specified additional products or product upgrades for which we do not have vendor-specific objective evidence of fair value |
| We have a standard software license agreement that provides for revenue recognition provided that, among other factors, delivery has taken place, collectibility from the customer is probable and no significant future obligations or customer acceptance rights exist |
| However, customer negotiations and revisions to these terms could have an impact on our ability to recognize revenue at the time of delivery |
| In addition, slowdowns or variances from our expectations of our quarterly licensing activities may result in fewer customers, which could impact our service offerings, resulting in lower revenues from our customer training, consulting services and customer support organizations |
| Our ability to maintain or increase support and service revenues is highly dependent on our ability to increase the number of enterprises that license our software products and the number of seats licensed by those enterprises |
| Our support and service revenues are vulnerable to reduced demand and increased competition |
| Our support and service revenues represented approximately 61prca, 58prca and 59prca of total revenues for the years ended December 31, 2005, 2004 and 2003 |
| Thus, reduced license revenue is likely to result in lower support and services revenue in the future |
| Our support agreements generally have a term of one year and are renewable thereafter, generally for one year |
| Customers may elect not to renew their support agreements or may reduce the license software quantity under their support agreements, in either event reducing our future support revenue |
| Additionally, demand for these services is affected by competition from independent service providers and systems integrators with knowledge of our software products |
| Since mid-2000, we have experienced increased competition for professional services engagements, which has resulted in an overall decrease in average billing rates for our consultants and price pressure on our software support products |
| If our business continues to be affected this way, our support and service revenues may decline |
| For the years ended December 31, 2005, 2004 and 2003, we recognized support revenues of dlra76dtta8 million, dlra65dtta2 million and dlra42dtta4 million, respectively |
| Our support agreements typically have a term of one year and are renewable thereafter for periods generally of one year |
| Customers may elect not to renew their support agreements or may reduce the license software quantity under their support agreements, thereby reducing our future support revenue |
| We may not realize the anticipated benefits of past or future acquisitions, and integration of these acquisitions may disrupt our business and management |
| In the past we have acquired companies, products or technologies, and we are likely to do so in the future |
| Most recently, we completed the acquisition of Scrittura in August 2005 |
| We may not realize the anticipated benefits of this or any other acquisition and each acquisition has numerous risks |
| These risks include: • difficulty in assimilating the operations and personnel of the acquired company; • difficulty in effectively integrating the acquired technologies or products with our current products and technologies; • difficulty in maintaining controls, procedures and policies during the transition and integration; • disruption of our ongoing business and distraction of our management and employees from other opportunities and challenges due to integration issues; • difficulty integrating the acquired company’s accounting, management information, human resources and other administrative systems; • inability to retain key technical and managerial personnel of the acquired business; • inability to retain key customers, distributors, vendors and other business partners of the acquired business; • inability to achieve the financial and strategic goals for the acquired and combined businesses; • incurring acquisition-related costs or amortization costs for acquired intangible assets that could impact our operating results; • potential impairment of our relationships with employees, customers, partners, distributors or third-party providers of technology or products; • potential failure of the due diligence processes to identify significant issues with product quality, architecture and development, integration obstacles or legal and financial contingencies, among other things; • incurring significant exit charges if products acquired in business combinations are unsuccessful; • incurring additional expenses if disputes arise in connection with any acquisition; 11 _________________________________________________________________ [73]Table of Contents • potential inability to assert that internal controls over financial reporting are effective; • potential inability to obtain, or obtain in a timely manner, approvals from governmental authorities, which could delay or prevent such acquisitions; and • potential delay in customer and distributor purchasing decisions due to uncertainty about the direction of our product offerings |
| Mergers and acquisitions of high technology companies are inherently risky and ultimately, if we do not complete the integration of acquired businesses successfully and in a timely manner, we may not realize the benefits of the acquisitions to the extent anticipated, which could adversely affect our business, financial condition or results of operations |
| In addition, the terms of our acquisitions may provide for future obligations, such as our payment of additional consideration upon the occurrence of specified future events or the achievement of future revenues or other financial milestones |
| To the extent these events or achievements involve subjective determinations, disputes may arise that require a third party to assess, resolve and/or make such determinations, or involve arbitration or litigation |
| For example, several of our recent acquisitions have included earn-out arrangements that contain audit rights |
| Should a dispute arise over determinations made under those arrangements, we may be forced to incur additional costs and spend time defending our position, and may ultimately lose the dispute, any of which outcome would cause us not to realize all the anticipated benefits of the related acquisition and could impact our consolidated results of operations |
| Increasing competition could cause us to reduce our prices and result in lower gross margins or loss of market share |
| The enterprise content management market is fragmented, rapidly changing and highly competitive |
| Our current competitors include: • companies addressing needs of the market in which we compete such as EMC Corporation, FileNet Corporation, Hummingbird Ltd, IBM, Microsoft Corporation, Open Text Corporation, Oracle Corporation, Stellent, Inc, Vignette Corporation and Xerox Corporation; • intranet and groupware companies, such as IBM, Microsoft Corporation and Novell, Inc |
| ; • open source vendors, such as OpenCms, Mambo and RedHat, Inc |
| ; and • in-house development efforts by our customers and partners |
| We also face potential competition from our strategic partners, such as Microsoft Corporation, or from other companies that may in the future decide to compete in our market |
| Many existing and potential competitors have longer operating histories, greater name recognition and greater financial, technical and marketing resources than we do |
| Many of these companies can also take advantage of extensive customer bases and adopt aggressive pricing policies to gain market share |
| Potential competitors may bundle their products in a manner that discourages users from purchasing our products or makes their products more appealing |
| Barriers to entering the content management software market are relatively low |
| Competitive pressures may also increase with the consolidation of competitors within our market and partners in our distribution channel, such as the acquisition of Groove Networks by Microsoft Corporation, Captiva Software Corporation and Documentum, Inc |
| by EMC Corporation, Presence Online Pty Ltd |
| and Epicentric, Inc |
| In recent quarters, some of our competitors have reduced their price proposals in an effort to strengthen their bids and expand their customer bases at our expense |
| Even if these tactics are unsuccessful, they could delay decisions by some customers who would otherwise purchase our software products and may reduce the ultimate selling price of our software and services, reducing our gross margins |
| 12 _________________________________________________________________ [74]Table of Contents Our future revenues depend in part on our installed customer base continuing to license additional products, renew customer support agreements and purchase additional services |
| Our installed customer base has traditionally generated additional license and support and service revenues |
| In addition, the success of our strategic plan depends on our ability to cross-sell products, such as the products acquired in the acquisitions of MediaBin, iManage and Software Intelligence to our installed base of customers |
| Our ability to cross-sell new products may depend in part on the degree to which new products have been integrated with our existing application suite, which may vary with the timing of new product acquisitions or releases |
| In future periods, customers may not necessarily license additional products or contract for additional support or other services |
| Customer support agreements are generally renewable annually at a customer’s option, and there are no mandatory payment obligations or obligations to license additional software |
| If our customers decide to cancel their support agreements or fail to license additional products or contract for additional services, or if they reduce the scope of their support agreements, revenues could decrease and our operating results could be adversely affected |
| Charges to earnings resulting from the application of the purchase method of accounting and asset impairments may adversely affect the market value of our common stock |
| In accordance with accounting principles generally accepted in the United States of America, we accounted for our acquisitions using the purchase method of accounting, which resulted in significant charges to earnings in prior periods and, through ongoing amortization, will continue to generate charges that could have a material adverse effect on our consolidated financial statements |
| Under the purchase method of accounting, we allocated the total estimated purchase price of these acquisitions to their net tangible assets, amortizable intangible assets, intangible assets with indefinite lives based on their fair values as of the closing date of these transactions and recorded the excess of the purchase price over those fair values as goodwill |
| A portion of the estimated purchase price in the iManage and MediaBin acquisitions was also allocated to in-process technology and was expensed in the quarter in which the acquisition was completed |
| We will incur additional depreciation and amortization expense over the useful lives of certain net tangible and intangible assets acquired and significant stock-based compensation expense in connection with these transactions |
| These depreciation and amortization charges could have a material impact on our consolidated results of operations |
| At December 31, 2005, we had dlra191dtta6 million in net goodwill and dlra25dtta5 million in net other intangible assets, which we believe are recoverable |
| Generally accepted accounting principles in the United States of America require that we review the value of these acquired assets from time to time to determine whether the recorded values have been impaired and should be reduced |
| In connection with our 2002 review, we reduced recorded goodwill by dlra76dtta4 million |
| We will continue to perform impairment assessments on an interim basis when indicators exist that suggest that our goodwill or intangible assets may be impaired |
| These indicators include our market capitalization declining below our net book value or if we suffer a sustained decline in our stock price |
| Changes in the economy, the business in which we operate and our own relative performance may result in indicators that our recorded asset values may be impaired |
| If we determine there has been an impairment of goodwill and other intangible assets, the carrying value of those assets will be written down to fair value, and a charge against operating results will be recorded in the period that the determination is made |
| Any impairment could have a material impact on our consolidated operating results and financial position, and could harm the trading price of our common stock |
| Economic conditions and significant world events have harmed and could continue to negatively affect our revenues and results of operations |
| Our revenue growth and profitability depend on the overall demand for our enterprise content management software platforms and applications |
| The decline in customer spending on many kinds of information technology initiatives worldwide, particularly spending on public-facing Web applications, has resulted in lower revenues, longer sales cycles, lower average selling prices and customer deferral or cancellation of orders |
| To the extent that information technology spending, particularly spending on public-facing Web applications, does not improve or even declines, the demand for our products and services, and therefore our future revenues, will be negatively affected |
| In addition, many of our customers have also been affected adversely by the same economic conditions that Interwoven has experienced and, as a result, we may find that collecting on accounts receivable may take longer than we expect or that some accounts receivable will become uncollectible |
| 13 _________________________________________________________________ [75]Table of Contents Our consolidated financial results could also be significantly affected by geopolitical concerns and world events, such as wars and terrorist attacks |
| Our revenues and financial results could be negatively affected to the extent geopolitical concerns continue and similar events occur or are anticipated to occur |
| We must attract and retain qualified personnel to be successful and competition for qualified personnel is increasing in our market |
| Our success depends to a significant extent upon the continued contributions of our key management, technical, sales, marketing and consulting personnel, many of whom would be difficult to replace |
| The loss of one or more of these employees could harm our business |
| We do not have key person life insurance for any of our key personnel |
| Our success also depends on our ability to identify, attract and retain qualified technical, sales, marketing, consulting and managerial personnel |
| Competition for qualified personnel is particularly intense in our industry and in our area |
| This makes it difficult to retain our key personnel and to recruit highly qualified personnel |
| We have experienced, and may continue to experience, difficulty in hiring and retaining candidates with appropriate qualifications |
| To be successful, we need to hire candidates with appropriate qualifications and retain our key executives and employees |
| Replacing departing executive officers and key employees can involve organizational disruption and uncertain timing |
| We are currently searching for a Chief Executive Officer to replace Martin W Brauns, who is retiring effective March 31, 2006 |
| The volatility of our stock price has had an impact on our ability to offer competitive equity-based incentives to current and prospective employees, thereby affecting our ability to attract and retain highly qualified technical personnel |
| If these adverse conditions continue, we may not be able to hire or retain highly qualified employees in the future and this could harm our business |
| In addition, regulations adopted by The NASDAQ National Market requiring shareholder approval for all stock option plans, as well as regulations adopted by the New York Stock Exchange prohibiting NYSE member organizations from giving a proxy to vote on equity compensation plans unless the beneficial owner of the shares has given voting instructions, could make it more difficult for us to grant options to employees in the future |
| In addition, a new accounting pronouncement, which comes into effect on January 1, 2006, will require us to record compensation expense for the fair value of options granted to employees |
| To the extent that new regulations make it more difficult or expensive to grant options to employees, we may incur increased cash compensation costs or find it difficult to attract, retain and motivate employees, either of which could harm our business |
| We have experienced transitions in our management team and our Board of Directors in the past and may continue to do so in the future |
| We have experienced transitions on our Board of Directors and among our executive officers, including the resignation of Martin W Brauns as Chairman of the Board of Directors effective January 25, 2006 and as our President and Chief Executive Officer effective March 31, 2006 |
| We currently do not have a new Chief Executive Officer identified and there is no assurance that we will be able to identify and hire such a person by March 31, 2006 when Mr |
| Brauns’ resignation is effective |
| Our stock price may be volatile, and your investment in our common stock could suffer a decline in value |
| The market prices of the securities of software companies, including our own, have been extremely volatile and often unrelated to their operating performance |
| Broad market and industry factors may adversely affect the market price of our common stock, regardless of our actual operating performance |
| Factors that could cause fluctuations in the price of our stock may include, among other things: • actual or anticipated variations in quarterly operating results; • changes in financial estimates by us or in financial estimates or recommendations by any securities analysts who cover our stock; • operating performance and stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are Internet-related or otherwise deemed comparable to us; 14 _________________________________________________________________ [76]Table of Contents • announcements by us or our competitors of new products or services, technological innovations, significant acquisitions, strategic relationships or divestitures; • announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us; • announcements of negative conclusions about our internal controls; • articles in periodicals covering us, our competitors or our markets; • reports issued by market research and financial analysts; • capital outlays or commitments; • additions or departures of key personnel; • sector factors including conditions or trends in our industry and the technology arena; and • overall stock market factors, such as the price of oil futures, interest rates and the performance of the economy |
| These fluctuations may make it more difficult to use our stock as currency to make acquisitions that might otherwise be advantageous, or to use stock compensation equity instruments as a means to attract and retain employees |
| Any shortfall in revenue or operating results compared to expectations, as we experienced in the second quarter of 2005, could cause an immediate and significant decline in the trading price of our common stock |
| In addition, we may not learn of such shortfalls until late in the quarter and may not be able to adjust successfully to these shortfalls, which could result in an even more immediate and greater decline in the trading price of our common stock |
| In the past, securities class action litigation has often been initiated against companies following periods of volatility in their stock price |
| If we become subject to any litigation of this type, we could incur substantial costs and our management’s attention and resources could be diverted while the litigation is ongoing |
| Our failure to deliver defect-free software could result in losses and harmful publicity |
| Our software products are complex and have in the past and may in the future contain defects or failures that may be detected at any point in the product’s life |
| We have discovered software defects in the past in some of our products after their release |
| Although past defects have not had a material effect on our results of operations, in the future we may experience delays or lost revenues caused by new defects |
| Despite our testing, defects and errors may still be found in new or existing products, and may result in delayed or lost revenues, loss of market share, failure to achieve market acceptance, reduced customer satisfaction, diversion of development resources and damage to our reputation |
| As has occurred in the past, new releases of products or product enhancements may require us to provide additional services under our support contracts to ensure proper installation and implementation |
| Errors in our application suite may be caused by defects in third-party software incorporated into our applications |
| If so, we may not be able to fix these defects without the cooperation of these software providers |
| Since these defects may not be as significant to our software providers as they are to us, we may not receive the rapid cooperation that we may require |
| We may not have the contractual right to access the source code of third-party software and, even if we access the source code, we may not be able to fix the defect |
| As customers rely on our products for critical business applications, errors, defects or other performance problems of our products or services might result in damage to the businesses of our customers |
| Consequently, these customers could delay or withhold payment to us for our software and services, which could result in an increase in our provision for doubtful accounts or an increase in collection cycles for accounts receivable, both of which could disappoint investors and result in a significant decline in our stock price |
| In addition, these customers could seek significant compensation from us for their losses |
| Even if unsuccessful, a product liability claim brought against us would likely be time consuming and costly and harm our reputation, and thus our ability to license products to new customers |
| Even if a suit is not brought, correcting errors in our application suite could increase our expenses |
| 15 _________________________________________________________________ [77]Table of Contents Because a significant portion of our revenues are influenced by referrals from strategic partners and, in some cases, sold through resellers, our future success depends in part on those partners, but their interests may differ from ours |
| Our direct sales force depends, in part, on strategic partnerships, marketing alliances and resellers to obtain customer leads, referrals and distribution |
| Approximately 59prca of our orders from customers for the year ended December 31, 2005 were influenced by or co-sold with our strategic partners and resellers |
| If we are unable to maintain our existing strategic relationships or fail to enter into additional strategic relationships, our ability to increase revenues will be harmed, and we could also lose anticipated customer introductions and co-marketing benefits and lose our investments in those relationships |
| In addition, revenues from any strategic partnership, no matter how significant we expect it to be, depend on a number of factors outside our control, are highly uncertain and may vary from period to period |
| Our success depends in part on the success of our strategic partners and their ability and willingness to market our products and services successfully |
| These third parties are under no obligation to recommend or support our software products and could recommend or give higher priority to the products and services of other companies, including those of one or more of our competitors, or to their own products |
| Our inability to gain the support of resellers, consulting and systems integrator firms or a shift by these companies toward favoring competing products could negatively affect our software license and support and service revenues |
| Some systems integrators also engage in joint marketing and sales efforts with us |
| If our relationships with these parties fail, we will have to devote substantially more resources to the sales and marketing of our software products |
| In many cases, these parties have extensive relationships with our existing and potential customers and influence the decisions of these customers |
| A number of our competitors have longer and more established relationships with these systems integrators than we do and, as a result, these systems integrators may be more likely to recommend competitors’ products and services |
| We may also be unable to grow our revenues if we do not successfully obtain leads and referrals from our customers |
| If we are unable to maintain these existing customer relationships or fail to establish additional relationships of this kind, we will be required to devote substantially more resources to the sales and marketing of our products |
| As a result, we are dependent on the willingness of our customers to provide us with introductions, referrals and leads |
| Our current customer relationships do not afford us any exclusive marketing and distribution rights |
| In addition, our customers may terminate their relationship with us at any time, pursue relationships with our competitors or develop or acquire products that compete with our products |
| Even if our customers act as references and provide us with leads and introductions, we may not penetrate additional markets or grow our revenues |
| We also rely on our strategic relationships to aid in the development of our products |
| Should our strategic partners not regard us as significant to their own businesses, they could reduce their commitment to us or terminate their relationship with us, pursue competing relationships or attempt to develop or acquire products or services that compete with our products and services |
| Our revenues from international operations are a significant part of our overall operating results |
| We have established offices in various international locations in Europe and Asia Pacific and we derive a significant portion of our revenues from these international locations |
| For the years ended December 31, 2005, 2004 and 2003, revenues from these international operations constituted approximately 32prca, 34prca and 36prca of our total revenues, respectively |
| We anticipate devoting significant resources and management attention to international opportunities, which subjects us to a number of risks including: • difficulties in attracting and retaining staff (particularly sales personnel) and managing foreign operations; • the expense of foreign operations and compliance with applicable laws; • political and economic instability; • the expense of localizing our products for sale in various international markets; • reduced protection for intellectual property rights in some countries; 16 _________________________________________________________________ [78]Table of Contents • protectionist laws and business practices that favor local competitors; • difficulties in the handling of transactions denominated in foreign currency and the risks associated with foreign currency fluctuations; • changes in multiple tax and regulatory requirements; • the effect of longer sales cycles and collection periods or seasonal reductions in business activity; and • economic conditions in international markets |
| Any of these risks could reduce revenues from international locations or increase our cost of doing business outside of the United States |
| For example, beginning January 1, 2005, our Vice President of Enterprise Sales in Europe moved to Singapore to assume the role of our Vice President of Enterprise Sales in the Asia Pacific region |
| We believe the delay in replacing this position in the quarter caused our revenues from customers in Europe to suffer in the first and second quarters of 2005 |
| Fluctuations in the exchange rates of foreign currency, particularly in Euro, British Pound and Australian Dollar and the various other local currencies of Europe and Asia, may harm our business |
| We are exposed to movements in foreign currency exchange rates because we translate foreign currencies into United States Dollars for reporting purposes |
| Our primary exposures have related to operating expenses and sales in Europe and Asia that were not United States Dollar-denominated |
| Historically, these risks have been minimal for us, but as our international revenues and operations grow, currency fluctuations could have a material adverse impact on our consolidated financial condition and results of operations |
| Workforce reductions may require us to incur severance costs and reduce our facilities commitments, which may cause us to incur expenses or recognize additional financial statement charges |
| At various times since 2001, we have reduced our worldwide workforce in response to declining demand for our products and to integrate businesses acquired |
| In connection with these activities, we relocated offices and abandoned facilities in the San Francisco Bay Area; Chicago, Illinois; New York, New York; Boston, Massachusetts; Austin, Texas and several locations internationally |
| As a result, we are continuing to pay for facilities that we are not using and have no future plans to use |
| We recorded charges for excess facilities, net of expected sublease income, of dlra8dtta1 million and dlra12dtta6 million in the years ended December 31, 2004 and 2003, respectively |
| At December 31, 2005, we have an accrual for excess facilities of dlra16dtta9 million, which is net of anticipated sublease income of dlra2dtta9 million and a present value discount of dlra189cmam000 |
| If the commercial real estate market deteriorates, if our anticipated sublease income is not realized or if we cannot sublease these excess facilities at all, we may be required to record additional charges for excess facilities or revise our estimate of sublease income in the future which may be material to our consolidated financial condition and results of operations |
| We have continued to review operational performance across the Company and will continue to make cost adjustments to better align our expenses with our expected revenues |
| We also may be required to make further adjustments to our business model to achieve operational efficiency and, as a result, may be required to take additional charges, which could be material to our results of operations |
| If our products cannot scale to meet the demands of thousands of concurrent users, our targeted customers may not license our software, which will cause our revenues to decline |
| Our strategy includes targeting large organizations that require our enterprise content management software because of the significant amounts of content that these companies generate and use |
| For this strategy to succeed, our software products must be highly scalable and 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 |
| If our customers cannot successfully implement large-scale deployments of our software 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 consolidated financial condition and operating results |
| 17 _________________________________________________________________ [79]Table of Contents If our products do not operate with a wide variety of hardware, software and operating systems used by our customers, our revenues would be harmed |
| We currently serve a customer base that uses a wide variety of constantly changing hardware, software applications and operating systems |
| For example, we have designed our products to work with databases and servers developed by Microsoft Corporation, Sun Microsystems, Inc, Oracle Corporation and IBM and with software applications including Microsoft Office, WordPerfect, Lotus Notes and Novell GroupWise |
| We must continually modify and enhance our software products to keep pace with changes in computer hardware and software and database technology as well as emerging technical standards in the software industry |
| We further believe that our application suite will gain broad market acceptance only if it can support a wide variety of hardware, software applications and systems |
| Additionally, customers could delay purchases of our software until they determine how our products will operate with these updated platforms or applications |
| Our products currently operate on the Microsoft Windows XP, Microsoft Windows NT, Microsoft Windows 2000, Linux, IBM AIX, Hewlett Packard UX and Sun Solaris operating environments |
| If other platforms become more widely used, we could be required to convert our server application products to additional platforms |
| We may not succeed in these efforts, and even if we do, potential customers may not choose to license our products |
| In addition, our products are required to interoperate with leading content authoring tools and application servers |
| We must continually modify and enhance our products to keep pace with changes in these applications and operating systems |
| If our products were to be incompatible with a popular new operating system or business application, our business could be harmed |
| Also, uncertainties related to the timing and nature of new product announcements, introductions or modifications by vendors of operating systems, browsers, back-office applications and other technology-related applications, could harm our business |
| Difficulties in introducing new products and product upgrades and integrating new products with our existing products in a timely manner will make market acceptance of our products less likely |
| The market for our products is characterized by rapid technological change, frequent new product introductions and technology-related enhancements, uncertain product life cycles, changes in customer demands and evolving industry standards |
| We expect to add new functionality to our product offerings by internal development and possibly by acquisition |
| Content management and document management technology is more complex than most software and new products or product enhancements can require long development and testing periods |
| Any delays in developing and releasing new products or integrating new products with existing products could harm our business |
| New products or upgrades may not be released according to schedule, may not be adequately integrated with existing products or may contain defects when released, resulting in adverse publicity, loss of sales, delay in market acceptance of our products or customer claims against us, any of which could harm our business |
| If we do not develop, license or acquire new software products, adequately integrate them with existing products or deliver enhancements to existing products, on a timely and cost-effective basis, our business will be harmed |
| 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 our internally developed software and used in our products to perform key functions |
| The functionality of our software 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 fail to continue 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 |
| 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 18 _________________________________________________________________ [80]Table of Contents may be forced to limit the features available in our current or future product offerings |
| Either alternative could seriously harm our business and operating results |
| When we account for stock-based compensation using the fair value method, it will significantly increase our compensation costs and increase our net loss |
| In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (“SFAS”) Nodtta 123R, Share-Based Payment, which requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of compensation expense in the consolidated statement of operations |
| The accounting provisions of SFAS Nodtta 123R are effective for years beginning after June 15, 2005 and we will be required to adopt the provisions of this statement in the first quarter of 2006 |
| We are currently assessing the impact of adopting SFAS Nodtta 123R, but as we have 1dtta3 million unvested stock options outstanding at December 31, 2005, we expect the adoption to have a significant adverse impact on our consolidated statements of operations |
| We might not be able to protect and enforce our intellectual property rights, a loss of which could harm our business |
| We depend upon our proprietary technology and rely on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures and contractual restrictions to protect it |
| We currently have 32 issued United States patents and 43 foreign patents, as well as several United States and foreign patents pending approval |
| These patents may not offer us meaningful product differentiation or market exclusivity because there are alternative processes available or prospective customers do not assign material value to the unique capabilities inherent in the patented processes |
| It is possible that patents will not be issued from our currently pending applications or any future patent application we may file |
| We also have restricted customer access to our source code and require all employees enter into confidentiality and invention assignment agreements |
| Despite our efforts to protect our proprietary technology, unauthorized parties may attempt to copy aspects of our products or to obtain and use information we regard as proprietary |
| In addition, the laws of some foreign countries do not protect our proprietary rights as effectively as the laws of the United States and we expect that it will become more difficult to monitor use of our products as we increase our international presence |
| Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity |
| Any such resulting litigation could result in substantial costs and diversion of resources that could have a material adverse effect on our business, operating results and financial condition |
| Further, third parties may claim that our products infringe the intellectual property of their products |
| For example, Advanced Software, Inc |
| had filed suit against us in the United States District Court for the Northern District of California alleging that our TeamSite software infringes Advanced Software’s United States Patent |
| Although this matter was settled and dismissed with prejudice in September 2005, intellectual property litigation is inherently uncertain and, regardless of the ultimate outcome, could be costly and time-consuming to defend, cause us to cease making, licensing or using products that incorporate the challenged intellectual property, require us to redesign or reengineer such products, if feasible, divert management’s attention or resources, or cause product delays, or require us to enter into royalty or licensing agreements to obtain the right to use a necessary product, component or process; any of which could have a material impact on our consolidated financial condition and results of operation |