SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [ x ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended September 30, 2001. or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period from _____________________ to _____________________. Commission file number 0-19817. Stellent, Inc. ---------------------------------------------------- (Exact name of registrant as specified in its charter) Minnesota 41-1652566 ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7777 Golden Triangle Drive, Eden Prairie, Minnesota 55344-3736 --------------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (952) 903-2000 -------------------------------------------------- (Registrant's telephone number, including area code) IntraNet Solutions, Inc. ---------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.01 par value - 22,207,500 shares as of November 8, 2001. 1 INDEX STELLENT, INC. Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets - September 30, 2001 and March 31, 2001 .........................3 Condensed Consolidated Statements of Earnings - Three and six months ended September 30, 2001 and 2000............................................................................4 Condensed Consolidated Statements of Cash Flows - Six months ended September 30, 2001 and 2000............................................................................5 Notes to Condensed Consolidated Financial Statements...................................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................8 Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................20 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote Of Security Holders...................................................21 Item 6. Exhibits and Reports on Form 8-K......................................................................22 SIGNATURES......................................................................................................24 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS STELLENT, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED) SEPTEMBER 30, MARCH 31, 2001 2001 ------------- ------------ ASSETS Current assets: Cash and cash equivalents .......................................................... $ 10,058 $ 14,355 Short-term marketable securities.................................................... 74,419 81,262 Accounts receivable, net............................................................ 24,559 21,403 Prepaid royalties................................................................... 2,344 2,231 Prepaid expenses and other current assets........................................... 7,592 3,468 ------------- ------------ Total current assets.................................................................. $ 118,972 $ 122,719 Long-term marketable securities ...................................................... 16,298 10,893 Property and equipment, net........................................................... 6,089 4,051 Prepaid royalties, net of current..................................................... 3,424 2,074 Other intangible assets, net.......................................................... 29,486 31,118 Deferred income taxes................................................................. 5,762 4,894 Investments in and notes with other companies......................................... 5,408 5,571 Other ................................................................................ 1,609 266 ------------- ------------ Total assets.......................................................................... $ 187,048 $ 181,586 ============= ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.................................................................... $ 3,028 $ 1,380 Deferred revenues................................................................... 5,874 5,942 Commissions payable................................................................. 687 2,226 Accrued expenses.................................................................... 5,583 3,951 ------------- ------------ Total current liabilities............................................................. 15,172 13,499 Deferred revenue, net of current portion.............................................. 368 606 Other................................................................................. 37 37 ------------- ------------ Total liabilities..................................................................... 15,577 14,142 ------------- ------------ Shareholders' equity: Common stock........................................................................ 224 220 Additional paid-in capital.......................................................... 195,531 187,428 Accumulated deficit ................................................................ (24,284) (20,204) ------------- ------------ Total shareholders' equity.......................................................... 171,471 167,444 ------------- ------------ Total liabilities and shareholders' equity............................................ $ 187,048 $ 181,586 ============= ============ See accompanying notes. 3 STELLENT, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------------- ------------------------------------ 2001 2000 2001 2000 ----------------- ----------------- ---------------- ----------------- Revenues: Product licenses................................ $ 17,968 $ 12,747 $ 37,040 $ 20,194 Services........................................ 5,199 2,875 10,726 4,890 ----------------- ----------------- ---------------- ----------------- Total revenues.................................. 23,167 15,622 47,766 25,084 ----------------- ----------------- ---------------- ----------------- Cost of revenues: Product licenses................................ 847 834 1,918 1,499 Services........................................ 3,587 1,551 6,571 2,709 ----------------- ----------------- ---------------- ----------------- Total cost of revenues........................... 4,434 2,385 8,489 4,208 ----------------- ----------------- ---------------- ----------------- Gross profit..................................... 18,733 13,237 39,277 20,876 ----------------- ----------------- ---------------- ----------------- Operating expenses: Sales and marketing............................. 11,578 6,545 22,855 10,801 General and administrative...................... 2,475 2,317 4,907 3,744 Research and development........................ 4,595 2,652 8,746 3,706 Acquisition and related costs................... -- 590 - 590 Amortization of acquired intangible assets and other.................................. 3,484 3,466 6,865 3,629 Write-off of in-process research and development -- 10,400 -- 10,400 ----------------- ----------------- ---------------- ----------------- Total operating expenses......................... 22,132 25,970 43,373 32,870 ----------------- ----------------- ---------------- ----------------- Loss from operations............................. (3,399) (12,733) (4,096) (11,994) Other: Interest income, net............................ 981 1,719 2,239 3,969 Investment impairment........................... (2,223) -- (2,223) -- ----------------- ----------------- ---------------- ----------------- Net loss......................................... $ (4,641) $ (11,014) $ (4,080) $ (8,025) ================= ================= ================ ================= Net loss per common share - basic and diluted.... $ (0.21) $ (0.52) $ (0.18) $ (0.38) ================= ================= ================ ================= Weighted average common shares outstanding - basic and diluted ............................. 22,364 21,331 22,223 21,257 See accompanying notes. 4 STELLENT, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) SIX MONTHS ENDED SEPTEMBER 30, -------------------------------- 2001 2000 ------------- ------------- OPERATING ACTIVITIES: Net loss................................................................................ $ (4,080) $ (8,025) Adjustments to reconcile net loss to cash provided by (used in) operating activities: Depreciation and amortization......................................................... 762 571 Amortization of intangible assets, acquisition expense and other...................... 6,865 3,382 Amortization of in-process research and development expense .......................... -- 10,400 Investment impairment................................................................. 2,223 -- Non cash marketing expense............................................................ -- 247 Tax benefit from employee stock option exercises......................................... 868 -- Changes in operating assets and liabilities, net of amounts acquired: Accounts receivable..................................................................... (3,156) (3,830) Prepaid expenses and other current assets.............................................. (6,098) (420) Accounts payable........................................................................ 1,648 (412) Accrued liabilities .................................................................... 1,700 58 Deferred revenue........................................................................ (306) (303) Accrued commissions..................................................................... (1,539) (1,239) Income taxes payable ................................................................... (868) -- ------------- ------------- Net cash flows used in operating activities............................................. (1,981) 429 ------------- ------------- INVESTING ACTIVITIES: Purchases and maturities of marketable securities, net.................................. 1,438 33,391 Purchases of fixed assets............................................................... (2,279) (1,577) Acquisitions, net of cash acquired ..................................................... (100) (54,521) Purchases of investments in and notes with other companies.............................. (2,060) (2,113) Other................................................................................... (990) -- ------------- ------------- Net cash used in investing activities................................................... (3,991) (24,820) ------------- ------------- FINANCING ACTIVITIES: Issuance of common stock, net of offering expenses...................................... -- 22,244 Proceeds from exercise of stock options and warrants.................................... 1,654 1,471 Other................................................................................... (68) (90) ------------- ------------- Net cash flows provided by financing activities......................................... 1,586 23,625 ------------- ------------- Cumulative effect of foreign currency translation adjustment............................... 89 -- ------------- ------------- Net decrease in cash....................................................................... (4,297) (766) Cash and equivalents, beginning of period.................................................. 14,355 8,859 ------------- ------------- Cash and equivalents, end of period........................................................ $ 10,058 $ 8,093 ============= ============= Non-cash financing activity - Issuance of common stock for acquisition..................... $ 5,496 $ -- ============= ============= See accompanying notes. 5 STELLENT, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF THE BUSINESS Stellent, Inc., (formerly IntraNet Solutions, Inc.) is a leading provider of business content management solutions. Stellent's products enable customers to rapidly deploy business Web sites by automating the content contribution, editing, management, and publishing processes for web sites. Business and Web content from a wide variety of enterprise sources, including desktop applications, business applications, and templates, is automatically converted to output formats. These output formats, which include XML, HTML, WML, cHTML, and PDF, allow content to be viewed on the Web with just a standard browser or on a wireless device. With headquarters in Eden Prairie, Minnesota, the company maintains offices throughout the United States, Europe, and Australia. The company currently has more than 1,500 customers, primarily located throughout the United States and Europe. 2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Regulation S-X pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position as of September 30, 2001 and March 31, 2001 and the results of operations for the three and six months ended September 30, 2001 and 2000 and cash flows for the six months ended September 30, 2001 and 2000. The results of operations for the three and six months ended September 30, 2001 are not necessarily indicative of the results for the full year. Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Revenue Recognition: The Company derives all of its revenues from licenses of its suite of products and related services. Product license revenue is recognized when evidence of a purchase arrangement exists, the product has been shipped and accepted by the customer, the fee is determinable and collectible, and no significant obligations remain related to implementation. Technical services and support revenue consists of fees from consulting and maintenance. Consulting services include needs assessment, software integration, security analysis, application development and training. The Company bills consulting fees either on a time and materials basis or on a fixed-price schedule. The Company's clients typically purchase maintenance agreements annually, and the Company prices maintenance agreements based on a percentage of the product license fee. Clients purchasing maintenance agreements receive product upgrades, Web-based technical support and telephone hot-line support. The Company recognizes revenue from maintenance agreements ratably over the term of the agreement, typically one year. Customer advances and billed amounts due from customers in excess of revenue recognized are recorded as deferred revenue. Cash and Equivalents: The Company considers all short-term, highly liquid investments that are readily convertible into known amounts of cash and have original maturities of three months or less to be 6 cash equivalents. Short-term Marketable Securities: Investments in debt securities with a remaining maturity of three months or less at the date of purchase are classified as short-term investments. Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. The book value of the investments approximates their estimated market value. As of September 30, 2001 the Company's investments were in commercial paper and U.S. Government Agency securities. All investments have a contractual maturity of three months or less and are held to maturity. Reclassifications: Certain reclassifications have been made to the consolidated statements of cash flows for the six month period ending September 30, 2000 to conform with the presentation used in the September 30, 2001 consolidated statement of cash flows. Certain reclassifications have been made to the March 31, 2001 consolidated balance sheet to conform with the presentation used in the September 30, 2001 consolidated balance sheet. The reclassifications had no effect on total assets, total liabilities or stockholders equity as previously reported. Net Income per Common Share: The Company's basic net income per share amounts have been computed by dividing net income by the weighted average number of outstanding common shares. The Company's diluted net income per share is computed by dividing net income by the weighted average number of outstanding common shares and common share equivalents relating to stock options and warrants, when dilutive. Due to net losses being reported in all periods presented, all common share equivalents were antidilutive. 3. ACQUISITIONS On July 10, 2000, the Company acquired the Information Exchange Division (IED, now called Stellent Software Components Division or SCD) of EBT International, Inc. ("EBTI") formerly Inso Corporation. SCD is the market leader in Web conversion and mobile device viewing technologies and applications. The transaction was accounted for under the purchase method of accounting. The Company paid aggregate consideration to EBTI in the transaction of $55 million in cash. The Company recorded approximately $15 million in goodwill and approximately $36 million in other intangible assets, including approximately $10.4 million of in-process research and development, which was expensed when the acquisition was recorded. On July 10, 2001, the Company acquired select assets of RESoft, a leading provider of end-to-end content management solutions for the real estate and legal industries, for 200,000 shares of Stellent common stock. The acquisition was valued at approximately $5.6 million, including acquisition costs. This acquisition has been accounted for under the purchase method of accounting, and approximately $4.6 million of the purchase price was allocated to goodwill, $0.5 million to intangible assets and $0.5 million to fixed assets. 4. INCOME TAXES Deferred income taxes reflect the effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. A valuation allowance of approximately $20.5 million has been established for a portion of the deferred tax assets to reflect their anticipated ability to be realized. 7 For the periods presented, the financial statements reflect an effective tax rate of zero, due to the utilization of net operating loss carry forwards and adjustment of the deferred tax valuation allowance. 5. NEW ACCOUNTING STANDARDS On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all business combinations completed after June 30, 2001. SFAS 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of this Statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS 142. Major provisions of these Statements and their effective dates for the Company are as follows: o All business combinations initiated after June 30, 2001 must use the purchase method of accounting. The pooling of interest method of accounting is prohibited except for transactions initiated before July 1, 2001. o Intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as part of a related contract, asset or liability. o Goodwill, as well as intangible assets with indefinite lives, acquired after June 30, 2001, will not be amortized. Effective April 1, 2002, all previously recognized goodwill and intangible assets with indefinite lives will no longer be subject to amortization. o Effective April 1, 2002, goodwill and intangible assets with indefinite lives will be tested for impairment annually and whenever there is an impairment indicator. o All acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting. The Company will continue to amortize goodwill and intangible assets recognized prior to July 1, 2001, under its current method until April 1, 2002, at which time annual and quarterly goodwill amortization of approximately $5.3 million and $1.3 million, respectively, and annual and quarterly amortization of approximately $1.0 million and $250,000 million, respectively, relating to intangible assets with indefinite lives will no longer be recognized. By March 31, 2003 the Company will have completed a transitional fair value based impairment test of goodwill as of April 1, 2002. By June 30, 2002, the Company will have completed a transitional impairment test of all intangible assets with indefinite lives. Management does not anticipate that the transitional valuation will result in a material reclassification between goodwill and intangible assets with definite lives. Impairment losses, if any, resulting from the transitional testing will be recognized in the quarter ended June 30, 2002, as a cumulative effect of a change in accounting principle. PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Stellent, Inc., is a leading provider of business content management solutions, providing browser-based Web and wireless access to content-centric business Web sites and content-supported e-business applications. Stellent's products enable customers to rapidly deploy business Web sites by automating the content contribution, editing, management, and publishing processes for these sites. Business and Web content from a wide variety of enterprise sources, including desktop applications, business applications, and templates, is automatically converted to output formats. These output formats, which include XML, HTML, WML, cHTML, and PDF, allow content to be viewed on the Web with just a standard browser or on a wireless device. Personalization and compatibility with corporate security models ensure that users access only the information they need. Our customers are primarily located throughout the United States and Europe. 8 We derive all of our revenues from licenses of our software products and related services. Product license revenue is recognized when evidence of a purchase arrangement exists, the product has been shipped and accepted by the customer, the fee is determinable and collectible, and no significant obligations remain related to implementation. Revenues for services consist of fees from consulting and maintenance. Consulting services include needs assessment, software integration, security analysis, application development and training. We bill consulting fees either on a time and materials basis or on a fixed price schedule. Our clients typically purchase annual maintenance agreements, and we price maintenance agreements based on a percentage of the product license fee. Clients purchasing maintenance agreements receive product upgrades, Web-based technical support and telephone hot-line support. We recognize revenues from maintenance agreements ratably over the term of the agreement, typically one year. Cost of revenues consists of technology royalties, costs to manufacture, package and distribute our products and related documentation, as well as personnel and other expenses related to providing services. Sales and marketing expenses consist primarily of employee salaries, commissions, and costs associated with marketing programs such as advertising, public relations and trade shows. Research and development expenses consist primarily of salaries and related costs associated with the development of new products, the enhancement of existing products and the performance of quality assurance and documentation activities. General and administrative expenses consist primarily of salaries and other personnel-related costs for executive, financial, human resources, information services and other administrative personnel, as well as legal, accounting, insurance costs and provisions for doubtful accounts. Since our inception, we have incurred substantial costs to develop and acquire our technology and products, to recruit and train personnel for our sales and marketing, research and development and services departments, and to establish an administrative organization. As a result, we had an accumulated deficit of $24.3 million at September 30, 2001. We anticipate that our operating expenses will increase in future quarters as we increase our international operations, increase our sales and marketing operations, develop new distribution channels, fund greater levels of research and development, broaden services and improve operational and financial systems. In addition, our limited operating history makes it difficult for us to predict future operating results. We cannot be certain that we will sustain revenue growth or profitability. FORWARD-LOOKING STATEMENTS The information presented in this Item contains forward-looking statements within the meaning of the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are subject to risks and uncertainties, including those discussed under "Risk Factors" below, that could cause actual results to differ materially from those projected. Because actual results may differ, readers are cautioned not to place undue reliance on these forward-looking statements. RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2000 REVENUES Total revenues increased by $7.6 million, or 48%, to $23.2 million for the three months ended September 30, 2001 from $15.6 million for the three months ended September 30, 2000. The increase in revenues was attributable to the internal expansion of our customer base and increased sales to existing customers both from our direct sales force and through our partners. Product Licenses. Revenues for product licenses increased by $5.3 million, or 41%, to $18.0 million for the three months ended September 30, 2001 from $12.7 million for the three months ended September 30, 2000. The increase in revenues for product licenses was attributable to the expansion of 9 our customer base and increased sales to existing customers both from our direct sales force and through our partners. Services. Revenues for services increased by $2.3 million or 81%, to $5.2 million for the three months ended September 30, 2001 from $2.9 million for the three months ended September 30, 2000. The increase in revenues for services was primarily attributable to a larger installed base of products. COST OF REVENUES AND GROSS PROFIT Total cost of revenues increased by $2.0 million or 86%, to $4.4 million for the three months ended September 30, 2001 from $2.4 million for the three months ended September 30, 2000. Total cost of revenues as a percentage of total revenues was 19% for the three months ended September 30, 2001 compared to 15% for the three months ended September 30, 2000. Gross profit increased by $5.5 million, or 42%, to $18.7 million for the three months ended September 30, 2001 from $13.2 million for the three months ended September 30, 2000. Total gross profit as a percentage of total revenues was 81% for the three months ended September 30, 2001 compared to 85% for the three months ended September 30, 2000. The increase in gross profit dollars was primarily due to increased revenues for product licenses and services. Product Licenses. Cost of revenues for product licenses remained flat at $0.8 million for the three months ended September 30, 2001 and 2000. Gross profit as a percentage of revenues for product licenses was 95% for the three months ended September 30, 2001 compared to 93% for the three months ended September 30, 2000. The increase in the gross profit as a percentage of revenues was primarily attributable to the increase in our OEM business, which typically has higher product margins, and a change in our product mix in our other non-OEM business and to certain royalty costs remaining constant while revenue has increased. Services. Cost of revenues for services increased by $2.0 million or 131%, to $3.6 million for the three months ended September 30, 2001 from $1.6 million for the three months ended September 30, 2000. Gross profit as a percentage of revenues for services was 31% for the three months ended September 30, 2001 compared to 46% for the three months ended September 30, 2000. The decrease in the gross profit as a percentage of revenues for services was primarily due to increased employee headcount and other staffing costs, including recruiting fees, for consulting services personnel. OPERATING EXPENSES Sales and Marketing. Sales and marketing expenses increased by $5.1 million, or 77%, to $11.6 million for the three months ended September 30, 2001 from $6.5 million for the three months ended September 30, 2000. Sales and marketing expenses as a percentage of total revenues were 50% for the three months ended September 30, 2001 compared to 42% for the three months ended September 30, 2000. The increase in sales and marketing expense as a percentage of revenue was primarily due to increased staffing and marketing expenses for advertising and branding associated with changing our name. General and Administrative. General and administrative expenses increased by $0.2 million or 7%, to $2.5 million for the three months ended September 30, 2001 from $2.3 million for the three months ended September 30, 2000. General and administrative expenses as a percentage of total revenues were 11% for the three months ended September 30, 2001 compared to 15% for the three months ended September 30, 2000. General and administrative expenses decreased as a percentage of revenues due primarily to an increase in total revenues with certain expenses remaining constant. Research and Development. Research and development expenses increased by $1.9 million, or 73%, to $4.6 million for the three months ended September 30, 2001 from $2.7 million for the three months ended September 30, 2000. Research and development expenses as a percentage of total revenues were 20% for the three months ended September 30, 2001 compared to 17% for the three months ended 10 September 30, 2000. The increase in research and development expenses as a percentage of revenue was primarily due to increases in staffing and related costs to support product enhancements. Amortization of Intangibles. A portion of the purchase price of SCD was allocated to excess cost over fair value of net assets acquired, core technology, customer base, software, trademarks and other intangibles, and will be amortized over the assets' estimated useful lives, of three years. A portion of the purchase price of RESoft was allocated to certain intangible assets, such as trademarks, that will also be amoritized over their useful lives of three years. Intangible amortization and other expense was $3.5 million for the three month periods ended September 30, 2001 and 2000. OTHER INCOME, NET Net interest income was $1.0 million for the three months ended September 30, 2001 compared to net interest income of $1.7 million for the three months ended September 30, 2000. Net interest income for the three months ended September 30, 2001 and 2000 was primarily related to short-term investments purchased with the proceeds of our public stock offerings completed in June 1999 and March 2000. The decrease in net interest income was primarily due to the decrease in funds invested following the purchase of the SCD division from EBTI on July 10, 2000 as well as decreases in the interest rates earned by invested funds resulting from decreases in market interest rates. Investment Impairment. During the second quarter, the Company determined that a permanent decline in the value of several of its investments in and notes with other companies had occurred due to the poor financial performance and cash flow of these companies. As a result, the Company recorded a write-down on the investments in and notes with these companies of approximately $2.2 million. RESULTS OF OPERATIONS - SIX MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30, 2000 REVENUES Total revenues increased by $22.7 million, or 90%, to $47.8 million for the six months ended September 30, 2001 from $25.1 million for the six months ended September 30, 2000. The increase in revenues was attributable to the acquisition of SCD in July 2000, internal expansion of our customer base and increased sales to existing customers both from our direct sales force and through our partners. Product Licenses. Revenues for product licenses increased by $16.8 million, or 83%, to $37.0 million for the six months ended September 30, 2001 from $20.2 million for the six months ended September 30, 2000. The increase in revenues for product licenses was attributable to the acquisition of SCD in July 2000, the expansion of our customer base and increased sales to existing customers both from our direct sales force and through our partners. Services. Revenues for services increased by $5.8 million or 119%, to $10.7 million for the six months ended September 30, 2001 from $4.9 million for the six months ended September 30, 2000. The increase in revenues for services was primarily attributable to a larger installed base of products including the acquisition of SCD in July 2000. COST OF REVENUES AND GROSS PROFIT Total cost of revenues increased by $4.3 million or 102%, to $8.5 million for the six months ended September 30, 2001 from $4.2 million for the six months ended September 30, 2000. Total cost of revenues as a percentage of total revenues was 18% for the six months ended September 30, 2001 compared to 17% for the six months ended September 30, 2000. Gross profit increased by $18.4 million, or 88%, to $39.3 million for the six months ended September 30, 2001 from $20.9 million for the six months ended September 30, 2000. Total gross profit as a percentage of total revenues was 82% for the six months ended September 30, 2001 compared to 83% for the six months ended September 30, 2000. The increase in gross profit dollars was primarily due to increased revenues for product licenses and services. 11 Product Licenses. Cost of revenues for product licenses increased by $0.4 million, or 28%, to $1.9 million for the six months ended September 30, 2001 from $1.5 million for the six months ended September 30, 2000. Gross profit as a percentage of revenues for product licenses was 95% for the six months ended September 30, 2001 compared to 93% for the six months ended September 30, 2000. The increase in the gross profit as a percentage of revenues was primarily attributable to the increase in our OEM business, which typically has higher product margins, a change in our product mix in our other non-OEM business, and certain royalty costs remaining constant while revenue has increased. Services. Cost of revenues for services increased by $3.9 million or 143%, to $6.6 million for the six months ended September 30, 2001 from $2.7 million for the six months ended September 30, 2000. Gross profit as a percentage of revenues for services was 39% for the six months ended September 30, 2001 compared to 45% for the six months ended September 30, 2000. The decrease in the gross profit as a percentage of revenues for services was primarily due to increased employee headcount and other staffing costs, including recruiting fees, for consulting services personnel. OPERATING EXPENSES Sales and Marketing. Sales and marketing expenses increased by $12.1 million, or 111%, to $22.9 million for the six months ended September 30, 2001 from $10.8 million for the six months ended September 30, 2000. Sales and marketing expenses as a percentage of total revenues were 48% for the six months ended September 30, 2001 compared to 43% for the six months ended September 30, 2000. The increase in sales and marketing expense as a percentage of revenue was primarily due to increased staffing and marketing expenses for advertising and branding associated with changing our name. General and Administrative. General and administrative expenses increased by $1.2 million or 31%, to $4.9 million for the six months ended September 30, 2001 from $3.7 million for the six months ended September 30, 2000. General and administrative expenses as a percentage of total revenues were 10% for the six months ended September 30, 2001 compared to 15% for the six months ended September 30, 2000. General and administrative expenses decreased as a percentage of revenues due primarily to an increase in total revenues with certain expenses remaining constant. Research and Development. Research and development expenses increased by $5.0 million, or 136% to $8.7 million for the six months ended September 30, 2001 from $3.7 million for the six months ended September 30, 2000. Research and development expenses as a percentage of total revenues were 18% for the six months ended September 30, 2001 compared to 15% for the six months ended September 30, 2000. The increase in research and development expenses was primarily due to the acquisition of SCD and increases in staffing and related costs to support product enhancements. Amortization of Intangibles. A portion of the purchase price of SCD was allocated to excess cost over fair value of net assets acquired, core technology, customer base, software, trademarks and other intangibles, and will be amortized over the assets' estimated useful lives, of three years. A portion of the purchase price of RESoft was allocated to certain intangible assets, such as trademarks, that will also be amortized over their useful lives of three years. Intangible amortization and other expense was $6.9 million for the six month period ended September 30, 2001. OTHER INCOME, NET Net interest income was $2.2 million for the six months ended September 30, 2001 compared to net interest income of $4.0 million for the six months ended September 30, 2000. Net interest income for the six months ended September 30, 2001 and 2000 was primarily related to short-term investments purchased with the proceeds of our public stock offerings completed in June 1999 and March 2000. The decrease in net interest income was primarily due to the decrease in funds invested following the purchase of the SCD division from EBTI on July 10, 2000 as well as decreases in the interest rates earned by invested funds resulting from decreases in market interest rates. Investment Impairment. During the second quarter, the Company determined that a permanent decline in the value of several of its investments in and notes with other companies had occurred due to the poor financial performance and cash flow of these companies. As a result, the Company recorded a write-down on the investments in and notes with these companies of approximately $2.2 million. 12 NET OPERATING LOSS CARRYFORWARDS As of March 31, 2001 we had net operating loss carryforwards of approximately $43.8 million. The net operating loss carryforwards will expire at various dates beginning in 2011, if not utilized. The Tax Reform Act of 1986 imposes substantial restrictions on the utilization of net operating losses and tax credits in the event of an "ownership change" of a corporation. Our ability to utilize net operating loss carryforwards on an annual basis will be limited as a result of "ownership changes" in connection with the sale of equity securities. We have provided a valuation allowance of approximately $20.5 million on a portion of the deferred tax asset because of the uncertainty regarding its realization. Our accounting for deferred taxes and the valuation allowance involves the evaluation of a number of factors such as our history of operating losses, potential future losses and the nature of assets and liabilities giving rise to deferred taxes. Although realization of the net deferred tax asset is not assured, the Company believes based on its projections of future taxable income, that it is more likely than not that the net deferred tax asset will be realized. The amount of net deferred tax assets considered realizable however, could be adjusted in the future based on changes in conditions or assumptions. LIQUIDITY AND CAPITAL RESOURCES We have funded our operations and satisfied our capital expenditure requirements primarily through operating revenues, revolving working capital and term loans from banking institutions, private placements and public offerings of securities. Net cash used by operating activities was $2.0 million for the six months ended September 30, 2001, compared to net cash provided by operating activities of $0.4 million for the six months ended September 30, 2000. The change in cash flow from operations is primarily due to the increases in prepaid royalties and prepaid expenses and other current assets. Our prepaid royalties increased because we entered into several software arrangements requiring up-front payments in order to lock-in royalty rates or gain access to technology in order to expand our product lines. Our prepaid expenses and other current assets increased relating primarily to prepayments that we have made for consulting services for development of next generation technology and to certain inventory purchases. To date, we have invested our capital expenditures primarily in property and equipment, consisting largely of computer hardware and software. Capital expenditures for the six months ended September 30, 2001 and 2000 were $2.3 million and $1.6 million, respectively. We have also entered into capital and operating leases for facilities and equipment. We expect that our capital expenditures will increase as our employee base grows. As of September 30, 2001, we had $10.1 million in cash and equivalents, $90.7 million in marketable securities and $103.8 million in working capital. Net cash provided by financing activities was $1.6 million for the six months ended September 30, 2001 and $23.6 million for the six months ended September 30, 2000. We currently believe that the cash and equivalents and marketable securities on hand will be sufficient to meet our working capital requirements for the foreseeable future. After that time, we may require additional funds to support our working capital requirements or for other purposes and may seek to raise such additional funds through public or private equity financings or from other sources. We cannot be certain that additional financing will be available on terms favorable to us, or on any terms, or that any additional financing will not be dilutive. The Company continues to evaluate potential strategic acquisitions that could utilize equity and, or, cash resources. Such opportunities could develop quickly due to market and competitive factors. 13 PRO FORMA NET INCOME PER COMMON SHARE The Company's pro forma basic net income per share is computed by dividing pro forma net income by the weighted average number of outstanding common shares and the Company's pro forma diluted net income per share is computed by dividing pro forma net income by the weighted average number of outstanding common shares and common share equivalents relating to stock options and warrants, when dilutive. Common stock equivalent shares consist of stock options and warrants (using the treasury stock method). The accompanying pro forma supplemental financial information is presented for informational purposes only and is not a substitute for the historical financial information presented in accordance with accounting principles generally accepted in the United States. THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- --------------------------- SUPPLEMENTAL INFORMATION: 2001 2000 2001 2000 ----------- ------------- ----------- ----------- Net loss........................................... $(4,641) $(11,014) $(4,080) $(8,025) Add back charges: Amortization of intangible assets and other.... 3,484 3,466 6,865 3,629 Write-off of in-process research and development.................................. -- 10,400 -- 10,400 Acquisition and related costs ................. -- 590 -- 590 Investment impairment ......................... 2,223 -- 2,223 -- -------- --------- --------- -------- Total add back charges ............................. 5,707 14,456 9,088 14,619 Pro forma net income before pro forma income taxes . 1,066 3,442 5,008 6,594 Pro forma income taxes ............................. (373) (1,205) (1,753) (2,308) -------- --------- --------- -------- Pro forma net income ............................... $ 693 $ 2,237 $ 3,255 $ 4,286 ======== ========= ========= ======== Pro forma basic net income per share................ $ 0.03 $ 0.10 $ 0.15 $ 0.20 ======== ========= ========= ======== Pro forma diluted net income per share.............. $ 0.03 $ 0.09 $ 0.14 $ 0.18 ======== ========= ========= ======== Weighted average common shares outstanding - basic.. 22,364 21,331 22,223 21,257 Weighted average common shares outstanding - diluted 23,617 23,555 23,685 23,168 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS BUSINESS COMBINATIONS AND GOODWILL AND INTANGIBLE ASSETS In July 2001, the FASB issued Statement of Financial Accounting Standards (SFAS) 141 Business Combinations and SFAS 142 Goodwill and Intangible Assets. These pronouncements, among other things, eliminate the pooling-of-interest method of accounting for business combinations and eliminate the amortization of goodwill for financial reporting purposes. However, goodwill will then be tested for impairment annually or whenever an impairment indicator arises. SFAS 142 is effective for the Company April 1, 2002. As of April 1, 2002, the amortization of certain of the Company's intangible assets related to goodwill and workforce with an original cost of approximately $19 million and an estimated net unamortized value of approximately $8 million as of April 1, 2002 will cease and only future impairments of these assets as they occur will be recorded. These assets were acquired in July 2000 and are currently being amortized over their estimated useful life of three years. ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS In September 2001, the FASB issued Statement of Financial Accounting Standards 144, Accounting for the Impairment or Disposal of Long-lived Assets (SFAS 144). This statement supercedes SFAS 121, Accounting for the Impairment of Long Lived Assets and for Long-lived assets to be disposed of, and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of the Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a 14 segment of a business. SFAS 144 combines the two accounting models for disposals of long-lived assets from SFAS 121 and APB 30. SFAS 144 also resolves implementation issues related to SFAS 121. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early application encouraged. This statement is not anticipated to have a current material effect on the financial statements of the company, but could have a future financial statement effect on the company in the event that an asset impairment has occurred. RISK FACTORS DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This Form 10-Q for the second quarter ended September 30, 2001 contains certain forward looking statements within the meaning of Section 21E of the Exchange Act. Such forward-looking statements are based on the beliefs of the Company's management as well as on assumptions made by and information currently available to the Company at the time such statements were made. When used in this Form 10-Q, the words "anticipate", "believe", "estimate", "expect", "intend" and similar expressions, as they relate to the Company, are intended to identify such forward-looking statements. Although the Company believes these statements are reasonable, readers of this Form 10-Q should be aware that actual results could differ materially from those projected by such forward-looking statements as a result of the risk factors listed below and set forth in the Company's Annual Report on Form 10-K for fiscal year 2001 ("Form 10-K") under the caption "Risk Factors." Readers of this Form 10-Q should consider carefully the factors listed below and under the caption "Risk Factors" in the Company's Form 10-K, as well as the other information and data contained in this Form 10-Q. The Company cautions the reader, however, that such list of factors under the caption "Risk Factors" in the Company's Form 10-K may not be exhaustive and that those or other factors, many of which are outside of the Company's control, could have a material adverse effect on the Company and its results of operations. All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements set forth hereunder and under the caption "Risk Factors" in the Company's Form 10-K. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. FLUCTUATIONS IN OUR OPERATING RESULTS MAY MAKE IT DIFFICULT TO PREDICT OUR FUTURE PERFORMANCE. While our products and services are not seasonal, our revenues and operating results are difficult to predict and may fluctuate significantly from quarter to quarter. If our quarterly revenues or operating results fall below the expectations of investors or securities analysts, the price of our common stock could fall substantially. A large part of our sales typically occurs in the last month of a quarter, frequently in the last week or even the last days of the quarter. If these sales were delayed from one quarter to the next for any reason, our operating results could fluctuate dramatically. In addition, our sales cycles may vary, making the timing of sales difficult to predict. Furthermore, our infrastructure costs are generally fixed. As a result, modest fluctuations in revenues between quarters may cause large fluctuations in operating results. These factors all tend to make the timing of revenues unpredictable and may lead to high period-to-period fluctuations in operating results. Our quarterly revenues and operating results may fluctuate for several additional reasons, many of which are outside of our control, including the following: o demand for our products and services; o the timing of new product introductions and sales of our products and services; 15 o unexpected delays in introducing new products and services; o increased expenses, whether related to sales and marketing, research and development or administration; o changes in the rapidly evolving market for Web content management solutions; o the mix of revenues from product licenses and services, as well as the mix of products licensed; o the mix of services provided and whether services are provided by our staff or third-party contractors; o the mix of domestic and international sales; o costs related to possible acquisitions of technology or businesses; o general economic conditions; and o public announcements by our competitors. OUR SUCCESS DEPENDS ON OUR ABILITY TO EXPAND OUR SALES FORCE AND DISTRIBUTION CHANNELS. To increase our market share and revenues, we must increase the size of our sales force and the number of our distribution channel partners. Our failure to do so may have a material adverse effect on our business, operating results and financial condition. There is intense competition for sales personnel in our business, and we cannot be sure that we will be successful in attracting, integrating, motivating and retaining new sales personnel. Our existing or future distribution channel partners may choose to devote greater resources to marketing and supporting the products of other companies. In addition, we will need to resolve potential conflicts among our sales force and distribution channel partners. POTENTIAL ACQUISITIONS MAY BE DIFFICULT TO COMPLETE OR TO INTEGRATE AND MAY DIVERT MANAGEMENT'S ATTENTION. We may seek to acquire or invest in businesses, products or technologies that are complementary to our business. If we identify an appropriate acquisition opportunity, we may be unable to negotiate favorable terms for that acquisition, successfully finance the acquisition or integrate the new business or products into our existing business and operations. In addition, the negotiation of potential acquisitions and the integration of acquired businesses or products may divert management time and resources from our existing business and operations. To finance acquisitions, we may use a substantial portion of our available cash or we may issue additional securities, which would cause dilution to our shareholders. WE MAY NOT BE PROFITABLE IN THE FUTURE. Our revenues may not grow in future periods, may not grow at past rates and we may not sustain our quarterly pro forma profitability. If we do not sustain our recent pro forma profitability, the market price of our stock may fall. Our ability to sustain our recent pro forma profitable operations depends upon many factors beyond our direct control. These factors include, but are not limited to: o the demand for our products; o our ability to quickly introduce new products; o the level of product and price competition; 16 o our ability to control costs; and o general economic conditions. THE INTENSE COMPETITION IN OUR INDUSTRY MAY REDUCE OUR FUTURE SALES AND PROFITS. The market for our products is highly competitive and is likely to become more competitive. We may not be able to compete successfully in our chosen marketplace, which may have a material adverse effect on our business, operating results and financial condition. Additional competition may cause pricing pressure, reduced sales and margins, or prevent our products from gaining and sustaining market acceptance. Many of our current and potential competitors have greater name recognition, access to larger customer bases, and substantially more resources than we have. Competitors with greater resources than ours may be able to respond more quickly than we can to new opportunities, changing technology, product standards or customer requirements. WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH. Any failure to properly manage our growth may have a material adverse effect on our business, operating results and financial condition. The rapid growth that we have experienced places significant challenges on our management, administrative and operational resources. To properly manage this growth, we must, among other things, implement and improve additional and existing administrative, financial and operational systems, procedures and controls on a timely basis. We will also need to expand our finance, administrative and operations staff. We may not be able to complete the improvements to our systems, procedures and controls necessary to support our future operations in a timely manner. Management may not be able to hire, train, integrate, retain, motivate and manage required personnel and may not be able to successfully identify, manage and exploit existing and potential market opportunities. In connection with our expansion, we plan to increase our operating expenses to expand our sales and marketing operations, develop new distribution channels, fund greater levels of research and development, broaden services and support and improve operational and financial systems. Our failure to generate additional revenue commensurate with an increase in operating expenses during any fiscal period could have a material adverse effect on our financial results for that period. WE DEPEND ON THE CONTINUED SERVICE OF OUR KEY PERSONNEL. We are a small company and depend greatly on the knowledge and experience of our senior management team and other key personnel. If we lose any of these key personnel, our business, operating results and financial condition could be materially adversely affected. We must hire additional employees to meet our business plan and alleviate the negative effect that the loss of a senior manager could have on us. Our success will depend in part on our ability to attract and retain additional personnel with the highly specialized expertise necessary to engineer, design and support our products and services. Like other software companies, we face intense competition for qualified personnel. We may not be able to attract or retain such personnel. WE HAVE RELIED AND EXPECT TO CONTINUE TO RELY ON SALES OF OUR CONTENT MANAGEMENT AND VIEWING SOFTWARE PRODUCTS FOR OUR REVENUES. We currently derive all of our revenues from product licenses and services associated with our suite of content management and viewing software products. The market for content management and viewing software products is new and rapidly evolving. We cannot be certain that a viable market for our products will emerge, or if it does emerge, that it will be sustainable. If we do not continue to increase revenues related to our existing products or generate revenues from new products and services, our 17 business, operating results and financial condition may be materially adversely affected. We will continue to depend on revenues related to new and enhanced versions of our software products for the foreseeable future. Our success will largely depend on our ability to increase sales from existing products and generate sales from product enhancements and new products. We cannot be certain that we will be successful in upgrading and marketing our existing products or that we will be successful in developing and marketing new products and services. The market for our products is highly competitive and subject to rapid technological change. Technological advances could make our products less attractive to customers and adversely affect our business. In addition, complex software product development involves certain inherent risks, including risks that errors may be found in a product enhancement or new product after its release, even after extensive testing, and the risk that discovered errors may not be corrected in a timely manner. OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR PROPRIETARY TECHNOLOGY. If we are unable to protect our intellectual property, or incur significant expense in doing so, our business, operating results and financial condition may be materially adversely affected. Any steps we take to protect our intellectual property may be inadequate, time consuming and expensive. We currently have no patents or pending patent applications. Without significant patent or copyright protection, we may be vulnerable to competitors who develop functionally equivalent products. We may also be subject to claims that our current products infringe on the intellectual property rights of others. Any such claim may have a material adverse effect on our business, operating results and financial condition. We anticipate that software product developers will be increasingly subject to infringement claims due to growth in the number of products and competitors in our industry, and the overlap in functionality of products in different industries. Any infringement claim, regardless of its merit, could be time-consuming, expensive to defend, or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements may not be available on commercially favorable terms, or at all. We are not currently involved in any intellectual property litigation. We rely on trade secret protection, confidentiality procedures and contractual provisions to protect our proprietary information. Despite our attempts to protect our confidential and proprietary information, others may gain access to this information. Alternatively, other companies may independently develop substantially equivalent information. OUR PRODUCTS MAY NOT BE COMPATIBLE WITH COMMERCIAL WEB BROWSERS AND OPERATING SYSTEMS. Our products utilize interfaces that are compatible with commercial Web browsers. In addition, our Stellent Content Management System is a server-based system written in Java that functions in both Windows NT and UNIX environments. We must continually modify our products to conform to commercial Web browsers and operating systems. If our products were to become incompatible with commercial Web browsers and operating systems, our business would be harmed. In addition, uncertainty related to the timing and nature of product introductions or modifications by vendors of Web browsers and operating systems may have a material adverse effect on our business, operating results and financial condition. WE COULD BE SUBJECT TO PRODUCT LIABILITY CLAIMS IF OUR PRODUCTS FAIL TO PERFORM TO SPECIFICATIONS. If software errors or design defects in our products cause damage to customers' data and our agreements do not protect us from related product liability claims, our business, operating results and financial condition may be materially adversely affected. In addition, we could be subject to product 18 liability claims if our security features fail to prevent unauthorized third parties from entering our customers' intranet, extranet or Internet Web sites. Our software products are complex and sophisticated and may contain design defects or software errors that are difficult to detect and correct. Errors, bugs or viruses spread by third parties may result in the loss of market acceptance or the loss of customer data. Our agreements with customers that attempt to limit our exposure to product liability claims may not be enforceable in certain jurisdictions where we operate. FUTURE REGULATIONS COULD BE ADOPTED THAT RESTRICT OUR BUSINESS. Federal, state or foreign agencies may adopt new legislation or regulations governing the use and quality of Web content. We cannot predict if or how any future laws or regulations would impact our business and operations. Even though these laws and regulations may not apply to our business directly, they could indirectly harm us to the extent that they impact our customers and potential customers. SIGNIFICANT FLUCTUATION IN THE MARKET PRICE OF OUR COMMON STOCK COULD RESULT IN SECURITIES LITIGATION AGAINST US. In the past, securities class action litigation has been brought against publicly held companies following periods of volatility in the price of their securities. If we were subject to such litigation due to volatility in our stock price, we may incur substantial costs. Such litigation could divert the attention of our senior management away from our business, which could have a material adverse effect on our business, operating results and financial condition. The market price of our common stock has fluctuated significantly in the past and may do so in the future. The market price of our common stock may be affected by each of the following factors, many of which are outside of our control: o variations in quarterly operating results; o changes in estimates by securities analysts; o changes in market valuations of companies in our industry; o announcements by us of significant events, such as major sales, acquisitions of businesses or losses of major customers; o additions or departures of key personnel; and o sales of our equity securities. OUR PERFORMANCE WILL DEPEND ON THE CONTINUING GROWTH AND ACCEPTANCE OF THE WEB. Our products are designed to be used with intranets, extranets and the Internet. If the use of these methods of electronic communication does not grow, our business, operating results and financial condition may be materially adversely affected. Continued growth in the use of the Web will require ongoing and widespread interest in its capabilities for communication and commerce. Its growth will also require maintenance and expansion of the infrastructure supporting its use and the development of performance improvements, such as high speed modems. The Web infrastructure may not be able to support the demands placed on it by continued growth. The ongoing development of corporate intranets depends on continuation of the trend toward network-based computing and on the willingness of businesses to reengineer the processes used to create, store, manage and distribute their data. All of these factors are outside of our control. 19 OUR EXISTING SHAREHOLDERS HAVE SIGNIFICANT INFLUENCE OVER US. Robert F. Olson, our Chairman, holds approximately 10.5% of our outstanding common stock. Accordingly, Mr. Olson is able to exercise significant control over the affairs of Stellent. Additionally, our directors and executive officers beneficially own approximately 10.7% of our common stock. These persons have significant influence over Stellent's affairs, including approval of the acquisition or disposition of assets, future issuances of common stock or other securities and the authorization of dividends on our common stock. Our directors and executive officers could use their stock ownership to delay, defer or prevent a change in control of Stellent, depriving shareholders of the opportunity to sell their stock at a price in excess of the prevailing market price. WE CAN ISSUE SHARES OF PREFERRED STOCK WITHOUT SHAREHOLDER APPROVAL, WHICH COULD ADVERSELY AFFECT THE RIGHTS OF COMMON SHAREHOLDERS. Our Articles of Incorporation permit us to establish the rights, privileges, preferences and restrictions, including voting rights, of unissued shares of our capital stock and to issue such shares without approval from our shareholders. The rights of holders of our common stock may suffer as a result of the rights granted to holders of preferred stock that may be issued in the future. In addition, we could issue preferred stock to prevent a change in control of Stellent, depriving shareholders of an opportunity to sell their stock at a price in excess of the prevailing market price. CERTAIN PROVISIONS OF MINNESOTA LAW MAY MAKE A TAKEOVER OF STELLENT DIFFICULT, DEPRIVING SHAREHOLDERS OF OPPORTUNITIES TO SELL SHARES AT ABOVE-MARKET PRICES. Certain provisions of Minnesota law may have the effect of discouraging attempts to acquire Stellent without the approval of our Board of Directors. Consequently, our shareholders may lose opportunities to sell their stock for a price in excess of the prevailing market price. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our interest income on cash and marketable securities is affected by changes in interest rates in the United States. Through September 30, 2001, changes in these rates have not had a material effect on the Company, and the Company does not anticipate that future exposure to interest rate market risk will be material. Our investments are held in commercial paper which are affected by equity price market risk and other factors. The Company does not anticipate that exposure to these risks will have a material impact on the Company, due to the nature of its investments. The Company has no history of, and does not anticipate in the future, investing in derivative financial instruments. Most transactions with international customers are entered into in U.S. dollars, precluding the need for foreign currency hedges. Any transactions that are currently entered into in foreign currency are not deemed material to the financial statements. Thus, the exposure to market risk is not material. 20 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. On August 29, 2001, the Company held its Annual Meeting of the Shareholders to consider a vote upon the following proposals. The tabulation of the votes, in favor, against, and abstaining with regard to the proposals is set forth below. PROPOSAL IN FAVOR WITHHELD AGAINST -------- ---------- --------- -------- 1. Election of Directors: Robert F. Olson 16,994,770 3,048,498 -- Vernon J. Hanzlik 16,990,170 3,053,098 -- Michael W. Ferro, Jr. 19,856,480 186,788 -- Kenneth H. Holec 19,856,680 186,588 -- Steven C. Waldron 19,856,580 186,688 -- 2. Approve the amendment and restatement of the 2000 Stock Incentive Plan to increase the aggregate number of shares of common stock authorized to be issued thereunder from 2,000,000 to 3,100,000 shares. 10,809,563 25,594 9,208,111 3. Ratification of the appointment of Grant Thornton LLP as independent auditors for the Company for fiscal year March 31, 2001. 19,943,303 1,579 98,386 21 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (A.) EXHIBITS EXHIBIT INDEX FILE DESCRIPTION REFERENCE ------- ------------ --------- 3.1 Amended and Restated Articles of Incorporated by reference to Exhibit 3.1 Incorporation, as amended of the Registrant's Form 8-K dated August 29, 2001 3.2 Bylaws Incorporated by reference to Exhibit A of the Registrant's Definitive Proxy Statement Schedule 14A, filed with the Securities and Exchange Commission July 22, 1997, File No. 0-19817 4.7 Warrant to purchase 225,000 shares of Incorporated by reference to Exhibit 4.7 of the common stock to Merrill, Lynch, Pierce, Registrant's Form 10-K for the year ended Fenner & Smith dated February 22, 2000 March 31, 2001. 10.4 Stellent, Inc. 1994-1997 Stock Option Incorporated by reference to Exhibit A of and Compensation Plan* the Registrant's Definitive Proxy Statement Schedule 14A, filed with the Securities and Exchange Commission July 28, 1998 10.20 Stock Purchase Warrant Agreement dated Incorporated by reference to Exhibit December 20, 1996, by and between the 10.20 of the Registrant's Form 10-KSB for Registrant and Rita M. Olson the fiscal year ended March 31, 1997 10.28 InfoAccess, Inc. 1990 Stock Option Plan Incorporated by reference to Exhibit 99.1 as amended September 29, 1999 of the Registrant's statement on Form S-8, File No. 333-90843 10.29 InfoAccess, Inc. 1995 Stock Option Plan Incorporated by reference to Exhibit 99.2 as amended September 29, 1999 of the Registrant's statement on Form S-8, File No. 333-90843 10.30 Employment Agreement Dated August 1, Incorporated by reference to Exhibit 1999, by and between the Registrant and 10.30 of the Registrant's Form 10-Q for Robert F. Olson* the quarter ended September 30, 1999 10.31 Stellent, Inc. 1999 Employee Incorporated by reference to Exhibit Stock Option and compensation plan 10.31 of the Registrant's Form 10-Q for the three months ended September 30, 1999 10.32 Agreement and Plan of Merger among Incorporated by reference to Exhibit 2 to Stellent, Inc., IntraNet Chicago the Registrant's Current Report on Form 8-K Acquisition Corporation, IntraNet Kansas dated July 10, 2000 City Acquisition Corporation, Inso Chicago Corporation, Inso Kansas City Corporation and Inso Corporation, dated as of July 10, 2000 10.33 Stellent, Inc. 2000 Stock Incentive Incorporated by reference to Exhibit B to Plan* the Registrant's Definitive Proxy statement on Schedule 14A, filed with the Securities and Exchange Commission on July 25, 2000 10.34 Amended and Restated 2000 Employee Electronic transmission Stock Plan 10.35 Stellent, Inc. 1997 Directors Stock Incorporated by reference to Exhibit B of Option Plan* the Registrant's Definitive Proxy Statement Schedule 14A, filed with the Securities and Exchange Commission July 28, 1998 10.36 Stellent, Inc. Employee Stock Purchase Incorporated by reference to Exhibit A of Plan* the Registrant's Definitive Proxy Statement filed with the Securities and Exchange Commission July 29, 1999 22 EXHIBIT INDEX FILE DESCRIPTION REFERENCE ------- ------------ --------- 10.37 Employment Agreement Dated April 1, 2001 Incorporated by reference to Exhibit by and between the Registrant and 10.37 of the Registrant's Form 10-Q for Gregg A. Waldon* the quarter ended June 30, 2001 10.38 Employment Agreement Dated October 1, Electronic Transmission 2001 by and between the Registrant and Vernon J. Hanzlik* 10.39 Employment Agreement Dated May 10, 2001 Electronic Transmission by and between the Registrant and Scott Norder* 10.40 Employment Agreement Dated June 14, 2000 Electronic Transmission by and between the Registrant and Robin Pederson* 10.41 Employment Agreement Dated April 1, 2001 Electronic Transmission by and between the Registrant and Daniel Ryan* 10.42 Employment Agreement Dated March 9, 2001 Electronic Transmission by and between the Registrant and Mitch Berg* 11.1 Computation of earnings per share Electronic transmission ---------- * Management contract, compensation plan or arrangement. (B) REPORTS ON FORM 8-K A current report on Form 8-K was filed, dated August 29, 2001, relating to the change in the name of the Company from IntraNet Solutions, Inc. to Stellent, Inc. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Stellent, Inc. ------------------------- (Registrant) Date: November 14, 2001 By: /s/ Vern Hanzlik -------------------------------------------- Vern Hanzlik, President and Chief Executive Officer (Principal Executive Officer) Date: November 14, 2001 By: /s/ Gregg A. Waldon -------------------------------------------- Gregg A. Waldon Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer) 24 EXHIBITS FILE DESCRIPTION REFERENCE 3.1 Amended and Restated Articles of Incorporated by reference to Exhibit 3.1 Incorporation, as amended of the Registrant's Form 8K dated August 29, 2001 3.2 Bylaws Incorporated by reference to Exhibit A of the Registrant's Definitive Proxy Statement Schedule 14A, filed with the Securities and Exchange Commission July 22, 1997, File No. 0-19817 4.7 Warrant to purchase 225,000 shares of Incorporated by reference to Exhibit 4.7 of the Registrant's common stock to Merrill, Lynch, Pierce, Form 10-K for the year ended March 31, 2001. Fenner & Smith dated February 22, 2000 10.4 Stellent, Inc. 1994-1997 Stock Option Incorporated by reference to Exhibit A of the Registrant's and Compensation Plan* Definitive Proxy Statement Schedule 14A, filed with the Securities and Exchange Commission July 28, 1998 10.20 Stock Purchase Warrant Agreement dated Incorporated by reference to Exhibit 10.20 of the Registrant's December 20, 1996, by and between the Form 10-KSB for the fiscal year ended March 31, 1997 Registrant and Rita M. Olson 10.28 InfoAccess, Inc. 1990 Stock Option Plan Incorporated by reference to Exhibit 99.1 of the Registrant's as amended September 29, 1999 statement on Form S-8, File No. 333-90843 10.29 InfoAccess, Inc. 1995 Stock Option Plan Incorporated by reference to Exhibit 99.2 of the Registrant's as amended September 29, 1999 statement on Form S-8, File No. 333-90843 10.30 Employment Agreement Dated August 1, 1999, Incorporated by reference to Exhibit 10.30 of the Registrant's by and between the Registrant and Form 10-Q for the quarter ended September 30, 1999 Robert F. Olson* 10.31 Stellent, Inc. 1999 Employee Incorporated by reference to Exhibit 10.31 of the Registrant's Stock Option and compensation plan Form 10-Q for the three months ended September 30, 1999 10.32 Agreement and Plan of Merger among Incorporated by reference to Exhibit 2 to the Registrant's Stellent, Inc., IntraNet Chicago Current Report on Form 8-K dated July 10, 2000 Acquisition Corporation, IntraNet Kansas City Acquisition Corporation, Inso Chicago Corporation, Inso Kansas City Corporation and Inso Corporation, dated as of July 10, 2000 10.33 Stellent, Inc. 2000 Stock Incentive Plan* Incorporated by reference to Exhibit B to the Registrant's Definitive Proxy statement on Schedule 14A, filed with the Securities and Exchange Commission on July 25, 2000 10.34 Amended and Restated 2000 Employee Electronic transmission Stock Plan 10.35 Stellent, Inc. 1997 Directors Stock Incorporated by reference to Exhibit B of the Registrant's Option Plan* Definitive Proxy Statement Schedule 14A, filed with the Securities and Exchange Commission July 28, 1998 10.36 Stellent, Inc. Employee Stock Purchase Incorporated by reference to Exhibit A of the Registrant's Plan* Definitive Proxy Statement filed with the Securities and Exchange Commission July 29, 1999 FILE DESCRIPTION REFERENCE 10.37 Employment Agreement Dated April 1, 2001 Incorporated by reference to Exhibit 10.37 of the Registrant's by and between the Registrant and Gregg Form 10-Q for the quarter ended June 30, 2001 A. Waldon* 10.38 Employment Agreement Dated October 1, 2001 Electronic Transmission by and between the Registrant and Vernon J. Hanzlik* 10.39 Employment Agreement Dated May 10, 2001 Electronic Transmission by and between the Registrant and Scott Norder* 10.40 Employment Agreement Dated June 14, 2000 Electronic Transmission by and between the Registrant and Robin Pederson* 10.41 Employment Agreement Dated April 1, 2001 Electronic Transmission by and between the Registrant and Daniel Ryan* 10.42 Employment Agreement Dated March 9, 2001 Electronic Transmission by and between the Registrant and Mitch Berg* 11.1 Computation of earnings per share Electronic transmission